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CA FINAL - ADVANCED AUDITING & PROFESSIONAL ETHICS - PAPER 3
By C.V. SHARMA Sir
INDEX
S.No. Chapter Name Pg. No.
1 STANDARDS ON AUDITING 1.1 to 1.153
2 PROFESSIONAL ETHICS 2.1 to 2.90
3A COMPANY AUDIT 3.1 to 3.72
3B CARO, 2016 3.1 to 3.15
4 PEER REVIEW & QUALITY REVIEW 4.1 to 4.18
5 AUDIT OF BANKS 5.1 to 5.24
6 AUDIT OF INSURANCE COMPANIES 6.1 to 6.18
7 AUDIT OF NBFC 7.1 to 7.17
8 MANAGEMENT AUDIT 8.1 to 8.13
9 AUDIT OF CONSOLIDATED FINANCIAL STATEMENTS 9.1 to 9.13
10 LIABILITIES OF THE AUDITOR 10.1 to 10.7
11 AUDIT COMMITTEE & CORPORATE GOVERNANCE 11.1 to 11.19
12 INVESTIGATION & DUE DILIGENCE 12.1 to 12.18
13 AUDIT UNDER FISCAL LAWS 13.1 to 13.33
14 AUDIT OF PUBLIC SECTOR UNDERTAKINGS 14.1 to 14.8

ADVANCED AUDITING & PROFESSIONAL ETHICS MASTER MINDS
CA C.V.SARMA, M.Com., FCA
1
ENGAGEMENT & QUALITY CONTROL STANDARDS
These standards are issued by Auditing and Assurance Standards Board (AASB)
under the authority of the Institute of Chartered Accountants of India. These standards are
broadly classified into the following categories:
 Standards on Auditing (SA) -- 100 - 999
 Standards on Review Engagements (SRE) -- 2000 - 2699
 Standards on Assurance Engagement (SAE) -- 3000 - 3699
 Standards on Related Services (SRS) -- 4000 - 4699
 Standards on Quality Control (SQC)
All these Standards are collectively called as Engagement and Quality Control
Standards.
What are Standards on Auditing
Standards on Auditing are the engagement standards that are to be applied in the audit of
historical financial information. Therefore, compliance with auditing standards is an
obligation on the part of the auditor while conducting audit of Financial Statements of all
entities irrespective of nature, size or complexity of the entity.
Why should the auditor has to apply Standards on auditing while doing Audit
Function?
1. The framework for Assurance Engagements issued by ICAI specifies that Audit
of Financial Statements is an Assurance Engagement and the same has to be
conducted as per Standards on Auditing.
2. SA 200 prescribes that the auditor shall comply with all SA's relevant to the
audit. It also specifies that the auditor shall not represent compliance with SAs,
unless he has complied with the same.
3. Section 143(9) of the Companies Act, 2013 imposed a duty on the auditor to
comply with Auditing Standards.
4. Clause (9) of Part I of Second Schedule to Chartered Accountants Act, 1949
specifies that a member in practice shall be guilty of professional misconduct, if he
fails to invite attention to any material departure from the generally accepted
procedures of audit (SAs).
SAs cover all the aspects of audit starting from acceptance of engagement till issuance of
final audit report. These standards are mandatory in nature from the date specified in
the standard. They enhance the audit quality.
Structure of the Standard
1. Introduction
2. Objective
3. Definitions
4. Requirements
1 .1
5. Application and Other Explanatory material

The ICAI also issue “Guidance Notes” which are designed primarily to provide
guidance to the members in relation to the matters that may arise in the course of
professional work and which requires assistance to resolve. These Guidance Notes are
recommendatory in nature.
STANDARD ON QUALITY CONTROL - 1
QUALITY CONTROL FOR FIRMS THAT PERFORM AUDITS AND REVIEWS OF
HISTORICAL FINANCIAL INFORMATION, AND OTHER ASSURANCE AND
RELATED SERVICES ENGAGEMENTS
INTRODUCTION
SQC 1 made it mandatory on the part of all the firms to establish, maintain and to
monitor a system of quality control including quality control policies and procedures.
Where a firm is defined to include a sole practitioner/proprietor, partnership, or
any such entity of professional accountants, as may be permitted by law.
The nature of the policies and procedures developed by individual firms to comply with this
SQC will depend on various factors.
Effective Date
April 1, 2009
OBJECTIVES
Establishment of Quality Control policies and procedures helps in providing a
reasonable assurance that:
 The firm and its personnel comply with professional standards and
regulatory and legal requirements; and
 The reports issued by the firm or engagement partners are appropriate in the
circumstances.
ELEMENTS OF A SYSTEM OF QUALITY CONTROL
The firm‘s system of quality control should include policies and procedures addressing each
of the following elements:
1. Leadership responsibilities for quality within the firm.
2. Ethical requirements.
3. Acceptance and continuance of client relationships and specific engagements.
4. Human resources.
5. Engagement performance.
6. Monitoring.
The quality control policies and procedures should be documented and
communicated to the firm‟s personnel. Such communication describes the quality
control policies and procedures and the objectives they are designed to achieve, and
includes the message that each individual has a personal responsibility for
quality and is expected to comply with these policies and procedures. In addition, the firm
recognizes the importance of obtaining feedback on its quality control system from its
1 .2
personnel. Therefore, the firm encourages its personnel to communicate their views or
concerns on quality control matters.
LEADERSHIP RESPONSIBIITIES FOR QUALITY WITHIN THE FIRM
The firm‘s chief executive officer (or equivalent) or, if appropriate, the firm‘s managing
partners (or equivalent), to assume ultimate responsibility for the firm‟s system of
quality control.
The firm‘s leadership significantly influences the internal culture of the firm. The
persons who had assumed the leadership responsibilities of the firm shall have to
promote a quality-oriented internal culture.
This can be done by giving clear, consistent and frequent actions and messages
through conducting seminars, meetings, mission statements, news letter and the like
emphasizing the firm‟s quality control policies and procedures. The leadership of
the firm should also be able to communicate that they will recognize and reward high
quality work.
ETHICAL REQUIREMENTS
The firm should establish policies and procedures designed to provide it with reasonable
assurance that the firm and its personnel comply with relevant ethical requirements.
Ethical requirements relating to audits and reviews of historical financial information, and
other assurance and related services engagements are contained in the Code which are as
follows:
 Integrity;
 Objectivity;
 Professional competence and due care;
 Confidentiality; and
 Professional behavior.
INDEPENDENCE
The firm should establish policies and procedures to ensure that the firm, its personnel
and, where applicable, others subject to independence requirements (including experts
contracted by the firm and network firm personnel), maintain independence where
required by the Code.
Under this heading the firm is required to:
 Communicate its independence requirements to its personnel and, where
applicable, to others subject to them;
 Identify and evaluate circumstances and relationships that create threats to
independence;
For this purpose, the firm must insist the engagement partner and personnel
involved in carrying out the engagement, to notify about the relationships that
may create a threat to their independence.
 Insist the personnel involved in the engagement to notify the firm about the
breaches of independence of which they become aware.
1 .3
 To communicate the breaches to the engagement partner or other relevant

personnel subjected to independence requirements in order to address that breach
and to take appropriate action.
 Insisting the engagement partner or other relevant personnel subjected to
independence requirement to communicate to the firm, about the actions taken by
them to resolve the matter, so that the firm can determine whether it should take
further action.
 Obtain written confirmation, either in paper or electronic form, regarding
compliance with its policies and procedures on independence from all firm
personnel required to be independent in terms of the requirements of the Code.
 Rotate the engagement partner after a specified period, normally not more than
7 years for audit of financial statements of listed entities to reduce the possibility of
familiarity threat.
ACCEPTANCE AND CONTINUANCE OF CLIENT RELATIONSHIP AND
SPECIFIC ENGAGEMENTS
The firm should establish policies and procedures:
To accept and continue client relationships and specific engagements, only where it satisfies
about:
A. The integrity of the client
Matters that the firm considers under this head may include, for example:
a. The business reputation of the client.
b. The nature of operations.
c. The attitude of the client towards matters such as aggressive interpretation of
accounting standards.
d. Indications of limitation in the scope of work.
e. Indications that client might be involved in money laundering or other
criminal activities.
f. The reasons for the proposed appointment of the firm and non-
reappointment of the previous firm.
This information may be obtained from, for example:
a. Communications with existing or previous providers of professional accountancy
services to the client and discussions with other third parties.
b. Inquiring bankers, legal counsel and industry peers.
c. Background searches of relevant databases.
B. Competence, capability, time and resources to perform the engagement;
and
In considering whether the firm has the capabilities, competence, time and resources
to undertake a new engagement from a new or an existing client, the firm should
follow a system of reviewing the specific requirements of the engagement and existing
partner and staff profiles at all relevant levels. Matters the firm considers include
whether:
1. Firm personnel have knowledge of relevant industries or subject matters;
1 .4
2. Firm personnel have experience with relevant regulatory or reporting

requirements, or the ability to gain the necessary skills and knowledge
effectively;
3. The firm has sufficient personnel with the necessary capabilities and
competence;
4. Availability of experts, if needed;
5. Individuals meeting the criteria and eligibility requirements to perform
engagement quality control review are available, where applicable; and
6. The firm would be able to complete the engagement within the reporting
deadline.
7. Deciding whether to continue a client relationship includes consideration of
significant matters that have arisen during the current or previous
engagements, and their implications for continuing the relationship. For
example, a client may have started to expand its business operations into an
area where the firm does not possess the necessary knowledge or expertise.
C. Its ability to comply with the ethical requirements.
HUMAN RESOURCES
The firm should establish policies and procedures to ensure that it has sufficient
personnel with the capabilities, competence, and commitment to ethical principles
necessary to perform its engagements in accordance with professional standards and
regulatory and legal requirements.
This enables the firm to issue appropriate report.
Capabilities and competence
Under this heading, the firm should consider
 Professional education.
 Continuing professional development, including training.
 Work experience.
 Coaching by more experienced staff, for example, other members of the engagement
team.
Performance evaluation, compensation and promotion
It should also establish policies like:
 Communicating firm‘s expectations regarding performance and ethical principles.
 Evaluation of performance
 Providing counseling and career development.
 Communicating to the personal that their promotion is dependent on factors such as
performance evaluation, adherence to ethical principles and also communicating that
failure to adhere to policies may result in disciplinary action.
Assignment of Engagement Teams
The firm should assign responsibility for each engagement to an engagement partner.
The firm should establish policies and procedures like:
1 .5
 Ensuring that the engagement partner has the appropriate capabilities,

competence, authority and time to perform the role; and
 Communication of the responsibilities to the engagement partner.
 Communication of identity of the engagement partner to key members of the client‘s
management/those charged with governance;
The firm should also assign appropriate staff with the necessary capabilities,
competence and time to perform engagements.
The following should be the points to be considered by the firm while assigning staff to
perform engagements.
 Experience in conducing engagements of similar nature.
 Ability to understand professional/regulatory and legal requirements.
 Knowledge of relevant information technology.
 Knowledge of the relevant industries in which the clients operate.
 Ability to apply professional judgment.
 An understanding of the firm‘s quality control policies and procedures.
ENGAGEMENT PERFORMANCE
assurance that engagements are performed in accordance with professional standards
and regulatory and legal requirements, and that the firm or the engagement partner
issues reports that are appropriate in the circumstances.
 Ensuring that all members of the engagement team understand the objectives of
the work they are to perform.
 Specifying them about applicable engagement standards
 Preparation of manuals, for effective conduct of audit
 Staff training
Engagement supervision
Supervision includes the following:
 Checking the progress of the engagement and ensuring that the work is being carried
out in accordance with the plan.
 Addressing significant issues arising during the engagement
 Checking the need to modify the plan of audit
 Deciding about whether there is a need for consultations with more experience
engagement team members.
Consultation
In some cases, it may be necessary for the firm to have consultation with individuals, within
or outside the firm, having specialized expertise to resolve a difficult or contentious matter.
It promote quality of services rendered by the firm.
The firm should also ensure proper maintenance of documentation of matters relating to
consultation.
1 .6
Engagement Review:
Under this heading, the firm shall establish policies and procedures to ensure that:
 the work has been performed in accordance with professional standards and
regulatory and legal requirements;
 Evidence obtained is sufficient and appropriate
 Significant matters have been raised for further consideration;
 Appropriate consultations have taken place in the cases required
 Appropriate documentation is maintained.
 Revision of the nature, timing and extent of work done if necessary;
 Objectives of the engagement have been achieved
Engagement Quality Control Review
A quality control review shall concentrate on checking of the quality relating to the
significant judgments made by the engagement team and the conclusions reached in
formulating the report.
The firm should establish policies and procedures relating to:
 Compulsory performance of an engagement quality control review in respect of audit
of financial statements of listed entities.
 Establishing criteria in respect of audit of other entities.
 The nature, timing and extent of an engagement quality control review;
This involves review of financial statements and the report thereon to ensure that the
report is appropriate.
It also involves a review of significant judgments made by the engagement team and
the conclusions that were reached. This can be done by going through the working
papers maintained.
 Documentation for an engagement quality control review
The documentation to be maintained by an engagement quality control review shall
include matters such as:
1. Significant risks identified and responses thereto.
2. Description of judgments made in respect of materiality and significant riks.
3. Details of consultations and conclusions thereon.
4. Description of corrected and uncorrected misstatements.
5. Details of the matters to be communicated to management and those charged
with governance.
6. The appropriateness of the report to be issued.
 Selection of criteria in respect of eligibility of engagement quality control reviewers.
Other Points
1. Extent of review is dependent upon the complexity of the engagement. However,
review does not reduce the responsibilities of the engagement partner.
1 .7
2. The review shall have to be conducted in a timely manner at appropriate stages

during the engagement so that significant matters may be promptly resolved before
the report is issued.
3. Where there is a difference of opinion between the engagement quality control
reviewer and engagement partner which respect to following of recommendations
made by the reviewer, the report is not issued until the matter is resolved by
following the firm‘s procedures for dealing with differences of opinion.
Criteria for the Eligibility of Engagement Quality Control Reviewers
The firm‘s policies and procedures should ensure that the Quality Control Reviewer is
having:
A. The technical qualifications required;
 The experience ;
 Objectivity
B. The engagement quality control reviewer:
 Is not selected by the engagement partner;
 Does not otherwise participate in the engagement during the period of review;
 Does not make decisions for the engagement team; and
 Suitably qualified external persons may be contracted where sole practitioners or
small firms identify engagements requiring engagement quality control reviews.
Engagement Documentation
A. Completion of the Assembly of Final Engagement Files
Under this heading, the firm should establish policies with respect to:
Completion of the assembly of final engagement files on a timely basis which is not
ordinarily more than 60 days after the date of the auditor‘s report. However, if any law or
regulation specify such time limits, they have to be adhered to.
B. Maintenance of confidentiality, safe custody, integrity, accessibility and
retrievability of engagement documentation
This can be achieved through
 The use of a password
 Taking appropriate back-ups for documentation maintained electronically. Etc.
C. Retention of engagement documentation
The period of retention should generally be dependent on:
 The needs of the firm such as whether the engagement is a continuing engagement.
 The requirements of applicable laws and regulations.
 Such a period shall not generally be shorter than 7 years from the date of the auditor‘s
report.
D. Ownership of Engagement Documentation
Unless otherwise specified by law or regulation, engagement documentation is the
property of the firm. The firm may, at its discretion, make portions of, or extracts from,
1 .8
engagement documentation available to clients, provided such disclosure does not

undermine the validity of the work performed.
Monitoring
The firm should establish policies and procedures to ensure that the system of quality
control is:
 Adequate
 Operating effectively and
 Complied with in practice
For this the firm has to evaluate its quality control systems at periodical intervals by
selection of completed engagements.
This process of evaluation can be entrusted to a partner(s). During this process, the
evaluator may identify weaknesses in the system and corrective action is required to be
initiated. In such a case, the same must have to be communicated to appropriate persons
and follow up shall also be made.
The firm should communicate to relevant engagement partners and other appropriate
personnel deficiencies noted and recommendations for appropriate remedial action.
Complaints and Allegations
assurance that it deals appropriately with:
 Complaints and allegations that the work performed by the firm fails to comply with
professional standards and regulatory and legal requirements; and
 Allegations of non-compliance with the firm‘s system of quality control.
The firm investigates such complaints and allegations. The investigation is supervised by a
partner who is not otherwise involved in the engagement.
Where the results of the investigations indicate deficiencies in the design or operation of the
firm‘s quality control policies and procedures, or non-compliance with the firm‘s system of
quality control by an individual or individuals, the firm should takes appropriate action.
SA 200 – OVERALL OBJECTIVES OF THE INDEPENDENT AUDITOR AND THE

CONDCUT OF AN AUDIT IN ACCORDANCE WITH STANDARDS ON AUDITING
This Standard on Auditing establishes the overall responsibilities of an independent auditor
when conducting an audit of financial statements.
The primary objective of audit is to enhance the degree of confidence of the intended users
of financial statements. The degree of confidence of the users can be enhanced, if the
auditor conduct audit in accordance with the Standards on Auditing and relevant ethical
requirements and express his opinion on the basis of such audit.
Objectives
1. To obtain reasonable assurance that whether financial statements as a whole are
free from material misstatements whether due to fraud or error, thereby
enabling the auditor to express an opinion on whether the Financial
Statements are prepared, in all material respects, in accordance with applicable
financial reporting framework, and
1 .9
2. To report on the Financial Statements

TERMS:
Applicable Financial Reporting Framework
Applicable Financial Reporting Framework means, law/regulation/framework applied by
management/those charged with governance for preparation and presentation of Financial
Statements.
For example, the Financial Statements of a company are required to be prepared in
accordance with the requirements of Part I and Part II of Schedule III to the Companies Act,
2013 as well as by following the mandatory Accounting Standards notified by the Central
Government.
Fair Presentation Framework

The term ―fair presentation framework‖ is used to refer to a financial reporting framework
that requires compliance with the requirements of the framework and:
i. Acknowledges explicitly or implicitly that, to achieve fair presentation of the
Financial Statements, it may be necessary for management to provide
disclosures beyond those specifically required by the framework; or
ii. Acknowledges explicitly that it may be necessary for management to depart
from the requirements of the framework to achieve fair presentation of
the Financial Statements. Such departures are expected to be necessary only in
extremely rare circumstances.
Compliance Framework
The term ―Compliance Framework‖ is used to refer to a financial reporting framework that
requires compliance with the requirements of the framework, but does not contain the
acknowledgements in (i) or (ii) above.
Reasonable Assurance
Reasonable Assurances in the context of an audit of Financial Statements means a high,
but not absolute level of assurance.
The auditor is not expected to, and cannot, reduce audit risk to zero and cannot therefore
obtain absolute assurance that the Financial Statements are free from material
misstatements due to fraud or error. He can obtain only a a reasonable assurance. This is
because of the existence of inherent limitations of audit, such as:
1. Heavy dependence on Internal Controls which may fail due to collusion
between or among employees and between employees and outsiders.
2. Overriding of controls by the top level management.
3. Evidence obtained by the auditor during the course of audit is primary and not
conclusive in nature. In other words, an audit is not an investigation.
4. The Nature of Financial Reporting
The preparation of Financial Statements involves judgments by
management which, are always subjective and always there is a degree of
uncertainty in making such judgments.
5. The nature of audit procedures
1.10
Sometimes, the auditor may be unable to obtain audit evidence such as:
Test Nature of audit - When the auditor follows test nature of audit (i.e. audit
sampling), there is always a possibility that the transactions which were not selected
and verified by the auditor may contain material misstatements, which may not be
identified by the auditor.
Audit Risk
The term ―Audit Risk‖ can be defined as the risk that the auditor expresses an inappropriate
audit opinion when the Financial Statements are materially misstated. It has three
components. They are
a. Inherent Risk
b. Control Risk
c. Detection Risk
Inherent Risk
Inherent Risk can be defined as the ―risk that an account balance or a class of transaction or
a disclosure may be materially misstated before consideration of any related controls‖.
Control Risk
The risk that a misstatement that could occur in an account balance or a class of transaction
or disclosure that is material and will not be prevented or detected and corrected, on timely
basis by the entity‘s internal control.
Detection Risk
The risk that the procedures performed by the auditor to reduce audit risk to an acceptably
low level, will not detect a misstatement that exist.
Relationship between the combined level of Inherent and Control Risks with
Detection Risk
There is an inverse relationship between the combined level of inherent and control risks
with detection risk. If the auditor assessed the combined level of inherent and control risks
at a high level, then he needs to keep the detection risk at a low level so that he can keep the
audit risk at an acceptably low level. Where, the auditor assessed the combined level of
inherent and control risks at low level, then he can keep the detection risk at a slightly high
level.
REQUIREMENTS TO BE FOLLOWED BY THE AUDITOR FOR CONDUCT OF
AUDIT
I. Ethical Requirements
The following are the fundamental principles of professional ethics that are required to be
followed by the auditor while conducting the audit of financial statements.
(a) Integrity
The auditor should be
 Straightforward
 Honest and
 Sincere in his approach to the work
If the auditor is dishonest on insincere, he cannot perform his functions
effectively.
1.11
(b) Objectivity
The auditor should be objective, i.e., he must be fair and unbiased. He should express his
opinion based on an objective consideration of facts, rather than on any pre-
determined notions.
(c) Independence
Independence can be be defined as “while making decisions or judgment about
the truthness and fairness of financial statements, the auditor should not be
sub-ordinate to the wishes or directions of any other person or to his own self-
interest”.
An auditor should not only be independent but should also appear to be so independent.
Independence in appearance is avoiding facts and circumstances that are so
significant that a third party would reasonably conclude an auditor‟s integrity,
objectivity and professional skepticism had been compromised.
Many numbers of people rely upon the report given the auditor. If the auditor is not
independent, the opinion expressed by him is not reliable to the users of financial
statements and hence it may defeat the very purpose for which the auditor is appointed.
Threats to Independence
The code of ethics for professional accountants identifies 5 types of threats. They are as
follows:
Self-interest threats
Self-interest threats which occur when an auditng firm, its partner or associate could
benefit from a financial interest in an audit client. For example:
a. Direct financial interest or materially indirect financial interest in a client
b. Loan or guarantee to or from the concerned client
c. Undue dependence on client‘s fee and, hence, concerns about losing the engagement
d. Close business relationship with an audit client etc.
Self-review threats
Self-review threats, which occur when the auditor is supposed to review the work
performed by him previously. For example:
a. The auditor had provided management services such as internal audit, investment
advisory services etc. In this case, the services that are performed by the auditor are
themselves subject matter of audit.
b. When a member of the audit team was previously a director or senior employee of the
client
c. When an auditor having recently been a director or senior officer of the company.
Advocacy threats
Advocacy threats which occur when the auditor promotes client‘s opinion to a point where
people may believe that objectivity is getting compromised. For example, when an
auditor deals with shares or securities of the audited company or becomes client‘s
advocate in litigations.
Familiarity threats
1.12
Familiarity threats occur when the auditors form relationships with the client where they
end up being too sympathetic to the client‟s interests. This can occur in many ways:
a. Close relative of the audit team working in a senior position in the client company
b. Former partner of the audit firm being a director or senior employee of the client
c. Long association between specific auditors and specif clients
d. Acceptance of a significant gift or hospitality from the client company etc.
Intimidation threats
Intimidation threats which occur when the auditors are deterred from acting
objectively with an adequate degree of professional skepticism. These could happen
because of:
a. Threat of replacement over disagreements with the application of accounting
principles, or
b. Pressure to disproportionately reduce work in response to reduced audit fee
Safeguards to Independence
In order to safeguard the independence of the auditors, serveral provisions were introduced
in the Companies Act, 2013. Accordingly, a Chartered Accountant cannot be appointed as
an auditor of a company if:
a. he is an officer or employee of the company
b. he is a partner or employee of an officer or employee of the company
c. he, his partner or his relative is indebted to the company, or its subsidiary company
or its holding company or any subsidiary of such holding company or its associate
company for an amount exceeding Rs.5,00,000 or provided any guarantee or
provided any security for indebtness for an amount exceeding Rs.1,00,000.
d. If he, his relative or his partner his holding any security of the company.
e. If he, or any partner of his firm is having any business relationship.
f. he is a relative of a director or a key managrial personnel.
The provisions introduced in the Companies Act, 2013 regarding removal of auditors
[Section 140(1) and 140(4)] were also intended to safeguard the independence of the
auditor.
(d) Professional competence and due care
(e) Confidentiality
The auditor should respect the confidentiality of information acquired in the course of his
work and should not disclose any such information to a third party without
obtaining prior permission from the client or unless there is a legal or professional duty to
disclose.
An auditor has access to a lot of information pertaining to his clients. Some of the
information possessed by the auditor may be of a sensitive nature. If the auditor discloses
this information to any unauthorized person, it may be detrimental to the interest of the
client.
1.13
To achieve the objective of maintaining confidentiality of information, the ―Professional

Ethics‖ issued by the ICAI specifies that a Chartered Accountant in practice shall be deemed
to be guilty of professional misconduct when he, without obtaining prior permission of the
client, discloses any information acquired by him during his professional assignment to any
person other than the client.
However, where there is a requirement of law for disclosure of information, the same can
be disclosed even without obtaining permission from the client. For example, where
the law specifically requires the auditor to disclose the affairs of the client in a criminal case
against the later, the auditor can disclose it even without obtaining the permission of the
client.
(f) Professional behavior.
II. Professional Skepticism
In layman‘s language, professional skepticism can be defined as an attitude of
questioning mind. The auditor shall always conduct the audit with professional
skepticism recognizing that circumstances may exist, that cause the financial statements to
be materially misstated. The auditor shall maintain an attitude of professional skepticism
throughout the audit. This helps the auditor to identify:
• Audit evidence that contradicts with other audit evidence obtained
• Conditions that may indicate possible fraud.
III. Professional Judgment
The auditor shall exercise professional judgment in planning and performing an audit of
financial statements. Professional judgment is essential for proper conduct of an audit.
Professional judgment is required regarding decisions about:
 Materiality
 Audit risk
 Nature, timing, and extent of audit procedures to be used
 Sufficiency and appropriateness of audit evidence
 Drawing conclusions based on audit evidence
IV. Sufficient Appropriate Audit Evidence and Audit Risk
The objective of conducting audit is to get a reasonable assurance that the financial
statements are free from material misstatements. To get this assurance, the auditor needs to
obtain sufficient appropriate audit evidence by following different audit procedures.
The sufficiency and appropriateness of audit evidence are interrelated. Sufficiency is the
measure of the quantity of audit evidence. The quantity of audit evidence needed is
dependent on several factors such as:
 Experience of the auditor
 The materiality of the item
 Audit risk that can be accepted by the auditor
 Trend of Accounting Ratios etc.
 The quality of audit evidence (the higher the quality, the less may be required).
Obtaining more audit evidence, however, may not compensate for its poor quality.
1.14
Appropriateness refers to the relevance of audit evidence.

CONDUCT OF AN AUDIT IN ACCORDANCE WITH STANDARDS ON AUDITING
Complying with Standards on Auditing relevant to the Audit
 The auditor shall comply with all Standards on Auditing relevant to the audit. A
Standard on Auditing is relevant to the audit when the standard is in effect and the
circumstances addressed by the SA exist.
 The auditor shall have an understanding of the entire text of SA, including its
application and other explanatory material, to understand its objectives and to apply
its requirements properly.
 The auditor shall not represent compliance with Standards on Auditing in his
report unless the auditor has complied with the requirements of this SA and all
other Standards on Auditing relevant to the audit.
Objectives Stated in Individual SA‟s
In planning and performing the audit, the auditor shall keep in mind the objectives stated in
the relevant standards on auditing in order to achieve the overall objectives of audit. This
helps the auditor in:
 Determining whether any audit procedures in addition to those required by the SA‘s
are necessary and
 Evaluating whether sufficient appropriate audit evidence has been obtained.
Overall Objectives of the Auditor
In conducting an audit of financial statements, the overall objectives of the auditor are
(a) To obtain reasonable assurance about whether the FS as a whole are free from material
misstatement, and
(b) To report on the financial statements, and communicate as required by the SA‘s, in
accordance with the auditor‘s findings.
Complying with Relevant Requirements
The auditor shall comply with each requirement of an SA unless, in the circumstances of the
audit:
 The entire SA is not relevant; or
 The requirement is not relevant because it is conditional and the condition does not
exist.
Failure to Achieve an Objective
If an objective in a relevant SA cannot be achieved, the auditor shall evaluate whether this
prevents the auditor from achieving the overall objectives of the auditor and thereby
requires the auditor to modify the auditor‟s opinion or withdraw from the
engagement. Failure to achieve an objective represents a significant matter requiring
documentation in accordance with SA 230.
SA - 210 – AGREEING THE TERMS OF AUDIT ENGAGEMENTS
Effective Date
1st April, 2010
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Introduction
The objective of the auditor is to accept or continue an audit engagement only when the
basis upon which it is to be performed has been agreed. In other words, the
auditor has to accept or continue an audit engagement only when:
 Preconditions for an audit are present and
 Common understanding of the terms of the audit engagement
between him and management/those charged with governance.
PRECONDITIONS FOR AN AUDIT
The following are the preconditions for an audit:
I. Use of Acceptable financial reporting framework
II. Agreement of Premise
I. Management/those charged with governance should agree to make use of an
acceptable financial reporting framework for preparation and presentation of
financial statements and
Applicable Financial Reporting Framework
Acceptable Financial Reporting Framework is the base upon which the management
shall prepare Financial Statement. Therefore, first of all, the auditor shall determine
whether the financial reporting framework to be applied by the management in
preparation of financial statements is acceptable or not. For this purpose, the auditor
may consider the following:
i. The nature of the entity (business enterprise/a not for profit
organization)
ii. The purpose of financial statements (for example, whether they
are prepared to meet the common financial information needs of a wide
range of users or the financial information needs of specific users)
iii. The requirement of a law or a regulation
II. Agreement of the premise by management/those charged with governance.
Premise
The management should acknowledge/agree that the following are its responsibilities,
which are fundamental to the conduct of audit.
a. Preparation and presentation of financial statements in accordance
with the applicable financial reporting framework.
b. Designing, implementing and maintenance of internal control
c. Providing the auditor with:
i. All information such as records and documentation relevant to
the preparation and presentation of financial statements
ii. Additional information requested by the auditor
iii. Unrestricted access to those within the entity to obtain audit
evidence.
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COMMON UNDERSTANDING OF THE TERMS OF THE AUDIT ENGAGEMENT

In the interest of both the auditor and the entity, it is an obligation on the part of the
auditor to send an audit engagement letter before the commencement of the audit.
This helps in avoiding misunderstandings between the auditor and the client.
Form and Content of Audit Engagement Letter
The form and content of the audit engagement letter may vary from entity to entity. In
addition to including the matters discussed above, the auditor may also include the
following in the audit engagement letter.
a. The Objective of Audit
b. Elaboration of the scope of audit by providing reference to applicable
legislations, Pronouncements of ICAI etc.
c. Clearly stating that some material misstatements may not be detected
even though the audit is properly planned and performed in accordance with
Standards on Auditing because of the existence of inherent limitations of
audit and inherent limitations of internal control.
d. The basis of computation of fees
e. Stating that the audit process may be subjected to “Peer Review”
f. Stating that management is responsible for the following:
i. Proper maintenance of accounts and other related records
ii. Selection and consistent application of appropriate accounting policies
iii. Prevention and Detection of Frauds and Errors
iv. Introduction of Internal Controls
v. Making accounting estimates
vi. Preparation of Financial Statements by using an acceptable
financial reporting framework.
vii. Preparation of Financial Statements on Going Concern basis.
viii. Prevention and detection of non compliance with the provisions of
applicable laws and regulations.
ix. Identification of Related Parties and Related Party Transactions and
proper disclosure of the same in the Financial Statements.
x. Provide written representations.
xi. Provide the auditor the other information ( i.e. Draft copy of Annul
Report)
g. Arrangements concerning involvement of other auditors, internal
auditors, experts etc.
h. A request to management to agree to the terms of the engagement and to
acknowledge the receipt of the audit engagement letter,
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AUDIT OF COMPONENTS
When the auditor of a parent entity is also the auditor of a component, whether there is a
need to send a separate audit engagement letter to the component shall be determined by
the auditor after taking into account the following factors:
 Who appoints the auditor of the component?
 Whether a separate report is to be issued in respect of the component?
 Degree of Ownership by Parent
 Degree of independence of the component management from the parent
entity
RECURRING AUDITS
There is no need on the part of the auditor to send a new audit engagement letter for each
period. However, it may be appropriate to revise the terms of the audit engagement or
to send a new audit engagement letter in the following cases:
 Significant change in Ownership
 Significant change in nature or size of the business of the entity
 Changes in Senior management
 Change in Legal or Regulatory requirements etc.
ACCEPTANCE OF A CHANGE IN THE TERMS OF ENGAGEMENT
Sometimes, the entity may request the auditor to change the terms of the audit
engagement. Generally a request for a change in the terms of audit engagements may be
made in the following circumstances:
 Management‟s misunderstanding of the nature of an audit
 To restrict the scope of audit engagement
When such a request is made, the auditor shall consider whether there is a reasonable
justification for changing the terms of audit engagement. For example, if change is
requested because of management‘s misunderstanding of the nature of the audit, it can be
considered as a reasonable justification and hence the auditor can revise the terms of audit
engagement.
Limitation on scope prior to Audit Engagement Acceptance
If management/those charged with governance impose a limitation on the scope of the
auditor‘s work in the terms of a proposed audit engagement and the auditor
believes that the limitation would result in issuance of a disclaimer of opinion,
he shall not accept such a limited engagement unless required by a law or
regulation.
Example of an Audit Engagement Letter - Audit of Financial Statement sunder the
Companies Act 2013 and the Rules There under (When Reporting u/s 143(3)(i)of the
Companies Act, 2013 is Not Applicable)
To,
The Board of Directors of..................(name of the Entity)
(Address)
Dear Sirs,
1.18
I / We refer to the letter dated _________ informing me / us about my / our (re)

appointment/ratification as the auditors of the Company. You have requested that I /we audit
the financial statements of the Company as defined in Section 2(40) of the Companies Act,
2013 („2013 Act‟), for the financial year(s) beginning April 1, 20XX and ending March 31, 20YY.
The financial statements of the Company include, where applicable, consolidated financial
statements of the Company and of all its subsidiaries, associate companies and joint ventures.
I am / We are pleased to confirm my / our acceptance and my / our understanding of this
audit engagement by means of this letter.
My / Our audit will be conducted with the objective of me / our expressing an opinion if the
aforesaid financial statements give the information required by the 2013 Act in the manner so
required, and give a true and fair view in conformity with the applicable accounting principles
generally accepted in India, of the state of affairs of the Company as at 31st March, 20YY,
and its profit/loss and its cash flows for the year ended on that date. In forming my / our
opinion on the financial statements, I / we will rely on the work of branch auditors appointed
by the Company and my / our report would expressly state the fact of such reliance. I / We
will conduct my / our audit in accordance with the Standards on Auditing (SAs), issued by the
Institute of Chartered Accountants of India (ICAI) and deemed to be prescribed by the
Central Government in accordance with Section 143(10) of the2013Act. Those Standards
require that I / we comply with ethical requirements and plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from material
misstatements. An audit involves performing procedures to obtain audit evidence about the
amounts and the disclosures in the financial statements. The procedures selected depend on
the auditor‟s judgment, including the assessment of the risks of material misstatement of the
financial statements, whether due to fraud or error.
An audit also includes evaluating the appropriateness of the accounting policies used and the
reasonableness of accounting estimates made by the Management, as well as evaluating the
overall presentation of the financial statements. Because of the inherent limitations of an
audit, including the possibility of collusion or improper management override of controls, there
is an unavoidable risk that material misstatements due to fraud or error may occur and not be
detected, even though the audit is properly planned and performed in accordance with the
SAs. In making our risk assessments, we consider internal control relevant to the entity‟s
preparation of the financial statements in order to design audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the entity‟s internal control. However, we will communicate to you in writing
concerning any significant deficiencies in internal control relevant to the audit of the financial
statements that we have identified during the audit.
My / Our audit will be conducted on the basis that the Management and those charged
with governance (Audit Committee / Board) acknowledge and understand that they have
the responsibility:
(a)For the preparation of financial statements that give a true and fair view in accordance with
the applicable Financial Reporting Standards and other generally accepted accounting
principles in India. This includes:
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 Proper maintenance of accounts and other matters connected therewith;

 The responsibility for the preparation of the financial statements on a going concern
basis;
 The preparation of the annual accounts in accordance with, the applicable accounting
standards and providing proper explanation relating to any material departures from
those accounting standards;
 Selection of accounting policies and applying them consistently and making judgments
and estimates that are reasonable and prudent so as to give a true and fair view of the
state of affairs of the Company at the end of the financial year and of the profit and
loss of the Company for that period;
 Taking proper and sufficient care for the maintenance of adequate accounting record in
accordance with the provisions of the 2013 Act for safeguarding the assets of the
Company and for preventing and detecting fraud and other irregularities;
 Laying down internal financial controls to be followed by the Company and that such
internal financial controls are adequate and were operating effectively; and
 Devising proper systems to ensure compliance with the provisions of all applicable law
and that such systems were adequate and operating effectively.
(b)Identifying and informing me / us of financial transactions or matters that may have any
adverse effect on the functioning of the Company.
(c)Identifying and informing me / us of :
 All the pending litigations and confirming that the impact of the pending litigations o
the Company‟s financial position has been disclosed in its financial statements;
 All material foreseeable losses, if any, on long term contracts including derivativ
contracts and the accrual for such losses as required under any law or accounting
standards; and
 Any delay in transferring amounts, required to be transferred, to the Investor Educatio
and Protection Fund by the Company.
(d)Informing me / us of facts that may affect the financial statements, of which Management
may become aware during the period from the date of my / our report to the date the
financial statements are issued.
(e)Identifying and informing me / us as to whether any director is disqualified as on March 31,
20YY from being appointed as a director in terms of Section 164 (2) of the 2013 Act. This
should be supported by written representations received from the directors as on March 31,
20YY and taken on record by the Board of Directors.
(f)To provide me / us, inter-alia, with:

(i)Access, at all times, to all information, including the books, accounts, vouchers and other
records and documentation of the Company, whether kept at the Head Office or elsewhere, of
which the Management is aware that are relevant to the preparation of the financial
statements such as records, documentation and other matters. This will include books of
account maintained in electronic mode;
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(ii)Access, at all times, to the records of all the subsidiaries (including associate companies and
joint ventures as per Explanation to Section 129(3) of the2013 Act) of the Company in so far
as it relates to the consolidation of its financial statements, as envisaged in the 2013 Act;
(iii)Access to reports, if any, relating to internal reporting on frauds (e.g., vigil mechanism
reports etc.), including those submitted by cost accountant or company secretary in practice
to the extent it relates to their reporting on frauds in accordance with the requirements of
Section 143(12) of the2013Act;
(iv)Additional information that I / we may request from the Management for the purposes of
my / our audit;
(v)Unrestricted access to persons within the Company from whom I / we deem it necessary to
obtain audit evidence. This includes my / our entitlement to require from the officers of the
Company such information and explanations as I / we may think necessary for the performance
of my / our duties as the auditors of the Company; and
(vi)All the required support to discharge my / our duties as the statutory auditors as
stipulated under the Companies Act, 2013/ ICAI standards on auditing and applicable guidance.
As part of my / our audit process, I / we will request from the Management written
confirmation concerning representations made to me / us in connection with my / our audit.
My / Our report prepared in accordance with relevant provisions of the 2013 Act would be
addressed to the shareholders of the Company for adoption of the accounts at the Annual
General Meeting.
In respect of other services, my / our report would be addressed to the Board of Directors.
The form and content of my / our report may need to be amended in the light of my / our audit
findings. In accordance with the provisions of Section 143(12) and 143(13) of the 2013 Act, if
in the course of performance of my/ our duties as auditor, I / we have reason to believe that
an offence involving fraud is being or has been committed against the Company by officers or
employees of the Company,
I / we will be required to report to the Central Government, in accordance with the rules
prescribed in this regard which, inter alia, requires me / us to forward my / our report to the
Board or Audit Committee, as the case may be, seeking their reply or observations, to enable
me / us to forward the same to the Central Government. Such reporting will be made in good
faith and, therefore, cannot be considered as breach of maintenance of client confidentiality
requirements or be subject to any suit, prosecution or other legal proceeding since it is done in
pursuance of the 2013 Act or of any rules or orders made there under.
I / We also wish to invite your attention to the fact that my / our audit process is subject to
'peer review' / „quality review‟ under the Chartered Accountants Act, 1949. The reviewer(s)
may inspect, examine or take abstract of my / our working papers during the course of the
peer review/quality review.
I / We may involve specialists and staff from my / our affiliated network firms to perform
certain specific audit procedures during the course of my / our audit. In terms of Standard on
Auditing 720–“The Auditor‟s Responsibility in Relation to Other Information in Documents
Containing Audited Financial Statements” issued by the ICAI and deemed to be prescribed by
1.21
the Central Government in accordance with Section 143(10) of the 2013 Act, I / we request
you to provide to me / us a Draft of the Annual Report containing the audited financial
statements so as to enable me / us to read the same and communicate material inconsistencies,
if any, with the audited financial statements, before issuing the auditor‟s report on the
financial statements.
{Other relevant information}
{Insert Other information, such as fee arrangements, billings and other specific terms, as
appropriate.}
I / We look forward to full cooperation from your staff during my / our audit. Please sign and
return the attached copy of this letter to indicate your acknowledgement of, and agreement
with, the arrangements for my / our audit of the financial statements including our respective
responsibilities.
Yours faithfully, (signature)

(Name of the Member)
(Designation)
(Name of the Firm)
Date:
Place:
Copy to: Chairman, Audit Committee
Acknowledged on behalf of:
Name and Designation
Date
SA - 230 – AUDIT DOCUMENTATION

SCOPE
This standard made the auditor responsible to prepare audit documentation in respect
of audit of financial statements and for audit of historical information.
OBJECTIVE
Audit documentation maintained by the auditor provides:
 Evidence that the audit was planned and performed in accordance with
Standards on Auditing and applicable legal and regulatory requirements.
 Assist in directing and supervising the audit work
 Assist in fixing responsibility on the audit team in respect of work allotted to them
 Helps in providing guidance for future audits
EFFECTIVE DATE
April 1, 2009
DEFINITIONS
Audit Documentation
Audit documentation can be defined as the record of
 Audit procedures performed
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 Audit evidence obtained and

 Conclusions reached by the auditor
The documentation maintained by the auditor may some times be called as ―working
papers‖ or ―work papers‖.
Audit File
―Audit file‖ contains audit documentation maintained by the auditor for a specific
engagement in one or more folders or other storage media in physical or in electronic form‖.
Experienced Auditor
An individual (whether internal or external to the firm) who has practical audit experience,
and a reasonable understanding of:
 Audit processes;
 SA's and applicable legal and regulatory requirements;
 The business environment in which the entity operates; and
 Auditing and financial reporting issues relevant to the entity‘s industry.
CONTENTS OF AUDIT DOCUMENTATION

The auditor shall prepare audit documentation that is sufficient to enable an
experienced auditor, having no previous connection with the audit, to understand:
THE NATURE, TIMING AND EXTENT OF THE AUDIT PROCEDURES
PERFORMED
When the auditor is documenting the nature, timing and extent of audit procedures
performed, he shall record:
(a) The identifying characteristics of the specific items or matters tested
Recording the identifying characteristics serves a number of purposes. For example, by
recording the identifying characteristics helps in making a person/audit team responsible
for its work. For example:
 When the auditor carries a detailed test of purchase orders, the identifying
characteristics may be in the form of the date and unique purchase order
number.
 When the auditor follows sampling method, he may identify the population and
sample selected (for example, all journal entries over a specified amount from the
journal register).
 When the auditor follows systematic sampling method, he may identify the
sample by recording the starting point and sampling interval (for example, sample of
shipping reports selected from the shipping log for the period April 1 to
September 30, starting with report number 12345 and selecting every 125th
report).
 When the auditor made inquiries of specific entity personnel, the dates of the
inquiries and the names, job designations of the entity personnel can be identified.
(b) Who performed the audit work and the date such work was completed; and
(c) Who reviewed the audit work performed and the date and extent of such review.
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II. THE RESULTS OF THE AUDIT PROCEDURES PERFORMED AND THE

AUDIT EVIDENCE OBTAINED;
OTHER CONTENTS
 Communication with Previous Auditor
 Previous Year Audited Financial Statements
 Evidence that Internal Controls have been evaluated
 Copies of Legal Documents relating to the entity such as MOA, AOA, Partnership Deed
etc.
 Extracts of provisions of Special Acts, if any, applicable
 List of Books of Account, List of Bank Accounts, List of Officers, List of Accounting
Policies, List of Frauds and Errors identified during the previous audits.
 Trend of Accounting Ratios
 Copies of specific contracts, agreements etc.
 Audit Engagement Letter
 Audit Programme
 Checklists
 Letters of confirmation
 Written representation
 CARO Questionnaire
 Minutes of the meetings of Board of Directors/Shareholders
 Audit Note Book
OWNERSHIP OF AUDIT DOCUMENTATION
According to a circular issued by ICAI, the minimum period for which the auditor is
required to maintain working papers is 7 years. Unless otherwise specified by law or
regulation, audit documentation is the property of the auditor. He may at his discretion,
make portions of, or extracts from, audit documentation available to clients,
provided such disclosure does not affect the independence of the auditor.
SA 240 - THE AUDITOR‟S RESPONSIBILITIES RELATING TO FRAUD IN AN

AUDIT OF FINANCIAL STATEMENTS
Scope
This Standard on Auditing deals with the auditor‘s responsibilities relating to fraud in an
audit of financial statements.
Characteristics of Fraud
Misstatements in the financial statements can arise from either fraud or from error.
The distinguishing factor between fraud and error is whether the underlying action that
results in the misstatement of the financial statements is intentional or unintentional.
The auditor is concerned with fraud that causes a material misstatement in the
1.24
Two types of intentional misstatements are relevant to the auditor– misstatements

resulting from fraudulent financial reporting and misstatements resulting
from misappropriation of assets.
MISSTATEMENTS RESULTING FROM FRAUDULENT FINANCIAL
REPORTING
Fraudulent financial reporting involves intentional misstatements including omissions of
amounts or disclosures in financial statements to deceive financial statement users.
Reasons for Fraudulent Financial Reporting
1. Pressures to meet market expectations
2. A desire to maximize compensation based on performance
3. To minimize tax
4. To inflate earnings to secure bank financing.
Fraudulent financial reporting may be accomplished by the following:
 Manipulation, falsification (including forgery), or alteration of accounting
records or supporting documentation from which the financial statements are
prepared.
 Misrepresentation in or intentional omission from, the financial statements of
events, transactions or other significant information.
 Intentional misapplication of accounting principles relating to amounts,
classification, manner of presentation, or disclosure.
 Recording fictitious journal entries, particularly close to the end of an accounting
period, to manipulate operating results.
 Advancing or delaying recognition in the financial statements of events and
transactions that have occurred during the reporting period.
 Concealing, or not disclosing, facts that could affect the amounts recorded in
the financial statements.
Misappropriation of assets involves the theft of an entity‘s assets. It can be
accomplished by following any one of the following ways:
 Embezzling receipts (for example, misappropriating collections on accounts
receivable or diverting receipts in respect of written-off accounts to personal bank
accounts).
 Stealing physical assets or intellectual property (for example, stealing
inventory for personal use or for sale, stealing scrap for resale, colluding with a
competitor by disclosing technological data in return for payment).
 Causing an entity to pay for goods and services not received (for example,
payments to fictitious vendors, kickbacks paid by vendors to the entity‘s purchasing
agents in return for inflating prices, payments to fictitious employees).
 Using an entity‟s assets for personal use (for example, using the entity‘s assets
as collateral for a personal loan or a loan to a related party).
Misappropriation of assets is often accompanied by false or misleading records in
order to conceal the fact that the assets are missing or have been pledged without proper
authorization.
1.25
Why Frauds take place

Fraud involves incentive or pressure to commit fraud, a perceived opportunity to do
so.
For example:
Incentive or pressure to commit fraudulent financial reporting may exist when
management is under pressure, from sources outside or inside the entity, to achieve an
expected (and perhaps unrealistic) earnings target or financial outcome –
particularly since the consequences to management for failing to meet financial
goals can be significant.
Similarly, individuals may have an incentive to misappropriate assets, for example, because
the individuals are living beyond their means.
A perceived opportunity to commit fraud may exist when an individual believes
internal control can be overridden, for example, because the individual has knowledge
of specific deficiencies in internal control.
Responsibility for the Prevention and Detection of Fraud
The primary responsibility for the prevention and detection of fraud rests with
both those charged with governance of the entity and management.
Responsibilities of the Auditor
The responsibility of the auditor is limited to obtaining reasonable assurance that
the financial statements taken as a whole are free from material misstatement,
whether caused by fraud or error. However, because of the existence of inherent limitations
of an audit, there is an unavoidable risk that some material misstatements of the financial
statements may not be detected, even though the audit is properly planned and performed
in accordance with the SA‘s.
The risk of not detecting a material misstatement resulting from fraud is
higher than the risk of not detecting one resulting from error. This is because
fraud may involve sophisticated and carefully organized schemes designed to conceal it,
such as forgery, deliberate failure to record transactions, or intentional misrepresentations
being made to the auditor.
When obtaining reasonable assurance, the auditor is responsible for maintaining
professional skepticism throughout the audit.
Effective Date
1st April, 2009.
Objectives
The objectives of the auditor are:
 To identify and assess the risks of material misstatement in the financial statements
due to fraud;
 To obtain sufficient appropriate audit evidence about the assessed risks of material
misstatement due to fraud, through designing and implementing appropriate
responses; and
 To respond appropriately to identified or suspected fraud.
1.26
Definitions
Fraud - An intentional act by one or more individuals among management, those charged
with governance, employees, or third parties, involving the use of deception to obtain an
unjust or illegal advantage.
Fraud risk factors - Events or conditions that indicate an incentive or pressure to commit
fraud or provide an opportunity to commit fraud.
REQUIREMENTS
Professional Skepticism
In accordance with SA 200, the auditor shall maintain professional skepticism
throughout the audit, recognizing the possibility that a material misstatement due to
fraud could exist notwithstanding the auditor‘s past experience of the honesty and integrity
of the entity‘s management and those charged with governance.
Discussion Among the Engagement Team
SA 315 requires a discussion among the engagement team member which shall place
particular emphasis on how and where the entity‘s financial statements may be susceptible
to material misstatement due to fraud.
Risk Assessment Procedures and Related Activities
The auditor shall make inquiries of management regarding:
 Management‟s assessment of the risk of material misstatements due to Fraud
 Management‟s process for identifying and responding to the risks of fraud
 Management‟s communication, if any, to employees regarding its views on
business practices and ethical behavior.
 Inquiring management to ascertain whether they have knowledge of any actual,
suspected or alleged fraud.
For those entities that have an internal audit function, the auditor shall make inquiries of
internal auditor.
Unusual or Unexpected Relationships Identified
The auditor shall evaluate whether unusual or unexpected relationships that have been
identified in performing analytical procedures, including those related to revenue
accounts, may indicate risks of material misstatement due to fraud.
Evaluation of Fraud Risk Factors

The auditor shall evaluate whether the information obtained from the other risk assessment
procedures and related activities performed indicates that one or more fraud risk factors are
present. While fraud risk factors may not necessarily indicate the existence of fraud, they
have often been present in circumstances where frauds have occurred and therefore may
indicate risks of material misstatement due to fraud.
The fraud risk factors identified in this Appendix are examples of such factors
that may be faced by auditors in a broad range of situations. Separately
presented are examples relating to the two types of fraud relevant to the
auditor‟s consideration, i.e., fraudulent financial reporting and
misappropriation of assets. For each of these types of fraud, the risk factors are
1.27
further classified based on the three conditions generally present when

material misstatements due to fraud occur:
(a) Incentives/pressures
(b) Opportunities, and
(c) Attitudes/rationalizations
RISK FACTORS RELATING TO MISSTATEMENTS ARISING FROM
FRAUDULENT FINANCIAL REPORTING
A. Incentives/Pressures
Financial stability or profitability is threatened by economic, industry, or entity
operating conditions, such as:
 High degree of competition or market saturation, accompanied by declining
margins.
 Significant declines in customer demand and increasing business failures in
either the industry or overall economy.
 Operating losses making the threat of bankruptcy, foreclosure, or hostile takeover
imminent.
 Rapid growth or unusual profitability especially compared to that of other
companies in the same industry.
Excessive pressure exists for management to meet the requirements or expectations
of third parties due to the following:
 Profitability or trend level expectations of investment analysts, institutional investors,
significant creditors, or other external parties (particularly expectations that are
unduly aggressive or unrealistic), including expectations created by management in,
for example, overly optimistic press releases or annual report messages.
 Need to obtain additional debt or equity financing to stay competitive—
including financing of major research and development or capital expenditures.
Information available indicates that the personal financial situation of management or
those charged with governance is threatened by the entity‘s financial performance
arising from the following:
 Significant financial interests in the entity.
 Significant portions of their compensation (for example, bonuses, stock options, and
earn-out arrangements) being contingent upon achieving aggressive targets for stock
price, operating results, financial position, or cash flow.
 Personal guarantees of debts of the entity.
 There is excessive pressure on management or operating personnel to meet financial
targets established by those charged with governance, including sales or profitability
incentive goals.
B. Opportunities
The nature of the industry or the entity‘s operations provides opportunities to engage in
fraudulent financial reporting that can arise from the following:
 Assets, liabilities, revenues, or expenses based on significant estimates that involve
subjective judgments or uncertainties that are difficult to corroborate.
1.28
 Significant operations located or conducted across international borders in

jurisdictions where differing business environments and cultures exist.
The monitoring of management is not effective as a result of the following:
 Domination of management by a single person or small group (in a non owner-
managed business) without compensating controls.
There is a complex or unstable organizational structure, as evidenced by the following:
 High turnover of senior management, legal counsel, or those charged with
governance.
Internal control components are deficient as a result of the following:
 Inadequate monitoring of controls
 Accounting and information systems which are not effective, including situations
involving significant deficiencies in internal control.
Attitudes/Rationalizations
 Known history of violations of securities laws or other laws and regulations, or
claims against the entity, its senior management, or those charged with
governance alleging fraud or violations of laws and regulations.
 Excessive interest by management in maintaining or increasing the entity‟s
stock price or earnings trend.
 The practice by management of committing to analysts, creditors, and other third
parties to achieve aggressive or unrealistic forecasts.
 Management failing to remedy known significant deficiencies in internal
control on a timely basis.
 Dispute between shareholders in a closely held entity.
The relationship between management and the current or predecessor auditor
is strained, as exhibited by the following:
 Frequent disputes with the current or predecessor auditor on accounting,
auditing, or reporting matters.
 Unreasonable demands on the auditor, such as unrealistic time constraints
regarding the completion of the audit or the issuance of the auditor‘s report.
 Domineering management behavior in dealing with the auditor, especially involving
attempts to influence the scope of the auditor‟s work or the selection or
continuance of personnel assigned to on the audit engagement.
RISK FACTORS ARISING FROM MISSTATEMENTS ARISING FROM
MISAPPROPROPRIATION OF ASSETS
Incentives/Pressures
 Personal financial obligations may create pressure on management or
employees with access to cash or other assets susceptible to theft to misappropriate
those assets.
 Adverse relationships between the entity and employees with access to cash
or other assets susceptible to theft may motivate those employees to misappropriate
those assets. For example, adverse relationships may be created by the following:
o Known or anticipated future employee layoffs.
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o Promotions, compensation, or other rewards inconsistent with

expectations.
Opportunities
Certain characteristics or circumstances may increase the susceptibility of assets to
misappropriation. For example, opportunities to misappropriate assets increase when there
are the following:
 Large amounts of cash on hand or processed.
 Inventory items that are small in size, of high value, or in high demand.
 Easily convertible assets, such as bearer bonds, diamonds, or computer chips.
 Fixed assets which are small in size, marketable, or lacking observable
identification of ownership.
Inadequate internal control over assets may increase the susceptibility of
misappropriation of those assets. For example, misappropriation of assets may occur
because there is the following:
 Inadequate segregation of duties or independent checks.
 Inadequate oversight of senior management expenditures, such as travel
and other reimbursements.
 Inadequate job applicant screening of employees with access to assets.
 Inadequate record keeping with respect to assets.
 Inadequate system of authorization and approval of transactions (for example,
in purchasing).
 Lack of complete and timely reconciliations of assets.
 Lack of mandatory vacations for employees performing key control functions.
 Inadequate management understanding of information technology, which
enables information technology employees to perpetrate a misappropriation.
Attitudes/Rationalizations
 Behavior indicating displeasure or dissatisfaction with the entity or its treatment of
the employee.
 Changes in behavior or lifestyle that may indicate assets have been
misappropriated.
 Tolerance of petty theft.
RESPONSE TO THE ASSESSED RISK OF MATERIAL MISSTATEMENTS DUE
TO FRAUD
When the auditor comes across circumstances that indicate that the financial statements
may be materially misstated as a result of fraud, the auditor shall identify and assess the risk
of material misstatements due to fraud.
In the course of audit of K Ltd., its auditor Mr. 'N' observed that there was a
special audit conducted at the instance of the management on a possible
suspicion of a fraud and requested for a copy of the report to enable him to
report on the fraud aspects. Despite many reminders it was not provided. In
absence of the special audit report, Mr. 'N' insisted that he be provided with
1.30
at least a written representation in respect of fraud on/by the company. For

this request also, the management remained silent. Please guide Mr. 'N'.
Auditors Responsibilities Relating to Fraud: As per SA 240, ―The Auditor‘s Responsibilities
relating to Fraud in an Audit of Financial Statements‖, the primary responsibility for the
prevention and detection of fraud rests with both those charged with governance of the
entity and management. In addition an auditor conducting an audit in accordance with SAs
is responsible for obtaining reasonable assurance that the financial statements taken as a
whole are free from material misstatement, whether caused by fraud or error. The risk of not
detecting a material misstatement resulting from fraud is higher than the risk of not
detecting one resulting from error. This is because fraud may involve sophisticated and
carefully organized schemes designed to conceal it, such as forgery, deliberate failure to
record transactions, or intentional misrepresentations being made to the auditor.
As per SA 580, ―Written Representations‖, if management modifies or does not provide the
requested written representations, it may alert the auditor to the possibility that one or more
significant issues may exist. Further, If management does not provide one or more of the
requested written representations, the auditor shall discuss the matter with management;
re-evaluate the integrity of management and evaluate the effect that this may have on the
reliability of representations (oral or written) and audit evidence in general; and take
appropriate actions, including determining the possible effect on the opinion in the auditor‘s
report.
The auditor shall disclaim an opinion on the financial statements if the auditor concludes
that there is sufficient doubt about the integrity of management such that the written
representations are not reliable; or management does not provide the written
representations.
Further the auditor is required to report as per Paragraph 4 (xxi) of CARO, 2003, if there is
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.
In the instant case, in the course of audit of K Ltd., its auditor Mr. N observed that there was
a special audit conducted at the instance of the management on a possible suspicion of
fraud. Therefore, the auditor requested for special audit report, which was not provided by
the management despite of many reminders. Mr. N also insisted for written representation
in respect of fraud on/by the company. For this request also management remained silent.
Hence, the fact is required to be reported as per Paragraph 4(xxi) of the CARO, 2003 and
the auditor should also disclaim an opinion on the financial statements.
SA 250 - CONSIDERATION OF LAWS AND REGULATIONS IN AN AUDIT OF
FINANCIAL STATEMENTS
This SA deals with the responsibility of the auditor to consider laws and regulations
in an audit of financial statements.
Effective Date
April 1, 2009.
Objectives
 To obtain sufficient appropriate audit evidence regarding compliance with
the provisions of those laws and regulations having a direct effect on the
determination of material amounts and disclosures in the financial statements;
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 To identify instances of non-compliance with other laws and regulations that

may have a material effect on the financial statements; and
 To respond appropriately to non-compliance or suspected non-
compliance with laws and regulations.
Definition
Non-compliance can be defined as “acts of omission or commission by the entity,
either intentional or unintentional, which are contrary to the prevailing laws or
regulations”.
Effect of Laws and Regulations
The effect of laws and regulations on the financial statements varies considerably.
The provisions of some laws or regulations have a direct effect on the financial
statements. In other words, they determine the amounts to be reported as well as may
also specify how to disclose them in the financial statements. Examples: Tax Laws,
Labour laws like PF, ESI etc.
Other laws or regulations such as Pollution Control Act do not have a direct effect on
the entity‘s financial statements, but still the management is required to comply with those
provisions.
Non-compliance with laws and regulations may result in fines, litigation or other
consequences that may have a material effect on the financial statements.
RESPONSIBILITY OF MANAGEMENT
Management of an entity as well as the persons those charged with governance
are made primarily responsible for prevention and detection of non-
compliance with laws and regulations.
For this purpose, the management may implement the following policies and
procedures:
 Maintaining a register of significant laws and regulations with which the entity
has to comply within its particular industry
 Introducing appropriate systems of internal control
 Developing and following a code of conduct
Where, Code of Conduct can be defined as a written document containing
standard operating instructions to be followed for compliance with laws and
regulations
 Giving proper training to employees to understand the code of conduct
 Monitoring compliance with the code of conduct and taking appropriate
action on those employees who failed to comply with applicable laws and
regulations.
 Engaging legal advisors to assist in monitoring legal requirements.
 Assigning these responsibilities to the following:
 An internal audit function.
 An audit committee.
AUDITOR‟S RESPONSIBILITY
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Non-compliance with applicable laws and regulations may result in material

misstatements in the financial statements. Non-compliance would also result in
fines, penalties, litigations, discontinuance of operations etc. and hence may have a material
affect on the financial statements. Therefore, the auditor is responsible for obtaining
reasonable assurance that the financials are free from material misstatements. For this
purpose, the auditor is made responsible to detect non-compliance with laws and
regulations.
Whether an act constitutes non-compliance with laws and regulations is a matter for
legal determination, which is ordinarily beyond the auditor‟s professional
competence.
However, because of the auditor‘s training, experience and understanding of the
entity and its industry, he may be in a position to recognize acts which may
constitute non-compliance with laws and regulations. The auditor‘s responsibility is
limited to detection of non-compliance and not the prevention of non-compliance
because of the existence of inherent limitations of audit. The following are the
inherent limitations of audit:
 There are many laws and regulations, relating to the operating aspects of an
entity that do not affect the financial statements and are not captured by the
entity‘s information systems
 Non-compliance may involve conduct designed to conceal it, such as collusion,
forgery, deliberate failure to record transactions, management override of controls
Because of the above said inherent limitations of audit, the auditor may not be able to detect
all material misstatements resulting from non-compliance with the applicable laws and
regulations.
AUDITOR‟S RESPONSIBILITIES IN RELATION TO LAWS HAVING A DIRECT
EFFECT ON FINANCIAL STATEMENTS
In respect of laws having a direct effect on the financial statements, the auditor is made
responsible to obtain sufficient appropriate audit evidence to ensure that the entity
under audit has actually complied with those laws and regulations.
AUDITOR‟S RESPONSIBILITIES IN RELATION TO LAWS THAT DO NOT HAVE
A DIRECT EFFECT ON FINANCIAL STATEMENTS
Although certain laws and regulations may not have a direct effect on financial statements,
compliance with such laws may be fundamental to continuation of business or to avoid
material penalties (for example, compliance with the terms of an operating license,
compliance with regulatory solvency requirements, or compliance with environmental
regulations). To illustrate further, a Non Banking Financial Company might have to cease to
carry on the business if it fails to obtain a certificate of registration issued under Chapter III
B of the Reserve Bank of India Act, 1934 and if its Net Owned Funds are less than the
amount specified by the RBI in this regard.
Non-compliance with such laws and regulations may therefore have a material
effect on the financial statements. Therefore the auditor is required to follow
the procedures prescribed in the standard for identification on non-compliance
with laws and regulations.
AUDIT PROCEDURES
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To identify instances of non-compliance with other laws and regulations, the auditor may
follow the procedures explained below:
I. Obtain a general understanding of the legal framework applicable to the entity
and industry in which the entity operates.
II. Sometimes, the other audit procedures followed by the auditor for forming an
opinion on the financial statements may bring instances of identified or suspected
non-compliance to the auditor‟s attention such as:
 Reading minutes
 Inquiring entity‘s management and in-house legal counsel or external legal counsel
concerning litigation, claims and assessments
For this purpose, the auditor should maintain an attitude of professional skepticism
throughout the audit.
Indications of non-compliance with laws and regulations
If any one of the following matters comes to the knowledge of the auditor during the course
of audit, they may indicate the possibility of existence of non-compliance with laws and
regulations.
 Investigations by regulatory organizations and government departments
 Payment of fines or penalties
 Sales commissions appear excessive when compared with those ordinarily paid in the
industry
 Unusual payments towards legal fees
 Adverse media comment
Audit Procedures When Non-Compliance is Identified
When the auditor become aware of information concerning an instance of non-
compliance or suspected non-compliance, then he shall:
 Obtain an understanding of the nature of the act and the circumstances in which
it has occurred and
 Evaluate the possible effect of such identified or suspected non-compliance on
financial statements:
 In the form of fines, penalties, litigations including vitiation of going concern
assumption
 Whether such potential financial consequences require a disclosure
 Whether they make the financial statements misleading
When the auditor suspects non-compliance, then he should
 Discuss the matter with management/those charged with governance.
 If management/those charged with governance do not provide sufficient
information about compliance, consult with entity‟s legal counsel to ascertain
the possible effect of such suspected non-compliance on the financial statements.
 When the auditor is not satisfied with the legal counsel‟s opinion, he may
consult his own legal counsel to ascertain as to whether a contravention of a law
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or regulation is involved, the possible legal consequences, including the possibility of

fraud, and what further action, if any, the auditor would take.
 If sufficient information about suspected non-compliance cannot be obtained,
the auditor shall evaluate the affect of the lack of sufficient appropriate audit
evidence on his opinion.
REPORTING
 If non-compliance has a material effect on financials and is not reflected adequately
in the financial statements – express qualified or adverse opinion
 If the auditor is unable to evaluate whether the non-compliance has a material effect
on financials due to managements failure to provide sufficient appropriate evidence –
express qualified or disclaimer of opinion
PRACTICAL QUESTION
While verifying the employee records in a company, it was found that a major
portion of the labour employed was child labour. On questioning the
management, the auditor was told that it was outside his scope of the
financial audit to look into the compliance with other laws. Comment.
As per SA 250, ―Consideration of Laws and Regulations in an Audit of Financial
Statements‖, the auditor shall obtain sufficient appropriate audit evidence regarding
compliance with the provisions of those laws and regulations generally recognised to
have a direct effect on the determination of material amounts and disclosures in the
financial statements including tax and labour laws.
Further, non-compliance with other laws and regulations may result in fines, litigation
or other consequences for the entity, the costs of which may need to be provided for
in the financial statements, but are not considered to have a direct effect on the
If the auditor suspects there may be non-compliance, the auditor shall discuss the
matter with management. If management does not provide sufficient information
that supports that the entity is in compliance with laws and regulations and, in the
auditor‘s judgment, the effect of the suspected non-compliance may be material to the
financial statements, the auditor shall consider the need to obtain legal advice.
If the auditor is precluded by management from obtaining sufficient appropriate audit
evidence to evaluate whether non-compliance that may be material to the financial
statements has, or is likely to have, occurred, the auditor shall express a qualified
opinion or disclaim an opinion on the financial statements on the basis of a limitation on
the scope of the audit.
In the instant case, major portion of the labour employed in the company was child
labour. While questioning by auditor, reply of the management that it was outside his
scope of financial audit to look into the compliance with other laws is not acceptable as it
may have a material effect on financial statements.
Thus, auditor should ensure the disclosure of above fact and provision for the cost of
fines, litigation or other consequences for the entity. In case, the auditor concludes that
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 statement
1.35
SA - 260 (R) – COMMUNICATION WITH THOSE CHARGED WITH

GOVERNANCE
This standard on Auditing deals with the responsibility of the auditor to
communicate some specific matters with those charged with governance in an
audit of financial statements. The auditor‘s responsibility to communicate with those
charged with governance is not restricted to the matters specified in this standard.
Some times, law/regulations or even other standards on auditing may specify that
certain matters are required to be communicated. In such a case, the auditor is under
obligation to communicate such matters also.
EFFECTIVE DATE
01-04-2017
DEFINITIONS
Those Charged with governance:
“Those Charged with governance” can be defined to include ―the person(s) or
organization(s) with a responsibility for overseeing the strategic direction of the entity
including overseeing the financial reporting process.
“Management” includes the persons with a responsibility for the conduct of entity‘s
operations.
OBJECTIVES
The following are the objectives with which the auditor is required to communicate matters
with those charged with governance.
1. To communicate responsibilities of the auditor clearly
2. To communicate the planned scope and timing of the audit
3. To provide timely observations that are significant and relevant to the
responsibilities of those charged with governance;
IDENTIFYING THOSE CHARGED WITH GOVERNANCE
For the purpose of communication, first of all, the auditor should determine the
appropriate person(s) with whom communication is to be made.
Generally, the entity‘s governance is the collective responsibility of a governing body, such
as Board of directors, partners, a committee of management, trustees etc.
Where it is not possible for the auditor to identify the person(s) with whom the
communication is to be made, the auditor should come to an agreement with
the entity about the relevant person(s) with whom communication is to be
made.
In some cases, all of those charged with governance are involved in managing the entity, for
example, a small business where a single owner manages the entity and no one else has a
governance role. In these cases, if matters required by this SA are communicated with
person with management responsibilities, the matter need not be communicated again with
the same person in their governance role.
MATTERS TO BE COMMUNICATED
RESPONSIBILITIES OF THE AUDITOR
1.36
The responsibilities of the auditor in relation to the audit of financial statements clearly
stating therein that:
 His responsibility is to form and express an opinion on the financial statements
prepared by management;
 Audit does not relieve management or those charged with governance of
their responsibilities;
 He is not required to design procedures for identifying matters to be
communicated with those charged with governance;
 When SA 701 applies, the auditor‘s responsibilities to determine and communicate
key audit matters in the auditor‘s report;
Generally the above said matters are often included by the auditor in the terms of audit
engagement (audit engagement letter) and a copy of the same will be provided to
those charged with governance.
PLANNED SCOPE & TIMING OF AUDIT
Communication of the planned scope and timing of the audit helps those charged with
governance in discussing the issues of risk and materiality with the auditor and to
identify any areas in which they may request the auditor to undertake additional
audit procedures.
However, the auditor should keep in mind that too much communication of these
matters in detail may reduce the effectiveness of audit.
COMMUNICATING SIGNIFINACT RISKS IDENTIFIED BY THE AUDITOR
Under this heading the auditor may communicate matters such as:
 How the auditor plans to address the significant risks of material misstatements,
whether due to fraud or error;
 How the auditor plans to address areas of higher assessed risks of material
misstatement;
 The nature and extent of specialized skill or knowledge needed to perform the
planned audit procedures including the use of an auditor‘s expert.
 When SA 701 applies, the auditor‘s preliminary views about key audit matters;
SIGNIFICANT AUDIT FINDINGS
Qualitative aspects of entity‟s accounting policies and practices
Under this heading, the auditor shall communicate matters such as:
 The appropriateness of the accounting policies. Where the auditor finds the
accounting policies being followed by the management as inappropriate, he may
suggest acceptable alternative accounting policies;
 The effect of significant accounting policies in controversial or emerging areas
(or those unique to an industry, particularly when there is a lack of authoritative
guidance or consensus);
 Changes in significant accounting policies including an evaluation of the effect
of such change on the current and future earnings of the entity.
Accounting Estimates made
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i. The process followed by the management for making accounting estimates;
ii. The possibility of risk of material misstatements in the accounting estimates so
made by the management;
Significant difficulties, if any, encountered during the audit
a. Significant delays by management in providing required information;
b. Imposition of restrictions by the management as to the time of completion
of audit;
c. Unavailability of expected information;
d. Management‘s unwillingness to make assessment of entity‟s ability to
continue as a going concern when requested.
e. Material weaknesses in the internal controls that comes to the attention of the
auditor and were communicated to the management; (this is applicable only when
the management and TCWG are not one and the same)
f. Any other significant matter arising from the audit.
Circumstances that affects the form and content of auditor‟s report
When the auditor wants to include additional information in his report, the same shall also
be communicated to those charged with governance. This includes matters such as:
 The auditor expects to modify the opinion as per SA 705
 A material uncertainty related to going concern as per SA 570
 Key Audit matters are communicated as per SA 701
 The auditor considers necessary to include an EMP or OMP as per SA 706
When should the auditor communicate
The auditor shall communicate these matters on timely basis.
Circumstance When to communicate
Planning Matters Early in the engagement
Significant difficulty As soon as practicable
Material Weaknesses AS soon as practicable
SA - 265 - COMMUNICATING DEFICIENCIES IN INTERNAL CONTROL TO

THOSE CHARGED WITH GOVERNANCE AND MANAGEMENT
INTRODUCTION
The auditor has to form and express an opinion on the financial statements whether they are
reflecting a true and fair view. For this purpose, he has to ascertain whether the financial
statements contain any material misstatements. If the financial statements contain material
misstatements, they may not reflect a true and fair view. The existence or otherwise of
material misstatements in financial statements is the result of either fraud or error.
Therefore, the auditor shall, first of all, evaluate the effectiveness or otherwise of the internal
controls. If internal controls existing in the entity are effective the possibility of
1.38
occurrence of frauds and errors is less and hence the risk of material misstatements in
the financial statements will also be less. On the other hand, if the auditor finds that the
internal controls were not effective, the risk of material misstatements in the
financial statements is more. This process conducted by the auditor is technically called as
“Risk Assessment Process”.
During the “Risk Assessment Process”, the auditor may identify some deficiencies
in the internal controls.
OBJECTIVE
This standard imposes responsibility on the auditor to communicate “Significant
Deficiencies in Internal Control”. It also requires the auditor to communicate “Other
Deficiencies in Internal Control” when he is of the opinion that those deficiencies are
very much important and hence should be brought to the notice of those persons charged
with governance.
This SA is effective from 1st April, 2010
DEFINITIONS
Deficiency In Internal Control
Deficiency in Internal Controls is said to exist when:
 A control necessary to prevent, or detect and correct, misstatements in the financial
statements on a timely basis is missing.
 A control is designed, implemented or operated in such a way that it is unable to
prevent, or detect and correct, misstatements in the financial statements on a
timely basis;
Significant deficiency in Internal Control
A deficiency or combination of deficiencies in internal control that, in the auditor‘s
professional judgment, is of sufficient importance to merit the attention of those
charged with governance.
AUDIT PROCEDURES
IDENFICIATION OF DEFICIENCIES & DISCUSSIONS WITH MANAGEMENT
When the auditor is of the view that there exist some deficiencies in the Internal Controls, he
should discuss the same with “Appropriate Level of Management” which has the
authority to take remedial action on any identified deficiencies. This discussion
provides an opportunity for the auditor to alert management on a timely basis to the
existence of deficiencies of which the management may not have been previously aware.
DETERMINING WHETHER THE IDENFITIED DEFICIENCES CONSTITUTE
SIGNIFICANT DEFICIENCES
After having discussions with management, if the auditor identifies one or more deficiencies
in internal control, he shall determine whether such deficiencies constitute significant
deficiencies whether individually or in combination.
A deficiency in internal control on its own may not constitute a significant deficiency.
However, a combination of deficiencies affecting the same account balance or disclosure
may increase the risks of misstatement and hence to be considered as a significant
deficiency.
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Indicators of Significant Deficiencies in Internal Control

When the auditor identifies:
 Significant transactions in which management is financially interested and
are not being appropriately scrutinized by those charged with governance
 Management Fraud irrespective of its materiality
 Management‘s failure to take action on significant deficiencies previously
communicated
 Non existence of controls over:
 Prevention and detection of fraud
 Significant transactions with related parties etc.
COMMUNICATION OF SIGNIFICANT DEFICIENCIES TO THOSE CHARGED
WITH GOVERNANCE
Communication of significant deficiencies identified by the auditor to those charged with
governance and management is a must even though they may already be aware of significant
deficiencies.
Oral Communication
The significant deficiencies identified by the auditor may be communicated orally in the first
instance to management and, when appropriate, to those charged with governance. This
helps in taking timely remedial action to minimize the risks of material misstatement.
However oral communication does not relieve the auditor of the responsibility to
communicate the significant deficiencies in writing.
Written Communication
Regardless of whether the significant deficiencies were communicated orally, the auditor
shall communicate the same in writing to those charged with governance on a timely basis.
This communication assists those charged with governance in fulfilling their
responsibilities.
Communication with Management
The auditor shall communicate the significant deficiencies to management on a timely basis
unless it would be inappropriate to communicate directly to management. For significant
deficiencies, the appropriate level is chief executive officer/chief financial officer. For other
deficiencies, the appropriate level may be operational management.
CONTENTS OF COMMUNICATION
The auditor shall include the following in his written communication:
Description of the Deficiencies
In his written communication, the auditor shall clearly describe the deficiency and he has to
provide explanation with regard to the potential effects of such significant deficiencies.
However, there is no need on the part of the auditor to quantify the effects of significant
deficiencies.
Description of management responses & suggestions
The auditor may also include management‘s responses and suggestions for remedial action
on the identified significant deficiencies.
1.40
Statements
In his communication, the auditor should clearly state that:
 The purpose of the audit is to express an opinion on the financial statements;
 The purpose of consideration of internal control is not to express an opinion
on the effectiveness of internal controls but to design audit procedures
 The matters reported are the deficiencies identified and considered as important
to those charged with governance
 Had he performed more extensive procedures, he might have identified more
deficiencies
 The communication is provided for use of those charged with governance and it may
not be suitable for other purposes.
Identification of significant deficiencies reported but no remedial action taken
The auditor should also include significant deficiencies that were reported upon by him but
no remedial action has been taken by the management/those charged with governance. In
other words, if previously communicated significant deficiency remains, the current year‘s
communication may repeat the description or simply provide a reference to the previous
communication.
The auditor may also obtain from the management/those charged with governance
reasons for not taking remedial action. If the explanations provided by the
management were not found to be reasonable, it has to be treated as a significant
deficiency.
SA – 299 (R) : JOINT AUDIT OF FINANCIAL STATEMENTS

Introduction
The practice of appointing more than one auditor to conduct the audit of large
entities has been prevailing for a long time. This is done either due to the
requirements of laws or regulations or voluntarily.
This standard lays down the principles for effective conduct of joint audit to
achieve the overall objectives of the auditor as per SA 200.
This standard deals with the special considerations in carrying out audit by joint
auditors. Therefore, in addition to the requirements specified in this standard, the joint
auditors also need to comply with all other applicable Standards on Auditing.
Effective Date
01.04.2018
Definition
Joint Audit and Joint Auditors
A joint audit is an audit of Financial Statements of an entity by two or more auditors
appointed with the objective of issuing the audit report. Such auditors are described as joint
auditors.
AUDIT PLANNING, RISK ASSESSMENT AND ALLOCATION OF WORK:
 The engagement partner and other key members of the engagement team
from each of the joint auditors shall be involved in planning the audit. For this
1.41
purpose, the joint auditors are expected to hold a meeting immediately after their
appointment.
 In such a meeting, the joint auditors should divide the work among themselves
by mutual discussion.
 Such division of work should be in terms of identifiable units or specified areas.
 If in a specified circumstance, division of work is not possible in the manner specified
above, the work is to be divided either with reference to items of assets or
liabilities or income or expenditure.
 Even if the joint auditors divided the work in between themselves, there are certain
areas which cannot be divided. Those areas are called common areas and would be
carried out by all the joint auditors.
 They shall discuss the nature, timing and the extent of audit procedures for
common areas of audit to be performed by each of the joint auditors.
 The joint auditors should document the division of work as well as the nature,
timing and extent of audit procedures to be performed in respect of common areas
and preferably be communicated to those charged with governance.
CO-ORDINATION:
Where, in the course of his work, if any of the joint auditors comes across matters which
are relevant to the areas of responsibility of other joint auditors and which
deserve their attention or which requires disclosure or requires discussion, or
application of judgment by the other joint auditor, the same should be
communicated in writing to all the other joint auditors prior to the completion of
audit.
RESPONSIBILITY:
Each joint auditor is responsible:
1. For the work done by him
2. For evaluating the system of internal control in relation to the work area allotted
to him;
3. For determination of the nature, timing and extent of audit procedures to be applied
in relation to the areas of work allocated to them.
4. For obtaining information and explanations from management with reference to
their allotted work area.
5. To receive the branch audit reports in relation to branches allotted to him. They
should also take decisions with regard to visiting the branch premises.
All the joint auditors are jointly responsible for:
a) Audit work not divided by them (i.e. common areas) and is carried out by all of
them.
b) Appropriateness of decisions taken collectively by all the joint auditors concerning
the nature, timing and extent of audit procedures in respect of common areas.
c) In respect of matters which are brought to the notice of the joint auditors by any one
of them and on which there is an agreement among the joint auditors.
1.42
d) Presentation and Disclosure of the Financial Statements as required by the applicable

e) Ensuring that the audit report complies with the requirements of the relevant
statutes, the applicable standards on auditing and other relevant
pronouncements issued by ICAI.
Each joint auditor is entitled to assume that the other joint auditors have carried out their
part of the audit work in accordance with Standards on Auditing issued by ICAI, and if not
the other joint auditor would bring to the notice of all the joint auditors that he has departed
from Standards on Auditing. Therefore, it is not necessary for a joint auditor to review
the work performed by other joint auditors, or perform any tests to ascertain
whether the work has actually been performed in such a manner.
AUDIT CONCLUSIONS AND REPORTING:
On completion of audit, the joint auditors mutually discuss and arrive at an agreed
report.
However, where the joint auditors are in disagreement with regard to any matter, each
one of them should express his own opinion through a separate report. In this case, the
rule of majority shall not prevail.
Where joint auditors express their opinion in the form of a separate report, every joint
auditor shall make a reference to the fact that separate reports were issued by the other
joint auditors under the heading “Other Matter Paragraph” as per Revised SA 706.
ADVANTAGES & DISADVANTAGES OF JOINT AUDIT:
Joint audit basically implies pooling together the resources and expertise of more than one
firm of auditors to render an expert job in a given time period which may be difficult to
accomplish acting individually.
The following are the advantages of joint audit:
 Sharing of Expertise
 Advantage of mutual consultations
 Lower work load
 Better quality
 Improved service to the client
 Healthy competition towards better performance
The following are the disadvantages of joint audit:
 Sharing of fee
 Problems of co-ordination of work
 Psychological problems where firms of different standing are associated in the joint
audit
 General superiority complexes of some auditors
SA 315 – IDENTIFYING AND ASSESSING THE RISKS OF MATERIAL

MISSTATEMENT THROUGH UNDERSTANDING THE ENTITY AND ITS
ENVIRONMENT
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Objective
The objective of the auditor is to identify and assess the risk of material
misstatement, whether due to fraud or error, at the financial statement and
assertion levels, through understanding the entity and its environment including
the entity‟s internal control, thereby providing a basis for designing and
implementing responses to the assessed risks of material misstatement. This will help
the auditor to reduce the risk of material misstatement to an acceptably low level.
Definitions
Assertions – Representations by management, explicit or otherwise, that are embodied in
Business Risk – A risk resulting from significant conditions, events, circumstances,
actions or inactions that could adversely affect an entity‘s ability to achieve its objectives and
execute its strategies, or from the settings of inappropriate objectives and strategies.
Internal Control – The process designed, implemented and maintained by those charged
with governance, management and other personnel to provide reasonable assurance about
the achievement of an entity‘s objectives with regard to reliability of financial reporting,
effectiveness and efficiency of operations, safeguarding of assets, and compliance with
Risk assessment procedures – The audit procedures performed to obtain an
understanding of the entity and its environment, including the entity‘s internal control, to
identify and assess the risk of material misstatement, whether due to fraud or
error, at the financial statement and assertion level.
Significant Risk – An identified and assessed risk of material misstatement that, in the
auditor‘s judgment, requires special audit consideration.
Material Weakness – A weakness in internal control that could have a material effect on
SOURCES OF MISSTATEMENTS
1) The omission of a financial statement element, account or item
2) An inaccuracy in gathering or processing data from which financial statements
are prepared
3) A financial statement disclosure that is not presented in conformity with generally
accepted accounting principles.
4) The omission of information required to be disclosed in conformity with
generally accepted accounting principles
5) An incorrect accounting estimate arising from oversight or misinterpretation of
facts
6) Difference between management‘s and the auditor‘s judgment concerning accounting
estimates, or the selection and application of accounting policies that the auditor
considers inappropriate.
RISK ASSESSMENT PROCEDURES AND RELATED ACTIVITIES
The auditor should perform the following risk assessment procedures to obtain an
understanding of the entity and its environment, including its internal controls –
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The risk assessment procedures shall include the following:

1. Inquiries of management and others within the entity who in the auditor‘s judgment
may have information that is likely to assist in identifying risk of material misstatement
due to fraud or error.
2. Analytical procedures
3. Observation and Inspection
Inquiries of Management and Others
 Inquiries directed towards those charged with governance may help the auditor
understand the environment in which the financial statements are prepared.
 Inquires directed towards internal audit personnel may provide information
about internal audit procedures performed during the year relating to the design and
effectiveness of the entity‘s internal controls and whether the management has
satisfactorily responded to findings from those procedures.
 Inquiries directed towards in-house legal counsel may provide information about
such matters as litigation, compliance with laws and regulations etc.
 Inquiries directed towards marketing or sales personnel may provide
information about changes in the entity‘s marketing strategies, sales trends, or
contractual arrangements with its customers.
 Inquiries directed to information systems personnel may provide information
about system changes, system or control failures or other system related risks.
ANALYTICAL PROCEDURES
Analytical procedures performed as risk assessment procedures may identify and

assist the auditor in assessing the risks of material misstatement thereby helps the auditor
in designing and implementing responses to the assessed risks.
Analytical procedures may help in identifying the existence of unusual ratios, trends,
unusual relationships etc. particularly risks of material misstatements due to fraud.
OBSERVATION AND INSPECTION
Observation and Inspection may support inquiries of management and others, and may also
provide information about the entity and its environment.
IDENTIFYING AND ASSESSING THE RISK OF MATERIAL MISSTATEMENT
AT FINANCIAL STATEMENT LEVEL
RMM at the financial statement level refer to risks that relate pervasively to the financial
statements as a whole and they may 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.
Risks at the financial statement level may derive in particular from a weak control
environment. For example, the following are the causes of RMM at the financial
statements level:
 Concerns about the integrity of the entity‘s management.
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 Concerns about the conditions and reliability of an entity‘s records may cause the
auditor to conclude that it is unlikely that Sufficient Appropriate Audit Evidence will
be available to support an unqualified opinion on the Financial Statements.
 Unusual pressures on the management
 Factors affecting the industry in which the entity operates
AT THE ASSERTION LEVEL
In presenting the Financial Statements in accordance with Applicable Financial Reporting
Frame work, management implicitly or explicitly makes several assertions. The auditor
should consider RMM at the assertion level for classes of transactions (Statement of Profit &
Loss), account balances (Balance Sheet) and disclosures (Notes to account).
UNDERSTANDING OF THE ENTITY
Obtaining an understanding of the entity and its environment, including entity‘s internal
controls is a continuous process. This understanding establishes a frame of reference
within which the auditor plans the audit and also helps in exercising professional
judgment throughout the audits.
UNDERSTANDING THE NATURE OF THE ENTITY
The auditor shall understand the nature of the entity, including:
1) Its operations
2) Its ownership and governance structure
Under this heading, the auditor shall verify whether the entity has a complex structure,
for example with subsidiaries or other components in multiple locations. Complex
structures often introduce issues that may give rise to RMM. Such issues may include
whether goodwill, joint ventures, investments are accounted properly.
Selection and Application of Accounting Policies
 The effect of significant accounting policies in controversial or emerging
areas for which there is a lack of authoritative guidance or consensus.
 Changes in the entity‟s accounting policies including the reasons for changes
thereto. The auditor shall evaluate whether the entity‘s accounting policies are
appropriate for its business and are consistent with the Applicable Financial
Reporting Framework and accounting policies used in the relevant industry.
 Financial reporting standards and laws and regulations that are new to the entity,
and when and how the entity will adopt such requirements.
UNDERSTANDING THE ENVIRONMENT
Industry Factors/Environment
The following are the matters that are required to be considered by the auditor under this
heading:
 The market and competition
 Cyclical or seasonal activity
 Product technology
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Regulatory Factors/Environment
 Accounting principles and industry specific practices
 Regulatory framework for a regulated industry
 Government policies currently affecting the conduct of the entity‘s business, such as
monetary, including foreign exchange controls, fiscal, financial incentives (for
example, government ait programs), and tariffs.
 Environmental requirements affecting the industry and the entity‘s business.
External Environment/Factors
 General economic conditions
 Interest rates
 Availability of financing
 Inflation
 Currency revaluation
OBJECTIVES, STRATEGIES AND THE RELATED BUSINESS RISKS THAT MAY
RESULT IN A MATERIAL MISSTATEMENT
Strategies are the approaches by which management intends to achieve its objectives.
Business Risk may arise for example, from:
 The development of new products or services that may fail
 Flaws in a product or service that may result in liabilities and reputational risk.
MEASUREMENT AND REVIEW OF THE ENTITY‟S FINANCIAL
PERFORMANCE
Management and others will measure and review those things they regard as important.
Performance measurement, whether external or internal, create pressures on the
entity. These pressures, in turn, may motivate the management to take action to
improve business performance or to misstate the financial statements.
Examples of internally generated information used by management for measuring and
reviewing financial performance and which the auditor may consider, include:
 Key performance indicators (financial and non-financial) and key ratios
 Budgets, forecasts etc
 Comparison of entity‘s performance with that of competitors
INTERNAL CONTROLS
An understanding of internal control assists the auditor in identifying types of potential
misstatements and factors that affect the RMM, and in designing the nature, timing and
extent of audit procedures
CONDITIONS AND EVENTS THAT MAY INDICATE RMM
 Operations in regions that are economically unstable, for example, countries with
significant currency devaluation or highly inflationary economies
 Operations exposed to volatile markets, for example, futures trading
 Going concern and liquidity issues including loss of significant customers
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 Constrains on the availability of capital and credit

 Developing or offering new products or services, or moving into new lines of business
 Expanding into new locations
 Significant transactions with related parties
 Weaknesses in internal control, especially those not addressed by management
 Installation of significant new IT systems related to financial reporting.
 Inquiries into the entity‘s operations or financial results by regulatory or government
bodies
 Pending litigation and contingent liabilities
SA 320 - MATERIALITY IN PLANNING AND PERFORMING AN AUDIT

In conducting an audit of financial statements, the overall objective of the auditor is to
obtain reasonable assurance that the financial statements as a whole are free from material
misstatements resulting either from frauds or from errors. This helps the auditor in
forming and expressing an opinion on the financial statements. In other words, if the
financial statements contain material misstatements, they may not reflect a true and fair
view.
This standard deals with the responsibility of the auditor in respect of:
a. Applying the concept of materiality in planning and performing audit
b. Determination of Materiality for financial statements as a whole
c. Determination of materiality level for particular classes of transactions
d. Determination of Performance Materiality Level
Guiding Principles of Materiality
 Misstatements including omissions are considered as material if they are capable of
influencing the economic decisions of users taken on the basis of the financial
statements.
 Judgments about whether a particular item is material or not has to be taken by the
auditor by taking into account the size or nature of the misstatement and the
surrounding circumstances.
 While judging materiality, the auditor is expected to consider the common
financial information needs of users of financial statements as a group rather
than the possible impact of misstatements on specific individual users of financial
statements.
 Determination of materiality is a matter of professional judgment.
Relationship between Materiality and Audit Risk
There is an inverse relationship between materiality level and the audit risk. Higher the
materiality level, lower will be the audit risk and lower the materiality level, higher will be
the audit risk.
Where ―Audit Risk‖ can be defined as the risk that the auditor expresses an inappropriate
audit opinion when the financial statements are materially misstated.
AT PLANNING STAGE
When the auditor is planning for the audit, he has to determine materiality for the financial
1.48
statements as a whole.
DETERMINING MATERIALITY FOR THE FINANCIAL STATEMENTS AS A
WHOLE
Step 1: Choosing an Appropriate Benchmark
Determining materiality involves the exercise of professional judgment. The auditor may
use a percentage to a chosen benchmark as a starting point of determination of materiality
for the financial statements as a whole. For example, the materiality for the financial
statements as a whole can be determined based on a percentage of Profit Before Tax.
Generally, the auditor may use the following as a Benchmark:
1. Gross Profit
2. Profit Before Tax
3. Total Expenses
4. Total Equity
5. Net Asset Value
Step 2: Determining a Percentage to be Applied
While determining a Percentage to be applied to the chosen benchmark the auditor should
keep in mind that there is a relationship between the percentage and the chose benchmark.
For example a percentage applied to PBT will normally be higher than a percentage applied
to total revenue. In other words, if the auditor applied 5% on PBT for a manufacturing
company, he may consider 1% of total revenue or expenses for a not-for-profit entity.
II.DETERMINING MATERIALITY LEVEL FOR PARTICULAR CLASSES OF
TRANSACTIONS / ACCOUNT BALANCES/DISCLOSURES
Sometimes it may be necessary for the auditor to determine different materiality levels for
particular classes of transactions/account balances/ disclosures when he is of the opinion
that misstatements in such class of transactions/account balances or disclosures could
reasonably be expected to influence the economic decisions of the users of financial
statements although such misstatements are lesser than the materiality for the financial
statements as a whole. The following are the factors that indicate the existence of one or
more such transactions:
 Whether law, regulation or applicable financial reporting framework affect user‘s
expectations for example, related party transactions, remuneration of management and
 The key disclosures in relation to the industry for example, research and development
costs for a pharmaceutical company.
III. DETERMINING PERFORMANCE MATERIALITY
“Performance Materiality” means the amount or amounts set by the auditor at
less than materiality for the financial statements as a whole to reduce to an
acceptably low level the probability that the aggregate of uncorrected
misstatements exceeds materiality for the financial statements as a whole.
Some times, the aggregate of individually material misstatements may cause the financial
statements to be materially misstated. Hence, it is necessary for the auditor to determine
performance materiality for individual material misstatements.
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The auditor may also fix Performance materiality for particular classes of
transactions/account balances/disclosures.
REVISION OF MATERIALITY AS THE AUDIT PROGRESSES
Materiality for the financial statements as a whole as well as materiality for particular
classes of transactions may need to be revised as a result of change in circumstances that
occurred during the audit.
DOCUMENTATION
The audit documentation shall include the factors considered by the auditor in determining:
 Materiality for the financial statements as a whole
 Materiality for particulars classes of transactions/account balances/disclosures
 Performance materiality
 Revision if any made to the above as the audit progresses.
This standard is applicable from 1st April, 2010.
Previous Examination Questions
As an auditor of RST Ltd. Mr. P applied the concept of materiality for the
financial statements as a whole. On the basis of obtaining additional
information of significant contractual arrangements that draw attention to a
particular aspect of a company's business, he wants to re-evaluate the
materiality concept. Please, guide him.
Re-evaluation of the Materiality Concept: In the instant case, Mr. P, as an auditor of RST
Ltd. has applied the concept of materiality for the financial statements as a whole. But he
wants to re-evaluate the materiality concept, on the basis of additional information of
significant contractual arrangements which draws attention to a particular aspect of the
company‘s business.
As per SA 320 ―Materiality in Planning and Performing an Audit‖, while establishing the
overall audit strategy, the auditor shall determine materiality for the financial statement as a
whole. He should set the benchmark on the basis of which he performs his audit procedure.
If, in the specific circumstances of the entity, there is one or more particular classes of
transactions, account balances or disclosures for which misstatements of lesser amounts
than the materiality for the financial statements as a whole could reasonably be expected to
influence the economic decisions of users taken on the basis of the financial statements, the
auditor shall also determine the materiality level or levels to be applied to those particular
classes of transactions, account balances or disclosures.
The auditor shall revise materiality for the financial statements in the event of becoming
aware of information during the audit that would have caused the auditor to have
determined a different amount (or amounts) initially.
If the auditor concludes a lower materiality for the same, then he should consider the fact
that whether it is necessary to revise performance materiality and whether the nature,
timing and extent of the further audit procedures remain appropriate.
Thus, Mr. P can re-evaluate the materiality concepts after considering the necessity of such
revision.
1.50
SA 450 - EVALUATION OF MISSTATEMENTS IDENTIFIED DURING THE

AUDIT
INTRODUCTION
According to SA-700(R) – “Forming an opinion and reporting on the financial
statements”, the auditor has to obtain reasonable assurance that the financial
statements are free from material misstatements and therefore they are reflecting a true and
fair view.
For this purpose, first of all the auditor has to evaluate whether the misstatements
identified by him are material or not. This standard helps the auditor in evaluation of
misstatements identified by him during the course of audit.
This standard is effective for audit of Financial Statements from 01-04-2010.
OBJECTIVES
The auditor has to evaluate
a. The effect of identified misstatements on the audit and
b. The effect of uncorrected misstatements on the Financial Statements.
DEFINITIONS
Misstatement
A difference between amount, classification, presentation, or disclosure of a
reported Financial Statement item and the amount, classification,
presentation, or disclosure that is required for the item in accordance with the
applicable financial reporting framework.
In other words, misstatement can be defined as those adjustments of amounts,
classifications, presentation or disclosures that are necessary in the opinion of the auditor to
satisfy that the Financial Statements give a true and fair view.
Misstatements may result from:
1. An inaccuracy in gathering or processing data from which the Financial
Statements are prepared.
2. An omission of an amount or disclosure.
3. An incorrect accounting estimate arising from overlooking or clear mis-
interpretation of facts.
4. An unreasonable accounting estimate made by the management.
5. Inappropriate selection and application of accounting policies.
Uncorrected misstatements
Misstatements that the auditor has accumulated during the audit and that have not been
corrected.
AUDIT PROCEDURES
STEP - 1 : ACCUMULATION OF IDENTIFIED MISSTATEMENTS
The auditor shall accumulate all the misstatements identified by him during the
course of audit. In doing so, he shall not consider misstatements that are clearly
trivial.
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Misstatements that are clearly trivial can be defined as those misstatements, which are
below the amount designated by the auditor. When misstatements are clearly trivial, they do
not have a material effect on the Financial Statements. Hence, there is no need for the
auditor to accumulate those misstatements, which are clearly trivial.
For this purpose, misstatements can be broadly classified into 3 types. They are
1. Factual misstatements
2. Judgmental misstatements
3. Projected misstatements
Factual Misstatements
These are the misstatements identified by the auditor about which there is no doubt to the
auditor.
Judgmental Misstatements
These misstatements arise because of differences in judgment of management and.
judgment of the auditor. For example, if there is a difference in judgment between the
management and the auditor regarding the reasonableness of an accounting estimate made
by the management. In the judgment of the management, the accounting estimate may be
reasonable but it may not be reasonable in the judgment of the auditor. Like wise,
differences may also arise with regard to selection or application of accounting policies.
Projected Misstatements
These are the best estimate of misstatements by auditor. For example, when the
auditor follows sampling procedure and identifies certain misstatements in the sample,
the same has to be projected by the auditor to the entire population.
STEP - 2: CONSIDERATION OF IDENTIFIED MISSTATEMENTS AS THE AUDIT
PROGRESSES
When the auditor identifies a misstatement, he has to consider the circumstances in
which such misstatement occurs. The occurrence of a misstatement may indicate the
existence of other misstatements and if these are aggregated with misstatements
accumulated by the auditor they may become material. For example, when the auditor
identifies that a misstatement arose from a breakdown in internal control or a
misstatement occurring because of inappropriate assumptions.
The auditor shall request the management to examine a class of transactions/account
balance or disclosure to determine the amount of actual misstatement and to make
appropriate adjustments to the financial statements. Such a request may be made, for
example, based on the auditor‘s projection of misstatements identified in an audit sample to
the entire population from which it was drawn.
If the aggregate of misstatements accumulated during the audit approaches materiality
determined in accordance with Standard on Auditing 320, the audit risk in such a case is
greater than an acceptably low level because the fact that the possible undetected
misstatements when aggregated with misstatements accumulated during the audit could
exceed materiality. Undetected misstatements may exist because of sampling risk.
When the auditor is of the opinion that
a. The nature of identified misstatements and the circumstances of their occurrence
indicate that other misstatements may exist and if these are aggregated with
misstatements accumulated during the audit could become material or
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b. If the aggregate of misstatements accumulated during the audit approaches

materiality level
The auditor shall determine whether there is a need to revise the overall audit strategy and
audit plan.
Communication and Correction of misstatements
The auditor shall communicate all the misstatements accumulated during the audit to
appropriate level of management on a timely basis.
Timely communication of misstatements enables management to evaluate whether the
items are misstatements, inform the auditor if it disagrees and take action if necessary.
Some times a law or regulation may restrict the auditor from communicating certain
misstatements to management say for example if such communication might prejudice an
investigation by an appropriate authority into an actual or suspected illegal act.
He shall also request the management to correct those misstatements.
If management refuses to correct some or all of the misstatements communicated by the
auditor, the auditor shall obtain an understanding of the reasons for not correcting such
communicated misstatements and such reasons shall be considered while evaluating
whether the financial statements as a whole are free from material misstatements.
STEP – 3 : EVALUATING THE EFFECT OF UNCORRECTED MISSTATEMENTS
The auditor shall determine whether uncorrected misstatements identified by him are
material either individually or in aggregate. The following are the factors to be considered by
the auditor to determine whether the uncorrected misstatements are material or not:
The size and nature of the misstatements
Each individual misstatement is to be considered to evaluate its effect on the relevant classes
of transactions, account balances or disclosures. While doing so, the auditor shall also
consider whether the materiality level for the particular class of transactions, account
balances or disclosures exceeded.
If an individual misstatement is identified as material, it cannot be offset by other
misstatement. For example, if revenue has been materially overstated, the financial
statements as a whole will be materially mis-stated, even though the effect of such
misstatement on earnings is completely offset by an equivalent overstatement of expenses.
Sometimes, the auditor may find classification misstatements. In such a case the auditor is
required to evaluate whether such a misstatement is material or not. For this purpose, he
has to consider several matters such as:
 The effect of classification misstatement on debt
 The effect on individual items or sub-totals
 The effect on the key ratios
A classification misstatement need not be treated as material even though it exceeds the
materially level. For example, a misclassification between balance sheet items may not be
considered material when the amount of misclassification is small in relation to the size of
the related balance sheet items and the misclassification doest not affect the income
statement or any key ratios.
The particular circumstances of their occurrence
1.53
In the following circumstances, the auditor may consider some misstatements as

material even if they are lower than the materiality when such misstatements:
 Affects compliance with regulatory requirements
 Affects compliance with debt contracts
 Affect the ratios used
 Affects segment information (for example, the significance of the matter to a
segment or other portion of the entity‘s business that has been identified as playing a
significant role in the entity‘s operations or profitability)
 Has the effect of increasing the management compensation
 Makes a change in earnings or other trends
 Relates to incorrect selection or application of accounting policy that has an
immaterial effect on the current period‘s financial statements but is likely to have a
material effect on future period‘s financial statements.
 Relating to related parties
The circumstances explained above are only examples and the above list is inclusive. The
existence of any circumstances such as these does not necessarily lead to a
conclusion that the misstatement is material.
Communication with those charged with Governance
The auditor shall communicate to those charged with governance the following provided
that those charged with and the management are not one and the same:
 Uncorrected misstatements and
 Their effect on his opinion
 Requesting that uncorrected misstatements be corrected.
Written Representations
Because management/those charged with governance are responsible for adjusting the
financial statements to correct material misstatements, the auditor shall request a written
representation from them about uncorrected misstatements. In some case,
management/those charged with governance may not believe the certain uncorrected
misstatements as misstatements. In such a case, they have to add words such as:
“We do not agree that items …………… and ……………………… constitute
misstatements because of the following reasons”
SA 500 – AUDIT EVIDENCE

SCOPE
The basic objective behind appointment of auditor is to report whether the financial
statements present the true and fair view. To form an opinion whether the financial
statements are presenting a true and fair view, the auditor has to obtain sufficient
appropriate audit evidence.
This standard explains “what is audit evidence” in an audit of Financial Statements. It
also explains the audit procedures to be followed by the auditor to obtain sufficient
appropriate audit evidence to draw reasonable conclusions about true and fair view of
the Financial Statements.
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Why the auditor needs evidence

While preparing the financial statements, management makes several assertions where
assertion refers to declarations made by the management about the financial
statements. The auditor needs evidence to ascertain whether the assertions made by the
management are correct or not. The following are the assertions made by the management
in preparation of financial statements.
ASSERTIONS RELATING TO ACCOUNT BALANCES (BALANCE SHEET)
Existence – assets, liabilities exist
Rights and Obligations – the entity holds or controls the rights to assets and liabilities
are the obligation of the entity.
Completeness – all assets and liabilities that should have been recorded have been
recorded
Valuation – assets, liabilities are included in the Financial Statements at appropriate
amounts and any resulting valuations are appropriately recorded.
ASSERTIONS RELATING TO CLASSES OF TRANSACTIONS AND EVENTS
(PROFIT & LOSS ACCOUNT)
Occurrence – transactions and events that have been recorded have occurred and pertain
to the entity.
Completeness – all transactions and events that should have been recorded have been
recorded.
Accuracy – amounts and other data relating to recorded transactions and events have been
recorded appropriately.
Cut-off – transactions and events have been recorded in the correct accounting period.
Classification – transactions and events have been recorded in the proper accounts.
ASSERTIONS ABOUT PRESENTATION AND DISCLOSURE
Occurrence and rights and obligations – disclosed events, transactions and other
matters have been occurred and pertain to the entity
Completeness – all disclosures that should have been included in the financial statements
have been included
Classification and understandability – financial information is appropriately
presented and described, and disclosures are clearly expressed.
Accuracy and valuation – financial and other information are disclosed fairly and at
appropriate amounts.
a.
EFFECTIVE DATE
01.04.2009.
DEFINTIONS
Audit Evidence
Audit evidence can be defined as information used by the auditor in arriving at
conclusions on which auditor‟s opinion is based. It not only includes information
contained in the accounting records but it also includes other information.
1.55
Audit evidence includes:

1. Information contained in the accounting records:
Accounting records include the records of initial accounting entries, invoices, contracts,
journal entries, worksheets, spreadsheets supporting computations etc.
2. Other information:
Other information which the auditor may use as audit evidence includes minutes of
the meetings, written confirmations for trade receivables and payables etc. It may
also include information obtained by the auditor from previous audits.
The auditor should obtain sufficient appropriate audit evidence by designing
and performing the procedures explained below:
SUFFICIENT APPROPRIATE AUDIT EVIDENCE
According to Standard on Auditing-200, the auditor shall get a reasonable assurance that
the financial statements are free from material misstatements. To get this reasonable
assurance, the auditor has to obtain sufficient appropriate audit evidence.
Sufficiency of Audit Evidence
Sufficiency refers to the quantity of audit evidence that should be obtained by the auditor.
Whether the evidence gathered by the auditor is sufficient or not is dependent on several
factors such as:
 Experience of the Auditor
 Materiality of the Item
 Audit Risk that can be accepted by the auditor
 Trend of Accounting Ratios
 Quality of audit evidence – i.e. the higher the quality, the less is the audit
evidence required to be gathered by the auditor
Appropriateness of Audit Evidence
Appropriateness means the relevance and reliability of audit evidence.
Relevance deals with the logical connection with the purpose of audit procedure. For
example, if the purpose of an audit procedure is to test for overstatement in accounts
payable, verifying the records relating to accounts payable is the relevant audit procedure.
While testing for the understatement of accounts payable, the relevant evidence may be in
the form of supplier‘s statements, subsequent disbursements etc.
Obtaining sufficient appropriate audit evidence helps the auditor in reducing
the audit risk to an acceptably low level. Where “Audit Risk” can be defined as the
risk arising in a situation where the auditor expresses an inappropriate audit opinion when
the financial statements are materially misstated.
RELIABILITY STANDARDS OF AUDIT EVIDENCE
1. Audit Evidence obtained from independent sources outside the entity is more
reliable. (External Evidence)
2. Audit Evidence generated internally is reliable if the related internal controls are
effective. (Internal Evidence)
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3. Written evidence i.e. audit evidence in documentary form such as paper,

electronic or other form is more reliable than evidence obtained orally.
4. Audit Evidence obtained directly from a third party is more reliable than any other
audit evidence.
AUDIT PROCEDURES FOR OBTAINING AUDIT EVIDENCE
The auditor can obtain audit evidence through performing the procedures explained below:
1. Risk Assessment Procedures
2. Further Audit Procedures which comprise:
a. Tests of Control/Compliance Procedures
b. Substantive Procedures
RISK ASSESSMENT PROCEDURES
Risk Assessment procedures refers to the audit procedures performed to obtain an

understanding of the entity and its environment, including the entity‘s internal control, to
identify and assess the risks of material misstatement, whether due to fraud or error, at the
financial statement and assertion levels.
TESTS OF CONTROLS/COMPLIANCE PROCEDURES
Tests of controls are designed to evaluate the operating effectiveness of

internal controls in preventing or detecting material misstatements resulting
from frauds & errors.
In other words, compliance procedures are the procedures followed by the auditor which
relates to client‘s internal controls. While following these procedures, the auditor
concentrates on:
1. Existence
2. Continuity
3. Effectiveness
The extent of substantive procedures may need to be increased when the
results from test of controls are unsatisfactory.
SUBSTANTIVE PROCEDURES
Substantive Procedures are the tests designed to obtain evidence as to the accuracy,
validity and completeness of the data produced by the accounting system. The
following are the substantive procedures that can be followed by the auditor to obtain
sufficient appropriate audit evidence.
1. Tests of details of transactions & Balances -- Vouching & Verification
The alternatives available for the auditor for selecting the items for testing are as follows:
 Selecting all items (100% examination)
 Selecting specific items and
 Audit Sampling
The application of any one or combination of the above alternatives depends on the risk of
material misstatements.
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Selecting all items (100% examination)

100% examination may be appropriate when:
 The population constitutes a small number of large value items
 Existence of a significant risk
 Other means do not provide sufficient appropriate audit evidence
Selecting Specific Items
The auditor may decide to select specific items from a population. They may include
 High value items/Suspicious, unusual, risk prone
 All items over certain amount
Audit Sampling
Audit sampling is designed to enable conclusions to be drawn about an entire population on
the basis of testing a sample drawn from it.
2. Substantive Analytical Procedures
Substantive Analytical Procedures includes analysis/comparison of significant ratios and
trends and investigating into the resulting fluctuations.
OTHER AUDIT PROCEDURES:
1. Inspection
Inspection consists of
 Examination of Records
 Examination of Documents
 Physical Verification of Tangible Assets
whether internal or external, whether in paper form or in electronic form or other
media.
Inspection of tangible assets may provide evidence with respect to the existence but
may not about the ownership and valuation of the same.
2. Observation
Observation consists of looking at a process or procedure being performed
by others, for example, observation of inventory counting by the auditor
when it is carried on by the entity. The main limitation of observation is that it
provides audit evidence but it is limited to the point of time at which the
observation takes place. The other limitation of this technique is the fact that the
auditor is observing the process may affect the way in which the process or procedure
is performed.
3. External Confirmation
It represents audit evidence obtained by the auditor as a direct written response from
a third party either in paper form, or by electronic or other medium. Generally,
external confirmation technique is followed to ascertain the correctness of certain
account balances. However, external confirmation need not be restricted to account
balances only. For example, the auditor may request confirmation of the terms of
agreements or transactions with third parties.
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External Confirmation procedures are also used to obtain audit evidence about
the absence of certain conditions. For example the absence of a “side
agreement” that may influence revenue recognition.
4. Recalculation
It involves checking of the mathematical accuracy of documents or records. It
may be performed manually or electronically.
5. Inquiry:
Inquiry consists of seeking information from knowledgeable persons within
the entity or outside the entity. The information may be either financial or
non-financial. The inquiry may be either written or oral. Once the auditor
follows this technique, it is necessary for the auditor to evaluate responses to inquiry.
Responses to inquiries may provide the auditor with:
1. Information not previously possessed.
2. Information that differs significantly from other information that the auditor has
previously obtained.
3. A basis for the auditor to modify or perform additional audit procedures.
6. Re-performance:
Re-performance involves independent execution of procedures or controls by the
auditor that were originally performed as part of entity‘s internal control.
Example:
1. Re-performing the reconciliation of bank statement.
2. Re-performing the ageing of accounts receivable.
RELIABILITY OF INFORMATION PRODUCED BY MANAGEMENT‟S

EXPERT/USING THE WORK OF AN MANAGEMENT‟S EXPERT
An individual or organization possessing expertise in a field other than
accounting or auditing, whose work in that filed is used by the entity to assist
in preparing the Financial Statements.
While preparing the financial statements, sometimes the entity may require expertise in
fields such as actuarial calculations, valuations etc. In such a situation, the entity may
either employ or engage an expert in these fields to obtain the needed expertise. Such expert
appointed/engaged by the management is technically called as “Management‟s Expert”.
If the entity fails to do so, there will be an increased risk of material misstatements in
While conducting the audit, when the auditor comes to know that the work of
management‘s expert has been used in preparation of financial statements, then he shall
 Evaluate the competence, capabilities and objectivity of the expert
 Obtain an understanding of the work of that expert
 Evaluate whether the expert‘s work constitute appropriate audit evidence for the
relevant assertion.
Evaluate the competence, capabilities, objectivity of the expert
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Before placing reliance on any information produced by the management‘s expert, the
auditor shall consider important factors such as the competence, capabilities and objectivity
of the management‘s expert.
“Competence” is related to the nature and level of expertise of the management‘s expert.
“Capability” refers to the ability to exercise that competence.
“Objectivity” relates to the possible effect that bias, conflict of interest or the influence of
others may have on the management‘s expert‘s professional judgment.
AUDIT PROCEDURES
 Consider the expert‘s qualifications, membership of a professional body etc.
 Consider expert‘s experience
 Experience of the expert in the specific field in which the auditor wants to gather
audit evidence for example, a particular actuary may specialize in property insurance
but have limited expertise regarding pension calculations.
 Published papers/ books written by expert
 Discussions with others who have familiarity with that expert‘s work
 Discussions with auditor‟s expert who assist the auditor in obtaining sufficient
appropriate audit evidence
 Personal experience with the work of expert carried out by him previously
While evaluating the Objectivity of the management‘s expert, the auditor shall consider
factors such as:
 Business and Personal relationships
 Whether the management‘s expert is engaged/employed by the entity
Obtain an understanding of the work of management‟s expert
The auditor has to obtain an understanding of the work of the management‘s expert. This
includes considering:
 Understand the nature, scope and objectives of the expert‘s work
 The source data or information used by the expert
 The assumptions and methods used by the management‘s expert
 Evaluate whether the expert‟s work constitute appropriate audit
evidence for the relevant assertion.
If the auditor is unable to understand the same, he may consider using the work of
an auditor‟s expert.
SA - 501 : AUDIT EVIDENCE
SPECIFIC CONSIDERATIONS FOR SELECTED ITEMS
INTRODUCTION
The purpose of this Standard on Auditing is to establish standards on the auditor's
responsibilities and provide additional guidance to that contained in SA-500 ―Audit
Evidence‖.
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This standard will assist the auditor in obtaining audit evidence with respect to the specific
financial statement amounts and other disclosures.
This Standard on Auditing comprises the following parts:
PART A: ATTENDANCE AT PHYSICAL INVENTORY COUNTING
The auditor should follow the audit procedures described below during his attendance at the
time of physical verification of inventory to obtain sufficient appropriate audit evidence
regarding the same.
For the purpose of this standard, the definition of "Inventory" is same as defined under
AS-2 -Valuation of Inventories.
RESPONSIBILITY OF THE MANAGEMENT
Physical verification of inventories is the responsibility of the management of the
entity. For the purpose of making physical verification, management ordinarily establish
procedures by following which the inventory is physically counted at least once in a year.
This is done generally either at the end of the year or as near the end of the year as possible.
This will serve as a basis for preparation of the financial statements.
RESPONSIBILITY OF THE AUDITOR
Attendance on the Date of Physical Count
It is the responsibility of the auditor to attend at physical inventory counting for
obtaining sufficient appropriate audit evidence regarding the existence of the
inventory as well as the physical condition of inventory where the auditor is of the view
that inventory is material to the financial statements.
This will enable the auditor to
 inspect the inventory
 to observe whether the procedures established by the management for physical
verification were complied with
However, the auditor may not be able to attend the physical inventory counting due to
factors such as the nature and location of the inventory.
Attendance on a date other than the date of Physical Count
If the auditor is unable to attend the physical inventory count on the date planned due
to unforeseen circumstances, the auditor should take or observe some physical counts
on an alternative date. In such a case, the auditor may perform alternative audit
procedures, if necessary, to ensure that changes in inventory between the date of
physical count and the period end date are correctly recorded.
Impracticability of attendance
Where attendance at the physical inventory counting is impracticable, due to factors such
as the nature and location of the inventory, the auditor should consider whether
alternative procedures provide sufficient appropriate audit evidence of existence
and condition of inventory.
For example, the auditor should examine a sample of documents evidencing the movement
of inventory into and out of stores shortly before and after the cut - off date, and verify
whether the inventory represented by those documents were included or excluded, as
appropriate during the inventory count.
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If the alternative audit procedures followed by the auditor does not provide sufficient
appropriate audit evidence, then it is a limitation on scope of audit and the same
should be reported by the auditor.
Planning the Attendance
In planning attendance at the physical inventory count or the alternative procedures, the
auditor would consider the following:
 Internal control systems regarding inventory
 Inherent, control and detection risks and
 Materiality of inventory
 The locations at which inventory is held and its nature. Whether an expert's
assistance is needed.
When inventory is situated in several locations, the auditor would consider at which
locations attendance is appropriate, taking into account
a. the materiality of the inventory
b. the risk of material misstatement and
c. the assessment of inherent and control risk at different locations.
AUDIT PROCEDURE
1. Verify whether adequate procedures are established and proper instructions
issued for physical inventory counting.
2. Verify the reasonableness of timing of the count.
3. Review whether proper Cut-off Procedures were followed by Management.
Cut-off procedures should include details of the movement of inventory just prior to,
during and after the count were followed to ensure that such movements are
appropriately included and/or excluded, as applicable from such inventory. For
example,
(a) Goods purchased but not received are included in the inventories; and
(b) Goods sold but not dispatched are excluded from the inventories.
4. Review the instructions provided by the management which should cover:
a. tagging
ii) Accurate identification of
a. the stage of completion of work in progress
b. slow moving, obsolete, damaged or rejected items
c. inventory owned by a third party, for example, on consignment and
inventory in transit; and
5. Ensure that the instructions provided by the management were adequately
implemented. For this purpose, the auditor would observe physical verification
procedures performed by the employees and perform test counts.
6. Trace the items selected from inventory records to the physical inventory sheets.
7. Obtain direct confirmation with third party when inventory is under the custody
and control of a third party.
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8. Depending on materiality of the inventory, the auditor should consider the following:
a. The conduct of the third party in the past with the entity and
independence of the third party.
b. Observing, or arranging for another auditor to observe, the physical
inventory count.
c. Obtaining another auditor's report on the adequacy of the third party's
accounting and internal control systems for ensuring that the inventory is
correctly counted and adequately safeguarded.
d. Inspect documentation regarding inventory held by third parties, for
example, warehouse receipts.
e. Subsequent receipt of goods from third parties.
9. Obtain written representations from management concerning:
(a) the completeness of information provided regarding the inventory; and
(b) assurance with regard to adherence to laid down procedures for physical
inventory count.
Audit Conclusions and Reporting
If the auditor is unable to obtain sufficient appropriate audit evidence concerning the
existence of inventory, or if the inventory is not disclosed appropriately in the
financial statements, the auditor should issue a qualified opinion.
PART B: INQUIRY REGARDING LITIGATION AND CLAIMS
Definitions
1. "Litigation" means a lawsuit or legal action including all proceedings therein.
2. "Claims" means- a right to payment or right to an equitable remedy for breach of
performance.
Litigation and claims involving an entity may have a material effect on the Financial
Statements and thus may be required to be disclosed and/or provided for in the financial
statements.
The auditor should carry out audit procedures in order to become aware of any litigation
and claims involving the entity. Such procedures would include the following:
1. Inquire the management about litigations and claims pending against the
organization.
2. Obtain representations from the Management.
3. Review minutes of the board/committee and correspondence with the entity's lawyers.
4. Examine legal and other relevant expense accounts.
5. Make a direct communication with the entity‘s lawyers and with such other
professionals engaged by the entity particularly when the auditor believes that effect of
such litigations and claims is material to the financial statements of the entity. Such a
communication is of great help for the auditor in assessing the reliability of
management‘s estimates of the financial implications, including costs of such litigations
and claims.
Contents of the Letter
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The letter of communication with the entity‘s lawyers should be prepared by

management. This letter should request the entity‘s lawyers to communicate directly
with the auditor. The letter would ordinarily specify the following:
a. A list of litigation and claims
b. Management's assessment of the outcome of the litigation or claim and
its estimate of the financial implications, including costs involved.
c. A request that the entity's lawyer:
 confirm the reasonableness of management's assessments;
 provide the auditor with further information if the list is
considered to be incomplete or incorrect; and
 provide updated information as and when requested by the auditor
up to the date of the audit report.
6. Consider the status of legal matters up to the date of the audit report.
7. In case of disagreement between management and the entity's lawyers, meet
the entity's lawyers and discuss the likely outcome of litigation and claims. Such
meetings would take place with management's permission and, preferably, with a
representative of management in attendance.
If management refuses to give permission to communicate with the entity's lawyers,
this would constitute a limitation on the scope of the auditor's work that requires
expression of a qualified opinion or a disclaimer of opinion as the case may be.
Where a lawyer or a professional refuses to respond in an appropriate manner and
the auditor is unable to obtain sufficient appropriate audit evidence by applying
alternative procedures, the auditor would consider whether there is a scope
limitation which may lead to a qualified opinion or a disclaimer of opinion.
PART C: VALUATION AND DISCLOSURE OF LONG-TERM INVESTMENTS
The auditor should perform audit procedures designed to obtain sufficient appropriate audit
evidence for valuation and disclosure of long term investments.
Definitions
Definition of AS-13 is equally applicable for this standard as well.
When long-term investments are material to the financial statements, the auditor should
obtain sufficient appropriate audit evidence regarding their valuation and
disclosure.
Audit Procedure
1. Obtain audit evidence with respect to the ownership and existence of Long Term
Investments.
2. Ensure that the entity has the ability to continue to hold the investments on a long term
basis by discussing the same with management.
3. In the case of quoted securities, consider market quotations, which provide an indication
of value and compare such values to the carrying amount of the securities up to the date
of the auditor's report.
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4. In case of unquoted securities, ascertain the method adopted by the entity for
determining the value of such securities as at the year end. Ensure that the method
adopted is a recognized method of valuation of securities. The term recognized method
includes methods such as Profit Earning capacity Value method, break-up value method,
capitalization of yield method, yield to maturity method, etc.
5. If there is an uncertainty about the recovery of the carrying amount, the auditor
would consider whether appropriate adjustments and/or disclosures have been
made.
6. Obtain written representations from the management regarding:
(a) the completeness of information
(b) the valuation of long term investments in the financial statements
including adequacy of provision for diminution in such values
and
(c) the intention of the management to continue to hold long-term
investments as Long-term investments.
If the auditor is unable to obtain sufficient appropriate audit evidence concerning the
existence, valuation of long term investments or concludes that their disclosure in
the financial statements is not adequate, the auditor should express a qualified
opinion or a disclaimer of opinion in the audit report, as may be appropriate.
PART D: SEGMENT INFORMATION
The auditor should perform audit procedures designed to obtain sufficient appropriate audit
evidence for appropriate disclosure of segment information.
Definitions
―Segment Information" means the information to be disclosed in respect of reportable
segments as given in Accounting Standard (AS) 17.
AUDIT PROCEDURE:
1. When segment information is material to the financial statements, the auditor should
obtain sufficient appropriate audit evidence regarding its disclosure in
accordance with the applicable identified financial reporting framework.
2. Consider segment information in relation to the financial statements taken as a whole. It
is not required to apply audit procedures on the segment information standing alone.
3. Audit procedures regarding segment information ordinarily consist of analytical
procedures and other audit tests appropriate in the circumstances.
4. Discuss with management the methods used in determining segment information, and
consider whether such methods are likely to result in disclosure in accordance with the
applicable financial reporting framework. The auditor would consider sales, transfers
and charges between segments, elimination of inter-segment amounts, comparisons with
budgets and other expected results, for example, operating profits as a percentage of
sales, and the allocation of assets and costs among segments including consistency with
prior periods and the adequacy of the disclosures with respect to inconsistencies.
5. Obtain a written representation from management concerning:
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(a) the completeness of information regarding segments and disclosure thereof;

and
(b) appropriateness of the selection of segments based on risks and returns;
and
If the auditor is unable to obtain sufficient appropriate audit evidence concerning
segment information or concludes that their disclosure in the financial statements
is not adequate, the auditor should express a qualified opinion or a disclaimer of
opinion in the audit report, as may be appropriate.
SA 505 - EXTERNAL CONFIRMATIONS

Introduction
Scope of the Standard
This standard deals with the use of external confirmation procedures by the auditor to
obtain audit evidence. It does not address inquiries regarding litigation and
claims which is dealt with by Statutory Auditor 501.
External Confirmation Procedures to obtain Audit Evidence
According to SA 500 – Audit Evidence, the term “Audit Evidence” is defined as
“information used by the auditor in arriving at conclusions on which the
auditor‟s opinion is based.
SA– 500 also specifies that the reliability of audit evidence is influenced by the source,
nature and the circumstances under which it was obtained and the following generalizations
were made in respect of audit evidence. These generalizations can also be called as
“Reliability Standards of Audit Evidence”.
1. Audit Evidence obtained from independent sources outside the entity is more
reliable.
2. Audit evidence is more reliable when it exists in documentary form i.e. in
paper, electronic or other medium.
3. Audit evidence obtained directly by auditor from a third party is more reliable
than audit evidence obtained indirectly or by inference.
4. Audit evidence generated internally is reliable when the related controls are effective.
5. Audit evidence provided by original documents is more reliable than audit evidence
provided by photocopies or facsimiles.
Therefore, if the auditor obtains audit evidence directly from a third party, it is more
reliable. To obtain audit evidence directly from a third party, the auditor needs to follow
External Confirmation procedures.
This standard assists the auditor in designing and performing external
confirmation procedures in order to obtain sufficient appropriate audit evidence.
Effective Date
01-04-2010
Definitions
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External Confirmation
Audit Evidence obtained as a direct written response to the auditor from a third party
(the confirming party/respondent), in paper form, or by electronic or other medium.
Positive Confirmation Request
A request that the confirming party respond directly to the auditor indicating whether the
confirming party agrees or disagrees with the information in the request, or providing
requested information.
Negative Confirmation Request
A request that the confirming party respond directly to the auditor only if the confirming
party disagrees with the information provided in the request.
Non-response
A failure of the confirming party to respond, or fully respond, to a positive
confirmation request, or a confirmation request returned undelivered.
Exception
A response that indicates a difference between information requested to be confirmed, or
contained in the entity‘s records, and information provided by the confirming party.
Requirements
External Confirmation Procedure
STEP: 1 : Determining the information to be confirmed or requested
The auditor generally performs External Confirmations procedures either to:
 Confirm or (Also called Closed Confirmation)
 Request Information (Also called Blank/Open Confirmation)
with regard to the following:
1. Accounts Receivable Balances
2. Accounts payable Balances
3. Bank Balances
4. Amounts due to lenders (Loan Balances)
5. Investments held by third parties
6. Inventories held by third parties
7. Title Deeds of the property held by third parties
[
8. The Terms of Agreements/Contracts between the entity and other parties including
confirmation about the absence of certain conditions such as a “side agreement”.
STEP: 2 : Selecting the appropriate confirming party
The response to confirmation is more reliable when the respondent/confirming party
has adequate knowledge about the matter to be confirmed or the about the information
to be provided. Hence the auditor should send the confirmation request to a party who
believes to be knowledgeable by the auditor.
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STEP: 3 : DESGINING THE CONFIRMATION REQUEST

The design of confirmation request may directly affect the response rate. The confirmation
request may be either positive or negative.
Factors to consider when designing the confirmation request
1. Prior experience on the audit or similar engagements
2. Specific Identified risks of material misstatement including fraud risks
3. The method of communication (Paper/Electronic)
4. The ability of the intended confirming party to confirm or provide the requested
information (for example individual invoice amount vs. total balance)
5. The assertion being addressed
Confirming parties may be more likely to respond indicating their
disagreement when the information in the request is not in their favour, and less
likely to respond otherwise. For example, holders of bank deposit account may
be more likely to respond if they believe that the balance in their account is
understated but may be less likely to respond when they believe the balance is
overstated. Therefore, sending negative conformation requests to holders of
bank deposit accounts may be a useful procedure in ascertaining whether
balances may be understated but is unlikely to be effective if the auditor is
seeking evidence regarding overstatement.
Use of Positive External Confirmation
A Positive external confirmation request asks the confirming party to reply to
the auditor in all cases, either by indicating the confirming party‟s agreement
with the given information, or by asking the confirming party to provide
information. A response to a positive confirmation request, ordinarily provide
more reliable audit evidence.
However, there is a risk that the confirming party may provide a reply without
verifying whether the information provided in the confirmation request is correct. This
risk can be reduced by the auditor by using positive confirmation requests that do
not state the amount/other information and ask the confirming party to fill in the
amount or furnish other information (Blank Confirmation). On the other hand, use of this
type of “blank” confirmation request may result in lower response rate
because additional effort is required of the confirming parties.
Use of Negative External Confirmation
A negative external confirmation request, ask the confirming party to respond only when
the confirming party is in disagreement with the information provided in the
confirmation request.
Use of negative confirmation provides less reliable audit evidence than use of positive
confirmations because of any one of the following reasons:
1. The confirmation request made by the auditor may not have reached the
confirming party and
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2. The response given by the confirming party may not have reached the auditor.
However, if all the following conditions are satisfied, the auditor may use negative
external confirmation request.
a. When a large number of small balances exist
b A low exception rate is expected
c. When the related internal controls are effective
The auditor should also ensure that requests are properly addressed. For this purpose,
the auditor should test the correctness of some or all of the addresses on the confirmation
request before they are sent out.
He should also ensure that the confirmation request contains his address to which the
confirming party should send his response.
STEP: 4 : Follow-up on Confirmation Request
Where the auditor has not received a reply to a previous request within a reasonable time, he
may send an additional confirmation request.
Management’s Refusal to allow the auditor to send a confirmation
request/REFUSAL BY MANAGEMENT
If management refuses to allow the auditor to send a confirmation request, the auditor shall:
Inquire whether reasons for the refusal provided by the management are valid
and reasonable
Some times management may not allow the auditor to send confirmation request. For
example, management may say that there exist a legal dispute between the organization and
the intended confirming party, and if the auditor follows confirmation procedure, it may
aggravate the situation. In such a case, the auditor should evaluate whether the reasons
explained by the management for its refusal are valid and reasonable.
The auditor is also required to obtain audit evidence to confirm the validity and
reliability of reasons explained by the management for its refusal.
Evaluating implications of management‟s refusal
If reasons for refusal by management are unreasonable or where management failed
to provide evidence as to the reasons for refusal, it may indicate the possible
existence of fraud or error and hence the auditor should re-assess the risk of
material misstatement in the financial statements and accordingly should modify the
nature, timing and extent of audit procedures.
Perform alternative audit procedures
A refusal by management may have to be treated as a limitation on the audit evidence the
auditor may wish to obtain. In such a case, the auditor should perform alternative audit
procedures to confirm the matter. The alternative audit procedures to be followed by the
auditor were given under the heading “non-response”
If the auditor concludes that
1. Management‘s refusal to allow the auditor to send a confirmation request is
unreasonable and
2. If the auditor is unable to obtain reliable audit evidence from alternative
audit procedures,
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Then, he shall
a. Determine the implications on his opinion and
b. Communicate with those charged with governance
RESULTS OF EXTERNAL CONFIRMATION PROCEDURE
b)
Reliability of Responses to Confirmation Requests

SA 500 indicates that even when audit evidence is obtained from sources
external to the entity, some circumstances may affect its reliability. All responses
carry some risk of interception, alteration or fraud regardless of whether a
response is obtained in paper form, or by electronic or other medium.
If the auditor identifies factors that give rise to doubts about the reliability of
the response to a confirmation request, he shall obtain further audit evidence to
resolve those doubts.
Factors that give rise to doubts about the reliability of response
1. The response may have been received by the auditor indirectly.
Example
The confirming party incorrectly addressed it to the entity rather than to the auditor.
In such case, the auditor may request the confirming party to respond in writing directly to
the him.
2. Appeared not to come from the originally intended confirming party.
Responses received electronically, for example by facsimile or electronic mail,
involves risks as to reliability because proof of origin and authority of the respondent
may be difficult to establish, and alterations may be difficult to detect. To mitigate
this, the auditor might incorporate various techniques for validating the identity of
a sender of information in electronic form, for example, through the use of encryption,
electronic digital signatures, and procedures to verify website authenticity.
Unreliable Responses
When the auditor concludes that a response is unreliable, the auditor may need to revise
the assessment of the risks of material misstatement at the assertion level and modify
planned audit procedures accordingly, in accordance with SA 315. For example, an
unreliable response may indicate a fraud risk factor that requires evaluation in
accordance with SA 240.
Non-Response
A non-response to a confirmation request may indicate a previously unidentified
risk of material misstatement. In such a case, the auditor may need to revise the
assessed risk of material misstatement and modify planned audit procedures.
Therefore, in case of each of non-response, the auditor shall perform alternative audit
procedures to obtain sufficient appropriate audit evidence.
Examples of alternative audit procedures
For Accounts Receivable Balances – Examination of subsequent cash receipts
For Accounts Payable Balances - Examination of subsequent cash disbursements
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When a response to a positive confirmation request is necessary to obtain

sufficient appropriate audit evidence
If the auditor has determined that a response to a positive confirmation request is necessary
to obtain Sufficient Appropriate Audit Evidence, alternative audit procedures will not
provide the audit evidence in such a case. If the auditor does not obtain such confirmation,
he shall determine the implications for the audit and his opinion thereon as per SA 705.
Reasons
a. The information available to corroborate management‘s assertions is only
available outside the entity.
b. Identification of factors such as management over+
c. ride of controls
Exceptions
Where the auditor finds exceptions in responses, they may indicate misstatements or
potential misstatements in the financial statements. When the misstatements are
identified, the auditor should verify whether such misstatements are the results of any
fraud. However, some exceptions do not represent misstatements which may arise due to
timing difference.
Other Points
1. Although external confirmations may provide relevant audit evidence relating to certain
assertions, there are some assertions for which external confirmations provide less
relevant audit evidence. For example, it provides less reliable audit evidence relating to
the recoverability of accounts receivable balances, than they do of their existence.
2. Factors that may assist the auditor in determining whether external confirmations are to
be performed include:
i. The confirming party‘s knowledge of the subject matter – responses may be
more reliable if provided by a person at the confirming party who has the requisite
knowledge about the information being confirmed.
ii. The ability or willingness of the intended confirming party to respond – for
example, the confirming party –
 May not accept responsibility for responding to a confirmation request
 May consider responding too costly or time consuming
 May have concerns about the potential legal liability resulting from
responding.
 May operate in an environment where responding to confirmation requests is
not a significant aspect of day-to-day operations.
iii. The objectivity of the intended confirming party – if the confirming party is a
related party of the entity, responses to confirmation request may be less reliable.
PRACTICAL QUESTIONS
During the course of audit of Star Limited the auditor received some of the
confirmation of the balances of creditors outstanding in the balance sheet
through external confirmation by negative confirmation request. In the list of
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Sundry Creditors there are number of creditors of small balances except one,
old outstanding of Rs. 15 Lacs, of whom, no confirmation on the credit balance
received. Comment with respect to Standard of Auditing.
External Confirmation: As per SA 505, ―External Confirmation‖, Negative Confirmation is a
request that the confirming party respond directly to the auditor only if the confirming party
disagrees with the information provided in the request. Negative confirmations provide less
persuasive audit evidence than positive confirmations.
The failure to receive a response to a negative confirmation request does not explicitly
indicate receipt by the intended confirming party of the confirmation request or verification
of the accuracy of the information contained in the request.
Accordingly, a failure of a confirming party to respond to a negative confirmation request
provides significantly less persuasive audit evidence than does a response to a positive
confirmation request. Confirming parties also may be more likely to respond indicating their
disagreement with a confirmation request when the information in the request is not in their
favor, and less likely to respond otherwise.
In the instant case, the auditor sent the negative confirmation requesting the creditors
having outstanding balances in the balance sheet while doing audit of Star Limited. One of
the old outstanding of rupees 15 lacs has not sent the confirmation on the credit balance. In
case of non response, the auditor may examine subsequent cash disbursements or
correspondence from third parties, and other records, such as goods received notes. Further
non response for negative confirmation request does not means that there is some
misstatement as negative confirmation request itself is to respond to the auditor only if the
confirming party disagrees with the information provided in the request.
But, if the auditor identifies factors that give rise to doubts about the reliability of the
response to the confirmation request, he shall obtain further audit evidence to resolve those
doubts.
SA 510 – INITIAL AUDIT ENGAGEMENTS – OPENING BALANCES
INTRODUCTION
This standard deals with the auditor‟s responsibilities in respect of initial audit
engagements. It also specifies the audit procedures to be performed by the auditor in
respect of initial audit engagements.
Opening Balances can be defined as “those account balances that exist at the
beginning of the period”. They can also be defined as closing balances of the prior
period. They reflect the effects of transactions and events of prior periods and
they also reflect the accounting policies applied in the prior period.
Initial Audit Engagement – An Engagement in which either
a. The financial statements for the prior period were not audited; or
b. The financial statements for the prior period were audited by a predecessor
auditor.
Predecessor Auditor – The auditor from a different firm, who audited the financial
statements of an entity in the prior period and who has been replaced by the current
auditor.
OBJECTIVE
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While conducting an initial audit engagement, the auditor should obtain sufficient
appropriate audit evidence about the following:
a. Whether opening balances contain misstatements that materially affect
the current period‘s financial statements; and
b. Whether the accounting policies reflected in the opening balances have
been consistently applied in the current period‘s financial statements.
AUDIT PROCEDURES
Opening Balances
For this purpose, the auditor shall read the most recent financial statements and the
predecessor auditor‟s report thereon to get information regarding opening balances
including disclosures.
1. Determine whether the prior period‘s closing balances have been correctly
brought forward to the current period.
In case any adjustments are made, verify whether they have been disclosed as prior
period items in the current year‘s Statement of Profit or Loss.
2. If the prior period‟s financial statements were audited by a predecessor
auditor, go through the copies of audited financial statements. Ordinarily, the
current auditor can place reliance on the closing balances contained in the financial
statements for the preceding period, except when during the performance of audit
procedures for the current period he comes across some evidence to the contrary.
If the predecessor auditor‘s report is modified, the current auditor shall evaluate the
effect of that modification in assessing the risks of material misstatements in the
current period‘s financial statements.
3. If the prior period‟s financial statements were not audited, obtain
sufficient appropriate audit evidence regarding the correctness of opening
balances.
For Current Assets and Liabilities
For current assets and liabilities, some audit evidence can be obtained about the
correctness of opening balances as a part of the current period‘s audit procedures.
For example, the collection of opening accounts receivable during the current
period will provide evidence of their existence and valuation at the beginning of the
period. In case of inventories, the current period‘s audit procedures on the closing
inventory provide little audit evidence regarding inventory on hand at the
beginning of the period. In such a case, the auditor can observe current physical
inventory count and reconciling it to the opening inventory quantities
For non-current assets and liabilities
For non-current assets such as properties, plant and equipment, investments etc. some
audit evidence may be obtained by examining the accounting records as well as obtaining
confirmations with third parties, for example, long-term debt.
By following the above said procedure, if the auditor obtains evidence that the opening
balances contain misstatements which have a material affect on the current period‘s
financial statements, then he shall perform such additional audit procedures as are
appropriate to determine the effect of such misstatements on the current period‘s financial
statements. If the auditor concludes that such misstatements exist in the current
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period‟s financial statements, then he shall consider the impact of those

misstatements on his opinion.
Accounting policies
The auditor shall also 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. Where the auditor observes any changes in the
accounting policies, he shall verify whether such changes have been properly accounted for
and are adequately disclosed.
AUDIT CONCLUSIONS AND REPORTING
Opening Balances
If the auditor is unable to obtain sufficient appropriate audit evidence regarding the
opening balances, he shall express a qualified opinion or a disclaimer of opinion as
appropriate
If the auditor concludes that the opening balances contain misstatements that are
not properly accounted for or disclosed, he shall express a qualified opinion or an
adverse opinion, as appropriate.
Accounting Policies
If the auditor concludes that a change in accounting policy is not properly accounted
for/disclosed, he shall express a qualified opinion or adverse opinion as appropriate.
CA Ashutosh has been appointed as an auditor of Healh Ltd. For the financial
year 2013-14 which was audited by CA Amaawti in 2012-13. As the auditor of
Awesome Health Ltd., state the steps that CA Asutosh would take to ensure that
the closing balances of the financial year 2012-13 have been brought to account
in 2013-14 as Opening Balances and Opening Balances do not contain any
misstatements.
According to SA 510 on ―Initial Audit Engagements- Opening Balances‖, the
objective of the Auditor while conducting an initial audit engagement with respect to
opening balances is to obtain sufficient appropriate audit evidence so that the-
(i) opening balances of the preceding period have been correctly
brought forward to the current period;
(ii) opening balances do not contain any misstatement that materially
affect the current period‘s financial statements; and
(iii) appropriate accounting policies reflected in the opening balances
have been consistently applied in the current period‘s financial
statements, or changes thereto are properly accounted for and
adequately presented and disclosed in accordance with the
applicable financial reporting framework.
Being a new assignment, audit evidence regarding opening balances can be obtained
by perusing the copies of the audited financial statements.
For current assets and liabilities, some audit evidence about opening balances may be
obtained as part of the current period‘s audit procedures. For example, the collection/
payment of opening accounts receivable/ accounts payable during the current period
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will provide some audit evidence of their existence, rights and obligations,
completeness and valuation at the beginning of the period.
In respect of other assets and liabilities such as property plant and equipment,
investments, long term debts, the auditor will examine the records relating to opening
balances. The auditor may also be able to get the confirmation from third parties (e.g.,
balances of long term loan obtained from banks can be confirmed from the Bank Loan
statement).
In an initial audit engagement the auditor will have to satisfy about the
sufficiency and appropriateness of „Opening Balances' to ensure that they are
free from misstatements, which may materially affect the current financial
statements. Lay down the audit procedure, you will follow, when financial
statements are audited for the first time. If, after performing the procedure,
you are not satisfied about the correctness of 'Opening Balances', what
approach you will adopt in drafting your audit report?
Audit Procedure for ensuring correctness of Opening Balances: As per SA 510 ―Initial Audit
Engagements-Opening Balances‖, the auditor shall obtain sufficient appropriate audit
evidence about whether the opening balances contain misstatements that materially affect
the current period‘s financial statements by –
a. Determining whether the prior period‘s closing balances have been correctly
brought forward to the current period or, when appropriate, any adjustments
have been disclosed as prior period items in the current year‘s Statement of Profit
and Loss;
b. Determining whether the opening balances reflect the application of appropriate
accounting policies; and
c. By evaluating whether audit procedures performed in the current period provide
evidence relevant to the opening balances; or performing specific audit
procedures to obtain evidence regarding the opening balances.
If the auditor obtains audit evidence that the opening balances contain misstatements that
could materially affect the current period‘s financial statements, the auditor shall perform
such additional audit procedures as are appropriate in the circumstances to determine the
effect on the current period‘s financial statements. If the auditor concludes that such
misstatements exist in the current period‘s financial statements, the auditor shall
communicate the misstatements with the appropriate level of management and those
charged with governance.
Approach for drafting Audit Report : If the auditor concludes that the opening balances
contain a misstatement that materially affects the current period‘s financial statements, and
the effect of the misstatement is not properly accounted for or not adequately presented or
disclosed, the auditor shall express a qualified opinion or an adverse opinion, as
appropriate, in accordance with SA 705 and in case where the auditor is unable to obtain
sufficient appropriate audit evidence regarding the opening balances, the auditor shall
express a qualified opinion or a disclaimer of opinion, as appropriate, in accordance with SA
705.
SA 520 – ANALYTICAL PROCEDURES

Effective Date
01-04-2010
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SCOPE
This standard deals with auditor‘s use of Analytical Procedures as substantive procedures
(also called as substantive analytical procedures).
The auditor shall use analytical procedures as substantive procedures near the end of the
audit. This assists the auditor in forming an overall conclusion on the financials. They also
include investigation of identified fluctuations as are necessary.
DEFINITION
Analytical Procedures means
 Evaluation of financial information
 Through analysis of relationships
 Among both financial and non-financial data and
 Includes investigation as is necessary of identified fluctuations.
Analytical procedures include
 Consideration of Comparisons and
 Consideration of Relationships
Consideration of Comparisons
 Comparable information for prior periods (Intra Firm Comparison)
 Anticipated results like budgets and forecasts or with expectations of the auditor for
example an estimation of depreciation (Comparison with budgets)
 Similar industry information (Comparison with industry averages). For
example, a comparison of entity‘s ratio of sales to accounts receivable with industry
averages.
Consideration of Relationships
Analysis of relationships include considering relationships:
 Among elements of financial information that would be expected to conform
to a predictable pattern such as gross margin percentage.
 Between financial information and relevant non-financial information such
as payroll costs to number of employees.
INVESTIGATING THE RESULS
If the analytical procedures identified:
 Fluctuations
 Relationships that are inconsistent with relevant information
 Relationships that differ from expected values by a significant amount
The auditor shall investigate such differences by
 Inquiring management
 Obtaining sufficient appropriate evidence relevant to the fluctuation and
 Performing other audit procedures where management failed to provide explanations
or the explanations provided by management are considered as inadequate by the
auditor.
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FORMING OVERALL CONCLUSIONS

The conclusions drawn by the auditor from the results of analytical procedures:
 Are intended to corroborate conclusions formed during the audit of individual
components of financials
 Assist auditor to draw reasonable conclusions on which to base his opinion
 May identify previously unrecognized risk of material misstatement
 May require the auditor may revise his risk assessment and modify planned audit
procedures.
EXAMPLES OF ANALYTICAL PROCEDURES
Tests of Reasonableness
Reasonableness Tests are made by reviewing the relationship of certain account
balances to other balances for reasonableness of amounts. Examples of accounts that
may be reasonably tested are –
a. Raw-material consumption to production (Quantity)
b. Wastage & Scrap percentage against production (Quantity)
c. Sales discounts and commissions against sales volume
d. Rental Revenue based on occupancy of premises.
Ratios
Analysis by computation of ratios include –
a. Gross Profit Turnover
b. Accounts receivable turnover
c. Inventory turnover etc.
SA 530 – AUDIT SAMPLING
Introduction:
Some people argue that to express proper opinion, an auditor should examine all the
transactions. They feel that an auditor cannot reach valid conclusions unless he has
examined all the transactions. This view is, however, not correct. (Imagine what it would
be like if, to see whether the rice has been cooked properly, a housewife has to test each and
every grain).
a.
In order the draw reasonable conclusions about true and fair view of financial statements,
the auditor is required to obtain sufficient appropriate audit evidence. According to
Standard on Auditing-500, Audit Sampling is one means to obtain sufficient appropriate
audit evidence.
WHY:
When the auditor follows audit sampling technique, it helps him to draw conclusions about
the population from which the sample is selected.
DEFINITIONS
Audit Sampling
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Audit Sampling can be defined as application of audit procedures to less than 100% of items
within a population and to draw conclusions about the entire population.
Population
Population can be defined as the entire set of data from which a sample is selected and
about which the auditor wishes to draw conclusions.
Sampling Unit
The individual items constituting a population is called sampling unit.
Stratification
Stratification can be defined as the process of dividing population into sub-populations
generally based on a monetary value.
Effective Date
01-04-2009
TYPES OF SAMPLING
1. Statistical Sampling
2. Non-statistical Sampling
SELECTION OF SAMPLE
There are many methods of selecting samples. The principle methods of sampling are as
follows:
Statistical Sampling:
Random Selection:
The transactions will be selected using random number tables. A random number table is a
matrix of rows and columns. Each cell (i.e., intersection of a row and a column) contains a
randomly generated number. A random number table can be used as follows to select a
random sample:
a. Select a cell at random, ex: By putting the pencil on the random number table while
closing your eyes.
b. Proceed column-wise (from top to bottom) or row-wise (from left to right) and select
each successive cell in that column or row. Then proceed to the first cell in the next
column or row, as the case may be and repeat the above process till the number of
cells selected equals the sample size.
c. Select items from the population corresponding to the random numbers selected.
For example, suppose the first random number selected by you is 337. Suppose
further that the debtor accounts, from which you want to select the sample, are
numbered consecutively from 1 to 870. You will select 337th debtor account.
Systematic Selection:
Under this method, transactions will be selected using a constant interval, the first
selection having a random start. To get sampling interval, one has to divide the number of
sampling units in the population by sample. For Ex: IF the auditor wishes to select a sample
of 40 cash receipts out of a total of 360, the auditor has to divide the population with
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sample. In this case it is 360/40 and hence he may determine the constant interval as every
9th cash receipt. The first cash receipt may be any receipt from the 1 st to 9th. Suppose, if
the auditor selects the 3rd receipt, he would then select 12th, 21st, 30th and so on.
Haphazard Selection:
Under this method, the auditor has no intention either to include or exclude specific
transactions from the population. For example, the winner is selected from amongst
thousands of postcards in a TV Quiz. However, this method may often result in selection of
a biased sample.
Block Sampling
It involves selection of a defined block of consecutive items. For example, the first 250
payment vouchers for the month of March may be selected. Once the first item in a block is
selected, rest of the block follows consecutively. This method cannot be ordinarily be used
in audit sampling because there is a close similarity between this method and non-statistical
sampling.
Cluster Sampling
Cluster sampling involves dividing the population into groups known as clusters and then
selecting all the individual items in the cluster from the randomly selected clusters.
The main difference between cluster sampling and stratified sampling is that in stratified
sampling, the sample is taken from all the strata randomly where as in cluster sampling, all
the individual items are taken from randomly selected clusters.
Stratification/Stratified Sampling:
Stratification can be defined as the process of division/sub division of population into
groups/sub groups generally based on the monetary value. This method involves dividing
the whole population into separate groups called strata. Once the population is divided
into strata, the auditor shall take a sample from each of group (also called as
stratum). The number of groups into which the whole population has to be divided is
determined on the basis of auditor‘s judgment.
For example, trade receivables balances may be divided into five groups as follows:
a. Balances in excess of Rs.10,00,000
b. Balances in the range of Rs.7,75,001 to Rs.10,00,000
c. Balances in the range of Rs.5,50,001 to Rs.7,75,000
d. Balances in the range of Rs.2,25,001 to Rs.5,50,000
e. Balances Rs.2,25,000 and below.
The results of audit procedures applied to a sample of items within a stratum can only be
projected to the items that make up that stratum. To draw a conclusion on the entire
population, the auditor will need to consider the risk of material misstatement in relation to
whatever other strata make up the entire population. In other words, if a class of
transactions or account balance has been divided into strata, the misstatement
is projected for each stratum separately. Projected misstatements for each
stratum are then combined when considering the possible effect of
misstatements on the total class of transactions or account balance.
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Stratification enables the auditor to direct audit efforts towards the items which contain the
greatest potential for monetary error and it also helps to ensure that the sample selected is
representative.
Stratified Sampling is simply an extension of simple random sampling. Therefore, random
selection method is applied through random number tables to select samples even in
stratified sampling.
SAMPLE SIZE
The auditor shall select sample size that is sufficient to reduce the sampling risk to an
acceptably low level. The level of sampling risk that the auditor is willing to accept
affects the sample size required. The lower the risk the auditor is willing to accept, the
greater the sample size to be selected by the auditor. In other words, there is an inverse
relationship between sample risk and sample size.
Where Sampling Risk can be defined as the risk that the auditor‘s conclusions based on
sample may be different from the conclusions that would be reached by the auditor if the
entire population were subjected to the same audit procedures. Sampling risk can lead to
two types of erroneous conclusions:
TESTS OF CONTROL
When the auditor performs tests of control, the following risks may arise:
Risk of Over Reliance
The auditor concludes that the internal controls are effective, but in reality they are
ineffective. This affects the quality of audit adversely and would lead to inappropriate
opinion.
Risk of Under Reliance
The auditor concludes that internal controls are ineffective, but in reality they are very much
effective. This leads to additional work and hence a waste of time to the auditor.
SUBSTANTIVE TESTS
Risk of incorrect acceptance
This risk arises when the auditor concludes that an account balance is correct although such
balance is incorrect. This affects the quality of audit adversely and would lead to
inappropriate opinion.
Risk of incorrect rejection
This risk arises when the auditor concludes that although an account balance is incorrect
although it is correctly stated. This leads to additional work and hence a waste of time
to the auditor.
PERFORMING AUDIT PROCEDURES
 The auditor shall perform audit procedures, appropriate to the purpose, on each
item selected.
 If the auditor is unable to apply the designed audit procedures, or suitable
alternative audit procedures, to a selected item, he shall treat that item as a
deviation from the prescribed control in case of tests of control or a misstatement,
in the case of tests of details.
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 When the auditor identifies a deviation or a misstatement in the sample, he shall

investigate into the nature and cause of such deviation or misstatement and
then evaluate the possible effect of such deviation on the population.
However, if the auditor concludes that the deviation discovered is an anomaly, he
shall ensure that such deviation is not representative of the population. “Anomaly”
can be defined as a misstatement or a deviation that is demonstrably not
representative of population.
PROJECTION OF MISSTATEMENTS
The auditor shall project the misstatements found in the sample to the
population. After projecting the misstatements to the population, the auditor shall
compare the aggregate of deviations with tolerable misstatements. If the
aggregate of deviations is not in excess of tolerable misstatement set by the auditor,
the same may be ignored.
When the projected misstatements exceed tolerable misstatement, the sample
does not provide a reasonable basis for conclusions about the population that has
been tested. The closer the projected misstatement to tolerable misstatement, the more
likely that actual misstatement in the population may exceed tolerable misstatement.
“Tolerable Misstatement” is defined as a monetary amount set by the auditor in
respect of which the auditor seek to obtain an appropriate level of assurance that this
amount is not exceeded by the actual misstatement in the population.
For tests of Controls, the auditor shall compare the sample deviation rate with
tolerable rate of deviation.
For example, let‘s say that one internal control that the client employs is that two signatures
are required to approve a vendor payment. By choosing a sample of 20 items, it was
identified that 3 out of 20 failed to follow the internal control because they either contained
only one signature or included the wrong signatures. The sample exception rate is 3/20 =
15%, and let‘s assume that the auditor‘s tolerable exception rate is 6%. Because the sample
rate is greater than the tolerable rate, the control risk is assessed to be higher than it was
originally estimated to be.
Tolerable Rate of Deviation - A rate of deviation from prescribed internal control
procedures set by the auditor in respect of which the auditor seeks to obtain an appropriate
level of assurance the this rate is not exceeded by the actual rate of deviation in the
population.
If control is satisfactory in its design and implementation a much smaller sample can
give the auditor the necessary reliability of the result he obtains. On the other hand, if in
certain areas controls are slack or not properly implemented, the auditor may have to
take a much larger sample for getting satisfactory result.
EVALUATING THE RESULTS OF AUDIT SAMPLING
The auditor shall evaluate:
1) The results of the sample; and
2) Whether the use of audit sampling has provided a reasonable basis for conclusion about
the population that has been tested.
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For tests of control, an unexpectedly high sample deviation rate may lead to an increase
in the assessed risk of material misstatement, unless further audit evidence substantiating
the initial assessment is obtained.
For tests of details, an unexpectedly high misstatement amount in a sample may cause
the auditor to believe that a class of transactions or account balance is materially misstated,
in the absence of further audit evidence that no material misstatement exists.
SA 540 – AUDITING ACCOUNTING ESTIMATES, INCLUDING FAIR VALUE

ACCOUNTING ESTIMATES AND RELATED DISCLOSURES
Accounting Estimate can be defined as “approximation of a monetary amount in the
absence of precise means of measurement”.
TYEPES OF ACCOUNTING ESTIMATES
1. A forecast of the outcome of one or more transactions (Called as Accounting
Estimate)
2. An estimate of value of an item of financial statement based on the conditions
prevalent at the date of measurement (Called as Fair Value Accounting
Estimate)
Examples of Accounting Estimates
 Provision for Depreciation
 Provision for Taxation
 Provision to meet warranty or guarantee claims
 Provision for slow moving or non-moving inventory
 Provision for Doubtful Debts
 Provision for Pending Law Suits
 Amortization of Goodwill
 Amortization of Preliminary Expenses
Examples of Fair Value Accounting Estimates
 Property held for disposal
 Exchange of Assets without monetary consideration
 Financial Instruments such as shares which are not actively traded in open market
RESPONSIBILITY
Management Responsibility
Management is made primarily responsible for making accounting estimates
including fair value accounting estimates. These estimates are generally made in
conditions of uncertainty and as a result the risk of material misstatement is
greater.
AUDITOR‟S RESPONSIBILITY/OBJECTIVE
The auditor has to obtain sufficient appropriate audit evidence to satisfy that:
 The accounting estimates including fair value accounting estimates made by the
management are reasonable and
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 They are adequately disclosed in the financial statements

Why accounting estimates made by the management are not reasonable
The Accounting Estimates made by the management may be unreasonable because of any
one of the following reasons:
Lack of Objective Data
In order to make accounting estimates, management makes use of some information.
The correctness or otherwise of accounting estimates made by the management,
therefore, depends on the accuracy, validity and the reliability of information used by
management for making such estimates.
 Uncertainty attached with an item
 Management Bias
This can be defined as ―lack of neutrality by management, in the preparation and
presentation of accounting estimates‖. Sometimes, management may make
wrong/incorrect or biased accounting estimates intentionally to acquire
desired results. This will increase the risk of estimation uncertainty, and
hence will increase the Risk of material misstatements in the Financial Statements.
“Estimation uncertainty” can be defined as the susceptibility of an accounting
estimate and related disclosures to an inherent risk of precision in its measurement.
The degree of estimation uncertainty affects the risk of material misstatement of an
accounting estimate. In other words, there exist a direct relationship between the
level of estimation uncertainty and risk of material misstatements in financial
statements.
If there is a low estimation uncertainty, then there will be a low risk of material
misstatement. If there is a high estimation uncertainty, then there will be a high
risk of material misstatements in financial statements.
Situations in which there exist a low estimation uncertainty
 Frequently made estimates arising out of routine transactions
 Estimation model is well known and is generally accepted
 Methods of estimation prescribed by the financial reporting framework
 Estimates based on readily available information
Situations in which there exist a high estimation uncertainty
 Estimates relating to outcome of litigations
 Fair Value Accounting Estimates of financial instruments not traded in open
market etc.
In order to obtain sufficient appropriate audit evidence, the auditor has to follow the
procedures prescribed below:
AUDIT PROCEDURES/RISK ASSESSMENT PROCEDURES
 Verify the accuracy, validity and reliability of data used by the management
for making accounting estimates. For example in respect of Provision for warranty
claims made by management, the auditor has to ensure that correct information
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relating to sales of the organization has been taken into account. Otherwise the
estimates may be wrong.
 Evaluate whether the assumptions made by the management in making such
accounting estimates are reasonable or not.
This can be done by comparing the assumptions made by the management with
common estimation methods used by the entities operating under the same
industry. The auditor can also ascertain this by comparing the previous period
accounting estimates with actual results.
 Determine whether the management has applied specific methods and
disclosures as per the requirements of the applicable financial
reporting framework.
Some times, the applicable financial reporting framework may provide guidance as
to how accounting estimates are to be made & they may also provide some
disclosure requirements relating to such accounting estimates.
 Testing of calculations involved in accounting estimates (Arithmetical Accuracy)
 Determine whether the methods for making accounting estimates have been
consistently applied and the basis for their change. Changes may be made if
there are changes in conditions or availability of new information. In case of
arbitrary changes it may give rise to inconsistencies in financial statements, which
results in material misstatements.
 Consider events occurring up to the date of auditor‟s report. This will
provide evidence, which either “confirm” or “contradicts” the estimate.
However, this is not applicable to fair value accounting estimates because
such estimates were made on the basis of conditions prevalent at the balance sheet
date.
 See whether expert has been used by the management for making estimates
Based on the above, the auditor should evaluate whether the accounting estimates/fair value
accounting estimates made by the management are reasonable or misstated.
INDICATORS OF POSSIBLE MANAGEMNT BIAS
In the following situations, generally, the auditor should conclude that the accounting
estimates are misstated:
 When there is a difference between auditor‟s point estimate and
management‟s point estimate.
The term “management‟s point estimate” can be defined as ―the amount
selected by management for recognition or disclosure in the financial statements as
an accounting estimate‖. The term “auditor‟s point estimate” can be defined as
the amount, in the opinion of the auditor, to be recognized in the Financial
Statements.
 When there is a change in method of making accounting estimates, which is
arbitrary in nature.
In case of high estimation uncertainty, the auditor may refer the matter to an expert.
Also verify whether the disclosures of accounting estimates are in accordance with the
applicable reporting framework.
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Documentation
The auditor shall document the basis for his conclusions about the reasonableness of the
accounting estimates and their disclosures.
PRACTICAL QUESTION
V Ltd. sold 1 lakh vacuum pumps during the year 2006-07 with a condition to
make good by repair/replacement any manufacturing defects reported
within 6 months from the date of sale. Past experience in this regard
showed that there were no replacements carried out, but minor/major
repairs were necessitated to the extent of 10%/5% respectively of the units
sold. The cost of such minor/major repairs would amount to 1,000/6,000
respectively. While finalizing the accounts for the year, the company does
not reflect any provision, in this regard. (5 Marks, May, 2008)
As per AS – 29, ‗Provisions, Contingent Liabilities and Contingent Assets‘, a provision is

a liability which can be measured only by using a substantial degree of estimation.
As per AS – 29, a provision should be recognised when:
 An enterprise has a present obligation as a result of a past event.
 It is probable that an outflow of resources embodying economic benefits will
be required to settle the obligation and
 A reliable estimate can be made of the amount of the obligation.
If these conditions are not met, no provision should be recognised.
In the present case, V Ltd. fulfils all the above conditions. The sale of pumps with a
warranty obligation constitutes the present obligation as a result of past event. It is
probable that some outflow will be involved in setting the warranty obligation, satisfy
the second condition. As per the details based on past precedence reliable estimate can
be made as under:
[6000X(5% of 100000) + 1000 X (10% of 100000)] = 400 lakhs
Thus, V Ltd as on 31.3.07 should make a provision for warranty obligation against sale of
vacuum pumps to the extent of 400 lakhs. The auditor should insist on such provision
being created. If provision is not made he should qualify his audit report.
Z Ltd. provided, 5 lakhs for inventory obsolescence in the last year‟s

accounts. In the subsequent year, it was determined that 50% of this stock was
actually usable. The Company wants to adjust the same as a “Prior period
adjustment”. (5 Marks, November, 2007)
As per Accounting Standard 5 ―Net Profit or Loss for the period, Prior Period Items
and Change in Accounting Policies‖, Prior period items are income or expenditure
which arise in the current period as a result of errors or omissions in the preparation of
the Financial Statements of one or more prior periods.
The write back of provision made in respect of inventories in the earlier year does not
constitute prior period adjustment since it neither constitutes error nor omission but
it merely involves making estimates based on prevailing circumstances when
Financial Statements were being prepared.
An estimate may have to be revised -
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 If changes occur in the circumstances on which the estimate was based or

 as a result of new information, more experience or subsequent developments.
The revision of the estimate, by its nature, does not bring the adjustment within the
definitions of an extraordinary item or a prior period item.
A change in an accounting estimate may affect the current period only or both the
current period and future periods. In both cases, the effect of the change relating to the
current period is recognised as income or expense in the current period. The effect, if
any, on future periods, is recognised in future periods.
Further, as per SA 540 ―Auditing Accounting Estimates, Including Fair Value
Accounting Estimates, and Related Disclosures‖, the auditor shall review the outcome
of accounting estimates included in the prior period financial statements or where
applicable, their subsequent re-estimation for the purpose of the current period.
In this case, Z Ltd. provided 5 lakhs for inventory obsolescence in last year‘s accounts. In
the subsequent year due to change in circumstances, it was determined that 50% of
such stock was usable. Revision of such an estimate does not bring the resulting amount
of 2.5 lakhs within the definition either of a prior period item or of an extraordinary
item. The amount, however, involved is material and requires separate disclosure to
understand the financial position and performance of an enterprise. Accordingly,
adjustment in the value of the inventory through prior period item would not be proper.
SA 550 – RELATED PARTIES

Effective Date
01-04-2010
Introduction
Many related party transactions may be entered by the organization in the normal
course of business and hence they may not carry higher risk of material
misstatement than similar transactions with unrelated parties. However, in some
circumstances, transactions with related parties may not be conducted under
normal market terms and conditions; for example, some related party transactions
may be conducted with no exchange of consideration.
Therefore, planning and performing the audit with professional skepticism is particularly
important in this context.
This standard on Auditing deals with auditor‟s responsibilities regarding related
party relationships and transactions while performing an audit of financial
statements.
OBJECTIVES
When the applicable financial reporting framework establishes requirements
Where the applicable financial reporting framework establishes related party requirements,
it is the duty of the auditor to obtain sufficient appropriate audit evidence about
whether the related party relationships and transactions have been appropriately
identified, accounted for and disclosed in the financial statements in accordance with
the framework.
When the applicable financial reporting framework establishes minimal or no
requirements
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Irrespective of whether the applicable financial reporting framework establishes related

party requirements, the auditor is required to obtain an understanding of related party
relationships and transactions:
 to recognize fraud risk factors arising from related party relationships and
transactions which helps the auditor in identification and assessment of the
risks of material misstatements; and
 to conclude whether the financial statements are affected by those relationships
and transactions.
DEFINITIONS
Arm‘s length transaction – A transaction conducted on such terms and conditions as
between a willing buyer and a willing seller who are unrelated and are acting independently
of each other and pursuing their own best interests.
Related Party – A party that is either:
a. A related party as defined in the applicable financial reporting framework;
or
b. Where the applicable financial reporting framework establishes minimal or no
related party requirements;
 A person or other entity that has control or significant influence, directly
or indirectly through one or more intermediaries, over the reporting entity;
 Another entity over which the reporting entity has control or
significant influence, directly or indirectly through one or more
intermediaries; or
 Another entity that is under common control with the reporting entity
through having
a. Common Controlling Ownership
b. Owners who are close family members; or
c. Common Key Management
AUDIT PROCEDURES
Understanding the Entity‟s Related Party Relationships and Transactions
The auditor shall inquire of management regarding the following:
a. The identity of entity‟s related parties, including changes from the prior period
b. The nature of relationship between the entity and these related parties; and
c. Whether the entity entered into any transactions with these related parties
during the period, and, if so, the type and purpose of the transactions.
d. Inquire whether management has established any controls for
 identification, accounting and proper disclosure of related party
relationships and transactions
 Approval of significant transactions and arrangements
DUTIES OF THE AUDITOR
Audit Procedures
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During the audit, the auditor may inspect records or documents that may provide
information about related party relationships and transactions, for example:
 Entity‘s Income Tax Returns
 Information supplied by the entity to regulatory authorities
 Shareholders register to identify the entity‘s principal shareholders

[
Records of the entity‘s investments
 Internal Auditor‘s Report
 Significant contracts re-negotiated by the entity during the period
 Life Insurance policies acquired by the entity
 Minutes of meetings of shareholders and of Those Charged with Governance
 Contracts and agreements with Key management
 Significant contracts re-negotiated by the entity during the period
When the auditor identifies Previously Unidentified or Undisclosed related
parties or significant related party transactions
When the auditor identifies related parties or significant related party transactions that were
not previously identified or disclosed by the management to the auditor, the auditor shall:
 Communicate the same to the other members of the engagement team
 Where the applicable FRF establishes related party requirements:
a. Request management to identify all transactions with newly identified
related parties for further evaluation by the auditor; and
b. Inquire as to why the entity‘s controls over related party relationships and
transactions failed to identify related party relationships and transactions.
 Perform appropriate substantive audit procedures relating to such newly
identified related parties or significant related party transactions.
Examples of arrangements that may indicate the existence of related party
relationships or transactions that management has not previously identified or
disclosed to the auditor include:
 Participation in unincorporated partnerships with other parties
 Agreement for the provision of services to certain parties under terms and conditions
that are outside the entity‘s normal course of business.
 Guarantees and guarantor relationships
Identified significant related party transactions outside the entity‟s normal
course of business
In case of identified significant related party transactions, the auditor shall:
a. Inspect the underlying contracts or agreements, if any, and evaluate:
1) The business rationale of the transactions to conclude whether such
transactions have been entered into to engage in fraudulent financial reporting
or to conceal misappropriation of assets;
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2) The transactions have been appropriately accounted for and disclosed in

accordance with the applicable FRF.
b. Obtain audit evidence that the transactions have been appropriately authorized and
approved.
INDICATIONS
 Complex equity transactions, such as corporate restructurings or acquisitions.
 Transactions with offshore entities in jurisdictions with weak corporate laws.
 The leasing of premises or the rendering of management services by the entity to
another party if no consideration is exchanged.
 Sales transactions with unusually large discounts or returns.
 Transactions with circular arrangements, for example, sales with a commitment to
repurchase.
 Transactions under contracts whose terms are changed before expiry.
CONCLUSION
In forming an opinion on the Financial Statements, the auditor shall evaluate whether the
identified related party relationships and transactions have been appropriately accounted
for and disclosed in accordance with the applicable FRF.
SA 560 – SUBSEQUENT EVENTS

This SA deals with the responsibility of the auditor relating to subsequent events
in an audit of financial statements.
The Financial Statements may be affected by certain events that occur after the date of the
Financial Statements. These events can be broadly classified into two types. They are
a. Those events that provide evidence of conditions that existed at the date
of the Financial Statements and (May be called as Adjusting Events).
For Example, debtors as on balance sheet date are declared insolvent after the
balance sheet date but before the date of auditor‘s report and settlement of legal
dispute before audit report date.
b. Those that provide evidence of conditions that arose after the date of the
Financial Statements. (May be called as Non-Adjusting Events). For
example, occurrence of a fire accident after the date of Balance Sheet Date.
This standard is effective for audits of Financial Statements for periods beginning on or
after April 1, 2009.
Definitions
Subsequent Events
Subsequent Events can be defined as those ―events occurring between the date of the
financial statements and the date of the auditor‟s report, and facts that become
known to the auditor after the date of the auditor‟s report‖.
Date of Financial Statements
The date of the end of the latest period covered by the financial statements.
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Date of the auditor‟s report

The date the auditor dates the report on the financial statements in accordance with
Standard on Auditing 700 (Revised).
The auditor‘s report cannot be dated earlier than the date of approval of the financial
statements.
When the auditor gives a date to his report, it signifies that the auditor informs the reader
that he has considered the effect of events and transactions of which the auditor becomes
aware and that occurred up to that date.
Date of approval of the financial statements
The date on which the financial statements have been prepared and those with the
recognized authority have asserted that they have taken responsibility for those financial
statements.
Date the financial statements are issued
The date that the auditor‘s report and audited financial statements are made available to
third parties. In some cases, the date the financial statements are issued may be the date
that they are filed with a regulatory authority. The date the financial statements are issued
should be on or after the date of providing of the report by the auditor.
Objectives
The objectives of the auditor are as follows:
 To obtain sufficient appropriate audit evidence that the events occurring between the
date of the Financial Statements and the date of the auditor‘s report that require
adjustment of, or disclosure in, the Financial Statements are appropriately reflected
in those Financial Statements and
 Respond appropriately to facts that become known to the auditor after the date
of the auditor‟s report, that, had they been known to the auditor at that date, may
have caused the auditor to amend the auditor‘s report.
AUDIT PROCEDURES
The auditor shall design and perform audit procedures to obtain sufficient
appropriate audit evidence that all events occurring between the date of the financial
statements and the date of the auditor‘s report that require adjustment or disclosure
in the financial statements have been identified and appropriately
adjusted/disclosed.
 Obtain an understanding of the procedures if any, established by management
to identity the subsequent events/events occurring after the date of balance sheet.
 Inquire the management or persons those charged with governance about the
occurrence of any subsequent events which might affect the financial statements. In
this connection, the auditor should concentrate on the current status of the items
that were accounted for on the basis of inconclusive data.
 Read minutes of the meetings of the entity‘s owners, management and those
charged with governance, which were held after the date of the financial statements.
 Inquire about the matters discussed at any such meetings for which minutes are not yet
available.
 Read the entity‘s latest interim financial statements, if any.
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 Read the entity‘s latest available budgets, cash flow forecasts for period after the
date of the financial statements.
 Inquire the entity‘s legal counsel concerning litigations and claims.
 Obtain written representations from management or from persons those charged
with governance that all events occurring subsequent to the date of the financial
statements, which requires adjustment or disclosure, have been adjusted or disclosed.
FACTS WHICH BECOME KNOWN TO THE AUDITOR AFTER THE DATE OF
THE AUDITOR‟S REPORT BUT BEFORE THE DATE THE FINANCIAL
STATEMENTS ARE ISSUED
The auditor has no obligation to perform any audit procedures regarding the financial
statements after the date of the auditor‘s report.
However, when, after the date of the auditor‘s report but before the date the financial
statements are issued, a fact becomes known to the auditor that, had it been known to the
auditor at the date of the auditor‘s report, may have caused the auditor to amend the
auditor‘s report, the auditor shall:
 Discuss the matter with management and where appropriate with those charged
with governance.
 Determine whether the financial statements need amendment and, if so, inquire
how management intends to address the matter in the financial statements
If management amends the financial statements
 If management amends the financial statements, the auditor shall:
a. Carryout audit procedures necessary in the circumstances on the amendment
b. Extend the audit procedures referred to above to the date of the new
auditor‘s report and
c. Provide a new report on the amended financial statements. This new
audit report shall not be dated earlier than the date of approval of the
amended financial statements.
When management does not amend the financial statements in circumstances where
the auditor believes they need to be amended, then the auditor shall notify management
and with those charged with governance, not to issue the financial statements to third
parties before making necessary amendments. When the financial statements are issued
without the necessary amendments, the auditor shall take appropriate action. Such an
action of the auditor is in the form of preventing reliance on the auditor‟s report. For
this purpose, the auditor may take legal advice.
If law does not prohibit management from restricting amendment
Sometimes, a law or regulation or financial reporting framework may allow the management
to make amendments only to the effect of those subsequent events causing such
amendment. In such a case, the auditor is also permitted to restrict the audit procedures to
that amendment only. Two alternatives are available for the auditor in respect of issue of
a new report regarding the amended financial statements in such cases. They are
1. Amend the auditor‘s report and include an additional date, which is restricted only
to that amendment.
In other words, the auditor‘s report in this case includes two dates. The date of
auditor‘s report prior to the date on the amended report indicates the readers when
the audit work is completed originally. The second date signifies that the audit
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procedures followed by the auditor relates only to the subsequent amendment of the
2. Provide a new or amended auditor‘s report, which shall include a statement in an
Emphasis of Matter Paragraph that conveys that auditor‘s procedures on
c)
subsequent events are restricted solely to the amendment of the financial statements.
If law do not require the management to amend financial statements

In some entities, management may be allowed by law not to issue amended financial
statements and hence the auditor need not provide an amended or new auditor‘s report.
However, if the management does not amend the financial statements in
circumstances where the auditor believes they need to be amended, then:
a. If the auditor‘s report has not yet been provided to the entity, the auditor shall
modify the opinion as required by Standard on Auditing 705 and then provide his
report to the entity concerned, or
b. If the auditor‘s report has already been provided to the entity, the auditor shall
notify management and with those charged with governance, not to issue the
financial statements to third parties before making necessary amendments.
When the financial statements are issued without the necessary amendments, the
auditor shall take appropriate action. Such an action of the auditor is in the form of
preventing reliance on the auditor‟s report. For this purpose, the auditor may
take legal advice.
FACTS WHICH BECOME KNOWN TO THE AUDITOR AFTER THE FINANCIAL

STATEMENTS HAVE BEEN ISSUED
After the financial statements have been issued, the auditor has no obligation to perform any
audit procedures regarding such financial statements. However, when, after the financial
statements have been issued, a fact becomes known to the auditor that, had it been known to
the auditor at the date of the auditor‘s report, may have caused the auditor to amend the
auditor‘s report, the auditor shall:
a. Discuss the matter with management and, where appropriate, those charged with
governance
b. Determine whether the financial statements need amendment and, if so,
c. Inquire how management intends to address the matter in the financial statements.
(Refer to Section 130 & 131 of the Companies Act, 2013)
SUBSEQUENT EVENTS AND BRANCH AUDITOR‟S REPORT
If branch auditor has already audited the branch and submitted the report to the principal
auditor, the principal auditor would follow audit procedures in respect of events occurring
between the date of signing of the audit report of the auditor of the branch and date of
signing of his (principal auditor) report.
SA - 570 (R) - GOING CONCERN
Certain fundamental accounting assumptions underlie the preparation and
presentation of financial statements. Their acceptance and use are assumed and therefore
their use in preparation and presentation of financial statements is not required to be
stated specifically. However, if such fundamental accounting assumptions are not
followed, the fact that those were not followed in the preparation of financial statements
should be clearly disclosed.
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Responsibilities of Management
One such fundamental accounting assumptions is Going Concern. Under this assumption, it
is assumed that the organization will continue in operation for the foreseeable future.
Since going concern assumption is a fundamental accounting assumption, while preparing
the financial statements, the management has to use such assumption. In other words,
management has to prepare the financial statements on going concern basis whether or
not the financial reporting framework so requires.
In case the financial statements have not been prepared on a going concern basis,
the fact should be appropriately disclosed in the financial statements. In such a case, the
financial statements should also clearly disclose:
 The basis of preparation of financial statements

 The reason why the entity is not regarded as a going concern
When the management has a plan to
 Liquidate its business or
 Cease its operations
Then management is not expected to prepare financial statements on going concern
basis.
When the use of the going concern assumption is appropriate, assets and liabilities are
recorded on the basis that the entity will be able to realize its assets and discharge its liabilities
in the normal course of business.
When the going concern assumption used by the management is inappropriate, then the
classification of assets and liabilities made by the management as well as the value of
assets and liabilities as shown by the management in the Financial Statements will
become wrong and hence the Financial Statements may not reflect a true and fair view.
Objective/Responsibilities of the Auditor
In an audit of financial statements, the following are the responsibilities of the auditor:
1. To obtain sufficient appropriate audit evidence about the appropriateness of
management‘s use of the going concern assumption.
In other words, the auditor has to evaluate whether the going concern assumption
used by the management in preparation and presentation of financial statements is
appropriate or not. For this purpose, the auditor has to gather sufficient appropriate
audit evidence
2. To conclude whether there is any material uncertainty about the entity‘s ability to
continue as a going concern
3. To determine what type of audit report is to be issued
However, the auditor cannot provide any guarantee about the entity‘s ability to
continue as a going concern because of the inherent limitations of the audit.
Effective Date
April 1, 2017
Audit Procedures/Risk Assessment Procedures:
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The auditor has to verify whether the going concern assumption used by the management
in the preparation and presentation of financial statements is appropriate or not. For this
purpose, the auditor shall consider whether events or conditions exist that may cast
significant doubt on the entity‘s ability to continue as a going concern. In doing so, if the
auditor finds that management has evaluated the entity‘s ability to continue, then he has to
discuss about whether any events or conditions were identified by management.
Events or Conditions that individually/collectively may cast d0ubt about Going
Concern Assumption
Financial
 Substantial and continuous operating losses
 Negative cash flows
 Negative Net worth
 Negative Working Capital
 Adverse key financial ratios
 Inability to pay creditors on due dates
 Indications of withdrawal of financial support by creditors
 Suppliers insisting on cash-on-delivery
 Arrears or discontinuance of dividends
 Inability to comply with the terms of loan agreements/debenture agreements
 Excessive reliance on short-term borrowings to finance long-term assets
 Fixed-term borrowings approaching maturity without realistic prospects of renewal
or repayment
Operating
 Loss of key management without replacement
 Loss of a major market/key customer(s)
 Loss of principal supplier(s)
 Labor difficulties
 Emergence of a highly successful competitor
Other
 Non-compliance with capital or other statutory requirements.
 Pending legal proceedings against the entity that may result in judgments that could
not be met.
 Changes in law or regulation or government policy.
 Uninsured or underinsured catastrophes when they occur.
However, the existence of the events or conditions discussed above can be mitigated by
other factors. For example, if during the course of audit the auditor observes that the entity
is unable to meet its debt payment obligations, the auditor should not conclude that the
organizations is not a going concern. In such a case the auditor is expected to discuss the
plans of the management for future action. The management can mitigate the above
said factor by either of the following:
 By disposing of assets
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 Rescheduling loan repayments or

 Obtaining additional capital.
Similarly, the loss of a principal supplier may be mitigated by the availability of a suitable
alternative source of supply.
The auditor should also verify whether the outcome of these plans is likely to
improve the situation.
OTHER AUDIT PROCEDURES
When the auditor identifies some events or conditions as discussed above, he had to
conclude whether such events or conditions can be treated as a material uncertainty with
regard to entity‘s ability to continue as a going concern. For this purpose, he has to discuss
the following with management:
1) Analyze and discuss cash flows, profit and other forecasts with management
2) Analyze entity‘s latest interim financial statements.
3) Read minutes of the meetings of the Board of Directors with particular reference
to financial difficulties.
4) Inquire the entity‘s legal counsel regarding the existence of litigations and claims,
their outcome and the financial implications.
5) Consider subsequent events which may have an affect on the entity‘s ability to
continue.
AUDIT CONCLUSIONS AND REPORTING
Based on the audit evidence obtained, the auditor shall conclude whether, a material
uncertainty exists which may cast significant doubt on the entity‘s ability to continue as a
going concern.
I. Use of Going Concern Assumption Appropriate but a Material Uncertainty
Exists
When the auditor concludes that the use of the going concern assumption is
appropriate, but a material uncertainty exists, he shall determine whether the financial
statements:
 Disclose clearly that there is a material uncertainty about the entity‘s ability
to continue as a going concern.
 Describe the events or conditions that may cast significant doubt about the
entity‘s ability to continue as a going concern; and
If adequate disclosure is made
If adequate disclosure is made in the financial statements, the auditor shall express an
unmodified opinion and include an Emphasis of Matter paragraph in his report, which
should:
 Highlight the existence of a material uncertainty that may cast significant doubt
on the entity‘s ability to continue as a going concern; and to
 Draw attention to the note in the financial statements
Illustration of an Emphasis of Matter Paragraph

Without qualifying our opinion, we draw attention to Note X in the
financial statements which indicates that the Company incurred a net
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loss of XXX during the year ended March 31, 20X1 and, as of that date,
the Company‟s current liabilities exceeded its total assets by XXX. These
conditions, along with other matters as set forth in Note X, indicate the
existence of a material uncertainty that may cast significant doubt about
the Company‟s ability to continue as a going concern.
If adequate disclosure is not made
If adequate disclosure is not made in the financial statements, the auditor shall express a
qualified or adverse opinion, as appropriate. In such a case, he has to state clearly in
his report that there exists a material uncertainty about the entity‘s ability to continue as a
going concern.
If financial statements omits the required disclosures

If the financial statements omit the required disclosure, the auditor shall express an
adverse opinion.
II. USE OF GOING CONCERN ASSUMPTION INAPPROPRITE
When the going concern assumption made by the management is inappropriate, the auditor
shall express an adverse opinion. This opinion is required to be expressed by the auditor
even when the financial statements include a disclosure that the going concern
assumption made by the management is inappropriate.
When the auditor concludes that the going concern assumption is inappropriate, the
entity may prepare financial statements on an alternative basis (ex. Liquidation
basis). In such a case, the auditor should perform an audit of those financial statements
and can express an unmodified opinion, provided there is adequate disclosure therein.
The auditor may include an emphasis of matter paragraph by which he can draw the
attention of the users of financial statements that an alternative basis is used for preparation
of financial statements and the reasons for its use.
PRACTICAL QUESTION
Yummy Ltd., dealing in manufacturing and trading of milk butter, has a
benchmark in its product for so many years. Tasty Ltd., a rival company
to Yummy Ltd., has introduced its new product, peanut butter. Due to
being health conscious, the consumers have shifted from milk butter to
peanut butter within few months. This has result into massive loss during
the year to Yummy Ltd. due to non-selling of perishable milk products.
The company has also started having negative net worth. It's production
head, finance head and marketing head have also left the company. The
company has no sound action plan to mitigate these situations. Kindly guide
the auditor of Yummy Ltd., how he should deal with the situation.
As per SA 570 on ―Going Concern‖, it is the responsibility of the Auditor to obtain
sufficient appropriate audit evidence about the appropriateness of management‘s use
of the going concern assumption in the preparation and presentation of the
financial statements and to conclude whether there is a material uncertainty about
the entity‘s ability to continue as a going concern. The auditor shall evaluate
management‘s assessment of the entity‘s ability to continue as a going concern. In
evaluating management‘s assessment, the auditor shall consider whether
management‘s assessment includes all relevant information of which the auditor is
aware as a result of the audit.
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In the instant case, Yummy Ltd. has suffered massive loss due to introduction of a
substitute of its product by its rival company, Tasty Ltd., and having negative net
worth also. Besides this, its production head, finance head and marketing head have
also left the company. The company, in addition, has no action plan to mitigate these
situations. Thus there are clear indications that there is danger to entity‘s ability to
continue in future. Considering the fact that there is no sound plan of action from
the management to mitigate these factors and to put the company back on the recovery,
the going concern assumption does not hold appropriate.
Therefore, the auditor should ask the management for its adequate disclosure in the
financial statement and include the same in his report. However, if the management
fails to make adequate disclosure, the auditor should express a qualified or adverse
opinion.
If the result of the inappropriate assumption used in the preparation of financial
statements is so material and pervasive as to make the financial statements
misleading, the auditor should express an adverse opinion.
A Ltd. was under audit for the year ended 31.03.2004. An appeal filed by A
Ltd. against the demand of Excise Duty of 26 crores was pending before
the Supreme Court for which neither provision was made nor was
disclosed in the notes to the financial statements. On 12th July, 2004, the
auditor came to know through paper reports that the point involved in the
appeal of A Ltd. was adjudicated by the Supreme Court in the case of some
other assessee, which is in favour of the department of Excise Duty. The
auditor insisted that provisions be made of 26 crores in the financial
statements. The Management was of the view that since its own case is
still pending, no provision is called for. It was also of the view that the
event does not have any effect on the financial position of the company on
the date of the Balance Sheet. Is the view of the Management tenable?
As per AS 29 "Provisions, Contingent liabilities and Contingent Assets", a contingent
liability is a possible obligation that arises from past events and the existence of which
will be confirmed only by the occurrence or non-occurrence of one or more uncertain
future events not wholly within the control of the enterprise.
Further, future events that may affect the amount required to settle an obligation
should be reflected in the amount of a provision where there is sufficient objective
evidence that the event will occur.
As per SA 570 ―Going Concern‖, there are certain examples of events or conditions that,
individually or collectively, may cast significant doubt about the going concern
assumption. Pending legal or regulatory proceedings against the entity that may, if
successful, result in claims that the entity is unlikely to be able to satisfy is one of the
example of such event.
When the auditor concludes that the use of the going concern assumption is appropriate
in the circumstances but a material uncertainty exists, the auditor shall determine
whether the financial statements adequately describe the principal events or conditions
that may cast significant doubt on the entity‘s ability to continue as a going concern and
management‘s plans to deal with these events or conditions; and disclose clearly that
there is a material uncertainty related to events or conditions that may cast significant
doubt on the entity‘s ability to continue as a going concern and, therefore, that it may be
unable to realize its assets and discharge its liabilities in the normal course of business.
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Since the issue involved in the appeal of A Ltd. was similar to the point in case of some
other company and since the appeal of that company was decided against that company
and in favour of the Excise Department, it is necessary for A Ltd. to make a provision of
26 crores as per AS 29. The case settled by the Supreme Court on similar point
reflects significant developments affecting the assessment about the potential risk faced
by the company. The view of the management that its own appeal is undecided or that it
has no effect on the financial position as on 31.03.2004 is not at all tenable. Since the
financial position is materially affected, the auditor should express a qualified opinion
or an adverse opinion as may be appropriate.
ABC company files a law suit against Unlucky Company for Rs.5 crores. The
Attorney of the company feels that the suit is without merit, so unlucky
company merely discloses the existence of the law suit in the notes
accompanying its financial statements. As an auditor, how will you deal with
the situation?
As per AS 29 "Provisions, Contingent liabilities and Contingent Assets", a contingent
liability is a possible obligation that arises from past events and the existence of which will
be confirmed only by the occurrence or non-occurrence of one or more uncertain future
events not wholly within the control of the enterprise;
Further, future events that may affect the amount required to settle an obligation should be
reflected in the amount of a provision where there is sufficient objective evidence that the
event will occur.
As per SA 570 ―Going Concern‖, there are certain examples of events or conditions that,
individually or collectively, may cast significant doubt about the going concern assumption.
Pending legal or regulatory proceedings against the entity that may, if successful, result in
claims that the entity is unlikely to be able to satisfy is one of the example of such event.
When the auditor concludes that the use of the going concern assumption is appropriate in
the circumstances but a material uncertainty exists, the auditor shall determine whether the
financial statements adequately describe the principal events or conditions that may cast
significant doubt on the entity‘s ability to continue as a going concern and management‘s
plans to deal with these events or conditions; and disclose clearly that there is a material
uncertainty related to events or conditions that may cast significant doubt on the entity‘s
ability to continue as a going concern and, therefore, that it may be unable to realize its
assets and discharge its liabilities in the normal course of business.
In the instant case, ABC Company has filed a law suit against Unlucky Company for Rs. 5
crores. Though, the attorney of Unlucky Company feels that the suit is without merit so the
company merely discloses the existence of law suit in the notes accompanying its financial
statements. But the auditor may evaluate the source data on which basis the opinion is
formed. If the auditor finds the uncertainty, he may request the management to adjust the
sum of Rs. 5 crore by making provision for expenses as per AS 29. If the management does
not accept the request the auditor should qualify the audit report.
SA 580 - WRITTEN REPRESENTATIONS
This standard on Auditing deals with the responsibility of the auditor to obtain
written representations from management/those charged with governance.
Definitions
Written Representations
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Written representations can be defined as “a written statement provided by

management to the auditor to confirm certain matters or to support other
audit evidence.
Objectives:
The auditor is required to obtain written representations from the management/those
charged with governance. In other words, written representations are requested from
those responsible for the preparation and presentation of Financial Statements.
The following are the objectives behind obtaining written representations:
 To ensure that the management has fulfilled its fundamental responsibilities;
(Otherwise called as to confirm certain matters) and
 To support other audit evidence.
This standard is effective for audit of financial statements from 01-04-2009.
Written Representations as Audit Evidence
Written representations are considered as a part of information required by the
auditor. Therefore Written Representations are an important source of audit
evidence. Audit evidence is all the information used by the auditor in arriving
at the conclusions on which the audit opinion is based.
If management fails to provide the requested Written Representations, it may alert the
auditor to the possibility that one or more significant issues may exist. Further, a request
for written representation may prompt management to consider such matters more
rigorously, thereby enhancing the quality of representations.
AUDIT PROCEDURES
The auditor shall request written representations from those responsible for the preparation
and presentation of the financial statements. Generally management is regarded as
responsible for preparation and presentation of the financial statements because of its
knowledge of the entity in conducting the entity‘s business.
Therefore, the auditor shall request the written representations from entity‘s chief executive
officer or other equivalent persons. In some cases, those charged with governance are also
responsible for the preparation and presentation of financial statements. In such a case,
written representations are to be requested from those charged with governance.
CONTENTS OF WRITTEN REPRESENTATIONS
I. Representations as to preparation and presentation of Financial Statements
The following shall be included by the management in the representations relating to
preparation and presentation of Financial Statements.
 That it has fulfilled its responsibility for the preparation and presentation of financial
statements as set out in the terms of the audit engagement;
 That the financial statements are prepared and presented in accordance with the
applicable financial reporting framework;
 That transactions and events have been carried out in accordance with legislation;
 That the selection and application of accounting policies are appropriate;
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 That the significant assumptions used in making accounting estimates are

reasonable;
 That related party relationships and transactions have been appropriately accounted
for and disclosed in accordance with the applicable accounting standards in India;
 That all events subsequent to the date of the financial statements which require
adjustment or disclosures as per the requirements of the accounting standards have
been properly adjusted or disclosed;
 Any other matter that the auditor may consider appropriate.
Even though the management has included most of the above matters in the terms of audit
engagement, the auditor should confirm these matters through written representations.
This is because of the fact that the auditor is unable to judge whether management has
prepared and presented the financial statements on the basis of the terms of audit
engagement.
II. Representations as to Information
The following shall be included by the management in the representations relating to
Information:
A clear statement that:
 All transactions have been recorded in the accounting records and are reflected in the
financial statements;
 All information relating to fraud or suspected fraud has been disclosed;
 All known instances of non-compliance or suspected non-compliance with laws and
regulations have been disclosed;
 All related parties and related party relationships and transactions known to them are
disclosed;
 All information relevant to the preparation and presentation of financial statements
has been provided;
 The final version of the annual report will be provided to the auditor when available
before issuing the same by the entity.
 Any other matter that the auditor may consider appropriate.
Date and period covered by written representations

The auditor‟s report cannot be dated before the date of the written
representations. This is because of two reasons. The first reason is that without
considering the written representations given by the management, which are treated as
audit evidence by the auditor, he cannot form and express an opinion on the financial
statements. Moreover, he is also required to consider the events occurring up to the date of
his report, written representations provides a clue as to the treatment of such events
(adjustment/disclosure) and hence written representations are to be dated as near as
practicable to the date of auditor‟s report.
Such representations provided by the management shall cover all the period referred to in
the auditor‘s report.
Form of written representations
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The written representations shall be in the form of a representation letter addressed to the
auditor.
Doubt as to the reliability of the written representations
If the auditor finds that the written representations provided by the management are
inconsistent with other audit evidence, he shall perform audit procedures to resolve the
matter.
If the auditor concludes that the written representations are not reliable, the auditor shall
determine the effect of this on his opinion.
When management fails to provide requested written representations
Where the management fails to provide one or more of the written representations
requested, then the auditor shall:
 Discuss the matter with management
 Re-evaluate the integrity of management and evaluate the effect on the reliability of
representations (oral or written) and audit evidence in general and
 Consider the impact of this on the auditor‘s opinion.
SA - 600 : USING THE WORK OF ANOTHER AUDITOR
According to SA-200 “Overall Objectives of the Independent Auditor and the
conduct of an audit in accordance with Standards on Auditing‖, when the auditor
delegates work to assistants or uses work performed by other auditors and experts, he will
continue to be responsible for forming and expressing his opnion on the financial
information. However, he wil be entitled to rely on work performed by others,
provided he exercises adequate skill and care.
Where another auditor has been appointed for the component, the principal auditor is
normally entitled to rely upon the work of such auditors unless there are special
circumstances to make him visit the component and examine the books and records of the
said component.
Definitions:
1. “Principal Auditor” means the auditor responsible for reporting on the financial
information of an entity when that financial information includes the financial
information of one one more components audited by another auditor.
2. “Component” means a division, branch, subsidiary, associated enterprises or other
entity whose financial information is included in the financial information audited by
the principal auditor.
3. “Other auditor” means an auditor, other than the principal auditor, who has the
responsibility for reporting on the financial information of a component which is
included in the financial information audited by the ―principal auditor‖.
While relying upon the work of the other auditor, the prinicipal auditor can follow the
procedures outlined below:
 Advise the other auditor about significant accouting, auditing and reporting
requirements and obtain representations as to their compliance.
 Advise the other auditor about the areas requiring special considerations.
 Advise the other auditor the time table
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 Advise the other auditor of the use that is to be made of the other auditor‟s
work.
 Ascertain the audit procedures adopted by the other auditor. These
procedures can also be reviewed by the principal auditor through
questionnaires/checklists.
 Ascertain the limitations, if any placed on the branch auditor.
 In this connection, the prinicipal auditor need not evaluate the professional
competence of the other auditor except in special circumstances.
 Consider significant audit findings.
 Discuss the audit findings with the other auditor and with the management.
If the prinicipal auditor is not satisified with the work of the other auditor, he may decide
to make supplemental tests or request the other auditor to do the same.
When considered necessary, the principal auditor may require the other auditor to answer a
detailed questionnaire regarding matters on which the principal auditor requires
information for discharging his duties. The other auditor should respond to such
questionnaire on a timely basis.
RESPONSIBILITY:
The prinicipal auditor will not be held responsible in respect of work entrusted to the other
auditor except when he does not exercise due diligence and care in carrying out his work.
REPORITNG:
The prinicipal auditor should issue a qualified report/disclaimer of opinion, if
 He concludes that he cannot use the work of the other auditor and
 if he is not able to perform sufficient additional procedures to come to conclusions.
SA 610(R) – USING THE WORK OF INTERNAL AUDITORS
This standard on auditing deals with the responsibilities of the external auditor when
using the work of internal auditors.
The external auditor may use the work of the internal auditor in any one of the following
ways:
1. In obtaining audit evidence
2. To take direct assistance of internal auditor under the direction, supervision and
review of external auditor.
This Standard helps the external auditor in determining:
 Whether to use the work of Internal Auditor
 The nature and extent to which such work can be used and
 Audit procedures to be followed to assess the work of internal auditor.
Effective Date
01-04-2016
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Objectives behind appointment of Internal Auditor/Responsibilities of the

Internal Audit Function
1. Monitoring Internal Controls
Under this heading, the responsibilities of the Internal Auditor include the following:
 Review of internal controls
 Monitoring their operations and
 Recommending improvements thereto.
2. Examination of financial and operating information
The internal auditor responsibility also includes reviewing financial and other
information to ensure that it is accurate, valid and reliable.
3. Review of Compliance with laws and regulations
The internal auditor may be assigned the task of reviewing the compliance with laws,
regulations and with management policies and directives.
AUDIT PROCEDURES
Examples of work of the internal audit function that can be used by the external auditor
include the following:
 Testing of the operating effectiveness of controls
 Substantive procedures involving limited judgment
 Observation of inventory counts
 Testing of compliance with regulatory requirements.
Determining whether and to what extent to use the work of Internal Auditors
The external auditor can make use of the work carried out by the internal auditor as
audit evidence, provided the work performed by the internal auditor is likely to be
adequate for the purpose of his audit. For this purpose, the external auditor shall
evaluate:
I. Objectivity
Objectivity refers to the ability to perform those tasks without allowing bias,
conflict of interest or undue influence of others to override professional judgments.
Under this heading, the auditor should:
 Ascertain the status of the internal audit function within the entity and whether such
status helps in keeping the internal audit function objective.
 Consider whether the internal auditor has direct access to those charged with
governance.
 To whom the internal audit function reports?
 Whether decisions relating to employment in internal audit function being
taken by those charged with governance?
 Whether any constraints or restrictions placed on the internal audit function by
management/those charged with governance?
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 Whether the management is taking action on recommendations of the internal

audit function?
II. Technical Competence

Competence of the internal audit function refers to the attainment and maintenance of
knowledge and skills of the function as a whole at the level required to enable assigned
tasks to be performed diligently and in accordance with applicable professional
standards.
 Whether the internal auditors are the members of relevant professional bodies?
 Whether the internal auditors have adequate technical training and proficiency
as internal auditors?
 Whether they are complying with the mandatory/recommendatory Standards on
Internal Audit issued by ICAI?
Verify whether the internal audit function applies a systematic and disciplined
approach while conducting their functions.
III. Due Professional Care
 Whether activities of the internal audit function are properly planned, supervised,
reviewed and documented?
 Whether internal audit manual exist and whether they are adequate for effective
performance of audit?
Procedures to Determine the Adequacy of Work of the Internal Audit Function
The procedures the external auditor may perform to evaluate the quality of the work
performed and the conclusions reached by the internal audit function include the following:
 Making inquiries of appropriate individuals within the internal audit function.
 Observing procedures performed by the internal audit function.
 Reviewing the work program of internal audit function and working papers.
Determining Whether Internal Auditors Can Be Used to Provide Direct
Assistance for Purposes of the Audit
Some times, the external auditor may be prohibited by law or regulation from obtaining
direct assistance from internal auditors.
If not prohibited by law and the external auditor plans to use internal auditors to
provide direct assistance on the audit, the external auditor shall evaluate
 The level of competence of the internal auditor
 The existence of threats to objectivity. For this purpose, the external auditor shall
inquire the internal auditor about the existence of interests and relationships that
may create a threat to the objectivity of the internal auditor.
Prior to using internal auditors to provide direct assistance for purposes of the audit, the
external auditor shall:
(a) Obtain written agreement from an authorized representative of the entity that
the internal auditors will be allowed to follow the external auditor‘s instructions, and that
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the entity will not intervene in the work the internal auditor performs for the external
auditor; and
(b) Obtain written agreement from the internal auditors that they will keep
confidential specific matters as instructed by the external auditor and inform the external
auditor of any threat to their objectivity.
The external auditor shall not use an internal auditor to provide direct assistance if:
(a) There are significant threats to the objectivity of the internal auditor; or
(b) The internal auditor lacks sufficient competence to perform the proposed work.
SA 620 USING THE WORK OF AN AUDITOR‟S EXPERT

This Standard on Auditing (SA) deals with the auditor‘s responsibilities regarding the use of
work of an expert. Generally, auditors do use the work carried out by an expert in obtaining
sufficient appropriate audit evidence.
Effective Date
April 1, 2010
Non-Applicability
This SA does not deal with:
(a) Situations where the engagement team includes an expert or
(b) Situation where managements makes use of the work of an expert in preparation of
financial statements (i.e. Management‘s Expert).
Objectives
This standard provides guidance to the auditor:
a. To determine whether to use the work of an auditor‘s expert; and
b. If using the work of an auditor‘s expert, to determine whether that work is
adequate for the auditor‘s purposes.
Even though the auditor makes use of the work of an auditor‘s expert, his responsibility is
not reduced and he is made solely responsible for the audit opinion expressed.
Need of an expert to management
While preparing the financial statements, sometimes management may need expertise in a
field other than accounting because management does not possess the necessary expertise.
In such a case, the risks of material misstatement may increase. Therefore, management
may make use of an expert called as ―management expert‖.
Need of an expert to auditor
During the course of audit, some times, the auditor may also need expertise in a field other
than accounting or auditing. For this purpose, the auditor may decide to use the work of an
expert. Such person, whose work may be used by the auditor, is called as ―Auditor‘s Expert‖.
Areas in which an expert‟s work can be used by the auditor
The work of an expert may be useful to the auditor in respect of matters such as:
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o Valuation of complex financial instruments

o Valuation of land and buildings
o Valuation of plant and machinery
o Valuation of jewelry, works of art, antiques etc.
o Valuation of intangible assets
o Actuarial calculation of liabilities associated with employee benefit plans.
o Estimation of oil and gas reserves
o The interpretation of contracts, laws and regulations
o The analysis of complex or unusual tax compliance issues
Such ―auditor‘s expert‖ may be either an individual or organisation possessing
expertise in a field other than accounting or auditing, whose work in that field is used by the
auditor to assist him in obtaining sufficient appropriate audit evidence. Where, expertise
can be defined as skills, knowledge and experience in a particular field.
An auditor‘s expert may be either an auditor‘s internal expert (who is a partner or staff,
including temporary staff, of the auditor‘s firm or a network firm), or an auditor‟s
external expert.
Considerations when deciding whether to use an auditor‟s expert
When management has used a management‘s expert in preparing the financial statements,
the auditor‘s decision on whether to use an auditor‘s expert may be influenced by such
factors as:
o The complexity of the matter involved.
o The risks of material misstatement in the matter.
o The availability of alternative sources of audit evidence.
o Whether the management‘s expert is employed by the entity, or engaged by it.
o The management‘s expert‘s competence and capabilities.
o Whether the management‘s expert is subject to technical performance
standards or other professional or industry requirements.
NATURE, TIMING AND EXTENT OF AUDIT PROCEDURES
The nature, timing and extent of audit procedures will vary depending on the
circumstances. The following are the factors to be considered by the auditor while
determining the nature, timing and extent of audit procedures to be followed. In the
following situations, generally, the auditor is expected to follow extensive audit
procedures.
o The work of the auditor‘s expert relates to a significant matter that involves
subjective and complex judgments.
o The auditor has not previously used the work of the auditor‘s expert, and
o has no prior knowledge of that expert‘s competence, capabilities and
objectivity.
o The expert is an auditor‘s external expert and is not, therefore, subject to the
firm‟s quality control policies and procedures.
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Evaluation of the Expert

The auditor shall evaluate whether the auditor‘s expert has the necessary competence,
capabilities and objectivity for the auditor‘s purposes.
―Competence‖ relates to the nature and level of expertise of the auditor‘s expert.
―Capability‖ relates to the ability of the auditor‘s expert to exercise that competence in the
circumstances of the engagement.
―Objectivity‖ relates to the possible effects that bias, conflict of interest, or the influence of
others may have on the professional or business judgment of the auditor‘s expert.
The auditor can obtain information regarding the competence, capabilities and objectivity of
an auditor‘s expert from a variety of sources, such as:
o Personal experience with previous work of that expert.
o Knowledge of that expert‟s qualifications, membership of a professional body,
license to practice, or other forms of external recognition.
o Experience of the expert
o Whether the expert is having expertise in the specific field in which the auditor
wants to gather audit evidence. For example, a particular actuary may specialize in
property and casualty insurance, but have limited expertise regarding pension
calculations.
Understanding the Field of Expertise
The auditor shall obtain sufficient understanding of the field of expertise of the
auditor‘s expert through following procedures specified in the above paragraph or
through discussion with that expert.
o Published papers or books written by that expert.
o Whether that expert‘s work is subject to technical performance standards or
other professional or industry requirements
o Discussions with other auditors or others who are familiar with that expert‘s
work.
o Inquire of the entity about any known interests or relationships that the entity
has with the auditor‘s external expert that may affect that expert‘s objectivity such as
1) Financial interests
2) Business and personal relationships
o Obtain a written representation from the auditor‘s external expert about any
interests or relationships with the entity of which that expert is aware.
Agreement with the Auditor‟s Expert
The agreement between the auditor and an auditor‘s external expert is often in the form
of an engagement letter.
Matters to be considered for deciding whether an agreement is required between the auditor
and the expert:
1) Access to sensitive or confidential entity information by expert.
2) Complexity of the matter.
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3) Whether the work of the expert had been used by the auditor previously.
When there is no written agreement, evidence of the agreement may be included in
audit program.
The agreement may include the following matters:
1) The nature, scope and objectives of that expert‘s work; (Whether external or
Internal)
2) The respective roles and responsibilities of the auditor and that expert;
3) Who should perform detailed testing of source data.
4) Consent for the auditor to discuss the auditor‘s expert‘s findings or conclusions with
the entity and others, and stating that the findings of the expert may be included
in a modified report, if necessary.
5) Access to, and retention of, each other‘s working papers. When the auditor‘s expert is
a member of the engagement team, that expert‘s working papers form part of the audit
documentation. Subject to any agreement to the contrary, auditor‘s external experts‘
working papers are their own and do not form part of the audit documentation.
6) The nature, timing and extent of communication between the auditor and that expert,
including the form of any report to be provided by that expert; and
7) The agreement should specifically include provisions specifying that the auditor‘s expert
shall maintain confidentiality.
Evaluating the Adequacy of the Auditor‟s Expert‟s Work
The auditor shall evaluate the adequacy of the auditor‘s expert‘s work for the auditor‘s
purposes.
 Verify the Accuracy, validity and the reliability of the source date used by the expert.
 Verify the reasonableness of significant assumptions made by the expert.
CONCLUSION
Work of Auditor‟s Expert is not adequate
If the auditor determines that the work of the auditor‘s expert is not adequate for the
auditor‘s purposes, the auditor shall:
(a) Agree with that expert on the nature and extent of further work to be performed by
that expert; or
(b) Perform further audit procedures appropriate to the circumstances which may
involve further work being performed by both the expert and the auditor or include
employing another expert.
Even after performing further audit procedures, if the auditor concludes that the work of the
auditor‘s expert is not adequate, then he shall express a modified opinion in the
auditor‘s report in accordance with SA 705 because the auditor has not obtained sufficient
Reference to the Auditor‟s Expert in the Auditor‟s Report
The auditor shall not refer to the work of an auditor‘s expert if the auditor issues an
unmodified opinion. In some cases, law or regulation may require a reference to the
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work of an auditor‘s expert, for example, for the purposes of transparency in the public
sector.
Reference to the work of an auditor‘s expert can be done only when the auditor issues a
modified report and that to after taking permission from such expert.
SA 700 (R) – FORMING AN OPINION AND REPORTING ON FINANCIAL
STATEMENTNS
EFFECTIVE DATE
01-04-2017
SCOPE
This standard deals with the responsibility of the auditor to form an opinion on the
Financial Statements. It also deal with the Form and Content of the Auditor‘s Report
The term Financial Statements means a complete set of General purpose Financial
Statements prepared in accordance with general purpose framework including the
related notes. The related notes ordinarily comprise a summary of Significant
Accounting Policies and Other Explanatory information.
“General purpose framework” can be defined as a financial reporting framework that
is designed to meet the common financial needs of many users. It is divided into
the following:
Fair Presentation Framework
A financial reporting framework that requires compliance with the requirements of the FRF
and acknowledges that:
 Management may provide disclosures beyond those specifically required by
the framework.
 Management may depart from a requirement of framework to achieve fair
presentation of Financial Statements in a very rare case.
Compliance Framework
A FRF requiring compliance with requirements of the framework but does not contain
acknowledgement as above.
FORMING AN OPNION ON THE FINANCIAL STATEMENTS
The auditor shall form an opinion whether the financial statements are
prepared, in all material respects, in accordance with Applicable Financial
Reporting Framework.
If all the following conditions are satisfied, the auditor can conclude that the Financial
Statements as a whole are free from material misstatements whether due to fraud
or error and hence can issue an unmodified opinion.
a) Financial Statements are prepared, in all material respects, in accordance with
Applicable Financial Reporting Frame work.
b) The Financial Statements adequately describe the Applicable Financial Reporting
Frame work.
c) The Financial Statements adequately disclose the significant accounting
policies selected and applied by the entity;
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d) The accounting policies selected and applied are consistent with the
applicable FRF;
e) The Accounting Estimates made by the management are reasonable;
f) The Terminology used in Financial Statements is appropriate;
g) The auditor is able to obtain sufficient appropriate audit evidence;
h) The uncorrected misstatements are not material;
Form of an Opinion
The auditor shall express an unmodified opinion when he concludes that the Financial
Statements are prepared as per Applicable Financial Reporting Frame work and are free
from material misstatements.
When the auditor:
1. Concludes that the Financial Statements as a whole are not free from material
misstatements; or
2. is unable to obtain Sufficient Appropriate Audit Evidence;
-- he shall modify the opinion as per SA 705.
Auditor‟s Report
The auditor‘s report shall be in writing.
Auditor‟s Report for audits conducted in accordance with Standards on
Auditing
The following are the basic elements of the auditor‘s report for audits conducted in
accordance with Standards on Auditing
1. Title
2. Addressee
3. Auditor‘s Opinion
4. Basis for Opinion
5. Key Audit Matters
6. Responsibilities of Management for the Financial Statements
7. Auditor‘s responsibilities for the audit of Financial Statements
- Other Matters
- Report on Other legal and regulatory requirements
8. Signature of the Auditor
9. Place of Signature
10. Date of Auditor‘s Report
ELEMENTS OF AUDIT REPORT
1. TITLE
The auditor‘s report should have an appropriate title. The title of the auditor‘s report
should clearly indicate that it is the report of an independent auditor. In other
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words, the auditor may give “Independent Auditor‟s Report” as title to his report.
Giving an appropriate title to the report will help the readers to distinguish the
independent auditor‘s report from reports issued by others. This also affirms the readers
that the auditor has met the ethical requirements regarding independence.
2. ADDRESSEE
The auditor‘s report shall be appropriately addressed. To whom the report is to be
addressed depends on the terms of engagement and applicable laws and
regulations. Generally, the auditor is required to address his report for whom the report
is prepared. Thus, in case of a company, the report is to be addressed to shareholders.
3. OPINION PARAGRAPH
The auditor‘s report shall include a section with the heading ―Opinion‖.
 State whether the financial statements give a true and fair view
 It should also:
a. Identify the entity whose Financial Statements have been audited;
b. State that the financial statements have been audited;
c. Identify the title of each statement comprising the Financial Statements;
d. Refer to the notes, including summary of significant accounting policies; and
e. Specify the date or, or period covered by, each financial statement comprising
Illustration
We have audited the attached Balance Sheet of ABC Limited for the year
ending on 31st March, 2017 and Statement of Profit and Loss Account annexed
thereto for the period ending on 31st March, 2017 including Cash Flow
Statement and they give a true and fair view/present fairly in all material
respects (When Financial Statements are prepared with a fair presentation framework).
Description of the AFRF
The auditor shall describe the AFRF used by management in preparation and
presentation of Financial Statements. This helps users to understand the context in which
the auditor‘s opinion is expressed.
The AFRF is identified by using terms such as:
―… In accordance with the Accounting Standards prescribed under Section 133 of the
Companies Act, 2013‖ or
―… In accordance with the Accounting Standards issued by ICAI‖ or
―… In accordance with the International Financial Reporting Standards
In some cases, the financial statements may present that they are prepared in accordance
with two financial reporting frameworks (e.g. Accounting Standards referred to in
Section 133 of Companies Act, 2013 and the IFRS).
Reporting when management used and complied with two financial reporting
frameworks
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If financial statements comply with each of the frameworks individually, two opinions are
expressed. The following are the alternatives available to the auditor in such a case for
reporting:
Alternative 1 – Expression of Separate Opinion
a. An opinion that the financial statements are prepared in accordance with accounting
standards issued pursuant to Section 133 of the Companies Act, 2013 and
b. An opinion that the financial statements are prepared in accordance with other financial
reporting framework i.e. IFRS.
Alternative 2 – Expression of Single Opinion
The financial statements are presented fairly, in all material respects, in accordance with
accounting principles generally accepted in India and with IFRS.
Reporting when management used and complied with one of the frameworks, but
fail to comply other framework
In such a case, the auditor can give an unmodified opinion in respect of financial
framework complied with by the entity and can issue a modified report with
regard to other framework in accordance with SA 705.
4. Basis of Opinion
This section should include the following:
1. States that the audit was conducted in accordance with Standards on Auditing.
2. Should describe the responsibilities of the auditor.
3. Includes a statement that the auditor is independent of the entity in accordance
with the relevant ethical requirements relating to audit and has fulfilled his
responsibilities. This statement should refer to the Code of Ethics Issued by ICAI.
4. State whether the auditor believes that the audit evidence that he has obtained is
sufficient appropriate to provide a basis for his opinion;
Illustration
We conducted our audit in accordance with Standards on Auditing. (In case of audit of a
company, add the word under section 143(10) of the Companies Act, 2013). Our
responsibilities under those Standards are further described in the Auditor‘s
Responsibilities for the Audit of the Financial Statements section of our report. We are
independent of the entity in accordance with the ethical requirements that are relevant to
our audit of the financial statements, and we have fulfilled our other responsibilities in
accordance with these requirements. We believe that the audit evidence we have obtained
is sufficient and appropriate to provide a basis for our opinion.
5. KEY AUDIT MATTERS
The auditor shall communicate Key Audit Matters in accordance with SA 701.
Illustration
Key audit matters are those matters that, in our professional judgment, were of
most significance in our audit of the financial statements of the current period.
These matters were addressed in the context of our audit of the financial
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statements as a whole, and in forming our opinion thereon, and we do not provide
a separate opinion on these matters.
6. MANAGEMENT’S RESPONSIBILITIES FOR THE FINANCIAL STATEMENTS

 Maintenance of adequate accounting records
 Selection and consistent application of appropriate accounting policies
 Designing, implementing and maintenance of internal control to ensure
that the financial statements prepared by them are free from material misstatements
resulting either from fraud or from error.
 Safeguarding of assets
 Making accounting estimates
 Assessing the entity‘s ability to continue as a going concern.
 To prepare financial statements in accordance with the applicable financial
reporting framework as specified in the terms of audit engagement.
Illustration
The Company’s Board of Directors is responsible for the matters stated in section 134(5)
of the Companies Act, 2013 (―the Act‖) with respect to the preparation of these standalone
financial statements that give a true and fair view of the financial position, financial
performance, (changes in equity) and cash flows of the Company in accordance with the
accounting principles generally accepted in India, including the accounting Standards
specified under section 133 of the Act. This responsibility also includes maintenance of
adequate accounting records in accordance with the provisions of the Act for
safeguarding of the assets of the Company and for preventing and detecting frauds
and other irregularities; selection and application of appropriate accounting
policies; making judgments and estimates that are reasonable and prudent; and
design, implementation and maintenance of adequate internal financial controls,
that were operating effectively for ensuring the accuracy and completeness of the accounting
records, relevant to the preparation and presentation of the financial statement that give a
true and fair view and are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, management is responsible for assessing the
Company’s ability to continue as a going concern, disclosing, as applicable, matters
related to going concern and using the going concern basis of accounting unless
management either intends to liquidate the Company or to cease operations, or has no
realistic alternative but to do so.
7. AUDITOR’S RESPONSIBILITIES FOR THE FINANCIAL STATEMENTS
This section of the Auditor‘s Report shall:
a. State that the objectives of the auditor are to:
i. Obtain reasonable assurance about whether the financial statements as a whole
are free from material misstatements whether due to fraud or error; and
ii. Issue an auditor‘s report that includes the auditor‘s opinion.
b. State that reasonable assurance is a high level of assurance, but is not a guarantee that
an audit conducted in accordance with Standards on Auditing will always detect a
material misstatement when it exists; and
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c. State that he has exercised professional judgment and has maintained professional
skepticism throughout the audit;
d. State that the auditor communicates with those charged with governance
regarding the planned scope and timing of audit and the significant audit findings,
including any significant deficiencies in internal controls that the auditor identifies
during the audit.
e. State that the auditor provides those charged with governance with a statement that he
has complied with relevant ethical requirements regarding independence and
communicate with them all relationships and other matters that may be reasonably
thought to bear on the auditor‘s independence;
f. State that he has communicated key audit matters in accordance with SA 701 to
those charged with governance also.
g. State the extent to which the financial information of components is audited by another
auditor for example the number of divisions/branches audited by other
auditors;
h. State that the following are his responsibilities:
1. To identify and assess risk of material misstatements and to obtain sufficient
2. To evaluate the effectiveness of internal controls to design audit procedures
but not to express any opinion on the effectiveness of such internal controls.
3. Evaluation of appropriateness of accounting policies.
4. Evaluation of the reasonableness of the accounting estimates made.
5. Evaluation of appropriateness of going concern assumption made by the
management.
This paragraph may be included by the auditor:
1. Within the body of the auditor‘s report
2. Within an appendix to the auditor‘s report
3. When the law permits, can specify the website of the appropriate authority
REPORT ON OTHER LEGAL AND REGULATORY REQUIREMENT
As required by the Companies (Auditor‟s Report) Order, 2016, issued by the Central
Government of India in terms of sub-section (11) of section 143 of the Companies Act, 2013,
we give in the Annexure a statement on the matters specified in paragraphs 3 and 4 of the
Order, to the extent applicable.
As required by Section 143(3) of the Act, we report that:
We have sought and obtained all the information and explanations which to the best of
our knowledge and belief were necessary for the purposes of our audit.
In our opinion, proper books of account as required by law have been kept by the
Company so far as it appears from our examination of those books [and proper returns
adequate for the purposes of our audit have been received from the branches not visited by
us.]
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[The reports on the accounts of the branch offices of the Company audited under Section
143(8) of the Act by branch auditors have been sent to us and have been properly dealt with
by us in preparing this report.]
The Balance Sheet, the Statement of Profit and Loss, and the Cash Flow Statement dealt
with by this Report are in agreement with the books of account [and with the returns
received from the branches not visited by us9].
In our opinion, the aforesaid standalone financial statements comply with the
Accounting Standards specified under Section 133 of the Act, read with Rule 7 of the
Companies (Accounts) Rules, 2014.
On the basis of the written representations received from the directors as on 31st March,
20XX taken on record by the Board of Directors, none of the directors is disqualified
as on 31st March, 20XX from being appointed as a director in terms of Section 164 (2) of the
Act.
With respect to the adequacy of the internal financial controls over financial
reporting of the Company and the operating effectiveness of such controls, refer to our
separate Report in ―Annexure A‖.
The Company has disclosed the impact of pending litigations on its financial position
in its financial statements – Refer Note XX to the financial statements; [or the Company
does not have any pending litigations which would impact its financial position10]
The Company has made provision, as required under the applicable law or accounting
standards, for material foreseeable losses, if any, on long-term contracts including
derivative contracts – Refer Note XX to the financial statements; [or the Company did not
have any long-term contracts including derivative contracts for which there were any
material foreseeable losses.11]
There has been no delay in transferring amounts, required to be transferred, to the
Investor Education and Protection Fund by the Company {or, following are the
instances of delay in transferring amounts, required to be transferred, to the Investor
Education and Protection Fund by the Company or there were no amounts which were
required to be transferred to the Investor Education and Protection Fund by the Company}.
OTHER MATTER
Illustration
We did not audit the financial statements/ information of ………………. (number) branches
included in the standalone financial statements of the company whose financial
statements/financial information reflect total assets of Rs. ……as at 31st March 20XX and
the total revenue of Rs. ………for the year ended on that date, as considered in the
standalone financial statements/information of these branches have been audited by the
branch auditors whose reports have been furnished to us, and our opinion in so far as it
relates to the amounts and disclosures included in respect of branches, is based solely on the
report of such branch auditors. Our opinion is not modified in respect of these matters.
8. SIGNATURE
The auditor‘s report shall be signed. In other words, where an individually practicing
chartered accountant or a proprietor of a proprietary concern is appointed, the
report shall be signed by that individual. Where a partnership firm is appointed as
the auditor, any partner of the partnership firm can sign for and on behalf of the
partnership firm. In all cases, the proprietor/partner signing on the audit report shall
1.115
mention the membership number. They shall also include the registration number of
the firm, wherever applicable allotted by ICAI.
9. DATE OF AUDITOR’S REPORT

The date on the audit report informs the users of the auditor‘s report that the auditor has
considered the effect of events or transactions that occurred up to that date.
10. PLACE OF SIGNATURE
The auditor‘s report shall name specific location, which is ordinarily the city where the
auditor‘s report is signed.
Illustration 1 – Auditor‟s Report on Financial Statements of a Listed Entity
Prepared in Accordance with a Fair Presentation Framework
For purposes of this illustrative auditor‘s report, the following circumstances are assumed:
 Audit of a complete set of financial statements of a listed company (registered under
the Companies Act, 2013) using a fair presentation framework. The audit is not a
group audit (i.e., SA 600 does not apply).
 The financial statements are prepared by management of the entity in accordance
with the accounting Standards prescribed under section 133 of the Companies Act,
2013.
 The terms of the audit engagement reflect the description of management‟s
responsibility for the financial statements in SA 210.
 The auditor has concluded an unmodified (i.e., ―clean‖) opinion is appropriate based
on the audit evidence obtained.
 The relevant ethical requirements that apply to the audit comprise the Code of Ethics
issued by ICAI together with the other relevant ethical requirements relating to the
audit and the auditor refers to both.
 Based on the audit evidence obtained, the auditor has concluded that a material
uncertainty does not exist related to events or conditions that may cast significant
doubt on the entity‟s ability to continue as a going concern in accordance with SA 570
(Revised).
 Key audit matters have been communicated in accordance with SA 701.
 Those responsible for oversight of the financial statements differ from those
responsible for the preparation of the financial statements.
 In addition to the audit of the financial statements, the auditor has other reporting
responsibilities required under the Companies Act, 2013.
INDEPENDENT AUDITOR‟S REPORT

To the Members of ABC Company Limited
Report on the Audit of the Standalone Financial Statements Opinion
We have audited the standalone financial statements of ABC Company Limited (―the
Company‖), which comprise the balance sheet as at 31st March 20XX, and the statement of
Profit and Loss, (statement of changes in equity)2 and statement of cash flows for the year
then ended, and notes to the financial statements, including a summary of significant
1.116
accounting policies and other explanatory information [in which are included the Returns
for the year ended on that date audited by the branch auditors of the Company‘s branches
located at (location of branches)]
In our opinion and to the best of our information and according to the explanations given to
us, the aforesaid standalone financial statements give the information required by the Act in
the manner so required and give a true and fair view in conformity with the accounting
principles generally accepted in India, of the state of affairs of the Company as at March 31,
20XX, and profit/loss, (changes in equity) and its cash flows for the year ended on that date.
Basis for Opinion
We conducted our audit in accordance with the Standards on Auditing (SA‘s) specified
under section 143(10) of the Companies Act, 2013. Our responsibilities under those
Standards are further described in the Auditor‘s Responsibilities for the Audit of the
Financial Statements section of our report. We are independent of the Company in
accordance with the Code of Ethics issued by the Institute of Chartered Accountants of India
together with the ethical requirements that are relevant to our audit of the financial
statements under the provisions of the Companies Act, 2013 and the Rules there under, and
we have fulfilled our other ethical responsibilities in accordance with these requirements
and the Code of Ethics. We believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our opinion.
Key Audit Matters
Key audit matters are those matters that, in our professional judgment, were of most
significance in our audit of the financial statements of the current period. These matters
were addressed in the context of our audit of the financial statements as a whole, and in
forming our opinion thereon, and we do not provide a separate opinion on these matters.
[Description of each key audit matter in accordance with SA 701.]
Management‟s Responsibility for the Standalone Financial Statements
The Company’s Board of Directors is responsible for the matters stated in section 134(5) of
the Companies Act, 2013 (―the Act‖) with respect to the preparation of these standalone
financial statements that give a true and fair view of the financial position, financial
performance, (changes in equity) and cash flows of the Company in accordance with6 the
accounting principles generally accepted in India, including the accounting Standards
specified under section 133 of the Act. This responsibility also includes maintenance of
adequate accounting records in accordance with the provisions of the Act for safeguarding of
the assets of the Company and for preventing and detecting frauds and other irregularities;
selection and application of appropriate implementation and maintenance of accounting
policies; making judgments and estimates that are reasonable and prudent; and design,
implementation and maintenance of adequate internal financial controls, that were
operating effectively for ensuring the accuracy and completeness of the accounting records,
relevant to the preparation and presentation of the financial statement that give a true and
fair view and are free from material misstatement, whether due to fraud or error.
Company‘s ability to continue as a going concern, disclosing, as applicable, matters related
to going concern and using the going concern basis of accounting unless management either
intends to liquidate the Company or to cease operations, or has no realistic alternative but to
do so.
1.117
Those Board of Directors are also responsible for overseeing the Company‘s financial
reporting process.
Auditor‟s Responsibilities for the Audit of the Financial Statements

Our objectives are to obtain reasonable assurance about whether the financial statements as
a whole are free from material misstatement, whether due to fraud or error, and to issue an
auditor‘s report that includes our opinion. Reasonable assurance is a high level of assurance,
but is not a guarantee that an audit conducted in accordance with SA‘s will always detect a
material misstatement when it exists. Misstatements can arise from fraud or error and are
considered material if, individually or in the aggregate, they could reasonably be expected to
influence the economic decisions of users taken on the basis of these financial statements.
Paragraph 40(b) of this SA explains that the shaded material below can be located in an
Appendix to the auditor‘s report. Paragraph 40(c) explains that when law, regulation or
applicable auditing standards expressly permit, reference can be made to a website of an
appropriate authority that contains the description of the auditor‘s responsibilities, rather
than including this material in the auditor‘s report, provided that the description on the
website addresses, and is not inconsistent with, the description o f the auditor’s
responsibilities below.
As part of an audit in accordance with SA‘s, we exercise professional judgment and maintain
professional skepticism throughout the audit.
We also:
Identify and assess the risks of material misstatement of the financial statements, whether
due to fraud or error, design and perform audit procedures responsive to those risks, and
obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion.
The risk of not detecting a material misstatement resulting from fraud is higher than for one
resulting from error, as fraud may involve collusion, forgery, intentional omissions,
misrepresentations, or the override of internal control.
Obtain an understanding of internal control relevant to the audit in order to design audit
procedures that are appropriate in the circumstances. Under section 143(3)(i) of the
Companies Act, 2013, we are also responsible for expressing our opinion on whether the
company has adequate internal financial controls system in place and the operating
effectiveness of such controls.
Evaluate the appropriateness of accounting policies used and the reasonableness of
accounting estimates and related disclosures made by management.
Conclude on the appropriateness of management‘s use of the going concern basis of
accounting and, based on the audit evidence obtained, whether a material uncertainty exists
related to events or conditions that may cast significant doubt on the Company‘s ability to
continue as a going concern. If we conclude that a material uncertainty exists, we are
required to draw attention in our auditor‘s report to the related disclosures in the financial
statements or, if such disclosures are inadequate, to modify our opinion.
Our conclusions are based on the audit evidence obtained up to the date of our auditor‘s
report. However, future events or conditions may cause the Company to cease to continue as
a going concern.
Evaluate the overall presentation, structure and content of the financial statements,
including the disclosures, and whether the financial statements represent the underlying
transactions and events in a manner that achieves fair presentation.
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We communicate with those charged with governance regarding, among other matters, the
planned scope and timing of the audit and significant audit findings, including any
significant deficiencies in internal control that we identify during our audit.
We also provide those charged with governance with a statement that we have complied
with relevant ethical requirements regarding independence, and to communicate with them
all relationships and
Other Matter
included in the stand alone financial statements of the Company whose financial
statements/financial information reflect total assets of Rs. ……………….. as at 31st March
20XX and the total revenue of Rs.
………………. for the year ended on that date, as considered in the standalone financial
statements/information of these branches have been audited by the branch auditors whose
reports have been furnished to us, and our opinion in so far as it relates to the amounts and
disclosures included in respect of branches, is based solely on the report of such branch
auditors.
Our opinion is not modified in respect of these matters.
Report on Other Legal and Regulatory Requirements
As required by the Companies (Auditor‘s Report) Order, 2016 (―the Order‖), issued by the
Central Government of India in terms of sub-section (11) of section 143 of the Companies
Act, 2013, we give in the Annexure a statement on the matters specified in paragraphs 3 and
4 of the Order, to the extent applicable.
We have sought and obtained all the information and explanations which to the best of our
knowledge and belief were necessary for the purposes of our audit.
In our opinion, proper books of account as required by law have been kept by the Company
so far as it appears from our examination of those books [and proper returns adequate for
the purposes of our audit have been received from the branches not visited by us.]
received from the branches not visited by us].
In our opinion, the aforesaid standalone financial statements comply with the Accounting
Standards specified under Section 133 of the Act, read with Rule 7 of the Companies
(Accounts) Rules, 2014.
20XX taken on record by the Board of Directors, none of the directors is disqualified as on
31st March, 20XX from being appointed as a director in terms of Section 164 (2) of the Act.
With respect to the adequacy of the internal financial controls over financial reporting of the
Company and the operating effectiveness of such controls, refer to our separate Report in
―Annexure A‖.
1.119
With respect to the other matters to be included in the Auditor‘s Report in accordance with
Rule 11 of the Companies (Audit and Auditors) Rules, 2014, in our opinion and to the best of
our information and according to the explanations given to us:
The Company has disclosed the impact of pending litigations on its financial position in its
financial statements – Refer Note XX to the financial statements; [or the Company does not
have any pending litigations which would impact its financial position]
standards, for material foreseeable losses, if any, on long-term contracts including derivative
contracts – Refer Note XX to the financial statements; [or the Company did not have any
long-term contracts including derivative contracts for which there were any material
foreseeable losses.]
There has been no delay in transferring amounts, required to be transferred, to the Investor
Education and Protection Fund by the Company {or, following are the instances of delay in
transferring amounts, required to be transferred, to the Investor Education and Protection
Fund by the Company or there were no amounts which were required to be transferred to
the Investor Education and Protection Fund by the Company}.
For XYZ & Co Chartered Accountants (Firm‘s Registration No.)
Signature (Name of the member signing the audit report)
(Designation)
Membership NO.
Place of Signature:
Date:
Illustration 2 – Auditor‟s Report on Consolidated Financial Statements of a
Listed Company (incorporated under the Companies Act, 2013) Prepared in
Accordance with a Fair Presentation Framework
Audit of a complete set of consolidated financial statements of a listed Company
(incorporated under the Companies Act, 2013) using a fair presentation framework. The
audit is a group audit of an entity with subsidiaries (i.e., SA 600 applies).
The consolidated financial statements are prepared by management of the entity in
accordance with the Accounting Standards prescribed under section 133 of the Companies
Act, 2013 (a general purpose framework).
The terms of the audit engagement reflect the description of management‘s responsibility
for the consolidated financial statements in SA 210.
The auditor has concluded an unmodified (i.e., ―clean‖) opinion is appropriate based on the
audit evidence obtained.
The Code of Ethics issued by ICAI comprises all of the relevant ethical requirements that
apply to the principal auditor in relation to this audit.
Based on the audit evidence obtained, the principal auditor has concluded that a material
uncertainty does not exist related to events or conditions that may cast significant doubt on
the entity‘s ability to continue as a going concern in accordance with SA 570 (Revised).
Key audit matters have been communicated in accordance with SA 701.
1.120
Those responsible for oversight of the consolidated financial statements differ from those
responsible for the preparation of the consolidated financial statements.
In addition to the audit of the consolidated financial statements, the principal auditor has
other reporting responsibilities required under the Companies Act, 2013.
Report on the Audit of the Consolidated Financial Statements Opinion
We have audited the accompanying consolidated financial statements of ABC Company
Limited (hereinafter referred to as the „Holding Company‖) and its subsidiaries (Holding
Company and its subsidiaries together referred to as ―the Group‖), its associates and jointly
controlled entities, which comprise the consolidated Balance Sheet as at March 31, 20XX,
and the consolidated statement of Profit and Loss, (the consolidated statement of changes in
equity) and the consolidated cash flows Statement for the year then ended, and notes to the
consolidated financial statements, including a summary of significant accounting policies
(hereinafter referred to as ―the consolidated financial statements‖).
us, the aforesaid consolidated financial statements give the information required by the Act
in the manner so required and give a true and fair view in conformity with the accounting
principles generally accepted in India, of their consolidated state of affairs of the Company
as at March 31, 20XX, of consolidated profit/loss, (consolidated changes in equity)16 and its
consolidated cash flows for the year then ended.
Basis for Opinion
We conducted our audit in accordance with the Standards on Auditing (SAs) specified under
section 143(10) of the Companies act, 2013. Our responsibilities under those Standards are
further described in the Auditor‘s Responsibilities for the Audit of the Consolidated
Financial Statements section of our report. We are independent of the Group in accordance
with the Code of Ethics issued by ICAI, and we have fulfilled our other ethical
responsibilities in accordance with the provisions of the Companies Act, 2013. We believe
that the audit evidence we have obtained is sufficient and appropriate to provide a basis for
our opinion.
Key Audit Matters
Key audit matters are those matters that, in our professional judgment, were of most
significance in our audit of the consolidated financial statements of the current period.
These matters were addressed in the context of our audit of the consolidated financial
statements as a whole, and in forming our opinion thereon, and we do not provide a
separate opinion on these matters.
[Description of each key audit matter in accordance with SA 701.]
Responsibilities of Management and Those Charged with Governance for the
Consolidated Financial Statements
The Holding Company‘s Board of Directors is responsible for the preparation and
presentation of these consolidated financial statements in term of the requirements of the
Companies Act, 2013 that give a true and fair view of the consolidated financial position,
consolidated financial performance and consolidated cash flows of the Group including its
Associates and Jointly controlled entities in accordance with the accounting principles
generally accepted in India, including the Accounting Standards specified under section 133
1.121
of the Act. The respective Board of Directors of the companies included in the Group and of
its associates and jointly controlled entities are responsible for maintenance of adequate
accounting records in accordance with the provisions of the Act for safeguarding the assets
of the Group and for preventing and detecting frauds and other irregularities; the selection
and application of appropriate accounting policies; making judgments and estimates that
are reasonable and prudent; and the design, implementation and maintenance of adequate
internal financial controls, that were operating effectively for ensuring accuracy and
completeness of the accounting records, relevant to the preparation and presentation of the
financial statements that give a true and fair view and are free from material misstatement,
whether due to fraud or error, which have been used for the purpose of preparation of the
consolidated financial statements by the Directors of the Holding Company, as aforesaid.
In preparing the consolidated financial statements, the respective Board of Directors of the
companies included in the Group and of its associates and jointly controlled entities are
responsible for assessing the ability of the Group and of its associates and jointly controlled
entities to continue as a going concern, disclosing, as applicable, matters related to going
concern and using the going concern basis of accounting unless management either intends
to liquidate the Group or to cease operations, or has no realistic alternative but to do so.
The respective Board of Directors of the companies included in the Group and of its
associates and jointly controlled entities are responsible for overseeing the financial
reporting process of the Group and of its associates and jointly controlled entities.
Auditor‟s Responsibilities for the Audit of the Consolidated Financial
Statements
Our objectives are to obtain reasonable assurance about whether the consolidated financial
statements as a whole are free from material misstatement, whether due to fraud or error,
and to issue an auditor‘s report that includes our opinion. Reasonable assurance is a high
level of assurance, but is not a guarantee that an audit conducted in accordance with SA‘s
will always detect a material misstatement when it exists. Misstatements can arise from
fraud or error and are considered material if, individually or in the aggregate, they could
reasonably be expected to influence the economic decisions of users taken on the basis of
these consolidated financial statements.
Appendix to the auditor‘s report. Paragraph 40(c) explains that when law, regulation or the
website addresses, and is not inconsistent with, the description of the auditor‘s
professional skepticism throughout the audit. We also:
Identify and assess the risks of material misstatement of the consolidated financial
statements, whether due to fraud or error, design and perform audit procedures responsive
to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis
for our opinion. The risk of not detecting a material misstatement resulting from fraud is
higher than for one resulting from error, as fraud may involve collusion, forgery, intentional
omissions, misrepresentations, or the override of internal control.
1.122

related to events or conditions that may cast significant doubt on the ability of the Group
and its associates and jointly controlled entities to continue as a going concern. If we
conclude that a material uncertainty exists, we are required to draw attention in our
auditor‘s report to the related disclosures in the consolidated financial statements or, if such
disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit
evidence obtained up to the date of our auditor‘s report. However, future events or
conditions may cause the Group and its associates and jointly controlled entities to cease to
continue as a going concern.
Evaluate the overall presentation, structure and content of the consolidated financial
statements, including the disclosures, and whether the consolidated financial statements
represent the underlying transactions and events in a manner that achieves fair
presentation.
Obtain sufficient appropriate audit evidence regarding the financial information of the
entities or business activities within the Group and its associates and jointly controlled
entities to express an opinion on the consolidated financial statements.
Other Matters
We did not audit the financial statements / financial information of subsidiaries, and jointly
controlled entities, whose financial statements / financial information reflect total assets of
Rs. as at 31st March, 20XX, total revenues of Rs. _ and net cash flows amounting to
Rs. for the year ended on that date, as considered in the consolidated financial
statements. The consolidated financial statements also include the Group‟s share of net
profit/loss of Rs. for the year ended 31st March, 20XX, as considered in the consolidated
financial statements, in respect of associates, whose financial statements / financial
information have not been audited by us. These financial statements / financial information
have been audited by other auditors whose reports have been furnished to us by the
Management and our opinion on the consolidated financial statements, in so far as it relates
to the amounts and disclosures included in respect of these subsidiaries, jointly controlled
entities and associates, and our report in terms of sub-sections (3) and (11) of Section 143 of
the Act, in so far as it relates to the aforesaid subsidiaries, jointly controlled entities and
associates, is based solely on the reports of the other auditors.
As required by Section 143(3) of the Act, we report, to the extent applicable, that:
knowledge and belief were necessary for the purposes of our audit of the aforesaid
consolidated financial statements.
In our opinion, proper books of account as required by law relating to preparation of the
aforesaid consolidated financial statements have been kept so far as it appears from our
examination of those books and the reports of the other auditors.
1.123
The Consolidated Balance Sheet, the Consolidated Statement of Profit and Loss, and the
Consolidated Cash Flow Statement dealt with by this Report are in agreement with the
relevant books of account maintained for the purpose of preparation of the consolidated
In our opinion, the aforesaid consolidated financial statements comply with the Accounting
Standards specified under Section 133 of the Act.
On the basis of the written representations received from the directors of the Holding
Company as on 31st March, 20XX taken on record by the Board of Directors of the Holding
Company and the reports of the statutory auditors of its subsidiary companies, associate
companies and jointly controlled companies incorporated in India, none of the directors of
the Group companies, its associate companies and jointly controlled companies
incorporated in India is disqualified as on 31st March, 20XX from being appointed as a
director in terms of Section 164 (2) of the Act.
With respect to the adequacy of internal financial controls over financial reporting of the
Group and the operating effectiveness of such controls, refer to our separate report in
Annexure.
Rule 11 of the Companies (Audit and Auditor‘s) Rules, 2014, in our opinion and to the best
of our information and according to the explanations given to us:
The consolidated financial statements disclose the impact of pending litigations on the
consolidated financial position of the Group, its associates and jointly controlled entities–
Refer Note XX to the consolidated financial statements.
Or
There were no pending litigations which would impact the consolidated financial position of
the Group, its associates and jointly controlled entities.
Provision has been made in the consolidated financial statements, as required under the
applicable law or accounting standards, for material foreseeable losses, if any, on long-term
contracts including derivative contracts – Refer (a) Note XX to the consolidated
financial statements in respect of such items as it relates to the Group, its associates and
jointly controlled entities and (b) the Group‘s share of net profit/loss in respect of its
associates.
Or
The Group, its associates and jointly controlled entities did not have any material
foreseeable losses on long-term contracts including derivative contracts.18
Education and Protection Fund by the Holding Company and its subsidiary companies,
associate companies and jointly controlled companies incorporated in India.
Or
Following are the instances of delay in transferring amounts, required to be transferred, to
the Investor Education and Protection Fund by the Holding Company, and its subsidiary
companies, associate companies and jointly controlled companies incorporated in India.
Or
1.124
There were no amounts which were required to be transferred to the Investor Education and
Protection Fund by the Holding Company, and its subsidiary companies, associate
companies and jointly controlled companies incorporated in India.
Place of Signature:
Date:
For XYZ & Co Chartered Accountants (Firm’s Registration No.)
Signature (Name of the Member Signing the Audit Report)
(Designation)
(Membership No. XXXX)
Illustration 3 – Auditor‟s Report on Financial Statements of an Unlisted
Company Prepared in Accordance with a Fair Presentation Framework
Audit of a complete set of financial statements of an unlisted company (registered under the
Companies Act, 2013) using a fair presentation framework. The audit is not a group audit
(i.e., SA 600 does not apply).
The financial statements are prepared by management of the entity in accordance with the
accounting Standards prescribed under section 133 of the Companies Act, 2013.
The terms of the audit engagement reflect the description of management‘s responsibility
for the financial statements in SA 210.
The relevant ethical requirements that apply to the audit comprise the Code of Ethics issued
by ICAI together with the other relevant ethical requirements relating to the audit and the
auditor refers to both.
Based on the audit evidence obtained, the auditor has concluded that a material uncertainty
does not exist related to events or conditions that may cast significant doubt on the entity‘s
ability to continue as a going concern in accordance with SA 570 (Revised).
The auditor is not required, and has otherwise not decided, to communicate key audit
matters in accordance with SA 701.
Those responsible for oversight of the financial statements differ from those responsible for
the preparation of the financial statements.
In addition to the audit of the financial statements, the auditor has other reporting
responsibilities required under the Companies Act, 2013.
Report on the Audit of the Standalone Financial Statements Opinion
We have audited the standalone financial statements of ABC Company Limited (―the
Company‖), which comprise the balance sheet as at 31st March 20XX, and the statement of
Profit and Loss, (statement of changes in equity)23 and statement of cash flows for the year
then ended, and notes to the financial statements, including a summary of significant
accounting policies and other explanatory information [in which are included the Returns
1.125
for the year ended on that date audited by the branch auditors of the Company‘s branches
located at (location of branches)]
us, the aforesaid standalone financial statements give the information required by the Act in
the manner so required and give a true and fair view in conformity with the accounting
principles generally accepted in India, of the state of affairs of the Company as at March 31,
20XX, and profit/loss, (changes in equity) and its cash flows for the year ended on that date.
Basis for Opinion
We conducted our audit in accordance with the Standards on Auditing (SA‘s) specified
under section 143(10) of the Companies Act, 2013. Our responsibilities under those
Standards are further described in the Auditor‘s Responsibilities for the Audit of the
Financial Statements section of our report. We are independent of the Company in
accordance with the Code of Ethics issued by the Institute of Chartered Accountants of
India together with the ethical requirements that are relevant to our audit of the financial
statements under the provisions of the Companies Act, 2013 and the Rules there under, and
we have fulfilled our other ethical responsibilities in accordance with these requirements
and the Code of Ethics. We believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our opinion.
Responsibility of Management for Standalone Financial Statements
The Company‘s Board of Directors is responsible for the matters stated in section 134(5) of
the Companies Act, 2013 (―the Act‖) with respect to the preparation of these
standalone financial statements that give a true and fair view of the financial position,
financial performance, (changes in equity) and cash flows of the Company in accordance
with the accounting principles generally accepted in India, including the accounting
Standards specified under section 133 of the Act. This responsibility also includes
maintenance of adequate accounting records in accordance with the provisions of the Act
for safeguarding of the assets of the Company and for preventing and detecting frauds and
other irregularities; selection and application of appropriate implementation and
maintenance of accounting policies; making judgments and estimates that are reasonable
and prudent; and design, implementation and maintenance of adequate internal financial
controls, that were operating effectively for ensuring the accuracy and completeness of the
accounting records, relevant to the preparation and presentation of the financial statement
that give a true and fair view and are free from material misstatement, whether due to fraud
or error.
Company‘s ability to continue as a going concern, disclosing, as applicable, matters related
to going concern and using the going concern basis of accounting unless management either
intends to liquidate the Company or to cease operations, or has no realistic alternative but to
do so.
Those Board of Directors are also responsible for overseeing the company‘s financial
reporting process.
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Appendix to the auditor‘s report. Paragraph 40(c) explains that when law, regulation or the
related to events or conditions that may cast significant doubt on the Company’s ability to
required to draw attention in our auditor‘s report to the related disclosures in the financial
statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions
are based on the audit evidence obtained up to the date of our auditor‘s report. However,
future events or conditions may cause the Company to cease to continue as a going concern.
Evaluate the overall presentation, structure and content of the financial statements,
including the disclosures, and whether the financial statements represent the underlying
transactions and events in a manner that achieves fair presentation.
We also provide those charged with governance with a statement that we have complied
with relevant ethical requirements regarding independence, and to communicate with them
all relationships and other matters that may reasonably be thought to bear on our
independence, and where applicable, related safeguards.
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Other Matter
included in the standalone financial statements of the company whose financial
statements/financial information reflect total assets of Rs. ……as at 31st March 20XX and
the total revenue of Rs. ………for the year ended on that date, as considered in the
standalone financial statements/information of these branches have been audited by the
branch auditors whose reports have been furnished to us, and our opinion in so far as it
relates to the amounts and disclosures included in respect of branches, is based solely on the
report of such branch auditors.
Our opinion is not modified in respect of these matters.
As required by the Companies (Auditor‘s Report) Order, 2016 (―the Order‖), issued by the
Central Government of India in terms of sub-section (11) of section 143 of the Companies
Act, 2013, we give in the Annexure a statement on the matters specified in paragraphs 3 and
4 of the Order, to the extent applicable.
knowledge and belief were necessary for the purposes of our audit.
In our opinion, proper books of account as required by law have been kept by the Company
so far as it appears from our examination of those books [and proper returns adequate for
the purposes of our audit have been received from the branches not visited by us.]
received from the branches not visited by us].
In our opinion, the aforesaid standalone financial statements comply with the Accounting
Standards specified under Section 133 of the Act, read with Rule 7 of the Companies
(Accounts) Rules, 2014.
20XX taken on record by the Board of Directors, none of the directors is disqualified as on
31st March, 20XX from being appointed as a director in terms of Section 164 (2) of the Act.
With respect to the adequacy of the internal financial controls over financial reporting of the
Company and the operating effectiveness of such controls, refer to our separate Report in
―Annexure A‖.
Rule 11 of the Companies (Audit and Auditors) Rules, 2014, in our opinion and to the best of
our information and according to the explanations given to us:
The Company has disclosed the impact of pending litigations on its financial position in its
financial statements – Refer Note XX to the financial statements; [or the Company does not
have any pending litigations which would impact its financial position]
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standards, for material foreseeable losses, if any, on long-term contracts including derivative
contracts – Refer Note XX to the financial statements; [or the Company did not have any
long-term contracts including derivative contracts for which there were any material
foreseeable losses.]
Education and Protection Fund by the Company {or, following are the instances of delay in
transferring amounts, required to be transferred, to the Investor Education and Protection
Fund by the Company or there were no amounts which were required to be transferred to
the Investor Education and Protection Fund by the Company}.
(Designation)
(Membership No. XXXXX)
Place of Signature:
Date:
llustration 4 – Auditor‟s Report on Financial Statements of a Non Corporate

Entity Prepared in Accordance with a Fair Presentation Framework
Audit of a complete set of financial statements of a non corporate entity using a fair
presentation framework. The audit is not a group audit (i.e., SA 600 does not apply).
The financial statements are prepared by management of the entity in accordance with the
Accounting Standards issued by the Institute of Chartered Accountants of India.
The terms of the audit engagement reflect the description of management’s responsibility
for the financial statements in SA 210.
The relevant ethical requirements that apply to the audit are the Code of Ethics issued by
ICAI.
Based on the audit evidence obtained, the auditor has concluded that a material uncertainty
does not exist related to events or conditions that may cast significant doubt on the entity‘s
ability to continue as a going concern in accordance with SA 570 (Revised).
The auditor is not required, and has otherwise not decided, to communicate key audit
matters in accordance with SA 701.
Those responsible for oversight of the financial statements differ from those responsible for
the preparation of the financial statements.
The auditor has no other reporting responsibilities required under local law.
The auditor elects to refer to the description of the auditor‘s responsibility included on a
website of an appropriate authority.
To the Partners of ABC & Associates [or Other Appropriate Addressee]
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Opinion
We have audited the financial statements of ABC & Associates (the entity), which comprise
the balance sheet at March 31st 20XX, and the profit and loss account, (and statement of
cash flows) for the year then ended, and notes to the financial statements, including a
summary of significant accounting policies.
In our opinion, the accompanying financial statements give a true and fair view of the
financial position of the entity as at March 31, 20XX, and of its financial performance (and
its cash flows)36 for the year then ended in accordance with the Accounting Standards
issued by the Institute of Chartered Accountants of India (ICAI).
Basis for Opinion
We conducted our audit in accordance with the Standards on Auditing (SAs) issued by ICAI.
Our responsibilities under those standards are further described in the Auditor‘s
our audit of the financial statements in [jurisdiction], and we have fulfilled our other ethical
responsibilities in accordance with these requirements. We believe that the audit evidence
we have obtained is sufficient and appropriate to provide a basis for our opinion.
Responsibilities of Management and Those Charged with Governance for the Financial
Statements Management is responsible for the preparation and fair presentation of the
financial statements in accordance with the aforesaid Accounting Standards, and for such
internal control as management determines is necessary to enable the preparation of
financial statements that are free from material misstatement, whether due to fraud or
error.
In preparing the financial statements, management is responsible for assessing the entity‘s
ability to continue as a going concern, disclosing, as applicable, matters related to going
to liquidate the entity or to cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the entity‘s financial
reporting process.
A further description of the auditor‘s responsibilities for the audit of the financial statements
is located at [Organization‘s] website at: [website link].This description forms part of our
auditor‘s report.
(Designation)
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Place of Signature:
Date:
Illustration 5 – Auditor‟s Report on Financial Statements of Non Corporate
Entity Prepared in Accordance with a General Purpose Compliance Framework
[Appropriate Addressee]
Opinion
We have audited the financial statements of ABC & Associates (the entity), which comprise
the balance sheet as at March 31, 20X1, and the Profit and Loss Account (and the cash flow
statement) for the year then ended, and notes to the financial statements, including a
summary of significant accounting policies.
In our opinion, the accompanying financial statements of the entity are prepared, in all
material respects, in accordance with XYZ Laws.
Basis for Opinion
We conducted our audit in accordance with Standards on Auditing (SA‘s). Our
responsibilities under those Standards are further described in the Auditor‘s
our audit of the financial statements, and we have fulfilled our other responsibilities in
accordance with these requirements. We believe that the audit evidence we have obtained is
sufficient and appropriate to provide a basis for our opinion.
Responsibilities of Management and Those Charged with Governance for the
Financial Statements
Management is responsible for the preparation of the financial statements in accordance
with XYZ Law and for such internal control as management determines is necessary to
enable the preparation of financial statements that are free from material misstatement,
whether due to fraud or error.
In preparing the financial statements, management is responsible for assessing the entity‘s
ability to continue as a going concern, disclosing, as applicable, matters related to going
to liquidate the entity or to cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the entity’s financial
reporting process.
material misstatement when it exists.
Misstatements can arise from fraud or error and are considered material if, individually or
in the aggregate, they could reasonably be expected to influence the economic decisions of
users taken on the basis of these financial statements.
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Appendix to the auditor’s report. Paragraph 40(c) explains that when law, regulation or
national auditing standards expressly permit, reference can be made to a website of an
procedures that are appropriate in the circumstances, but not for the purpose of expressing
an opinion on the operating effectiveness of the entity‘s internal financial controls.
Conclude on the appropriateness of management’s use of the going concern basis of
related to events or conditions that may cast significant doubt on the entity‘s ability to
required to draw attention in our auditor‟s report to the related disclosures in the financial
statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions
are based on the audit evidence obtained up to the date of our auditor‘s report. However,
future events or conditions may cause the entity to cease to continue as a going concern.
(Designation)
Place of Signature:
Date:
SA 701 - COMMUNICATING KEY AUDIT MATTERS IN THE INDEPENDENT
AUDITOR‟S REPORT
Scope
This Standard deals with the auditor‟s responsibility to communicate key audit
matters to the users of financial statements through auditor‟s report.
Applicability
This SA applies to:
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1. Audit of complete set of general purpose financial statements of listed entities and
2. Audit of entities other than listed entities where the auditor otherwise decides to
communicate key audit matters in his report.
3. When the auditor is required by law or regulation to communicate key audit
matters in the auditor‘s report.
However, SA 705 (Revised) prohibits the auditor from communicating key audit
matters when the auditor disclaims an opinion on the financial statements,
unless such reporting is required by law or regulation.
Effective Date
This SA is effective for audits of financial statements for periods beginning on or after April
1, 2017.
Definition
Key audit matters— Those matters that, in the auditor‘s professional judgment, were of
most significance in the audit of the financial statements of the current period. Key audit
matters are selected from matters communicated with those charged with
governance.
Purpose
 To enhance the communicative value of the auditor‘s report by providing greater
transparency about the audit that was performed.
Users of financial statements have expressed an interest in those matters that have
been communicated by the auditor to those charged with governance as per SA
260(R) and have called for additional transparency about those communications.
 To provide additional information to the users of financial statements.
Communicating key audit matters in the auditor‟s report is in the context of the
auditor having formed an opinion on the financial statements as a whole.
Communicating key audit matters in the auditor‘s report is not:
 A substitute for disclosures to be made by the management in the financial
statements as per applicable financial reporting framework.
 A substitute for expression of a modified opinion by the auditor as per SA 705
(R).
 A substitute for reporting the events or conditions that may cast significant doubt
about the entity‘s ability to continue in operations as per SA 570 (R) or
 A separate opinion on individual matters.
 Inclusion of an Emphasis of matter paragraph or other matter paragraph is not a
substitute for communication of Key Audit Matters to users of financial statements.
Relationship between Key Audit Matters, the Auditor‟s Opinion and Other
Elements of the Auditor‟s Report
Even though the auditor expresses a qualified or adverse opinion, he is required to
determine key audit matters and should communicate the same to intended users of
financial statements to enhance the understanding of the audit.
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When the auditor expresses a qualified/adverse opinion, sometimes, he may

determine that:
1. No other matters are key audit matters. The following illustrates the presentation in the
auditor‘s report if the auditor has determined there are no key audit matters to
communicate:
Key Audit Matters
[Except for the matter described in the Basis for Qualified (Adverse) Opinion
section or Material Uncertainty Related to Going Concern section,] We have
determined that there are no [other] key audit matters to communicate in our
report.
2. If one or more matters other than the matter(s) giving rise to an adverse opinion are
determined to be key audit matters, the same shall have to be reported by the auditor and
description of such other key audit matters do not imply that the financial
statements as a whole are more credible in relation to those matters than would be
appropriate in the circumstances, in view of the adverse opinion.
Determining Key Audit Matters
1. The auditor shall determine key audit matters from the matters that were
communicated by him with those charged with governance.
2. He is not required to communicate all the matters that were communicated to
3. The key audit matters to be determined and communicated by the auditor shall
be those matters, which in the auditor‟s professional judgment, were of
most significant in the audit of financial statements of the current period.
4. The significance of term ―current period‖ is that the auditor is required to
communicate the matters relating to the audit of current period financial
statements only even when comparative financial statements are presented.
5. However, he should consider whether a key audit matter of the prior period
continues to be a key audit matter in the audit of the financial statements of the
current period.
In making this determination, the auditor shall take into account the following:
a. Areas of higher assessed risk of material misstatement, or significant risks
identified in accordance with SA 315.
Under this heading the auditor may consider the following as Key Audit
Matters:
 The significant risks identified by the auditor during the course of audit that were
communicated to those charged with governance as per SA 260 (R).
 The significant risks identified by the auditor as per SA 315.
The standard defines a significant risk as an identified and assessed risk of material
misstatement that, in the auditor‘s judgment, requires special audit
consideration. The following are the examples of Significant Risks:
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 Areas of significant management judgment

 Significant unusual transactions
 A significant change in the audit approach, for example, if the auditor‘s risk
assessment was based on an expectation that certain controls were operating
effectively and the auditor has obtained audit evidence that they were not
operating effectively throughout the audit period.
b. Significant auditor judgments relating to areas in the financial statements
that involved significant management judgment, including accounting
estimates that have been identified as having high estimation uncertainty.
Under this heading the auditor may consider the following as Key Audit
Matters:
Significant qualitative aspects relating to entity‘s accounting practices including accounting
policies, accounting estimates and disclosures that were reported by the auditor as per SA
260 (R) to those charged with governance. In many cases, this relates to critical accounting
estimates and related disclosures and hence in such a case it shall be considered as a Key
Audit Matter.
c. The effect on the audit of significant events or transactions that occurred
during the period.
Under this heading the auditor may consider the following as Key Audit Matters:
The events or transactions that had a significant effect on the financial statements
of the entity or on the audit such as:
 Significant transactions with related parties or
 Significant transactions that are outside the normal course of business for the entity
or
 Transactions that otherwise appear to be unusual or
 Significant economic, accounting, regulatory, industry or other developments that
affected management‘s assumptions or judgments.
In determining the key audit matters, the auditor shall take into account the following:
1. The matters that pose challenges to the auditor in obtaining sufficient
appropriate audit evidence or in forming an opinion on the financial statements
may be particularly relevant in the auditor‘s determination of key audit matters.
2. The where an auditor‘s expert is involved.
3. The requirements of Standards on Auditing relating to specific communication
with those charged with governance.
COMMUNICICATING KEY AUDIT MATTERS
The auditor shall describe each key audit matter, using an appropriate subheading, in a
separate section of the auditor‘s report under the heading ―Key Audit Matters‖.
1. Description of Individual Key Audit Matters;
2. Reference to Where the Matter Is Disclosed in the Financial Statements;
3. Why the matter was considered to be one of most significance;
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4. How the matter was addressed in the audit.

The introductory language in this section of the auditor‟s report shall state
that:
 Key audit matters are those matters that, in the auditor‘s professional judgment, were
of most significance in the audit of the financial statements of the current period; and
 These matters were addressed in the context of the audit of the financial statements
as a whole
Descriptions of Individual Key Audit Matters
The description of each key audit matter in the Key Audit Matters section of the
auditor‟s report shall include a reference to the related disclosure(s), if any, in
the financial statements and shall address:
 The auditor shall adequately describe each key audit matter. Adequate
description of the key audit matter will help the users to understand why the
matter was treated as most significant by the auditor and how the matter was
addressed in the audit.
 While giving description, the auditor should limit the usage of highly technical
auditing terms. The description shall have to be given in a concise and
understandable form.
 The auditor should also take care to ensure that the “Original Information” is
not provided in such a description. Original information is any information about
the entity that has not otherwise been made publicly available by the entity.
 However, the auditor may encourage management or those charged with
governance to disclose additional information, through including new or
enhanced disclosures in the financial statements or in an annual report, rather than
the auditor providing original information in the auditor‘s report.
Reference to Where the Matter Is Disclosed in the Financial Statements
 The description of key audit matters should not be a mere reiteration of what is
disclosed in the financial statements. Therefore, the auditor is required to provide
reference to any related disclosures made by the entity in its financial statements.
 In addition to referring to related disclosure(s), the auditor may draw attention to key
aspects of them. For example:
When an entity includes robust disclosure about accounting estimates, the
auditor may draw attention to the disclosure of key assumptions, the
disclosure of the range of possible outcomes, as part of addressing why the matter
was one of most significance in the audit and how the matter was addressed in the
audit.
Why the Auditor Considered the Matter to Be One of Most Significance in the
Audit
 The auditor may describe the factors that led him to conclude that a particular matter
was of most significance in the audit. For example:
a. Economic conditions that affected the auditor‘s ability to obtain audit
evidence, for example illiquid markets for certain financial instruments.
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b. Changes in the entity‘s strategy or business model that had a material effect
on the financial statements.
How the matter was addressed in the audit
The auditor should also specify about how the matter was addressed by him in the
audit. He may describe:
 Key observations with respect to the matter;
 The auditor‘s approach or response to a matter
For example, in describing the auditor‘s approach to an accounting estimate that has
been identified as having high estimation uncertainty, such as the valuation of
complex financial instruments, the auditor may wish to highlight that the auditor
employed or engaged an auditor‘s expert.
 A brief overview of procedures performed;
Sometimes, it may be quite difficult for the auditor to describe the audit procedures
particularly in complex, judgmental areas of the audit. Nonetheless, the auditor may
consider it necessary to describe certain procedures performed to communicate how
the matter was addressed in the audit.
 An indication of the outcome of the auditor‘s procedures;
The auditor should also ensure that language used in the description of a key
audit matter help the readers to understand that:
 The matter has been appropriately resolved by the auditor;
Circumstances in Which a Matter Determined to Be a Key Audit Matter is Not
Communicated in the Auditor‟s Report
The auditor shall describe each key audit matter in the auditor‘s report.
However, when the auditor is of the opinion that the adverse consequences to the entity or
the public as a result of such communication are viewed as so significant that they would
reasonably be expected to outweigh the public interest benefits of communicating about the
matter, then the auditor is not required to communicate such a matter as a key auditor
matter although such matters were determined as such by the auditor. To assess the adverse
consequences of such communication, it is necessary for the auditor to discuss with
management to have an understanding of their views. In some cases, management may
specify to the auditor that such communication may harm the entity‘s commercial
negotiations or competitive position.
The auditor should also obtain a written representation from management as to why public
disclosure about the matter is not appropriate, including management‘s view about the
significance of the adverse consequences that may arise as a result of such communication.
Some times, a law, regulation or certain financial reporting frameworks permit delayed
disclosure or non-disclosure of the matter. In such a case also, the auditor is not required to
communicate such a matter as a key audit matter.
Form and Content of the Key Audit Matters Section in Other Circumstances
If the auditor determines:
 That there are no key audit matters to communicate; or
 That a Key Audit Matter will not be communicated ; or
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 That a modified opinion is to be issued.

the auditor shall include a statement to this effect in a separate section in his report under
the heading ―Key Audit Matters.‖
Communication with Those Charged with Governance
The auditor shall communicate with those charged with governance:
a. Those matters the auditor has determined to be the key audit matters; or
b. That there are no key audit matters to communicate in the auditor‘s report.
Documentation
The auditor shall include in the audit documentation:
1. The matters that required significant auditor attention;
2. The rationale for the auditor‘s determination as to whether or not each of these
matters is a key audit matter;
3. Where applicable, the rationale for the auditor‘s determination that there are no key
audit matters to communicate in the auditor‘s report; and
4. Where applicable, the rationale for the auditor‘s determination not to communicate
in the auditor‘s report a matter determined to be a key audit matter.
SA 705 (R) – MODIFICATIONS TO THE OPINION IN THE INDEPENDENT
AUDITOR‟S REPORT
Scope
This Standard on auditing deals with the responsibility of the auditor to issue an
appropriate report when the auditor concludes that a modification to his opinion on
the financial statements is necessary.
Effective Date
April 1, 2018
Definitions
Pervasive
A term used to describe the effects of misstatements on the Financial
Statements. This term is also used to describe the possible effects of undetected
misstatements on the financial statements due to an inability to obtain sufficient
Pervasive effect
Pervasive effects on the financial statements are those that, in the auditor‘s judgment:
a. Are not confined to specific elements, accounts or items of the financial statements;
b. If so confined, represent or could represent a substantial proportion of the
financial statements; or
c. In relation to disclosures, are fundamental to users‟ understanding of the
Types of Modified opinion
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A Modified opinion may be either

 a qualified opinion or
 an adverse opinion or
 a disclaimer of opinion.
CIRCUMSTANCES WHEN A MODIFICATION TO THE AUDITORS OPNION IS
REQUIRED /WHEN AN AUDITOR IS REQUIRED TO MODIFY HIS REPORT
The auditor shall modify the opinion in the following situations:
Situation 1:
When the financial statements as a whole are not free from material
misstatements
As per SA 700, the auditor is required to obtain a reasonable assurance that the financial
statements as a whole are free from material misstatements.
SA 450 defines a misstatement as a difference between the amount, classification,
presentation, or disclosure of a reported financial statement item and the amount,
classification, presentation, or disclosure that is required for the item to be in accordance
with the applicable financial reporting framework.
Accordingly, a material misstatement of the financial statements may relate to:
(a) The appropriateness of the selected accounting policies;
(b) The application of the selected accounting policies; or
(c) The appropriateness or adequacy of disclosures in the financial statements.
a. Appropriateness of the Selected Accounting Policies
Some times, the applicable financial reporting framework (AFRF) may specify certain
requirements relating to accounting policies. When the entity follows accounting
policies which are inconsistent with the policies to be followed as per applicable
financial reporting framework, it can be said that the financial statements contains
material misstatements.
b. Application of the Selected Accounting Policies
Where the management:
 fail to apply the selected accounting policies consistently;
 where the accounting policy has not been applied consistently between
periods or to similar transactions and events (consistency in application); or
 an unintentional error in application
c. Appropriateness or Adequacy of Disclosures in the Financial Statements
(a) The financial statements do not include all the disclosures required by the
applicable financial reporting framework;
(b) The disclosures in the financial statements are not presented in accordance
with the applicable financial reporting framework; or
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(c) The financial statements do not provide the disclosures necessary to achieve fair
presentation.
Situation 2
Unable to obtain sufficient appropriate audit evidence
The auditor may be unable to obtain sufficient appropriate audit evidence (also referred to
as a limitation on the scope of the audit) because of:
(a) Circumstances beyond the control of the entity;
(b) Circumstances relating to the nature or timing of the auditor‘s work; or
(c) Limitations imposed by management.
However, an inability to perform a specific procedure does not constitute a
limitation on the scope of the audit if the auditor is able to obtain sufficient
appropriate audit evidence by performing alternative audit procedures.
Examples of circumstances beyond the control of the entity include when:

The entity‘s accounting records have been destroyed.
The accounting records of a significant component have been seized indefinitely
by governmental authorities.
Example for circumstances relating to the nature or timing of the auditor‟s
work include when:
The timing of the auditor‘s appointment is such that the auditor is unable to observe the
counting of the physical inventories.
Examples of Limitations imposed by management
When management imposes any limitation on the scope of work, then the auditor may not
be able to perform a procedure which is required to be performed. In other words, the
auditor may not be able to obtain sufficient appropriate audit evidence in such a case. For
example:
Management prevents the auditor from observing the counting of the physical
inventory.
Management prevents the auditor from requesting external confirmation of specific
account balances.
DETERMINING THE TYPE OF MODIFICATION TO THE AUDITOR‟S OPINION
When to express a Qualified Opinion?
The auditor shall express a qualified opinion when:
(a) The auditor, having obtained sufficient appropriate audit evidence, concludes that
misstatements, individually or in the aggregate, are material, but not
pervasive, to the financial statements; or
(b) The auditor is unable to obtain sufficient appropriate audit evidence on
which to base the opinion, but the auditor concludes that the possible effects of
undetected misstatements on the financial statements, if any, could be material
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but not pervasive.

When to express an Adverse Opinion?
The auditor shall express an adverse opinion when the auditor, having obtained sufficient
appropriate audit evidence, concludes that misstatements, individually or in the
aggregate, are both material and pervasive to the financial statements.
When to express a Disclaimer of Opinion?
The auditor shall disclaim an opinion when the auditor is unable to obtain sufficient
appropriate audit evidence on which to base the opinion, and the auditor concludes that
the possible effects of undetected misstatements on the financial statements, if
any, could be both material and pervasive.
FORM AND CONTENT OF AUDITOR‟S REPORT WHEN THE OPINION IS
MODIIFIED
When the auditor modifies the opinion, he shall use the heading ―Qualified Opinion‖,
―Adverse Opinion‖ or ―Disclaimer of Opinion‖ as appropriate in the Opinion Section
Paragraph.
Qualified Opinion
When a qualified opinion is issued due to:
Material misstatements in Financial Statements
In this case, the auditor shall state that, in his opinion, except for effects of the
matter(s) described in the Basis for Qualified Opinion:
 The accompanying financial statements present fairly (or give a true and fair
view) in accordance with Applicable Financial Reporting Frame work (When
reporting is done in accordance with a fair presentation framework)
 The financial statements have been prepared, in all material respects, in
accordance with Applicable Financial Reporting Frame work (When
reporting is done in accordance with a compliance framework)
Inability to obtain sufficient appropriate audit evidence
In this case the auditor shall use corresponding phrase “except for the possible effects
of the matters” described in the Basis for Qualified Opinion …..
Adverse Opinion
When the auditor expresses an adverse opinion, he shall state that, in his opinion, because
of the significance of the matter(s) described in the basis for adverse opinion section:
 The accompanying financial statements do not present fairly (or give a true
and fair view) in accordance with Applicable Financial Reporting Frame work
(When reporting is done in accordance with a fair presentation framework)
 The accompanying financial statements have not been prepared, in all material
respects, in accordance with Applicable Financial Reporting Frame work
(When reporting is done in accordance with a compliance framework)
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Disclaimer of Opinion
When the auditor disclaims an opinion, he shall state that:
 He does not express an opinion on the accompanying Financial Statements.
 He is unable to obtain sufficient appropriate audit evidence to provide a basis for
audit opinion due to the matter(s) described in the Basis for Disclaimer of opinion
section.
Basis for Modification paragraph/Opinion Paragraph
When the auditor modifies the opinion on the financial statements, he shall amend the
heading ―Basis for Opinion‖ as per SA 700 to “Basis for Qualified Opinion”, “Basis for
Adverse Opinion” or “Basis for Disclaimer of Opinion” as appropriate and should
clearly describe about the matter giving rise to the modification.
When the misstatement relates to amounts
The auditor shall quantify and describe about the financial effect of such misstatements on
the financial statements. Where it is not possible to quantify, the fact shall be indicated.
When the misstatement relates to disclosures
Where the misstatement is relating to non-disclosure of information required to be
disclosed, the auditor shall:
 Discuss the non-disclosure with those charged with governance
 Describe the nature of omitted information and
 Include the disclosures omitted by management where ever practicable
Modification relating to inability to obtain sufficient appropriate audit
evidence
The auditor should include the reasons for such inability.
Consequence of an Inability to Obtain Sufficient Appropriate Audit Evidence
Due to a Management-Imposed Limitation after the Auditor Has Accepted the
Engagement
If, after accepting the engagement, the auditor becomes aware that management has
imposed a limitation on the scope of the audit that the auditor considers likely to
result in the need to express a qualified opinion or to disclaim an opinion on the
financial statements, the auditor shall request that management remove the
limitation.
If management refuses to remove the limitation, the auditor shall communicate
the matter to those charged with governance and shall determine whether it is
possible to perform alternative procedures to obtain sufficient appropriate audit
evidence.
If the auditor is unable to obtain sufficient appropriate audit evidence, he shall
determine the implications as follows:
(a) If the possible effects of undetected misstatements on the financial
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statements could be material but not pervasive, the auditor shall qualify the
opinion; or
(b) If the possible effects of undetected misstatements on the financial statements could
be both material and pervasive so that a qualification of the opinion would be
inadequate to communicate the gravity of the situation, the auditor shall:
(i) Resign from the audit, where practicable and not prohibited by law or
regulation; or
(ii) If resignation from the audit before issuing the auditor‘s report is not
practicable or possible, disclaim an opinion on the financial statements.
If the auditor resigns, before resigning, the auditor shall communicate to those
charged with governance any matters regarding misstatements identified during
the audit that would have given rise to a modification of the opinion.
Considerations when the auditor disclaims an opinion on the Financial
Statements
Unless required by law or regulation, when the auditor disclaims an opinion
on the Financial Statements, the auditor‟s report shall not include Key Audit
Matters section in accordance with SA 701.
SA – 706 (R) – EMPHASIS OF MATTER PARAGRAPHS AND OTHER MATTER
PARAGRAPHS IN THE INDEPENDENT AUDITOR‟S REPORT
This standard on auditing deals with additional communication in the auditor‘s report
when the auditor considers it necessary to:
1) Draw user‟s attention to a matter or matters presented or disclosed in the
Financial Statements that are of such importance that they are fundamental to
user‟s understanding of the Financial Statements (Emphasis of Matter
Paragraph) or
2) Draw user‟s attention to any matter or matters other than those presented or
disclosed in Financial Statements that are relevant to user‟s understanding of
the audit, the auditor‘s responsibilities or the auditor‘s report (Other Matter
Paragraph).
Effective Date
1st April, 2017
ALL ABOUT EMPHASIS OF MATTER PARAGRAPH
After forming an opinion on the financial statements, if the auditor wants to draw the
attention of the users of financial statements about a matter or matters that were already
disclosed appropriately in the financial statements and he is of the view that those
matters are very much important for better understanding of financial statements by users,
then the auditor shall include a paragraph called as “Emphasis of matter paragraph” in
his report. Such a paragraph shall refer only to information presented or
disclosed in the financial statements.
The following are the examples of situations where in the auditor is expected to include an
emphasis of matter paragraph in his report:
a. An uncertainty relating to the future outcome of an exceptional litigation or
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b. Early application (where permitted) of a new accounting standard that has

a pervasive effect on the financial statements in advance of its effective date.
c. A major catastrophe that has had, or continues to have, a significant effect on
the entity‘s financial position.
d. To alert users that the Financial Statements are prepared in accordance with a
special purpose framework.
e. When facts become known to the auditor after the date of auditor‘s report and
the auditor provides a new or amended auditor‘s report.
Where the auditor has determined certain matters as key audit matters in
accordance with SA 701 which are fundamental to the user‘s understanding of financial
statements, the auditor is required to follow the requirements of SA 701 and is not
supposed to include those matters in Emphasis of Matter Paragraph. In other words, the
use of Emphasis of Matter Paragraph is not a substitute for SA 701.
However, some times, a matter or matters may not be determined as key audit matter by the
auditor as per SA 701. In such a case, if in the auditor‘s judgment, such matter or matters or
fundamental to users understanding of the Financial Statements and wants to draw the
attention of the users, such matter or matters may be included in an Emphasis of Matter
Paragraph.
WHERE & HOW TO INCLUDE
a. This paragraph shall be included immediately after the Opinion Paragraph in
the auditor‘s report.
b. When a key audit matters section is presented in the auditor‘s report, an
emphasis of matter paragraph may be presented either directly or indirectly before
or after the Key Matters section based on the auditor‘s judgment as to their
relevance.
c. The auditor should use the heading ―Emphasis of Matter Paragraph‖ or other
appropriate heading.
d. The auditor shall clearly indicate that his opinion is not modified in respect of
the matter emphasized.
OTHR ASPECTS
a. The inclusion of an emphasis of matter paragraph in the auditor‘s report does not
affect the auditor‟s opinion. In other words, even if the auditor includes an
emphasis of matter paragraph in his report, the report given cannot be construed as a
modified opinion.
b. Inclusion of an emphasis of matter paragraph in the auditor‘s report is not a
substitute for issuance of a modified opinion as per SA 705.
c. Inclusion of an emphasis of matter paragraph is not a substitute for disclosures
to be made by the management in the financial statements as per the applicable
Illustration for Emphasis of Matter
Without qualifying our report, we draw attention to Note X to the financial statements,
which describes about an uncertainty related to the outcome of the lawsuit filed against the
Company by XYZ Ltd.
However, it should be noted that widespread use of Emphasis of Matter
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Paragraph by the auditor in his report may diminish the effectiveness of

auditor‟s communication of such matter.
ALL ABOUT OTHER MATTER PARAGRAPH
After forming an opinion on the financial statements, if the auditor wants to draw the
attention of the users of financial statements about any matter or matters other than
those disclosed in the financial statements, then the auditor is required to include a
separate paragraph in his report called as ―Other Matter Paragraph.
WHEN TO INCLUDE
Generally, in the following situations, the auditor may include an other matter paragraph in
his report with respect to:
i. Matters relevant to users‘ understanding of the audit
ii. Matters relevant to the auditor‘s responsibilities or
iii. Matters relevant to the auditor‘s report
i. Matters relevant to users‟ understanding of the audit
Sometimes, even though circumstances warrant an auditor to resign from the engagement
because of limitation on the scope of audit imposed by management, it may not be
possible for the auditor to do so. In such a situation, the auditor may consider it necessary
to include “other matter paragraph” to explain why it is not possible for the auditor to
resign from the engagement.
ii. Matters relevant to the auditor‟s responsibilities
To elaborate his responsibilities where the law or regulation permits
iii. Matters relevant to the auditor‟s report
Where the entity prepared its financial statements by using different financial
reporting frameworks, say a national and international framework and where the
auditor reported on both sets of financial statements, the auditor may include the fact that
another set of financial statements have been prepared by the same entity in accordance
with another general purpose framework and that the auditor has issued a report on those
Other aspects
 Should clearly reflect that the matters included under this heading are not required to
be disclosed in the financial statements.
 It should not include information required to be provided by management.
 It should not include information that the auditor is prohibited from providing by law
or regulation.
WHERE & HOW TO INLCUDE
The placement of other matter paragraph depends on the nature of information to be
communicated. When the other matter paragraph is included to draw users‟ attention
to a matter relevant to their understanding of the audit, this paragraph is required to be
included immediately after the opinion paragraph and Emphasis of Matter
Paragraph, if any.
1.145
When the other matter paragraph is included to draw users‘ attention to a matter relating to
Other Reporting Responsibilities, this paragraph may be included in the section sub-titled
“Report on Other Legal and Regulatory Requirements”.
SA 710 – COMPARATIVE INFORMATION – CORRESPONDING FIGURES AND
COMPARATIVE FINANCIAL STATEMENTS
Terms used
Comparative Information
The amounts and disclosures included in the financial statements in respect of
one or more prior periods in accordance with the applicable financial
reporting framework.
The FRF generally requires presentation of comparative information in the Financial
Statements of the current period. However, nature of the comparative information
that is presented in an entity‘s Financial Statements depends on the requirements of
the AFRF or may also be specified in the terms of engagement.
Corresponding Figures
Comparative information where amounts and other disclosures for the prior period are
included as an integral part of the current period financial statements, and are
intended to be read only in relation to the amounts and other disclosures relating
to the current period (referred to as ―current period figures‖). The level of details
presented in the corresponding amounts and disclosures is dictated primarily by its
relevance to the current period figures.
Features
 Amounts and disclosures of the preceding period form an integral part of current
period financials
 Auditor‘s report refers to Financial Statements of current period
 Dictated by its relevance to current period financials.
Comparative Financial Statements
Comparative Information where amounts and other disclosures for the prior period are
included for comparison with the financial statements of the current period but, if audited,
are referred to in the auditor‘s opinion.
Features
 Amounts and disclosures of the preceding period included for comparison with the
Financial Statements of the current period.
 Does not form part of the current period Financial Statements
 Auditor‘s report refers to each period that Financial Statements are presented
OBJECTIVES
To obtain Sufficient Appropriate Audit evidence about whether the Comparative
Information has been presented, in all material respects in accordance with Applicable
Financial Reporting Framework.
AUDIT PROCEDURES
The auditor shall determine:
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1) Whether the Financial Statements include the financial information required

by the Applicable Financial Reporting Framework.
2) Whether such information is appropriately classified.
3) Evaluate whether the Comparative Information agrees with the amounts and
other disclosures presented in the prior period; and
4) Evaluate whether the accounting policies reflected in the Comparative
Information are consistent with those applied in the current period
5) Ensure that in case of changes in accounting policies, whether those changes
have been properly accounted for and adequately presented and disclosed.
CORRESPONDING FIGURES
When corresponding figures are presented, the auditor‘s opinion should not refer to
corresponding figures, except:
When prior period auditor‟s opinion is modified and matter leading to
modification is unresolved:
The auditor shall modify the opinion on the current period financials. In the basis for
modification paragraph, the auditor shall refer to both the current period‘s figures and the
corresponding figures in the description of the matter giving rise to the modification when
the effects or possible effects of the matter on the current period‘s figures are material.
Material misstatements exist in prior period financials on which unmodified
opinion has been issued:
 Auditor shall verify whether the misstatement has been dealt with as required under
the Applicable Financial Reporting Framework.
 If not dealt with, the auditor shall express qualified or adverse opinion on current
period financials with respect to Corresponding Figures included therein.
 When the misstated prior period financials have not been amended and a revised
auditor‘s report in accordance with SA 560 has not been issued, but Corresponding
Figures have been properly dealt with, and appropriately disclosed in current period
financials, the auditor‘s report may include an ―Emphasis of Matter Paragraph‖
Prior period Financial Statements audited by a predecessor auditor
If the auditor is permitted by law or regulation to refer to predecessor Auditor's Report on
the Corresponding Figures, the auditor shall state in “Other Matter Paragraph‖ that;
 The Financial Statements of prior period were audited by the predecessor
auditor;
 The type of opinion expressed by the predecessor auditor and if modified, the
reasons therefore and
 Date of that report.
Prior period Financial Statements not audited
 Auditor shall state in ―Other Matter Paragraph‖ that the Corresponding Figures are
not audited.
 Auditor shall request management to disclose the fact on the face of the current
period financials with respect to Corresponding Figures.
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 However, this does not relieve the auditor of the responsibility to obtain Sufficient
Appropriate Audit Evidence that the opening balances do not contain misstatements
that materially affect the current period‘s Financial Statements (SA 510).
COMPARATIVE FINANCIAL STATEMENTS
When Comparative Financial Statements are presented, the auditor‘s opinion shall refer to
each period for which Financial Statements are presented and on which an audit opinion is
expressed. This is because the auditor may express a modified opinion with respect to one
or more periods, while expressing an unmodified opinion on Financial Statements of other
periods.
A. Auditor‟s opinion differs between current and prior period financials
The auditor shall disclose the substantive reason for different opinion in the ―Other Matter
Paragraph‖ in accordance with SA 700.
Opinion on prior period Financial Statements may be different from ―Previous Opinion‖ if
the auditor becomes aware of circumstances or events that materially affect the Financial
Statements of a prior period during the course of the audit of the current period.
B. Prior period Financial Statements audited by a predecessor auditor
In addition to expressing an opinion on current period‘s financials, the auditor shall state on
―Other Matter Paragraph‖:
 The Financial Statements of prior period were audited by the predecessor auditor;
 The type of opinion expressed by the predecessor auditor and if modified, the reasons
therefore;
 Date of the report.
Unless the predecessor Auditor's Report on the prior period‘s Financial Statements is
revised with the Financial Statements.
Material misstatements exists that effect prior period Financials & predecessor
auditor expressed unmodified opinion
 Auditor shall communicate the misstatement with the appropriate level of
management and those charged with governance.
 Request to predecessor to be informed.
 If the prior period Financial Statements are amended, and the predecessor auditor
agrees to issue a new Auditor's Report on the amended Financial Statements of the
prior period, the auditor shall report only on the current period.
If predecessor auditor is unable or unwilling to revise prior period Auditor's
Report
The auditor may indicate in ―Other Matter Paragraph‖ that:
 Predecessor auditor reported on prior period financials ―before amendment‖.
 Current auditor has audited adjustments applied to amend prior period financials.
 Adjustments are appropriate and have been properly applied.
 Prior period Financials were not audited by current auditor except for the
adjustment.
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 No opinion is expressed in respect of prior period financials as a whole.

C. Prior period Financial Statements not audited
Auditor shall state in ―Other Matter Paragraph‖ that the Comparative Financial Statements
are not audited. However, this does not relieve the auditor of the responsibility to obtain
Sufficient Appropriate Audit Evidence that the opening balances do not contain
misstatement that materially affect the current period‘s Financial Statements.
SA 720 (R) – THE AUDITOR‟S RESPONSIBILITY IN RELATION TO OTHER
INFOMRATION
This standard deals with auditor‟s responsibility relating to “other information”

included in entity's annual report. The term ―other information‖ includes both
financial information and non-financial information.
Effective Date
01-04-2018
OBJECTIVE
The objectives of the auditor are:
1. To consider whether there is a material inconsistency between the other
information and the financial statements;
2. To consider whether there is a material inconsistency between the other
information and the auditor‟s knowledge obtained in the audit;
3. To respond appropriately when material inconsistencies appear to exist or when
the auditor identifies that other information appears to be materially misstated;
4. To report in accordance with this SA
―Other information‖ may include:
 Amounts
 Other Items
This information is provided by management, to:
o Summarize or
o Provide in greater detail
about amounts or other items in the financial statements.
Examples of Amounts that may be included in the Other Information
1. Summary of Key Financial Results such as net income, EPS, dividend, Sales and
other operating revenues, and purchases and operating expenses.
2. Selected operating data such as income from continuing operations or sales by
geographical segment etc.
3. Special items such as asset dispositions, asset impairments, litigation provisions,
restructuring etc.
4. Liquidity and capital resource information, such as cash, cash equivalents and
marketable securities, debt etc.,
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5. Capital Expenditure by segment or division

6. Amount of guarantees, legal and environmental claims and other contingencies.
7. Financial Ratios such as gross margin, return on average capital employed, current
ratio, Interest Coverage Ratio etc.
Some of these are directly reconcilable to the financial statements.
Other Examples
1. Explanation of critical accounting estimates and related assumptions
2. Related parties and related party transactions
3. Management‘s assessment of impact of new financial reporting standards.
4. General descriptions of the business environment and outlook.
5. Description of trends in market prices of key commodities or raw materials;
6. Explanation of specific factors influencing the entity‘s profitability in a segment.
Generally, the auditor has no specific responsibility to determine whether the other
information is properly stated or not and hence the auditor‟s opinion does not
cover other information.
However, the auditor has to read and consider other information to identify whether
the other information is materially inconsistent with:
o The financial statements or
o The auditor‟s knowledge obtained in the audit
Existence of material inconsistencies may indicate the existence of a material
misstatement in:
o Financial Statements or
o Other Information
Either of which may undermine the credibility of the financial statements and the
auditor‟s report thereon. This may also influence the economic decisions of the
users of the financial statements and auditor‘s report thereon.
DEFINITIONS
Annual Report
A document or combination of documents, prepared typically on an annual basis
by management or those charged with governance in accordance with law, regulation
or custom, the purpose of which is to provide the owners with information on the
entity‘s operations and the entity‘s financial results and financial position as set out in the
financial statements. An annul report contains or accompanies the financial
statements and the auditor‟s report thereon and usually includes information about
the entity‘s developments, its future outlook and risks and uncertainties, a statement by the
entity‘s governing body and reports covering governance matters.
Features of Annual Report

o Law, regulation or custom may define the content of an annual report.
1.150
o Annual report may be a single document or two or more separate documents. If

annual report is prepared by way of two or more separate documents, it may contain
the following documents:
1. Management Report
2. Management Commentary
3. Director‘s Report
4. Chairman‘s Statement
5. Corporate Governance Statement/reports
6. Corporate Social Responsibility Report
o May be made available either in printed form or electronically.
Other Information
Financial and non-financial information (other than the financial statements
and the auditor‟s report thereon) included in an entity‟s annual report.
Misstatement of the other information
A misstatement of the other information exists when the other information is incorrectly
stated or otherwise misleading (including because it omits or obscures information
necessary for a proper understanding of a matter disclosed in the other information).
AUDIT PROCEDURES
STEP: 1 – Obtaining the Other information
1. The auditor should determine about which document(s) comprises of annual
report and about entity‘s plan with regard to the manner and timing of
issuance of such documents. This should be done through having discussions
with management.
2. Obtain a final version of the document comprising the annual report before the
date of auditor‟s report. Obtaining the other information prior to the date of the
auditor‘s report enables the auditor to determine adjustments to be made to:
a. Financial Statements
b. Other Information
3. Where it is not possible for the auditor to obtain such documents prior to the date
of auditor‘s report, insist the management to provide a written representation
that the final version will be provided to the auditor prior to its issuance
by the entity.
STEP: 2 – Reading and considering the Other information
1. Compare selected amounts or other items in the other information with such
amounts or other items in the financial statements.
2. Determine the existence of a material inconsistency.
STEP: 3 – Responding to a material inconsistency
1.151
When the auditor identifies a material inconsistency, he shall discuss the matter
with management and perform other procedures to conclude the existence of a
material misstatement in:
a. Other Information
b. Financial Statements
A. MATERIAL MISSTATEMENT IN OTHER INFORMATION
Prior to the date of auditor‟s report:
If the auditor concludes that a material misstatement of the other information exists, he
shall request the management to correct the other information. If management:
Agrees to make correction
Verify whether the correction has been made correctly.
Refuses to make correction
The auditor shall communicate the matter with those charged with governance and
request them to make the needed corrections.
If those charged with governance also has not made the requisite corrections to the
other information wherein the auditor identifies material misstatements, he shall
o Withdraw from the engagement if possible;
o If not possible, consider the implications on audit report.
After the date of auditor‟s report:
Corrected:
The auditor shall perform procedures necessary in the circumstances. The procedures
include:
a. Verifying whether required adjustments have been correctly carried out.
b. Verify whether the management has communicated with those in receipt of
the other information informing them of the revision.
Not Corrected:
o Provide a new/amended report by including a modified section, to management
and shall request them to provide the report users for whom the auditor‘s report is
prepared.
o Bring the matter to the attention of the users for whom the auditor‟s report
is prepared (for example, by addressing the matter in a general meeting
of shareholders).
o Communicating with the regulator where required,
o Considering the implications for engagement continuance.
B. MATERIAL MISSTATEMENT IN FINANCIAL STATEMENTS
The auditor shall respond appropriately in accordance with other Standards on Auditing.
STEP: 4 – Reporting
1.152
The auditor‘s report shall include a separate section with a heading ―Other Information‖.
When the auditor is able to obtain other information prior to the date of
Auditor’s report:
Both in respect of audit of financial statements of a listed entity/unlisted
corporate entity
 The auditor‘s report shall identify the other information.
 The auditor‘s report shall also include a statement that:
a. Management is responsible for the other information.
b. Auditor‘s opinion does not cover the other information and accordingly the
auditor does not express an audit opinion or any form of conclusion thereon;
c. Include a description of auditor‘s responsibilities relating to other information
d. The auditor has nothing to report (if there is nothing to report)
If the auditor concludes that there is an uncorrected material misstatement of the
other information, he shall issue a modified opinion. In such a case, the auditor can
describe the uncorrected material misstatements of the other information.
When the auditor is unable to obtain other information prior to the date of
Auditor’s report in respect of audit of financial statements of a listed entity
Auditor‘s opinion does not cover the other information and accordingly the auditor will not
express an audit opinion or any form of conclusion thereon;
When the other information is obtained after the date of auditor‟s report, the
auditor is not required to update the procedures performed in accordance with
SA 560.
DOCUMENTATION
The auditor shall document matters such as the procedures performed and shall maintain a
final version of other information on which the auditor performed the work.
1.153
2
PRFOFESSIONAL ETHICS
The term “ethics” means moral principles which govern a person‟s behaviour. In other
words ethics is noting but the law or rules of acceptable behaviour. The whole
foundation of CA profession is its credibility. The purpose of introduction of
professional ethics is to ensure the credibility of the profession.
Section 22 of the Chartered Accountants Act which contains the Acts or Omissions of
Professional Misconduct has been divided into two Schedules. They are
 The First Schedule
 The Second Schedule
A member is liable to disciplinary action under Section 21 of the Chartered
Accountants Act, if he is found guilty of any professional or other misconduct.
The First Schedule

The First Schedule has 4 Parts. They are No. of Clauses
Part I - Professional misconduct in relation to Chartered Accountants
in Practice 12
Part II - Professional misconduct in relation to Chartered Accountants in
Service 2
Part III -Professional misconduct in relation to members generally 3
Part IV - Other misconduct in relation to members generally 2
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19
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The Second Schedule No. of Clauses
The Second Schedule has 3 Parts. They are
Part I - Professional misconduct in relation to Chartered Accountants
in Practice 10
Part II - Professional misconduct in relation to members generally 4
Part III –Other misconduct in relation to members generally 1
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15
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TOTAL NUMBER OF CLAUSES 34
EXAMPLES OF OTHER MISCONDUT
1. Where a CA retains the books of account and documents of the client and fails to
return those to the client on a request without a reasonable cause.
2.1
2. Where a CA uses the services of his articled or audit assistants for purpose other
than professional practice.
3. Non replying within a reasonable time and without good cause to the letter of the
public authorities.
Membership of the Institute
On acceptance of application by the council, the applicant‟s name shall be entered in the
Register and a certificate of membership in the appropriate form shall be issued ot the
applicant. The following are the particulars to be included in the Register about every
member of the Institute:
a. Full Name, Date of Birth, Residential and Professional Address
b. Date of entry of name in the Register
c. Qualifications
d. Whether he holds COP
e. Any other prescribed particulars.
DISABILITIES FOR THE PURPOSE OF MEMBERSHIP:
Section 8 of the Chartered Accountants Act enumerates the circumstances under which a
person is debarred from having his name entered in the Register of Members:
(1) If he has not attained the age of 21 years at the time of his application for the
entry of his name in the Register; or
(2) If he is of unsound mind and stands so adjudged by a competent Court; or
(3) If he is an un-discharged insolvent; or
(4) If he being a discharged insolvent, has not obtained from the Court a
certificate stating that his insolvency was caused by misfortune without any
misconduct on his part; or
(5) If he has been convicted by a Competent Court whether within or without India of
an offence involving moral turpitude and punishable with imprisonment
or
(6) If he has been removed from membership of the Institute on being found on inquiry
to have been guilty of professional or other misconduct
Types of Members of the Institute
According to Section 5 of the Chartered Accountants Act, 1949, the members of the Institute
shall be divided into two classes designated as Associates and Fellows.
Associate Member: Any person, whose name has been entered in the Register, shall be
deemed to have become an Associate of the Institute and shall also be entitled to use the
letters A.C.A. after his name to indicate that he is an Associate Member of the Institute.
Fellow Member: The name of the following types of members shall be entered into the
Register as a Fellow of the Institute, on payment of such fee along with the application made
and granted in the prescribed manner:
i) An associate member who has been in continuous practice in India for at least 5
years.
2.2
ii) A member who has been associate for a continuous period of not less than 5 years
and who possesses such qualifications as may be prescribed by the council with a
view to ensuring that he has experience equivalent to the experience normally
acquired as a result of continuous practice for a period of 5 years as a Chartered
Accountant.
The above mentioned members shall be entitled to use the letters F.C.A. after his name to
indicate that he is a Fellow Member of the Institute.
DISCIPLINARY PROCEDURE
Flow Chart of Discipline Procedure Mechanism
Complaint against member of ICAI of alleged misconduct along with prescribed

fee
Disciplinary Directorate
The Director (Discipline) shall arrive at a prima facie opinion on the occurrence of alleged
misconduct and decide whether the member is guilty of professional or other misconduct
falling in
First Schedule Second Schedule or Both Schedule

Place the matter before Place the matter before
Board of Discipline Disciplinary Committee
1. Reprimand the member 1. Reprimand the member

2. Remove the name of the member from 2. Remove the name of the member
the register up to a period of from the register permanently or for
3 months such period as it thinks fit
3. Impose fine up to Rs.100000 3. Impose fine up to Rs.500000
Any member aggrieved by order of Board of Discipline/Disciplinary Committee, can prefer
an appeal within 90 days before Appellate Authority.
It can
1. Confirm, modify or set aside the order,
2. Impose, Set aside, Reduce or enhance penalty
3. Remit the case to the Board of Discipline or Disciplinary Committee for reconsideration
4. Pass such order as the Authority thinks fit.
FIRST SCHEDULE
PROFESSIONAL MISCONDUCT IN RELATION TO CHARTERED
ACCOUNTANTS IN PRACTICE
CLAUSE - 1
2.3
Allows any person to practice in his name as a Chartered Accountant unless

such person is also a Chartered Accountant in practice and is in partnership
with or employed by him.
 The objective behind introduction of this clause is to safeguard the public
against unqualified accountant practicing under the cover of qualified
accountant.
 This clause insists that the work of the Chartered Accountant shall be carried out
by
 him or
 his partner or
 his employee who would work under his control and supervision.
CLAUSE - 2
Pays or allows or agrees to pay or allow, directly or indirectly any share,
commission or brokerage in the fees or profits of his professional business, to
any person other than a member of the Institute or a partner or a retired
partner or the legal representative of a deceased partner, or a member of any
other professional body or with such other persons having such qualifications
as may be prescribed for the purpose of rendering such professional services
from time to time in or outside India.
 The objective behind introduction of this clause is to ensure that professional work
is not to be introduced to a member by a third party.
 A Chartered Accountant should not share his fees or profits of his professional
business or should not pay any commission or brokerage in the fees or profit of
his professional business to any person.
 According to this clause, a Chartered Accountant in practice can share his fees only
with the following persons
a. a member of the Institute
b. a partner
c. retired partner
d. legal representative of a deceased partner
e. a member of any other professional body or
f. persons having prescribed qualifications
 A Chartered Accountant is deemed to be guilty even where he agrees to pay or
allow any share, commission or brokerage to any person except with those persons
mentioned above. Actual payment is not necessary.
 The registrars of various co-operative societies issued circulars where by the
auditor of a co-operative society has to deposit a % of his audit fee in the state
treasury for recovering the administrative and other expenses and the council decides
that there is no bar to accept such assignment.
CASE LAWS
2.4
1. A Chartered Accountant gave 50% of the audit fee received by him to his
employee in the nomenclature of office allowance – Held that Chartered
Accountant shared his profit and guilty of professional misconduct.
2. Mr. Ramana, A Chartered Accountant in practice enters into an agreement with a
senior accountant to pay 12% of the gross fee received by him from clients referred
by the accountant as commission. However, at the end of the first year, the
Chartered Accountant refuses to pay the agreed upon commission and tells the
senior accountant that the agreement stands terminated – Held guilty of
professional misconduct even though there is no actual payment. As per
the above clause, the Chartered Accountant will be deemed to be guilty of
professional misconduct even though he merely agrees to pay the amount. The
mere fact that Mr. Ramana terminated the agreement at the end of the 1st year is
not relevant since merely by entering into agreement, he has violated the
provisions of the Chartered Accountants Act, 1949.
Explanation
For the purpose of this clause, “partner” includes a person residing outside India with whom
a Chartered Accountant in practice has entered into Partnership which is not in
contravention of clause 4 Part I of First Schedule.
Sharing of Fees/Profit with legal representative of a deceased partner on Death
of a Partner
When there are two or more partners and one of them dies, the widow or the legal
representative of the deceased partner can continue to receive a share of the Firm
for a specified period, only when the partnership agreement contains a specific
stipulation to that effect.
PAYMENT OF GOODWILL
The following are the views of the council of the ICAI with regard to payment of goodwill.
1. Goodwill of a proprietary firm can be sold to another member after death of
the proprietor concerned.
2. Payment of the goodwill to the widow is permissible in case of such sale.
3. Such payment may be made in lump-sum or in installments. However, for
payment in installments, the agreement of sale should contain a
provision to that effect.
4. Fee sharing between the widow or legal representative of the proprietor of
a single member firm and the purchaser of goodwill of the firm is not
allowed.
5. The above decision of the council regarding sale of goodwill is
applicable even for a partnership firm when all the partners of the firm
die at the same time.
Contents of the notification issued by the institute of chartered accountants of
India in relation to clause 2, 3 and 5 of part i of the first schedule to the
chartered accountants act – Regulation 53A(1) of Chartered Accountants
Regulations, 1988
Professional bodies
For the purposes of Items (2), (3) and (5) of Part I of the First Schedule to the Act, a person
has to be a member of any of the following professional bodies, namely:
2.5
(a) The Institute of Company Secretaries of India

(b) The Institute of Cost and Works Accountants of India
(c) Bar Council of India
(d) The Indian Institute of Architects
(e) The Institute of Actuaries of India
Professional bodies outside india
The membership of the professional bodies or institutions outside India whose qualifications
relating to accountancy are recognized by the Council
Persons Qualified In India
For the purposes of Items (2), (3) and (5) of Part I of the First Schedule to the Act, the
following shall be the persons qualified in India, namely:
(i) Company Secretary
(ii) Cost Accountant
(iii) Actuary
(iv) Bachelor in Engineering from a University established by law or an Institution
recognized by law;
(v) Bachelor in Technology from a University established by law or an institution
recognized by law;
(vi) Bachelor in Architecture from a University established by law or an institution
recognized by law;
(vii) Bachelor in Law from a University established by law or an institution recognized by
law;
(viii) Master in Business Administration from Universities established by law or technical
institutions recognized by All India Council for Technical Education.
PAST EXAMINATION QUESTIONS
1. Mr. Qureshi, Chartered Accountant, in practice died in a road accident. His
widow proposes to sell the practice of her husband to Mr. Pardeshi, Chartered
Accountant, for, Rs.5 lakhs. The price also includes right to use the firm name-
Qureshi and Associates. Can widow of Qureshi sell the practice and can Mr.
Pardeshi continue to practice in that name as a proprietor?
With reference to Clause (2) of Part I to the First Schedule to Chartered Accountants Act,
1949 the Council of the Institute of Chartered Accountants of India stated that the goodwill of
a proprietary concern of chartered accountant can be sold to another member after the death
of the proprietor subject to certain conditions. It further resolved that the legal heir of the
deceased member has to obtain the permission of the Council within a year of the death of
the proprietor concerned. Thus in the given case and on the facts, the widow of Mr. Qureshi
who has sold the practice for Rs.5 lakhs is nothing but sale of goodwill. Thus the act of Mrs.
Qureshi is permissible.
2. Ajay is practicing Chartered Accountant. Vijay is a practicing Advocate
representing matters in courts of law. Ajay and Vijay agree to help each other in
matters involving their professional expertise. Accordingly Ajay recommends
Vijay in all tax litigations in courts of law. Vijay consults Ajay on all maters
2.6
relating to finance and related matters, which come to him for arguing in
various courts of law.
Ajay seeks your advise on how he and Vijay should (i) remunerate each other
(ii) “share” the remuneration.
According to clause 2 of Part I of First Schedule to the Chartered Accountants Act, 1949, a
Chartered Accountant in practice shall be deemed to be guilty of professional misconduct if
he either directly or indirectly pays or allows or agrees to pay or allow any share, commission
or brokerage in the fees or profits of his professional business to any person other than the
member of the institute or a partner or a retired partner or a legal representative of a
deceased partner or member of any other professional body or person having prescribed
qualifications.
Thus as per this clause, a Chartered Accountant can share his fee with a member of any other
professional body. A lawyer is the member of a professional body and therefore Ajay and
Vijay can share the fees or profits.
3. A Chartered Accountant obtained a loan from a finance company for
purchase of office building agreeing to pay interest at 6% p.a. and 10% of his
gross professional receipts till the loan is repaid.
A Chartered Accountant in practice is deemed to be guilty of professional misconduct if he
pays or allows or agree to pay or allow, directly or indirectly any share, commission or
brokerage in the fees or profits of his professional business, to any person other than a
member of the Institute or a partner or a retired partner or the legal representative of a
deceased partner as per clause 2 of Part I of the First Schedule to the Chartered Accountants
Act, 1949.
As per the facts, it is a case of pure loan arrangement with interest expressed as a percentage
of gross receipts. It is of no avail because there is total prohibition on the sharing of fees even
indirectly with nonmembers except in specified circumstances. Therefore, such a chartered
accountant is guilty of professional misconduct.
4. Mr. Ankit, who passed his CA examination of lCAl on 18th July, 2015 had
started his practice from 15th August, 2015. On 16th August, 2015 one candidate
approached him for articleship. Mr. Ankit decided to give her 1% profits of his
CA firm in addition to monthly stipend. She agreed to take both 1% of profits
and prescribed stipend. The ICAI had sent a letter to Mr. Ankit objecting the
payment of 1% profits. Mr. Ankit replied stating that sharing 1% profits is over
and above the stipend to help the articled clerk to overcome her financial crisis.
Is Mr. Ankit liable for Professional mis-conduct? (May 15 Old)
Sharing Fees with an Articled Clerk: As per Clause (2) of Part I of First Schedule to the
Chartered Accountants Act 1949, a Chartered Accountant in practice shall be deemed to be
guilty of professional misconduct if he pays or allows or agrees to pay or allow, directly or
indirectly, any share, commission or brokerage in the fees or profits of his professional
business, to any person other than a member of the Institute or a partner or a retired partner
or the legal representative of a deceased partner, or a member of any other professional body
or with such other persons having such qualification as may be prescribed, for the purpose of
rendering such professional services from time to time in or outside India.
In view of the above, the objections of the Institute of Chartered Accountants of India, as
given in the case, are correct and reply of Mr. Ankit, stating that he is paying 1 % profits of his
2.7
firm over and above the stipend to help the articled clerk to overcome her financial crisis is
not tenable.
Hence, Mr. Ankit is guilty of professional misconduct in terms of Clause (2) of Part I of First
Schedule to the Chartered Accountants Act, 1949.
CLAUSE - 3
Accepts or agrees to accept any part of the profits of the professional work of a
person who is not a member of the Institute.
Provided that nothing herein contained shall be construed as prohibiting a
member from entering into profit sharing or other similar arrangements,
including receiving any share, commission or brokerage in the fees, with a
member of such professional body or other person having qualifications as is
referred to in clause 2 of this part.
As clause 2 prohibits a member to pay or agrees to pay commission/share in the profits,
according to clause 3, a member is prohibited from accepting any part of the profits of the
professional work of a person who is not a member of the Institute. However, he can accept
share, commission or brokerage from a member of any other professional body or a person
having qualifications prescribed by ICAI.
Past Examination Questions
1. Mr. X is a practicing Chartered Accountant. Mr. Y is a practicing Advocate
representing matters in the court of law. X and Y decided to help each other in
the matters involving their professional expertise. Accordingly, Mr. X
recommends Mr. Y in all litigation matters in the court of law and Y consults X
in all matters relating to finance and other related matters, which comes to him
in arguing various cases. Consequently they started sharing profits of their
professional work. Is Mr. X liable for professional misconduct? (May 15 Old)
Sharing and Accepting of Part of Profits with an Advocate: According to Clause (2) of Part I of
the First Schedule to the Chartered Accountants Act, 1949, a Chartered Accountant in
practice is deemed to be guilty of professional misconduct if he pays or allows or agrees to
pay or allow, directly or indirectly, any share, commission or brokerage in the fees or profits
of his professional business, to any person other than a member of the Institute or a partner
or a retired partner or the legal representative of a deceased partner, or a member of any
other professional body or with such other persons having such qualification as may be
prescribed, for the purpose of rendering such professional services from time to time in or
outside India.
Furthermore, Clause (3) of Part I of the First Schedule to the said Act states that a Chartered
Accountant in practice is deemed to be guilty of professional misconduct if he accepts any
part of the profits of the professional work of a person who is not a member of the Institute.
However, a practicing member of the Institute can share fees or profits arising out of his
professional business with such members of other professional bodies or with such other
persons having such qualifications as prescribed by the Council under the Chartered
Accountants Regulations, 1988. Under the said regulations, the member of “Bar Council of
India” is included.
Therefore, Mr. Y, an advocate, a member of Bar Council, is allowed to share part of profits of
his professional work with Mr. X. Hence, Mr. X, a practicing Chartered Accountant, will not
2.8
be held guilty under any of the abovementioned clauses for paying and accepting part of
profits from Mr. Y.
CLAUSE - 4
Enters into partnership, in or outside India, with any person other than a
Chartered Accountant in practice or such other person who is a member of any
other professional body having such qualifications as may be prescribed,
including a resident who but for his residence abroad would be entitled to be
registered as a member under clause (v) of sub-section (1) of section 4 or whose
qualifications are recognized by the Central Government or the Council for the
purpose of permitting such partnerships;
According to this clause, a Chartered Accountant in Practice is permitted to enter into
partnership with only the following:
a. A Chartered Accountant in Practice or
b. A member of any other professional body having prescribed qualifications.
This prohibition applies only to the profession of accountancy.
Membership of Professional Bodies For Partnership – Regulation 53A(3) and
53B
Professional Bodies In India
(1) For the purposes of entering into partnership under Item (4) of Part I of the First
Schedule to the Act, a person shall be a member of any of the following professional bodies,
namely:
(a) Company Secretary
(b) Cost Accountant
(c) Advocate
(d) Engineer, member, The Institution of Engineers, or Engineering from a University
established by law or an institution recognized by law.
(e) Architect, member, The Indian Institute of Architects established under the Architects
Act, 1972;
(f) Actuary, member, The Institute of Actuaries of India, established under the Actuaries
Act, 2006.
Professional bodies outside India
Professional bodies or institutions outside India whose qualifications relating to accountancy
are recognized by the Council under sub-section (2) of section 29 of the Act.
Case Law
Ram, a chartered accountant in practice, entered into partnership with Shyam,
who is not a chartered accountant, for the purpose of carrying on business.
Explain whether Ram is guilty of professional misconduct under clauses (4) and
(11) of the first Schedule to the Chartered Accountants Act, 1949.
Clause (4) of Part I of First Schedule to the Chartered Accountant Act prohibits a chartered
accountant in practice to enter into a partnership with any person other than a chartered
accountant in practice. Clause (11) of the same schedule prohibits a chartered accountant in
practice to engage in any business or occupation other than the profession of chartered
accountants unless permitted by the Council so to engage. Ram, a chartered accountant in
2.9
practice has entered into partnership with Shyam who is not even a chartered accountant and
for the purpose of carrying on business for which permission has not been obtained.
Therefore, Ram has violated the provisions of clauses (4) and (11) and is guilty of professional
misconduct.
1. A Chartered Accountant in practice entered into Partnership with his uncle in
Textile business which, however, did not take off. Will he be held guilty of
professional misconduct?
As per clause 4 part I of the First Schedule to the Chartered Accountants Act, 1949, a
chartered accountant is not permitted to enter into partnership with any partner other than a
chartered accountant in practice and this prohibition applies not only to the profession of
accountancy but to any kind of business.
Since, Mr. A has entered into partnership with a non-member for doing textile business, he
will be held guilty of professional misconduct. Even if the agreement is not acted upon, the
mere fact that he entered into partnership by such an agreement would constitute
misconduct.
In a decision of the Council where a Chartered Accountant entered into a partnership
agreement with persons who were not the members of the Institute it was held that he was
guilty of professional misconduct under the clause. Even though the said agreement was not
acted upon, the mere fact that he did enter into a partnership by such an agreement
constituted misconduct.
2. Mr. P, a Chartered Accountant in practice entered into partnership with Mr.
L, an advocate for sharing of fees for work sent by one to the other. However,
due to some disputes, the partnership was dissolved after 1 month without any
fees having been received.
Clause (4) of Part I of the First Schedule to ………….. permits a Chartered Accountant in
practice to enter into partnership with other prescribed Professionals which includes an
Advocate, a member of Bar Council of India.
In the instant case, Mr. P, a chartered accountant, has entered into partnership with Mr. L,
an advocate.
Thus, he would not be guilty of professional misconduct as per Clause (4) of Part I of First
Schedule read with Regulation 53B.
3. A Chartered Accountant practicing in India enters into partnership with A
Certified Public Accountant in New York.
Clause (4) of Part I to the First Schedule ……….. Thus, chartered accountant would be guilty
of professional misconduct since certified public accountants (CPA) are not eligible to
become members of the Institute
4. A Chartered Accountant from the Institute of Chartered Accountants in
England and Wales in London, and in each case, the members concerned take
the profits earned in their own country.
Will it make any difference, if an Indian Chartered Accountant is practicing
outside India and becomes a partner with the aforesaid accountants?
As stated above, it is important that partnership with a member of the foreign professional
body is permissible provided inter-alia such bodies are eligible for the membership of the
2.10
Institute. The council of the Institute has not permitted partnership between members of the
Institute and members of above foreign professional bodies. Even a chartered
accountant from ICAEW who was eligible to become member of the Institute,
the profit sharing arrangement stated in the question goes against the
provisions of Clause (4). Hence, it would constitute professional misconduct.
CLAUSE - 5
Secures either through the services of a person who is not an employee of such
chartered accountant or who is not his partner or by means which are not open
to a Chartered Accountant, any professional business.
Provided that nothing herein contained shall be construed as prohibiting any
agreement permitted in terms of item (2), (3) and (4) of this part.
 A man must stand erect, and not to be kept erect by others
 A Chartered Accountant must get work not through any agency, but through
respect that he is able to command for his professional talent and skill.
 According to Chartered Accountant (Amendment) Act, 2006, securing any
professional business through certain categories of non-members is permitted.
CLAUSE - 6
Solicits clients or professional work either directly or indirectly by circular,
advertisement, personal communication or interview or by any other means:
Provided that nothing herein contained shall be construed as preventing or
prohibiting –
(i) Any Chartered Accountant from applying or requesting for or inviting
or securing professional work from another chartered accountant in
practice; or (Professional work occurs within the fraternity)
(ii) A member from responding to tenders or enquiries issued by various
users of professional services or organizations from time to time and
securing professional work as a consequence.
 The objective behind introduction of this clause is to ensure that the members
should not secure the professional work with the help of others.
 The satisfaction of clients would be the best advertisement which would lead to other
clients. An advertisement is not a key to success in profession. It is the quality service
which attracts and retains clients.
 This clause prohibits a member from soliciting professional work by means of
advertisement, circular, personal communication or interview or by any other means
to ensure that the members have not adopted any indirect methods to get the
professional work by gaining publicity and thereby solicit clients or professional work.
 However, a Chartered Accountant can
a. Apply/request/invite/secure professional work from another Chartered
Accountant in practice (Also called Assignment Basis)
b. Respond to tenders/enquiries to secure professional work as a
consequence.
The matter pertaining to responding to tenders issued by various users of professional
services or organization in areas exclusively reserved for the members of the Institute
2.11
was recently considered by the Council of the Institute. The Council on a consideration of the
matter has decided that –
In the exclusive areas of practice of Chartered Accountants, like audit and
attestation services i.e. those areas where the assignments can be performed only by
Chartered Accountants such as audit under Companies Act, Income Tax Act etc. or where
only Chartered Accountants have been invited for audit assignments, members should not
respond to such tenders. In such cases, entities may avail the multipurpose
empanelment data available with ICAI. However, wherever minimum fee of the
assignment is prescribed in the tender document itself, members may participate in
such tendering process.
A member of the Institute can respond to assignments based on individual letters
issued.
In those areas, where along with Chartered Accountants, other professionals can also
apply for the tender, there is no restriction for the Chartered Accountants to respond to
the tenders floated by authorities from time to time.
Frequently asked Questions on Tenders
1. Whether a member of Institute in practice can respond to such assignments
where quotations have been called for from practicing members/firms through
individual letters?
A member of the Institute in practice can respond to such assignments based on individual
letters issued.
2. Whether a member of Institute in practice can respond to such tenders
where only technical bid has been asked for from the members which is
followed by financial quotations request from the short-listed members through
individual letters?
A member of the Institute in practice can respond to such tenders.
SOME FORMS OF SOLICITING WORK PROHIBITED BY COUNCIL:
A. ADVERTISEMENT AND NOTE IN THE PRESS
a. Members should not advertise for soliciting work.
b. A member is prohibited from inserting advertisements for soliciting clients
under box numbers in the newspapers.
In other words, Members should not advertise in a manner which could be
interpreted as soliciting or offering professional work.
c. They should not circulate letters to a small field of possible clients.
d. Personal canvassing is not allowed.
e. Canvassing for the clients of previous employer through the help of the
employees not permitted
Exceptions
I. A member is allowed to advertise in news papers, magazines etc. in the following
cases.
 Dissolution of the firm
 Changes in partnership
2.12
 Change in address of practice

 Change in Telephone Numbers
The advertisement should be limited to bare statement of facts. While advertising,
the member should give due consideration for the following:
 Area of distribution
 Number of insertions
II. A member is also allowed to issue a classified advertisement in the
journal/newsletter of the Institute for
 Sharing professional work on assignment basis
 Seeking partnership
 Seeking salaried employment of an accountancy nature
Provided that, such an advertisement should only contain the following:
 Name of the Chartered Accountant
 Address
 E-mail address
 Telephone Number
 Fax Number
III. An advertisement of coaching/teaching activities by a member in practice may
amount to indirect solicitation and therefore may be voilative of provisions of clause 6.
Such members may put outside their coaching/teaching premises, sign board
mentioning the name of the coaching/teaching institute, contract details, subjects
taught etc.
B. APPLICATION FOR EMPANELMENT
Several government departments, government companies, co-operative societies,
banks and other similar institutions maintain panel of Chartered Accountants for
allotment of audits and other professional work. The members of the Institute are free
to write to the concerned organization with a request to place his name on the panel.
This entry of the name of the member in the panel maintained by different
organizations is called empanelment.
The member can make an application for empanelment provided the
existence of such a panel is within the knowledge of the member. It is also
permissible to quote fees on enquiry from such organizations. However, the
member should not send printed or cyclostyled copies of the scales of fees in
reply to such enquiries.
It is not proper to make roving enquiries by applying to any such organization for
having his name included in the panel.
C. PUBLICATION OF NAME IN THE TELEPHONE OR OTHER DIRECTORIES
It is not proper for a Chartered Accountant to have entries made in a Telephone
Directory either by making a special request or by means of an additional payment.
However, such entries can be made in the directories subject to the following
restrictions:
1. The entry should appear in the category of “Chartered Accountant”.
2.13
2. The member should belong to the town/city in respect of which the

directory is being published.
3. Entries should be open to all the Chartered Accountant in the particular
city/town.
4. The order of entries should be alphabetical.
5. Entries in Bold Type/Box are not permissible. Entry should be in
normal letters.
6. The payment for entry should not be unreasonable.
Subject to above conditions, the members name can be entered in Trade directories,
Internet, telephone services like “Ask me Services” etc.
D. ISSUING HAND BILLS
A member is prohibited from issuing hand bills with regard to changes in tax laws for
the guidance of public. However, the member is free to issue such hand bills to his
regular clients.
E. PUBLICATION OF BOOKS OR ARTICLES
A member is not permitted to indicate his association with any firm of
Chartered Accountants in a book or article published by him.
F. ISSUE OF GRETING CARDS OR INVITATIONS
A member is prohibited from issuing greeting cards or personal invitations
indicating their professional designation, status and qualification etc.
However, a member can use the designation “Chartered Accountant” as well as the
name of the firm may be used on
 greeting cards
 invitation for opening or inauguration of office of the members
 invitations for marriages and religious ceremonies
 change in office premises
 change in telephone numbers
provided that such greeting cards or invitations etc. are sent only to
 clients
 relatives and
 close friends of the members concerned
G. SOLICITING PROFESSIONAL WORK BY MAKING ROVING ENQUIRIES
A member is prohibited from issuing letters or circulars to persons who are likely to
require services of him because it amounts to solicitation of work.
H. PUBLIC INTERVIEWS
A member is not prohibited from giving public interviews. However, while
giving interviews, the member should ensure that it should not result in publicity.
In such an interview, the member can furnish his details along with their firms.
However, they should not highlight their professional attainments.
2.14
I. ACCEPTANCE OF ORIGINAL PROFESSIONAL WORK BY A MEMBER

EMANATING FROM THE CLIENT INTRODUCED TO HIM BY ANOTHER
MEMBER
Where any client was introduced to the member by another member and where original
professional work is emanating from such client, the member is prohibited from
accepting such work. In such cases, it is his duty to ask the client that he should come
through the other member dealing generally with his original work.
J. REPRESENTATION UNDER SECTION 225(3) OF THE COMPANIES ACT
(Now Section 140(4) of the Companies Act, 2013)
While making representation by a member under section 225(3) (now Section
140(4) of the Companies Act, 2013), the member should ensure that the
words used by him in such a representation should not secure him needless
publicity/it should not tantamount directly or indirectly for soliciting for his
continuance as an auditor.
However, that representation may include his willingness to continue as auditor
if reappointed by the shareholders.
K. A chartered accountant would not issue any circular or advertisement by virtue of which
they solicit people to visit their website.
WEBSITE
A Chartered Accountant or a Firm of Chartered Accountants in practice is allowed to post
their particulars on Website. The guidelines given by the Institute in this behalf are as
follows:
DO‟S
1. There is no standard format in which the website is required to be created.
2. There is no restriction on the colours that can be used in the website.
3. The address of the Website can be different from the name of the firm.
However, it should not amount to soliciting clients.
4. The address of the Website should be intimated to the ICAI within 30 days.
5. The website should run on a “pull” model and not on a “push” model of
technology.
6. Circulation of the information contained in the website through E-mail or by
any other mode or technique on its own is not permitted except on a specific “pull”
request.
7. The information that can be displayed in the Website may include the following:
(i) Member/Trade/Firm Name
(ii) Year of Establishment (on a specific pull request)
(iii) Address (HO & Branches)
(iv) Telephone Number(s)
(v) Fax Number(s)
(vi) E-mail ID(s)
(vii) Name of Partner(s), Year of Qualification, Tel. Number (R/M) Address, E-
mail
2.15
(viii) Names of Professional and Other Employees along with their designation.
(ix) Job Vacancies (including article ship)
8. Articles, professional information, professional updates and other matters of
professional interest may be included in the Website.
9. Chat rooms for chatting amongst members of ICAI as well as between firms and
client may also be provided.
10. May provide a link to the Website of ICAI or its Councils or its Branches and
Websites of Government Departments/Regulatory Authorities.
11. The Website should mention the date up to which it is updated.
12. Permitted to mention the Web Site address on their professional stationery.
13. Members can provide online advice to their clients who specifically request for
the advice whether free of charges or on payment.
14. A number of non-chartered Accountant firms have set up their own websites
providing advisory services on taxation and other areas. Some of such websites
may request Chartered Accountants/Firms to provide consultation and advice
through their websites. This is permitted provided that the contact address of
the Chartered Accountant concerned is not provided nor such website
contain any material which advertises professional achievements or status of such
Chartered Accountants except making a statement that they are Chartered
Accountants.
DON‟TS
The following shall be provided only on a specific “pull” request
1. Area of Experience of the Partners/Employees
2. Nature of Services Rendered/Assignments Handled
3. Number of Articled Clerks
Others
4. Names of clients and fee charged cannot be given
5. No photographs of any sort are permitted except passport size photographs.
6. No advertisement including in the nature of banner is permitted on the Website.
CASE LAWS:
1. A Chartered Accountant sent a printed card and circular letters soliciting work – Held
guilty.
2. A Chartered Accountant sent a printed circular to a person unknown to him offering his
services in profit planning and profit improvement programmes. The circular conveyed
the idea that it was meant for strangers only. Held, the Chartered Accountant was guilty
of professional misconduct under the clause as he used the circulars to solicit clients and
professional work.
3. A letter of request was sent for being appointed as auditor – Held guilty
4. A chartered accountant wrote several letters to the assistant registrar of co-operative
societies, stating that though his firm was on the panel of auditors, no audit work was
allotted to the firm and requested them to look into the matter – Held guilty
2.16
5. An assistant of the chartered accountant under his authorization wrote letter to stranger
association requesting for appointment as auditor – Held guilty
6. An advertisement was published in a newspaper containing the member‟s photograph
wherein he was congratulated on the occasion of the opening ceremony of his office –
Held guilty
7. A member had published an advertisement, in a newspaper inviting professional work
for accounts writing, income tax matters etc. It was held that the insertion of an
advertisement or such a nature amounted to soliciting professional work by
advertisement and the member was found guilty in terms of this clause.
1. Mr. Z, practicing Chartered Accountant has written to Director of Technical
Education requesting him for allotment of audit of certain schools.
As per Clause 6 of Part 1 of the First Schedule to the Chartered Accountant Act, a member in
practice is not allowed to solicit clients for professional work either directly or indirectly by
any other means.
In view of this, Mr. Z who has requested for the audits of certain schools of Director of
Technical Education would be held guilty of Professional misconduct under the Chartered
Accountants Act, 1949 because he has made roving enquiries.
However, if Director of Technical Education is maintaining a panel of auditors and, if Mr.
Z writes to him for inclusion of his name on the said panel then he would not be
held guilty of professional misconduct.
2. Mr. X, a practicing Chartered Accountant gave an advertisement under the
column "Business and Professionals" of a local newspaper offering part-time
secretarial work.
Clause (6) of Part I of the First Schedule to the Chartered Accountants Act, 1949 provides
that member in practice shall be guilty of misconduct if he "solicits client or professional
work either directly or indirectly by circular, advertisement personal communication or
interview or by any other means." This clause restricts a member not to solicit professional
work by means of advertisement, circular, personal communication or interview or by any
other means.
An advertisement for a part time secretarial work by practicing Chartered Accountant would
not be permissible because it would essentially be an offer for professional services.
Therefore, Mr. X would be guilty of professional misconduct.
3. Abhaya, a young Chartered Accountant in practice who did her articles
under a senior Chartered Accountant, writes to him with a request to divert
some of his surplus work to her on profit sharing basis.
Clause 6 of the First Schedule to the Chartered Accountants Act, 1949, lays down that a
Chartered Accountant in practice is deemed to be guilty of professional misconduct if he
solicits clients or professional work either directly or indirectly by circular, advertisement
personal communication, interview or by any other means.
However the clause specifies that, a chartered accountant can secure professional work from
another chartered accountant in practice. Therefore requesting work from a senior chartered
accountant to divert his surplus work on profit sharing basis is not a violation of the above
clause.
2.17
4. X & Co. Chartered Accountants, informed selected multi national

organisations, who are not their clients that Mr. Y the former partner-in-charge
of Taxation of one of the largest accounting firms of the world, had joined them
as a partner.
Clause (6) of Part I to the First Schedule to the CA Act, 949, prohibits solicitation of clients
performing work either directly or indirectly by circular, advertisement, personal
communication or interview or by any "other means". The issuance of circular to persons
who are not clients but may likely requires services of a chartered accountant would
tantamount to advertisement since it is solicitation of professional work by making roving
enquiries.
As per Clause (7) of Part I of the First Schedule to the CA Act, 1949, the usage of the words
"one of the largest accounting firms of the World" and the specification of specialization in
"taxation" would also amount to advertisement and thus, constitute professional misconduct.
Therefore, X & Co's letter stating that Mr. Y is joining the firm and that he was the former
partner in charge of taxation of the largest accounting firm of the world amounted to
advertisement and violation of clauses (6) and (7) of Part I of the First Schedule to the
Chartered Accountant Act 1949.
5. A partner of a firm of chartered accountants during a TV interview handed
over a bio-data of his firm to the chairperson. Such bio-data detailed the
standing of the international firm with which the firm was associated. It also
detailed the achievements of the concerned partner and his recognition as an
expert in the field of taxation in the country. The chairperson read out the said
bio-data during the interview.
Clause 6 of Part I of the First Schedule to the Chartered Accountants Act, 1949 prohibits
solicitation of client or professional work either directly or indirectly by circular,
advertisement personal communication or interview or by any other means since it shall
constitute professional misconduct.
The bio-data was handed over to the chairperson during the T. V. interview by the Chartered
Accountant which included details about the firm and the achievements of the partner as an
expert in the field of taxation. The chairperson simply read out the same in detail about
association with the international firm as also the achievements of the partner and his
recognition as an expert in the field of taxation.
Such an act would definitely lead to the promotion of the firms' name and publicity thereof as
well as of the partner and as such the handing over of bio-data cannot be approved. The
partner would be held guilty of professional miscount under Clause (6) of Part I of the First
6. M/s. XYZ. A firm in practice develops a website "xyz.com". The colour
chosen for the website was a very bright green and the web-site was to run on a
"push” technology where the names of the partners of the firm and the major
clients were to be displayed on the web-site.
The Council of the Institute had approved posting of particulars on website by Chartered
Accountants in practice under Clause (6) of Part I of First Schedule to the Chartered
Accountants Act, 1949 subject to the prescribed guidelines. The relevant guidelines in the
context of the website hosted by M/s XYZ are:
 No restriction on the colours used in the website;
 The websites are run on a "pull" technology and not a "push" technology
2.18
 Names of clients and fees charged not to be given.

In view of the above, M/s XYZ would have no restriction on the colours used in the website
but failed to satisfy the other two guidelines. Thus, the firm would be liable for professional
misconduct since it would amount to soliciting work by advertisement.
7. In a representation to be submitted to a company under section 225(3) of the
Companies Act, 1956 (Now Section 140(4) of Companies Act, 2013) the partner
of the firm of auditors wants to include the contributions made by the firm in
strengthening the control procedures of the company during their association
with the company.
Section 225(3) of the Companies Act 1956 (Now Section 140(4) of Companies Act,
2013) permits a retiring auditor to make a representation in writing (not exceeding a
reasonable length) to the company. The proposition of the partner to highlight contributions
made by the firm in strengthening the control procedures in the representation is not
acceptable because the representation letter should not prepared in manner so as to seek
publicity. The Code of Ethics issued by the Institute makes it amply clear that right to make
representation does not mean that an auditor has any prescriptive right or a lien on an audit.
The wording of his representation should be such that apart from the opportunity not being
abused to secure needless publicity, it does not tantamount directly or indirectly to
canvassing or soliciting for his continuance as an auditor, The letter should merely set out in
a dignified manner how he has been acting independently and conscientiously through the
term of office and may in addition indicate if he so chooses his willingness to continue
auditor if re-appointed by the shareholders. Thus such proposed by a partner could not be
approved since it would lead his being held guilty of professional misconduct under Clause(6)
of Part 1 of the First Schedule to the Chartered Accountants Act, 1949.
8. Mr. Sethi, a Chartered Accountant in practice, who is proposed to be
removed as the auditor of a company, makes unsubstantiated and derogatory
remarks against the management of the company in his representation under
Section 225 of the Companies Act, 1956 (Now Section 140(4)).
Unsubstantiated and derogatory remarks against the management the company by Mr. Sethi,
a chartered accountant in practice, on proposed removal as an auditor of a company does not
show behaviour of a professional chartered accountant. In terms of clause (6) of Part of the
First schedule to Chartered Accountants Act, 1949, it tantamount to securing professional
work by in dignified means. The Council of the Institute has clarified that the right to make
representation should be such that, apart from the opportunity not being abused to secure
needless publicity, it does not tantamount directly or indirectly to canvassing or soliciting for
his continuance as an auditor. The letter should merely set out in a dignified manner how he
has been acting independently and conscientiously through the term of office and may, in
addition, indicate if he so chooses his willingness to continue as auditor if re-appointed by
the shareholders. Therefore, Mr. Sethi is guilty of professional misconduct.
9. M/s. XYZ, a firm of Chartered Accountants created a website
www.xyzindia.com. The website besides containing details of the firm and bio-
data of the partners also contains the photographs of all the partners of the
firms.
As per detailed guidelines of the ICAI laid down in Clause (6) of Part 1 of the First Schedule to
the Chartered Accountants Act, 1949 a chartered accountant or the firm can create its own
website using any format subject to guidelines. However, the website should be so designed
that it does not solicit clients or professional work and should not amount to direct or
indirect advertisement. The guidelines of the ICAI to allow a firm to put up the details of the
2.19
firm bio-data of partners and display of a passport size photograph. In the case of M/s. XYZ
all the guidelines seem to have been complied and there appears to be no violation of the
Chartered Accountants Act, 1949 and its Regulations.
10. Mr. S, a Chartered Accountant published a book and gave his personal
details as the author. These details also mentioned his professional experience
and his present association as partner with M/s RST, a firm.
Clause (6) of Part I of the First Schedule ………… members should not adopt any indirect
methods to advertise their professional practice with a view to gain publicity and thereby
solicit clients or professional work. Such a restraint must be practiced so that members may
maintain their independence of judgement and may be able to command the respect of their
prospective clients. The Council has also specified that a member is not permitted to indicate
in a book or an article, published by him, the association with any firm of chartered
accountants. In this case, Mr. S a Chartered Accountant published the book and mentioned
his professional experience and his association as a partner with M/s RST, a firm of chartered
accountants.
Mr. S being a chartered accountant in practice has committed the professional misconduct by
mentioning that at present he is a partner in M/s. RST, a chartered accountants firm.
11. XYZ & Associates, a firm with 5 partners developed a website
www.xyzassociates.com. The website also contained a link to “All India
Chartered Accountants Association”, a voluntary association where X, a partner
of the firm is currently the Vice-president.
As per the guidelines laid down under Clause (6) of Part I of the First Schedule to the
Chartered Accountants Act, 1949 in respect of websites by chartered accountants in practice,
it is permitted that website may provide a link to the website of ICAI, its Regional Councils,
Branches and Government Departments and other professional Bodies like AICPA,
ICAEW, CICA. In this case, M/s XYZ Associates provided a link to “All India Chartered
Accountants Association” which is not permitted. Hence the firm would be liable for
misconduct under Clause (6) of Part I of the First Schedule to the Chartered Accountants Act,
1949.
12. M/s LMN, a firm of Chartered Accountants responded to a tender from a
State Government for computerization of land revenue records. For this
purpose, the firm also paid 50,000 as earnest deposit as part of the terms of the
tender.
Clause (6) of Part I of the First Schedule to the Chartered Accountants Act, 1949 lays down
guidelines for responding to tenders, etc. As per the guidelines if a matter relates to any
services other than audit, members can respond to any tender. Further, in respect of a non-
exclusive area, members are permitted to pay reasonable amount towards earnest
money/security deposits.
In the instance case, since computerization of land revenue records does not fall within
exclusive areas for chartered accountants, M/s LMN can respond to tender as well as deposit
50,000 as earnest deposit and shall not have committed any professional misconduct.
13. M, a practicing Chartered Accountant sent a letter to another firm of
Chartered Accountants, claiming himself to be a pioneer in liasoning with
Central Government Ministries and its allied Departments for getting various
Government clearances for which he had claimed to have expertise and had
given a list of his existing clients and details of his staff etc.
2.20
As per Clause (6) of Part I of First Schedule to the Chartered Accountants Act, 1949, a
member shall be held guilty if a Chartered Accountant in practice solicits clients or
professional work either directly or indirectly by circular, advertisement, personal
communication or interview or by any other means.
Further, as per Central Council Guidelines for Advertisement for the members in practice,
write up of the members should not claim superiority over any other
Member(s)/Firm(s) and should also not include the names of the clients.
In the present case, Mr. M, a practicing Chartered Accountant sent the letter to another firm
of Chartered Accountants, claiming himself to be a pioneer in liasoning with Central
Government Ministries and its allied Departments for getting various Government clearances
for which he had claimed to have expertise and had also given a list of his existing clients and
details of his staff etc. which seems to be indirect methods to adventure their professional
practice with a view to gain publicity and thereby solicit clients or professional work.
Hence, Mr. M was guilty of professional misconduct as per Clause (6) of Part I of First
Schedule of the Chartered Accountants Act, 1949.
14. A letter is sent by a Chartered Accountant in practice to the Ministry of
Finance inquiring whether a panel of auditors is being maintained by the
Ministry and if so to include his name in the panel (CV enclosed).
Clause (6) of Part I of the First Schedule to the Chartered Accountants Act, 1949 states that a
Chartered Accountant in practice shall be deemed to be guilty of misconduct if he solicits
clients or professional work either directly or indirectly by a circular, advertisement,
personal communication or interview or by any other means. Such a restraint has been put so
that the members maintain their independence of judgement and may be able to command
respect from their prospective clients.
In case of making an application for the empanelment for the allotment of audit and other
professional work, the Council has opined that, “where the existence of such a panel is within
the knowledge of the member, he is free to write to the concerned organization with a request
to place his name on the panel. However, it would not be proper for the member to make
roving inquiries by applying to any such organization for having his name included in any
such panel.”
Accordingly, the member is guilty of misconduct in terms of the above provision as he has
solicited professional work from the Finance Ministry, by inquiring about the maintenance of
the panel.
15. Mr. X, a Chartered Accountant and the proprietor of X & Co., wrote several
letters to the Assistant Registrar of Co-operative Societies stating that though
his firm was on the panel of auditors, no audit work was allotted to the firm and
further requested him to look into the matter.
As per Clause (6) of Part I of the First Schedule to the Chartered Accountants Act, 1949, a
Chartered Accountant in practice shall be deemed to be guilty of misconduct if he solicits
clients or professional work either directly or indirectly by a circular, advertisement, personal
communication or interview or by any other means.
In the given case, Mr. X, a Chartered Accountant and proprietor of M/s X and Co., wrote
several letters to the Assistant Registrar of Co-operative Societies, requesting for allotment of
audit work. In similar cases, it was held that the Chartered Accountant would be guilty of
2.21
professional misconduct under Clause (6) of Part I of the First Schedule to the Chartered
Accountants Act, 1949. The writing of continuous letter to ascertain the reasons for not
getting the work is quite alright but in case such either amount to request for allowing the
work then Mr. X will be liable for professional misconduct.
Consequently, Mr. X would therefore be held guilty under Clause (6) of Part I of the First
16. An advertisement was published in a Newspaper containing the photograph
of Mr. X, a member of the institute wherein he was congratulated on the
occasion of the opening ceremony of his office.
As per Clause (6) of Part I of the First Schedule …………. In the given case, Mr. X published an
advertisement in a Newspaper containing his photograph on the occasion of the opening
ceremony of his office. On this context, it may be noted that the advertisement which had
been put in by the member is quite prominent. If soliciting of work is allowed, the
independence and forthrightness of a Chartered Accountant in the discharge of duties cannot
be maintained.
The above therefore amounts to soliciting professional work by advertisement directly or
indirectly. Mr. X would be therefore held guilty under Clause (6) of Part I of the First
17. PQR and Associates, Chartered Accountants have their website and on the
letterhead of the firm it is mentioned that "Visit our website: PQR com". In the
website the nature of assignments handled, names of prominent clients and fees
charged is also displayed.
The Council of the Institute of Chartered Accountants has issued guidelines for posting the
particulars on Website by Chartered Accountants in practice and firms of Chartered
Accountants in practice under Clause (6) of Part I of First Schedule to the Chartered
Accountants Act, 1949. According to the guidelines the details in the website should be so
designed that it does not amount to soliciting client or professional work. It is permitted to
mention the website address on letterhead but soliciting people to visit website is not
permitted. PQR and Associates letterhead invites to people to visit their website. Similarly
the website mentions the nature of assignments, names of the prominent clients and fees
charged. The nature of assignments is permitted for display only on specific 'Pull" request.
And the name of clients, the fees charged is not permitted at all.
PQR & Associates will be held guilty of Professional Misconduct under Clause (6) of Part I of
First Schedule to the Chartered Accountants Act, 1949.
18. During the opening ceremony of a new branch office of CA. Young, his friend
CA. Old introduced to CA. Young, his friend and client Mr. Rich, the owner of an
Export House whose accounts had been audited by CA. Old for more than 15
Years. After few days, Mr. Rich approached CA. Young and offered a
certification work which hitherto had been done by CA. Old. CA. Young
undertook the work for a fee which was not less than fee charged by CA. Old in
earlier period. Comment whether CA. Young had done any professional
misconduct. (Nov. 18)
Acceptance of original professional work by a member emanating from the client Introduced
to him by another member: As per Clause (6) of Part I of the First Schedule to the Chartered
Accountants Act, 1949, a Chartered Accountant in practice shall be deemed to be guilty
2.22
of misconduct if he solicits clients or professional work either directly or indirectly by a

circular, advertisement, personal communication or interview or by any other means.
Further, some forms of the soliciting work which the Council has prohibited include that a
member should not accept the original professional work emanating from a client introduced
to him by another member. If any professional work of such client comes to him directly, it
should be his duty to ask the client that he should come through the other member dealing
generally with his original work.
In the given case, CA Old introduced his friend CA. Young to his friend and client Mr. Rich,
the owner of an Export House whose accounts has been audited by CA. Old for more than 15
years. After a few day Mr. Rich approached CA. Young and offered a certification work which
hitherto had been done by CA. Old. Fees charged by CA. Young is also not less than fee
charged by CA. Old.
In view of above decision CA Young should ask the client to come through CA Old. However,
CA Young undertook the work without informing CA. Old. Thus, CA. Young is held guilty
under Clause (6) of Part I of the First Schedule to the Chartered Accountants Act, 1949.
19. A CA firm M/s GST & Associates, has sent a letter to the Goods and Service
Tax Council stating that the firm has 2 partner who specialise in the law of
Goods and Service Tax and asked the said Council to include their name in the
panel, whenever formed, for providing advisory and audit services for Goods
and Service Tax. Comment with reference to the Chartered Accountants Act,
1949. (Nov. 17 Old)
Making Roving Inquiries: Clause (6) of Part I of the First Schedule to the Chartered
Accountants Act, 1949 states that a Chartered Accountant in practice shall be deemed to be
guilty of misconduct if he solicits clients or professional work either directly or indirectly by a
circular, advertisement, personal communication or interview or by any other means. Such a
restraint has been put so that the members maintain their independence of judgement and
may be able to command respect from their prospective clients.
In case of making an application for the empanelment for the allotment of audit and other
professional work, the Council has opined that, “where the existence of such a panel is within
the knowledge of the member, he is free to write to the concerned organization with a request
to place his name on the panel. However, it would not be proper for the member to make
roving inquiries by applying to any such organization for having his name included in any
such panel.”
Accordingly, CA. Firm M/s GST & Associates and its partners are guilty of misconduct
under Clause (6) of Part I of the First Schedule to the Chartered Accountants Act, 1949 as it
has solicited professional work from the Goods and Service Tax Council, by inquiring about
the maintenance of the panel and advertising about 2 partners in the firm having specialized
knowledge of GST Law.
CLAUSE - 7
Advertises his professional attainments or services, or uses any designation or
expressions other than the Chartered Accountant on professional documents,
visiting cards, letter heads or sign boards unless it be a degree of a University
established by law in India or recognized by the Central Government or a title
indicating membership of the Institute of Chartered Accountants or of any other
institution that has been recognized by the Central Government or may be
recognized by the Council;
2.23
Provided that a member in practice may advertise through a write up, setting
out the service provided by him or his firm and particulars of his firm subject to
such guidelines as may be issued by the Council.
A. This clause prohibits a member from advertising his professional attainments or
services.
B. The name and address of a member or of his firm with description of Chartered
Accountant may appear in an advertisement in the following circumstances
a. advertisement for recruiting staff in the member‟s own office
- While advertising, the member should avoid the expression such as “a well-
known firm”, “a leading firm” etc.
b. advertisements on behalf of clients requiring staff
c. advertisement on behalf of clients wishing to acquire or dispose of
business or property.
d. Advertisements for the sale of a business or property by a member acting
in a professional capacity as trustee, liquidator or receiver.
provided that
i. the advertisement is not displayed more prominently than is usual
ii. the word „Chartered Accountant‟ should not be bolder than the substance of the
advertisement
However, the ICAI has amended the Chartered Accountants Act vide Amendment Act, 2006
and according to that amendment, now a Chartered Accountant can advertise through a write
up. The Institute has issued extant guidelines which are required to be followed by the
members while they are giving advertisement through a write-up. The guidelines issued by
the ICAI in this behalf are as follows:
GUIDELINES FOR ADVERTISEMENT FOR THE MEMBERS IN PRACTICE
Pursuant to Clause (7) of Part I of the First Schedule to the Chartered Accountants Act, 1949
As per the above clause, the members may advertise through a write up including
therein the particulars of services provided by them subject to the following
Guidelines. However, the members must maintain the dignity and reputation of the
profession while doing so.
“Write up” means the writing of particulars according to the information given
in the Guidelines setting out services rendered by the Members or firms and any
writing or display of the particulars of the Member(s) in Practice or of firm(s)
issued, circulated or published by way of print or electronic mode or otherwise
including in newspapers, journals, magazines and websites ( in Push as well in
Pull mode) in accordance with the Guidelines.
The Member(s)/Firm(s) should also ensure that the contents of the Write up are true to
the best of their knowledge and belief and are in conformity with these Guidelines.
In this connection, it is hereby clarified that the ICAI does not own any responsibility
for the content of the write up by the Writer Member(s) / Firm(s).
The write-up may include only the following information:
(A) FOR MEMBERS
2.24
(i) Name
(ii) Membership Number
(iii) Age
(iv) Date of becoming ACA
(v) Date of becoming FCA
(vi) Date from which COP held
(vii) Recognized qualifications
(viii) Languages known
(ix) Telephone/Mobile/Fax No.
(x) Professional Address
(xi) Web Address
(xii) E-mail
(xiv) Passport size photograph
(xv) Details of Number of Employees
(a) Chartered Accountants -
(b) Other Professionals –
(c) Articles/Audit Assistants
(d) Other Employees
(xvi) Names of the employees and their particulars on the lines allowed for a member
as stated above.
(xvii) Services provided
(a) ………………………………
(b) ………………………………
(c) ………………………………
(B) FOR FIRMS
(i) Name of the Firm
(ii) Firm Registration Number
(iii) Year of establishment
(iv) Professional Address(s)
(v) Working Hours
(vi) Tel. No(s)/Mobile No./Fax No(s)
(vii) Web address
(viii) E-mail
(ix) No. of partners
(x) Name of the proprietor/partners and their particulars on the lines allowed for a
member as stated above including passport size photograph.
(xi) C A Logo
(xii) Details of Number of Employees
(a) Chartered Accountants -
(b) Other professionals –
2.25
(c) Articles/Audit Assistants

(d) Other employees
(xiii) Names of the employees of the firm and their particulars on the lines allowed
for a member as stated above.
(xiv) Services provided:
(a) ………………………………
(b) ………………………………
(c) ………………………………
The write-up may be signed either by the member or any partner of the partnership firm
and it may also contain the Name of the Member/ Name of the Partner signing it as well as
Place and Date.
OTHER CONDITIONS
1. It should not be false or misleading
2. It should not claim superiority over any other Member(s)/Firm(s).
3. It should not be indecent, sensational
4. It should not contain testimonials or endorsements concerning Member(s).
5. It should not contain any other representation(s) that may like to cause a person to
misunderstand and/or to be deceived.
6. It should not violate the provisions of the „Act‟, Rules made there under and
„The Chartered Accountants Regulations,1988‟.
7. It should not include the names of the clients (both past and present)
8. It should not be of font size exceeding 14.
9. It should not contain any information about achievements/award or any
other position held.
D. Under this clause, a member is prohibited from using any designation or
expression other than that of a Chartered Accountant in professional
documents, visiting cards, letter heads or sign boards. In other words, the
following are prohibited.
a. The size of the sign board to be used by the member for his office is a matter
of own discretion and good taste.
b. Use of glow signs or lights on large-sized boards as is used by traders or
shop-keepers would not be proper.
c. A member can have a name board at the place of his residence with the
designation of a Chartered Accountant provided it is a name plate or name
board of an individual member and not of the firm.
d. Improper to state as an Income-tax Consultant or a Cost Consultant or a
Management Consultant.
e. Should not use designation such as “Member of Parliament”, Municipal
Councilor or any other functionary in addition to that of a
Chartered Accountant.
f. Date of setting up the practice or date of establishment of the firm
except providing the date on web site on specific “pull” request.
2.26
g. Use of logos by members on letter heads, visiting cards etc. is prohibited

except CA Logo.
E. A local paper can publish the details of the examination success of local candidates. In
such cases, the following particulars may be published.
a. Candidates Name and Address
b. School
c. Examination passed with details of any prize or place gained
d. Name of the Principal, firm and town in which the principal practices may
be published.
F. There is no objection to the publication of photographs and brief particulars of
members in magazines provided
a. no payment is made for such publication and
b. there is no advertisement of professional attainments.
G. Members writing articles or letters to the press on subjects connected with the
profession may give their names and use the description „Chartered
Accountant‟.
H. Members may practice as advocates subject to the permission of the Bar
Council but in such case, they should not use designation „chartered accountant‟ in
respect of the matters involving the practice as an advocate. In respect of other matters
they should use the designation „Chartered Accountant‟ but they should not use the
designation „Chartered Accountant‟ and „advocate‟ simultaneously.
I. GUIDELINES RELATING TO ACCEPTANCE OF DIRECTORSHIP IN
COMPANIES
 More companies are now appointing Chartered Accountants as directors on their
Boards.
 The prospectus issued by these companies, publish descriptions about the Chartered
Accountants expertise, specialization and knowledge in a particular field. In
this connection the attention of the members is invited to the following.
a. Particulars about directorship held by the member in other companies can,
however, be given, but the name of the Firm of Chartered Accountant in
which the member is a partner should not be given.
b. The member should take necessary steps to ensure that such prospectus or
public announcement do not advertise his professional attainments and
also that such prospectus do not directly or indirectly amount to
solicitation of clients for professional work.
c. As soon as he is appointed as a director on the Board of a Company, the
member should specifically invite the attention of the management to the
above said provisions and should request the management to get his approval
before any such prospectus is issued.
The committee on ethical standards has opined that it is not permissible for a
chartered accountant in practice to print their photograph on their visiting
cards
2.27
However a member in practice is allowed to print Quick Response Code (QR Code) on
the visiting card, provided the code does not contain information that is not otherwise
permissible to be printed on the visiting card.
Members may appear in films or agree to broadcast in the radio or give lectures at forums
and may give their names and describe themselves as Chartered Accountants.
Case Laws:
1. A Chartered Accountant used the designation “Industrial and Management
Consultant” in addition to the designation Chartered Accountant on printed circular
sent to a stranger. Held he was guilty of professional misconduct under the clause.
2. A Chartered Accountant wrote several letters to Government Department,
pointing out seniority of his firm, sending his life sketch and stating that he had a
glorious record of service to the country as well as to the organisation of accountancy
profession with a view to get the audit work. Held, he was guilty of professional
misconduct under the clause.
1. Mr. Enterprising, who recently started his practice has put up sign board
outside his office describing himself as a 'Chartered Accountant and
Management Consultant.
Clause 7 of Part I of the First Schedule to the Chartered Accountants Act, 1949 prohibits a
practicing chartered accountant to, "advertise his professional attainments or services, or
uses any designation or expression other than chartered accountant on professional
documents, visiting cards, letter heads or sign boards, unless it be a degree of a University
established by law in India or recognised by the Central Government or a title indicating
membership of the Institute of Chartered Accountants or of any other institution that has
been recognised by the Central Government or may be recognised by the Council “.
Therefore, this clause prohibits advertising of professional attainments or services of a
member. It also restrains a member from using any designation or expression other than that
of a chartered accountant in documents through which the professional attainments of the
member would come to the notice of the public. It is, therefore improper for a Chartered
Accountant to state on his professional documents that he is an Income Tax Consultant or a
Cost Consultant or Management Consultant.
In view of the above, Mr. Enterprising who has put up a sign board outside his office
describing him self as a "Chartered Accountant and Management Consultant" is guilty of
professional misconduct under this clause.
2. A chartered accountant in practice appearing on television on budget
proposals was introduced to the viewers, on the basis of the bio-data furnished
by him, as the senior most partner of M/s. Tick and Tag, a leading firm of
chartered accountants established in Delhi in 1948.
Clause 7 of part I of First Schedule to the Chartered Accountants Act, 1949, prohibits a
Chartered Accountant from advertising his professional attainments or services. Accordingly
the code of conduct states that, "members may appear in television and films and agree to
broadcast in the Radio or give lectures at forums and may give their names and describe
themselves as chartered accountants. Special qualifications or specialised knowledge directly
relevant to the subject matter of the Programme also be given. But no reference should be
made, in the case of practicing member, to the name and address or service of the firm."
Therefore, reference to the name of the firm, i.e. M/s. Tick and Tag and use of
2.28
adjective expressions such as a leading firm of a chartered accountants and "senior most
partner are violative of the Code of Conduct. Further, it also states that the practice of stating
even the date of setting up the practice by a member must be avoided. Thus, reference to the
date of establishment of firm in Delhi in 1948 is also against the provisions of Chartered
Accountants Act, 1949.
Keeping this in view, as per the provisions of the Chartered Accountants Act, 1949, the
Chartered Accountant is guilty of professional misconduct as the impugned announcement
was made on the basis of bio-data given by him.
3. A practicing Chartered Accountant uses a visiting card in which he designates
himself, besides as Chartered Accountant, as Tax Consultant Cost Accountant.
Section 7 of the Chartered Accountants Act, 1949 read with Clause (7) of Part I of the First
Schedule to the said Act prohibits advertising of professional attainments or services of a
member. It also restrains a member from using any designation or expression …………. Thus,
it is improper to use designation "Tax Consultant" since neither it is a degree of a University
established by law in India or recognised by the Central Government nor it is a recognised
professional membership by the Central Government or the Council.
Cost Accountant: As stated in the preceding paragraph, this would also constitute misconduct
under section 7 of the Act read with Clause (7) of Part I of the First Schedule to the Chartered
Accountants Act, 1949. A chartered accountant in practice cannot use any other designation
than that of a chartered accountant. Nevertheless, a member in practice may use any other
letters or descriptions indicating membership of accountancy bodies which have been
approved by the Council. Thus, it is improper for a chartered accountant to state in his
documents that he is a “Cost Accountant”. However as per the Chartered Accountants Act,
1949, the Council has resolved that the members are permitted to use letters indicating
membership of the Institute of Cost and Works Accountants but not the designation "Cost
Accountant".
4. The offer document of a listed company in which Mr. D, a practicing
Chartered Accountant is a director mentions the name of Mr. D as a director
along with his various professional attainments and spheres of specialisation.
The Council of the ICAI has in a communication to members stated that if a public
company, in which a chartered accountant in practice is a director, issues a prospectus or
gives any announcement that gives descriptions about the Chartered Accountant‟s expertise,
specialisation and knowledge in any particular field, it shall constitute a violation of
Clauses (6) and (7) of Part I of the First Schedule to the Chartered Accountants Act, 1949. The
Council has further stated that in such cases the member concerned has to take necessary
steps to ensure that such prospectus or public announcements or public communications do
not advertise his professional attainments and also that such prospectus or public
announcements or public communications do not directly or indirectly amount to solicitation
of clients for professional work by the members. Thus in the instant case, Mr. D would be
held to be guilty of professional misconduct and liable for disciplinary action.
5. B, a Chartered Accountant in practice is a partner in 3 firms. While printing
his personal letter heads, B gave the names of all the firms in which he is a
partner.
Clause (7) of Part I of the First Schedule to the Chartered Accountants Act, 1949 prohibits
advertising of professional attainments or services of a member. It also restrains a member
from …………………... Even a member is not permitted to specify the date of setting up of
2.29
practice or establishment of firm. However, there is no prohibition for printing names of all
the three firms on the personal letterheads in which a member holding Certificate of Practice
is a partner. Thus B is not guilty of any misconduct under the Chartered Accountants Act,
1949.
6. Mr. M, a Chartered Accountant in practice, has printed visiting cards which
besides other details also carries a Quick Response (QR) code. The visiting card
as well the QR code contains his name, office and residential address, contact
details, e-mail id and name of the firm's website. Comment with reference to the
Chartered Accountants Act, 1949 and schedules thereto. (May 17 old)
Printing of QR Code on Visiting Cards: As per Clause (7) of Part I of First Schedule to the
Chartered Accountants Act, 1949, a Chartered Accountant in practice is deemed to be guilty
of professional misconduct if he advertises his professional attainments or services.
Ethical Standards Board has also clarified that a member in practice is allowed to print Quick
Response Code (QR Code) on the visiting Card, provided that the Code does not contain
information that is not otherwise permissible to be printed on a visiting Card.
In the given case, Mr. M has printed visiting cards which carries Quick Response Code (QR
Code) besides other details. The visiting card as well as the QR Code contains his name, office
and residential address, contact details, e-mail id and name of the firm‟s website which are
otherwise allowed to be printed on the visiting cards of a Chartered Accountant in practice.
Thus, Mr. M is not guilty under Clause (7) of Part I of First Schedule to the Chartered
CLAUSE - 8
Accepts a position as auditor previously held by another chartered accountant
or a certified auditor who has been issued certificate under the Restricted
Certificate Rules, 1932 without first communicating with him in writing.
 This clause specifies that, before accepting a position as auditor, a chartered
accountant is under obligation to communicate with the previous auditor in
writing.
 The reason behind introduction of this clause is that, the member may have an
opportunity to know the existence of any professional or other reasons why
he should not accept the appointment.
 Acceptance of Audit/Commencement of Audit work must be done only
after receipt of response from the previous auditor or after lapse of time
allowed to the previous auditor to respond.
 This requirement of communication would apply to all types of audits i.e.
statutory audit, tax audit, internal audit, concurrent audit or any kind of audit.
However, this is not applicable for issuance of a Certificate by the auditor.
 The term previous auditor means the immediately preceding auditor who held
same or similar assignment comprising same/similar scope of work. For example, a
chartered accountant in practice appointed for an assignment of physical verification
of inventory, before acceptance of appointment, must communicate with the previous
auditor being a chartered accountant in practice who was holding the appointment of
physical verification of inventory.
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 This communication should be made through registered post with

acknowledgement due and should not be done by ordinary post or under
certificate of posting. In other words, the members should retain positive
evidence of the delivery of the communication to the addressee. In the
opinion of the Council, communication by a letter sent "Registered Acknowledgment
due" or by hand against a written acknowledgment would in the normal course
provide such evidence.
 In case the time schedule given for the assignment is such that there is not time to wait
for the reply from the outgoing auditor, the incoming auditor may give a conditional
acceptance.
 The following are some of the professional reasons for non acceptance of an
audit:
a. Non-compliance of the provisions of Section 224 and 225 of the
Companies Act ( Now Sections 139 to 142) as mentioned in Clause (9)
b. Non payment of undisputed audit fees. The provision for audit fee made in
accounts and signed by both the auditee and auditor shall be considered as
undisputed audit fees. This is not applicable in respect of sick units for
carrying out the statutory audit under the Companies act, 2013 or various other
statutes.
c. Issuance of a qualified report.
In the first two cases, an auditor who accepts the audit would be guilty of
professional misconduct.
In case where the retiring auditor had issued a qualified report, whether to accept
such audit or not depends upon the professional judgment of the auditor. If the
auditor is of the opinion that, the attitude of the retiring auditor was not proper and
justified, he can accept the offer. If, on the other hand, he feels that the retiring auditor
has qualified the report for good and valid reasons, it would be helping practice not to
accept the audit. There is however no rule, written or unwritten, which prevent an
auditor from accepting the appointment offered to him in these circumstances.
Case Laws:
1. A Chartered Accountant commenced the work of audit on the very day he sent
letter to the previous auditor - Held, he was guilty of professional misconduct under the
clause. The appointment could be accepted only when the outgoing auditor does not respond
within a reasonable time.
2. A Chartered Accountant sent a registered letter to the previous auditor after the
commencement of the audit by him. Held he was guilty of professional misconduct
under the clause.
3. A Chartered Accountant commenced the audit within five days of the date of his
appointment without sending any communication to the previous auditor. The
previous auditor also denied the receipt of any communication-Held he was guilty of
professional misconduct under the clause.
4. A chartered accountant had sent a communication to the previous auditor under
certificate of posting without obtaining any acknowledgment thereof. The Council held
the member guilty in terms of this Clause.
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5. A Chartered Accountant sent a letter by ordinary post to the previous auditor after
the acceptance of the audit assignment. Held he was guilty of professional misconduct
under the clause as the same amounts to non-communication, with the previous auditor.
6. Where a Chartered Accountant had conducted tax audit of a firm without first
communicating in writing with the previous tax auditor. Held he was guilty under
the clause.
1. Mr. Rajesh has accepted his appointment as an auditor immediately after
intimating his appointment over the phone to the previous auditor.
Clause 8 of the Part I of the First Schedule to the Chartered Accountants Act, 1949
contemplates that a member in practice is deemed to be guilty of professional misconduct if
he accepts a position as an auditor previously held by another Chartered Accountant or a
restricted state auditor, without first communicating with him in writing.
In the instant case, Mr. Rajesh had accepted an appointment immediately after he had
intimated his appointment over the telephone to the previous auditor who subsequently, in
due course, objected to his accepting the appointment. In the circumstances, the
member could be held guilty of professional misconduct for the following reasons;
(a) That he had failed to communicate with the retiring auditor in writing; and
(b) That he did not wait for a reasonable length of time for a reply to be received from
him.
In fact, it is intended that member should communicate with the previous auditor so as to
retain positive evidence which in the opinion of the Council necessitates that communication
by a letter sent by "Registered Acknowledgment" or by hand against a written
acknowledgment. Further the appointment should be accepted only when the outgoing
auditor does not respond within a reasonable time. It is implied therefore that some
reasonable time and opportunity must be given to the other party to send his reply if he so
chooses.
The objective of the rule is that incoming auditor may take into account the objections, if any,
raised by the retiring auditor before he accepts the appointment. It is a safeguard against a
client successfully concealing some of his malpractice on account of which the previous
auditor may have refused to conduct or complete the audit, and changing over to a new
auditor in the expectation that he would not know of the facts on this account, it is incumbent
on the incoming auditor to wait for a communication from the retiring auditor and he should
not rush to accept the appointment. If he does not wait, he would be guilty of professional
misconduct.
2. Mr. X a Chartered Accountant accepted his appointment as tax auditor of a
firm under Section 44AB, of the Income-tax Act, and commenced the tax audit
within two days of his appointment since the client was in a hurry to file Return
of Income before the due date. After commencing the audit, Mr. X realised
his mistake of accepting this tax audit without sending any communication to
the previous tax auditor. In order to rectify his mistake, before signing the tax
audit report, he sent a registered post to the previous auditor and obtained
the postal acknowledgement. Will Mr. X be held guilty under the CA Act?
As per Clause 8 of Part I of First Schedule to the Chartered Accountants Act, 1949, Mr. X will
be held guilty since he has accepted the tax audit, without first communicating with the
previous auditor in writing. The object of the incoming auditor communicating in writing
with the retiring auditor is to ascertain whether there are any circumstances which warrant
2.32
him not to accept the appointment, for example, whether the previous auditor has been
changed on account of having qualified the report etc. Under all circumstances, it would be
essential for the incoming auditor to carefully consider the facts before deciding whether or
not he should accept the audit. As a matter of professional courtesy and professional
obligation it is necessary for the new auditor appointed to communicate with such earlier
auditor. The Code of Ethics further points out that it would also be a healthy practice if a tax
auditor appointed for conducting special audit under the Income-tax Act, 1961
communicates even with the member who has conducted the statutory audit.
Considering the above, though Mr. X tried to rectify his mistake, by communicating with the
previous tax auditor after accepting the audit but before signing the audit report, the auditor
will be held guilty of professional misconduct.
3. W, a Chartered Accountant has sent letters under certificate of posting to the
previous auditor informing him his appointment as an auditor before the
commencement of audit by him.
Clause 8 of Part I of the First Schedule to the Chartered Accountants Act, 1949 requires
communication by the incoming auditor with the previous auditor before accepting a
position by him. The Council of the Institute has taken the view that a mere posting of a letter
"under certificate of posting" is not sufficient to establish communication with the retiring
auditor unless there is some evidence to show that the letter has in fact reached the person
communicated with. A Chartered Accountant who relies solely upon a letter posted "under
certificate of posting" therefore does so at his own risk. Since the letters were sent " under
certificate of posting" to the previous auditor to prove communication with the retiring
auditor. In the opinion of the Council, communication by a letter sent "Registered
Acknowledgement Due" or by hand against a written acknowledgement would in the normal
course provide positive evidence. Hence "W" was guilty of professional misconduct under
Clause (8) of Part I of First Schedule to the Chartered Accountants Act, 1949.
4. BC & Co., a firm of Chartered Accountants, accepted an assignment for audit
under State level VAT Act, without any prior communication with the previous
auditor.
As per Clause (8) of Part I of First Schedule to the CA Act 1949, a chartered accountant in
practice is deemed to be guilty of professional misconduct if he accepts a position as auditor
previously held by another chartered accountant or a certified auditor who has been issued
certi ficate under the Restricted Certificates Rules 1932, without first communicating with
him in writing.
In the instant case, BC & Co. accepted VAT – audit under State Level Act, carried out by
another firm of chartered accountants in the previous year, without prior communication
with the previous auditor.
A communication is mandatory requirement for all types of audit, if the previous auditor is a
chartered accountant. Hence, the firm is guilty of professional misconduct.
CLAUSE - 9
Accepts an appointment as auditor of a company without first ascertaining from
it whether the requirements of Section 225 of the Companies Act, 1956, In
respect of such appointment have been duly complied with". (Now sections 139,
140 and 142 read with section 141 of the Companies Act, 2013)
 Clause (9) of part I of the First Schedule to Chartered Accountants Act, 1949, provides
that a member in practice shall be deemed to be guilty of professional misconduct if
he 'accepts' an appointment as auditor of a company without first ascertaining
2.33
from it whether the requirements of Sections 224, 224A and 225 of the Companies
Act, 1956, have been duly complied with. (Now sections139, 140 and 142 read with
Section 141 of the Companies Act, 2013)
 To ascertain means to find out whether the company has complied with the aforesaid
provisions. He has to verify relevant records to ascertain whether the company has
complied with these provisions. Therefore, the auditor is not expected to accept a
compliance certificate provided by the management. In this regard, the
auditor may verify the following:
a. Board Resolution
b. General Meeting Resolution
c. Special Resolution if provisions of section 140(1) is applied
d. Central Government approval, if auditor is to be removed before the expiry of his
term of office.
 The objective of this clause is to ensure that no shareholder or retiring auditor may, at
a later date, challenge the validity of such appointment.
 If the company is not willing to allow the incoming auditor to verify the relevant
records in order to enable him to ascertain as to whether the provisions have been
complied with, the incoming auditor should not accept the assignment.
Case Laws:
1. P, a Chartered Accountant had accepted appointment as an auditor of QRS
Company Limited without ascertaining from the Company whether the
requirement of Sections 139 to 142 of the Companies Act had been complied
with. However, he realized this defect only after acceptance.
Clause 9 of the Part I of the First Schedule to the Chartered Accountants Act, 1949 requires
the auditor to ascertain from the company whether the relevant requirements have been
complied with or not. However, in the instant case, "P" a chartered accountant, before
acceptance of his appointment as an auditor has failed to ascertain whether the provisions of
Sect ions 139 to 142 have been complied with by the company. The fact that "P" has realised
this defect only after acceptance would not save him from charge of misconduct. It is
necessary for the incoming auditor to verity the relevant records of the company to enable
him to ascertain whether the provisions of sections 139 to 142 have been complied with.
Therefore, P was guilty of professional misconduct under Clause (9) of Part I of First
2. Mrs. Fair is a Director of XYZ Private Limited, having 15% share-holdings in

the company. During 2014, the company appointed C.A. Mr. Lovely, Mrs. Fair's
spouse, as its statutory auditor. On Mr. Lovely's advice, the company issued
fresh equity shares in 2014-15, in the ratio of one share for every two shares
held by the shareholders of the company. Mr. Lovely used to deliver audit
report for subsequent years without any comments or disclosures, thereupon.
Clause (9) of Part I of the First Schedule to the Chartered Accountants Act, 1949, provides
that a member in practice shall be deemed to be guilty of professional misconduct if he
accepts an appointment as auditor of a company without first ascertaining from it whether
the requirements of Sections 224 and 225 of the Companies Act, 1956 (now Section 139 and
140 read with Section 141 of the Companies Act, 2013), in respect of such appointment have
been duly complied with.
2.34
As per Section 141(3)(f) of the Companies Act, 2013, a person shall not be eligible for
appointment as an auditor of a company whose relative is a director or is in the employment
of the company as a director or key managerial personnel. The definition of „Relative‟
includes husband and wife.
In this case Mrs. Fair is a Director of XYZ Private Limited and the company has appointed
Mr. Lovely, Chartered Accountant, Mrs. Fair's spouse, as its statutory auditor. Mr. Lovely
should not accept the appointment as statutory auditor of the company, where his wife Mrs.
Fair is director. This is contravention of section 141(3)(f) of the Companies Act, 2013.
Therefore, Mr. Lovely is liable for misconduct as per Clause (9) of Part I of the First Schedule
to the Chartered Accountants Act, 1949.
CLAUSE - 10
"Charges or offers to charge, accepts or offers to accept In respect of any
professional employment fees which are based on a percentage of profits or
which are contingent upon the findings, or results of such employment, except
as permitted under any regulations made under this Act."
 The objective of introduction of this clause is to ensure that members are prevented
from charging higher and irrational fees.
 This clause prohibits a member from charging or accepting any remuneration based
on a percentage of the profits or on the happening of a particular contingency such as,
the successful outcome of an appeal in revenue proceedings.
 The following are the exceptions to the above said rule. (Regulation 192)
(a) A receiver or a liquidator can charge fee based on a % of realization or
disbursement of assets.
(b) An auditor of a co-operative society can charge fee based on % of
i) paid up capital or
ii) working capital or
iii) gross or net income or
iv) profits
(c) A valuer for the purposes of direct taxes may charge fee based on a
percentage of the value of property valued.
Other Exceptions
In the case of certain management consultancy services as may be decided by
the resolution of the council from time to time, the fees may be based on
percentage basis which may be contingent upon the findings, or results of such
work;
 In the case of certain management consultancy services as may be decided by the
resolution of the council from time to time, the fees may be based on percentage basis
which may be contingent upon the findings, or results of such work;
 In the case of certain fund raising services, the fee may be based on percentage of
the fund raised;
 In the case of debt recovery services, the fees may be based on percentage of the
debt recovered;
2.35
 In the case of services related to cost optimization, the fees may be based on a
percentage of the benefit derived;
PAST EXAMINATION QUESTIONS:
1. John, a chartered accountant in practice undertakes to conduct an appeal
before the Income Tax Appellate Tribunal on the understanding with his client
that he would be paid Rs.4000 in the event of his succeeding in the appeal. In
the event of his not being successful in the appeal he would be satisfied with a
fee of Rs.1000 only.
Clause (10) of part I of the First Schedule of the Chartered Accountants Act, 1949 states that a
chartered accountant in practice shall be deemed to be guilty of professional misconduct if he
charges or offers to charge, accepts or offers to accept in respect of any professional
employment which are based on a percentage of profits or which are contingent upon the
findings or results of such employment except in cases which are permitted under any
regulations made under this Act. John, a chartered accountant in practice has offered to
charge different amount of fees depending on whether or not he succeeds in the appeal.
Therefore, he is charging fees which are contingent upon the results of his appeal which is
prohibited under the aforesaid clause. Therefore, John is guilty of professional misconduct
under this clause.
2. Mr. Bountiful a practicing Chartered Accountant, who is appointed to value
the good will of a running concern for its take-over charged his fees on the basis
of a predetermined percentage of the value of the goodwill.
Clause 10 of Part 1 of the First Schedule to the Chartered Accountants Act, 1949 states that a
practicing chartered accountant is deemed to be guilty of professional misconduct if he
charges or offers to charge, accepts or offers to accept in respect of any professional
employment fees which are based on a percentage of profits or which are contingent upon the
findings, or results of such employment, except in cases which are permitted under any
Regulations made under this Act. Professional services should not be offered 01: rendered
under an arrangement whereby no fee will be charged unless a specified finding or result is
obtained or where the fee is otherwise contingent upon the findings or results of such
services. However, fee should not be regarded as being contingent, provides certain
relaxation in case of a receiver or liquidator auditor of a cooperative society or a valuer. In the
instant case, Mr. Bonutiful has charged his fees on the basis of a pre-determined percentage
on the value of goodwill which is not permitted under the Act and Regulations. Hence, Mr.
Bountiful is guilty of professional misconduct.
3. Asha, a Chartered Accountant in practice, undertakes to conduct an appeal
before the Income-tax Appellate Tribunal.
Terms: Rs.5000 if she wins the appeal.
Rs. 500 if she does not succeed
Clause 10 of Part 1 of First Schedule to the Chartered Accountants Act, 1949, states that a
member of the Institute whether in practice or not shall be deemed to be guilty of
professional misconduct if he "charges or offers to charge, accepts or offers to accept in
respect of any professional employment fees which are based on a percentage of profits or
which are contingent upon the findings, or results of such employment, except in cases which
are permitted under any regulation made under this Act". Since Asha has quoted her fees
which are contingent upon the results of the appeal she is guilty of professional misconduct.
4. Miss Moongi, a practicing Chartered Accountant, accepts her appointment as
a valuer of goodwill of a business for the purpose of determining the value of
2.36
gift under the Gift Tax Act on the condition that she would be paid 5% of the
value of the goodwill so determined as her fees.
A Chartered Accountant in practice is deemed to be guilty of professional misconduct as per
clause (10) of Part I of the First Schedule to the Chartered Accountants Act, 1949, if he,
charges or offers to charge, accepts or offers to accept, in respect of any professional
employment fees which are based on a percentage of profits, or which are contingent upon
the findings or results of such employment except in cases which are permitted under
any Regulations made under this Act. The Council of the Institute has framed Regulation 192
which exempts members from the operation of this clause in certain professional services. As
per the said Regulation, in the case of a valuer for the purposes of direct taxes and duties, the
fees may be based on a percentage of the value of property valued. Since Ms. Moongi's case is
clearly covered under this specific exemption, she would not be held guilty of professional
misconduct.
5. Mr. Jaydev has charged a fee for representing his client in an Income Tax
appeal based on the expected relief to his client as a result of the appeal.
Under Clause (10) of the Part I of the First Schedule to the Chartered Accountants Act, 1949,
a Chartered Accountant in practice who charges or offers to charge, accepts or offers to accept
in respect of any professional employment fees which are based on a percentage of profits or
which are contingent upon the findings, or results of such employment, except in cases which
are permitted under any regulation made under the Chartered Accountants Act, is guilty of
The aforementioned restraint has been placed on the members of the profession to prevent
them from losing their independence of mind in the conduct of their work. In the absence
thereof, a member may be tempted to override his conscience and may decide to cut across -
legal requirements for his own personal profit. Such danger can not arise so long as the fees
are based merely on the value of time and effort.
In view of this, Mr. Jaydev is guilty of professional misconduct by charging a fee for
representing in income tax appeal proportionate to the relief that may be obtained as a result
of the appeal.
6. A chartered accountant, acting as liquidator of a company:
(i) charged fees as a percentage of realisation of assets and
(ii) refused to hand over accounting records and valuables of the
company in liquidation to the successor appointed by the Court.
(i) Clause (10) of Part I of First Schedule to the Chartered Accountants Act, 1949
prohibits charging of fees which are based as a percentage of profits or which are contingent
upon findings since a professional's opinion should not depend upon the ultimate results.
However, proviso to Regulation 192 permits that a liquidator may charge fees as acting as
a liquidator a percentage of realization of disbursement of the assets. Hence, a chartered
accountant charging fees as a percentage of realisation of assets is not guilty of professional
misconduct.
(ii) Normally speaking, the provision of the Chartered Accountants Act, 1949 are applicable
to a Chartered Accountant and nothing could be brought against a chartered accountant who
is acting as a liquidator of a company. But, section 22 of the Chartered Accountants Act, 1949
covers instances of professional misconduct which are not specified in schedule to the
Chartered Accountants Act, 1949. Therefore, a chartered accountant who is acting in the
capacity of a liquidator would be covered by the provision of the Act.
2.37
Therefore, refusal on the part of the chartered accountant to part with records and valuables
is wrong and without reasonable cause thus he will be held guilty of Other Misconduct'.
In Controller of Insurance Vs. B. Mukherjee, the Supreme Court in similar circumstances
held that the council had the power to hold an enquiry against a Chartered Accountant even
though the alleged misconduct was not one of those mentioned in the Schedules but in the
opinion of the council renders him unfit to be a member of the Institute and even though the
misconduct was with reference to him as liquidator and not as a Chartered Accountant.
7. CA. D, a Chartered Accountant prepared a project report for one of his clients
to obtain bank finance (long-term) of 50 lakhs from a Commercial Bank.
Consequent to the sanction of the loan by the bank CA. D raised a bill for his
services @ 2% of the loan sanctioned.
Clause (10) of Part I to First Schedule to the Chartered Accountants Act prohibits a Chartered
Accountant in practice to charge, to offer, to accept or accept fees which are based on a
percentage of profits or which are contingent upon the findings or results of such work done
by him.
However, this restriction is not applicable where such payment is permitted by the Chartered
Accountants Act, 1949. The Council of the Institute has framed regulation 192 which exempts
certain professional services from the operation of Clause (10).
The services rendered by CA. D are not covered under the said exemption and hence CA. D is
liable for professional misconduct.
8. Efficient Ltd. is running into losses and in order to optimize resource
utilization and cost reduction, approaches you to carryout the assignment and
offers a fee of 5% of benefits derived from the suggestions made by you. (May 18
Old)
Charging of Fees based on Percentage: Clause (10) of Part I to First Schedule to the Chartered
Accountants Act prohibits a Chartered Accountant in practice to charges or offers to charge,
accepts or offers to accept in respect of any professional employment fees which are based on
a percentage of profits or which are contingent upon the findings, or results of such
employment, except as permitted under any regulations made under this Act.
The Council of the Institute has however framed Regulation 192 which exempts members
from the operation of this clause in certain professional services which includes the services
related to cost optimisation, the fees may be based on a percentage of the benefit derived.
In the instant case, Efficient Ltd. is running into losses. Efficient Ltd. offered fee of 5%
benefits derived from the suggestions made with respect to optimization of resource
utilization and cost reduction. This service is covered under the said exemption.
Thus, the fees offered on a percentage basis of the benefit derived by services rendered
related to cost optimization are not liable for professional misconduct.
CLAUSE - 11
Engages in any business or occupation other than the profession of chartered
accountant unless permitted by the Council so to engage;
Provided that nothing contained herein shall disentitle a chartered accountant
from being a director of a company (Not being managing director or a whole
time director) unless he or any of his partners is interested in such company as
an auditor.”
2.38
Explanation:
This clause prohibits a member in practice from engaging himself in any business or
occupation other than the profession of chartered accountancy except when permitted by the
Council to be so engaged.
Permission granted generally – Regulation 190A and Regulation 191
Members in practice are generally permitted to engage in the following categories of
occupations, for which no specific permission from the Council is necessary.
1. Attending classes and appearing for any examination.
2. Private tutorship
3. Part-time tutorship under the coaching organisation of the Institute,
The council has passed a resolution under regulation 190A granting general
permission for private tutorship and part-time tutorship under coaching
organizations of the Institute) and specific permission (for part-time or full time
tutorship under any educational institution other than coaching organization of the
institute. Such general and specific permission granted is subject to the condition
that the direct teaching hours devoted to such activities taken together should not
exceed25 hours a week in order to be able to undertake attest functions.
4. Authorship of books and articles.
5. Valuation of papers, acting us paper-setter, head-examiner or a moderator, for any
examination.
6. Editorship of professional journals.
7. Employment under Chartered Accountants in practice or firms of such chartered
accountants.
8. Honorary office leadership of charitable-educational or other non-commercial
organizations.
9. Holding of public elective offices such as M.P., M.L.A., and M.L.C.
10. Acting as Notary Public, Justice of the Peace, Special Executive Magistrate and the
like.
11. Acting as Surveyor and Loss Assessor under the Insurance Act, 1938 provided they
are otherwise eligible.
12. Acting as recovery consultant in banking sector.
13. Holding of Life Insurance Agency License for the limited purpose of getting
renewal commission.
14. Owning agricultural land and carrying out agricultural activity.
Specific and prior approval:
Members of the Institute in practice may engage in the following categories of business or
occupations, after obtaining the specific and prior approval of the Council in each
case.
1. Full-time or part-time employment in business concerns provided that the
member and/or his relatives do not hold “substantial Interest” in such concerns”.
2. Full-time or part-time employment in non-business concern.
2.39
3. Office of managing director or a whole-time director of a body corporate within

the meaning of the Companies Act, 2013.
4. Interest in family business concerns (including such interest devolving on the
members as a result of in inheritance/succession / partition of the family business) or
concerns in which interests has been acquired as a result of relationships and in the
management of which no active part is taken.
5. Interest in an educational institution
6. Part-time or full-time lectureship for courses other than Institute's
examinations.
7. Part-time or full-time tutorship under any educational institution other than
the coaching organization of the Institute
8. Editorship of journals other than professional journals
9. Any other business or occupation for which the Executive Committee considers that
permission may be granted.
However, it is open to the Council to refuse permission in individual cases
though covered under any of the above categories.
A member in practice is permitted generally to be a “Director Simplicitor” in any
company which means an ordinary or simple director and he is not required to obtain any
specific permission of the council in this behalf irrespective of whether he and/or his relatives
hold substantial interest in that company. There is no bar for a member to be a
promoter/signatory to the Memorandum and Articles of Association of any company.
It may be pointed out that a member cannot accept and hold the office of a
managing director or a whole-time director in a company if the member and/or
his partners and relatives hold substantial interest in such a company,
Case Laws:
1. The Bombay high Court in WP No. 4906 of 1985 decided on 09.02.1989 has held that the
prohibition to enter into any partnership with any person other than a Chartered accountant
under Clause(4) of Part I of the First Schedule is absolute but not so under Clause (11).
According to the Court, Clause (11) enables the Chartered Accountant to engage in any
business or any occupation other than the profession of Chartered Accountancy provided the
Council grants permission to engage in such business or occupation. According to the Court,
it is obvious that the Council desired to retain the power to permit a Chartered Accountant to
engage in any business or occupation, which may be incidental or would be useful for
carrying on the profession of chartered accountancy. Regulation 166 reiterates what Clause
(11) provides. In pursuance of Regulation 166, the Council of the Institute has resolved that
permission would be granted to the Chartered Accountancy engaged in any business or
occupation other then the profession of chartered accountant in the cases set out in the
resolution (Appendix 10). Clauses (4) and (11) contemplate two district and separate
contingencies and Clause (4) cannot be so read as to f98ke Clause (11) and the power retained
by the Council to grant permission redundant.
2. Where a chartered accountant was Karta of the HUF was engaged in the business of a firm
without permission of the Council. Held that he was guilty) of professional misconduct under
Clause (11).
Part-time employment a Chartered Accountant in practice may accept.
2.40
A chartered accountant in practice may act as a liquidator, trustee, executor, administrator,

arbitrator, receiver, adviser or representative for costing, financial or taxation matter, or may
take up an appointment that may be made by the Central Government or a State Government
or a court of law or any other legal authority or may act as a Secretary in his professional
capacity, provided his employment is not on a salary-cum-full-time basis.
PAST EXAMINAITON QUESTIONS:
1. Mr. Ample, a practicing Chartered Accountant, has accepted a joint
authorship of a book on Management Accounting along with his colleague who
is a Cost Accountant in the College where he is a part-time lecturer.
Clause 11 of Part 1 of the First Schedule to the Chartered Accountants Act, 1949 prohibits a
chartered accountant in practice to engage in any other business or occupation other than the
profession of chartered accountant unless permitted by the Council. Mr. Ample has accepted
a joint authorship of a book on management accounting along with a cost accountant who is a
part-time lecturer in a college. The council as per the power vested in it under Regulation
190A of C.A. Regulations, 1988 has passed a general resolution which permits a practicing
member to author books and articles. Therefore, Mr. Ample has not committed any
misconduct.
2. Mr. Clever, a practicing Chartered Accountant, accepts appointment as a full
time lecturer in a Commerce College affiliated to the Bombay University.
Clause 11 of Part I of the First Schedule to the Chartered Accountants Act, 1949 prohibits a
member in practice engaging in any business or occupation other than profession of
chartered accountants unless permitted by the Council. Such prohibition has been introduced
as it would not be in keeping with the dignity of the profession and may also enable the
member to secure an unfair advantage in his professional practice. According to the specific
resolution passed by the Council of the Institute under Regulation 190A, members of the
Institute in practice may engage in part-time or full-time lecturership for courses other than
those relating to the Institute's examinations conducted under the auspices of the Institute or
the Regional Councilor their branches after obtaining the specific and prior approval of the
Council in each case.
In the instant case, Mr. Clever, a practicing Chartered Accountant has accepted appointment
as a full-time lecturer in a Commerce college affiliated to Bombay University without
obtaining specific and prior approval of the Council. Accordingly, Mr. Clever would be held
guilty of professional misconduct.
3. Mr. J started his practice as Chartered Accountant in 2014. During 2015, he
got an offer for the post of Chief Accountant of a Software Development
Company, as a fulltime employee, for a salary of 60,000 per month. On
accepting this offer, Mr. J converted his practice into a partnership firm by
taking a fresh Chartered Accountant as his partner. Mr. J neither intimated the
Institute nor obtained permission from the Institute about his employment.
Will Mr. J be held guilty under the Chartered Accountants Act?
As per Clause (11) of Part I of First Schedule to the Chartered Accountants Act, 1949, Mr. J
will be held guilty since he has accepted the full time salaried employment in addition to the
practice of Chartered Accountancy without obtaining permission of the Institute. The
Chartered Accountants Regulation, 1988 provide that a Chartered Accountant in practice
shall not engage in any business or occupation other than the profession of accountancy
except with the permission granted in accordance with the provisions contained in
Regulation 190A. Part (B) of Appendix 10 to the Chartered Accountants Regulations, 1988
2.41
requires member of the Institute in practice to engage in full-time or part-time employment

after obtaining the specific and prior approval of the Council. Further, Mr. J will be held
guilty of professional misconduct under Clause (1) of Part II of Second Schedule to the
Chartered Accountants Act, 1949 if contravenes any of the provisions of the Act since he has
failed to inform the Institute.
4. A chartered accountant holding certificate of practice and having four
articled clerks registered under him accepts appointment as a full-time lecturer
in a college. Also he becomes a partner with his brother in a business. Examine
his conduct in the light of Chartered Accountants Act, 1949 and the regulations
there under.
Clause (11) of Part I of the First Schedule to the Chartered Accountants Act, 1949 debars a
chartered accountant in practice from engaging in any business or occupation other than the
profession of chartered accountancy unless permitted by the Council of the Institute so to
engage. The council permits a member to accept full - time lecturer-ship in a college only
after obtaining the specific and prior approval of it. As also becoming a partner in a business
with his brother would require specific permission. Hence, the chartered accountant is liable
for professional misconduct since he failed to obtain specific and prior approval of the
Council in each case.
5. CA. Z who is a leading Income Tax Practitioner and consultant in Jaipur is
also trading in derivatives.
As per Clause (11) of Part I of First Schedule to the Chartered Accountants Act, 1949
(hereinafter referred as „Act‟), a Chartered Accountant is deemed to be guilty of professional
misconduct if he “engages in any business or occupation other than the profession of
Chartered Accountant unless permitted by the Council so to engage”.
However, the Council has granted general permission to the members to engage in 12
specific occupation. In respect of all other occupations specific permission of the Institute is
necessary.
In this case, CA. Z is engaged in the occupation of trading in derivatives which is not covered
under the general permission.
Hence specific permission of the Institute has to be obtained otherwise he will be deemed to
be guilty of professional misconduct under Clause (11) of Part I of First Schedule of the Act.
6. M, a Chartered Accountant in practice, is the Statutory Auditor of S Ltd. for
the year ended 31st March 2015. In January 2015, he was appointed as a
Director in H Ltd., which is the holding Company of S Ltd.
In terms of Clause (11) of Part I of the First Schedule to the CA Act, 1949, a CA in practice
cannot engage (unless permitted by the council) in any business or occupation other than the
profession of Chartered accountant, but he can be a director of a company wherein he or any
of his partners is not interested in such company as auditor.
However, public conscience is expected to be ahead of law and the requirement of
independence should be interpreted much more strictly. Members should thus not place
themselves in position which would either compromise or jeopardise their independence.
In view of the above, an auditor of a subsidiary cannot be a director of a holding company as
it will affect his independence.
2.42
7. Mr. J.J. a practicing Chartered Accountant engages himself as part time

finance manager of Quick Return Securities Ltd. He is of the view that as both
functions are independent, he need not take permission from the Institute.
Clause (11) of Part I of First Schedule of Chartered Accountants Act, 1949 states that a
Chartered Accountant is deemed to be guilty of professional misconduct if he engages in any
business other than the profession of Chartered Accountant unless permitted by the Council
for the same.
In the given case, Mr. J. J. a practicing Chartered Accountant is engaging himself as part time
Finance Manager without the permission of the Institute which is misconduct attracted by
Clause (11) of Part I of First Schedule.
8. Mr. B is a practicing Chartered Accountant holding a valid certificate of
practice. He accepted the appointment as Director of the Green World Co. Ltd.
Mr. C, a partner of Mr. B is statutory auditor of the said company.
Clause (11) of Part I of First Schedule to the Chartered Accountants Act, 1949 prohibits a
member to engage in any business or occupation other than the profession of chartered
accountants unless permitted by the Council so to engage. It does not prohibit a Chartered
Accountant from being a director of a company, except managing director or a whole time
director. But if any of the partners is interested in such company as an auditor then he cannot
be director of the said company.
In the present case Mr. B has accepted the directorship in a Company, where his partner Mr.
C is an auditor, without obtaining specific permission of the council. Hence, Mr. B will be
held guilty for professional misconduct under Clause (11) of Part I of First Schedule to the
Chartered Accountants Act, 1949.
Further, the Council of the Institute of Chartered Accountants of India has categorically
stated that in cases where a member is a director of a company, the firm, in which the said
member is a partner, should not express any opinion on its financial statements. Clause (4) of
Part I of the Second Schedule to the Chartered Accountants Act, 1949 states that expressing
an opinion on financial statements of any business or enterprise in which he, his firm or a
partner of his firm has a substantial interest would constitute misconduct.
Additionally, Section 141(3)(c) of the Companies Act, 2013 also disqualifies a
person to be appointed as an auditor if he is a partner of an officer of the
company. Furthermore, section 141(4) of the Companies Act, 2013 requires the
appointed auditor to vacate his office if he incurs any of the disqualifications
mentioned under sub-section (3).
Therefore, in cases, where a member of the Institute is a director of a company or a firm in
which said member is a partner should not express any opinion on its financial statements.
Hence Mr. C, a partner of Mr. B, should vacate the office.
9. Mr. A, a practicing Chartered Accountant, took over as the executive
chairman of a Software Company on 1.4.2015. On 10.4.2015 he applied to the
Council for permission.
As per Clause (11) of Part I of First Schedule to the Chartered Accountants Act, 1949, a
Chartered Accountant in practice will be deemed to be guilty of professional misconduct if he
engages in any business or occupation other than the profession of Chartered Accountant
unless permitted by the Council so to engage.
2.43
In the instant case, Mr. A took over as the executive chairman on 01.04.2015 and applied for
permission on 10.04.2015. On the basis of these facts, he was engaged in other occupation
between the period 01.04.2015 and 10.04.2015, without the permission of the Council and
therefore, Mr. A is guilty of professional misconduct in terms of Clause (11) of Part I of First
10. P, a Chartered Accountant holding Certificate of Practice, is a leading
Income Tax Practitioner in Gurugram. He is also trading in derivatives.
Comment with reference to the Chartered Accountant Act, 1949 and schedules
thereto. (May 17 old)
Engaging into a Business: As per Clause (11) of Part I of First Schedule of Chartered
Accountants Act, 1949, a Chartered Accountant in practice is deemed to be guilty of
professional misconduct if he engages in any business or occupation other than the
profession of Chartered Accountant unless permitted by the Council so to engage.
However, the Council has granted general permission to the members to engage in certain
specific occupation. In respect of all other occupations specific permission of the Institute is
necessary.
In this case, CA. P is engaged in the occupation of trading in commodity derivatives which is
not covered under the general permission.
Hence, specific permission of the Institute has to be obtained otherwise he will be
deemed to be guilty of professional misconduct under Clause (11) of Part I of First
Schedule of Chartered Accountants Act, 1949.
11. CA Raghu is practicing in the field of Income-tax over a period of 12 years.

He has gained experience in this domain over others.
Sam, a student of Chartered Accountancy Course is very much impressed with
the knowledge of CA Raghu. He approached CA Raghu to take guidance on some
topics of Income-tax related to his course. CA Raghu, on request decided to
spare time and started providing private tutorship to Sam and some of his
friends alongwith. However, he forgot to take specific permission from the ICAI,
for such private tutorship.
Is CA Raghu, professionally liable for misconduct? (May 15 Old)
Permission for Providing Private Tutorship: As per Clause (11) of Part I of the First Schedule
to the Chartered Accountants Act, 1949, a Chartered Accountant in practice shall be deemed
to be guilty of professional misconduct if he engages in any business or occupation other than
the profession of chartered accountant unless permitted by the Council so to engage.
Further, the Chartered Accountants Regulations, 1988 provides that a Chartered Accountant
in practice shall not engage in any other business or occupation other than the profession of
accountancy except with the permission granted in accordance with a resolution of the
Council. According to the same there is no specific permission from the council would be
necessary in the case of private tutorship.
In the given case, CA. Raghu has started providing private tutorship to Mr. Sam along with
some of his friends, without obtaining specific or prior approval of the Council.
On this context, it may be noted that the Council has provided general permission for
providing such private tutorship. Therefore, CA. Raghu would not be held guilty of
2.44
professional misconduct under Clause (11) of Part I of the First Schedule to the Chartered
CLAUSE - 12
"Allows a person not being a member of the institute in practice or a member
not being his partner to sign on his behalf or on behalf of his firm, any balance
sheet, profit and loss account, report or financial statements".
 As per the above clause, a member should not allow another member who is not his
partner to sign any balance sheet, profit and loss account or financial statements on
his behalf or on behalf of his firm.
 However, the Council has decided that where a Chartered Accountant while signing a
report or, a financial statement or any other document is statutory to disclose his
name.
1. Ram & Co. is a firm of chartered accountants in practice, of which Ram and
Shyam are partners. The firm was appointed as auditors of a limited company.
After the Completion of the audit but before the submission of the audit report
on the company's accounts for the year ended 31st March, 2005 both Ram and
Shyam went on a pilgrimage to Badrinath. In their absence & under instructions
the audit report was prepared and signed by Hari, a chartered accountant
employed by the firm, but this report did not contain all the statements required
to be included therein. Discuss the legal liability of Ram, Shyam and Hari in the
circumstances.
Section 145 of the Companies Act, 2013 states that, only the person appointed as auditor of
the company, or where a firm is so appointed, only a partner in the firm practicing in India,
may sign the audit report.
In the instant case, neither Ram nor Shyam, partners of Ram & Co. did sign the audit report
as required under the Companies Act.
Clause 12 of Part I of First Schedule also specifies that a chartered accountant in practice
shall be deemed to be guilty of professional misconduct if he allows any person not being his
partner to sign on his behalf or on behalf of his firm any balance sheet, profit and loss
account and report on financial statement. Therefore, Ram and Shyam may be held guilty of
professional misconduct. Hari can also be held guilty of professional misconduct under this
clause on account of his unawareness. Both Ram and Shyam can also be held to be grossly
negligent in the conduct of their professional duties as they did not sign the audit report
themselves which is a requirement of law as per clause (7) of Part 1 of Second Schedule.
Further, it has been stated that the report which Hari signed did not contain all the
statements required to be included there under. In this context a notification has been issued
by the Council of the Institute which specifies that a member of the Institute whether in
practice or not, who is employed by a chartered accountant in practice or by a firm of such
chartered accountants shall be deemed to be guilty of professional misconduct if he is grossly
negligent in the conduct of his duties. Therefore, Hari shall also be deemed to be guilty of
professional misconduct as per this notification.
2. Mr. Y, a practicing Chartered Accountant met with an accident and hence
authorized his employee Mr. B, who is a qualified Chartered Accountant to sign
the audit report of the company as it was getting delayed
2.45
As per Clause 12 of Part 1 of the First Schedule of the Chartered Accountants Act, 1949, a
member in practice is not allowed to authorize any other member except his partner to sign
on his behalf or on behalf of his firm any balance sheet, profit and loss Account, report or any
financial statement. In view of this Mr. Y who has allowed his employee Chartered
Accountant to sign their audit report would be held guilty of professional misconduct under
the Chartered Accountants Act, 1949.
3. Whether a Chartered Accountant employed in your firm can sign the Balance
Sheet of a concern in the name of your firm.
Clause 12 of Part 1 of the First Schedule to the Chartered Accountants Act prohibits a member
from allowing a person who is not his partner to sign on his behalf or on behalf of his firm
any balance sheet, profit and loss account, or a report on financial statement. In the
circumstances, a member who allows an employee chartered accountant to sign the balance
sheet of a concern would be guilty of professional misconduct under Section 22 of the
Chartered Accountants Act.
4. A firm of Auditors of a Limited Company gives Power of Attorney to an
employee Chartered Accountant to sign reports and financial statements of the
company.
Clause 12 of Part I of the First Schedule to the Chartered Accountants Act, 1949 states that a
"a Chartered Accountant in practice is deemed to be guilty of professional misconduct if he
allows a person not being a member of the Institute or a member not being his partner, to
sign on behalf or on behalf of his firm any balance sheet, profit and loss Account, report of
financial statement." This clause is to be read in conjunction with Section 26 of the Chartered
Accountants Act, 1949 which stipulates that 'no person other than a member of the Institute
shall sign any document on behalf of a Chartered Accountant in his or its professional
capacity. A report, however, may cover a wider range of documents but in the context in
which it is used in this clause, it would mean only a report arising out of a professional
assignment undertaken by him or his firm to the client(s) or where so required to an outsider
on behalf of himself or on behalf of a firm. The subject matter of report should be the
expression of professional opinion whether financial or non-financial. The financial
statements and the reports referred to in this Clause obviously mean the statements and
reports as ultimately finalized and submitted to outside authorities. As it is obvious that
reports and financial statement pertains to the Company, professional misconduct has been
committed by the firm in terms of Clause 12 referred to above.
5. CA. Smart, a practicing Chartered Accountant was on Europe tour between 15
-9-15 and 25-9-15. On 18-9-15 a message was received from one of his clients
requesting for a stock certificate to be produced to the bank on or before 20-
9-15. Due to urgency, CA. Smart directed his assistant, who is also a Chartered
Accountant, to sign and issue the stock certificate after due verification, on his
behalf.
As per Clause (12) of Part I of the First Schedule to the Chartered Accountants Act, 1949, a
Chartered Accountant in practice is deemed to be guilty of professional misconduct “if he
allows a person not being a member of the Institute in practice or a member not being his
partner to sign on his behalf or on behalf of his firm, any balance sheet, profit and loss
account, report or financial statements”.
In this case, CA. Smart allowed his assistant who is not a partner but a member of the
Institute of Chartered Accountants of India to sign stock certificate on his behalf and thereby
commits misconduct.
2.46
Thus, CA. Smart is guilty of professional misconduct under Clause (12) of Part I of First
6. Mr. 'A' is a practicing Chartered Accountant working as proprietor of M/s A &

Co. He went abroad for 3 months. He delegated the authority to Mr. 'Y' a
Chartered Accountant his employee for taking care of routine matters of his
office. During his absence Mr. 'Y' has conducted the under mentioned jobs in
the name of M/s A & Co.
 He issued the audit queries to client which were raised during the course of audit.
 He issued production certificate to a client under Central Excise Act, 1944.
 He attended the Income Tax proceedings for a client as authorized representative
before Income Tax Authorities.
Please comment on eligibility of Mr. 'Y' for conducting such jobs in name of M/s
A & Co. and liability of Mr. 'A' under the Chartered Accountants Act, 1949. (May
14 Old)
Delegation of Authority to the Employee: As per clause 12 of Part I of the First Schedule of
the Chartered Accountants Act, 1949, a Chartered Accountant in practice is deemed to be
guilty of professional misconduct “if he allows a person not being a member of the Institute
in practice or a member not being his partner to sign on his behalf or on behalf of his firm,
any balance sheet, profit and loss account, report or financial statements”.
In this case CA „A‟ proprietor of M/s A & Co., went to abroad and delegated the authority to
another Chartered Accountant Mr. Y, his employee, for taking care of routine matters of his
office who is not a partner but a member of the Institute of Chartered Accountants
The Council has clarified that the power to sign routine documents on which a professional
opinion or authentication is not required to be expressed may be delegated in the following
instances and such delegation will not attract provisions of this clause like issue of audit
queries during the course of audit, asking for information or issue of questionnaire, attending
to routing matters in tax practice, subject to provisions of Section 288 of Income Tax Act etc.
In the given case, Mr. „Y‟, a chartered accountant being employee of M/s A & Co has issued
audit queries which were raised during the course of audit. Here “Y” is right in issuing the
query, since the same falls under routine work which can be delegated by the auditor.
Therefore, there is no misconduct in this case as per clause 12 of Part 1 of First schedule to
the Act.
Further, issuance of production certificate to a client under Central Excise Act, 1944 by
Mr. “Y” being an employee of M/s A & Co. (an audit firm), is not a routine work and it is
outside his authorities. Thus, CA „A‟ is guilty of professional misconduct under clause 12 of
Part I of First Schedule of the Chartered Accountants Act, 1949.
In this instance, Mr. “Y”, CA employee of the audit firm M/s A & Co. has attended the
Income tax proceedings for a client as authorized representative before Income Tax
Authorities. Since the council has allowed the delegation of such work, the chartered
accountant employee can attend to routine matter in tax practice as decided by the council,
subject to provisions of Section 288 of the Income Tax Act. Therefore, there is no
misconduct in this case as per clause 12 of Part 1 of First schedule to the Act.
2.47
Part II – PROFESSIONAL MISCONDUCT IN RELATION TO MEMBERS OF THE

INSTITUTE IN SERVICE
A member of the Institute (other than a member in practice) shall be deemed to be guilty of
professional misconduct, if he being an employee of any company, firm or person
CLAUSE - 1
Pays or allows or agrees to pay directly or indirectly to any person any share in
the emoluments of the employment undertaken by him;
 A member in service is deemed to be guilty of professional misconduct, if he pays or
allows or agrees to pay any part of share of the emoluments of the employment with
any person either directly or indirectly.
 However sharing among relatives, dependents, friends etc. is allowed provided
a. there is no relationship in procuring or retaining the job and
b. the payment is not a consideration for job procurement or retention.
CLAUSE - 2
Accepts or agrees to accept any part of fees, profits or gains from a lawyer, a
chartered accountant or broker engaged by such company, firm or person or
agent or customer of such company, firm or person by way of commission or
gratification.
 Acceptance of any part of fees, profits or gains from a lawyer, a chartered accountant
or broker etc. either directly or by way of commission or gratification is prohibited
under this clause.
Mr. 'C', a Chartered Accountant holds a certificate of practice while in

employment also, recommends a particular lawyer to his employer in respect of
a case. The lawyer, out of the professional fee received from employer paid a
particular sum as referral fee to Mr. 'C'. (4 Marks) (May 14 Old)
Referral Fee from Lawyer: According to Clause 2 of Part II of First Schedule of the Chartered
Accountant Act, 1949, a member of the Institute(other than a member in practice) shall be
guilty of professional misconduct, if he being an employee of any company, firm or person
accepts or agrees to accept any part of fee, profits or gains from a lawyer, a chartered
accountant or broker engaged by such company, firm or person or agent or customer of such
company, firm or person by way of commission or gratification.
In the present case, Mr. C who beside holding a certificate of practice, is also an employee
and by referring a lawyer to the company in respect of a case, he receives a particular sum as
referral fee from the lawyer out of his professional fee.
Therefore, Mr. C is guilty of professional misconduct by virtue of clause 2 of Part II of First
schedule
PART III - Professional misconduct in relation to members of the Institute
generally
A member of the Institute, whether in practice or not, shall be deemed to be guilty of
professional misconduct, if he
CLAUSE - 1
Not being a fellow of the Institute, acts as a fellow of the Institute;
Explanation
2.48
 According to this clause, if an associate member of the Institute (ACA) acts as a fellow
member, he will be deemed to be guilty of professional misconduct.
 Here, the term “acts” implies exhibiting the term fellow on letters, visiting cards etc.
 A similar provision exists in Section 24 of the Chartered Accountants Act, 1949 which
reads as follows:
Any person who,
(i) not being a member of the Institute
a. represents himself as a member
b. using the designation Chartered Accountant
(OR)
(ii) Any member, who do not hold a Certificate of Practice represents himself as a
Chartered Accountant in practice.
 punishable with fine up to Rs.1000 for first conviction and
 punishable with fine up to Rs.5000 and/or imprisonment up to 6 months on
subsequent conviction.
CLAUSE - 2
Does not supply the information called for, or does not comply with the
requirements asked for, by the Institute, Council or any of its Committees,
Director (Discipline), Board of Discipline, Disciplinary Committee, Quality
Review Board or the Appellate Authority;
According to this clause, a Chartered Accountant is deemed to be guilty of professional
misconduct
a. when he fails to supply the information called for by the Institute or its constituent
bodies or
b. when he does not comply with the requirements asked for
Case Laws:
1. Inspite of repeated reminders a chartered accountant failed to reply to the letters of
the Institute asking him to confirm the date of leaving the services by the paid
assistant.- Held the Chartered accountant was guilty of professional misconduct under
the Clause.
2. Where a Chartered Accountant had continued to train an articled clerk though his
name was removed from the membership of the Institute and he had failed to send any
reply to the Institute asking him to send his explanation as to how he was training as his
articled clerk when he was not a member of the Institute. Held, he was guilty under this
clause.
1. XYZ Associates, a Chartered Accountants Firm is having a relationship with a
multi - national accounting firm in India. The ICAI required that all firms
having networking relationship with any other entity need to furnish
information online within the stipulated time. XYZ Associates failed to respond.
Comment on this with reference to Professional misconduct, if any. (Nov. 18)
Failed to Supply Information Called For: As per Clause (2) of Part III of the First Schedule to
the Chartered Accountants Act, 1949, a member, whether in practice or not, will be deemed
to be guilty of professional misconduct if he does not supply the information called for, or
does not comply with the requirements asked for, by the Institute, Council or any of its
2.49
Committees, Director (Discipline), Board of Discipline, Disciplinary Committee, Quality

Review Board or the Appellate authority.
Thus, in the given case, Mr. XYZ Associates, a chartered accountant firm is failed to furnish
the information of its relationship with multi-national accounting firm in India. The ICAI
required this information to be submitted online within the stipulated time. XYZ Associates
failed to respond and submit the required information. Therefore, XYZ Associates is held
guilty of professional misconduct as per Clause (2) of Part III of the First Schedule to
2. X, a chartered accountant in practice, in spite of several reminders from the
Secretary of the Institute of Chartered Accountants of India fails to submit Form
18. Is he liable for misconduct? (May 17 old)
Failure to Submit the Information: Clause (2) of Part III of the First Schedule requires a
member to supply the information called for by the Council or any of its Committees and
Clause (1) of Part II of the Second Schedule requires every member of the Institute to act
within the framework of the Chartered Accountants Act and the Regulation made thereunder.
Under the former clause, it is misconduct for chartered accountants generally, if they do not
supply the information called for by the Council. The Secretary acts for the Council; hence,
request from the Secretary amounts to a request from the Council. Besides, it is also a
contravention of Regulation of the Chartered Accountants Regulations, 1988.
Thus, failure to submit Form 18 constitutes professional misconduct.
3. Mr. 'G', while applying for a certificate of practice, did not fill in the columns
which solicite information about his engagement in other occupation or
business, while he was indeed engaged in a business. (May 14 Old)
Disclosure of Information: As per Clause 2 of Part III of First Schedule to the Chartered
Accountants Act, 1949 a member shall be held guilty if a Chartered Accountant, in practice or
not, does not supply the information called for, or does not comply with the requirements
asked for, by the Institute, Council or any of its Committees, Director (Discipline), Board of
Discipline, Disciplinary Committee, Quality Review Board or the Appellate Authority;
In the given case, Mr. “G”, a Chartered Accountant while applying for a certificate of practice,
did not fill in the columns which solicit information about his engagement in other
occupation or business, while he was indeed engaged in a business. Details of engagement in
business need to be disclosed while applying for the certificate of practice as it was the
information called for in the application, by the Institute.
Thus, Mr. G will be held guilty for professional misconduct under the clause 2 of Part III of
First Schedule of the Chartered Accountants Act, 1949.
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While inviting professional work from another chartered accountant or while
responding to tenders or enquiries or while advertising through a write up, or
anything as provided for in items (6) and (7) of Part I of this Schedule, gives
information knowing it be false.
Any member of the Institute, in the course of procurement of professional work from another
Chartered Accountant or from any other source provides or renders any information which
he knows to be false through any documents, or acts (like tenders, enquiries, response to
2.50
advertisement, CV type write ups etc.), he would be/deemed to guilty of professional

misconduct under clause (3), Part-III of Schedule-I.
PART IV- Other misconduct in relation to members of the Institute generally
A member of the Institute, whether in practice or not, shall be deemed to be guilty of other
misconduct, if he
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is held guilty by any civil or criminal court for an offence which is punishable
with imprisonment for a term not exceeding six months;
The important point to note is that if imprisonment te9Ure exceeds six months, this case will
be covered in the clause of Part III of Schedule II.
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in the opinion of the Council, brings disrepute to the profession or the Institute
as a result of his action whether or not related to his professional work.
The member is deemed to be guilty of professional misconduct irrespective of the fact
whether such acts are related to profession or not.
1. X, a Chartered Accountant availed a loan against his shares held as
investments from a nationalized bank. He issued 2 cheques towards repayment
of the said loan. Both the cheques were returned back by the bank with the
remarks "Refer to Drawer".
A Chartered Accountant is expected to maintain the highest standard of integrity even in his
personal affairs and any deviation from these standards, even in his non-professional work
would expose him to disciplinary action.
A member is liable to disciplinary action under Section 21 of the Chartered Accountants Act,
if he is found guilty of any professional or “Other Misconduct”.
As per Clause (2) of Part IV of the First Schedule to the Chartered Accountants Act, 1949, a
member of the Institute, whether in practice or not, shall be deemed to be guilty of other
misconduct, if he in the opinion of the Council, brings disrepute to the profession or the
Institute as a result of his action whether or not related to his professional work.
The question whether a particular act or omission constitutes “other misconduct” should be
based on facts and circumstances of each case.
Under Negotiable Instruments Act 1881, where any cheque drawn by a person for the
discharge of any liability is returned by the bank unpaid, either for insufficiency of funds or
the cheque amount exceeds the arrangements made by the drawer of the cheque, the drawer
of such cheque shall be deemed to have committed an offence.
In the given case the cheque was dishonoured with the remark “refer to drawer”. However,
such dishonour need not necessarily be only due to insufficiency of funds.
If it is proved that the cheques were dishonoured due to insufficiency of funds, the CA would
be held guilty of “other misconduct”.
2. Mr. R, a Chartered Accountant in practice approached Manager of a
Nationalised Bank for a loan of ` 25 lakhs. He has also informed the Manager
that if the loan is sanctioned, the Income Tax return of the Manager and staff
will be filed without charging any fees, as quid Pro quo for the loan sanctioned.
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Clause (2) of Part IV of First Schedule to the Chartered Accountants Act, 1949 states that
member of the Institute, whether in practice or not, shall be deemed guilty of other
misconduct, if he in the opinion of the Council, brings disrepute to the profession or to the
Institute as a result of his action whether or not related to his professional work".
Accordingly, a Chartered Accountant is also expected to maintain the highest standards and
integrity even in his personal affairs and any deviation from these standards calls for
disciplinary action.
In the present case, the action of Mr. R, a Chartered Accountant in practice offering free
service in return to sanction of loan brings disrepute to the profession of a Chartered
Accountant.
Hence, Mr. R will be held guilty of other misconduct under Clause (2) of Part IV of the First
3. YKS & Co., a proprietary firm of Chartered Accountants was appointed as
concurrent auditor of a bank. YKS used his influence for getting some cheques
purchased and thereafter failed to repay the loan/overdraft.
This is a case which is covered under the expression in other misconduct of the Chartered
Accountants Act, 1949. As per Clause (2) of Part IV of First Schedule to the Chartered
Accountants Act, 1949, a member of the Institute, whether in practice or not, shall be deemed
to be guilty of other misconduct, if he, in the opinion of the Council, brings disrepute to the
profession or the Institute as a result of his action whether or not related to his professional
work. Here the Chartered Accountant is expected to maintain the highest standards and
integrity even in his personal affairs and any deviation from these standards calls for
disciplinary action.
In the present case, YKS & Co, being a concurrent auditor used his position to obtain the
funds and failed to repay the same to the bank. This brings disrepute to the profession of a
Chartered Accountant. This act of YKS & Co is not pardonable.
Therefore, YKS & Co will be held guilty of other misconduct under Clause (2) of Part IV of
First Schedule to the Chartered Accountants Act, 1949..
CA. D, a chartered accountant in practice availed of a loan against his personal
investments from a bank. He issued 2 cheques towards repayment of the said
loan as per the instalments due. However, both the cheques were returned back
by the bank with the remarks "Insufficient funds". Comment with reference to
the Chartered Accountants Act, 1949. (Nov. 17 Old)
Bringing Disrepute to the Profession: A Chartered Accountant is expected to maintain the
highest standard of integrity even in his personal affairs and any deviation from these
standards, even in his non-professional work would expose him to disciplinary action.
A member is liable to disciplinary action under Section 21 of the Chartered Accountants
Act, if he is found guilty of any professional or “Other Misconduct”.
As per Clause (2) of Part IV of the First Schedule to the Chartered Accountants Act, 1949, a
member of the Institute, whether in practice or not, shall be deemed to be guilty of other
misconduct, if he in the opinion of the Council, brings disrepute to the profession or the
Institute as a result of his action whether or not related to his professional work.
The question whether a particular act or omission constitutes “other misconduct” should
be based on facts and circumstances of each case.
2.52
Under Negotiable Instruments Act 1881, where any cheque drawn by a person for the
discharge of any liability is returned by the bank unpaid, either for insufficiency of funds or
the cheque amount exceeds the arrangements made by the drawer of the cheque, the drawer
of such cheque shall be deemed to have committed an offence.
In the given case the cheque was dishonoured with the remark “Insufficient Funds”.
Therefore, CA D is liable for misconduct under Clause 2 of Part IV of the First Schedule of
THE SECOND SCHEDULE

Where the Director (Discipline) is of the opinion that a member is guilty of any professional
or other misconduct mentioned in the second schedule or in both the Schedule, he shall place
the matter before the Disciplinary Committee.
Part I - Professional misconduct in relation to chartered Accountant in practice
A Chartered Accountant in practice shall be deemed to be guilty of professional misconduct,
if he
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"Discloses Information acquired in the course of his professional engagement to
any person other than his client so engaging him without the consent of his
client or otherwise than as required by any law for the time being in force' .
 This clause prohibits a member from disclosing information acquired by him in the
course of his professional engagement to any person without the consent of the client.
 In case where the member is required to take the permission of the client, it should be
ensured that such consent is obtained from a person who is competent to accord such
consent. Thus, in case of a proprietary concern, the consent of the proprietor is to be
obtained. In case of a partnership firm, consent is to be obtained from any partner of
the firm. In case of Company, consent should be obtained from either Managing
Director or from Board of Directors in the form of a resolution.
 However, the Chartered Accountant is free to disclose the information in cases
required by any law for the time being in force.
 For example, where disclosure is required to be made to say, exchange control
authorities, while performing his professional duties, the member is not deemed to be
guilty even when the information is disclosed with out obtaining permission from the
client. In such cases, it has to be assumed that mere requirement of law itself shall be
treated as consent given by member and actual consent is not required.
ROLE OF CHARTERED ACOUNTANT IN RELATION TO UNLAWFUL ACTS BY
THEIR CLIENTS
No duty is cast on a member to inform the Income Tax Authorities about taxation frauds by
his client of which, he comes to know during the course of his professional work.
Case I: Intentional suppressions or misstatement by client in tax returns –
Fraud relates to past years
Where the client had intentionally suppressed or misstated the tax returns and such fraud is
relatable to the accounts or tax matters of the client for past years for which the client was not
represented by the member
 The client should be advised to make a disclosure
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 The member may continue to act for the client in respect of current matters by
making an assumption that past fraud does not affect the current tax matters.
 However, the member is advised to be extra careful to ensure that past behaviour is
not reflected in current matters.
Case II: Intentional suppressions or misstatement by client in tax returns –
Fraud relates to accounts examined and reported upon by the member
If the fraud relates to the accounts or tax matters examined by the member and reported
upon by him
 The client should be advised to make a disclosure
 If the client refuses, the member should inform the client that
a. he would disassociate with the client and
b. he would inform the authorities that the accounts prepared by him/reported
upon by him are unreliable on account of certain information since obtained.
And finally, the auditor should make a report to the authorities concerned.
Case III: Suppressions relates to current year accounts

If the suppression relates to accounts or returns currently being prepared, the member
should advise the client to make full disclosure in the accounts and when the client
refuse, he should make full reservation in his report, and should not associate
himself with the return.
Case Laws
 Where a Chartered Accountant disclosed to the Income Tax Officer information
acquired in the course of his professional engagement without the consent of his client
– Held guilty.
 Where a Chartered Accountant had disclosed information acquired by him in the
course of his professional engagement to persons other than his clients without the
consent of his clients and without requirement in any law. It was held that he was
guilty of professional misconduct under clause 1 of Part I of Second Schedule to the
Chartered Accountant Act.
1. As auditor of a Chemical Industry, Abhaya becomes aware of the secret
production process of the company developed at an enormous cost. She
describes the same in detail to her brother little aware that he will take
advantage of this information to start a similar industry on his own.
In terms of clause 1 of Part 1 of the Second Schedule to the Chartered Accountants Act, 1949,
a Chartered Accountant in practice is deemed to be guilty of professional misconduct, if he
"discloses information acquired in the course of his professional engagement to any person
other than his client, without the consent of his client or otherwise than as required by any
Law for the time being in force". Since Abhaya has revealed to her brother the company's
secret production process, which has come to her knowledge in her capacity as the auditor of
the company, she should be deemed to be guilty of professional misconduct.
2. Mr. Parekh, a Chartered Accountant was invited by the Chamber of

Commerce to present a paper in a symposium on the issues facing Indian
Leather Industry. During the course of his presentation he shared some of the
2.54
vital information of his client‟s business under the impression that it will help
the Nation to compete with other countries at international level. (Nov. 14 old)
Clause (1) of Part I of the Second Schedule to the Chartered Accountants Act, 1949 deals with
the professional misconduct relating to the disclosure of information by a chartered
accountant in practice relating to the business of his clients to any person other than his
client without the consent of his client or otherwise than as required by any law for the time
being in force would amount to breach of confidence. The Code of Ethics further clarifies that
such a duty continues even after completion of the assignment. The Chartered Accountant
may however, disclose the information in case it is required as a part of performance of his
professional duties. In the given case, Mr. Parekh has disclosed vital information of his
client‟s business without the consent of the client under the impression that it will help the
nation to compete with other countries at International level. Thus it is a professional
misconduct covered by Clause (1) of Part I of Second Schedule to the Chartered Accountants
Act, 1949.
3. XYZ Co. Ltd. has applied to a bank for loan facilities. The bank on studying
the financial statements of the company notices that you are the auditor and
requests you to call at the bank for a discussion. In the course of discussions,
the bank asks for your opinion regarding the company and also asks for detailed
information regarding a few items in the financial statements. The information
is available in your working paper file. What should be your response and why?
Clause (1) of Part I of the Second Schedule to the Chartered Accountants Act, 1949 states that
a chartered accountant in practice shall be deemed to be guilty of professional misconduct if
he discloses information acquired in the course of his professional engagement to any person
other than his client, without the consent of the client or otherwise than as required by law
for the time being in force. SA 200 on " Overall Objectives of the Independent Auditor and
the Conduct of an Audit in Accordance with Standards on Auditing" also reiterates that, "the
auditor should respect the confidentiality of information acquired in the course of his work
and should not disclose any such information to a third party without specific authority or
unless there is a legal or professional duty to disclose". In the instant case, the bank has asked
the auditor for detailed information regarding few items in the financial statements available
in his working papers. Having regard to the position stated earlier, the auditor cannot
disclose the information in his possession without specific permission of the client. As far
as working papers are concerned, working papers are the property of the auditor. The
auditor may at his discretion, make portions of or extracts from his working papers available
to his client". Thus, there is no requirement compelling the auditor to div ulge information
obtained in the course of audit and included in the working papers to any outside agency
except as and when required by any law.
4. Mr. B, a Chartered Accountant in practice was invited to deliver a seminar on
GST which was attended by professionals as well as by representatives of
various Industries. One section of audience raised a particular issue unique to
the industry to which it pertains. Mr. B enthusiastically explained the issue and
elaborated how he actually solved this, for his client facing the same issue with
worked out examples from the computer storage device using the actual data of
one of his clients with full identification of client details being displayed to the
group for the sake giving clarity on a topic in a real life situation. Comment his
acts in the light of Code of Conduct. (May 18 New)
Disclosure of Information to third Party: Clause (1) of Part I of the Second Schedule to the
Chartered Accountants Act, 1949 states that a chartered accountant in practice shall be
2.55
deemed to be guilty of professional misconduct if he discloses information acquired in the

course of his professional engagement to any person other than his client, without the
consent of the client or otherwise than as required by law for the time being in force.
SA 200 on " Overall Objectives of the Independent Auditor and the Conduct of an Audit in
Accordance with Standards on Auditing" also reiterates that, "the auditor should respect the
confidentiality of information acquired during his work and should not disclose any such
information to a third party without specific authority or unless there is a legal or
professional duty to disclose".
In the instant case, Mr. B is a Chartered Accountant in practice and he was invited to deliver
a seminar on GST which was attended by professional as well as by representatives of various
industries. During his session, a query was raised on particular issue and Mr. B used the
actual data of one of his clients with full identification of client details displayed to explain
and elaborate such query. Applying the above provision, the auditor cannot disclose the
information in his possession without specific permission of the client. Thus, CA. B will be
liable for professional misconduct under clause 1 of Part I of the Second Schedule to the
CLAUSE - 2
If he certifies or submits in his name or in the name of his firm, a report of an
examination of financial statements unless the examination of such statements
and the related records has been made by him or by a partner or an employee In
his firm or by another chartered accountant in practice".
 A Chartered Accountant in practice shall be deemed to be guilty of professional
misconduct if he certifies or submits a report of an examination of financial
statements unless such statements and related records were examined by
a. him
b. his partner
c. his employee
d. another chartered accountant in practice
 Point (d) above is particularly applicable in case of appointment of joint auditors.
In such a case, the work will be carried out by both the joint auditors and therefore
there arises a concept of examination of financial statements and related records by
another chartered accountant in practice.
1. Mr. Mohan is a practicing Chartered Accountant. He issued a certificate of
consumption which did not reflect the correct factual position of the
consumption of raw material by the concerned entity. It is found that the
certificate is given on the basis of data appearing in the minutes of meeting of
the Board of Directors.
According to Clause (2) of Part I of Second Schedule to the Chartered Accountants Act, 1949
a chartered accountant is held guilty of professional misconduct if he certifies or submits a
report of an examination of financial statements unless the examination of such statements
and the related records has been made by him or by a partner or employee in his firm or
any other chartered accountant in practice.
Mr. Mohan has issued a certificate of consumption which does not reflect the correct factual
position of the consumption of raw material by the concerned entity. He has failed in his duty
of examining the record. He has relied on the minutes of Board of director‟s meeting which is
not proper evidence to show the consumption of raw material. The relevant record of
production and stock register should have been scrutinized thoroughly and properly.
2.56
Clause (7) of Part I of Second Schedule to the Chartered Accountants Act, 1949 also applies to
this case which states that a Chartered Accountant in practice shall be deemed to be guilty of
professional misconduct, if he does not exercise due diligence or is grossly negligent in the
conduct of his professional duties.
Mr. Mohan will be held guilty of Professional Misconduct under Clause (2) of Part I of
Second Schedule to the Chartered Accountants Act, 1949.
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Permits his name or the name of his firm to be used in connection with an
estimate of earnings contingent upon future transactions in manner which may
lead to the belief that he vouches for the accuracy of the forecast".
 This clause prohibits a member from signing on an estimate of earnings contingent
upon future transactions in a manner which may lead to the belief that he vouches for
the accuracy of the forecast. (Forecasts/Projected Financial Statements)
 However, a member is not prohibited from associating his name with such forecast.
In other words, he can participate in the preparation of profit or financial forecasts
and can review them, provided that he clearly indicates the following in his
report.
a. Sources of Information
b. Basis of forecasts
c. Major assumptions made in arriving at the forecasts
d. States that he does not vouch for the accuracy of the forecast
1. Z, a Chartered Accountant, certifies a financial forecast of his client which
was forwarded to the client‟s bank based on which the bank sanctioned a loan to
the client.
Certification of Financial Forecast: Under Clause (3) of Part I of Second Schedule to the
Chartered Accountants Act, 1949, a chartered accountant in practice is deemed to be guilty of
professional misconduct if he permits his name or the name of his firm to be used in
connection with an estimate of earnings contingent upon future transactions in a manner
which may lead to the belief that he vouches for the accuracy of the forecast.
Further, SAE 3400 “The Examination of Prospective Financial Information”, provides that
the management is responsible for the preparation and presentation of the prospective
financial information, including the identification and disclosure of the sources of
information, the basis of forecasts and the underlying assumptions. The auditor may be
asked to examine and report on the prospective financial information to enhance its
credibility, whether it is intended for use by third parties or for internal purposes. Thus,
while making report on projection, the auditor need to mention that his responsibility is to
examine the evidence supporting the assumptions and other information in the prospective
financial information, his responsibility does not include verification of the accuracy of the
projections, therefore, he does not vouch for the accuracy of the same.
In the instant case, Mr. Z has certified a financial forecast of his client which was forwarded
to the client‟s bank based on which the bank sanctioned a loan to the client. Thus, Mr. Z will
not be held guilty of misconduct if all the requirements have been complied with or vice
versa.
2. L, a chartered accountant prepares and certifies projected financial
statements of his client Abacus Ltd. Abacus Ltd. forwarded the same to their
banks to secure some loans and bank, on that basis sanctioned a loan. Comment
2.57
with reference to the Chartered Accountants Act, 1949 and schedules thereto.
(May 17 old)
Certification of Projected Financial Forecast: Under Clause (3) of Part I of Second Schedule
to the Chartered Accountants Act, 1949, a chartered accountant in practice is deemed to be
guilty of professional misconduct, if he permits his name or the name of his firm to be used in
Further, SAE 3400 “The Examination of Prospective Financial Information”, provides that
the management is responsible for the preparation and presentation of the prospective
financial information, including the identification and disclosure of the sources of
information, the basis of forecasts and the underlying assumptions. The auditor may be
asked to examine and report on the prospective financial information to enhance its
credibility, whether it is intended for use by third parties or for internal purposes. Thus,
while making report on projection, the auditor need to mention that his responsibility is to
examine the evidence supporting the assumptions and other information in the prospective
financial information, his responsibility does not include verification of the accuracy of the
projections, therefore, he does not vouch for the accuracy of the same.
In the instant case, Mr. L, a chartered accountant, has prepared and certified a projected
financial forecast of his client Abacus Ltd. which was forwarded to the client‟s bank to secure
some loans and based on which the bank sanctioned a loan to the client is not in order.
Thus, Mr. L will be held guilty of misconduct in view of above.
3. Mr. 'E', a practicing Chartered Accountant, was requested by one of his client
to prepare a projection for next five years and also a report on the same. Mr. 'E'
after having prepared the same stated in his report „The sources of information,
the basis of forecasts and also the major assumptions made in arriving at the
forecasts. He also stated that he does not vouch for the accuracy of the forecasts.
(May 14 Old)
Certification of Financial Forecast: As per Clause (3) of Part I of Second Schedule to the
Chartered Accountants Act, 1949, a chartered accountant in practice is deemed to be guilty of
professional misconduct if he permits his name or the name of his firm to be used in
Accuracy does not refer to arithmetical accuracy. All forecasts are estimates based on certain
assumptions duly evaluated on a consideration of various relevant factors and cannot be
ascertained with accuracy. The Guidance Note on Accountants Report on Profit Forecasts
and/or Financial forecast considered the implications of this clause and made it clear that the
chartered accountant can participate in the preparation of profit or financial forecasts and
review them. But, first of all, he should clearly indicate in his report the sources of
information, the basis of forecasts and also the major assumptions made in arriving at the
forecasts and, secondly, he should not vouch for the accuracy of the forecasts.
In the instant case, Mr. E after having prepared the projections for next five years stated in
his report, “the sources of information, the basis of forecasts and also the major assumptions
made in arriving at the forecasts.” He also stated that he does not vouch for the accuracy of
the forecasts. Therefore there is no violation of the Chartered Accountants Act, 1949 and its
Regulations.
2.58
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Expresses his opinion on financial statements of any business or enterprise in
which he, his firm, or a partner in his firm has a substantial interest;
 A Chartered Accountant is deemed to be guilty of professional misconduct if he
expresses his opinion on the financial statements of any business or enterprise in
which he, his firm, or a partner in his firm has a substantial interest.
 A Chartered Accountant is prohibited from expressing an opinion in an enterprise of
which the member is either an owner or a partner.
 A Chartered Accountant is prohibited from expressing an opinion in an enterprise of
which a partner or relative of a member has substantial interest.
 Where the member or his partner or relative is a director or in the employment of an
officer or an employee of the company.
 A CA in employment of another CA holding certificate of practice cannot certify
financial statements of the employer concern.
 A CA should not accept auditorship of a college, if he is working as a part-time lecturer
in that college.
 Members are not permitted to write books of account of their client.
 Statutory auditor of a company cannot be its internal auditor
1. Mr. X, a practicing Chartered Accountant accepts appointment as an auditor
of a Company in which his relative has a substantial interest.
Even though it is possible to appoint a person who is having substantial interest in a
company to be its auditor previously, according to the amended Clause 4 of Part I of Second
Schedule to the Chartered Accountants Act, 1949, a Chartered Accountant is prohibited from
accepting appointment as an auditor of a company in which his relative has a substantial
interest.
Hence, Mr. X is hit by the above clause and accordingly he should not be appointed as the
auditor in which his relative has a substantial interest. Therefore X violated the above clause
and he is guilty of professional misconduct under this clause.
2. A firm of Chartered Accountants was appointed by a company to evaluate the
costs of the various products manufactured by it for its information system. One
of the partners of the firm was a Non-Executive Director of the company.
Clause (4) of Part I of the Second Schedule to Chartered Accountants Act, 1949, states that
expressing an opinion on financial statements of any business or enterprise in which he, his
firm or a partner in his firm has a substantial interest would constitute misconduct. Also, the
Council of the Institute of Chartered Accountants of India has stated that in cases where a
member of the Institute is a director of a company, or the firm in which the said member is a
partner, should not express any opinion on its financial statements. As per facts of the case,
the firm has been retained to evaluate the cost of products manufactured by it for its
information system. It is a part of management consultancy service of the firm and moreover
its partner was on the Board. Hence, the firm can perform this assignment and it will not
constitute misconduct. However, the firm while accepting the position as auditor in future
would have to consider whether it would be possible to act in independent manner and
express opinion on financial statements.
2.59
3. Mr. Shah, a Chartered Accountant certified the financial statements of a

company in which his wife is a Director holding substantial interest.
Clause (4) of Part I of Second Schedule to the Chartered Accountants Act, 1949 states that if
an auditor expresses his opinion on the financial statements of any business or enterprise in
which he, his firm or partner in his firm has a substantial interest, he is committing
professional misconduct. Further as per Council General Guidelines, 2008, a member of the
Institute shall not express his opinion on financial statements of any business or enterprise in
which one or more persons, who are his “relatives” within the meaning of AS 18 have, either
by themselves or in conjunction with such member, a substantial interest in the said business
or enterprise.
The Council also emphasizes that the aforesaid requirement of Clause (4) is equally
applicable while performing all types of attest functions by the members.
This is further a contravention of section 141(3)(f) of the Companies Act, 2013, which
requires that a person shall not be eligible for appointment as an auditor of a company whose
relative is a director or is in the employment of the company as a director or key managerial
personnel.
In the given case, Mr. Shah, Chartered Accountant, has certified the financial statements of a
company in which his wife is a director with substantial interest. Hence, this amount to
professional misconduct which attracts Clause (4) of Part I of Second Schedule to the
Chartered Accountants Act, 1949 and Mr. Shah shall have to vacate the office accordingly.
4. P, a Chartered Accountant in practice, accepts appointment as statutory
auditor for LMN Pvt. Ltd. Q, brother of P has substantial interest in LMN Pvt.
Ltd.
Accepting Appointment as an Auditor where Relative Holding Substantial Interest: As per
Clause (4) of Part I of Second Schedule, a CA in practice is deemed to be guilty of professional
misconduct if he expresses his opinion on financial statements of any business or enterprise
in which he, his firm or a partner in his firm has a substantial interest. As per Council
General Guidelines, 2008, the above restriction is also made applicable for relatives of the
members.
Further, as per Section 141(3)(f) of the Companies Act, 2013, a person shall not be eligible for
appointment as an auditor of a company whose relative is a director or is in the
employment of the company as a director or key managerial personnel.
In the instant case, since Q, a relative has a substantial interest in LMN Pvt. Ltd., P
cannot conduct the audit and needs to vacate the office. Thus, P will be guilty of misconduct
in terms of above clause.
5. AP & Co., a firm of Chartered Accountants, was appointed by D Ltd., to
evaluate the cost of a new product manufactured by it for their information
system and fixation of fair market price. Partner 'P' of the CA firm is a non-
executive director of the Company. Comment with reference to Chartered
Accountants Act, 1949 and Regulations there to. (May 18 Old)
Evaluation of Cost of Products: Clause (4) of Part I of the Second Schedule to Chartered
Accountants Act, 1949, states that expressing an opinion on financial statements of any
business or enterprise in which he, his firm or a partner in his firm has a substantial interest
would constitute misconduct.
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Also, the Council of the Institute of Chartered Accountants of India has stated that in cases
where a member of the Institute is a director of a company, or the firm in which the said
member is a partner, should not express any opinion on its financial statements.
As per facts of the case, the firm has been retained to evaluate the cost of products
manufactured by it for its information system. It is a part of management consultancy service
of the firm and moreover its partner was on the Board.
Hence, the firm can perform this assignment and it will not constitute misconduct.
However, the firm while accepting the position as auditor in future would have to consider
whether it would be possible to act in independent manner and express opinion on financial
statements.
6. A firm of Chartered Accountants was appointed by a company to evaluate the
costs of the various products manufactured by it for their operation system.
One of the partners of the firm of chartered accountants was a non-executive
director of the company. (Nov. 14 – Old)
Expression of Opinion on Financial Statements: Clause 4 of Part I of the Second Schedule to
Chartered Accountants Act, 1949, states that expressing an opinion on financial statements of
any business or any enterprise in which the auditor, his firm or a partner in his firm has a
substantial interest would constitute misconduct. Also, the Council of the Institute of
Chartered Accountants of India has stated that in cases where a member of the Institute is a
director of a company, or the firm in which the said member is a partner, should not express
any opinion on its financial statements.
As per facts of the case, the firm has been retained to evaluate the cost of products
manufactured by it for its information system. It is a part of management consultancy service
of the firm and moreover its partner was on the Board.
Hence, the firm can perform this assignment and it will not constitute misconduct.
However, the firm while accepting the position as auditor in future would have to consider
whether it would be possible to act in independent manner and express opinion on financial
statements.
CLAUSE - 5
Fails to disclose a material fact known to him which is not disclosed in a
financial statement, but disclosure of which is necessary in making such
financial statement not misleading where he is concerned with that financial
statement in a professional capacity;
 Where a Chartered Accountant fails to disclose a material fact known to him, in a
financial statement reported on by him, he will be deemed to be guilty of professional
misconduct.
 In other words, the Chartered Accountant is guilty if all the following conditions are
satisfied.
a. the fact must be a material fact
b. the fact must be known to the auditor
Case Laws:
1. Where a CA failed to report to the shareholders of a company about the non-
creation of a sinking fund in accordance with the Debenture Trust Deed – Held
guilty.
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2. Where a CA had not disclosed the fact that a large amount of loan have been given
out of the funds of an Employees Provident Fund to the Employer Company
in contravention of the Rules of the Provident Fund and had failed to report the same
– Held guilty.
1. A company was operating Superannuation-cum-Pension Fund for its
employees under a separate Trust. The same persons were in-charge of the
management of the company as well as the Trust. The auditor was also
common. The Trust had granted huge loans to the company in violation of the
provisions of the trust deed. Even the cheques in part payment of the loan
received from the company were not deposited for collection by the Trust.
Though the auditor had commented upon these irregularities in the confidential
report given to the trustees he gave a clean report on the annual accounts of the
Trust.
A Chartered Accountant in practice is deemed to be guilty of professional misconduct under
clause 5 of Part I of the Second Schedule if he "fails to disclose a material fact known to him
which is not disclosed in a financial statement but disclosure of which is necessary to make
the financial statement not misleading". In this case, the Chartered Accountant was aware of
the contraventions and irregularities committed by the Trust as these were referred
confidential report given by the Chartered Accountant to the trustees of the company.
However, he had given a clean report on the annual accounts without any qualification.
On similar facts it was held by the Supreme Court in Kishorilal Dutta vs. P. K. Mukherjee that
it was the duty of the Chartered Accountant to have disclosed the irregularities and
contraventions to the beneficiaries of the fund in the statement of accounts signed by him.
Accordingly, in the-present case also it has to be held that the Chartered Accountant is guilty
of professional misconduct.
2. Mr. Extraordinary, a practicing Chartered Accountant, had failed to report
regarding a material claim against the company of which he was aware and
which the management intentionally did not include in their financial
statements, as it would affect the price of their shares on the Stock Exchange.
As per Second Schedule to the Chartered Accountant Act, 1949 a chartered accountant in
practice shall be deemed to be guilty of professional misconduct, if he fails to disclose a
material fact known to him which is not disclosed in financial statements but disclosure of
which is necessary to make the financial statements not misleading. Mr. Extraordinary had
failed to report a material claim against the company, which the management did not
disclose intentionally in the financial statements as it would affect their share prices on the
stock exchange. Since non-disclosure of material claims against the company about which
Mr. Extraordinary is aware would make the financial statements misleading, he would be
held guilty of professional misconduct under Part I of the Second Schedule to Chartered
3. Mr. Joe, a Chartered Accountant during the course of audit of M/s XYZ Ltd.
came to know that the company has taken a loan of 10 lakhs from Employees
Provident Fund. The said loan was not reflected in the books of account.
However, the auditor ignored this information in his report.
As per Clause (5) of Part I of Second Schedule to the Chartered Accountants Act, 1949, a
chartered Accountant in practice will be held liable for misconduct if he fails to disclose a
material fact known to him, which is not disclosed in the financial statements but disclosure
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of which is necessary to make the financial statements not misleading. In this case, Mr. Joe
has come across information that a loan of 10 lakhs has been taken by the company from
Employees Provident Fund. This is contravention of Rules and the said loan has not been
reflected in the books of accounts. Further, this material fact has also to be disclosed in the
financial statements. The very fact that Mr. Joe has failed to disclose this fact in his report, he
is attracted by the provisions of professional misconduct under Clause (5) of Part I of Second
4. A practicing Chartered Accountant was appointed to represent a company
before the tax authorities. He submitted on behalf of his clients certain
information and explanations to the authorities, which were found to be false
and misleading.
As per Clause (5) of Part I of Second Schedule to the Chartered Accountant Act, 1949, if a
member in practice fails to disclose a material fact known to him which is not disclosed in a
financial statement, but disclosure of which is necessary to make the financial statement not
misleading, where he is concerned with that financial statement in a professional capacity, he
will be held guilty under Clause (5). As per Clause (6) of Part I of Second Schedule if he fails
to report a material misstatement known to him to appear in a financial statement with
which he is concerned in a professional capacity, he will be held guilty under Clause (6).
In given case, the Chartered Accountant had submitted the statements before the taxation
authorities. These statements are based on the data provided by the management of the
company. Although the statements prepared were based on incorrect facts and misleading,
the Chartered Accountant had only submitted them acting on the instructions of his client as
his authorized representative.
Hence the Chartered Accountant would not be held liable for professional misconduct.
4. D, a Chartered Accountant in practice was appointed by Realty Limited to
represent its cases before GST Authorities under a duly executed power of
representation. In the course of proceedings he submitted certain statements-
written as well as oral-which later found to be false and materially misleading.
Comment this in the light of Professional Code. (Nov. 18)
Submitting Information as Authorized Representative: As per Clause (5) of Part I of Second
Schedule to the Chartered Accountant Act, 1949, if a member in practice fails to disclose a
material fact known to him which is not disclosed in a financial statement, but disclosure of
which is necessary to make the financial statement not misleading, where he is concerned
with that financial statement in a professional capacity, he will be held guilty under Clause
(5). As per Clause (6) of Part I of Second Schedule if he fails to report a material
misstatement known to him to appear in a financial statement with which he is concerned in
a professional capacity, he will be held guilty under Clause (6).
In given case, the Chartered Accountant had submitted the statements before the GST
authorities. These statements are based on the data provided by the management of the
company. Although the statements prepared were based on incorrect facts and misleading,
the Chartered Accountant had only submitted them acting on the instructions of his client as
his authorized representative.
Hence Mr. D would not be held liable for professional misconduct.
5. In the course of his audit assignment in M/s Bailey Ltd., CA Soft came to
know that the company, due to financial crunch and unable to meet employees
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salary, has taken a loan of Rs.50 lacs from Employees Gratuity Fund. The said
loan was not reflected in the books of account of the company and the auditor
ignored this transaction in his report.
Comment with reference to the Chartered Accountants Act, 1949 and
Regulations there to. (May 18 Old)
Failure to Disclose Material Facts: As per Clause (5) of Part I of Second Schedule to the
Chartered Accountants Act, 1949, a chartered Accountant in practice will be held liable for
misconduct if he fails to disclose a material fact known to him, which is not disclosed in the
financial statements but disclosure of which is necessary to make the financial statements not
misleading.
In this case, CA. Soft has come across information that a loan of `50 lakhs has been taken by
the company from Gratuity Fund. This is contravention of Rules and the said loan has not
been reflected in the books of account.
Further, this material fact has also to be disclosed in the financial statements. The very fact
that CA. Soft has failed to disclose this fact in his report, he would be guilty for professional
misconduct under Clause (5) of Part I of Second Schedule to the Chartered Accountants Act,
1949.
CLAUSE - 6
"Fails to report a material misstatement known to him to appear in a financial
statement with which he is concerned in a professional capacity”.
 Where a member fails to report a material misstatement known to him in the financial
statements, he will be deemed to be guilty of professional misconduct.
 In order to deem a member to be guilty of professional misconduct, the following two
conditions must be satisfied.
a. The misstatement should be material in nature and
b. It should be known to the member concerned
Case Laws:
A Chartered Accountant failed to disclose a misstatement or under statement by the company
in the balance sheet of its liabilities, which amount to a suppression of the correct state of
affairs. He also failed to report a material misstatement by the company in not giving the
previous year‟s figures in the corresponding column of the balance sheet.
1. Mr. X, partner of X & Co., Chartered Accountants, has compiled and signed
the Balance Sheet of False Ltd., for submission for the bankers of the said
company. Mr. X has also compiled and signed at the request of the company
another Balance Sheet inflating the value of assets by 20% for submission to a
term lending institution. Both the Balance Sheets were not in conformity with
the books of accounts maintained by the company as they were not up-to-date.
Comment on Mr. X‟s liability.
Mr. X would be held guilty under clauses (5) and (6) under Part I of the Second Schedule to
the Chartered Accountants, 1949 as Mr. X had compiled two different Balance Sheets for the
same period without reference to the actual books of accounts but on instructions of the
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client. As per Clause (5) he has failed to disclose material fact known to him and further as
per Clause (6) he has also failed to report a material misstatement known to him. Both the
balance sheets were incorrect and false as the books and records were not up to date. Thus
Mr. X is guilty of professional misconduct.
2. Alok Nanda is the auditor of a partnership firm consisting of X and Y as
partners. In his audit report to the firm, he did not refer to certain materially
irregular transactions found in the books of the firm for the reason that X
the senior partner had approved all such transactions.
In this case the auditor has carried out his work with due care and has been able to detect
some materially irregular transactions passed through the books of account on the approval
of the senior partner. However, he has not disclosed the same in his report to the firm as
these transactions have been approved by the senior partner. It has to be noted that the
auditor owes his duty to the partnership firm as a separate entity and not to the individual
partners.
As the transactions passed through the books of accounts are materially irregular, their non-
disclosure makes the financial statements misleading. Clauses 5 and 6 of Part II of the
Second Schedule to the Chartered Accountants Act, 1949, state that a chartered accountant
would be deemed to be guilty of professional misconduct in case he fails to disclose a material
fact known to him which is not disclosed in the financial statements but disclosure of which is
necessary to make the financial statement not misleading or fails to report on a material
misstatement known to him to appear in a financial statement with which he is concerned in
a professional capacity. Therefore, as per both these clauses, the auditor would be deemed to
be guilty of professional misconduct.
Further, the auditor can also be held liable for negligence under the common law and civil
proceedings can be instituted against him as he has acted in a negligent manner. It is
because the auditor owes his duty to the firm in his professional capacity and not to an
individual partner i.e. Mr. X. The purpose of the audit of the firm's accounts is to safeguard
the interests of all partners concerned. If the auditor overlooks some irregularities on the
ground that one of the partners has approved of them, he does not discharge his duties to
other partners. In this case it appears that nothing is known to Mr. Y and if any loss or
damage occurs, Mr. Y can proceed against the auditor and claim damages from him.
Therefore, Alok Nanda is liable both under the common law and under the provisions of the
Chartered Accountants Act, 1949, and Regulations, 1988.
CLAUSE - 7
Does not exercise due diligence, or is grossly negligent in the conduct of his
professional duties;
 Where the Chartered Accountant does not exercise due diligence or is grossly
negligent in performing his professional duties, he will be deemed to be guilty of
professional misconduct under this clause.
 The word negligence covers a wide field and includes in its range from fraud to
minor negligence.
 While deciding whether the member is grossly negligent in performing his duties, it is
necessary to judge whether the member has honestly and reasonably discharged
his duties.
 It is the duty of the auditor to carry out the work with reasonable skill and care. What
is reasonable skill, care and caution depends on the circumstances of each case.
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However, an auditor is not bound to be a detective, but he should be like a watchdog.

If there is anything calculated to excite suspicion he should probe it to the bottom;
Case Laws:
1. Where a Chartered Accountant, in a bank audit reported to the shareholders that he had
not verified the cash on hand and signed the balance sheet in anticipation of the receipt
of confirmation letters from the banks in respect of the cash said to be lying with them and
failed to report on the weakness of the bank‟s financial position. Held, that he was guilty of
under clause 7. Verification of cash was an essential duty of an auditor, which he failed to
discharge and in signing the report in anticipation of receiving the confirmation letters from
bank, he had failed to perform his duties with the requisite skill and care.
2. Where a Chartered Accountant certified the circulation of a newspaper based on the
statistic record but stated in his certificate that he had given it after examination of the books
of account without verifying the books of account and the statistical records agreed and also
without taking into account the return of copies unsold.
3. Where a Chartered Accountant, appointed as auditor of the Madras branch of a limited
company in Bombay was charged with failure to report to the Bombay office that some
entries in the bank pass book has not been passed through the cash book of the branch. Held
he was guilty of gross negligence. The High Court observed that a small fee paid to the
respondent should not come in the way of his doing duty without fear or favour, although it
involved unpleasant consequence namely, he might not be appointed again.
4. Where a Chartered Accountant had placed implicit reliance on his paid assistant who took
absolutely no step whatsoever to check the cash balances facilitating and resulting, in serious
defalcations. Held he was guilty under clauses 5, 7, 8 and 9.
5. Where a Chartered Accountant gave clean reports on the balance sheets whereas the
reports on the special audit conducted subsequently revealed certain irregularities which
amounted to failure to examine the pass book and to verify the cash balance. Held he was
guilty under clause 7.
6. Where a Chartered Accountant had not completed his work relating to the audit of the
accounts a company and had not submitted his audit report in due time to enable the
company to comply with the statutory requirement in this regard,. Held, he was guilty of
professional misconduct under clause 7.
7. A Chartered Accountant, with out examination of stock register of the firm and without
examining other relevant matters connected with the certificate, issued wrong consumption
certificate in respect of raw material and components on the basis of which, license of higher
value, for which the unit was not entitled, was issued by the Deputy controller of imports and
exports. Held the Chartered Accountant was guilty of gross negligence under the clause 7.
8. A Chartered Accountant adopted arbitrary valuation of closing stock and no verification at
all was done by him. Further he accepted the capitalization of a large sum of expenditure
which was in the nature of revenue. He had merely adopted an adhoc basis in deciding upon
capitalization of expenditure and failed to apply his mind and bring to bear on the subject the
due diligence and care expected of a member of the profession. Held, the Chartered
Accountant was guilty of gross negligence in the performance of his duties.
9. Where a Chartered Accountant issues two different certificates o circulation of a daily for
one and the same period showing different figures in respect of the number of copies printed
and circulated. Held, he was guilty under clauses 7 and 8.
10. A Chartered Accountant had failed to detect a fraud committed by the accountant of a
canteen which could have been detected if he had checked the castings of the cash books and
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also checked the contra entries of the bank and cash columns of the cash books. Held, he was
guilty of professional misconduct under clauses 7, 8 and 9.
1. A Chartered Accountant sends his report by Value Paid Postage (V.P.P.) to
cover the audit fee payable without signing the report.
Clause 7 of Part I of the Second Schedule to the Chartered Accountants Act, 1949, states that
a Chartered Accountant in practice shall be deemed to be guilty of professional misconduct,
"if he is grossly negligent in the conduct of his professional duties." This implies, whether or
not the accountant has honestly and reasonably discharged his duties. Professional
misconduct on the part of a person practicing one of the technical professions, cannot fairly
or reasonably be found merely on a finding of a bare non-performance of a duty or some
default in performing it. The charge is not one of inefficiency out of misconduct and in an
allegation of misconduct imputation of a certain mental condition is always involved. The test
must always be whether in addition to a failure to do the duty there has been a failure to act
honestly and Reasonably." (S. GANESAN vs. A..K.JOSCEL YNE) Keeping this in view it can
be said in the instant case that the Chartered Accountant while sending the report by
V.P.P. had only failed to perform his duty of signing the report. Mere non-signing cannot be
imputed for non-performance of a duty or some default in performing it. However, as the
auditor has sent the report by V.P.P. so as to cover his audit fees payable the intention of the
auditor as imputed from his action and mental condition is to recover the fees. Under the
circumstances, it seems that the auditor has failed to act honestly and reasonable and
therefore, he has committed professional misconduct.
2. CA. ZZ who conducted ABC audit of a marathi daily „New Era‟ certified the
circulation figures based on Management Information System Report (M.I.S
Report) without examining the books of Account.
According to Clause (7) of Part I of Second Schedule to the Chartered Accountants Act, 1949,
a Chartered Accountant in practice is deemed to be guilty of professional misconduct if he
“does not exercise due diligence or is grossly negligent in the conduct of his professional
duties”.
In the instant case, CA. ZZ did not exercise due diligence and is grossly negligent in the
conduct of his professional duties since he certified the circulation figures without examining
the books of accounts.
To ascertain the number of paid copies verification of remittances from the agents, credit
allowed to the agents for unsold copies returned, examination of books of account is
essential.
Further certification of circulation figures based on statistical information without cross
verification with financial records amounts to gross negligence and failure to exercise due
diligence.
Hence, CA. ZZ is guilty of professional misconduct as per Clause (7) of Part I of Second
Schedule of Chartered Accountants Act, 1949.
CLAUSE - 8
"Fails to obtain sufficient information which is necessary for expression of an
opinion or its exceptions are sufficiently material to negate the expression of an
opinion”.
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 A CA should express his opinion about the truth and or fairness of financial statements
only after obtaining requisite information and explanation.
 Where the evidence obtained by him during the course of audit is inadequate to form
an opinion, he should clearly express disclaimer of opinion.
 For example, if the auditor is unable to obtain evidence of the existence/valuation of
the investments which constitute the only asset of a company, he should not say that
“Subject to the verification of the existence and value of the investments, the balance
sheet shows a true and fair view. In other words, in such a case, he has to specifically
state that “As we have been unable to verify the existence and value of the investments
of the company, we are unable to state whether the balance sheet shows a true and fair
view”
 In other words, where a CA issues a qualified opinion in a situation where he is
expected to issue a disclaimer, he will be deemed to be guilty of professional
misconduct.
1. Mr. Jain, a Chartered Accountant certified the circulation of “Good Luck” a
weekly magazine without examination of financial records and other required
documents.
Failure to Obtain Information: Clause (8) of Part I of Second Schedule to Chartered
Accountants Act, 1949 states that if a Chartered Accountant in practice fails to obtain
sufficient information to warrant the expression of an opinion or his exceptions are sufficient
material to negate the expression of an opinion, the chartered accountant shall be deemed to
be guilty of a professional misconduct. Mr. Jain, a Chartered Accountant, certified the
circulation figures of Good Luck, a weekly magazine without examination of financial records
and other required documents. The chartered accountant should not express his opinion
before obtaining the required data and information. As an auditor, Mr. Jain ought to have
verified the basic records such as print order, printer‟s bill, number of copies sold and paid
for, number of copies returned unsold to ensure the correctness of circulation figures. Thus
in the present case, Mr. Jain is held guilty of professional misconduct.
2. Mr. K, a Chartered Accountant certified the circulation of a weekly magazine
without examining the records and relevant documents.
Clause (8) of Part I of Second Schedule to the Chartered Accountants Act, 1949 states that if a
Chartered Accountant in practice fails to obtain sufficient information to warrant the
expression of an opinion or his exceptions are sufficient material to negate the expression of
an opinion, the chartered accountant shall be deemed to be guilty of a professional
misconduct.
Mr. K, a Chartered Accountant, certified the circulation of a weekly magazine without
examination of records and other relevant documents. The chartered accountant should not
express his opinion before obtaining the required data and information. As an auditor, Mr. K
ought to have verified the basic records such as print order, printer‟s bill, number of copies
sold and paid for, number of copies returned unsold to ensure the correctness of circulation
figures. Thus, in the present case, Mr. K will be held guilty of professional misconduct under
Clause (8) of Part I of Second Schedule to the Chartered Accountants Act, 1949.
3. Mr. A, a Chartered Accountant was the auditor of 'A Limited'. During the
financial year 2014-15, the investment appeared in the Balance Sheet of the
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company of 10 lakhs and was the same amount as in the last year. Later on, it
was found that the company's investments were only 25,000, but the value of
investments was inflated for the purpose of obtaining higher amount of Bank
loan.
The primary duty of physical verification and valuation of investments is of the management.
However, the auditor‟s duty is also to verify the physical existence and valuation of
investments placed, at least on the last day of the accounting year. The auditor should verify
the documentary evidence for the cost/value and physical existence of the investments at the
end of the year. He should not blindly rely upon the Management‟s representation.
In the instant case, such non-verification happened for two years. It also appears that
auditors failed to confirm the value of investments from any proper source. In case auditor
has simply relied on the management‟s representation, the auditor has failed to perform his
duty.
Grossly Negligent in Conduct of Duties: As per Part I of Second Schedule to the Chartered
Accountants Act, 1949, a Chartered Accountant in practice shall be deemed to to be guilty of
professional misconduct, if he, certifies or submits in his name or in the name of his firm, a
report of an examination of financial statements unless the examination of such statements
and the related records has been made by him or by a partner or an employee in his firm or
by another chartered accountant in practice, under Clause (2); does not exercise due
diligence, or is grossly negligent in the conduct of his professional duties, under Clause (7); or
fails to obtain sufficient information which is necessary for expression of an opinion or its
exceptions are sufficiently material to negate the expression of an opinion, under Clause (8).
Accordingly, Mr. A, will be held liable for professional misconduct under Clauses (2), (7) and
(8) of Part I of the Second Schedule to the Chartered Accountants Act, 1949.
4. Mr. X, a practicing Chartered Accountant, issued a circulation certificate for a
periodical on the basis of outward memos, which was later found to be false.
As per Clause (8) of Part I of Second Schedule to the Chartered Accountants Act, 1949, a
Chartered Accountant in practice, will be deemed to be guilty of professional misconduct if he
fails to obtain sufficient information which is necessary for expression of an opinion or its
exceptions are sufficiently material to negate the expression of an opinion.
This indicates a Chartered Accountant must determine the extent of information, which,
should be obtained by him before he expresses an opinion on the financial statements.
In the present case, Mr. X certifies the circulation based on outward memos, without going
into the most elementary details of how the circulation of a periodical was maintained, i.e.
not verifying the financial records, bank statements, collections for the periodicals, payment
of the printer‟s bills etc. Hence, he is guilty of professional misconduct as per Clause (8) of
Part I of Second Schedule to the Chartered Accountants Act, 1949.
CLAUSE - 9
"Falls to invite attention to any material departure from the generally accepted
procedure of audit applicable to the circumstances":
While carrying out an independent audit, it is obligatory on the part of the auditors to follow
generally accepted procedures of audit applicable in the circumstances. If, a CA fails to
follow such procedures, it is his duty to report the same and he should draw attention to the
material departure from such procedures. He should also indicate the reasons for failure to
perform audit as per generally accepted procedures and standards.
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The auditor can have knowledge of the generally accepted procedures of audit from the
pronouncements of the Institute of Chartered Accountants of India.
CLAUSE - 10
Fails to keep moneys of his client other than fees or remuneration or money
meant to be expended in a separate banking account or to use such moneys for
purposes for which they are intended within a reasonable time.
While performing his duties, the member may be entrusted with moneys belonging to his
client. If he receives the moneys from his client, it would be his duty to deposit them in a
separate bank account and to utilize such funds only in accordance with the instructions of
the client or for the purposes intended by the client.
The following amounts received were excluded from the above clause:
a. An advance received against services to be rendered
b. Moneys received and intended to be spent within a reasonably short time need not be
put in a separate bank account.
The following amounts are required to be put in a separate bank account
a. Moneys received and are not intended to be spent within a reasonably short time
b. Moneys received by a Chartered Accountant, in his capacity as trustee, executor,
liquidator etc.
Case Laws:
A Chartered Accountant was found guilty of not keeping the client‟s money in a separate
account and not using it for the purpose for which it was given.
1. M/s XYZ a firm of Chartered Accountants received 2 lakhs in January, 2015
on behalf of one of their clients, who has gone abroad and deposited the amount
in their Bank account, so that they can return the money to the client in July,
2015, when he is due to return to India.
Clause (10) of Part I of Second Schedule states that a Chartered Accountant shall be deemed
to be guilty of professional misconduct if “he fails to keep money of his clients in separate
banking account or to use such money for the purpose for which they are intended”.
XYZ received the money in January, 2015 which is to be paid only in July 2015; hence it
should be deposited in a separate bank account. Since in this case XYZ have failed to keep the
sum of 2 lakhs received on behalf of their client in a separate Bank Account it amounts to
professional misconduct under Clause (10) of Part I of Second Schedule.
2. A charitable institution entrusted 10 lakhs with its auditors M/s Ram and Co.,
a Chartered Accountant firm, to invest in a specified securities. The auditors
pending investment of the money, deposited it in their Savings bank account
and no investment was made in the next three months.
If a Chartered Accountant in practice fails to keep moneys of his clients in a separate bank
account or fails to use such moneys for purposes for which they are intended then his action
would amount to professional misconduct under Clause (10) of Part I of Second Schedule to
the Chartered Accountants Act, 1949. In the course of his engagement as a professional
accountant, a member may be entrusted with moneys belonging to his client. If he should
receive such funds, it would be his duty to deposit them in a separate banking account, and to
utilise such funds only in accordance with the instructions of the client or for the purposes
intended by the client. In the given case by depositing the client‟s money by M/s Ram and
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Co., a firm of Chartered Accountants, in their own savings bank account, the auditors have
committed a professional misconduct. Hence in the given case, M/s Ram & Co. will be held
guilty of professional misconduct.
3. Mr. Z, a practicing Chartered Accountant, received a sum of ` 1 lac on 1.9.2014
from a Client who intends to leave abroad for a period of a year, with a request
that his advance tax liabilities to be paid over the three instalments. On 15 th
September, 2014, 15th December, 2014 and 15th March, 2015. After remitting
the 1st instalment of advance tax on 15.9.2014, Z did not keep the Balance
Money in a separate Bank account and he is of the opinion he will remit the
money within reasonable time as per payment schedule of Advance tax.
As per Clause (10) of Part I of Second Schedule to the Chartered Accountant Act, 1949, a
Chartered Accountant in practice will be deemed to be guilty of professional misconduct if he
fails to keep moneys of his client other than the fees or remuneration or money meant to be
expended in a separate banking account or to use such moneys for purposes for which they
are intended within a reasonable time.
The term reasonable time would depend upon the circumstances of the case. Moneys which
are intended to be spent within a reasonably short time need not be put in a separate bank
account.
Thus, in the instant case, Mr. Z should have kept the balance money af ter remitting the first
instalment of advance tax into a separate bank account. Hence, he is guilty of professional
misconduct as per Clause (10) of Part I of Second Schedule to the Chartered Accountants Act,
1949.
4. A film artist who was going abroad for long shooting, deposited a sum of
Rs.20 lakhs with his tax consultant Mr. G, a practicing Chartered Accountant for
payment of Goods and Service Tax monthly when they were due, Mr. G duly
remitted all but one installments. He utilized the amount of installment which
he did not pay, to remit his own advance income tax. However, while filing
return of GST of the film artist, he duly remitted on her behalf the tax payable
with interest due for late payment of GST out of money lying with him. He also
bore for himself the interest due to short fall in remittance of tax of his client.
Comment on the above in the light of Code of Conduct. (May 18 New)
Money of Clients to be Deposited in Separate Bank Account: Clause (10) of Part I of Second
Schedule states that a Chartered Accountant shall be deemed to be guilty of professional
misconduct if “he fails to keep money of his clients in separate banking account or to use such
money for the purpose for which they are intended”.
In the instant case, CA. G received sum of rupees Rs. 20 lakh from his client who is a film
artist for monthly installment payment of Goods and Service Tax. This money should have
been deposited in a separate bank account. CA. G utilized the amount of last installment for
his own advance tax payment, though he paid the same along with interest and bore the
interest due to short fall in remittance of tax of his client.
As per fact of the case CA. G has failed to keep the sum of rupees 20 lakh received on behalf
of his client in a separate Bank Account and utilized the same for his own advance tax
payment amounts to professional misconduct under Clause (10) of Part I of Second
Schedule.
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5. M/s. ABC, a firm of Chartered Accountants received Rs.2 lakhs in March,

2014 from a client to pay the Advance Tax. However, the firm has used that
money for its own purpose and later on adjusted the same with the outstanding
fee payable. (Nov. 14 – Old)
Money of clients to be deposited in separate bank account: Clause 10 of Part I of Second
Schedule states that a Chartered Accountant shall be deemed to be guilty of professional
misconduct if “he fails to keep money of his clients in separate banking account or to use such
money for the purpose for which they are intended”.
M/s. ABC received the money in March, 2014 for payment of the advance tax; hence it should
be deposited in a separate bank account. Since in this case M/s. ABC have failed to keep the
sum of 2 lakhs received on behalf of their client in a separate Bank Account, it amounts to
professional misconduct under clause 10 of part I of Second Schedule.
PART II
CLAUSE - 1
Contravenes any of the provisions of this Act or the regulations made there
under or any guidelines issued by the Council
1. Rehman Potnis, a Chartered Accountant in practice, took a loan of Rs.20,000
from a firm in which his articled clerk and his father were both interested.
Clause (1) of Part II of the Second Schedule to the Chartered Accountants Act, 1949 states
that a member of the Institute whether in practice or not shall be deemed to be guilty of
professional misconduct if he contravenes any provisions of this Act or the Regulations made
there under. Regulation 47 of the Chartered Accountants Regulations 1988 prohibits a
member from accepting any premiums or loan or any deposit in any form for engaging an
articled clerk directly or indirectly. Therefore, Rehman Potnis shall be guilty of professional
misconduct under this clause.
2. M/s. ABC, a firm of Chartered Accountants has taken a loan for acquiring
computers, from a company whose Managing Directors‟ son is an Articled
Trainee with A, a partner of M/s ABC.
As per Clause (1) of Part II of Second Schedule to the Chartered Accountants Act, 1949, a
chartered accountant is deemed to be guilty of professional misconduct if he contravenes any
of the provisions of Chartered Accountants Act, 1949 or Regulations made thereunder.
Regulation 47 of the Chartered Accountant‟s Regulations, 1988, prohibits a member from
accepting any premiums or loans or any deposit in any form from an articled clerk directly or
indirectly. However, M/s ABC has taken loan from a company whose Managing Director
happens to be father of articled clerk with Mr. A, a partner of M/s ABC. In this case, the
articled trainee has no direct interest in that company. There has been a case wherein a
chartered accountant was held guilty of professional misconduct because he took a loan from
a firm in which the articled clerk and his father were both interested. But, in this case as per
the facts, the articled trainee has no direct interest in the company. However, if relationship,
direct or indirect, can be established in view of relationship of articled trainee with MD of the
company, Mr. A of M/s ABC would be held liable for professional misconduct. Thus, M/s
ABC would be guilty of professional misconduct under this clause if it is proved that the loan
was related to the engagement of the articled clerk.
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3. A Chartered Accountant in practice had confirmed in the application made by

his articled clerk to the Council for permission to study that the normal working
hours of his office were 11 a.m. to 6 p.m. and the hours during which the articled
clerk was required to attend college classes were 7 a.m. to 9.30 a.m. On inquiry
from Principal of College, it was ascertained that the articled clerk used to
attend classes from 10 a.m. to 1.55 p.m. The Chartered Accountant pleaded
ignorance about the articled clerk attending the college classes during office
hours. Will the Chartered Accountant be held guilty of professional
misconduct?
As per Clause (1) of Part II of Second Schedule to the Chartered Accountants Act, 1949, a
member shall be held guilty of professional misconduct if he contravenes any provision of
the Act or the regulations made thereunder. The chartered accountant, as per Regulations
also, is expected to impart proper practical training. In the instant case, the articled clerk
must have not been attending office on a regular basis and the explanation of the
Chartered Accountant cannot be accepted particularly in view of the fact that the chartered
accountant did not obtain certificate from the Principal to confirm the timings. It is also quite
likely that the articled clerk would be availing leave quite often and coming late to the office.
Under the circumstances, the Chartered Accountant is guilty of professional misconduct in
regard to the discharge of his professional duties.
4. CA. X is a chartered accountant in practice. He has an articled trainee H. X
has informed H that since his practice and receipt of fees is seasonal, the
stipend would not be paid in the months of April to December, but would be
paid from January to March and the shortfall for the earlier 9 months will be
made good in these 3 months alongwith interest @ 5% p.a. Comment with
reference to the Chartered Accountant Act, 1949. (Nov. 17 Old)
Contravening Provisions of the Act: A member of the Institute, whether in practice or not,
shall be deemed to be guilty of professional misconduct under Clause (1) of Part II of the
Second Schedule to the Chartered Accountants Act, 1949, if he contravenes any of the
provisions of this Act or the regulations made there under or any guidelines issued by the
Council.
In the given case, CA. X has failed to make the payments of stipend to articled assistant every
month in accordance with Regulation 48. The fact that the articled assistant will be
compensated with extra sum in the form of interest on late payment is not relevant and the
plea that cycle of professional receipts from clients is seasonal is not acceptable.
Therefore, CA. X is guilty of professional misconduct under Clause (1) of Part II of the
Second Schedule to the Chartered Accountants Act, 1949 as he has contravened Regulation
48 by not making the payment every month.
5. M/s. XYZ, a firm of Chartered Accountants has taken a loan for acquiring a
home from a company whose Managing Director‟s son is an Articled Assistant
with A, a partner of M/s. XYZ. The Articled Assistant had no direct interest in
the Company and the loan was not related to his engagement. (Nov. 14 – Old)
Loan from a Company: As per Clause (1) of Part II of Second Schedule to the Chartered
Accountants Act, 1949, a chartered accountant is deemed to be guilty of professional
misconduct if he contravenes any of the provisions of Chartered Accountants Act,
1949 or Regulations made there under. Regulation 47 of the Chartered Accountant‟s
Regulations, 1988, prohibits a member from accepting any premiums or loans or any deposit
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in any form from an articled clerk directly or indirectly. However, M/s XYZ has taken loan
from a company whose Managing Director happens to be father of articled clerk with Mr. A, a
partner of M/s XYZ.
In this case, the articled trainee has no direct interest in that company. There has been a case
wherein a chartered accountant was held guilty of professional misconduct because he took a
loan from a firm in which the articled clerk and his father were both interested. But, in this
case as per the facts, the articled trainee has no direct interest in the company. However, if
relationship, direct or indirect, can be established in view of relationship of articled trainee
with MD of the company, Mr. A of M/s XYZ would be held liable for professional misconduct.
Thus, M/s XYZ would be guilty of professional misconduct under this clause if it is proved
that the loan was related to the engagement of the articled clerk.
CLAUSE - 2
being an employee of any company, firm or person, discloses confidential
Information acquired in the course of his employment except as and when
required by any law for the time being in force or except as permitted by the
employer;
CLAUSE - 3
Includes in any information, statement, return or form to be submitted to the
Institute, Council or any of its Committees, Director (Discipline), Board of
Discipline. Disciplinary Committee, Quality Review Board or the Appellate
Authority any particulars knowing them to be false;
Case Law
1. Where a Chartered Accountant in his application for empanelment as auditor of
branches of public sector banks submitted to the Institute included the name of another
member as one of partners of his firm though in fact the said member was not a partner
of the said firm on the date of the said application. Held that, the Chartered Accountant
had contravened clause (3) of Part III of the Second Schedule.
2. Where a Chartered Accountant had submitted an application of his firm for
empanelment as auditor of branches of Public Sector banks and Statutory Central
Audit and Branch Audit of Regional Rural Banks mentioning under the head "Details
of disciplinary proceedings pending against any partner / proprietor" as "NIL",
whereas a prima facie case against the member existed. Held that the Chartered
Accountant has violated the provisions of clause (3) of Part III of the Second Schedule.
1. CA P and CA Q are running a firm of Chartered Accountants in the name of
M/s. PQ & Co. On 21.06.2015 they included the name of CA R a practicing CA,
without his knowledge, as a partner while submitting an application for
empanelment as auditors for public sector banks branches to the institute.
Whether CA P and CA Q are professionally liable for misconduct? (May 15 Old)
Submitting Wrong Information to the Institute: As per Clause (3) of Part II of the Second
Schedule to the Chartered Accountants Act, 1949, a member of the Institute, whether in
practice or not, shall be deemed to be guilty of professional misconduct if he includes in any
information, statement, return or form to be submitted to the Institute, Council or any of its
committees, Director (Discipline), Board of Discipline, Disciplinary Committee, Quality
Review Board or the Appellate Authority any particulars knowing them to be false.
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In the instant case, CA. P and CA. Q, partners of M/s PQ & Co., included the name of CA. R,
another Chartered Accountant in practice, as partner in their firm, without his knowledge, in
their application for empanelment as auditor of branches of Public Sector Banks submitted to
the Institute. However, such a member was not a partner of the said firm as on the date of
application submitted. Here, CA. P and CA. Q have submitted wrong information to the
Institute.
Therefore, CA. P and CA. Q, both, would be held guilty of professional misconduct under
Clause (3) of Part II of the Second Schedule to the Chartered Accountants Act, 1949.
CLAUSE - 4
Defalcates or embezzles money received in his professional capacity.
Defalcation and embezzlement of moneys received in professional capacity amounts to fraud
and such member will be deemed to be guilty of professional misconduct under this clause.
Part III. Other misconduct in relation to members of the Institute generally
A member of the Institute, whether in practice or not, shall be deemed to be
guilty of other misconduct, if he is held guilty by any civil or criminal court for
an offence which is punishable with imprisonment for a term exceeding six
months.
Imprisonment awarded for a term exceeding six months in any civil/criminal matter treated
as a major offence under 'other misconduct' is included in this Schedule.
Ceiling on the Fees - To ensure that the professional independence of a member in fulltime or
part-time practice does not appear to be as far as possible, take care to see that the
professional fees for audit and other services received by the firm in which he is a partner, by
him and his partners individually and by firm or firms in which he or his partner are partners
from one or more clients or companies under the same management does not exceed 40% of
the gross annual fees of the firm, firms and partners referred to above. 'Companies under the
same management' here would refer to the definition of this expression as provided in
Section 370(1-B) of the Companies Act, 1956.
Provided that no such ceiling on the gross annual professional fees of a member would be
applicable in the case of audit of government companies, public undertakings nationalised
banks.
Important Notification
1. He, on behalf of firm of Chartered Accountants in which he is partner, accepts or
carries out any audit work involving receipt of audit fees of an amount less than as
mentioned below:
(With at least one partner holding C.P. for 5 years or more)
Practicing firm having 5 Practicing firm having
or more partners but less 10 or more partners
than 10 partners
(i) In cities with Rs. 6000/- p.a. Rs. 12000/- p.a.

population
of 3 million and above (as
per the last census)
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(ii) In cities/towns having Rs. 3500/- Rs. 8000/- p.a.

population of less than 3
million (as per the last
census)
Provided that such restrictions shall not apply in respect of the following:
(i) Audit of Accounts of Charitable Institution, Clubs, Provident Funds, etc., where the
appointment is honorary, i.e. without any fees.
(ii) Statutory audit of branches of banks including regional rural banks;
(iii) Audit of newly formed concerns relating to two accounting years from the date of
commencement of their operation;
(iv) Certification or audit under Income-tax Act or other attestation work carried out by
the Statutory Auditor; and
(v) Sales Tax Audit and VAT Audit.
1. M/s ASKS, a firm of Chartered Accountants, having three partners accepts

an audit assignment of a private limited company for a fee of Rs.4,000 only.
Comment. (Nov. 15 Old)
Minimum Audit Fee: Prescribed minimum audit fee is recommendatory, not mandatory in
nature. Therefore, acceptance of audit assignment by M/s ASKS, a firm of Chartered
Accountants having 3 partners, of a private limited company for audit fees of rupees 4,000 is
not violation of any provisions.
Therefore M/s ASKS will not be held liable for guilty of misconduct.
MAINTENANCE OF BRANCH OFFICE

According to Section 27 of the CA Act, where a Chartered Accountant or a Firm of Chartered
Accountants opens one or more of branch offices, each such branch shall be under the
charge of a member of the Institute. Violation of this provision shall constitute
Such a Chartered Accountant in-charge of the branch should be associated either as a
paid assistant or as a partner with the member/Firm. If he is a paid assistant, he
must be in whole time employment with the member/firm.
For the purpose of compliance of this section, the member in-charge must reside in the
place where the branch office is situated or must attend the said office for a period of
not less than 182 days in a year.
However, a member can be in-charge of two offices if they are located in one and
the same accommodation.
The above rule applies when the branch office is situated at a place beyond 50Kms
from the municipal limits in which the head office is situated.
Exemption to members practicing in Hill Areas:
The provision of Section 27 are not made applicable in respect of members practicing in hill
areas subject, however to the following conditions:
1. Such member/firm can open temporary office in a city in the plains for a limited
period not exceeding 3 months in a year.
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2. The regular office need not be closed during this period

3. All correspondence can continue to be made at the regular office
4. The name board of the firm in the temporary office should not be displayed at times
other than the period such office is permitted to function.
5. The temporary office should not be mentioned in the letterheads, visiting cards
or any other documents as a place of business of the member/firm.
6. Before commencement of every winter, it shall be obligatory on the member/firm to
inform the Institute that he/it is opening the temporary office from a particular
date and after the office is closed at the expiry of the period of permission, an
intimation to that effect should also be sent to the office of the Institute by
registered post.
1. Mr. G, a Chartered Accountant in practice as a sole proprietor has an office in
Mumbai near Church Gate. Due to increase in professional work, he opens
another office in a suburb of Mumbai which is approximately 80 kilometers
away from his existing office. For running the new office he employs three
retired Income-tax Officers.
In terms of section 27 of the Chartered Accountants Act, 1949, if a chartered accountant in
practice has more than one office in India, each one of these offices should be in the separate
charge of a member of the Institute. There is however an exemption for the above if the
second office is located in the same premises, in which the first office is located; or the second
office is located in the same city, in which the first office is located; or the second office is
located within a distance of 50 km‟s from the municipal limits of a city, in which the first
office is located. Since the second office is situated beyond 50 km‟s of municipal limits of
Mumbai city. Thus, he would be liable for committing a professional misconduct.
2. M & Co., a sole proprietary Chartered Accountant firm in practice with an
office in a busy belt of a city, had great difficulty in regularly attending to the
consultancy needs of his clients who are mostly located in an industrial cluster
in a nearby outskirt which is situated at a distance of 26 kms from the office of
the firm. To mitigate the difficulty and to have ease of business, a facilitation
centre was opened in the industrial cluster. The proprietor managed, both the
office and the facilitation centre, by himself. No intimation was made to the
Institute of Chartered Accountants of India. Examine whether there, is any
professional misconduct in this respect. (May. 18)
Maintenance of Branch Office in the Same City: As per section 27 of the Chartered
Accountants Act, 1949 if a chartered accountant in practice has more than one office in India,
each one of these offices should be in the separate charge of a member of the Institute.
However, a member can be in charge of two offices if the second office is located in the same
premises or in the same city, in which the first office is located; or the second office is located
within a distance of 50 Kilometres from the municipal limits of a city, in which the first office
is located. Further a member having two offices of the type referred to above,
shall have to declare which of the two offices is his main office, which would
constitute his professional address.
In the given case, M & Co., a sole proprietary Chartered Accountant firm in practice with an
office in a busy belt of a city and had great difficulty in regularly attending to the consultancy
needs of his clients. Therefore, a facilitation centre was opened in the industrial cluster and
the proprietor is managing both the office and facilitation centre. Though distance between
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his office and facilitation centre i.e. sort of second office is within prescribed range i.e. 50
kilometres but M& Co., will be liable for misconduct as prescribed intimation about
facilitation centre and main office should be sent to the Institute of Chartered
Accountants of India.
3. Mr. K, Chartered Accountant in practice as a sole proprietor at Chennai has
an office in the suburbs of Chennai. Due to increase in the income tax
assessment work, he opens another office near the income tax office, which is
within the city and at a distance of 30 kms. from his office in the suburb. For
running the new office, he has employed a retired Income Tax Commissioner
who is not a Chartered Accountant. Comment. (Nov. 15 Old)
Maintenance of Branch Office in the Same City: As per section 27 of the Chartered
Accountants Act, 1949 if a chartered accountant in practice has more than one office in India,
each one of these offices should be in the separate charge of a member of the Institute.
However, a member can be in-charge of two offices if the second office is located in the same
premises or in the same city, in which the first office is located; or the second office is located
within a distance of 50 kilometers from the municipal limits of a city, in which the first office
is located.
In the given case, Mr. K, Chartered Accountant in practice as a sole proprietor at Chennai
has an office in suburbs of Chennai, and due to increase in the work he opened another
branch within the city near the income tax office. He also employed a retired income tax
commissioner to run the new office and the second office is situated within a distance of 30
kilometers from his office in the suburb.
In view of above provisions, there will be no misconduct if Mr. K will be in-charge of both
the offices. However, he is bound to declare which of the two offices is the main office.
OTHER IMPORTANT ASPECTS
According to Section 25 of the Chartered Accountants Act, 1949, no company incorporated in
India or elsewhere, shall practice as Chartered Accountants. Here, the term company shall
include a LLP which has company as its partner. Therefore, if a LLP has company as its
partner cannot be engaged in practice.
MANAGEMENT CONSULTANCY SERVICES
 Financial Management Planning
 Capital Structure Planning
 Working Capital Management
 Conducting Feasibility Studies
 preparing project reports
 Preparing Cash Budgets, Cash Flow Statement, Fund Flow Statement etc.
 Budgeting
 Market research and demand studies
 Inventory Management
 Managerial Decision Making including price fixation
 Management Accounting System, Cost Control & Value Analysis
 Personnel Recruitment and Selection
 Setting up Incentive Plans
 Management and Operational Audits
 Advice regarding amalgamation and merger
 Business Policy, organization development, corporate planning
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 System Analysis and other services relating to EDP

 Acting as an advisor to issue like drafting prospectus, filing of listing agreement
, complying the formalities with stock exchange etc.(but not activities of
broking, underwriting & portfolio management)
 Investment Counseling
 Acting as registrar to an issue
 Acting as recovery consultant in banking sector
PRACTICAL QUESITONS
1. A Chartered Accountant in practice has been suspended from practice for a
period of 6 months and he had surrendered his Certificate of Practice for the
said period. During the said period of suspension, though the member did not
undertake any audit assignments, he undertook representation assignments for
income tax whereby he would appear before the tax authorities in his capacity
as a Chartered Accountant.
In the instant case, a chartered accountant not holding certificate of practice cannot take up
any other work because it would amount to violation of the relevant provisions of the
Chartered Accountants Act, 1949. In case a member is suspended and is not holding
Certificate of Practice, he cannot in any other capacity take up any practice separable from
his capacity to practises as a member of the Institute. This is because once a member
becomes a member of the Institute, he is bound by the provisions of the Chartered
Accountants Act, 1949 and its Regulations. If he appears before the income tax authorities, he
is only doing so in his capacity as a chartered accountant and a member of the Institute.
Having bound himself by the said Act and its Regulations made thereunder, he cannot then
set the Regulations at naught by contending that even though he continues to be a member
and has been punished by suspension, he would be entitled to practice in some other
capacity. Thus in the instant case, a chartered accountant would not be allowed to represent
before the income tax authorities for the period he remains suspended.
2. Mr. R, a Chartered Accountant in practice has been elected as the treasurer
of a Regional Council of the Institute. The Regional Council had organized an
international tour through a tour operator during the year for its members.
During the audit of the Regional Council, it was found that Mr. R had received a
personal benefit of 50,000 from the tour operator.
Embezzlement of Funds: Section 21 of the Chartered Accountants Act, 1949 provides that a
member is liable for disciplinary action if he is guilty of any professional or “Other
Misconduct.” Though the term “Other Misconduct” has not been defined in the said Act, this
provision enables the Council to enquire into any misconduct of a member even if it does not
arise out of his professional work. This is considered necessary because a chartered
accountant is expected to maintain the highest standards of integrity even in his personal
affairs and any deviation from these standards even in his non-professional work, would
expose him to disciplinary action. The Council has also laid down that among other things
“misappropriation by an office-bearer of a Regional Council of the Institute of a large amount
and utilization thereof for his personal use” would amount to “other misconduct”. Thus, in
the instant case, Mr. R would be liable for disciplinary action.
3. The Cashier of a company committed a fraud and absconded with the
proceeds thereof. This happened during the course of the accounting year. The
Chief Accountant of the company also did not know about fraud. In the course
of the audit, at the end of the year, the auditor failed to discover the fraud. After
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the audit was completed, however, the fraud was discovered by the Chief
Accountant. Investigation made at that time indicates that the auditor did not
exercise proper skill and care and performed his work in a desultory and
haphazard manner. With this background, the Directors of the company intend
to file disciplinary proceedings against the auditor.
Discuss the position of the auditor with regard to the disciplinary proceedings.
Reasonable Care and Skill: Apparently, as it appears from the facts of the case that the
auditor did not exercise proper skill and care and that he performed his work in a desultory
and haphazard manner. In this matter, the test for auditor‟s liability lies in whether he has
applied reasonable care, skill and caution called for in the circumstances of the case and
whether he reasonably used all the information that he came across in the course of audit.
Cash is a very significant item in any situation and the fact that the cashier had left during the
year without notice should have placed the auditor on alert as regards the cash book. In fact,
the very fact that the cashier was absconding, i.e., left without any notice constituted
sufficient circumstances to excite suspicion of the auditor to probe to the bottom. As per SA
240, “The auditor‟s responsibilities relating to fraud in an audit of financial statements”, it
can be concluded that the auditor did not plan and perform the audit with an attitude of
professional skepticism. Thus, having regard to this and a fraud has actually taken place
during the year, committed by the absconding cashier, it is reasonable to think that prima
facie there is a case against the auditor for gross negligence. Clause (7) of Part I of Second
Schedule to the Chartered Accountants Act, 1949 requires that it is the duty of an auditor to
bring to bear in the work he has to perform that skill, care and caution as per the
circumstances in an honest and reasonable manner. As it appears from the facts of the case,
the auditor has been grossly negligent in performing his duties which constitutes professional
misconduct. Thus, such instances require reference to Disciplinary Committee of the Council
of the Institute. If a member is found guilty by the Council of any of the acts or omissions
stated in the Schedule, its finding with recommendations are to be referred to the High Court
for decision.
4. Mr. A, a practicing Chartered Accountant agreed to select and recruit
personnel, conduct training programmes for and on behalf of a client.
Providing Management Consultancy and Other Services: Under Section 2(2)(iv) of the
Chartered Accountants Act, 1949, a member of the Institute shall be deemed “to be in
practice” when individually or in partnership with Chartered Accountants in practice, he, in
consideration of remuneration received or to be received renders such other services as, in
the opinion of the Council, are or may be rendered by a Chartered Accountant in practice.
Pursuant to Section 2(2)(iv) above, the Council has passed a resolution permitting a
Chartered Accountant in practice to render entire range of “Management Consultancy and
other Services”.
The definition of the expression “Management Consultancy and other Services” includes
Personnel recruitment and selection. Personnel Recruitment and selection includes,
development of human resources including designing and conduct of training programmes,
work study, job description, job evaluation and evaluations of work loads.
So, Mr. A is not guilty of professional misconduct.
5. XY & Co., a firm of Chartered Accountant having 2 partners X & Y, one in
charge of Head Office and another in charge of Branch at a distance of 80 kms,
puts up a name-board of the firm in both premises and also in their respective
residences.
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Putting Name Board of the Firm at Residence: The council of the Institute has decided that
with regard to the use of the name-board, there will be no bar to the putting up of a name-
board in the place of residence of a member with the designation of chartered accountant,
provided, it is a name-plate or board of an individual member and not of the firm.
In the given case, partners of XY & Co., put up a name board of the firm in both offices and
also in their respective residences.
Thus, the chartered accountants are guilty of misconduct. Distance given in the question is
not relevant for deciding.
6. Mr. Rahul, a locally based Chartered Accountant, accepted an audit
assignment at a fee lower than that charged by the previous auditor, who was
stationed in another town and had to spend a lot of money on travel for which
he did not charge separately.
Undercutting of Fees: In this case, Mr. Rahul is a locally based Chartered Accountant,
accepted an audit assignment at a fee lower than that charged by the previous auditor, who
was outstation based Chartered Accountant and had to spend a lot of money on travel which
was included in his audit fee and was not charged by him separately. The motive of Mr. Rahul
was not to get the work from previous auditor by accepting the audit assignment on lower fee
i.e. undercutting of fee. Because, in considering whether variation in fees charged would
constitute undercutting, the quantum of work; incidental and out of pocket expenses and
other terms of appointment should be considered.
Since the previous auditor was stationed in another town and therefore, had to incur higher
cost on account of conveyance, and the previously the fee was decided on a composite basis
inclusive of travelling expenses of the auditor, it cannot be said that Mr. Rahul has accepted
an audit assignment based on under cutting of fees.
Hence, Mr. Rahul will not be held guilty for misconduct.
7. P, a Chartered Accountant in practice provides management consultancy and
other services to his clients. During 2015, looking to the growing needs of his
clients to invest in the stock markets, he also advised them on Portfolio
Management Services whereby he managed portfolios of some of his clients.
Advising on Portfolio Management Services: The Council of the Institute of Chartered
Accountants of India (ICAI) pursuant to Section 2(2)(iv) of the Chartered Accountants Act,
1949 has passed a resolution permitting “Management Consultancy and other Services” by a
Chartered Accountant in practice. A clause of the aforesaid resolution allows Chartered
Accountants in practice to act as advisor or consultant to an issue of securities including such
matters as drafting of prospectus, filing of documents with SEBI, preparation of publicity
budgets, advice regarding selection of brokers, etc. It is, however, specifically stated that
Chartered Accountants in practice are not permitted to undertake the activities of broking,
underwriting and portfolio management services. Thus, a chartered accountant in practice is
not permitted to manage portfolios of his clients.
In view of this, P would be guilty of misconduct under the Chartered Accountants Act,
1949.
8. D, who conducts the tax audit u/s 44AB of the Income Tax Act, 1961 of M/s
ABC, a partnership firm, has received the audit fees of ` 25,000 on progressive
basis in respect of the tax audit for the year ended 31.3.2015. The audit report
was, however, signed on 25.5.2015.
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Entire Audit Fees Received in Advance: As per Chapter X of Council General Guidelines,
2008 a member of the Institute in practice or a partner of a firm in practice or a firm shall
not accept appointment as auditor of a concern while indebted to the concern or given any
guarantee or provided any security in connection with the indebtedness of any third person
to the concern, for limits fixed in the statute and in other cases for amount exceeding `
10,000/-.
However, the Research Committee of the ICAI has expressed the opinion that where in
accordance with the terms of engagement of auditor by a client, the auditor recovers his fees
on a progressive basis as and when a part of the work is done without waiting for the
completion of the whole job, he cannot be said to be indebted to the company at any stage.
In the instant case Mr. D is appointed to conduct a tax audit u/s 44AB of the Income Tax Act,
1961. He has received the audit fees of Rs.25,000 in respect of the tax audit for the year
ended 31.3.2015 which is on progressive basis. Therefore, Mr. D will not be held guilty for
misconduct.
9. A Chartered Accountant in practice has been suspended from practice for a
period of 6 months. During the said period, though he did not undertake the
audit assignment since he had surrendered certificate of practice, he had
appeared before Income Tax authorities in his capacity as a Chartered
Accountant.
Undertaking Tax Representation Work: A chartered accountant not holding certificate of
practice cannot take up any other work because it would amount to violation of the relevant
provisions of the Chartered Accountants Act, 1949.
In case a member is suspended and is not holding Certificate of Practice, he cannot in any
other capacity take up any practice separable from his capacity to practices as a member of
the Institute. This is because once a person becomes a member of the Institute; he is bound
by the provisions of the Chartered Accountants Act, 1949 and its Regulations.
If he appears before the income tax authorities, he is only doing so in his capacity as a
chartered accountant and a member of the Institute. Having bound himself by the said Act
and its Regulations made there under, he cannot then set the Regulations at naught by
contending that even though he continues to be a member and has been punished by
suspension, he would be entitled to practice in some other capacity.
Thus, in the instant case, a chartered accountant would not be allowed to represent before
the income tax authorities for the period he remains suspended. Accordingly, in the present
case he is guilty of professional misconduct.
10. Mr. C accepted the statutory audit of M/s PSU Ltd., whose net worth is
negative for the year 2013-14. The audit was to be conducted for the year 2014-
15. The audited accounts for the year 2014-15 showed liability for payment of tax
audit fees of 15,000 in favour of Mr. E, the previous auditor.
Accepting Appointment as an Auditor: As per Chapter 7 of Council General Guidelines 2008,
a member of the Institute of Chartered Accountants of India in practice shall be deemed to be
guilty of professional misconduct if he accepts appointment as auditor of an entity in case the
undisputed audit fee of another chartered accountant for carrying out the statutory audit
under Companies Act or various other statutes has not been paid.
As per the proviso, such prohibition shall not apply in case of a sick unit where a sick unit is
defined to mean “where the net worth is negative”.
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In the instant case, though the undisputed fees are unpaid, Mr. C would still not be guilty of
professional misconduct since the M/s PSU Ltd. is a sick unit having negative net worth for
the year 2013-14.
11. M/s PQR, a firm of Chartered Accountants with 5 partners has accepted the
audit of ABC Pvt. Ltd. for 2014-15 at an audit fee of 2,500. ABC Pvt. Ltd. was
incorporated in April, 2012, but had commenced operations in January, 2015.
Minimum Audit Fee: Prescribed minimum audit fee is recommendatory, not mandatory in
nature. Therefore, acceptance of audit assignment by M/s PQR, a firm of Chartered
Accountants having 5 partners, of ABC Pvt. Ltd. for audit fees of ` 2,500 is not violation of
any provisions.
Therefore M/s PQR will not be held liable for guilty of misconduct.
12. Write a short note on Record of Audit Assignments (as required by ICAI
regulations).
Record of Audit Assignments: In exercise of the powers conferred by Chapter 8 of Council
General Guidelines 2008, the Council of the Institute of Chartered Accountants of India
specified that a member of the Institute in practice shall be deemed to be guilty of
professional misconduct, if he holds at any time appointment of more than the “specified
number of audit assignments of the companies under Section 224 and /or Section 228 of the
Companies Act, 1956 (now under Section 141(3)(g) and 143 of the Companies Act, 2013). As a
part of this clause, to meet its requirements, a Chartered Accountants in practice as well as a
firm in practice shall maintain a record of the audit assignments accepted as laid out in
guidelines issued by the Council of the ICAI under Part II of Second Schedule to the
Chartered Accountants Act, 1949 in respect of ceiling on audits containing following
particulars:
Name of Company Audit/ Assignment.
Regn. No.
Date of appointment with Registrar of Companies.
Date of acceptance.
Date on which form 23B filed (now Form ADT-1 as per the provisions and rules made
under Companies Act, 2013).
13. L, a chartered accountant did not maintain books of account for his
professional earnings on the ground that his income is less than the limits
prescribed u/s 44AA of the Income Tax Act, 1961.
Maintenance of Books of Account: As per the Council General Guidelines 2008, under
Chapter 5 on maintenance of books of accounts, it is specified that if a chartered accountant
in practice or the firm of Chartered Accountants of which he is a partner fails to maintain and
keep in respect of his/its professional practice, proper books of account including the Cash
Book and Ledger he will be deemed to be guilty of professional misconduct.
Some Other Aspects
 It is not permissible for CA Firm to print its vision and values behind the
visiting cards, it would result in solicitation and therefore would be violative of the
provisions of Clause (6) of Part-I of First Schedule to the Chartered Accountants Act,
1949.
 It is not permissible for chartered accountants in practice to take agencies of
UTI, GIC or NSDL.
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 It is permissible for a member in practice to be a settler of a trust.

 A member in practice cannot hold Customs Brokers License under section 146
of the Customs Act, 1962 read with Customs Brokers Licensing Regulations, 2013 in
terms of the provisions of Code of Ethics.
 A Chartered accountant in service may appear as tax representative before tax
authorities on behalf of his employer, but not on behalf of other employees of the
employer.
 A chartered accountant who is the statutory auditor of a bank cannot for the
same financial year accept stock audit of the same branch of the bank or
any of the branches of the same bank or sister concern of the bank, for the same
financial year.
 A CA Firm which has been appointed as the internal auditor of a PF Trust by a
Government Company cannot be appointed as its Statutory Auditor.
 A concurrent auditor of a bank „X‟ cannot be appointed as statutory auditor of bank „Y‟,
which is sponsored by „X‟.
 A CA/CA Firm can act as the internal auditor of a company & statutory auditor of its
employees PF Fund under the new Companies Act (2013).
 Mentioning the firm as a "Knowledge Partner" or in the "Thank You" advertisement, is
not permissible, however mention of name of an individual member with prefix/suffix
“CA” as a “knowledge partner “ is permissible.
 Concurrent auditor of an entity cannot accept an assignment under ant statute.
 A chartered accountant in practice may establish a TIN – FC, and may as well
establish a TIN - FC under franchise from the other entity which is already a TIN – FC.
 A statutory auditor and tax auditor can not be valuer of the unquoted equity shares as
it would create threats to independence of the auditor, which may not possibly be
reduced by application of safeguards.
 The use of banner with name of CA firm is not permissible in terms of provisions of
Items 6 and 7 of Part –I of First Schedule to The Chartered Accountants Act, 1949.
 While noting that it had already allowed its members to appear before the various
authorities including Company Law Board, Income Tax Appellate Tribunal, Sales Tax
Tribunal where the law has permitted the same, so far as the designation “Corporate
Lawyer” is concerned, the Council was of the view that as per the existing provisions of
law, a Chartered Accountant in practice is not entitled to use the designation
“Corporate Lawyer”.
 The members are not permitted to use the initials „CPA‟ (standing for Certified Public
Accountant) on their visiting cards.
 Doing internship for company secretary by a CA in practice is akin to attending
classes, which is in turn, is covered under Clause (5) of the „Permission granted
generally‟ of Appendix 9 of the Chartered Accountants, 1988, and as such, the same is
permissible.
 No communication under clause 8 of Part-I of Schedule-I to the Chartered
Accountants Act, 1949 is required in case of death of the previous Auditor. However,
the new auditor may be required to get a letter from the entity to confirm the factum of
death of previous auditor.
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 It is not permissible for a member who has been Director of a Company, upon
resignation from the Company to be appointed as an auditor of the said Company, and
the cooling period for the same may be 2 years.
 Images of non – personal items such as books etc. on the website of a CA Firm are not
violative of website guidelines. As regard the use of images of people, the images of the
people who are not the members of the firm are not permissible.
 The use of „Dr.‟ with the designation „CA‟ may be left to the discretion of member (i.e.
whether to use „CA‟ first, or „Dr. First, or use „Dr.‟ only before the name of the
member).
 CA. in practice can be a „Director Simplicitor‟, which includes an independent director.
The independent directors are part of the Board where the Accounts are approved,
they being party to approval of financial statement. As such, there is no bar in their
signing the financial statement. However, they can not be involved in the day to day
affairs of the company.
Clarification on prohibition of simultaneously undertaking Concurrent Audit
and Quarterly Review of the same Bank. –
Since queries are being received from members at large on the issue, it is accordingly hereby
clarified that concurrent audit and the assignment of quarterly review of the same Bank
cannot be undertaken simultaneously as the concurrent audit being a kind of internal audit
and the quarterly review being a kind of statutory audit undertaken simultaneously are
prohibited under the provisions of „Guidance Note on Independence of Auditors‟.
If there are 10 partners in a firm of Chartered Accountants, then how many tax
audits reports can each partner sign in a financial year?
As per Chapter VI of Council General Guidelines, 2008 (Tax Audit Assignments under
Section 44AB of the Income Tax Act, 1961), a member of the Institute in practice shall not
accept, in a financial year, more than the specified number of tax audit assignments as
prescribed under Section 44AB of the Income Tax Act, 1961. The specified number of tax
audit assignments under Section 44AB of the Income Tax Act, 1961 is 60.
It is further provided in Chapter VI of Council General Guidelines, 2008 that in case of firm
of Chartered Accountants in practice, specified number of tax audit assignments means 60
tax audit assignments per partner of the firm, in a financial year.
Therefore, if there are 10 partners in a firm of Chartered Accountants in practice, then all the
partners of the firm can collectively sign 600 tax audit reports. This maximum limit of 600
tax audit assignments may be distributed between the partners in any manner whatsoever.
For instance, 1 partner can individually sign 600 tax audit reports in case remaining 9
partners are not signing any tax audit report.
The members of the profession have sought the Institute‟s view as to whether
the Chartered Accountants in Practice acting as Recovery Consultant for
recovery of Non-Performing Assets (NPA) of Banks under the Securitization and
Reconstruction of Financial Assets and Enforcement of Security Interest Act,
2002 (SRFA&ESI) can charge fee on percentage basis as is permitted under
Regulation 192 of the Chartered Accountants Regulations, 1988 for „receiver‟ or
„liquidator‟.
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The Institute has examined the matter in detail and is of the view that Recovery Consultant
cannot be equated with „receiver‟ or „liquidator‟ provided under Regulation 192 of the
Chartered Accountants Regulations, 1988 and as such, the charging of fee by Recovery
Consultant in Banking Sector on percentage basis is not permissible.
Clarification regarding Inclusion of "Insurance Financial Advisory Services
under the Insurance Regulatory & Development Authority Act, 1999, including
Insurance Brokerage" in the definition of "Management Consultancy & Other
Services"
The attention of the members is drawn to the Announcement published in the January 2005
issue of the Journal at page 935 as well as hosted in the website regarding inclusion of
"Insurance Financial Advisory Services under the Insurance Regulatory & Development
Authority Act, 1999, including Insurance Brokerage" in the definition of "Management
Consultancy and Other Services" as appearing at pages 8-10 of Code of Ethics, January 2001
edition.
In this regard, it may be clarified that as per the decision of the Council, a member is
permitted to render Insurance Financial Advisory Services as prescribed under
"The Insurance Regulatory and Development Authority (Insurance Brokers) Regulations,
2002" only in Corporate form. Further, the members are required to comply with the
conditions prescribed by the Insurance Regulatory & Development Authority and the
conditions to be prescribed by The Institute of Chartered Accountants of India.
It may also be clarified that the members are not permitted to do any work relating to
insurance agency as prescribed under "Insurance Regulatory and Development Authority
(Licencing of Insurance Agents) Regulations, 2000" and "Insurance Regulatory and
Development Authority (Licencing of Corporate Agents) Regulations, 2002", either
individually or in partnership/proprietorship form or in corporate form
The existing position regarding allowing members generally to hold life insurance agency
licence for limited purpose of getting renewal commission, still hold good as provided in the
Appendix (9) to the Chartered Accountants Regulations, 1988 (2002 edition).
Clarification regarding (1) Listing with bodies creating data-base for
independent directors of Chartered Accountants and (2) acting as Financial
Intermediary
Some members have brought to our notice that some website is creating data-base for
independent directors and is inviting Chartered Accountants to enroll with it. The data-base
collected by it will be provided to the listed Companies in order to reach the Chartered
Accountants for taking them on their Board as Independent Directors. It is also brought to
our notice that certain Chartered Accountants have been approached to act as e-
Intermediary. The members have sought clarification whether they can enroll with the
website creating such data-base and whether they can act as e- Intermediary.
The aforesaid issues have been examined. The Code of Ethics, 2005 edition, at page 81*
provides as under: “(16) A number of Chartered Accountants Societies or other bodies are
creating data-bases of Chartered Accountants or Chartered Accountants‟ Firms and are
offering listing to Chartered Accountants. Such listing would be permitted with or without
payment. In case a Chartered Accountant or Chartered Accountants‟ Firm is a member of a
professional body or association or Chamber of Commerce and they offer listing to the
members or firm, the same would be permitted.” Accordingly, it is clarified that listing with
the website collecting the data-base for independent directors is permissible with or
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without payment. It is also clarified that since acting as E-Return Intermediary

comes within the purview of the definition “ Management Consultancy and Other Services”
appearing at pages 8-10 ** of Code of Ethics, 2005 edition, it is permissible.
Clarification on Chartered Accountants acting as Direct Selling Agent (DSA) –
Ethical issues involved As you are aware that various Companies are appointing Chartered
Accountants as their Direct Selling Agents (DSA) and thus is an emerging area of professional
opportunities for the members. We may inform you that the Committee on Ethical Standards
(CES), a non-standing Committee of the Institute, considered the matter in great details and
was of the view that one has to see the ethical issues involved while acting as Direct Selling
Agent (DSA) and decided that: 1) A member in practice is not permitted to market any
specific product. 2) He may verify credit card credential 3) He may provide services that are
in the nature of verification etc. which are in the nature of assurance services. 4) He may
provide services, which are in the nature of Management Consultancy & other Services and
can perform all those services, which a Chartered Accountant can provide. Members are
required to keep in mind the aforesaid decision of the Committee while acting as Direct
Selling Agent (DSA).
KYC NORMS FOR A CA IN PRACTICE
The KYC norms approved by the council of ICAI are given below:
Where client is an individual/proprietor
A. GENERAL INFORMAITON
1. Name of the Individual
2. PAN or Aadhar Card Number
3. Business Description
4. Copy of the last audited Financial Statements
B. ENGAGEMENT INFORMATION
 Type of Engagement
Where client is a corporate entity
1. Name and address of the entity
3. Name of the parent company in case of subsidiary
4. Copy of the last audited Financial Statements
C. REGULATORY INFORMATION
1. Company PAN
2. Company Identification Number (CIN)
3. Director‟s Names and Addresses
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4. Director‟s Identification Number (DIN)

Where client is a non corporate entity
1. Name and address of the entity
2. Copy of PAN
4. Partner‟s names and addresses (With their PAN/Aadhar)
5. Copy of Last Audited Financial Statements
GENERAL
1. Mr. X, a Chartered Accountant in Practice filed his income tax return for the
Assessment Year 2018-19 under section 44ADA of the Income Tax Act, 1961,
declaring his income on presumptive basis. In a disciplinary proceeding against
him for an alleged misuse of funds of his clients, it was asked that he should
submit his books of accounts for the financial year ended on 31/03/2018. Mr. X
refused to submit books of accounts on the ground that he had not maintained
any books and even for income tax purposes, he submitted his Return of Income
on a presumptive basis. Is he right in putting such a defence? Analyse the issues
in the light of Professional Code, if any. (May. 18)
As per the Council General Guidelines 2008, under Chapter 5 on maintenance of books of
accounts, it is specified that if a chartered accountant in practice or the firm of Chartered
Accountants of which he is a partner fails to maintain and keep in respect of his/its
professional practice, proper books of account including the Cash Book and Ledger, he is
deemed to be guilty of professional misconduct.
Accordingly, it does not matter that as per section 44ADA of the Income Tax Act Mr. X
declared his income on presumptive basis. Here, it may be noted that though 44ADA of the
Income Tax Act exempt the requirement of books and accounts but as per Council General
Guidelines a chartered accountant in practice is required to maintain and keep proper books
of accounts including cash book and ledger. Hence, Mr. X is guilty of professional
misconduct.
2. Mr. Dice, a practising Chartered Accountant was ordered to surrender his
Certificate of Practice and he was suspended for one year on certain
professional misconduct against him. During the period of suspension, Mr.
Dice, designating himself as GST Consultant, did the work of filing GST returns
and made appearance as a consultant before various related authorities. He
contended that there is nothing wrong in it as he, like any other GST consultant,
could take such work and his engagement as such in no way violates the order of
suspension inflicted on him. Is he right in his contention? (May 18 New)
Filing of GST Returns and Appearance as GST Consultant: A chartered accountant not
holding certificate of practice cannot take up any other work in the capacity of Chartered
Accountant in practice because it would amount to violation of the relevant provisions of the
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In case a member is suspended and is not holding Certificate of Practice, he cannot in any
other capacity take up any practice separable from his capacity to practices as a member of
the Institute. This is because once a member becomes a member of the Institute, he i s bound
by the provisions of the Chartered Accountants Act, 1949 and its Regulations.
In case he files GST returns and appears as a consultant before various related authorities in
his capacity as a chartered accountant and a member of the Institute , having bound himself
by the said Act and its Regulations made thereunder, he cannot then set the Regulations at
naught by contending that even though he continues to be a member and has been punished
by suspension, he would be entitled to practice in some other capacity. But if he is doing so in
any other capacity such as GST Consultant wherein his capacity is not chartered accountant
in practice, he will not be held guilty for misconduct.
In the instant case, Mr. Dice was a practicing chartered accountant and he was ordered to
surrender his certificate of practice and was suspended for one year. Mr. Dice is doing the
work of filing GST returns and has appeared as a consultant before various related
authorities as GST Consultant which is not in capacity of a practicing chartered accountant
rather in capacity of authorized representative. Any person who has been authorized to act as
a GST Practitioner on behalf of the concerned registered person can become authorized
representative. Thus, Mr. Dice would not be allowed to represent as a Chartered Accountant
before various related authorities for the period he remains suspended. Accordingly, in the
present case he is guilty of professional misconduct.
3. A member of the institute shall not accept in a year more than the specified
number of tax audits under section 44AB of the Income Tax Act.
Mr. Gaurav is a partner in M/s. XYZ & Co., a firm of Chartered Accountants with
6 partners.
During the assessment year 2015-16, Mr. Gaurav alone had signed 290 tax audit
reports consisting of both corporate and non-corporate assesses. (Nov. 16
Old)
Ceiling limit for signing the Tax Audit Reports: As per Council General Guidelines 2008, a
member of the Institute in practice shall not accept, in a financial year, more than the
“specified number of tax audit assignments” under Section 44AB of the Income-tax Act, 1961.
It is also provided further that where any partner of a firm of Chartered Accountants in
practice accepts one or more tax audit assignments in his individual capacity, the total
number of such assignments which may be accepted by him shall not exceed the “specified
number of tax audit assignments” in the aggregate.
In the case of firm of Chartered Accountants in practice “the specified number of tax audit
assignments” means, 60 tax audit assignments per partner in the firm, in a financial year,
whether in respect of corporate or non-corporate assesses.
Further, as per clarification issued by the Institute on Tax Audit Assignments, tax audit
reports may be signed by the partners in any manner whosoever in accordance with specified
audit limits. Thus, one partner can individually sign all the tax audit reports subject to
specified tax audit assignment limits on behalf of all the partners in the firm of Chartered
Accountants in practice or all the partners of the firm can collectively sign the tax audit
reports.
In the instant case, there are 6 partners in M/s XYZ & Co., a Chartered Accountants firm,
accordingly specified ceiling limit for the firm will be (60 tax audit assignments per partner X
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6 partners) = 360. Therefore, all the 6 partners of the firm can collectively sign 360 tax audit
reports. This maximum limit of 360 tax audit assignments may be distributed between the
partners in any manner whatsoever. For instance, 1 partner can individually sign 360 tax
audit reports in case remaining 5 partners are not signing any tax audit report.
Assuming Mr. Gaurav has signed 290 tax audit reports consisting of both corporate and non-
corporate assesse on behalf of firm and remaining partners are signing audit reports within
the specified number of tax audit assignments u/s 44AB i.e. upto 70.
Hence, Mr. Gaurav shall not be deemed to guilty of professional misconduct provided
total number of tax audit reports on behalf of firm do not exceeds 360.
4. Mr. Z accepted the statutory audit of a sick unit-NCT Limited for the year
ending 31-3- 2015. During course of audit it was noticed by the statutory auditor
that company‟s net worth was negative for year ended 31-3-2014 and there was
also a liability of tax audit fees of Rs.35000 in favour of the previous auditor.
Comment. (Nov. 16 Old)
Accepting Appointment as an Auditor: As per Chapter 7 of Council General Guidelines 2008,
a member of the Institute of Chartered Accountants of India in practice shall be deemed to be
guilty of professional misconduct if he accepts appointment as auditor of an entity in case the
undisputed audit fee of another chartered accountant for carrying out the statutory audit
under Companies Act or various other statutes has not been paid.
As per the proviso, such prohibition shall not apply in case of a sick unit where a sick unit is
defined to mean “where the net worth is negative”.
In the instant case, though the undisputed fees are unpaid, Mr. Z would still not be guilty
of professional misconduct since the M/s NCT Limited. is a sick unit having negative net
worth for the year 2013-14.
5. Mr. S, a practicing Chartered Accountant agreed to provide “Portfolio
Management Services” to his client M/s. D Limited. Comment with reference to
the Chartered Accountants Act, 1949. (Nov. 15 Old)
Advising on Portfolio Management Services: The Council of the Institute of Chartered
Accountants of India (ICAI) pursuant to Section 2(2)(iv) of the Chartered Accountants Act,
1949 has passed a resolution permitting “Management Consultancy and other Services” by a
Chartered Accountant in practice. A clause of the aforesaid resolution allows Chartered
Accountants in practice to act as advisor or consultant to an issue of securities including such
matters as drafting of prospectus, filing of documents with SEBI, preparation of publicity
budgets, advice regarding selection of brokers, etc. It is, however, specifically stated that
Chartered Accountants in practice are not permitted to undertake the activities of broking,
underwriting and portfolio management Services. Thus, a chartered accountant in practice is
not permitted to manage portfolios of his clients.
In view of this, Mr. S would be guilty of misconduct under the Chartered Accountants Act,
1949.
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ADVANCED AUDITING & PROFESSIONAL ETHICS CA C.V.SARMA, M.Com., FCA
3
THE COMPANY AUDIT
Introduction
Section 138 to 148 of the Companies Act, 2013, deals with matters such as:
 who can be appointed as an auditor
 what are the qualifications and disqualifications
 the manner of appointment and removal of an auditor
 the rights and duties of an auditor etc.
IMPORTANT DEFINITIONS UNDER COMPANIES ACT, 2013 – Sec. 2
Associate Company
―Associate Company‖ as in relation to another company, means a company in which that
other company has a significant influence, but which is not a subsidiary company of the
company having such influence and includes a Joint Venture Company.
Significant influence means control of at least 20% of Total Voting Power or control or
participation in business decisions under an agreement.
Chartered Accountant
―Chartered Accountant‖ means a Chartered Accountant as defined in Sec. 2(1)(b) of the
Chartered Accountants Act, 1949 and who holds a valid certificate of practice under Section
6(1) of that Act.
Control
―Control‖ shall include the right to appoint majority of the directors or to control the
management or policy decisions exercisable by a person or persons acting individually or in
concert, directly or indirectly, including by virtue of their shareholding or management rights
or shareholders agreements or voting agreements or in any other manner.
Financial Year
―Financial Year‖ in relation to any company or body corporate, means the period ending on
the 31st day of March every year, and where it has been incorporated on or after the
1st day of January of a year, the period ending on the 31st day of March of the
following year in respect whereof financial statement of the company or body corporate is
made up.
Key Managerial Personnel
―Key Managerial Personnel‖ in relation to a company, means –
i. the chief executive officer (CEO) or the managing director(MD) or the
manager
ii. the company secretary (CS)
iii. the whole-time director (WTD)
iv. the chief financial officer (CFO) and
v. such other officer as may be prescribed;
3.1
The Board of Directors of a company shall have the power to designate any
officer, not more than one level below the directors, who is in whole-time
employment, as KMP of the company. (Amendment Act, 2017)
Officer
―Officer‖ includes any director, manager or key managerial personnel or any person in
accordance with whose directions or instructions the Board of Directors or any one or more
of the directors is or are accustomed to act (also called as Shadow Director).
Subsidiary Company
The Subsidiary Company in relation to any other company (that is to say the holding
company), means a company in which the holding company –
i) controls the composition of the Board of Directors; or
The composition of BOD shall be deemed to be controlled by another company
if that other company by exercise of some power can appoint or remove all or
majority of the directors.
ii) controls more than one-half of the total voting power either at its own or
together with one or more of its subsidiary companies;
For the purpose of this clause a company shall be deemed to be a subsidiary company of the
holding company even if the control referred to in (i) or (ii) is of another subsidiary of the
holding company.
The term ―small company‖ means a company other than a public company having
i) a paid-up share capital which does not exceed 50 lakhs or such higher
amount as may be prescribed which shall not be more than 10 crore rupees
(this can be prescribed by Central Government by way of a notification) and
ii) the turnover as per profit and loss account for the immediately preceding
financial year does not exceed Rs.2 crore rupees or such higher amount as
may be prescribed which shall not be more than 100 crores (this can be
prescribed by Central Government by way of a notification).
However, the following companies will not qualify as a Small Company:
a. a holding company or a subsidiary company
b. a company registered under section 8 or
c. a company or a body corporate governed by any Special Act
RELEVANT SECTIONS IN THE COMPANIES ACT
138-- Internal Audit
139-- Appointment of Company Auditor
140-- Removal, resignation of auditors
141-- Eligibility, Qualifications and Disqualifications of
auditors
142-- Remuneration of auditors
143-- Powers and duties of auditors
144-- Auditor not to render certain services
145-- Signature on audit reports
146-- Attending to General Meetings by auditors
3.2
147-- Punishment for contravention
148-- Cost Audit
INTERNAL AUDIT – Sec. 138 and Rule 13 of Companies (Accounts) Rules, 2014
The Companies Act, 2013 contains an express provision about Internal Audit recognizing the
utility of such an audit as a part of better internal control.
The following classes of companies shall be required to appoint an internal auditor or a firm
of internal auditors or a body corporate, namely:
a. every listed company
b. every unlisted public company having-
i. Paid up share capital of Rs.50 crores or more during the preceding
Financial Year or
ii. Turnover of Rs.200 crores or more during the preceding FY or
iii. Outstanding loans or borrowings from banks or public financial
institutions exceeding Rs.100 crores or more at any point of time
during the preceding FY or
iv. Outstanding deposits of Rs.25 crores or more at any point during
the preceding FY
c. Every private company having-
i. Turnover of Rs.200 crores or more during the preceding FY
ii. Outstanding loans or borrowings from banks or public financial
institutions exceeding Rs.100 crores or more at any point during the
preceding FY
Rules relating to Appointment of Internal Auditor
 Internal Auditor may be either an individual or a firm or a Body Corporate.
 Internal Auditor may be either a Chartered Accountant/Cost Accountant
whether engaged in practice or not or such other professional as decided by the
Board.
 The internal auditor may or may not be an employee of the company. In other
words, internal auditor may be either employed by the entity or engaged by the
entity.
 The appointment of Internal Auditor should be done only by means of a resolution
passed at a meeting of Board of Directors. A copy of such resolution shall have to be
filed with ROC with in 30 days of passing of such resolution.
The audit committee of the company or the Board shall, in consultation with the
Internal Auditor, formulate the scope, periodicity and methodology for
conducting the internal audit.
The ESB of ICAI has given a clarification that a CA/CA firm can act as the
internal auditor of a company and statutory auditor of its employees PF Fund.
PRACTICAL QUESTIONS
3.3
1. JKT Ltd. having Rs.40 lacs paid up capital, Rs.9.50 crores reserves and
turnover of last three consecutive financial years, immediately preceding the
financial year under audit, being Rs.49 crores, Rs.145 crores and Rs.260 crores,
but does not have any internal audit system. In view of the management,
internal audit system is not mandatory. Comment
As per section 138 of the Companies Act, 2013, read with rule 13 of Companies (Audit and
Auditors) Rules, 2014 every unlisted public company shall be required to appoint an internal
auditor or a firm of internal auditors or a body corporate, having-
(i) turnover of two hundred crore rupees or more during the preceding financial year;
or
(ii) outstanding loans or borrowings from banks or public financial institutions
exceeding one hundred crore rupees or more at any point of time during the
preceding financial year:
In the instant case, JKT Ltd. is having turnover of Rs. 260 crores during the preceding
financial year which exceeds the threshold limit of two hundred crore rupees or more. Hence,
the Company is compulsorily required to appoint an Internal Auditor.
2. The following details are given for a company, as at the end of the preceding
financial year. Examine whether internal audit is mandatorily required if the
company is (a) Listed Company (B) Unlisted public company (c) Private
Company
Paid up Equity Capital Rs.500 Lakhs, Paid up Preference Capital Rs.500 lakhs,
Turnover is Rs.200 crores, Loans and Borrowings from Banks Rs.80 Crores
(Total Loan taken was Rs.105 Crores, but the company had repaid Rs.25 crores
during that year itself) and Deposits Outstanding Rs.15 Crore
Ans: Listed Company – Applicable
Unlisted Company – Applicable because Turnover and Loan conditions are satisfied
Private Company – Applicable because Turnover and Loan conditions are satisfied
APPOINTMENT OF AUDITOR – SECTION 139
APPOINTMENT OF SUBSEQUENT AUDITOR (OTHER THAN A GOVERNMENT
COMPANY)- Sec. 139(1)
1. According to Section 139(1) of Companies Act, 2013, every company, at its first
Annual General Meeting, shall appoint an individual or a firm as an auditor.
The term every company includes all types of companies such as
 Private Limited Company
 Public Limited Company
 Listed Company
 Unlisted Company
 Profit making company
 Loss making company
 Indian Company
 Foreign Company having a place of business in India
3.4
 Profit oriented company
 Non-profit oriented company
 Company having a share capital
 Company not having a share capital etc.
2. The auditor so appointed 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 6th Annual General Meeting with the Annual General Meeting
wherein such appointment has been made being counted as the First Meeting.
3. On appointment of the auditor, the company should inform the same to the
auditor concerned and should file a notice of such appointment with the registrar
within 15 days of the meeting in which the auditor is appointed through filing
Form No.ADT-1.
Other Conditions for appointment
The company shall obtain a written consent from the auditor to such appointment and
should also obtain a certificate that –
a. He or it is eligible for appointment and is not disqualified for appointment
under the Act or the rules made there under.
b. The proposed appointment is as per the term provided under the act [Section
139(2)]
c. The proposed appointment is within the limits laid down by the act[Section
141(3)(g)]
d. The list of proceedings against the auditor or audit firm or any partner of the audit
firm pending with respect to professional matters of conduct, as disclosed in
the certificate, is true and correct.
Illustrative Eligibility Letter u/s 139(1) of the Companies Act, 2013 in case of
Appointment for New Client
[Date]
To The Board of Directors [Name of the Company]
[Address]
Dear Sirs,
We thank you for your letter dated_____, regarding the proposed appointment of our firm
as statutory auditors of ____________ (―the Company‖) at the ensuing annual general
meeting of the Company for holding such office from the conclusion of the said meeting until
the conclusion of the 6th annual general meeting with respect to the 5 financial years
beginning April 1, 20XX and ending March 31, 20YY.
We consent to being appointed as auditors of the Company As requested by you, and in
accordance with the requirements of Section 139 (1) of the Companies Act 2013 (―the Act‖)
read with Rule 4 of the Companies (Audit and Auditors) Rules, 2014, we certify that:
(1) We are eligible for appointment as auditors of the Company under Section 139 of the
Companies Act,2013 (―the Act‖) and meet the criteria for appointment specified in
Section 141 of the Act.
3.5
(2) We are not disqualified from being appointed as auditors under the Act or the Chartered
Accountants Act, 1949 and the rules or regulations made there under.
(3) The proposed appointment will be as per the term provided in the Act.
(4) If appointed, such appointment will be within the limits laid down by or under the
authority of the Act.
(5) There are no pending proceedings against the firm or any partner of the firm with respect
to professional matters of conduct under the Chartered Accountants Act, 1949 and the
rules and regulations made there under. (or) The list of pending proceedings against the
firm or any partner of the firm with respect to professional matters of conduct under the
Chartered Accountants Act, 1949 and the rules and regulations made there under.
We also confirm that the Firm has been subjected to the peer review process of the Institute
of Chartered Accountants of India (ICAI) and holds a valid certificate issued by the Peer
Review Board of the ICAI – Copy enclosed. Further, we would like to draw your attention to
the announcement issued by the Institute of Chartered Accountants of India (ICAI) in terms
of which the registration number of the firm as provided by the ICAI is required to be
indicated in the resolution for appointment of auditors under the Act. Accordingly, you are
requested to ensure that the registration number is indicated in the resolution for our
appointment at the Annual General Meeting.
For your information, our Firm Registration Number is ________.
Yours faithfully,
PRACTICAL QUESTION
No Annual General Meeting (AGM) was held for the year ended 31st March,
2014, in XYZ Ltd., Ninu is the auditor for the previous 3 years, whether she is
continuing to hold office for current year or not.
Section 139(1) of the Companies Act, 2013 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.
In case the annual general meeting is not held within the period prescribed, the
auditor will continue in office till the annual general meeting is actually held
and concluded. Therefore, Ninu shall continue to hold office till the conclusion of the
annual general meeting.
Sec. 139(2) – ROTATION OF AUDITORS
Applicability
Section 139(2) is applicable to the following types of Companies:
d. Listed Companies;
e. Unlisted public companies having a paid-up share capital of 10 crores or
more;
f. Private Limited Companies having a paid-up share capital of 50 crores or
more;
3.6
g. Companies specified in b and c having a lesser paid-up capital than specified above
but having public borrowings from financial institutions, banks or public
deposits of 50 crores or more.
Non-applicability
Section 139(2) is not applicable for the following types of companies.
a. One person Company
b. Small Company
c. Dormant Company as per Rule 6 of Companies (Miscellaneous) Rules, 2014
TERM OF AUDITOR
Individual
The maximum term for which an individual can be appointed as the auditor of the
company shall not exceed one term of five consecutive years.
Firm
The maximum term for which a firm can be appointed as the auditor of the company shall
not exceed two terms of five consecutive years.
PRACTICAL QUESTIONS
1. Rano is a private limited Company, having paid up share capital of rupees 18
crore. It is having public borrowing from nationalized banks and financial
institutions of rupees 72 crore. Will the manner of rotation of auditor
applicable?
Yes, the manner of rotation of auditors is applicable to the company. Although the paid up
share capital of the company is less than 20 crores, since the company is having a public
borrowing of 50 crores or more, manner of rotation is applicable.
2. For the purpose of rotation of auditors, whether the period for which the
individual or the firm has held office as auditor prior to the commencement of
the Act shall be taken into consideration for calculating the period of five
consecutive years, in case of individual; or ten consecutive years for firm.
Yes, as per rule 6(3) of Companies (Audit and Auditors) Rules, 2014, the period for which the
individual or the firm has held office as auditor prior to the commencement of the Act shall
be taken into consideration for the purpose of rotation of auditors.
COOLING PERIOD
Case – 1 : Individuals
An individual auditor who has completed his term (i.e. one term of 5 consecutive
years) shall not be eligible for re-appointment as auditor in the same company for
5 years from the completion of his term.
Case – 2 : Firm
A firm which had completed its term shall not be eligible for re-appointment as
auditor in the same company for 5 years from the completion of such term.
Restrictions in respect of common partners
3.7
If on the date of appointment, the proposed audit firm and the previous audit firm whose
term expires in the immediately preceding financial year have common partner or partners,
then the proposed audit firm shall not be appointed as the auditor of the same company for
a period of 5 years.
PRACTICAL QUESTION
1. M/s XYZ & Co., is an audit firm having partner Mrs. X, Mr. Y and Mr. Z, whose tenure has
expired in the company immediately preceding the financial year, M/s ABZ& Co., is another
audit firm in which Mr. Z is a common partner, will also be disqualified for the same
company along with M/S XYZ & Co. the period of 5 years.
2. Orange Ltd. is an unlisted public company. Its balance sheet shows paid
up share capital of 5 crore and public deposits of 100 crore. The company
appointed M/s Santra & Co., a chartered accountant firm, as the statutory
auditor in its annual general meeting held at the end of September, 2014 for
11 years.
You are required to state the provisions related to- rotation of auditor and
cooling off period as per the section 139(2) of the Companies Act, 2013 in
case of an individual auditor or an audit firm, both, and comment upon
the facts of the case provided above with respect to aforesaid provisions.
Rotation of Auditor & Cooling Off Period Provisions: The provision related to
Rotation of Auditor & Cooling Off Period is newly inserted by section 139(2) of the
Companies Act, 2013 read with Rule 5 of the Companies (Audit & Auditors) Rules,
2014, which is discussed as under:
The provisions related to rotation of auditor are applicable to those companies which
are prescribed in Companies (Audit and Auditors) Rules, 2014, which prescribes the
following classes of companies excluding one person companies and small companies,
namely:-
a. all unlisted public companies having paid up share capital of ` 10 crore or
more;
b. all private limited companies having paid up share capital of ` 20 crore or
more;
c. all companies having paid up share capital of below threshold limit mentioned
above, but having public borrowings from financial institutions, banks or public
deposits of 50 crores or more.
As per Section 139(2) of the Companies Act, 2013, no listed company or a company
belonging to such class or classes of companies as mentioned above, shall appoint or re-
appoint-
a. an individual as auditor for more than one term of 5 consecutive years; and
b. an audit firm as auditor for more than two terms of 5 consecutive years.
In the given case, Orange Ltd. is an unlisted public company having paid up share
capital of 5 crore and public deposits of 100 crore. The company has appointed M/s
Santra & Co., a chartered accountant firm, as the statutory auditor in its AGM held at
the end of September, 2014 for 11 years.
3.8
The provisions relating to rotation of auditor will be applicable as the public deposits
exceeds 50 crore. Therefore, Orange Ltd. can appoint M/s Santra & Co. as an auditor
of the company for not more than one term of five consecutive years twice i.e. M/s
Santra & Co. shall hold office from the conclusion of this meeting upto conclusion of
sixth AGM to be held in the year 2019 and thereafter can be re-appointed as auditor
for one more term of five years i.e. up to year 2024. As a result, the appointment of M/s
Santra & Co. made by Orange Ltd. for 11 years is void.
Cooling off period: As per the proviso to section 139(2) of the Companies Act,
2013-
a. an individual auditor who has completed his term under clause (a) shall not be
eligible for re-appointment as auditor in the same company for 5 years from the
completion of his term;
b. an audit firm which has completed its term under clause (b), shall not be eligible
for re-appointment as auditor in the same company for 5 years from the completion
of such term.
Therefore, M/s Santra & Co. shall not be re-appointed as Auditor in Orange Ltd. for
further term of 5 years i.e. upto year 2029.
Time limit within which the existing companies are required to comply with
these provisions
Every company existing on the commencement of the act and is required to comply with the
provisions relating to rotation of auditors, shall comply with these requirements within 3
years from the date of commencement of this Act.
RIGHT OF REMOVAL OR RESIGNATION
This section has not placed any restrictions on -
a. Right of the company to remove auditor before the expiry of his/their
term i.e. 5 years in case of an individual and before the expiry of 10 years in case of a
firm.
b. right of the auditor to resign from the office before expiry of his/their
term i.e. 5 years in case of an individual and before the expiry of 10 years in case of a
firm.
Illustration explaining rotation in case of individual auditor
3.9
Illustration explaining rotation in case of audit firm
Further restrictions – Sec.139(3)

3.10
The members of the company can pass a resolution to the effect that -
a. The auditing partner and his team shall be rotated at such intervals specified. This
is applicable when a partnership firm is appointed by the members,
b. The audit shall be conducted by more than one auditor
HOW TO ROTATE AUDITORS – Section 139(4)
The Central Government may, by rules, prescribe the manner in which the companies shall
rotate auditors in pursuance of Section 139(2)
1. Companies required to constitute an Audit Committee
a. The audit committee shall recommend the name of an individual or an audit firm to
the Board.
b. The Board shall consider the recommendations of the committee and shall make its
recommendation for appointment of the next auditor to the members.
2. Companies not required to constitute an Audit Committee
1. The Board shall recommend either the name of an individual or an audit firm to
the members for appointment of the next auditor in Annual General Meeting.
2. In case of an auditor (whether an individual or audit firm period for which the
individual or the firm has held office as auditor prior to the commencement of the
Act, shall be taken into account for calculating the period of 5 consecutive years or
10 consecutive years, as the case may be.
3. A break in the term for a continuous period of 5 years shall be considered as
fulfilling the requirement of rotation.
4. If a partner, who is in charge of an audit firm and also certifies the financial
statements of the company, retires from the said firm and joins another firm of
chartered accountants, such other firm shall also be ineligible to be appointed
for a period of 5 years.
APPOINTMENT OF SUBSEQUENT AUDITOR OF A GOVERNMENT COMPANY -
Sec.139(5)
Applicability
The provisions of this sections are applicable not only for a Government Company but also
applicable to a company owned or controlled, directly or indirectly by Central Government of
by any State Government or Governments or partly by Central Government and partly by one
or more State Governments.
1) The subsequent auditor of a government company or a government controlled company
shall be appointed by the Comptroller & Auditor General within a period of
180 days from the commencement of the financial year.
2) The auditor so appointed shall hold the office as auditor till the conclusion of the
Annual General Meeting.
Other Aspects
143(5) – Right to direct the manner of conducting audit
In the case of a Government Company or a Government controlled company, C & AG has the
authority to direct the auditor appointed by him about the manner in which the accounts of
3.11
the company are required to be audited. The auditor of a government company shall submit
a copy of his report to the C & AG which shall include the directions, if any, issued by C & AG.
143(6) – Right to carryout supplementary Audit
The C & AG shall within 60 days from the date of receipt of the audit report have a right to
conduct a supplementary audit.
143(7) – Right to carryout Test Audit
Further, the C & AG can conduct Test Audit of a Government Company or a Government
controlled company.
PRACTICAL QUESTION
Nickson Ltd. is a subsidiary of Ajanta Ltd., whose 20% shares have been held by
Central Government, 25% by Uttar Pradesh Government and 10% by Madhya
Pradesh Government. Nickson Ltd. appointed Mr. P as statutory auditor for the
year.
According to Section 139 (7) of the Companies Act, 2013, a Government company is defined
―as any company in which not less than 51% of the paid-up share capital is held by the
Central Government or by any State Government or Governments or partly by the Central
Government and partly by one or more State Governments and includes a company which is
a subsidiary of a Government Company as thus defined‖. The auditors of a government
company shall be appointed or reappointed by the Comptroller and Auditor General of India.
In the given case Ajanta Ltd is a government company as its 20% shares have been held by
Central Govt, 25% by U.P. State Government and 10% by M.P. State Govt. Total 55% shares
have been held by Central and State governments. Therefore, it is a Government company.
Nickson Ltd. is a subsidiary company of Ajanta Ltd. Hence Nickson Ltd. covers in the
definition of a government company. Hence the Auditor of Nicksons Ltd. can be appointed
only by C & AG.
Therefore, appointment of ‗P‘ is invalid and ‗P‘ should not give acceptance to the Directors of
Nicksons Ltd.
APPOINTMENT OF FIRST AUDITOR (OTHER THAN A GOVERNMENT
COMPANY – Sec. 139(6)
1) The first auditors (other than of a Government Company) shall be appointed by the
Board of Directors within 30 days of registration of the company. Here date of
registration means date of incorporation.
2) If the Board of Directors fails to appoint the first auditor within the stipulated period,
then the members shall appoint the first auditor within 90 days in an EGM.
3) The company need not intimate about the appointment to the Registrar of
Companies. In other words, there is no need on the part of the company to file any form
with ROC in respect of appointment of first auditor.
4) The auditor so appointed either by the Board or by the members shall hold office till
the conclusion of the First Annual General Meeting.
5) Mere inclusion of name in Articles of Association or mere signature in the AOA does not
entitle a person to become the first auditor of the company automatically. In other words,
in some cases, the first auditor may be named in AOA. The act does not recognize this
3.12
method of appointment. Hence, the first auditors would be validly appointed only by a
resolution of the BOD or that of the company in general meeting.
PRACTICAL QUESTION
Managing Director of PQR Ltd. himself wants to appoint Shri Ganpati, a
practicing Chartered Accountant, as first auditor of the company. Comment on
the proposed action of the Managing Director.
Section 139(6) of the Companies Act, 2013 (the Act) lays down that ―the first auditor or
auditors of a company shall be appointed by the Board of directors within 30 days from the
date of registration of the company‖. In the instant case, the appointment of Shri Ganapati, a
practicing Chartered Accountant as first auditors by the Managing Director of PQR Ltd by
himself is in violation of Section 139(6) of the Companies Act, 2013, which authorizes the
Board of Directors to appoint the first auditor of the company.
In view of the above, the Managing Director of PQR Ltd should be advised not to appoint the
first auditor of the company.
APPOINTMENT OF FIRST AUDITOR OF A GOVERNMENT COMPANY – Sec.
139(7)
Applicability
The provisions of this sections are applicable not only for a Government Company but also
applicable to a company owned or controlled, directly or indirectly by Central Government of
by any State Government or Governments or partly by Central Government and partly by one
or more State Governments.
Definition of a Government Company
According to section 2(45) of the Companies Act, 2013, a Government Company can be
defined as any company in which not less than 51% of the paid-up share capital is held by -
(a) Central Government; or
(b) Any State Government or State Governments; or
(c) Partly by Central Government and partly by one or more State Governments
The definition of Government Company also includes a subsidiary company of a
Government company.
1. The first auditor of a Government Company shall be appointed by Comptroller and
Auditor General of India.
2. Such appointment must be made within 60 days from the date of registration of the
company. Here, date of registration means date of incorporation.
3. Where the Comptroller and Auditor General fails to appoint the first auditor with
the period specified above, then the Board of Directors of the company shall appoint
such auditor within the next 30 days.
4. Where the Board fails to appoint the auditor within the period stipulated, it shall
inform the members of the company and there upon the members of the company
shall appoint the first auditor with in 60 days in an Extra Ordinary General
Meeting.
5. The first auditor appointed either by C&AG or by Board or by members shall hold
office till the conclusion of the first Annual General Meeting.
3.13
Indirect Control includes control by public financial institutions like LIC, IDFC,
IRBI, GIC, RCTFC, TFCI, PFCI, NHB, REC, IRFC, various state financial
corporation, NABARD etc. which are in turn owned/controlled by Government.
PRACTICAL QUESTION
The first auditor of M/s Healthy Wealthy Ltd., a Government company, was
appointed by the Board of Directors.
In the case of a Government Company, the appointment of first auditor is governed by the
provisions of Section 139(7) of the Companies Act, 2013. According to that section, the first
auditors of a Government Company shall be appointed by Comptroller and Auditor General
with in 60 days from the date of registration of the company. Where, the C&AG fails to
appoint the first auditor with in the said period, then the Board of Directors shall appoint the
first auditor with in the next 30 days. In this case, it is not clear whether the C&AG failed to
appoint the first auditor with in 60 days of registration. Therefore, if we assume that C&AG
fails to appoint the first auditor with in the stipulated period, the Board of Directors of the
company shall have every right to appoint the first auditor with in next 30 days. Therefore,
the appointment done by the Board is said to be valid.
However, where it is assumed that the time limit of 60 days specified in the Companies Act
has not yet expired, then the appointment made by the Board is invalid.
CASUAL VACANCY - Sec 139(8)
The term „casual vacancy‟ has not been defined under the Companies Act, 2013.
However, taking its natural meaning, casual vacancy in the office of the auditor may arise
because of any one of the following reasons:
a. Death
b. Disqualification
c. Dissolution of the firm of Auditors
d. Resignation
Section 140(2) and (3) of Companies Act, 2013 deals with procedures relating to
resignation by an auditor.
These sections specifies that –
a. If the auditor has resigned from the company, he shall file a statement in
Form ADT-3 with the company and with registrar of companies
within a period of 30 days from the date of resignation.
a. Where the auditor of a government company resigned from his office, he
has to file a copy of ADT-3 with C&AG also along with the company and
with registrar of companies.
b. In such statement, the auditor shall indicate the reasons and other facts
with regard to his resignation.
c. If the auditor does not comply with the aforesaid provisions, he/it shall be
liable to a penalty of Rs.50000 or the remuneration of the auditor
whichever is lower. In case of a continuing failure, a further penalty
of Rs.500 for each day subject to a maximum of Rs.500000.
Filling Casual Vacancy in respect of a Government Company
3.14
 Casual Vacancy arising out of any reason shall be filled within 30 days by
Comptroller and Auditor General.
 If the Comptroller and Auditor General fail to fill the casual vacancy within the
stipulated period, then the Board of Directors shall fill such a vacancy within
next 30 days.
Filling Casual Vacancy In respect of any other company
Where the casual vacancy arises because of resignation of the existing auditor, such a
vacancy shall be filled by Board with in 30 days and shall be approved by the
members in the general meeting with in 3 months of the recommendation of the Board.
In case of casual vacancy arising out of any other reason other than resignation of the
auditor, such a vacancy shall be filled by Board of Directors with in 30 days of
occurrence of such a vacancy.
Tenure of office
Any auditor appointed to fill a casual vacancy shall hold office till the conclusion of the
next AGM.
PRACTICAL QUESTION
1. At the AGM of ICI Ltd., Mr. X was appointed as the statutory auditor. He,
however, resigned after 3 months since he wanted to give up practice and join
industry. State how the new auditor will be appointed by ICI Ltd and the
conditions to be complied for.
Section 139(8) of the Companies Act, 2013 deal with provisions relating to appointment of
auditor caused due to casual vacancy. A casual vacancy normally arises when an auditor
ceases to act as such after he has been validly appointed, e.g., death, disqualification,
resignation, etc. In the instance case, Mr. X has been validly appointed and thereafter he had
resigned.
The law provides that in case a casual vacancy has been created by the resignation of the
auditor (as in this case), the Board cannot fill in that vacancy itself, such appointment shall
also be approved by the company at general meeting convened within three months of the
recommendation of the board and then he shall hold office till the conclusion of the nest
annual general meeting..
In this case the casual vacancy has been created on account of resignation. Therefore, Board
of Directors will have to fill the vacancy within thirty days and such appointment shall be
approved by the company at the general meeting within three months of the
recommendations of the board. . The new auditor so appointed shall hold office only till the
conclusion of the next annual general meeting.
The provisions of the Companies Act, 2013 applicable for the appointment of an auditor in
place of a retiring auditor would equally applicable in the instant case.
2. Due to the resignation of the existing auditor(s), the Board of directors of X
Ltd appointed Mr. Hari as the auditor. Is the appointment of Hari as auditor
valid?
Board's Powers to Appoint an Auditor: As per Section 139(8) of the Companies Act, 2013, any
casual vacancy in the office of an auditor shall-
3.15
(i) In the case of a company other than a company whose accounts are subject to audit
by an auditor appointed by the Comptroller and Auditor-General of India, be filled
by the Board of Directors within thirty days.
If such casual vacancy is as a result of the resignation of an auditor, such
appointment shall also be a pproved 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;
(ii) In the case of a company whose accounts are subject to audit by an auditor
appointed by the Comptroller and Auditor-General of India, be filled by the
Comptroller and Auditor-General of India within thirty days:
It may be noted that in case the Comptroller and Auditor-General of India does not fill the
vacancy within he said period the Board of Directors shall fill the vacancy within next thirty
days.
Therefore, the vacancy can be filled by the Board of Directors within thirty days but such
appointment should 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
3. M/s Young & Co., a Chartered Accountant firm, and Statutory Auditors of Old
Ltd., is dissolved on 1.4.2014 due to differences of opinion among the partners.
The Board of Directors of Old Ltd. in its meeting on 6.4.2014 appointed another
firm M/s Sharp & Co. as their new auditors for one year.
Section 139(8) of the Companies Act, 2013 lays down that the Board of Directors may fill any
casual vacancy in the office of an auditor provided that where such vacancy is caused by the
resignation of an auditor, the vacancy shall be filled in general meeting.
The expression ―casual vacancy‖ has not been defined in that Act. Talking its natural meaning
it may arise due to a variety of reasons which include death, resignation, disqualification,
dissolution of the firm etc. Furthermore Section 139(8) stipulates that any auditor appointed
in a casual vacancy shall hold office until the conclusion of the next AGM. In the instant case
the action of the board of directors in appointing M/s Sharp & Co. to fill up the casual
vacancy due to dissolution of M/s Young & Co., is correct. However, the board of directors
are not correct in giving them appointment for one year. M/s Sharp & Co. can hold office
until the conclusion of next AGM only.
REAPPOINTMENT OF RETIRING AUDITOR – Sec. 139(9)
The retiring auditor may be reappointed at an Annual General Meeting if –
a. he is not disqualified for re-appointment
b. he has not given the company a notice in writing of his unwillingness to
be re-appointed; and
c. a special resolution has not been passed at that meeting appointing
some other auditor or providing expressly that he shall not be re-
appointed.
According to Section 139(10), if at any Annual General Meeting, the Auditor is not appointed
or reappointed, the existing auditor shall continue to be the auditor of the company.
MANNER AND PROCEDURE OF SELECTION OF AUDITORS – Rule 3 of
Companies (Audit and Auditors) Rules, 2014 & 139(11)
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Case – 1 : Companies required to constitute an Audit Committee
Where a company is required to constitute an Audit Committee under Section 177 of the
Companies Act, 2013, the Audit Committee is the competent authority which will have the
following responsibilities:
1. It should consider the qualifications and experience of the auditor proposed for
appointment to evaluate whether such qualifications and experience are
commensurate with the size of the company as well as the requirements of the
company.
2. It should also consider an order or pending proceeding relating to the proposed
auditor in relation to professional conduct before The Institute of Chartered
Accountants of India or before any other competent authority or before any court.
3. It may call for further information from the proposed auditor as it may deem fit.
4. After considering all the above things, the committee shall recommend the name of
an individual or a firm as auditor to the Board of Directors for consideration.
5. If the Board agrees with the recommendation of the Audit Committee, it shall
recommend the same for further consideration to the members in the Annual
General Meeting.
6. If the Board disagrees with the recommendation of the Audit Committee, it shall refer
back the recommendation to the committee for reconsideration. In such a case, the
board shall specify the reasons for their disagreement.
7. If the Audit Committee decides not to reconsider its original
recommendation, the board shall record reasons for its disagreement with the
committee and send its own recommendations for consideration of the members
in the Annual General Meeting.
Case – 2 : Companies not required to constitute an Audit Committee
In this case, the responsibilities of the Audit Committee specified above will have to be
discharged by the Board of Directors.
All about Audit Committee -Section 177 read with Rule 5 of Companies
(Meetings of Board and its Powers) Rules, 2014
1. The Board of Directors of the following types of companies shall constitute an Audit
Committee.
a. All Listed Public Companies
b. All non listed public companies having
ii. Paid up capital of Rs.10 crores or more
iii. Turnover of Rs.100 crores or more
iv. Aggregate outstanding loans or borrowings or debentures or deposits of
Rs.50 crore or more
as per last audited Financial Statements
2. The audit committee shall consist of a minimum of 3 directors majority of whom
should be independent directors.
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3. Majority of the members of audit committee including its chairperson shall be persons
with ability to read and understand financial statements.
Duties of Audit Committee

a. Recommend for appointment, remuneration and terms of appointment of auditors
of the company. However, in case of a government company, it is limited
to the recommendation of remuneration.
b. Review and monitor the auditor‟s independence and performance, and
effectiveness of audit process.
c. Examination of financial statements and the auditors‟ report thereon;
d. Approval or any subsequent modification of transactions for the company with
related parties.
However, the audit committee may make omnibus approval for related party
transactions proposed to be entered into by the company subject to such
conditions as may be prescribed.
In case of transactions other than transactions referred to in section 188 of the
Companies Act, 2013, and where audit committee does not approve the
transaction, it shall make its recommendations to the Board.
Also, in case any transactions involving an amount not exceeding Rupees 1 crore is
entered into by a director or officer of the company without obtaining the approval
of the audit committee and it is not ratified by the audit committee within 3
months from the date of the transaction, such transaction shall be voidable at the
option of the audit committee and if the transaction is with the related party to any
director or is authorized by any other director, the director concerned shall
indemnify the company against any loss incurred by it.
These provisions shall not apply to a transaction, other than a transaction related
to in section 188, between a holding company and its wholly owned subsidiary
company.
e. Scrutiny of inter-corporate loans and investments;
f. Valuation of undertakings or assets of the company, wherever it is
necessary;
g. Evaluation of internal financial controls;
h. Monitoring the end use of funds raised through public offers etc.
Section 177(5)
The audit committee may call for the comments of the auditors about internal
control systems, the scope of audit, including the observations of the auditors
and review of financial statement before their submission to the board and may also discuss
any related issues with the internal and statutory auditors and the management of the
company.
177(6)
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The audit committee shall have authority to investigate into any matter in relation to
the items specified in sub-section 4 or referred to it by the board and for this purpose shall
have power to obtain professional advice from external sources and have full access to
information contained in the records of the company.
177(7)
The auditors of a company and the key managerial personnel shall have a right to be heard
in the meetings of the audit committee when it considers the auditor‘s report but shall not
have the right to vote.
177(8)
The Board‟s report under Section 134(3) shall disclose the composition of an audit
committee and where the board had not accepted any recommendation of the audit
committee, the same shall be disclosed in such report along with the reasons there
for.
177(9)
Every listed company shall establish a vigil mechanism for directors and employees to
report genuine concerns in such manner as may be prescribed.
177(10)
The vigil mechanism shall provide for adequate safeguards against victimization of
persons who use such mechanism and make provision for direct access to the chairperson of
the audit committee in appropriate or exceptional case. Provided that the details of
establishment of such mechanism shall be disclosed by the company on its website, if
any, and in the board repot.
REMOVAL OF AUDITORS BEFORE EXPIRY OF TERM - SEC. 140 (1)

The following is the procedure to be followed by the company if it wants to remove the
auditor (appointed under section 139) before the expiry of the term of office.
Procedure for removal of auditors
 The Board shall pass a resolution recommending the removal.
 Within 30 days of passing of such resolution, the company shall make an
application to the Central Government in Form ADT-2 along with prescribed fee.
 With in 60 days of receipt of approval from Central Government, the company
shall hold a general meeting and should pass a special resolution.
 Before taking any action for removal, the auditor concerned shall be given a
reasonable opportunity of being heard.
PRACTICAL QUESTION
Why Central Government permission is required, when the auditors are to be
removed before expiry of their term, but the same is not needed when the
auditors are changed after expiry of their term?
Removal of auditor before expiry of his term i.e. before he has submitted his report is a
serious matter and may adversely affect his independence. Further, in case of conflict of
interest the shareholders may remove the auditors in their own interest.
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Therefore, law has provided this safeguard so that central government may know the reasons
for such an action and if not satisfied, may not accord approval.
On the other hand if auditor has completed his term i.e. has submitted his report and
thereafter he is not re-appointed then the matter is not serious enough for central
government to call for its intervention.
In view of the above, the permission of the Central Government is required when auditors are
removed before expiry of their term and the same is not needed when they are not re-
appointed after expiry of their term.
APPOINTMENT OF AUDITOR OTHER THAN THE RETIRING AUDITOR –
Section 140(4)
Section 140 lays down procedure to be followed if the company wants to appoint a person
other than retiring auditor.
 Special notice shall be required from members proposing to move a resolution at
the next Annual General Meeting to appoint a person other than the retiring auditor or
to provide that the retiring auditor shall not be reappointed.
 Such special notice shall not be required in case where the retiring auditor has
completed a consecutive tenure of five years or, as the case may be, ten years, as
provided under sub-section (2) of section 139.
 On receipt of special notice, the company shall forthwith send a copy thereof to the
retiring auditor.
 On receipt of the copy of such notice, the retiring auditor has a right to make a
written representation in this behalf not exceeding a reasonable length and
he can request the company to circulate the copies of such written representation to
the members. The company shall circulate the copies of such written representation to
the members unless it is received by it too late.
 Where the company fails to circulate the copies of written representation either
because it was received too late or because of the company‘s default, the auditor may
ask the company to read the representation in the Annual General Meeting.
 Where the company is of the opinion that the retiring auditor abused his power of
making written representations, then it can make an application to the tribunal
and if the tribunal agrees with the contention of the company, then it may direct the
company not to circulate the representation or not to read such
representation in the meeting.
 The auditor has a right to be heard orally in the meeting.
ELIGIBILITY, QUALIFICATIONS AND DISQUALIFICATIONS OF AUDITORS –
Sec. 141
Section 141(1) – Qualifications
According to Section 141(1) of the Companies Act, 2013, a company can appoint either an
individual or a partnership firm as its auditor.
INDIVIDUAL
Where the company wants to appoint an individual as its auditor, such an individual must
satisfy the following two conditions:
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a. He must be a Chartered Accountant within the meaning of Chartered
Accountants Act, 1949 and
b. He must hold a valid Certificate of Practice.
PARTNERSHIP FIRM
Where the company wants to appoint a partnership firm as its auditor, such a firm must
satisfy all the following conditions:
a. Majority of the partners of the firm practicing in India must be qualified for
appointment
b. The appointment should be made in the name of the firm
Here, the term ―firm” also includes a Limited Liability Partnership Firm (LLP).
Section 141(2) – Qualifications
In case of appointment of a partnership firm as auditor, only the partners who are
Chartered Accountants shall be authorized to act and sign on behalf of the firm.
A firm/LLP can partner with non-members and still be appointed as auditor.
A multi-disciplinary firm consist of 10 partners where 8 are Chartered Accountants, 1 Company
Secretary and 1 Cost Accountant. Is the firm eligible for appointment as auditor?
Yes. As per section 141(2) of the CA, 2013, a multi-disciplinary firm can be appointed as the auditors
of the company, provided that only the partners who are chartered accountants are authorised to act
and sign on behalf of the firm. However the firm should be constituted as an LLP and no other body
corporate.
Disqualifications of Auditor – Section 141(3)
The following persons shall not be eligible for appointment as an auditor of a company:
a. a body corporate other than a Limited Liability Partnership firm;
b. an officer or an employee of the company;
Recently, the ESB of ICAI had clarified that a member cannot be
appointed as Statutory and/or Tax auditor, of such a company, for a
period of 2 years from the date of his resignation or removal as a
director from such company.
Example: G, a CA in practice is a director of Z Ltd. which is a holding company
of RST Ltd. On combine reading of Section 141(3)(b) and Section 2(59), it may
be concluded that CA G would be disqualified to be appointed as the auditor of
Z Ltd. but would not be disqualified in case of RST Ltd.
c. a partner, or an employee of an officer or employee of the company;
This sub-section disqualifies the below mentioned persons from being
appointed as auditor of a company:
o Partner of an officer of a company
o Employee of an officer of a company
o Partner of an employee of the company
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o Employee of an employee of the company
d. Indebtedness/Guarantee/Security
a person who, or his relative or partner –
(i) is holding any security
 in the company or
 its subsidiary, or
 its holding company or
 its associate company or
 a subsidiary of such holding company;
However, a relative may hold security in the company of face value not
exceeding Rs.1,00,000. If the relative acquires any security over and
above the prescribed threshold limit of Rs.1,00,000, the auditor should take
corrective action to maintain the limits within 60 days of such
acquisition.
The limit of Rs.100000 would be applicable only to relative and not where the
securities are held by an auditor or his partner. In case of an auditor or his
partner, securities of even small value shall be a disqualification.
(ii) Is indebted to
 the company or
For an amount exceeding Rs.5,00,000
(iii) has given a guarantee or provided any security in connection
with indebtedness to
 the company or
For an amount exceeding Rs.1,00,000
e. Business relationship
A person or a firm who has business relationship (whether directly or
indirectly) with –
 the company or
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 a subsidiary of such holding company
 a subsidiary of such associate company;
According to the Companies (Audit and Auditors) Rules, 2014, the term
―business relationship‖ shall be construed as any transaction entered into for a
commercial purpose. However, the following shall not be treated as
transactions entered with a commercial purpose.
i. Commercial transactions in the nature of professional services
permitted to be rendered by an auditor.
ii. Commercial transactions entered in the ordinary course of business at
arm‟s length price like sale of products or services to the auditor, as a
customer.
f. a person whose relative is a director or in employment of the company as a
director or key managerial personnel; In other words, a relative of director
or a key managerial personnel shall not be appointed as auditor.
Definition of „relative‟ [Sec 2(77) of the Companies Act, 2013]
‗Relative‘, with reference to any person, means any one who is related to another, if-
(i) they are members of a Hindu Undivided Family,
(ii) they are husband and wife, or
(iii) one person is related to the other in such manner as may be prescribed
As per Rule 4 the Companies (Specification of definitions details) Rules, 2014, a person
shall be deemed to be the relative of another, if he or she is related to another in the
following manner, namely:
(1) Father (including step-father)
(2) Mother (including stepmother)
(3) Son (including step-son)
(4) Son‘s wife
(5) Daughter
(6) Daughter‘s husband
(7) Brother (including step-brother)
(8) Sister (including step-sister)
g. a person who is in full time employment elsewhere or a person or a
partner of a firm holding appointment as its auditor, if such person or partner is
at the date of such appointment or reappointment holding appointment as
auditor of more than 20 companies other than one person companies,
dormant companies, small companies and private companies having a
paid up capital of less than 100 crores.
CEILING ON NUMBER OF AUDITS
Section 141(3)(g) of the Companies Act, 2013 contains provisions relating to the
maximum number of audits which a chartered accountant can accept. This maximum
number is referred to in that section is called as “specified number”.
3.23
Before appointment of an auditor, the company must obtain a certificate from him to the
effect that the appointment, if made, will not result in an excess holding of company
audits by the auditor as per the limits laid down in section 141(3)(g) of the Companies Act,
2013.
The council of The Institute of Chartered Accountants of India specifies that a member
of the Institute in practice shall be deemed to be guilty of professional
misconduct, if he holds appointment of more than “specified number” of
audit assignments of the companies.
1. According to this section, an individual Chartered Accountant in practice
who is not in full time employment can accept a maximum of 20
company audits. In other words, a person in full time employment
cannot be appointed as the auditor of a company.
2. In the case of a firm of chartered accountants, the specified number shall be
construed as number of companies specified for every partner of the
firm who is not in full time employment elsewhere. In other words,
where any partner of the firm is in whole time employment elsewhere, that
partner who is in whole time employment shall be excluded while
calculating the ceiling on number of audits.
3. Where a partner of the firm is also a partner in any other firm or practices
individually, the total number of audits should not exceed 20. In other
words, if a partner in a firm (who is not in whole time employment
elsewhere) is also practicing in his individual name and/or is also a partner
in any other firm or firms of auditors, the total number of audits held by him
individually and by different firms on his account is to be considered in
applying the ceiling on the number of audits.
4. While calculating ceiling on number of audits, joint audits are to be
included.
The following audits shall be excluded from computing ceiling on number of audits:
 Small Companies
 One Person Company
 Dormant Company
 Private Companies having a paid up capital of less than 100 crores and
if such a private limited company has not committed a default
in filing its financial statements under section 137 of the Act,
amd Annual Return under Section 92 of the Act with
Registrar.
h. Committed fraud
a person who has been convicted by a court of an offence involving fraud and
a period of 10 years has not elapsed from the date of such conviction.
Where an auditor has been convicted of a fraud, can he be
reappointed in the same company?
Section 141 (3)(h) of the CA, 2013 provides that an auditor shall be disqualified
to be appointed/re-appointed as an auditor in the same company unless ten
years have elapsed from the date of such conviction involving fraud.
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Can an auditor convicted of fraud be re-appointed as auditor for any
company?
The auditor shall be disqualified to be appointed/re-appointed as such in any
company unless ten years have elapsed from the date of such conviction
involving fraud.
i. Engaged in Consulting and Specialized Services
A person who, directly or indirectly, renders any specialized service referred to
in Section 144 to the Company or its holding company or its subsidiary
company.
Which companies shall an auditor concern himself with for
determining the ineligibility of providing negative listed services?
Section 144 of the CA, 2013 provides that an auditor shall not, either directly or
indirectly, render any of the negative listed services to:
(i) The Company;
(ii) Its holding company; or
(iii) Its subsidiary company
PRACTICAL QUESTIONS
1. Prakash, a member of the ICAI, does not hold a Certificate of practice. Is his
appointment as an auditor valid?
A person shall be qualified for appointment as an auditor of a company, only if he is a
Chartered Accountant within the meaning of the Chartered Accountants Act, 1949. Under the
Chartered Accountants Act, 1949, only a Chartered Accountant holding the certificate of
practice can engage in public practice. In this case, Mr. Prakash does not hold a certificate of
practice and hence is not qualified to be appointed as the auditor of a company.
2. Mr. Ample, a practicing Chartered Accountant, is holding securities of “XYZ
Ltd.” having face value of Rs.900/-. Whether Mr. Ample is qualified for
appointment as an Auditor of “XYZ Ltd.”?
As per section 141 (3)(d) (i) an auditor is disqualified to be appointed as an auditor if he, or
his relative or partner holding any security in the company or its subsidiary, or of its holding
or associate company or a subsidiary of such holding company.
In the present case, Mr. Ample is holding security of Rs.900 in the XYZ Ltd, therefore he is
not eligible for appointment as an Auditor of ―XYZ Ltd‖.
3. “Mr. P” is a practicing Chartered Accountant and “Mr. Q”, the relative of “Mr.
P”, is holding securities of “ABC Ltd.” having face value of Rs.90,000/-.
Whether “Mr. P” is Qualified from being appointed as an Auditor of “ABC Ltd.”?
As per section 141 (3)(d)(i) a person is disqualified to be appointed as an auditor if he, or his
relative or his partner is holding any security in the company or its subsidiary, or of its
holding or associate company or a subsidiary of such holding company. Further as per
proviso to this Section, the relative of the auditor may hold the securities or interest in the
company of face value not exceeding of Rs.1,00,000.
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In the present case, Mr. Q. (relative of Mr. P, an auditor), is having securities of Rs.90,000
face Value in ABC Pvt. Ltd., which is as per requirement of proviso to section 141 (3)(d)(i),
Therefore, Mr. P will not be disqualified to be appointed as an auditor of ABC Ltd.
4. Mr. M, a Chartered Accountant in practice, is holding debentures in D Ltd.
State whether he can be appointed as an auditor of D Ltd?
As per Section 141(3)(d)(i), Mr. M is disqualified to be an auditor of D Ltd. since he holds
debenture (a security) in the company.
5. Mr. R is a chartered accountant in practice. His father is holding shares in
Prakash Ltd. The face value of shares is Rs.15000. However, the market value
of same is Rs.125000. State whether Mr. R is disqualified to be appointed as
auditor in Prakash Ltd?
As per Section 141(3)(d)(i), Mr. R is not disqualified since holding of securities up to face
value of Rs.100000 by a relative does not result in disqualification (market value of the
security is immaterial)
6. “BC & Co.” is an Audit Firm having partners “Mr. B” and “Mr. C”, and “Mr. A”
the relative of “Mr. C”, is holding securities of “MWF Ltd.” having face value of
Rs.1,01,000/-. Whether “BC & Co.” is qualified from being appointed as an
Auditor of “MWF Ltd.”?
As per section 141 (3)(d) (i) an auditor is disqualified to be appointed as an auditor if he, or
his relative or partner holding any security in the company or its subsidiary, or of its holding
or associate company or a subsidiary of such holding company: Further as per proviso to this
Section, the relative of the auditor may hold the securities in the company of face value not
exceeding of Rs.1,00,000.
In the instant case BC & Co, will be disqualified for appointment as an auditor of MWF Ltd as
the relative of Mr. C i.e. partner of BC & Co., is holding the securities in MWF Ltd which is
exceeding the limit mentioned in proviso to section 141(3)(d)(i).
7. „B‟ owes Rs.5,01,000 to „C‟ Ltd., of which he is an auditor. Is his appointment
valid? Will it make any difference, if the advance is taken for meeting out
travelling expenses?
As per Section 141(3)(d)(ii) of the Companies Act, 2013, a person who, or his relative or
partner is indebted to the company, or its subsidiary, or its holding or associate company, or
a subsidiary of its holding company, for an amount exceeding Rs.500000/- then he is not
qualified for appointment as an auditor of a company. Accordingly, B‘s appointment is not
valid and he is disqualified as the amount of debt exceeds Rs.500000. Even if the advance
was taken for meeting out travelling expenses particularly before commencement of audit
work, his appointment is not valid because in such a case also the auditor shall be deemed to
be indebted to the company.
8. Mr. Amar, a Chartered Accountant, bought a car financed at Rs.7,00,000 by
Chaudhary Finance Ltd., which is a holding company of Charan Ltd. and Das
Ltd. He has been the statutory auditor of Das Ltd. and continues to be so even
after taking the loan.
According to section 141 (3)(d) (ii) of the Companies Act, 2013, a person is not eligible for
appointment as auditor of any company, If he is indebted to the company, or its subsidiary,
or its holding or associate company or a subsidiary of such holding company, in excess of
rupees five lakh.
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In the given case Mr. Amar is disqualified to act as an auditor under section141 (3)(d) (ii)) as
he is indebted to M/s Chaudhary Finance Ltd. for more than 500000. Also according to
Section141 (3)(d) (ii) he cannot act as an auditor of any subsidiary of Chaudhary Finance Ltd
and therefore he is also disqualified to work in Charan Ltd. & Das Ltd. Therefore he has to
vacate his office in Das Ltd.
9. Ram and Hanuman Associates, Chartered Accountants in practice have been
appointed as Statutory Auditor of Krishna Ltd. for the accounting year 2013-
2014. Mr. Hanuman holds 100 equity shares of Shiva Ltd., a subsidiary company
of Krishna Ltd.
As per sub-section (3)(d)(i) of Section 141 of the Companies Act, 2013 along with Rule 10 of
the Companies (Audit and Auditors) Rule, 2014, a person shall not be eligible for
appointment as an auditor of a company, who, or his relative or partner is holding any
security of or interest in the company or its subsidiary, or of its holding or associate company
or a subsidiary of such holding company. Provided that the relative may hold security or
interest in the company of face value not exceeding rupees one lakh.
Also, as per sub-section 4 of Section 141 of the Companies Act, 2013, where a person
appointed as an auditor of a company incurs any of the disqualifications mentioned in sub-
section (3) after his appointment, he shall vacate his office as such auditor and such vacation
shall be deemed to be a casual vacancy in the office of the auditor.
In the present case, Mr. Hanuman, Chartered Accountant, a partner of M/s Ram and
Hanuman Associates, holds 100 equity shares of Shiva Ltd. which is a subsidiary of Krishna
Ltd. Therefore, the firm, M/s Ram and Hanuman Associates would be disqualified to be
appointed as statutory auditor of Krishna Ltd., which is the holding company of Shiva Ltd.,
because one of the partners Mr. Hanuman is holding equity shares of its subsidiary.
10. Mr. Siva is a chartered accountant in practice. His sister‟s husband holds
equity shares having face value of Rs.50 lakhs in Shreya Ltd. Is Mr. Siva
disqualified to be appointed as an auditor of Shreya Ltd?
As per Section 141(3)(d)(i), Mr. Siva is not disqualified since sister‘s husband is not covered
in the definition of ―relative‖.
11. Mr. Akash is a chartered accountant in practice. His sister is CEO in Huge
Ltd. State whether Mr. Akash is disqualified to be the auditor of Small Ltd., a
subsidiary company of Huge Ltd.?
As per Section 143(1)(f), Mr. Akash is not disqualified.
12. Mr. Aditya, a practising chartered accountant is appointed as a “Tax
Consultant” of ABC Ltd., in which his father Mr. Singhvi is the Managing
Director.
A chartered accountant appointed as an auditor of a company, should ensure the
independence in respect of his appointment as an auditor, else it would amount to
"misconduct" under the Chartered Accountants Act, 1949 read with Guidance Note on
Independence of Auditors.
In this case, Mr. Aditya is a "Tax Consultant" and not a "Statutory Auditor" or "Tax Auditor"
of ABC Ltd., hence he is not subject to the above requirements.
13. “ABC & Co.” is an Audit Firm having partners “Mr. A”, “Mr. B” and “Mr. C”,
Chartered Accountants. “Mr. A”, “Mr. B” and “Mr. C” are holding appointment
as an Auditor in 4, 6 and 10 Companies respectively.
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(i) Provide the maximum number of Audits remaining in the name of “ABC &
Co.”
(ii) Provide the maximum number of Audits remaining in the name of
individual partner i.e. Mr. A, Mr. B and Mr. C.
In the instant case, Mr. A is holding appointment in 4 companies, whereas Mr. B is having
appointment in 6 Companies and Mr. C is having appointment in 10 Companies. In aggregate
all three partners are having 20 audits.
As per section 141(3)(g) of the Companies Act, 2013, a person shall not be eligible for
appointment as an auditor if he is in full time employment elsewhere or a person or a partner
of a firm holding appointment as its auditor, if such person or partner is at the date of such
appointment or reappointment holding appointment as auditor of more than twenty
companies;
As per section 141 (3)(g), this limit of 20 company audits is per person. In the case of an audit
firm having 3 partners, the overall ceiling will be 3 × 20 = 60 company audits. Sometimes, a
chartered accountant is a partner in a number of auditing firms. In such a case, all the firms
in which he is partner or proprietor will be together entitled to 20 company audits on his
account.
Conclusion:
(i) Therefore, ABC & Co. can hold appointment as an auditor of 40 more companies:
Total Number of Audits available to the Firm = 20*3 = 60
Number of Audits already taken by all the partners
In their individual capacity = 4+6+10 = 20
Remaining number of Audits available to the Firm = 40
(ii) With reference to above provisions an auditor can hold more appointment as auditor
= ceiling limit as per section 141(3)(g)- already holding appointments as an auditor. Hence
(1) Mr. A can hold: 20 - 4 = 16 more audits. (2) Mr. B can hold 20-6 = 14 more audits and (3)
Mr. C can hold 20-10 = 10 more audits.
14. KBC & Co. a firm of Chartered Accountants has three partners, K, B & C; K is
also in whole time employment elsewhere. The firm is offered the audit of ABC
Ltd. and is already holding audit of 40 companies.
As per section 141(3)(g) of the Companies Act, 2013, a person shall not be eligible for
appointment as an auditor if he is in full time employment elsewhere or a person or a partner
of a firm holding appointment as its auditor, if such person or partner is at the date of such
companies. In the firm of KBC & Co., K is in whole-time employment elsewhere, therefore, he
will be excluded in determining the number of company audits that the firm can hold. If B
and C do not hold any audits in their personal capacity or as partners of other firms, the total
number of company audits that can be accepted by KBC & Co., is forty, and in the given case
company is already holding forty audits, therefore, KBC & Co. can‘t accept the offer for audit
of ABC Ltd.
15. PBS & Associates, a firm of Chartered Accountants, has three partners P, B
and S. The firm is already having audit of 45 companies. The firm is offered 20
company audits. Decide and advise whether PBS & Associates will exceed the
ceiling prescribed under Section 141(3)(g) of the Companies Act, 2013 by
accepting the above audit assignments?
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Before appointment is given to any auditor, the company must obtain a certificate from him
to the effect that the appointment, if made, will not result in an excess holding of company
audit by the auditor concerned over the limit laid down in section 141(3)(g) of the Act which
prescribes that a person who is in full time employment elsewhere or a person or a partner of
a firm holding appointment as its auditor, if such person or partner is at the date of such
companies.
In the case of a firm of auditors, it has been further provided that ‗specified number of
companies‘ shall be construed as the number of companies specified for every partner of the
firm who is not in full time employment elsewhere.
If Mr. P, B and S do not hold any audits in their personal capacity or as partners of other
firms, the total number of company audits that can be accepted by M/s PBS & Associates is
60. But, the firm is already having audit of 45 companies. So the firm can accept the audit of
15 companies only, which is well within the limit, specified by Section 141(3)(g) of the
Companies Act, 2013.
16. Navy and Cavy Associates, a Chartered Accountant firm, has been
appointed as Statutory Auditor of Poor Ltd. for the financial year 2013-2014.
Mr. Savy, the relative of Mr. Navy, a partner in Navy and Cavy Associates,
is indebted for 6,00,000 to Wealthy Ltd., a subsidiary company of Poor
Ltd. Comment.
Indebtness to the Subsidiary Company: As per sub-section (3)(d)(ii) of Section
141 of the Companies Act, 2013 along with Rule 10 of the Companies (Audit and
Auditors) Rule, 2014, a person shall not be eligible for appointment as an auditor of a
company, who, or his relative or partner is indebted to the company, or its subsidiary, or
its holding or associate company or a subsidiary of such holding company, in excess
of ` 5 lakhs.
Also, as per sub-section 4 of Section 141 of the Companies Act, 2013, where a person
appointed as an auditor of a company incurs any of the disqualifications mentioned
in sub-section (3) after his appointment, he shall vacate his office as such auditor and
such vacation shall be deemed to be a casual vacancy in the office of the auditor.
In the present case, Mr. Savy, the relative of Mr. Navy, a partner in Navy and Cavy
Associates, has been indebted to Wealthy Ltd., a subsidiary company of Poor Ltd., for `
6 lakhs.
Therefore, the firm, Navy and Cavy Associates would be disqualified to be appointed as
statutory auditor of Poor Ltd. as per section 141(3)(d)(ii), which is the holding company
of Wealthy Ltd., because Mr. Savy, the relative of Mr. Navy, a partner in Navy and
Cavy Associates, has been indebted to Wealthy Ltd. for an amount exceeding the
minimum approved limit.
17. Mr. Pratiq, a practicing Chartered Accountant, has been appointed as an
auditor of Opus Ltd. He is holding securities of the company having face
value of R s . 89,000 only.
You are required to state, whether Mr. Pratiq is qualified to be appointed as
an auditor of Opus Ltd.
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Would your answer be different, if instead of Mr. Pratiq; Mr. Quresh, the
step- father of Mr. Pratiq, is holding the securities?
According to section 141(3)(d)(i) of the Companies Act, 2013 read with Rule 10 of the
Companies (Audit and Auditors) Rule, 2014, an auditor is disqualified to be appointed as
an auditor if he, or his relative or partner holding any security of or interest in the
company or its subsidiary, or of its holding or associate company or a subsidiary of such
holding company.
However, as per the proviso to this Section, the relative of the auditor may hold the
securities or interest in the company of face value not exceeding of ` 1,00,000.
Further, the term ―relative‖ has been defined under the Companies Act, 2013 which
means anyone who is related to another as members of a Hindu Undivided Family;
husband and wife; Father (including step- father), Mother (including step-mother),
Son (including step- son), Son‘s wife, Daughter, Daughter‘s husband, Brother (including
step- brother), Sister (including step- sister).
In the present situation,
(i) Mr. Pratiq is holding securities in Opus Ltd., which is not allowed as per the
provisions of section 141(3)(d)(i) of the Act. Therefore, Mr. Pratiq will be
disqualified to be appointed as an auditor of Opus Ltd.
(ii) Mr. Quresh, the step-father of Mr. Pratiq, is holding the securities in Opus Ltd.
It may be noted that step-father is included in the definition of the term ―relative‖ as
per the Companies Act, 2013. Further, proviso to section 141(3)(d)(i) of the Act allows
a relative of the auditor to hold securities in the company of face value not exceeding of
` 1,00,000.
Here, Mr. Quresh is holding securities for face value of ` 89,000 which is below the
limit as prescribed under the said proviso.
Therefore, Mr. Pratiq will not be disqualified to be appointed as an auditor of Opus Ltd.
18. CA Adroit was indebted to Anfractuous (P) Ltd. for a sum of

6,00,000 as on 01.04.2015. However, CA Adroit having come to know
that he might be appointed as auditor of the company, he squared up the
amount on 10.7.2015. Later on, he was appointed as an auditor of the
company for the year ended 31.3.2016 at the Annual General Meeting
held on 16.07.2015.
Subsequently, one of the shareholders complains that the appointment of
CA Adroit as an auditor is invalid because he incurred disqualification
under section 141 of the Companies Act, 2013. Comment.
Indebtness to the Company: According to the section 141(3)(d)(ii) of the
Companies Act, 2013, a person who is indebted to the company for an amount
exceeding 5,00,000 shall be disqualified to act as an auditor of such company and
further under section 141(4) he shall vacate his office of auditor when he incurs this
disqualification subsequent to his appointment.
However, where the person has liquidated his debt before the
appointment date, there is no disqualification to be construed for such
appointment.
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In the given case, CA Adroit was indebted to Anfractuous (P) Ltd. for a sum of
6,00,000 as on 01.04.2015. He was appointed as an auditor of the company for the
year ended 31.03.2016 at the Annual General Meeting held on 16.07.2015. He also
repaid the loan amount fully to the company on 10.7.2015 i.e. before the date of his
appointment.
Hence, the appointment of CA Adroit as an auditor is valid and the shareholder‘s
complaint is not acceptable.
Section 141(4)
If an auditor, after his appointment, becomes subject to any of the above
disqualifications, he shall be deemed to have automatically vacated his office and
that vacancy shall be considered to be a casual vacancy.
PRACTICAL QUESTION
A, a chartered accountant has been appointed as auditor of Laxman Ltd. In the
Annual General Meeting of the company held in September, 2013, which
assignment he accepted. Subsequently in January, 2014 he joined B, another
chartered accountant, who is the Manager Finance of Laxman Ltd., as partner.
Section 141(3) (c) of the Companies Act, 2013 prescribes that any person who is a partner or
in employment of an officer or employee of the company will be disqualified to act as an
auditor of a company. Sub-section (4) of Section 141 provides that an auditor who becomes
subject, after his appointment, to any of the disqualifications specified in sub-sections (3) of
Section 141, he shall be deemed to have vacated his office as an auditor.
In the present case, A, an auditor of M/s Laxman Ltd., joined as partner with B, who is
Manager Finance of M/s Laxman Limited, has attracted clause (3) (c) of Section 141 and,
therefore, he shall be deemed to have vacated office of the auditor of M/s Laxman Limited.
AUDITOR‟S REMUNERATION – Sec.142
1. According to Section 142 of Companies Act, 2013, the remuneration of the auditor shall
be fixed by the members
 Either in the general meeting or
 In such manner as determined in the general meeting.
2. Where the first auditors were appointed by the Board, the remuneration of such
first auditor may be fixed by the Board.
3. The term remuneration includes not only the fee payable to the auditor but it also
include the expenses, if any, incurred by the auditor in connection with the audit of
the company and any facility extended to him.
4. However, the term remuneration does not include any remuneration paid to the
auditor for any other service rendered by him at the request of the company.
5. In accordance with the disclosure requirements of Part II of Schedule III to the
Companies Act, 2013, the remuneration of the auditor shall be disclosed as under in
Notes to Accounts:
 As an auditor
 For Taxation matters
 For Company Law matters
 For Management Services
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 For Other Services
 For reimbursement of Expenses
POWERS/RIGHTS OF AUDITORS – Section 143(1)
Right to access to Books of account, vouchers and other relevant records
The auditor of a company shall have a right of access to the books, accounts and vouchers of
the company, at all times, whether they were kept at head office or at any other
place.
The term “at all times” here implies that an auditor can inspect the books, accounts and
vouchers usually during the normal working hours of the business of the client.
The term "books" not only includes financial books but also include statutory, statistical and
memoranda books. Memoranda books include Stock Records, Cost accounting records etc.
The term "vouchers" includes all correspondence, agreements or other documents which
may help in vouching the accuracy of the accounts maintained by the company.
Further, the auditor of a company which is a holding company shall also have
the right of access to the accounts and records of the associate and joint venture
companies, in addition to the accounts and records of all its
subsidiaries.[Section143(1)]
Case Study
While conducting the audit of a limited company for the year ended 31st March,
2014, the auditor wanted to refer to the Minute Books. The Board of Directors
refused to show the Minute Books to the auditor.
Provisions and Explanation: Section 143 of the Companies Act, 2013 grants powers to
the auditor that every auditor has a right of access, at all times, to the books and account
including all statutory records such as minute books, fixed assets register, etc. of the
company for conducting the audit. In order to verify actions of the company and to vouch and
verify some of the transactions of the company, it is necessary for the auditor to refer to the
decisions of the shareholders and/or the directors of the company. It is, therefore, essential
for the auditor to refer to the Minute Books. In the absence of the Minute Books, the auditor
may not be able to vouch/verify certain transactions of the company.
Conclusion: In case the directors have refused to produce the Minute Books, the auditor
may consider extending the audit procedure as also consider qualifying his report in any
appropriate manner.
Illustration
A is appointed as the auditor of XYZ Ltd. on 3 rd July, 2014. He informs the
company that he will visit its head office on August 10, 2014 (a holiday for the
company, being a Sunday) and examine the cash book. The accountant of the
company argues that A should come after 31st March, 2015 when the accounts
are closed. Moreover, he should not come on a Sunday as the Office is closed on
that day. State, whether the position taken by the accountant legally correct?
The auditor has access to books, accounts and vouchers ―at all times‖. This implies that he
can examine them at any time after assuming his office as the auditor and he need not wait
for the closing of the accounts, i.e., March 31, 2015. However, the expression ―at all times‖
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refers to only the normal business hours on any working day. Thus, A cannot insist that he
will examine the books on a holiday.
RIGHT TO OBTAIN INFORMATION AND EXPLANATIONS
The auditor of the company has a right to obtain such information and explanations as he
may think necessary for the performance of his duties as auditor. This information can be
obtained from the officers of the company. Here, the term ―Officer‖ includes all the directors,
manager and key managerial personnel of the company. The power conferred on the auditor
is very wide and it is entirely his discretion to call for any information, which he considers
necessary for conduct of his audit.
Officers of the company are under obligation to furnish without delay the information sought
by the auditor. In case any explanation or information required was not provided to him, he
can report the same to the members that he has not obtained all the information and
explanations which were required to perform his duties effectively.
RIGHT TO RECEIVE NOTICES AND TO ATTEND GENERAL MEETING – Sec.146
The auditor of a company is entitled to receive the notices of the meetings of the members of
the company. This right is not restricted to those at which the accounts audited by
him are to be discussed.
The auditor shall, unless otherwise exempted by the company, attend either by
himself or through his authorized representative, who shall also be qualified to be an
auditor, any general meeting and shall have right to be heard at such meeting on any part of
the business which concerns him as the auditor.
Illustration: AB Ltd. failed to send to its auditors the notice of an extra ordinary
general meeting on the plea that accounts are not being discussed at the
aforesaid meeting.
This is not correct since the requirements of section 146 apply to all general meetings held
during the period when the auditor holds his office.
PRACTICAL QUESTIONS
1. The Board of Directors of a company have filed a complaint with the Institute
of Chartered Accountants of India against their statutory auditors for their
failing to attend the Annual General Meeting of the Shareholders in which
audited accounts were considered.
Section 143 of the Companies Act, 2013 confers right on the auditor to attend the general
meeting.
The said section provides that all notices and other communications relating to any general
meeting of a company also to be forwarded to the auditor. Further, it has been provided that
The auditor shall, unless otherwise exempted by the company, attend either by himself or
through his authorized representative, who shall also be qualified to be an auditor, any
general meeting and shall have right to be heard at such meeting on any part of the business
which concerns his as the auditor.
2. Mr. Budha, Statutory Auditors of Secret Ltd. was not permitted by the Board
of Directors to attend general meeting of the company on the ground that his
right to attend general meetings is restricted only to those meetings at which the
accounts audited by him are to be presented and discussed.
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According to Section 146 of the Companies Act, 2013 the auditors of a company are under an
obligation to attend any general meeting of the company and not only those meetings at
which the accounts audited by them are to be presented and discussed.
In the instant case, the board of directors of Secret Ltd., have no right to restrict Mr. Buddha
from attending the general meeting and Mr. Buddha has every right to attend such meeting
as conferred by Section 146.
Thus, the action of the board of directors is contrary to the provisions of law and curtails the
right of the auditor.
3. Can a company restrict the rights of the auditor?
In this connection, it was held in Newton V Birmingham Small Arms Co., that the rights of an
auditor were conferred by the Companies Act and they cannot be limited or abridged
(shortened) either by the articles of the company or by a resolution of the members. Any
provision in the articles restraining its auditors from exercising statutory rights would be
ultra wires and hence void.
PRACTICAL QUESTIONS
1. Y, is the auditor of X Pvt. Ltd. In which there are four shareholders only, who
are also the Directors of the company. On account of bad trade and for reducing
the expenses in all directions, the directors asked Y to accept a reduced fee and
for that he has been offered not to carry out such full audit as he has done in the
past. Y accepted the suggestions of the directors.
Y may agree to temporary reduction in audit fees, if he so wishes, in view of the suggestions
made by the directors (perhaps in accordance with the decision of the company taken in
general meeting). But his duties as a company auditor are laid down by law and no restriction
of any kind can restrict the scope of his work either by the director or even by the entire body
Share holders.
There is no concept of full or part audit under Section 143 of the Companies Act, 2013.
Further, remuneration is a matter of arrangement between the auditor and the shareholders.
Section 142 specifies the remuneration of an auditor, shall be fixed by the company in general
meeting or in such manner as the company in general meeting may determine.
His duties may not necessarily commensurate with his remuneration. Y, therefore, should
not accept the suggestions of the directors regarding the scope of the work to be done. Even if
Y accepts the suggestions of the directors regarding the scope of work to be done, it would not
reduce his responsibility as an auditor under the law. Under the circumstances, Y is violating
the provisions of the Companies Act, 2013.
2. At the Annual General Meeting of the Company, a resolution was passed by
the entire body of shareholders restricting some of the powers of the Statutory
Auditors. Whether powers of the Statutory Auditors can be restricted?
Section 143 of the Companies Act, 2013 provides that an auditor of a company shall have
right of access at all times to the books and accounts and vouchers of the company whether
kept at the Head Office or other places and shall be entitled to require from the offices of the
company such information and explanations as the auditor may think necessary for the
purpose of his audit. These specific rights have been conferred by the statute on the auditor
to enable him to carry out his duties and responsibilities prescribed under the Act, which
cannot be restricted or abridged in any manner.
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Hence, any such resolution even if passed by entire body of shareholders is ultra-vires and
therefore void.
RIGHT OF LIEN
Lien refers to the right of a person for lawful possession of somebody's property on which he
has worked.
An auditor can exercise his lien on client's books and documents in his possession for non-
payment of fees by the client.
The Institute of Chartered Accountants of England and Wales has expressed a view on the
lien of the auditor, which are as follows:
1. Documents retained must belong to the client who owes money.
2. Such documents must have come to the auditor's possession on the client's
authority and should not be received through irregular or illegal means. In case
of a company, the books must have been received by the auditor on the authority of
the Board of Directors.
3. Some work must have been done on such documents
4. The fees for which the lien is exercised must be outstanding in respect of such ork.
Therefore, it can be said that exercising Right of Lien by the auditor is conditional. In other
words, to exercise right of lien, the auditor shall satisfy all the above said conditions. Right of
Lien is not unconditional.
Under section 128 of the Act, books of account of a company must be kept at the registered
office. These provisions ordinarily make it impracticable for the auditor to have possession of
the books and documents. The company provides reasonable facility to auditor for inspection
of the books of account by directors and others authorised to inspect under the Act. Taking
an overall view of the matter, it seems that though legally, auditor may exercise right of lien
in cases of companies, it is mostly impracticable for legal and practicable constraints.
Recently, the Ethical Standards Board (ESB) of ICAI had issued a clarification
stating that a Chartered Accountant cannot exercise lien over the client
documents/records for non-payment of his fees.
DUTIES OF AUDITORS
Sections 143 of the Companies Act, 2013 specifies the duties of an auditor of a company in a
quite comprehensive manner.
DUTY TO MAKE INQUIRY - Sec.143(1)
Section 143 (1) requires the auditor to make an inquiry in respect of matters specified in the
section.
The auditor shall inquire –
(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;
Duties of the Auditor
 Loans and advances granted by the company are properly secured
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 Terms on which they were made were prejudicial to the interests of the company or
its members or not.
(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 is 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.
An investment company can be defined as a company whose principal business is the
acquisition of shares, stocks, debentures or other securities.
(d) Whether loans and advances made by the company have been shown as deposits;
Loans and advances made to individuals or private concerns by the company and
deposits with banks, public authorities etc. are both shown as assets of the company in
the balance sheet. The term deposits may be defined as placing of money or money‘s
worth with a third party, either for safe keeping or by way of security or for the
purpose of earning interest from the party who customarily accepts deposits. Thus the
degree of risk associated with its repayment/encashment is far less than loans and
advances.
(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.
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. If he is satisfied as a result of the inquiries, he has no further duty to report that he
is so satisfied.
Therefore, it could be said that the auditor should make a report to the members in case he
finds answer to any of these matters in adverse.
PRACTICAL QUESTION
The auditor of Trilok Ltd. did not report on the matters specified in sub-section
(1) of Section 143 of the Companies Act, 2013, as he was satisfied that no
comment is required.
Section 143(1) of the Act deals with duties of an auditors requiring auditor to make an
enquiry in respect of specified matters. The matters in respect of which the enquiry has to be
made by the auditor include relating to loans and advances, transactions represented merely
by book entries, investments sold at less than cost price, loans and advances shown as
deposits, etc. Since the law requires the auditor to make an enquiry, the Institute opined that
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. If the auditor is
satisfied as a result of the enquiries, he has no further duty to report that he is so satisfied.
Therefore, the auditor of Trilok Ltd. is correct in non-reporting on the matters specified in
Section 143(1).
143(2)
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This section requires the auditor to make a report on the financial statements which are laid
before the company in a general meeting during his tenure of office. Under this section, the
auditor requires to report:
a. Whether in his opinion and to the best of his information and according to the
explanations given to him, the said accounts give the information required by the
Companies Act in the manner so required and
b. In the case of a company, the financial statements are to be drawn up in conformity
with the provisions of the act.
Most companies have to present their accounts in accordance with Schedule III. The
auditor is required to examine and report whether the said provisions have been
complied with in the presentation of the financial statements.
c. That the balance sheet gives a true and fair view of the company's affairs at the end
of financial year and the profit and loss account and cash flow statement gives a true
and fair view.
x
143(3)
Under this section, the auditor's report shall state
a. Whether he has obtained all the information and explanations which to
the best of his knowledge and belief were necessary for the purposes of his
audit;
The auditor forms his opinion on true and fair view of financial statements on the
basis of information and explanations obtained by him. The auditor has to
inform the shareholders whether or not he has been able to obtain adequate
information and explanations, which were necessary for the purposes of his audit.
b. Whether, in his opinion, proper books of account as required by law have
been kept by the company so 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;
The auditor has to report on the maintenance of proper books of account by the
company and receipt of proper returns from branches not visited by him.
c. Whether the report on the accounts of any branch office audited under
section 143(8) by a person other than the company's auditor has been
forwarded to him as required and how he has dealt with the same in
preparing the auditor's report;
Section 143(8) requires the branch auditor to prepare a report on the accounts of the
branch and forward the same to the company‘s auditor who should, in preparing his
own report on the accounts of the company, deal with the same in such manner as he
considers necessary.
d. Whether the company's balance sheet and profit and loss account dealt
with by 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 referred to in the Companies Act;
It is the responsibility of the company to ensure that every profit and loss account and
balance sheet of the company complied with accounting standards. If the company
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fails to comply with accounting standards, such companies shall disclose in its profit
and loss account and balance sheet
 The deviation from accounting standards
 The reasons for such deviation and
 The financial effect, if any, arising due to such deviation.
Therefore, the auditor is also under obligation to ensure that the financial statements
complied with applicable accounting standards.
f. The observations or comments of the auditor, which have any adverse
effect on the functioning of the company.
Illustrate which type of modifications in auditor‟s report will require
to report under 143(3)(f) and which are not?
Examples of emphasis of matter which may have an adverse effect on the
functioning of the company include situations where:
 The going concern assumption is appropriate but a material
uncertainty e x i s t that may cast a significant doubt about the
Company‘s ability to continue as a going concern; or
 a material uncertainty regarding the outcome of a litigation wherein an
unfavourable decision could result in a significant outflow of resources for
the company, etc.
g. The auditor should also state whether any director is disqualified from
being appointed as director under sub-section (2) of section 164.
If any one of the following conditions is satisfied, all the directors of that company
were not eligible to be appointed as a director of that company or any other company
for a period of 5 years from the date on which the defaults were committed.
a. The company has not filed the annual accounts or annual return for any
continuous three financial years or
b. The company has failed to repay its deposit or interest thereon on due date
or
c. The company has failed to redeem its debentures or interest on due date
or
d. The company failed to pay dividend
and such failure to pay or redeem continues for one year or more.
However, as per the Companies Amendment Act, 2017, a director shall not
be disqualified u/s. 164(2) for a period of 6 months from the date of his
appointment (Earlier, director shall be disqualified immediately).
h. Any qualification, reservation or adverse remark relating to the maintenance

of accounts and other matters connected therewith;
What is scope of auditor while reporting under 143(3)(h) “any
qualification, reservation or adverse remark relating to the
maintenance of accounts and other matters connected therewith”?
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According to Guidance Note, the words ―qualification‖, ―adverse remark‖ and
―reservation‖ used in clause (h) of section 143(3) should be considered to be
similar to the terms ―qualified opinion‖, ―adverse opinion‖ and ―disclaimer of
opinion‖, respectively, referred to in SA 705 ―Modifications to the Opinion in
the Independent Auditor‘s Report‖. Hence, the auditor would need to report
under clause (h) of section 143(3) any matter that causes a qualification, adverse
remark or disclaimer of opinion on the financial statements since such matters will
or possibly will have an effect on the books of account maintained by the
company. It should be noted that the auditor may have made an observation on
maintenance of cost records under clause (b) of section 143(3) and this may
not have had an effect on the financial statements of the company or the
auditor‘s opinion on the financial statements. Further, any material weakness in
internal financial controls that is reported by the auditor under clause (i) of
section 143(3) may not have an impact on the maintenance of books of account if
such material weakness did not result in a modification to the opinion on the
financial statements of the company. However, if the material weakness in
internal financial controls resulted in a modification to the audit opinion on the
financial statements, then such modification may be covered for reporting under
clause (h) of section 143(3).
i. Whether the company has adequate internal financial controls system with
reference to financial statements in place and the operating effectiveness of
such controls;
As per Section 134 of the Companies Act 2013, the term Internal Financial
Controls means the policies and procedures adopted by the company for ensuring:
 Orderly and efficient conduct of its business, including adherence to
Company‘s policies,
 Safeguarding of its assets,
 Prevention and detection of frauds and errors,
 Accuracy and completeness of the accounting records, and
 Timely preparation of reliable financial information.
This clause is not be applicable to a Private Limited Company which is:
 A One Person Company;
 A Small Company;
 Which has:
i) Turnover of less than Rs. 50 Crores as per latest audited financial
statement; or
ii) has aggregate borrowings from banks or financial institutions or
anybody corporate at any point of time during the financial year
less than Rs. 25 Crore.
Therefore, the auditor is not required to report about internal financial controls systems
in case of audit of the above said companies. However, this exemption is available in
respect of a private company only if such private company has not committed a
default in filing its financial statements under section 137 of the Companies
Act, 2013 or annual return under Section 92 of the said act with the registrar.
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j. Such other matters as may be prescribed;
a. Whether the company has disclosed the impact of pending litigations on its
financial position in its financial statements.
b. 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;
c. Whether there has been any delay in transferring amounts, required to be
transferred, to the Investor Education and Protection Fund by the
company.
143(4)
Where any of the matters referred to in Sections 143(2) and 143(3) is answered in
negative or with a qualification, it would be the duty of the auditor to state the reasons
for such an answer in his report.
AUDIT OF BRANCH OFFICE ACCOUNTS – Sec.143(8) and Rule 12
This section deals with audit of the accounts of a branch office of a company. The provisions
of the section are as follows:
Definition of Branch Office
The term ―Branch Office‖ in relation to a company, means any establishment described as
such by the company.
Who can be appointed as the auditor of an Inland/Indian Branch
In order to audit the accounts maintained at a branch office located within India, any one of
the following persons can be appointed as branch auditor:
 Company's auditor appointed u/s.139 of the Companies Act, 2013 or
 Any other person qualified for appointment as an auditor u/s.139
Who can be appointed as the auditor of a foreign branch/Branches located

outside India
The accounts of a branch office located outside India may be audited by any one of the
following persons.
- Company's auditor appointed u/s.139 of the Companies Act, 2013 or
- Any other person qualified for appointment as an auditor of the company or
- Any other person duly qualified to act as an auditor in accordance with the laws
of that country.
Who should appoint the Branch Auditor
The Branch Auditor of a company can be appointed by its shareholders. Alternatively,
the shareholders can delegate the power of appointing branch auditor to the Board of
Directors of the company. In such a case, the appointment of the branch auditor has to be
done by the Board of Directors in consultation with the company‘s auditors.
Powers & Duties
The powers & duties of the Company‘s Auditor in relation to the audit of the Branch, and the
Branch Auditor, shall be as contained in Sec143(1) to 143(4).
Rights of the Company Auditor
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Where the accounts of any branch office are audited by a person other than the company's
auditor, the company's auditor –
i) Shall be entitled to visit the branch office if he deems it necessary to do so
ii) Shall have the right of access at all times to the books and accounts and vouchers of
the company maintained at the branch office and
iii) He can call for such books at the company's registered office.
Preparation and submission of the report

The branch auditor shall prepare a report on the accounts of the branch examined by him
and the same shall be submitted to the company‘s auditor. The company‘s auditor shall deal
with the report in such manner as he considers necessary.
Further as per rule 12 of the Companies (Audit and Auditors) Rules, 2014, the
branch auditor shall submit his report to the company‘s auditor and reporting of fraud by the
auditor shall also extend to such branch auditor to the extent it relates to the concerned
branch.
Relationship between branch auditor and statutory auditor

 The statutory auditor would not be held responsible in respect of the work entrusted to
the branch auditor.
 The statutory auditors are entitled to make such enquiries as they think fit from the
branch auditors.
Recently, the ESB of ICAI has given a clarification that a partnership firm/LLP
having 10 or more partners cannot act as branch auditors of such a company of
which they are the statutory auditors, but there is no restriction in examination
of books of accounts and other records of those branches for the purposes of
their statutory audit of such company.
PRACTICAL QUESTION
1. M/s. Seeman & Co. had been the company auditor for Amudhan Company
Limited for the year 2013-14. The company had three branches located at
Chennai, Delhi and Mumbai. The audits of branches-Chennai, Delhi were
looked after by the company auditors themselves. The audit of Mumbai branch
had been done by another auditor M/s Vasan & Co., a local auditor situated at
Mumbai. The branch auditor had completed the audit and had given his report
too. After this, but before finalization, the company auditor wanted to visit the
Mumbai branch and have access to the inventory records maintained at the
branch. The management objects to this on the grounds of the company auditor
is transgressing the scope of audit areas agreed. Comment.
The audit of the branch of a company is dealt with in Section 143(8) of the Companies Act,
2013. According to this section, the audits of the branches can be done by the company
auditor himself or by another auditor. Even where, the branch accounts are audited, the
company auditor has right to visit the branch if he deems it necessary to do so for the
performance of his duties as auditor.
He has also right of access at all times to the books and accounts and vouchers of the
company maintained at the branch office. He can appropriately deal with the repot of the
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branch auditor in framing his main repot. He will disclose how he had dealt with the branch
audit report.
In this case, the audits of two branches were done by the company auditor and one branch
was done by a separate branch auditor.
Applying the above provisions, to the instant case, management‘s objection that the company
auditor is transgressing the scope of audit areas agreed, is absolutely, wrong. The right of
company auditor in visiting and accessing the records of branch can not be forfeited. Even
where the branch accounts are audited by another local auditor, the company auditor has
right to visit the branch and can have access to the books and vouchers of the company
maintained at the branch office.
2. CA Vishwam is appointed as the Branch Auditor of VVK Ltd. Is he required
to comply with the CARO when issuing his Branch Audit Report, or is CARO
applicable only with respect to the Audit Report issued by the Principal Auditor?
Sec. 143(8) specifies that a Branch Auditor has the same duties in respect of audit, as the
Company‘s Auditor. The Branch Auditor shall prepare a report on the accounts of the Branch
examined by him and send it to the Auditor of the Company who shall deal with it in his
report in such manner as he considers necessary.
The Report submitted by the Branch Auditor should contain a statement on all the matters
specified in CARO, to enable the Company‘s Auditor to consider the same. Hence, CARO is
applicable for Branch Audits also.
Duty to comply with Auditing Standards – Section 143(9) & (10)
According to Section 143(9) of the Companies Act, 2013, every auditor shall comply with the
auditing standards.
The auditing standards to be followed by the auditor shall have to be prescribed by Central
Government under Sec. 143(10) of Companies Act, 2013.
For this purpose, first of all, The Institute of Chartered Accountants of India is required to
recommend auditing standards to the Central Government.
The standards so recommended by The Institute of Chartered Accountants of India shall be
examined by National Financial Reporting Authority and after examination the NFRA may
make its own recommendations
After examination of the recommendations made by NFRA, the Central Government
prescribes the auditing standards to be followed.
Provided that until any auditing standards are notified, any standard, or standards of
auditing specified by the Institute of Chartered Accountants of India shall be deemed to be
the auditing standards.
MCA vide its notification dated 13th November, 2018 notified NFRA Rules, 2018.
Classes of companies and bodies corporate governed by the Authority.-
The Authority shall have power to monitor and enforce compliance with accounting
standards and auditing standards, oversee the quality of service under sub-section (2)
of section 132 or undertake investigation under sub-section (4) of such section of the auditors
of the following class of companies and bodies corporate, namely:-
(a) Companies whose securities are listed on any stock exchange in India or
outside lndia;
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(b) Unlisted public companies having paid-up capital of not less than Rs. 500
crores or having annual turnover of not less than Rs.1000 crores or having,
in aggregate, outstanding loans, debentures and deposits of not less than
Rs. 500 crores as on the 31st March of immediately preceding financial
year;
(c) Insurance companies, banking companies, companies engaged in the generation or
supply of electricity, companies governed by any special Act for the time being in force
or bodies corporate incorporated by an Act in accordance with clauses (b), (c), (d), (e)
and (f) of sub-section (4) of section 1 of the Act;
(d) any body corporate or company or person, or any class of bodies corporate
or companies or persons, on a reference made to the Authority by the
Central Government in public interest; and
(e) a body corporate incorporated or registered outside India, which is a
subsidiary or associate company of any company or body corporate
incorporated or registered in India as referred to in clauses (a) to (d), if the
income or net worth of such subsidiary or associate company exceeds 20%
per cent. of the consolidated income or consolidated net worth of such
company or the body corporate, as the case may be, referred to in clauses (a) to (d).
PRACTICAL QUESTION
M/s XYZ & Co., auditors of Goodwill Education Foundation, a recognised
nonprofit organisation feels that the standards on auditing need not to be
applied as Goodwill Education Foundation is a non-profit making concern.
As per sub section 9 of section 143 of the Companies Act, 2013, every auditor shall comply
with the auditing standards. Further as per sub section 10 of section 143 of the Act, the
Central Government may prescribe the standards of auditing or any addendum thereto, as
recommended by the Institute of Chartered Accountants of India, constituted under section 3
of the Chartered Accountants Act, 1949, in consultation with and after examination of the
recommendations made by the National Financial Reporting Authority:
Provided that until any auditing standards are notified, any standard, or standards of
auditing specified by the Institute of Chartered Accountants of India shall be deemed to be
the auditing standards.
Further, the Preface to Standards on Auditing gives the scope of the Standards on Auditing.
As per the Preface, the SAs will apply whenever an independent audit is carried out; that is,
in the independent examination of financial statements/information of any entity; whether
profit oriented or not and irrespective of its size, or legal form (unless specified otherwise)
when such an examination is conducted with a view to expressing an opinion thereon.
Also while discharging their attest function; it is the duty of the Chartered Accountant to
ensure that SA‘s are followed in the audit of financial information covered by their audit
reports.
In the given case, even though the client is a non-profit oriented entity the SAs shall apply
and the auditor shall be guilty of professional misconduct for failing to discharge his duty in
case of non-compliance with SA‘s.
Duty to report on any other matter specified by Central Government
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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.
COMPANIES (AUDITOR‟S REPORT) ORDER, 2016
In exercise of the powers conferred by sub-section (11) of section 143 of the Companies Act,
2013, the Central Government, hereby makes the following Order, namely The Companies
(Auditor‘s Report) Order, 2016.
Applicability
CARO, 2016 is applicable to every company including a foreign company. According
to Section 2(42) of Companies Act, 2013, Foreign Company means any company or body
corporate incorporated outside India which –
a. has a place of business in India whether by itself or through an agent,
physically or through electronic mode; and
b. conducts any business activity in India in any other manner.
In respect of Foreign Companies, an established place of business in India would include a
Liaison Office.
Every report made by the auditor in pursuance with the provisions of section 143 of
Companies Act, 2013 for financial year commencing on or after 1 st day of April, 2015 should
include CARO – 2016. Hence CARO, 2016 is applicable from FY 2015-16 and the matters
specified therein shall be included in each report made by the auditor u/s.143 on the accounts
of every company to which CARO, 2016 applies.
Non-Applicability-
CARO, 2016 is not applicable to consolidated financial statements.
CARO, 2016 is not applicable for the following types of companies:
(i) a banking company
(ii) an insurance company
(iii) a company licensed to operate under section 8 of the Companies Act;
(iv) a One Person Company and a small company and
(v) a private limited company provided all the following conditions are
satisfied:
a. It should not be a subsidiary or holding company of a public company
and
b. The paid up capital and reserves and surplus of such a company
shall not be more than 1 Crore as on the balance sheet date and
c. The total borrowings shall not exceed 1 crore from any bank or
financial institution at any point of time during the financial year and
d. The Total Revenue including revenue from discontinuing operations
shall not exceed 10 crore during the financial year.
Aggregate Amount: For this purpose, ―Any Bank or Financial Institution (FI)‖, would refer
to the aggregate to all Loans and not with reference to each Bank or Financial Institution.
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Where the Company is granted an Overdraft Facility against Fixed Deposits of the concerned
Bank, the amount Outstanding in Overdraft Facility (and not net of FD) is considered for
the purpose of CARO.
Outstanding Dues in respect of Credit Cards would also be considered while
calculating the limit of 1 Crore in respect of ―Borrowings‖ from a Bank or Financial
Institution.
The term ―Banks‖ refers to a Bank as defined under Banking Regulation Act, 1949. Therefore,
even Loans taken from a Private Bank or a Foreign Bank would also be taken
into consideration while examining the applicability of CARO.
TERMS USED IN THE ORDER
1. Paid-up Capital and Reserves and Surplus
Paid-up share capital would include both equity share capital as well as the preference
share capital. While calculating the paid-up capital, amount of calls unpaid should be
deducted from the paid-up capital. The amount originally paid-up on forfeited shares
should be added to the figure of paid-up capital. Share application money received
should not be considered as part of the paid-up capital.
The term ―reserves and surplus‖ include the following:
a. Capital Reserves
b. Capital Redemption Reserve
c. Securities Premium Reserve
d. Debenture Redemption Reserve
e. Revaluation Reserve
f. General Reserve
g. Surplus (Debit or Credit balance in P&L
h. Foreign currency translation reserve etc.
2. Borrowings
This include all fund-based loans such as term loans, demand loans, export credits,
working capital limits, cash credits, overdraft facilities, bills purchased or discounted etc.
However, this does not include non-fund based limit such as bank guarantees. However,
if the bank guarantee has been converted into fund-based limit, it should also be considered.
The term also includes interest accrued and due.
3. Financial Institution
It includes a non-banking financial company (NBFC).
4. REVENUE
According to Part II of Schedule III of the Companies Act, 2013 ―REVENUE‖ means
aggregate amount of sales affected by the company. The term ―sales affected‖ include sale of
goods as well as services rendered by the company. For determination of turnover, the
following points should be considered:
1. Taxes collected should not be taken into account if they are credited
separately.
2. Trade discounts should be deducted from the figure of turnover;
3. Commission allowed to third parties should not be deducted from the figure of
turnover; and
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4. Sales returns should be deduced from the figure of turnover even if the returns
are from the sales made in the earlier years.
5. Date of determination of limits
If at any point of time during the financial year covered by the audit report, the company
defeats any of the conditions mentioned for a private company for its exclusion from the
order, the order is made applicable.
MATTERS TO BE INCLUDED IN THE AUDITOR‟S REPORT
(i) FIXED ASSETS:
(a) Whether the company is maintaining proper records showing full particulars,
including quantitative details and situation of fixed assets;
Maintenance of Proper Records
The auditor has to verify whether the company is maintaining proper records with
respect to Fixed Assets. What constitute “proper record” is not defined in the act.
The auditor can satisfy that the company is maintaining proper records with respect to
Fixed Assets if the company is maintaining a ―Fixed Asset Register‖ showing
therein full particulars of Fixed Assets including quantitative details of Fixed Assets.
Here the term fixed assets includes both tangible and intangible assets. They
also include assets acquired through finance lease.
(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;
Physical Verification of Fixed Assets and material discrepancies:
It is the primary responsibility of the management to physically verify the
assets at reasonable intervals. Therefore, the auditor has to inquire whether the fixed
assets were physically verified by the management at reasonable intervals. What
constitute reasonable interval again is not defined in the Order. Reasonable interval
in respect of physical verification of Fixed Assets may be one, two or three years
depending upon the circumstances of the case.
If material discrepancies were noticed by the management on such physical
verification, the auditor has to verify whether they were properly dealt
with/adjusted in the books of account.
(c) Whether the title deeds of immovable properties are held in the name of the
company. If not, provide the details thereof;
(ii) INVENTORY:
Whether physical verification of inventory has been conducted at reasonable
intervals by the management and whether any material discrepancies were
noticed and if so, whether they have been properly dealt with in the books of
account;
Physical verification of Inventory and adjustment of material
discrepancies
It is the primary responsibility of the management to physically verify all the
inventories at reasonable intervals. The auditor has to verify whether management
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conducted physical verification of inventory at reasonable intervals. The auditor
should also verify whether any material discrepancies noticed by the management on
such physical verification were properly dealt with/adjusted in the books of account.
(iii) LOANS GRANTED:
Whether the company has granted any loans, secured or unsecured to companies,
firms, LLP or other parties covered in the register maintained under section 189 of the
Companies Act, 2013. If so,
(a) Whether the terms and conditions of the grant of such loans are not prejudicial
to the company‘s interest;
(b) Whether the schedule of repayment of principal and payment of interest has
been stipulated and whether the repayments or receipts are regular;
Explanation
Under this clause the auditor is required to verify whether the company has entered
into a loan agreement with the borrowers and whether the terms and conditions of such
loan agreement includes a schedule of repayment of principal and interest. The auditor
should also verify whether receipt of principal amount and interest on loans granted by
the company is regular as per the schedule of repayment.
The word ―regular‖ should be taken to mean that the principal and interest should
normally be received whenever they fall due.
(c) if the amount is overdue, state the total amount overdue for more than ninety
days, and whether reasonable steps have been taken by the company for
recovery of the principal and interest;
Explanation
Under this clause, the auditor is required to verify whether the company has taken
reasonable steps for recovery of principal and interest if it is overdue for more than 90
days. A loan is considered to be overdue when the payment has not been made or
received on the due date as per the agreement.
The term ―reasonable steps‖ has not been defined. Taking its natural meaning,
reasonable steps not only mean issuing a legal notice. Even a reminder notice sent
can be treated as a reasonable step.
(iv) In respect of loans, investments, guarantees, and security whether
provisions of section 185 and 186 of the Companies Act, 2013 have been
complied with. If not, provide the details thereof.
According to Section 185 of the Companies Act, 2013, no company shall, directly or
indirectly advance any loan to any of its directors or to any other persons with whom
directors are interested or give any guarantee or provide any security in connection with
any loan taken by the director or such other person.
According to Section 185, a company cannot give any loan to the following:
 Any Director of Lending Company.
 Director of holding company of lending company
 Any Relative of such Director.
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 Any partner of such Director.
 Any firm in which such director is a partner
 Any firm in which such director‘s relative is a partner
 Any PRIVATE Limited company in which such director is a Director or member.
 Body corporate in which such Director or Directors hold not less than 25% shares.
 Body Corporate, MD, BOD or manager accustomed to act in accordance with the
directions of board or of any Director or directors of lending company.
However, in the last 3 cases, loan/guarantee may be given subject to the
following conditions:
1. Prior approval of shareholders is required by way of passing a special resolution
and
2. That loan shall be utilized by the borrowing company for its principal business.
EXCEPTION TO SECTION 185
1) Managing or a whole time director
a) As a part of service extended to all employees.
b) As per a scheme approved by members through a special resolution.
2) Given in ordinary Course of Business
If the company is engaged in lending activity regularly, i.e. if the company lends
not only to Directors and related parties but also to Arm Length Parties or unrelated
parties, then it can be said that the loan is given in the ordinary course of business.
3) Loan given to a Wholly-Owned Subsidiary Company
4) Guarantee given by the Holding company against the loan taken by its subsidiary
company from bank or financial institutions.
According to Section 186 of the Companies Act, 2013, no company shall directly or
indirectly —
(a) give any loan to any person or other body corporate;
(b) give any guarantee or provide security in connection with a loan to any other body
corporate or person; and
(c) acquire by way of subscription, purchase or otherwise, the securities of any other
body corporate
exceeding sixty per cent of its paid-up share capital, free reserves and
securities premium account or one hundred per cent of its free reserves
and securities premium account, whichever is more.
If the limits mentioned above exceeds, then the company is required to take prior
approval by means of a special resolution passed at a general meeting.
The particulars of such loans or guarantees shall be disclosed by the
company in its financial statements.
(v) PUBLIC DEPOSITS:
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
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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?
Explanation
Where the company accepts deposits from public, the auditor has to verify whether it has
complied with the directives given by Reserve Bank of India as well as the provisions of
Section 73 to 76, and other relevant provisions of the Companies Act, 2013. The
company should also comply with any orders passed by the National Company Law
Tribunal/any court or any other tribunal.
Where the company contravenes any of the above provisions, the nature of such
contravention should be mentioned by the auditor in his report.
(vi) MAINTENANCE OF COST RECORDS:
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 so made and maintained;
(vii) STATUTORY DUES:
(a) Is the company regular in depositing undisputed statutory dues including
provident fund, employees‘ state insurance, income-tax, sales-tax, sales 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.
Explanation
1. For reporting under this clause, the auditor has to concentrate on the regularity of
deposit of undisputed statutory dues by the company.
The auditor should obtain sufficient and appropriate audit evidence to determine
whether the statutory due is question is a disputed amount. Statutory dues are treated
as disputed where there is a positive evidence or action on the part of the company to
show that it has not accepted the demand. For example, where the company had not
accepted the demand raised by the Assessing Officer in respect of Income Tax, and
where an application is made to the Commissioner Appeals for rectification of mistake
u/s.154, it can be deemed that the income tax is disputed.
2. Where the dispute relates only to a part and not the whole of amounts, only such
amount should be treated as disputed and the balance amount should be regarded as
undisputed.
3. If the company is not regular, the auditor is required to state the extent of arrears
outstanding as at the last day of the financial year concerned which remains
outstanding for a period of more than six months from the date they became payable.
4. In cases where there are no arrears on the balance sheet date but the company
has been irregular during the year in depositing the statutory dues, the auditor should
state this fact in his audit report.
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5. The word ―any other statutory dues‖ indicates that this clause covers all type of dues
under various statutes, which may be applicable to a company.
(b) In case dues of income tax or sales 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.
Explanation
In case of disputed statutory dues, the clause requires the auditor to report the amount
involved along with the forum before which the disputed is pending.
In this connection, it should be noted that a mere representation to the department
shall not constitute the dispute.
viii) REPAYMENT OF DUES:

Whether the company has defaulted in repayment of loans or borrowing to a financial
institution, bank, Government or dues to debenture holders? If yes, the period and
amount of default to be reported; (In case of defaults to banks, financial institutions
and Government, lender wise details to be provided)
Explanation
1. Under this clause, the auditor is required to report whether the company has
defaulted in repayment of dues to a financial institution or bank or Government
or debenture-holders. When the company defaulted in repayment, the auditor
is required to mention the period of default as well as the amount of default. In
case of defaults to banks, financial institutions and Government, the auditor
should provide lender wise details.
2. The term ―dues‖ include principal as well as interest.
3. The word ―default‖ has not been defined. Taking its natural meaning, when the
repayment is not made on the due date, it is treated as default.
(ix) END USE OF ISSUE PROCEEDS AND TERM LOANS:
Whether moneys raised by way of initial public offer or further public offer
(including debt instruments) and term loans were applied for the purposes
for which those are raised. If not, the details together with delays or default
and subsequent rectification, if any, as may be applicable shall be reported;
Under this clause the auditor is required to report whether
 money raised by the company through Initial Public Offer or Further Public Offer
including debentures, bonds etc. and term loans have been utilised for the
purposes for which those were raised.
 The term loans were applied for the purposes for which they were taken.
Normally, the companies do mention the end-use of the money proposed to be raised
through the Initial Public Offer or Further Public Offer in the offer document. The
auditor should examine such offer document to understand the proposed end use
of money raised from public.
The auditor should verify that the amount of end-use of money disclosed in the
financial statements by the management is not materially different from the
proposed and actual end use.
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If, for any reason, the auditor is not able to verify the end-use of money raised from
Initial Public Offer or Further Public Offer (including debt instruments), he should
state that he is not able to comment upon the disclosure of end-use of
money by the company since he could not verify the same. He should also
mention the reasons which resulted in the auditor‘s inability to verify the
disclosure.
(x) FRAUD:
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.
This clause requires the auditor to report whether any fraud by the company or any
fraud on the company by its officers or employees has been noticed or reported during
the year. If yes, the auditor is required to state the amount involved and the nature of
the fraud. The clause does not require the auditor to discover such frauds. The scope of
auditor‘s inquiry under this clause is restricted to frauds ―noticed or reported‖. This
indicates that management of the company should have knowledge about the frauds.
However, the auditor is not relived of his responsibility to follow SA 240. The following
are the audit procedures that can be followed by the auditor in this regard.
a. Examine Internal Auditor‟s Report, if any.
b. Examine the minutes of the audit committee to ascertain the instances of fraud
and the action taken.
c. Enquire the management about frauds that it has noticed or that have been
reported to it.
d. Obtain written representations from management.
Where the auditor identified any fraud and reported upon by him under Section
143(12) of the Companies Act, 2013, the same shall also be reported by the auditor
under this clause. However, it should be noted that the frauds suspected by the
auditor need not be reported under this clause.
(xi) MANAGERIAL REMUNERATION:
Whether managerial remuneration has been paid or provided in accordance
with the requisite approvals mandated by the provisions of section 197 read
with Schedule V to the Companies Act? If not, state the amount involved and
steps taken by the company for securing refund of the same;
According to Section 197 of the Companies Act, 2013, the total managerial remuneration
payable by a public company shall not exceed 11% of the net profit of the company. The
company may by passing an ordinary resolution make payment of
remuneration in excess of 11% of the net profits of the company (Instead of
Central Government Approval).
The remuneration payable to any one managing director, whole time director or manager
shall not exceed 5% of net profits.
It also specifies that the remuneration payable to directors who are neither managing
directors nor whole time directors shall not exceed 1% of the net profits if there is a
managing or whole time director and 3% of the net profits in any other case.
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The company may by passing special resolution, pay remuneration in excess
of the limits specified for MD or for a whole time director or manager.
Excessive remuneration drawn by a director without the approval of
shareholders shall be refunded with in the period specified by the company
subject to a maximum of 2 years. Alternatively, the company may waive the
recovery of such excess remuneration by passing a special resolution within
2 years.
(xii) NIDHI COMPANY:
Whether the Nidhi Company has complied with the Net Owned Funds to Deposits
in the ratio of 1:20 to meet out the liability and whether the Nidhi Company is
maintaining ten per cent unencumbered term deposits as specified in the Nidhi
Rules, 2014 to meet out the liability;
Section 406(1) of the Companies Act, 2013, ―Nidhi‖ means a company which has been
incorporated as a Nidhi with the objective of cultivating the habit of thrift and savings
amongst its members, receiving deposits from, or lending to, its members only, for their
mutual benefit, and which complies with such rules as are prescribed by the Central
Government for regulation of such class of companies.
As per rule 5 (1) of Nidhi Rules, 2014, every nidhi company should ensure that it has –
a. not less than 200 members
b. net owned funds of Rs.10 lakh rupees or more
c. unencumbered term deposits of not less than 10% of the outstanding deposits and
d. ratio of net owned funds to deposits of not more than 1:20.
In other words, a Nidhi company can accept deposits not exceeding 20 times of its net owned
funds as per last audited balance sheet. The unencumbered term deposits are required to be
made in a scheduled commercial bank (other than a co-operative bank or a regional rural
bank) or post office deposits in its own name which shall not be less than 10% of the deposits
outstanding at the close of business on the last working day of the second preceding month.
―Net Owned Funds‖ means aggregate of paid up equity share capital and free reserves as
reduced by accumulated losses and intangible assets appearing in the last audited balance
sheet.
(xiii) RELATED PARTIES AND RELATED PARTY TRANSACTIONS:
Whether all transactions with the related parties are in compliance with
sections 177 and 188 of Companies Act, 2013 where applicable and the
details have been disclosed in the Financial Statements etc., as required by
the applicable accounting standards;
Provisions of Section 188 in brief
Section 188 of the Companies Act specifies that approval of the Board of Directors
shall be obtained when the company wants to enter into any contract or arrangement
with related parties. However, this section is not applicable in respect of any
transactions entered at arms length price.
―Related party‖, with reference to a company, means—
(i) a director or his relative;
(ii) a key managerial personnel or his relative;
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(iii) a firm, in which a director, manager or his relative is a partner;
(iv) a private company in which a director or manager is a member or director;
(v) a public company in which a director or manager is a director or holds along with
his relatives, more than two per cent. of its paid-up share capital;
(vi) any body corporate whose Board of Directors, managing director or manager is
accustomed to act in accordance with the advice, directions or instructions of a
director or manager;
(vii) any person on whose advice, directions or instructions a director or manager is
accustomed to act:
(viii) any body corporate which is –
B. a holding, subsidiary or an associate company of such company;
C. a subsidiary of a holding company to which it is also a subsidiary; or
D. an investing company or the venturer of a company.
A body corporate (foreign company) which is a holding /subsidiary/associate/fellow
subsidiary of an Indian company will be treated as a related party.
According to Section 177 of the Companies Act, the audit committee is responsible to approve
any transaction entered by the company with related parties. However, Companies
Amendment Act, 2017 clarifies that Related Party Transactions between a
holding company and its subsidiaries will not require the approval of the audit
committee. For example, if a director or officer of the company enters into a related
transaction for an amount not exceeding Rs.1 crore, there is no need to obtain prior approval
of the audit committee in such a case.
If these transactions require board approval under section 188, then they will also require
approval of the audit committee.
(xiv) PRIVATE PLACEMENT OF SHARES:
Whether the company has made any preferential allotment or private
placement of shares or fully or partly convertible debentures during the
year under review and if so, as to whether the requirement of section 42 of
the Companies Act, 2013 have been complied with and the amount raised
have been used for the purposes for which the funds were raised. If not,
provide the details in respect of the amount involved and nature of non-
compliance;
The term ―private placement" means any offer of securities or invitation to subscribe
securities to a select group of persons who have been identified by the Board by a
company (other than by way of public offer) through issue of a private placement offer
letter.
i. A company whether private or public can issue shares on private placement basis
[Section 42(1)].
ii. “Private placement” means any offer or invitation to subscribe or issue of securities to a
select group of persons by a company (other than by way of public offer) through private
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placement offer-cum application which satisfies the conditions specified in section 42 of
Companies Act, 2013
iii. The offer of securities or invitation to subscribe securities shall be made to such
number of persons not exceeding 200 in a financial year excluding
securities issued to Qualified Institutional Buyer (QIB) and employees
under stock option scheme. . [Section 42(2)]
iv. If a company makes an offer to more than the prescribed number of persons, the
same shall be deemed to be an offer to the public. [Section 42(3)]
v. All monies payable towards subscription of securities under this section shall be
paid through cheque or demand draft or other banking channels but not by
cash. [Section 42(4)]
vi. If a company makes an offer to more than the prescribed number of persons, the
same shall be deemed to be an offer to the public.
vii. A company making an offer or invitation under this section shall allot its
securities within sixty days from the date of receipt of the application
money for such securities and if the company is not able to allot the securities
within that period, it shall repay the application money to the subscribers
within fifteen days from the date of completion of sixty days and if the
company fails to repay the application money within the aforesaid period, it shall
be liable to repay that money with interest at the rate of twelve per cent per
annum from the expiry of the sixtieth day:
viii. Provided that monies received on application under this section shall be kept in
a separate bank account in a scheduled bank and shall not be utilised for any
purpose other than--
(a) for adjustment against allotment of securities; or
(b) for the repayment of monies where the company is unable to allot securities
(xv) NON-CASH TRANSACTIONS:

Whether the company has entered into any non-cash transactions with
directors or persons connected with him and if so, whether the provisions
of section 192 of Companies Act, 2013 have been complied with;
Section 192 of the Companies Act prohibits entering of arrangement by the company
with its directors and persons connected with them. The section prohibits the company
from entering into following types of arrangements unless prior approval of the
members for such arrangement is accorded by passing a resolution in a general
meeting. In case the concerned director or the person connected therewith, is also a
director of its holding company, a similar approval should have been obtained by the
holding company through a resolution at its general meeting.
a. Arrangement by which a director of the company or its holding, subsidiary or
associate company or a person connected with such director acquires or is to
acquire assets for consideration other than cash, from the company.
b. An arrangement by which the company acquires or is to acquire assets for a
consideration other than cash, from such director or persons so connected.
(xvi) REGISTRATION BY NBFC:
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Whether the company is required to be registered under section 45-IA of
the Reserve Bank of India Act, 1934 and if so, whether the registration has
been obtained.
According to Section 45-IA of RBI Act, a non-banking financial company shall carry its
business only after obtaining a certificate of Registration from RBI. Hence, if the
company under audit is a NBFC, it is the duty of the auditor to verify and ensure that it
has obtained a certificate of registration from RBI.
Reasons to be stated for unfavourable or qualified answers
(1) Where, in the auditor's report, the answer to any of the questions referred to in paragraph
3 is unfavourable or qualified, the auditor's report shall also state the reasons for such
unfavourable or qualified answer, as the case may be.
(2) Where the auditor is unable to express any opinion in answer to a particular question, his
report shall indicate such fact together with the reasons why it is not possible for him to give
an answer to such question.
PRACTICAL QUESTIONS ON CARO
1. BK Ltd, a Benefit Fund, registered under NBFC Regulations, is in existence
for the past two decades. On 31st December 2015, this Company is converted
into a Bank. You have been appointed as an Auditor for the Financial Year
2015–2016. Comment whether CARO is applicable for this Company.
Banking Companies are exempted from CARO Reporting Requirements. As on the date of
Balance Sheet, the Company is a Banking Company. Hence, CARO is not applicable,
irrespective of the fact that the Company was converted from NBFC during the year.
2. S Pvt Ltd is the Holding Company of P Ltd. The Paid Up Capital and Reserves
are Rs. 30 Lakhs. The Borrowings from SBI is Rs.60 Lakhs. Total Revenue
from Operations (including from Discontinuing Operations) are Rs. 8 Crores.
The Auditors of S Pvt Ltd is of the view that CARO is not applicable since it is
a Private Limited Company satisfying the condition relating to Paid up Capital,
Borrowings and Total Revenue. Is their contention valid?
Whether CARO reporting is applicable for reporting on Consolidated Financial
Statements?
In this case, S Pvt Ltd is the Holding Company of P Ltd, a Public Company. Hence, CARO is
applicable for S Pvt Ltd. This is because, to exempt a private company from the requirements
of CARO, such a company is required to comply with all the four conditions that were
specified in the Act, where as in this case the company violated condition no.1.
CARO 2016 Reporting shall not apply to the Auditor‘s Report on Consolidated Financial
Statements.
3. M Pvt. Ltd provides the following information for the Financial Year 2015–
2016. Comment whether CARO is applicable for this Company:
(a) Paid–up Share Capital and Reserves – Rs.100 Lakhs,
(b) Borrowings from Banks – Rs.98 Lakhs,
(c)Total Revenue – Rs.12 Crores
To exempt a private company from the requirements of CARO, such a company is required to
comply with all the four conditions that were specified in the Act, where as in this case the
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company violated condition relating to total revenue and hence CARO is applicable in this
case.
Guru Pvt Ltd has 2 Branches – in Chennai and in Mumbai. Each Branch has a separate
Statutory Auditor and the Company, as a whole, has a Central Statutory Auditor. Comment
which
Detailsof these Auditors must comply with CARO.
Chennai Branch Mumbai Branch Total
Paid up Capital and Reserves (in Lakhs) 40 70 110
Borrowings from Banks (in Lakhs) 10 26 36
Total Revenue (in Crores) 3 6 9
The conditions to be satisfied from being exempt from CARO shall be considered for the
company as a whole. So, if CARO is applicable to the Company as a whole, then each and
every Branch of the Company will also be automatically covered under CARO (irrespective of
the fact that the Branch‘s transactions are within the limits).
The Branch Auditor has the same reporting responsibilities in respect of the
Branch, as those of the Company Auditor in respect of the Company. The
comments of the Branch Auditor in respect of the Branch are dealt with by the Central
Statutory Auditor of the Company while finalizing his report under CARO.
In instant case, the Company has a Paid up Capital and Reserves of Rs. 110 Lakhs, which
exceeds the exemption limit of Rs.100 Lakhs / 1 Crore. Therefore, CARO is applicable for the
Company.
So, in this case, all the 3 Auditors. (2 Branch Auditors + Central Statutory, Auditor) must
comply with CARO.
5. Vayu Pvt Ltd has a Turnover of 8 Crores for the Financial Year 2015–2016.
The Outstanding Balance of Loans from Banks and Financial Institutions is 24
Lakhs throughout the year. The Company had a Capital of 120 Lakhs at the
beginning of the year and on 15.09.2015 the Company made a Buy Back of
Shares worth 30 Lakhs resulting in a Share Capital of 90 Lakhs as on 31st
March 2016. Comment whether CARO is applicable for the Company
Condition Analysis
(a) Not a Holding or Subsidiary of a Public Assumed satisfied
(b) Paid up Capital and R&S on B/s date ≤ 1 Crore Satisfied, since the condition is with
Company
respect to B/s date. Net Amount 90
Lakhs is ≤ 1 Crore.
(c) Bank /Fin.Institution Borrowings at any time, ≤ Satisfied, since 24 Lakhs ≤ 1 Crore.
1 Crore
(d) Total Revenue ≤ 10 Crores Satisfied, since 8 Crores ≤ 10 Crores.
Since all 4 conditions are satisfied, CARO is not applicable in this case.
6. ABC Pvt. Ltd has a balance of 30 Lakhs as Capital Reserve, 30 Lakhs as
Revenue Reserves, 40 Lakhs as Revaluation Reserve and 20 Lakhs as Paid–
Up Share Capital as on 31st March. Comment on the applicability of CARO to
the Company.
The term “Reserves” includes all types of Reserves (Capital Reserves, Revenue Reserves,
Revaluation Reserve, etc)
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Here, Paid–Up Capital + Reserves = 20 Lakhs (Paid–Up Capital) + 100 Lakhs (Capital
Reserve + Revenue Reserve + Revaluation Reserve) = 120 Lakhs. Hence, CARO is applicable
for this Company.
7. Mahath Pvt Ltd provides the following information for the financial year
ending 31st March. Comment whether CARO is applicable for this Company.
(amounts in Lakhs)
Paid Up Share Capital 70.00
Capital Reserve 14.00
Revaluation Reserve 20.00
General Reserve 20.00
Profit and Loss (Dr.) 24 .00
As per Schedule III Requirements, Debit balance of P&L A/c, should be reduced from the
figure of Reserves.
In the present case,
Paid–Up Capital = 70 Lakhs
Reserves = 14 + 20 + 20 = 54 Lakhs
Less: P&L (Dr) = 24 Lakhs = 30 Lakhs
Paid Up Capital + Reserves = 100 Lakhs
Since Aggregate of Paid Up Capital and Reserves does not exceed 1 Crore, CARO is not
applicable for this Company assuming that all other 3 conditions of exemption are satisified.)
8. H Private Ltd had taken Overdrafts from SBI & HSBC with a limit of 40 Lakhs
each against the security of Fixed Deposit it had with those Banks and an
Unsecured Overdraft from a Financial Institution of 29 Lakhs. The said
loans were outstanding as at 31st March. The Paid Up Capital and Reserves of
the Company as at that date was 80 Lakhs and its Total Revenue during the
financial year ended on 31st March was 6 Crores. The Management of the
Company is of the opinion that CARO is not applicable to it because Total
Revenue and Paid–Up Capital were within the limits prescribed and
Borrowings against the Fixed Deposit cannot be considered. The Company
further contended that Borrowings Limit is to be reckoned per Bank or
Financial Institution and not cumulatively. Comment.
The term ―Borrowings ‘‘ include Total Borrowings from all the banks and financial
institutions cumulatively and it should also include borrowings against the Fixed Deposit.
Moreover, the outstanding balance shall not be netted off against the amount of Fixed
Deposit.
Total Borrowings in this case = 40 + 40 + 29 = 109 Lakhs = 1.09 Crores.
Since Borrowings is equal to greater than 1 Crore, CARO Reporting is applicable to the
Company.
9. In the current financial year, AP Pvt. Ltd has borrowed 1.20 Crore on 15th
June and repaid the entire loan before 31st March. Comment on the
applicability of CARO to this Company.
For the purpose of applicability of CARO, Balance Outstanding from a Bank or Financial
Institution, shall be construed at any point of time, during the year and not as at the end of
the year (i.e. 31st of March).
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Where the Company had Borrowings from a Bank in excess of ` 1 Crore during the year, but
the year–end balance of the same is NIL, the Company would be still covered by CARO,
notwithstanding that it fulfills all other conditions for exemption from the Order. In the
present case, AP Pvt Ltd will be covered under CARO.
10. Anand Pvt Ltd is incorporated on 1st July 2015. During the year ended 31st
March 2016, it had issued Shares (fully paid up) of ` 80 Lakhs, had borrowed `
25 Lakhs each from 2 Financial Institutions and its Total Revenue (Net of
Excise of ` 50 Lakhs which is credited to a separate account) is ` 975 Lakhs.
Will CARO be applicable to Anand Pvt Ltd?
Condition Analysis
(a) Not a Holding or Subsidiary of a Public Assumed satisfied.
Company
(b) Paid up Capital and R&S on B/s date ≤ 1 Satisfied, since 80 Lakhs ≤ 1 Crore.
Crore
(c) Bank / Fin.Instn Borrowings at any time, Satisfied, since 25×2= 50 Lakhs ≤ 1 Crore.
≤ 1 Crore
If Excise Duty is taken / credited to a
(d) Total Revenue ≤ 10 Crores separate account, it shall not form part of the
Total Revenue. So, Total Revenue for this Co.
= ` 9.75 Crores, i.e. ≤ ` 10 Crores.
CARO does not apply to Anand Pvt. Ltd, since all the conditions relating to exemption are
satisfied.
11. Tarun Pvt Ltd‟s Paid Up Capital and Reserves are less than 100 Lakhs
and it has no Borrowings from any Bank or Financial Institution. Its Sales
are 12 Crores before deducting Trade Discount 20 Lakhs and Sales Returns
190 Lakhs. The services rendered by the Company amounted to 20 Lakhs.
Comment on applicability of CARO to this Company
Principles: Total Revenue = [Sales 12 Crores (–) Trade Discount 20 Lakhs (–) Returns 190
Lakhs] + Services Income 20 Lakhs = Net 10.10 Crores
Analysis:
Condition Analysis
(b) Paid up Capital and R&S on B/s date ≤ ` 1 Satisfied, since it is given as ≤ ` 1 Crore.
Company
(c) Bank / Fin.Institution Borrowings at any time, Satisfied,
Crore since there are no
(d)
≤ ` Total Revenue ≤ ` 10 Crores
1 Crore Not satisfied, Since Total Revenue > `
Borrowings.
10 Crores.
CARO applies to Tarun Pvt Ltd, since the Total Revenue exceeds 10 Crores.
DUTY TO REPORT ON FRAUDS – Section 143(12) and Rule 13 of Companies
(Audit and Auditors) Amendment Rules, 2015
According to Section 143(12) of the Companies Act, 2013 and as per the amended Rule 13 of
Companies (Audit and Auditors) Rules, 2015, if an auditor of a company, in the course of
performance of his duties as statutory auditor, has reason to believe that an offence of
fraud, which involves or is expected to involve individually an amount of rupees
one crore or above, is being or has been committed against/in the company by its officers
or employees, the auditor shall report the matter to the Central Government.
Manner of reporting - When fraud involves an amount of Rs. 1 Crore and above
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When the auditor identifies fraud he must:
(a) Report the same to the Board or the Audit Committee, as the case may be, within 2
days of his knowledge of the fraud, seeking their reply or observations
within 45 days;
(b) On receipt of such reply or observations the auditor shall forward his report and the
reply or observations of the Board or the Audit Committee along with his comments
on such reply or observations of the Board or the Audit Committee to the Central
Government within 15 days from the date of receipt of such reply or observations;
(c) In case the auditor fails to get any reply or observations from the Board or the Audit
Committee within the stipulated period of 45 days, he shall forward his report to the
Central Government along with a note containing the details of his report that was
earlier forwarded to the Board or the Audit Committee for which he has not received
any reply or observations;
(d) The report shall be sent to the Secretary, Ministry of Corporate Affairs in a
sealed cover by Registered Post with Acknowledgement Due or by Speed
post followed by an e-mail in confirmation of the same.
(e) The report shall be on the letter-head of the auditor containing postal address, e-
mail address and contact telephone number or mobile number and be signed by the
auditor with his seal and shall indicate his Membership Number; and
(f) The report shall be in the form of a statement as specified in Form ADT-4.
Manner of reporting - When fraud involves an amount of less than Rs. 1 Crore
In case of a fraud involving lesser than rupees one crore, the auditor shall report the matter to
Audit Committee constituted under section 177 or to the Board with in 2 days of his
knowledge of the fraud and he shall report the matter specifying the following:-
a) Nature of Fraud with description;
b) Approximate amount involved; and
c) Parties involved.
The following details of each of the fraud reported to the Audit Committee or the Board
during the year, but not reported to Central Government shall be disclosed in the
Board‘s Report:-
a) Nature of Fraud with description;
b) Approximate Amount involved;
c) Parties involved, if remedial action not taken; and
d) Remedial action taken.
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 Rs. 1 lakh rupees but which may extend
to R.s25 lakh rupees.
 Internal Auditor is not required to report on fraud under this section.
 The reporting responsibility relating to fraud is also extended to branch
auditors to the extent it relates to the concerned branch.
OTHER POINTS
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 The auditor is required to report on fraud under this section only if he is the
first person to identify/note such instance. Accordingly, in case a fraud has
already been reported or has been identified by the management and has been dealt
with by them and informs the auditor, he will not be required to report the same
under Section 143(12).
 The auditor of the parent company is not required to report on frauds if
they have not been committed by the parent company, in case of audit of
consolidate financial statements.
 Based on harmonious reading of Section 143(12), Rule 13 of Companies (Audit and
Auditors) Amendment Rules, 2015 and Form ADT-4, reporting of fraud is applicable
only, when the auditor has a knowledge that fraud has occurred or is occurring i.e
when the auditor has evidence that a fraud exists.
AUDITOR NOT TO RENDER CERTAIN SERVICES – Sec. 144
An auditor appointed under this act shall not provide the following services, namely:
a. Accounting and book keeping services
b. Internal Audit
c. Actuarial Services
d. Investment Advisory Services
e. Investment Banking Services which provide guidance with respect to issue and
placement of stocks etc.
f. Rendering of Outsourced financial services
g. Design and implementation of any financial information system
h. Management Consultancy Services
FAQ‟s on Section 144

The company wishes to engage its Statutory Auditors in carrying out the audit of
the Company‟s Employees‟ Gratuity Fund for the FY 2014-2015. Will the said
service be covered within the scope of negative lists of services under section
144 of CA, 2013? Does the prior approval of the Board needed before engaging
them as gratuity auditor?
The said service will not be covered in the negative listed items under section 144 of CA,
2013. Also, the Gratuity Fund is separate from the company and its audit is completely
separate from the audit of the company and does not have to be authorised by the company
at all.
Can any of the relative of an individual auditor of a company provide such
negative listed services to the company?
The section clearly provides that the negative listed services cannot be provided by the
auditor directly or indirectly to the company or its holding company or subsidiary company.
Explanation to the section provides that the term directly or indirectly includes services
provided by the auditor himself or through relatives or such other persons connected or
associated with the auditor or any other entity on which the auditor has significant influence
or control or whose name or trade mark or brand is used by such individual. Thus neither the
auditor himself, nor his relative can provide such negative listed services to the company, its
holding or subsidiary company.
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Is providing services of filing of tax returns, TDS returns in professional capacity taken to be
negative list service under section 144?
The negative listed services under section 144 do not include services rendered with regard to filing of
tax returns or TDS returns. Hence the auditor can render such services to the auditee company.
PRACTICAL QUESTION
M/s Renault & Co., Chartered Accountants, appointed as a statutory
auditor of R Ltd. for the financial year 2013-14. The company is also in
need of some actuarial services. Consequently, the Board of Directors of the
company offered the same to M/s Sona & Co., an associate to M/s Renault &
Co., which has been duly accepted by the firm. Comment.
Services Not To Be Rendered By Auditor: This provision is newly inserted by
section 144 of the Companies Act, 2013. Section 144 prescribes certain services not to
be rendered by the auditor. An auditor appointed under this Act shall provide to the
company only such other services as are approved by the Board of Directors or the audit
committee, as the case may be, but which shall not include any of the following services
(whether such services are rendered directly or indirectly to the company or its holding
company or subsidiary company), namely (i) accounting and book keeping services; (ii)
internal audit; (iii) design and implementation of any financial information system;
(iv) actuarial services; (v) investment advisory services; (vi) investment banking
services; (vii) rendering of outsourced financial services; (viii) management services;
and (ix) any other kind of services as may be prescribed.
Further section 141(3)(i) of the Companies Act, 2013 also disqualify a person for
appointment as an auditor of a company whose subsidiary or associate company or any
other form of entity, is engaged as on the date of appointment in consulting and
specialized services as provided in section 144.
Additionally, in accordance with section 141(4) of the Act, where a person appointed as
an auditor of a company incurs any of the disqualifications mentioned above after his
appointment, he shall vacate his office as such auditor and such vacationshall be
deemed to be a casual vacancy in the office of the auditor.
In the given case, M/s Renault & Co., Chartered Accountants, was appointed as an
auditor of R Ltd. Further, the company offered actuarial services to M/s Sona & Co., an
associate to M/s Renault & Co., which has also been duly accepted by the firm.
Therefore, M/s Renault & Co. is disqualified to hold office as an auditor of R Ltd.
under section 141(3)(i), as its associate is involved in providing such services, to R Ltd.,
as mentioned in section 144 of the Companies Act, 2013.
Subsequently, M/s Renault & Co. shall have to vacate the office of auditor of R Ltd.
accordingly.
AUDITOR TO SIGN AUDIT REPORT – SEC. 145
The person appointed as an auditor of the company shall sign the auditor‘s report. Where an
individually practicing Chartered Accountant/Sole proprietor has been appointed as the
auditor, that individual or proprietor alone had the authority to sign on the auditor‘s report.
However, where a partnership firm has been appointed as the auditor, any Chartered
Accountant partner of such a partnership firm can sign for and on behalf of the firm. In all
cases, the person signing the report should also mention the membership number. In case
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where a sole proprietor/a partnership firm is appointed, the person signing the report must
also mention their name, designation, membership number as well as FRN – Firm
Registration Number.
PUNISHMENT FOR NON-COMPLIANCE [Section 147]
Section 147 of the Companies Act, 2013 prescribes following punishments for contravention:
(1) If any of the provisions of sections 139 to 146 (both inclusive) is contravened, the
company shall be punishable with fine which shall not be less than Rs.25,000
but which may extend to Rs.5,00,000 and every officer of the company who is in
default shall be punishable with imprisonment for a term which may extend to
one year or with fine which shall not be less than Rs.10,000 but which may extend to
Rs.1,00,000, or with both.
(2) If an auditor of a company contravenes any of the provisions of section 139, section
143, section 144 or section 145, the auditor shall be punishable with fine which
shall not be less than Rs.25000 but which may extend to Rs.500000 or 4
times the remuneration of the Auditor, whichever is less.
Provided that if an auditor has contravened such provisions knowingly or willfully
with the intention to deceive the company or its shareholders or creditors or tax
authorities, he shall be punishable with imprisonment for a term which may
extend to one year and with fine which shall not be less than Rs.50000 but
which may extend to Rs.25,00,000 or eight times the remuneration of the
auditor whichever is less.
(3) Where an auditor has been convicted under sub-section (2), he shall be liable to:-
(i) refund the remuneration received by him to the company;
(ii) and pay for damages to the company statutory bodies or authorities or to any
other persons for loss arising out of incorrect or misleading statements of
particulars made in his audit report.
(4) Where, in case of audit of a company being conducted by an audit firm and if it is
proved that the partner or partners of the audit firm has or have acted in a fraudulent
manner or abetted or colluded in an fraud by, or in relation to or by, the company or
its directors or officers, the liability, whether civil/criminal as provided in this Act or
in any other law for the time being in force, for such act shall be of the partner or
partners concerned and of the firm jointly and severally.
Provided that in case of a criminal liability of an audit firm, in respect of
liability other than fine, the concerned partner or partners, who acted in a
fraudulent manner or abetted or, as the case may be, colluded in any
fraud shall only be liable.
COST AUDIT – Sec.148
Cost Audit can be defined as the verification of the accuracy of cost accounts and cost
accounting records. The Cost Auditor will verify whether the cost statements drawn as per
the records depict a true and fair view of the cost of production of various products.
Sometimes, the Central Government may, by an order, direct a company or companies
operating under a specific industry to make and maintain cost accounting records
{Section 148(1)}. In such a case, it is mandatory for that company or those companies to
maintain cost accounting records prescribed by Central Government. These records to be
maintained by the company are in addition to the financial records.
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In some other cases, the Central Government may direct a company or companies operating
under a specific industry not only to make and maintain cost accounting records but also to
appoint a cost auditor {Section 148(2)}. When the Central Government so directs, it
becomes an obligation on the part of the company to appoint a cost auditor.
Rule 3 of the Companies (Cost Records and Audit) rules, 2014 provides the classes of
companies, engaged in the production of goods or providing services, having an overall
turnover from all its products and services of Rs.35 crore or more during the immediately
preceding financial year, required to include cost records in their books of accounts.
The requirement for cost audit shall not be applicable to a company whose
revenue from exports, in foreign exchange, exceeds 75% of its total revenue,
which is operating from SEZ and which is engaged in the generation of
electricity for captive consumption through captive generating plant. (as per
Rule 3 of Companies (Cost Records and Audit) Rules, 2014.
Rule 4 deals with provisions relating to the applicability of cost audit depending on the
turnover of the company.
All companies covered under regulated sector are required to get its cost records audited if
the overall annual turnover of the company from all its products and services during the
immediately preceding financial year is rs.50 crore or more and the aggregate
turnover of the individual product(s) or serviced(s) for which cost records are
required to be maintained is Rs.25 crore or more.
All companies covered under non-regulated sector are required to get its cost records
audited if the overall annual turnover of the company from all its products and services
during the immediately preceding financial years is rs.100 crore or more and the
aggregate turnover of the individual product(s) or service(s) for which cost
records are required to be maintained under rule 2 is.35 crore or more.
Who can be appointed as the Cost Auditor {Section 148(3)}
Cost audit is to be conducted by a person who is a qualified cost accountant and who holds a
valid certificate of practice under ICWAI Act, 1959. Here the term ―person‖ also includes a
partnership firm of cost accountants.
Rule 6 required the companies to appoint an auditor within 180 days of the commencement
of every financial year. The intimation relating to appointment of the cost auditor shall be
given within a period of 30 days of the Board meeting in from CRA-2 to the cost auditor as
well as to the Central Government.
The cost auditor appointed as such shall continue in such capacity till the expiry of 180 days
from the closure of the financial year or till he submits the cost audit report, for the financial
year for which he has been appointed.
Disqualifications
All the disqualifications applicable for company‘s auditor are also applicable for a cost
auditor. In addition, the ICWAI has notified that any cost accountant who accepts an
appointment as cost auditor
(a) If he is a partner or employee of the company‘s auditor appointed u/s.139
(b) If he is an employee of the firm or of any partners of a firm appointed u/s.139
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shall be deemed to be guilty of professional misconduct.
Appointment
Rule 14 of the Companies (Audit and Auditors) Rules, 2014
In case of companies required to constitute an audit committee
 The Board shall appoint the cost auditor.
 Such appointment must be made on the basis of the recommendations of the
Audit Committee.
 The audit committee shall also recommend the remuneration of the cost
auditor. The remuneration recommended by the Audit Committee shall be considered
and approved by the Board of Directors and ratified subsequently by the
shareholders;
In case of companies not required to constitute an audit committee
 The Board shall appoint the cost auditor on its own.
 The remuneration of such an auditor shall also be fixed by the board and it shall be
ratified by the shareholders subsequently.
The cost audit is in addition to financial audit.
Casual Vacancy
Any casual vacancy in the office of a cost auditor, whether due to resignation, death or
removal, shall be filled by the Board of Directors within 30 days of occurrence of such
vacancy and the company shall inform the central government in form CRA-2 with
30 days of such appointment of cost auditor.
Rights of the Cost Auditor [Section 148(5)]
The rights, duties and obligations applicable to company‘s auditors also apply to a cost
auditor appointed under this section
While conducting the cost audit, the cost auditor shall comply with the cost auditing
standards issued by the Institute of Cost and Works Accountants of India,.
Reporting [Section 148(6) & (7)]
After conducting and concluding the auditor, the cost auditor shall submit his report to
the Board.
After receipt of the report from the Cost Auditor, the company shall, within 30 days from
the date of receipt of the report shall furnish to the Central Government, a copy of the report
along with its information and explanations on every reservations/qualifications made by the
cost auditor through form cra-4.
Right of Central Government
After considering the report and explanations given by the company, the Central Government
may require further explanations from the company.
The provisions of section 143(12) of the Companies Act, 2013 and the relevant rules on duty
to report on fraud shall also apply to the cost auditor.
OTHER PRACTICAL QUESTIONS
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1. Mr. Rajendra, a fellow member of the Institute of Chartered Accountants of
India, working as Manager of Shrivastav and Co., a Chartered Accountant firm,
signed the audit report of Om Ltd. on behalf of Shrivastav & Co.
Section 145 of the Companies Act, 2013 requires that 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 i.e. where a firm
including a limited liability partnership is appointed as an auditor of a company, only the
partners who are chartered accountants shall be authorized to act and sign on behalf of the
firm.
Therefore, Mr. Rajendra, a fellow member of the Institute and a manager of M/s Shrivastav &
Co., Chartered Accountants, cannot sign on behalf of the firm in view of the specific
requirements of the Companies Act, 2013. If any auditor‘s report or any document of the
company is signed or authenticated otherwise than in conformity with the requirements of
Section 145, the auditor concerned and the person, if any, other than the auditor who signs
the report or signs or authenticates the document shall, if the default is willful, be punishable
with a fine.
2. The members of C. Ltd. preferred a complaint against the auditor stating that
he has failed to send the auditors report to them.
Section 143 of the Companies Act, 2013 lays down the powers and duties of auditor. As per
provisions of the law, it is no part of the auditor‘s duty to send a copy of his report to
members of the company. The auditor‘s duty concludes once he forwards his report to the
company. It is the responsibility of company to send the report to every member of the
company. In Re Allen Graig and Company (London) Ltd., 1934 it was held that duty of the
auditor after having signed the report to be annexed to a balance sheet is confirmed only to
forwarding his report to the secretary of the company. It will be for the secretary or the
director to convene a general meeting and send the balance sheet and report to the members
(or other person) entitled to receive it.
Hence in the given case, the auditor cannot be held liable for the failure to send the report to
the shareholders.
3. One of the directors of Hitech Ltd. is attracted by the disqualification under
Section 164(2) of the Companies Act, 2013.
Section 143(3)(g) of the Companies Act, 2013 imposes a specific duty on the auditor to report
whether any director is disqualified from being appointed as directors under section 164(2) of
the Companies Act, 2013. The auditor has to ensure that written representation have been
obtained by the Board from each director that one is not hit by Section 164(2).
Since in this case, one of the directors is attracted by disqualification under section 164(2) of
the Act, the auditor shall state in his report as per section 143 about the disqualification of the
particular director.
4. Mr. X, a Director of M/s KP Private Ltd., is also a Director of another
company viz., M/s GP Private Ltd., which has not filed the financial statements
and annual return for last three years 2010-11 to 2012-13. Mr. X is of the opinion
that he is not disqualified u/s 164(2) of the Companies Act, 2013, and auditor
should not mention disqualification remark in his audit report.
Section 143(3)(g) of the Companies Act, 2013 imposes a specific duty on the auditor to report
whether any director is disqualified from being appointed as director under section 164(2) of
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the Companies Act, 2013. As per provisions of Section 164(2), if a director is already holding
a directorship of a company which has not filed the financial statements or annual returns for
any continuous period of three financial years shall not be eligible to be reappointed as a
director of that company or appointed in other company for a period of five years from the
date on which the said company fails to do so.
In this case, Mr X is a director of M/s KP Private Ltd. as well as of M/s GP Private Ltd., And,
M/s GP Private Ltd., has not filed the financial statements and annual return for last three
years. Hence the provisions of section 164(2) are applicable to him and as such he is
disqualified from directorship of both the companies.
Therefore, the auditor shall report about the disqualification under section 143(3)(g) of the
Companies Act, 2013.
5. A Ltd. has its Registered Office at New Delhi. During the current accounting
year, it has shifted its Corporate Head Office to Indore though it has retained
the Registered Office at New Delhi. The Managing Director of the Company
wants to shift its books of account to Indore from New Delhi, as he feels that
there is no legal bar in doing so.
As per section 128(1) of The Companies Act 2013, every company shall keep at its registered
office proper books of accounts. It is permissible, however, for all or any of the books of
accounts to be kept at such place in India as the Board of Directors may decide but, when a
decision in this regard is taken, the company must file within seven days of such decision
with the Registrar of Companies a notice in writing giving full address of the other place.
In view of the above provisions, A Ltd should maintain its books of account at its registered
office at New Delhi. The Managing Director is not allowed to shift its books of account to
Indore unless decision in this behalf is taken by the Board of Directors and a notice is also
given to the Registrar of Companies within the specified time. The auditor may accordingly,
inform the Managing Director that his contention is not in accordance with the legal
provisions.
DIRECTOR‟S RESPONSIBILITY STATEMENT [SECTION. 134(5)]
The Director‘s Report is a part of Annual Report. A director‘s report is intended to explain to
shareholders, the overall financial position of the Company and its operations and business
scope.
According to this section it is mandatory for the Board of Directors of the company to include
the following in the Board Report under the heading Director‘s Responsibility Statement.
Format of Director‟s Responsibility Statement:
In pursuance of Section 134(5) of the Companies Act, 2013 the Directors hereby confirm that:
a. In the preparation of annual accounts, the applicable accounting standards had
been followed along with proper explanation relating to material departures.
b. The directors had selected such accounting policies and applied them
consistently and made judgments and estimates that are reasonable and
prudent so as to give a true and fair view of the state of affairs of the company at the
end of the financial year and of the profit and loss of the company for that period.
c. The directors had taken proper and sufficient care for the maintenance of
adequate accounting records in accordance with the provisions of this act for
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safeguarding the assets of the company and for preventing and detecting fraud and
other irregularities.
d. The directors had prepared the annual accounts on a going concern basis and
e. The directors in the case of a listed company, had laid down internal financial
controls to be followed by the company and that such internal financial controls are
adequate and were operating effectively.
f. The directors had devised proper systems to ensure compliance with the
provisions of all applicable laws and that such systems were adequate and
operating effectively.
CORPORATE SOCIAL RESPONSIBILITY (SECTION 135)
Every company having
 Net Worth of 500 crore or more, or
 Turnover of 1000 corre or more or
 A net profit of 5 crore or more
During the any financial year, shall constitute a Corporate Social Responsibility Committee of
the Board consisting of three or more directors, out of which at least one director shall be an
independent director.
The following are the responsibilities of Corporate Social Responsibility
Committee
a. It shall formulate and recommend to the board, a corporate social responsibility policy
which shall indicate the activities to be undertaken in areas or subjects
specified in Schedule VII.
b. Shall recommend the amount of expenditure to be incurred on the activities
referred to in clause (a) and
c. Shall monitor the corporate social responsibility policy of the company from
time to time.
The board of every company shall ensure that the company spends in every financial year, at
least 2% of the average net profits of the company made during the 3
immediately preceding financial years, in pursuance of its corporate social
responsibility policy. The company shall give preference to the local area and areas
around it where it operates, for spending the amount earmarked for CSR activities.
If the company fails to spend such amount, the board shall, in its report, specify the
reasons for not spending the amount.
Beneath minerals Limited is a Public Sector Company engaged in extraction of
minerals from land. It has to pump out water in the first layer of the soil if the
minerals are to be excavated. The Company pumps out water and diverts the
water through a water course constructed by it to nearby villages and the water
is allowed to be used by villagers for drinking purposes. The cost of construction
of water course amounted to Rs.5.25 crores and the Company had disclosed this
amount as CSR expenses in the Statement of Profit and Loss. Comment. (May,
18)
Company (Corporate Social Responsibility Policy) Rules, 2014 mandated the corporate
entities that the expenditure incurred for Corporate Social Responsibility (CSR) should
3.67
not be the expenditure incurred for the activities in the ordinary course of
business. If expenditure incurred is for the activities in the ordinary course of business,
then it will not be qualified as expenditure incurred on CSR activities.
In the instant case, Beneath minerals Limited is a public sector company which is engaged in
extraction of mineral from land, for that it has to pump out water in the first layer of the soil
if the minerals are to be excavated. The company pumps out water and diverts the water
through a water course constructed by it to nearby villages and the water is allowed to be
used by villagers for drinking purposes. Company has disclosed the cost of construction of
water course as CSR expenses in the statement of Profit and Loss, which is not correct as this
expenditure incurred for the construction of water course is incurred in the ordinary course
of activities of business.
Therefore, the treatment done by showing the cost of construction of water course as CSR
expense is not correct.
LAW RELATING TO DIVIDENDS:

Companies do retain some portion of the profit earned by it for financing
expansion/diversification. The remaining part of the profit may be distributed among the
members. The profit that is legally available for distribution as dividend to the shareholders
is technically called as divisible profit. That part of the divisible profit which is actually
distributed is known as ―Dividend‖.
TYPES OF DIVIDEND:
As per section 2(35) of the Companies Act, 2013, the term ―Dividend‖ includes interim
dividend also. Therefore, dividend declared by a company can be classified into two
categories. They are
a. Interim Dividend
b. Final Dividend
PROVISIONS OF THE COMPANIES ACT REGARDING DIVIDEND:
SOURCES OF DIVIDENDS:
According to Section 123(1) of Companies Act, 2013, a company can declare and pay
dividends only out of the following sources.
a) Out of profits of the company for that financial year arrived at after providing for
depreciation in accordance with Section 123(2) and as per Schedule II. or
b) Out of the profits for any previous financial years arrived at after providing for
depreciation and remaining undistributed. or
c) Out of both the above or
d) Out of moneys provided by the Central Government or any State Government for
payment of dividend in pursuance of a guarantee given by that government.
AUDIT OF DIVIDENDS:
LEGAL CONSIDERATIONS:
The law relating to dividends is contained in Sec.123 of the Companies Act, 2013. The legal
aspects can be explained under the following heads:
DIVIDENDS OUT OF CURRENT PROFITS
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The following are the conditions to be satisfied by the company for declaration of dividend
out of its current profits.
1. Provision for Depreciation
Section 123 of the Companies Act, 2013, provides that the dividend shall be declared or paid
by a company for any financial year out of profits of the company for that year arrived at after
providing for depreciation in a manner prescribed under Schedule II to the Companies Act,
2013.
2. Section 123(1) of the Companies Act, 2013, also prescribes that if a company has not
provided for depreciation for any previous financial year, it shall, before declaring or paying
dividend, provide for such depreciation:
a. Either out of the profits of that financial year
b. Out of the profits of any other previous financial year or years.
For example, the profits of a company for the year ending 31-03-2014 are proposed to be
distributed, and it is found that due to inadequacy of profits, no provision for depreciation
has been made for the year ended 31-03-2013, it would be necessary to make provisions in
respect of depreciation, for the year ended 31-03-2013 as well as 2014 and only the balance of
the profits for the year 31-03-2014 would be available for distribution as dividend.
3. Set-off of Past Losses
A company shall not declare dividends unless carried over previous losses are set off against
the profits of the company for the year for which dividend is proposed to be declared.
In other words, dividends shall not be declared unless carried over previous
losses and depreciation not provided in the previous year(s) are set off against
the profits of the company for the current year.
4. Transfer to Reserves
The company may, before declaration of any dividend in any financial year, transfer such
percentage of its profits for that financial year as it may consider appropriate to the reserves
such as:
a. Transfer of reserves as per any law for the time being in force. For example, a fixed
percentage of profits of a banking company must first be transferred to the General
Reserve before any dividend can be distributed.
b. Transfer required in accordance with:
i. Provisions of AOA
ii. Contractual Obligations
iii. Terms of a Loan agreement etc.
5. Payment of Preference Dividend
DIVIDENDS OUT OF PAST/ACCUMALATED PROFITS:
In case of inadequacy or absence of profits in any year, a company can declare dividend
either out of Free Reserves or out of Surplus. Where the company wants to declare
dividend out of Free Reserves, the company is required to comply with all the
following conditions.
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1. The rate of dividend declared shall not exceed the average rate of dividend declared
by the company for the preceding 3 financial years. This rule is not applicable to
a company, which has not declared any dividend in each of the three
preceding financial year. In other words, if the company has not declared
any dividend in the last 3 financial years continuously, it is not required to
maintain average rate of dividend.
2. The total amount to be drawn from accumulated profits shall not exceed 1/10 th of
sum of paid up capital and free reserves of the company as appearing in the latest
audited financial statements and the amounts so drawn shall first be utilized to set off
the losses incurred in the current year; and
3. The balance of reserves after such withdrawal shall not fall below 15% of its paid up
share capital.
The above conditions are not required to be complied with when the company
declares dividend out of Surplus/Balance in Profit & Loss Account.
Illustration
The profits of X Ltd. for F.Y. 2017-18 are inadequate and considering the different scenarios
the declaration of dividend may be as under:
Financial Year CASE 1 CASE 2 CASE 3
2014-15 10% NIL NIL
2015-16 NIL NIL 12%
2016-17 5% NIL NIL
Maximum rate of Average rate of The stipulation Average rate of
dividend for the year dividend is 15/3=5% regarding average dividend is 12/3=4%
2017-18 (The company can rate of dividend is (The company can
declare dividend up not applicable, as no declare dividend up
to 5% subject to dividend is declared to 4% subject to
compliance with in any of the 3 compliance with
other conditions preceding financial other conditions
prescribed) years. Accordingly, prescribed)
dividend for 2017-18
may be declared at
any rate subject to
the compliance with
other conditions
prescribed in the
rules.
PROCEDURE FOR DECLARATION OF DIVIDEND
Authority for declaration of Dividend:
The board of directors of the company shall recommend a rate of dividend to the
shareholders for their approval, only after taking into consideration the following
aspects:
a. Liquidity position
b. Expansion plans
c. Diversification Plans
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d. Working capital requirements
The shareholders may, at their discretion, declare a rate lower than the rate
recommended by the BOD but they cannot declare a rate of dividend which is higher
than the rate recommended by the Board of Directors.
Rules regarding declaration and distribution of dividend:
As per Section 2(35) of the Companies Act, 2013, dividend has been defined to include any
interim dividend also.
1. Dividends once declared become a liability on the part of the company.
2. Dividends are payable either in cash or through cheque or through dividend
warrants or through electronic mode.
3. Issue of shares in lieu of dividends is not possible.
4. Within 5 days from the date of declaration of dividend, the amount of dividend is to
be deposited by the company in a separate bank account. Sec.123(4)
Illustration
If the Board of Directors of XYZ Ltd. declared an Interim Dividend on 13th August 2018,
then the amount of Dividend should be deposited in a separate bank account within five
days from the date of declaration i.e. latest by 18th August 2018 irrespective of the
intervening holidays.
5. They must be paid within 30 days of the date of declaration.
6. Dividend declared which remains unpaid or unclaimed with in 30 days from the date of
declaration shall be transferred to a special account called as "Unpaid Dividend
Account" opened in any scheduled bank. Such transfer shall be made within 7
days from the date of expiry of 30 days. In case of any default, the company shall
pay interest @ 12% p.a. on the amount not transferred. The interest accrued on such
amount shall be paid to the members in proportion to the amount remaining unpaid to
them.
7. Any subsequent payment of the unpaid or unclaimed dividend has to be made by the
company out of this account only.
8. Any amounts transferred to unpaid dividend account and which remains unpaid or
unclaimed for a period of 7 years from the date of such transfer should be
transferred along with interest to a separate fund established by Central
Government under section 125 of the Companies Act, 2013, called as Investor
Education and Protection Fund.
9. All shares in respect of which unpaid or unclaimed dividend has to be transferred to
Investor Education and Protection Fund. Any claimant of shares transferred shall be
entitled to claim transfer to shares to his name on submission of documents as may be
prescribed.
INTERIM DIVIDEND
The Board of Directors of a company may declare interim dividend during any
financial year or during the period from the closure of the Financial Year till
holding of the Annual General Meeting out of the surplus in the profit and loss account
or out of the profits of the financial year till the quarter preceding the date of declaration of
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the interim dividend. Approval of members is not required for declaration of interim
dividend.
While declaring the Interim Dividend, the Board shall consider the financial results for the
period for which Interim Dividend is to be declared and should be satisfied that the financial
position of the company justifies and supports the declaration of such Dividend.
The financial results shall take into account –
(a) Depreciation for the full year,
(b) Tax on profits of the company including deferred tax for full year,
(c) Other anticipated losses for the financial year,
(d) Dividend that would be required to be paid at the fixed rate on preference shares.
(e) If the company has incurred losses during the current financial year up to
the end of the quarter immediately preceding the date of declaration of
interim dividend, the rate of interim dividend cannot be higher than the
average dividends declared by the company during the immediately
preceding 3 financial years.
The interim dividend so declared by the Directors and is subsequently regularized by the
Shareholders in the Annual General Meeting.
Illustration
On 10th July 2018 the Board of Directors of ABC Limited intends to consider and declare
Interim Dividend for the following Financial Year (F.Y.):
(i) 2017-18: Out of the profits earned in the F.Y. 2017-18;
(ii) 2018-19: Out of the profits earned during the first quarter of F.Y. 2018-19.
In case of Sl. No. (i) above, the Board may declare Interim Dividend before the approval of
financial statements for the F.Y. 2017-18. If the financial statements are already approved by
the Board, then the declaration of Interim Dividend for the F.Y. 2017-18 will not be possible.
Note: Though sub-section (3) of Section 123 of the Act provides that the Board of Directors of
a company may declare Interim Dividend during any financial year or at any time during the
period from the closure of the financial year till the holding of the Annual General Meeting.
In the given example if the financial statements for F.Y. 2017-18 are already approved by the
Board, then it is practically not possible to declare any Interim Dividend for the F.Y. 2017-18,
as the books of accounts would be closed for that financial year.
However, in case of Sl. No. (ii) above, the Board may declare Interim Dividend out of the
profits earned during the first quarter of F.Y. 2018-19.
Other Aspects
1. Should all fictitious assets be written off before distribution of Dividends?
There is no mandatory rule in accounting or any legal requirement that fictitious assets must
be written off before declaration of dividend. Therefore, writing off fictitious assets is
considered as desirable and it is not mandatory.
3.72
COMPANIES (AUDITOR’S REPORT) ORDER, 2016

In exercise of the powers conferred by sub-section (11) of section 143 of the Companies Act,
2013, the Central Government, hereby makes the following Order, namely The Companies
(Auditor’s Report) Order, 2016.
Applicability
CARO, 2016 is applicable to every company including a foreign company. According
to Section 2(42) of Companies Act, 2013, Foreign Company means any company or body
corporate incorporated outside India which –
a. has a place of business in India whether by itself or through an agent,
physically or through electronic mode; and
b. conducts any business activity in India in any other manner.
In respect of Foreign Companies, an established place of business in India would include a
Liaison Office.
Every report made by the auditor in pursuance with the provisions of section 143 of
Companies Act, 2013 for financial year commencing on or after 1st day of April, 2015 should
include CARO – 2016. Hence CARO, 2016 is applicable from FY 2015-16 and the matters
specified therein shall be included in each report made by the auditor u/s.143 on the accounts
of every company to which CARO, 2016 applies.
Non-Applicability-
CARO, 2016 is not applicable to consolidated financial statements.
CARO, 2016 is not applicable for the following types of companies:
(i) a banking company
(ii) an insurance company
(iii) a company licensed to operate under section 8 of the Companies Act;
(iv) a One Person Company and a small company and
(v) a private limited company provided all the following conditions are
satisfied:
a. It should not be a subsidiary or holding company of a public company
and
b. The paid up capital and reserves and surplus of such a company
shall not be more than 1 Crore as on the balance sheet date and
c. The total borrowings shall not exceed 1 crore from any bank or
financial institution at any point of time during the financial year and
d. The Total Revenue including revenue from discontinuing operations
shall not exceed 10 crore during the financial year.
Aggregate Amount: For this purpose, ―Any Bank or Financial Institution (FI)‖, would refer
to the aggregate to all Loans and not with reference to each Bank or Financial Institution.
Where the Company is granted an Overdraft Facility against Fixed Deposits of the concerned
Bank, the amount Outstanding in Overdraft Facility (and not net of FD) is considered for
the purpose of CARO.
3.1
Outstanding Dues in respect of Credit Cards would also be considered while
calculating the limit of 1 Crore in respect of ―Borrowings‖ from a Bank or Financial
Institution.
The term ―Banks‖ refers to a Bank as defined under Banking Regulation Act, 1949. Therefore,
even Loans taken from a Private Bank or a Foreign Bank would also be taken
into consideration while examining the applicability of CARO.
TERMS USED IN THE ORDER
1. Paid-up Capital and Reserves and Surplus
Paid-up share capital would include both equity share capital as well as the preference
share capital. While calculating the paid-up capital, amount of calls unpaid should be
deducted from the paid-up capital. The amount originally paid-up on forfeited shares
should be added to the figure of paid-up capital. Share application money received
should not be considered as part of the paid-up capital.
The term ―reserves and surplus‖ include the following:
a. Capital Reserves
b. Capital Redemption Reserve
c. Securities Premium Reserve
d. Debenture Redemption Reserve
e. Revaluation Reserve
f. General Reserve
g. Surplus (Debit or Credit balance in P&L
h. Foreign currency translation reserve etc.
2. Borrowings
This include all fund-based loans such as term loans, demand loans, export credits,
working capital limits, cash credits, overdraft facilities, bills purchased or discounted etc.
However, this does not include non-fund based limit such as bank guarantees. However,
if the bank guarantee has been converted into fund-based limit, it should also be considered.
The term also includes interest accrued and due.
3. Financial Institution
It includes a non-banking financial company (NBFC).
4. REVENUE
According to Part II of Schedule III of the Companies Act, 2013 ―REVENUE‖ means
aggregate amount of sales affected by the company. The term ―sales affected‖ include sale of
goods as well as services rendered by the company. For determination of turnover, the
following points should be considered:
1. Taxes collected should not be taken into account if they are credited
separately.
2. Trade discounts should be deducted from the figure of turnover;
3. Commission allowed to third parties should not be deducted from the figure of
turnover; and
4. Sales returns should be deduced from the figure of turnover even if the returns
are from the sales made in the earlier years.
5. Date of determination of limits
3.2
If at any point of time during the financial year covered by the audit report, the company
defeats any of the conditions mentioned for a private company for its exclusion from the
order, the order is made applicable.
MATTERS TO BE INCLUDED IN THE AUDITOR’S REPORT
(i) FIXED ASSETS:
(a) Whether the company is maintaining proper records showing full particulars,
including quantitative details and situation of fixed assets;
Maintenance of Proper Records
The auditor has to verify whether the company is maintaining proper records with
respect to Fixed Assets. What constitute “proper record” is not defined in the act.
The auditor can satisfy that the company is maintaining proper records with respect to
Fixed Assets if the company is maintaining a ―Fixed Asset Register‖ showing
therein full particulars of Fixed Assets including quantitative details of Fixed Assets.
Here the term fixed assets includes both tangible and intangible assets. They
also include assets acquired through finance lease.
(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;
Physical Verification of Fixed Assets and material discrepancies:
It is the primary responsibility of the management to physically verify the
assets at reasonable intervals. Therefore, the auditor has to inquire whether the fixed
assets were physically verified by the management at reasonable intervals. What
constitute reasonable interval again is not defined in the Order. Reasonable interval
in respect of physical verification of Fixed Assets may be one, two or three years
depending upon the circumstances of the case.
If material discrepancies were noticed by the management on such physical
verification, the auditor has to verify whether they were properly dealt
with/adjusted in the books of account.
(c) Whether the title deeds of immovable properties are held in the name of the
company. If not, provide the details thereof;
(ii) INVENTORY:
Whether physical verification of inventory has been conducted at reasonable
intervals by the management and whether any material discrepancies were
noticed and if so, whether they have been properly dealt with in the books of
account;
Physical verification of Inventory and adjustment of material
discrepancies
It is the primary responsibility of the management to physically verify all the
inventories at reasonable intervals. The auditor has to verify whether management
conducted physical verification of inventory at reasonable intervals. The auditor
should also verify whether any material discrepancies noticed by the management on
such physical verification were properly dealt with/adjusted in the books of account.
3.3
(iii) LOANS GRANTED:
Whether the company has granted any loans, secured or unsecured to companies,
firms, LLP or other parties covered in the register maintained under section 189 of the
Companies Act, 2013. If so,
(a) Whether the terms and conditions of the grant of such loans are not prejudicial
to the company’s interest;
(b) Whether the schedule of repayment of principal and payment of interest has
been stipulated and whether the repayments or receipts are regular;
Explanation
Under this clause the auditor is required to verify whether the company has entered
into a loan agreement with the borrowers and whether the terms and conditions of such
loan agreement includes a schedule of repayment of principal and interest. The auditor
should also verify whether receipt of principal amount and interest on loans granted by
the company is regular as per the schedule of repayment.
The word ―regular‖ should be taken to mean that the principal and interest should
normally be received whenever they fall due.
(c) if the amount is overdue, state the total amount overdue for more than ninety
days, and whether reasonable steps have been taken by the company for
recovery of the principal and interest;
Explanation
Under this clause, the auditor is required to verify whether the company has taken
reasonable steps for recovery of principal and interest if it is overdue for more than 90
days. A loan is considered to be overdue when the payment has not been made or
received on the due date as per the agreement.
The term ―reasonable steps‖ has not been defined. Taking its natural meaning,
reasonable steps not only mean issuing a legal notice. Even a reminder notice sent
can be treated as a reasonable step.
(iv) In respect of loans, investments, guarantees, and security whether
provisions of section 185 and 186 of the Companies Act, 2013 have been
complied with. If not, provide the details thereof.
According to Section 185 of the Companies Act, 2013, no company shall, directly or
indirectly advance any loan to any of its directors or to any other persons with whom
directors are interested or give any guarantee or provide any security in connection with
any loan taken by the director or such other person.
According to Section 185, a company cannot give any loan to the following:
 Any Director of Lending Company.
 Director of holding company of lending company
 Any Relative of such Director.
 Any partner of such Director.
 Any firm in which such director is a partner
 Any firm in which such director’s relative is a partner
 Any PRIVATE Limited company in which such director is a Director or member.
3.4
 Body corporate in which such Director or Directors hold not less than 25% shares.
 Body Corporate, MD, BOD or manager accustomed to act in accordance with the
directions of board or of any Director or directors of lending company.
However, in the last 3 cases, loan/guarantee may be given subject to the
following conditions:
1. Prior approval of shareholders is required by way of passing a special resolution
and
2. That loan shall be utilized by the borrowing company for its principal business.
EXCEPTION TO SECTION 185
1) Managing or a whole time director
a) As a part of service extended to all employees.
b) As per a scheme approved by members through a special resolution.
2) Given in ordinary Course of Business
If the company is engaged in lending activity regularly, i.e. if the company lends
not only to Directors and related parties but also to Arm Length Parties or unrelated
parties, then it can be said that the loan is given in the ordinary course of business.
3) Loan given to a Wholly-Owned Subsidiary Company
4) Guarantee given by the Holding company against the loan taken by its subsidiary
company from bank or financial institutions.
According to Section 186 of the Companies Act, 2013, no company shall directly or
indirectly —
(a) give any loan to any person or other body corporate;
(b) give any guarantee or provide security in connection with a loan to any other body
corporate or person; and
(c) acquire by way of subscription, purchase or otherwise, the securities of any other
body corporate
exceeding sixty per cent of its paid-up share capital, free reserves and
securities premium account or one hundred per cent of its free reserves
and securities premium account, whichever is more.
If the limits mentioned above exceeds, then the company is required to take prior
approval by means of a special resolution passed at a general meeting.
The particulars of such loans or guarantees shall be disclosed by the
company in its financial statements.
(v) PUBLIC DEPOSITS:
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?
Explanation
3.5
Where the company accepts deposits from public, the auditor has to verify whether it has
complied with the directives given by Reserve Bank of India as well as the provisions of
Section 73 to 76, and other relevant provisions of the Companies Act, 2013. The
company should also comply with any orders passed by the National Company Law
Tribunal/any court or any other tribunal.
Where the company contravenes any of the above provisions, the nature of such
contravention should be mentioned by the auditor in his report.
(vi) MAINTENANCE OF COST RECORDS:
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 so made and maintained;
(vii) STATUTORY DUES:
(a) Is the company regular in depositing undisputed statutory dues including
provident fund, employees’ state insurance, income-tax, sales-tax, sales 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.
Explanation
1. For reporting under this clause, the auditor has to concentrate on the regularity of
deposit of undisputed statutory dues by the company.
The auditor should obtain sufficient and appropriate audit evidence to determine
whether the statutory due is question is a disputed amount. Statutory dues are treated
as disputed where there is a positive evidence or action on the part of the company to
show that it has not accepted the demand. For example, where the company had not
accepted the demand raised by the Assessing Officer in respect of Income Tax, and
where an application is made to the Commissioner Appeals for rectification of mistake
u/s.154, it can be deemed that the income tax is disputed.
2. Where the dispute relates only to a part and not the whole of amounts, only such
amount should be treated as disputed and the balance amount should be regarded as
undisputed.
3. If the company is not regular, the auditor is required to state the extent of arrears
outstanding as at the last day of the financial year concerned which remains
outstanding for a period of more than six months from the date they became payable.
4. In cases where there are no arrears on the balance sheet date but the company
has been irregular during the year in depositing the statutory dues, the auditor should
state this fact in his audit report.
5. The word ―any other statutory dues‖ indicates that this clause covers all type of dues
under various statutes, which may be applicable to a company.
(b) In case dues of income tax or sales 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.
3.6
Explanation
In case of disputed statutory dues, the clause requires the auditor to report the amount
involved along with the forum before which the disputed is pending.
In this connection, it should be noted that a mere representation to the department
shall not constitute the dispute.
viii) REPAYMENT OF DUES:
Whether the company has defaulted in repayment of loans or borrowing to a financial
institution, bank, Government or dues to debenture holders? If yes, the period and
amount of default to be reported; (In case of defaults to banks, financial institutions
and Government, lender wise details to be provided)
Explanation
1. Under this clause, the auditor is required to report whether the company has
defaulted in repayment of dues to a financial institution or bank or Government
or debenture-holders. When the company defaulted in repayment, the auditor
is required to mention the period of default as well as the amount of default. In
case of defaults to banks, financial institutions and Government, the auditor
should provide lender wise details.
2. The term ―dues‖ include principal as well as interest.
3. The word ―default‖ has not been defined. Taking its natural meaning, when the
repayment is not made on the due date, it is treated as default.
(ix) END USE OF ISSUE PROCEEDS AND TERM LOANS:
Whether moneys raised by way of initial public offer or further public offer
(including debt instruments) and term loans were applied for the purposes
for which those are raised. If not, the details together with delays or default
and subsequent rectification, if any, as may be applicable shall be reported;
Under this clause the auditor is required to report whether
 money raised by the company through Initial Public Offer or Further Public Offer
including debentures, bonds etc. and term loans have been utilised for the
purposes for which those were raised.
 The term loans were applied for the purposes for which they were taken.
Normally, the companies do mention the end-use of the money proposed to be raised
through the Initial Public Offer or Further Public Offer in the offer document. The
auditor should examine such offer document to understand the proposed end use
of money raised from public.
The auditor should verify that the amount of end-use of money disclosed in the
financial statements by the management is not materially different from the
proposed and actual end use.
If, for any reason, the auditor is not able to verify the end-use of money raised from
Initial Public Offer or Further Public Offer (including debt instruments), he should
state that he is not able to comment upon the disclosure of end-use of
money by the company since he could not verify the same. He should also
mention the reasons which resulted in the auditor’s inability to verify the
disclosure.
3.7
(x) FRAUD:
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.
This clause requires the auditor to report whether any fraud by the company or any
fraud on the company by its officers or employees has been noticed or reported during
the year. If yes, the auditor is required to state the amount involved and the nature of
the fraud. The clause does not require the auditor to discover such frauds. The scope of
auditor’s inquiry under this clause is restricted to frauds ―noticed or reported‖. This
indicates that management of the company should have knowledge about the frauds.
However, the auditor is not relived of his responsibility to follow SA 240. The following
are the audit procedures that can be followed by the auditor in this regard.
a. Examine Internal Auditor’s Report, if any.
b. Examine the minutes of the audit committee to ascertain the instances of fraud
and the action taken.
c. Enquire the management about frauds that it has noticed or that have been
reported to it.
d. Obtain written representations from management.
Where the auditor identified any fraud and reported upon by him under Section
143(12) of the Companies Act, 2013, the same shall also be reported by the auditor
under this clause. However, it should be noted that the frauds suspected by the
auditor need not be reported under this clause.
(xi) MANAGERIAL REMUNERATION:
Whether managerial remuneration has been paid or provided in accordance
with the requisite approvals mandated by the provisions of section 197 read
with Schedule V to the Companies Act? If not, state the amount involved and
steps taken by the company for securing refund of the same;
According to Section 197 of the Companies Act, 2013, the total managerial remuneration
payable by a public company shall not exceed 11% of the net profit of the company. The
company may by passing an ordinary resolution make payment of
remuneration in excess of 11% of the net profits of the company.
The remuneration payable to any one managing director, whole time director or manager
shall not exceed 5% of net profits.
It also specifies that the remuneration payable to directors who are neither managing
directors nor whole time directors shall not exceed 1% of the net profits if there is a
managing or whole time director and 3% of the net profits in any other case.
The company may by passing special resolution, pay remuneration in excess
of the limits specified for MD or for a whole time director or manager.
Excessive remuneration drawn by a director without the approval of
shareholders shall be refunded with in the period specified by the company
subject to a maximum of 2 years. Alternatively, the company may waive the
recovery of such excess remuneration by passing a special resolution within
2 years.
3.8
(xii) NIDHI COMPANY:
Whether the Nidhi Company has complied with the Net Owned Funds to Deposits
in the ratio of 1:20 to meet out the liability and whether the Nidhi Company is
maintaining ten per cent unencumbered term deposits as specified in the Nidhi
Rules, 2014 to meet out the liability;
Section 406(1) of the Companies Act, 2013, ―Nidhi‖ means a company which has been
incorporated as a Nidhi with the objective of cultivating the habit of thrift and savings
amongst its members, receiving deposits from, or lending to, its members only, for their
mutual benefit, and which complies with such rules as are prescribed by the Central
Government for regulation of such class of companies.
As per rule 5 (1) of Nidhi Rules, 2014, every nidhi company should ensure that it has –
a. not less than 200 members
b. net owned funds of Rs.10 lakh rupees or more
c. unencumbered term deposits of not less than 10% of the outstanding deposits and
d. ratio of net owned funds to deposits of not more than 1:20.
In other words, a Nidhi company can accept deposits not exceeding 20 times of its net owned
funds as per last audited balance sheet. The unencumbered term deposits are required to be
made in a scheduled commercial bank (other than a co-operative bank or a regional rural
bank) or post office deposits in its own name which shall not be less than 10% of the deposits
outstanding at the close of business on the last working day of the second preceding month.
―Net Owned Funds‖ means aggregate of paid up equity share capital and free
reserves as reduced by accumulated losses and intangible assets appearing in the last audited
balance sheet.
(xiii) RELATED PARTIES AND RELATED PARTY TRANSACTIONS:
Whether all transactions with the related parties are in compliance with
sections 177 and 188 of Companies Act, 2013 where applicable and the
details have been disclosed in the Financial Statements etc., as required by
the applicable accounting standards;
Section 188 of the Companies Act specifies that approval of the Board of Directors
shall be obtained when the company wants to enter into any contract or arrangement
with related parties. However, this section is not applicable in respect of any
transactions entered at arms length price.
―Related party‖, with reference to a company, means—
(i) a director or his relative;
(ii) a key managerial personnel or his relative;
(iii) a firm, in which a director, manager or his relative is a partner;
(iv) a private company in which a director or manager is a member or director;
(v) a public company in which a director or manager is a director or holds along with
his relatives, more than two per cent. of its paid-up share capital;
3.9
(vi) any body corporate whose Board of Directors, managing director or manager is
accustomed to act in accordance with the advice, directions or instructions of a
director or manager;
(vii) any person on whose advice, directions or instructions a director or manager is
accustomed to act:
(viii) any body corporate which is –
B. a holding, subsidiary or an associate company of such company;
C. a subsidiary of a holding company to which it is also a subsidiary; or
D. an investing company or the venturer of a company.
A body corporate (foreign company) which is a holding /subsidiary/associate/fellow
subsidiary oaf an Indian company will be treated as a related party.
According to Section 177 of the Companies Act, the audit committee is responsible to approve
any transaction entered by the company with related parties. However, Companies
Amendment Act, 2017 clarifies that Related Party Transactions between a
holding company and its subsidiaries will not require the approval of the audit
committee. For example, if a director or officer of the company enters into a related
transaction for an amount not exceeding Rs.1 crore, there is no need to obtain prior approval
of the audit committee in such a case.
If these transactions require board approval under section 188, then they will also require
approval of the audit committee.
(xiv) PRIVATE PLACEMENT OF SHARES:
Whether the company has made any preferential allotment or private
placement of shares or fully or partly convertible debentures during the
year under review and if so, as to whether the requirement of section 42 of
the Companies Act, 2013 have been complied with and the amount raised
have been used for the purposes for which the funds were raised. If not,
provide the details in respect of the amount involved and nature of non-
compliance;
The term ―private placement" means any offer of securities or invitation to subscribe
securities to a select group of persons who have been identified by the Board by a
company (other than by way of public offer) through issue of a private placement offer
letter.
i. A company whether private or public can issue shares on private placement basis
[Section 42(1)].
ii. “Private placement” means any offer or invitation to subscribe or issue of securities to a
select group of persons by a company (other than by way of public offer) through private
placement offer-cum application which satisfies the conditions specified in section 42 of
Companies Act, 2013
iii. The offer of securities or invitation to subscribe securities shall be made to such
number of persons not exceeding 50 in a financial year excluding
securities issued to Qualified Institutional Buyer (QIB) and employees
under stock option scheme. . [Section 42(2)]
3.10
iv. If a company makes an offer to more than the prescribed number of persons, the
same shall be deemed to be an offer to the public. [Section 42(3)]
v. All monies payable towards subscription of securities under this section shall be
paid through cheque or demand draft or other banking channels but not by
cash. [Section 42(4)]
vi. If a company makes an offer to more than the prescribed number of persons, the
same shall be deemed to be an offer to the public.
vii. A company making an offer or invitation under this section shall allot its
securities within sixty days from the date of receipt of the application
money for such securities and if the company is not able to allot the securities
within that period, it shall repay the application money to the subscribers
within fifteen days from the date of completion of sixty days and if the
company fails to repay the application money within the aforesaid period, it shall
be liable to repay that money with interest at the rate of twelve per cent per
annum from the expiry of the sixtieth day:
viii. Provided that monies received on application under this section shall be kept in
a separate bank account in a scheduled bank and shall not be utilised for any
purpose other than--
(a) for adjustment against allotment of securities; or
(b) for the repayment of monies where the company is unable to allot securities
(xv) NON-CASH TRANSACTIONS:

Whether the company has entered into any non-cash transactions with
directors or persons connected with him and if so, whether the provisions
of section 192 of Companies Act, 2013 have been complied with;
Section 192 of the Companies Act prohibits entering of arrangement by the company
with its directors and persons connected with them. The section prohibits the company
from entering into following types of arrangements unless prior approval of the
members for such arrangement is accorded by passing a resolution in a general
meeting. In case the concerned director or the person connected therewith, is also a
director of its holding company, a similar approval should have been obtained by the
holding company through a resolution at its general meeting.
a. Arrangement by which a director of the company or its holding, subsidiary or
associate company or a person connected with such director acquires or is to
acquire assets for consideration other than cash, from the company.
b. An arrangement by which the company acquires or is to acquire assets for a
consideration other than cash, from such director or persons so connected.
(xvi) REGISTRATION BY NBFC:
Whether the company is required to be registered under section 45-IA of
the Reserve Bank of India Act, 1934 and if so, whether the registration has
been obtained.
According to Section 45-IA of RBI Act, a non-banking financial company shall carry its
business only after obtaining a certificate of Registration from RBI. Hence, if the
company under audit is a NBFC, it is the duty of the auditor to verify and ensure that it
has obtained a certificate of registration from RBI.
3.11
Reasons to be stated for unfavourable or qualified answers

(1) Where, in the auditor's report, the answer to any of the questions referred to in paragraph
3 is unfavourable or qualified, the auditor's report shall also state the reasons for such
unfavourable or qualified answer, as the case may be.
(2) Where the auditor is unable to express any opinion in answer to a particular question, his
report shall indicate such fact together with the reasons why it is not possible for him to give
an answer to such question.
PRACTICAL QUESTIONS ON CARO
1. BK Ltd, a Benefit Fund, registered under NBFC Regulations, is in existence
for the past two decades. On 31st December 2015, this Company is converted
into a Bank. You have been appointed as an Auditor for the Financial Year
2015–2016. Comment whether CARO is applicable for this Company.
Banking Companies are exempted from CARO Reporting Requirements. As on the date of
Balance Sheet, the Company is a Banking Company. Hence, CARO is not applicable,
irrespective of the fact that the Company was converted from NBFC during the year.
2. S Pvt Ltd is the Holding Company of P Ltd. The Paid Up Capital and Reserves
are Rs. 30 Lakhs. The Borrowings from SBI is Rs.60 Lakhs. Total Revenue
from Operations (including from Discontinuing Operations) are Rs. 8 Crores.
The Auditors of S Pvt Ltd is of the view that CARO is not applicable since it is
a Private Limited Company satisfying the condition relating to Paid up Capital,
Borrowings and Total Revenue. Is their contention valid?
Whether CARO reporting is applicable for reporting on Consolidated Financial
Statements?
In this case, S Pvt Ltd is the Holding Company of P Ltd, a Public Company. Hence, CARO is
applicable for S Pvt Ltd. This is because, to exempt a private company from the requirements
of CARO, such a company is required to comply with all the four conditions that were
specified in the Act, where as in this case the company violated condition no.1.
CARO 2016 Reporting shall not apply to the Auditor’s Report on Consolidated Financial
Statements.
3. M Pvt. Ltd provides the following information for the Financial Year 2015–
2016. Comment whether CARO is applicable for this Company:
(a) Paid–up Share Capital and Reserves – Rs.100 Lakhs,
(b) Borrowings from Banks – Rs.98 Lakhs,
(c)Total Revenue – Rs.12 Crores
To exempt a private company from the requirements of CARO, such a company is required to
comply with all the four conditions that were specified in the Act, where as in this case the
company violated condition relating to total revenue and hence CARO is applicable in this
case.
Guru Pvt Ltd has 2 Branches – in Chennai and in Mumbai. Each Branch has a separate
Statutory Auditor and the Company, as a whole, has a Central Statutory Auditor. Comment
which
Detailsof these Auditors must comply with CARO.
Chennai Branch Mumbai Branch Total
Paid up Capital and Reserves (in Lakhs) 40 70 110
3.12
Borrowings from Banks (in Lakhs) 10 26 36
Total Revenue (in Crores) 3 6 9
The conditions to be satisfied from being exempt from CARO shall be considered for the
company as a whole. So, if CARO is applicable to the Company as a whole, then each and
every Branch of the Company will also be automatically covered under CARO (irrespective of
the fact that the Branch’s transactions are within the limits).
The Branch Auditor has the same reporting responsibilities in respect of the
Branch, as those of the Company Auditor in respect of the Company. The
comments of the Branch Auditor in respect of the Branch are dealt with by the Central
Statutory Auditor of the Company while finalizing his report under CARO.
In instant case, the Company has a Paid up Capital and Reserves of Rs. 110 Lakhs, which
exceeds the exemption limit of Rs.100 Lakhs / 1 Crore. Therefore, CARO is applicable for the
Company.
So, in this case, all the 3 Auditors. (2 Branch Auditors + Central Statutory, Auditor) must
comply with CARO.
5. Vayu Pvt Ltd has a Turnover of 8 Crores for the Financial Year 2015–2016.
The Outstanding Balance of Loans from Banks and Financial Institutions is 24
Lakhs throughout the year. The Company had a Capital of 120 Lakhs at the
beginning of the year and on 15.09.2015 the Company made a Buy Back of
Shares worth 30 Lakhs resulting in a Share Capital of 90 Lakhs as on 31st
March 2016. Comment whether CARO is applicable for the Company
Condition Analysis
(a) Not a Holding or Subsidiary of a Public Assumed satisfied
(b) Paid up Capital and R&S on B/s date ≤ 1 Crore Satisfied, since the condition is with
Company
respect to B/s date. Net Amount 90
Lakhs is ≤ 1 Crore.
(c) Bank /Fin.Institution Borrowings at any time, ≤ Satisfied, since 24 Lakhs ≤ 1 Crore.
1 Crore
(d) Total Revenue ≤ 10 Crores Satisfied, since 8 Crores ≤ 10 Crores.
Since all 4 conditions are satisfied, CARO is not applicable in this case.
6. ABC Pvt. Ltd has a balance of 30 Lakhs as Capital Reserve, 30 Lakhs as
Revenue Reserves, 40 Lakhs as Revaluation Reserve and 20 Lakhs as Paid–
Up Share Capital as on 31st March. Comment on the applicability of CARO to
the Company.
The term “Reserves” includes all types of Reserves (Capital Reserves, Revenue Reserves,
Revaluation Reserve, etc)
Here, Paid–Up Capital + Reserves = 20 Lakhs (Paid–Up Capital) + 100 Lakhs (Capital
Reserve + Revenue Reserve + Revaluation Reserve) = 120 Lakhs. Hence, CARO is applicable
for this Company.
7. Mahath Pvt Ltd provides the following information for the financial year
ending 31st March. Comment whether CARO is applicable for this Company.
(amounts in Lakhs)
Paid Up Share Capital 70.00
3.13
Capital Reserve 14.00
Revaluation Reserve 20.00
General Reserve 20.00
Profit and Loss (Dr.) 24 .00
As per Schedule III Requirements, Debit balance of P&L A/c, should be reduced from the
figure of Reserves.
In the present case,
Paid–Up Capital = 70 Lakhs
Reserves = 14 + 20 + 20 = 54 Lakhs
Less: P&L (Dr) = 24 Lakhs = 30 Lakhs
Paid Up Capital + Reserves = 100 Lakhs
Since Aggregate of Paid Up Capital and Reserves does not exceed 1 Crore, CARO is not
applicable for this Company assuming that all other 3 conditions of exemption are satisified.)
8. H Private Ltd had taken Overdrafts from SBI & HSBC with a limit of 40 Lakhs
each against the security of Fixed Deposit it had with those Banks and an
Unsecured Overdraft from a Financial Institution of 29 Lakhs. The said
loans were outstanding as at 31st March. The Paid Up Capital and Reserves of
the Company as at that date was 80 Lakhs and its Total Revenue during the
financial year ended on 31st March was 6 Crores. The Management of the
Company is of the opinion that CARO is not applicable to it because Total
Revenue and Paid–Up Capital were within the limits prescribed and
Borrowings against the Fixed Deposit cannot be considered. The Company
further contended that Borrowings Limit is to be reckoned per Bank or
Financial Institution and not cumulatively. Comment.
The term ―Borrowings ’’ include Total Borrowings from all the banks and financial
institutions cumulatively and it should also include borrowings against the Fixed Deposit.
Moreover, the outstanding balance shall not be netted off against the amount of Fixed
Deposit.
Total Borrowings in this case = 40 + 40 + 29 = 109 Lakhs = 1.09 Crores.
Since Borrowings is equal to greater than 1 Crore, CARO Reporting is applicable to the
Company.
9. In the current financial year, AP Pvt. Ltd has borrowed 1.20 Crore on 15th
June and repaid the entire loan before 31st March. Comment on the
applicability of CARO to this Company.
For the purpose of applicability of CARO, Balance Outstanding from a Bank or Financial
Institution, shall be construed at any point of time, during the year and not as at the end of
the year (i.e. 31st of March).
Where the Company had Borrowings from a Bank in excess of ` 1 Crore during the year, but
the year–end balance of the same is NIL, the Company would be still covered by CARO,
notwithstanding that it fulfills all other conditions for exemption from the Order. In the
present case, AP Pvt Ltd will be covered under CARO.
10. Anand Pvt Ltd is incorporated on 1st July 2015. During the year ended 31st
March 2016, it had issued Shares (fully paid up) of ` 80 Lakhs, had borrowed `
25 Lakhs each from 2 Financial Institutions and its Total Revenue (Net of
3.14
Excise of ` 50 Lakhs which is credited to a separate account) is ` 975 Lakhs.
Will CARO be applicable to Anand Pvt Ltd?
Condition Analysis
Company
(b) Paid up Capital and R&S on B/s date ≤ 1 Satisfied, since 80 Lakhs ≤ 1 Crore.
Crore
(c) Bank / Fin.Instn Borrowings at any time, Satisfied, since 25×2= 50 Lakhs ≤ 1 Crore.
≤ 1 Crore
If Excise Duty is taken / credited to a
(d) Total Revenue ≤ 10 Crores separate account, it shall not form part of the
Total Revenue. So, Total Revenue for this Co.
= ` 9.75 Crores, i.e. ≤ ` 10 Crores.
CARO does not apply to Anand Pvt. Ltd, since all the conditions relating to exemption are
satisfied.
11. Tarun Pvt Ltd’s Paid Up Capital and Reserves are less than 100 Lakhs
and it has no Borrowings from any Bank or Financial Institution. Its Sales
are 12 Crores before deducting Trade Discount 20 Lakhs and Sales Returns
190 Lakhs. The services rendered by the Company amounted to 20 Lakhs.
Comment on applicability of CARO to this Company
Principles: Total Revenue = [Sales 12 Crores (–) Trade Discount 20 Lakhs (–) Returns 190
Lakhs] + Services Income 20 Lakhs = Net 10.10 Crores
Analysis:
Condition Analysis
(b) Paid up Capital and R&S on B/s date ≤ ` 1 Satisfied, since it is given as ≤ ` 1 Crore.
Company
(c) Bank / Fin.Institution Borrowings at any time, Satisfied,
Crore since there are no
(d)
≤ ` Total Revenue ≤ ` 10 Crores
1 Crore Not satisfied, Since Total Revenue > `
Borrowings.
10 Crores.
CARO applies to Tarun Pvt Ltd, since the Total Revenue exceeds 10 Crores.
3.15
6
4
UNIT 1: PEER REVIW
The term “peer” means a person of similar standing. The term “review” means
retrospective evaluation of the subject matter. In other words “Peer Review” would
mean review of work done by a professional, by another professional of similar
standing.
Every “Practice Unit” needs to maintain quality while carrying out their attestation
function by establishing and followiing quality control systems and procedures
as specified in SQC-1.
In order to examine whether the “Practice Unit” has
 Established quality control systems and procedures; and
 Followed them
a person may be appointed for conducting such examination/review. Such a review is
technically called as “Peer Review” and the person conducting it is called as “Peer
Reviewer”
The term “Practice Unit” shall include:
 members practicing individually or
 as a firm of chartered accountants
ELIGIBILITY OF REVIEWER
A peer reviewer should:
 Be a member of ICAI
 Possess at least 10 years of experience in practice and currently active in the
practice.
1
 Have conducted audit of Level 1 entities for at least 7 years to be eligible for
conducting peer review of level 1 entities.
 Should have:
i) Signed the Declaration of Confidentiality
ii) Undergone the requisite training prescribed by Board.
 Should not have been:
i) found guilty by the Council or Disciplinary Board or Committee at any time.
ii) Convicted by a competent court of an offence involving moral turpitude
and punishable with transportation or imprisonment.
A reviewer shall not accept any professional assignment from the Practice Unit
for a period of two years form the date of appointment.
Scope of Peer Review/Focus of Peer Review
The peer reviewer shall focus on aspects such as:
b. Whether the PU complied with technical, professional and ethical standards
c. The Quality of Reporting
4.1
d. Whether the PU have proper systems in place including documentation to

demonstrate the quality of the assurance services
e. Whether PU has a system of providing training Programs for staff
f. Whether the PU complies with directions/guidelines issued by the council with
regard to:
i) Fee to be charged;
ii) Number of audits undertaken
iii) Maintenance of register for Assurance Engagements
undertaken during the year etc.
g. Whether the PU complied with directions/guidelines issued by the council relating
to:
i) Articled assistants/audit assistants
ii) Maintenance of attendance register
iii) Maintenance of Work Diaries
iv) Stipend payments etc.
The term technical, professional and ethical standards include:
i. Accounting Standards issued by ICAI
ii. Standards issued by ICAI such as
a. Standards on Auditing
b. Statements
c. Guidance Notes
d. Standards on Internal Audit
e. Standards on Quality Control
f. Professional Standards issued by the Institute such as Professional Ethics
etc.
The term assurance services do not include (Areas excluded from the scope of Peer
Review)
i. Management Consultancy Engagements
ii. Representation before various Authorities
iii. Engagements to prepare tax returns or advising clients in taxation matters
iv. Engagement for the compilation of financial statements
v. Providing expert opinion on points of principle, such as Accounting Standards
vi. Engagement for due diligence etc.
The term assurance services may be used interchangeably with Audit Services,
Attestation Functions and Audit Functions.
The primary objective of peer review is not to find out deficiencies but to improve
the quality of services rendered by members of the profession. The peer review is to
provide guidance to members to improve their performance and to adhere to
various statutory and other regulatory requirements. Accordingly, where a practice unit is
not following technical standards, the reviewers are expected to recommend measures
to improve the procedures. The key objective is to identify weaknesses that are
4.2
chronic and pervasive in nature. For example, the absence of formal planning of
an audit represents a serious deficiency that needs to be remedied by the practice unit.
The process of peer review is to be carried out in respect of review of preceding 3 years.
PROCESS OF PEER REVIEW
 The Peer Review process will include
b. Selection of Practice Unit and appointment of Reviewer
c. Planning
d. Execution
e. Reporting
APPLICABILITY
Practice Units subject to Review
Every Practice Unit, based on their category as determined below will be subject to Peer
Review in accordance with this statement.
Level I
A Practice Unit which has undertaken any of the under-mentioned assurance services in the
period under review:
I. Central Statutory Audit of:
a. Banks
Public Sector
Private Sector
Foreign
Cooperative
b. Public Financial Institutions like ICICI, IDBI, IFCI, SIDBI etc.
c. PSU’s
Central - Undertakings like BEL, BMEL, BHEL, IRCTC etc.
State - Undertakings like AP TRANSCO etc.
d. Insurance Companies
e. Central Cooperative Societies
II. Statutory Audit of :
a. Asset management companies like UTI Asset Management, Mutual Funds
b. Listed Companies whether listed in India or Abroad whether Equity or Debt
Securities.
c. Entities that have raised over Rs.50 crores during the period under review as:
 Funds from public or banks or financial institutions;
 Donations and / or contributions;
 Funds from Central and / or State Government(s) schemes.
d. Entities having Net Worth of more than Rs. 500 Crores at any time during the
period under Review;
4.3
Level II
A Practice Unit which has undertaken any of the under-mentioned assurance services in the
period under review:
Statutory/Internal/Concurrent/Systems/Tax audit and/or Departmental
Review of Branches/Offices of
Banks:
a. Public Sector
b. Private Sector
c. Foreign Banks
d. Co-operative Banks
e. Regional Rural Banks
 Insurance Companies;
 Statutory Audit of Non – Banking Financial Companies (NBFC's).
 Statutory Audit of entities having Net Worth of over Rs. 5 Crores or an annual
turnover of more than Rs. 50 Crores during the period under Review.
Level III
Any other Practice Unit providing assurance services not covered in Level I and Level II
hereinabove.
Selection and Appointment of Reviewer
 Based on the category of practice unit, the Peer Review Board selects a
practice unit for peer review.
Periodicity of Peer Review
Level-I Practice Units shall have to be selected for review once in 3 years, Level-
II – Once in 4 years and Level-III – Once in 5 Years.
However, any practice unit not selected for peer review, may suo-moto apply
to the Board for the conduct of its peer review. An auditee (client) may request the
Peer Review Board for the conduct of Peer Review of its auditor (Practice
Unit).
 Once a Practice Unit is selected by the board, the same shall be notified to the
practice unit. The Board will recommend the names of 3 reviewers to the
selected Practice Unit. The practice unit shall select one out of three reviewers and
the same shall be intimated to the Board within seven days of receipt of
names from the Board.
 The Board shall intimate the reviewer so selected and seek his consent within
seven days.
 After receipt of consent from the reviewer, the same shall be intimated to the PU.
Planning
 Within 15 days of Board’s intimation, the PU shall furnish the following
information to the reviewer.
a. Duly filled-in Questionnaire sent by Board
b. Complete list of Assurance Service Clients
c. Note on the policies and procedures adopted by the practice unit
4.4
d. Details of any proceedings against the PU or any of its partners or qualified

assistants during the period of three years preceding the period of review.
 The reviewer shall within 15 days of receipt of the information, shall select a
sample of the assurance services and intimate the same to the PU. He may also
seek further clarifications from the PU on the information furnished/not
furnished.
 Then, the reviewer shall plan for an on-site review visit. This on-site review
shall not extend beyond 7 working days. The PU shall keep ready
necessary records of the selected assurance services. For this purpose the
reviewer shall allow the practice unit a minimum of 15 days time.
 The entire review process shall be completed within 90 days from the date of
notifying the PU about its selection for review.
Execution
 The reviewer is required to carry out a compliance review of the following
general controls for evaluating the degree of reliance to be placed upon them:
a. Independence
b. Maintenance of Professional Skills and Standards
c. Outside Consultation
d. Staff Recruitment, Supervision and Development
e. Office Administration
For example, while reviewing the Independence of the Practicing Unit, the following aspects
may be verified by the reviewer.
a. Does the PU have a policy to ensure independence, objectivity and integrity, on
the part of partners and staff?
b. Does the PU communicate these policies to all staff?
c. Does the PU monitor compliance with these policies?
d. Does the PU periodically review the PU’s association with clients to ensure
objectivity and independence?
 The reviewer shall select some assurance service engagements for review.
 The reviewer is required to adopt a combination of compliance approach and
substantive approach in the review process.
Compliance Approach - The compliance approach is to assess whether proper control
procedures have been established/followed by the practice unit. The following areas shall
be considered:
a. Assurance Service Records for administration
b. Review and evaluation of Internal Controls
c. Assurance Services Reporting
Substantive Approach - This approach requires a review of the assurance working
papers in order to establish the extent of compliance, whether the assurance work has been
carried out as per the Technical, Ethical and Professional Standards.
While evaluating the records, the peer reviewer may consider the following:
4.5
a. Any significant issues, matters, problems that arose during the course of the
engagement have been appropriately considered, resolved and
documented by the PU.
b. Adequate evidence in relation to the engagement is obtained to support the
reasonableness of the conclusions drawn and
c. Significant decisions relating to the engagement, use of professional judgment,
resolution of significant matters have been properly documented.
Reporting
Preliminary Report/Communication of Findings
After completing the on-site review, the reviewer, before making his report to the Board,
shall communicate his findings in the Preliminary Report to the PU if in his
opinion, the systems and procedures are deficient or non-compliant with reference to
any matter that has been noticed by him or if there are other matters where he wants to seek
clarifications.
The PU shall within 15 days after the date of receipt of the findings, make any
submissions or representations, in writing to the reviewer in response to the
preliminary report.
Final Report to Board
After receipt of the submissions or findings from the PU, if the peer reviewer finds them
satisfactory, then he shall submit a report to the board along with his initial findings,
response by the PU and the manner in which the responses have been dealt with. A copy of
the report shall also be forwarded to the PU.
In case the reviewer is of the opinion that the response by the PU is not satisfactory,
the reviewer shall accordingly submit a modified report to the board incorporating
his reasons for the same. The reviewer shall also submit his initial findings, response
by the PU and the manner in which the responses have been dealt with. A copy
of the report shall also be forwarded to the PU.
In case of a modified report, the Board shall order for a “Follow On” review after a
period of one year from the date of issue of report. The period within which the “Follow On”
review is to be carried out may be reduced to less than 1 year but shall not be less
than six months.
OTHERS
The reviewer may take the help of only one assistant who should be a CA who should be
working with the reviewer for at least one year as a member in practice.
The name of the qualified assistant shall be intimated to the Board as well as the
practice unit before the commencement of the peer review.
The qualified assistant is also required to sign declaration of confidentiality.
He should not have a direct interface with the practice unit.
4.6
UNIT 2: QUALITY REVIW

Quality means doing it right when no one is looking. Every audit firm is required to
design and establish a system of quality control. This provides it with
reasonable assurance that the firm and its personnel comply with:
 Professional standards and
 Regulatory and legal requirements and
 That reports issued are appropriate in the circumstances
Standard on Quality Control (SQC) 1 requires that every firm’s system of quality
control should include policies and procedures addressing each of the following
elements:
 Leadership responsibilities for quality within the firm
 Ethical requirements
 Acceptance and continuance of client relationships and specific engagements
 Human resources
 Engagement performance
 Monitoring
Scope of Quality Review
The scope of quality review includes:
1. Examining whether the engagement partner has ensured compliance with the
applicable technical standards in India and other applicable professional and
ethical standards and requirements.
2. Examining whether the Engagement partner has ensured compliance with the
relevant laws and regulations.
3. Examining whether the audit firm has implemented a system of quality control in
line with SQC 1.
THE QUALITY REVIEW BOARD (QRB)
The Quality Review Board (QRB) has been set up by the Central Government under
section 28A of the Chartered Accountants Act, 1949.
The Board comprises of a Chairperson and ten other members out of which five
members of the Board shall be nominated by the Central Government and other
five members shall be nominated by the Council of the ICAI. .
The Chairperson and members of the Board shall be appointed from amongst the
persons of eminence having experience in the field of law, economics, business,
finance or accountancy.
The Board may constitute one or more Quality Review Groups to conduct
preliminary reviews of the general purpose financial statements in consultation
with the Board.
There could be two categories of the Review Groups:
4.7
 Industry Specific (for reviewing general purpose financial statements of

enterprises associated with a particular industry, for example, banking, insurance,
electricity, mutual funds, merchant bankers, etc.
 Generic
Each of the Review Group would be assisted by Technical Reviewer(s), who may
be an outsourced service provider.
The job of the Technical Reviewer(s) would be to prepare a report on the review
of general purpose financial statements, with a view to assessing the quality of
audit and reporting by the auditors, and the review of quality control
framework adopted by the auditors/audit firms in conducting audit.
QUALIFICATIONS OF A TECHNICAL REVIEWER
1) No disciplinary proceeding shall be pending against the member.
2) No disciplinary action has been taken on the member by ICAI during the last 3
financial years.
3) No penal proceeding shall be pending against the member under any other law.
4) No penal action shall have been taken against the member under any other law
during the last 3 financial years.
5) A member/his firm/network firms/any partner of network firms should not have
been the statutory auditor or should not have rendered any other service
for the company whose audit report is selected for quality review during last
three financial years and /or thereafter.
6) A member or his/her firm or any of the network firms or any of the partners of the
firm or that of the network firms should not have had any association with the
specified statutory audit firm, during the last three financial years and /or
thereafter.
7) A member should comply with eligibility/qualification specified u/s. 141(1)(2)(3) of
the Companies Act, 2013.
Other criteria for empanelment
1) Reviewer should have minimum fifteen years of post qualification
experience as a chartered accountant and be currently active in the practice of
accounting and auditing.
2) Reviewer should have handled as a signing partner/proprietor at least three
statutory audit assignments as a Central Statutory Auditor of
Banks/Public Limited Companies/Government Companies/Private
Limited Companies having annual turnover of rupees fifty crores and
above during the last ten financial years; Provided that out of the aforesaid
three statutory audit assignments, at least one must be in respect of entities
other than Private Limited Companies.
3) Reviewer should not currently be a Member of the QRB or ICAI’s
Central Council/Regional Council/Branch level Management Committee.
SELECTION OF AUDIT FIRMS
Presently, the review undertaken by QRB covers statutory audit services only and
does not extend to internal audit services provided by the members of the Institute.
4.8
These are proposed to be covered by the Board at a later stage. Further, this review also
does not extend to services provided by the members of the Institute, in
employment.
The selection of an audit firm for review can be either based on the financial
statements of the enterprise/s audited by it or certain other factors identified by the
QRB.
Based on the Financial Statements of the Enterprise/s
Under this category, the audited accounts of companies having wider public interest,
such as listed companies, insurance companies, NBFCs, unlisted public sector undertakings,
asset management companies may be selected by Quality Review Board (QRB) on the
basis of one or more of the following:
 Suo-moto or random selection from particular class of enterprises/audit firms
 On account of being a part of a sector otherwise identified as being susceptible to
risk on the basis of market intelligence reports
 Regulatory concerns pointing towards stakeholder risks
 Reported fraud or likelihood of fraud
 Serious accounting irregularities reported in media or other reports
 Major non-compliances with provisions relating to disclosures under relevant
statutes
 Reference made to it by any regulatory body such as Reserve Bank of India,
Securities and Exchange Board of India, Insurance Regulatory and Development
Authority, Ministry of Corporate Affairs, etc.
The Secretariat of QRB places the details of the enterprises selected for review
before the Board for its consideration. The Board may consider whether the case
warrants a review by a Quality Review Group constituted for this purpose and may refer
the cases selected for review to the relevant Quality Review Group.
The Rules also provide that where the Board does not receive the information called
for by it from any company registered under the Companies Act, 1956/Companies Act,
2013, the Board may request the Central Government through the Ministry of
Corporate Affairs for assistance in obtaining the information.
Based on Audit Firms Auditing the Accounts
Selection of audit firms may also be made for review of their work on:
 Random basis
 The volume of work handled by them represented by the number and nature of
clients
 Their involvement in sectors that may be identified as facing high risk.
 On account of their reported involvement in fraud or likelihood of fraud.
 Audit firms auditing large as well as mid-cap/small cap companies may be
selected for the purpose.
OBJECTIVES/SCOPE OF QUALITY REVIEW/TECHNICAL REVIEW
The objective of the Quality/Technical review is directed towards
4.9
A. Inspection/evaluation of Audit quality by examining whether the audit firm under

review (AFUR) has:
 Implemented a system of quality control as specified in SQC 1 and
 Complied with the applicable technical standards in India
The term “Technical Standards” in the context of the Chartered Accountants
(Procedures of Meetings of Quality Review Board, and Terms and Conditions of
Service and Allowances of the Chairperson and Members of the Board) Rules, 2006
includes:
 Accounting Standards notified u/s.133 of the Companies Act, 2013
 Accounting Standards issued by ICAI
 Quality Control and Engagement Standards issued by ICAI
 Guidance Notes
 Notifications/Guidelines issued by ICAI
 Code of Ethics
 Complied with other applicable professional and ethical standards and
 Complied with relevant laws and regulations
 Considered SA 240, “The Auditors’ Responsibilities relating to Fraud in an
Audit of Financial Statements” issued by ICAI;
by obtaining sufficient appropriate evidence; and
B. To identify and address weaknesses and deficiencies in the audits performed by
the audit firms.
STAGES INVOLVED IN CONDUCTING QUALITY REVIEW ASSIGNMENTS
Selection of Audit Firm and Technical Reviewer
1) Selection of Audit Firm and Technical Reviewer to conduct Quality Review and
sending Offer Letter of Engagement to the Technical Reviewer.
2) Technical Reviewer to convey his acceptance of Letter of Engagement by
sending necessary declarations for meeting eligibility conditions and furnishing
statement of confidentiality by the Technical Reviewer and his assistant/s, if any.
3) Intimation to the Audit Firm about the proposed Quality Review and acceptance
of the assignment by the Technical Reviewer. Also marking a copy of the intimation
to the Technical Reviewer.
4) Technical Reviewer to send the specified Quality Review Program General
Questionnaire to the Audit firm for filling-up and call for additional
information from the Audit Firm, if required.
Carrying Quality Review
5) Technical Reviewer to carry out the Quality Review by visiting the office of the
Audit Firm by fixing the date as per mutual consent.
On-site visit and Qualified Assistant
The technical reviewers for carrying out the quality review assignment, could
undertake a maximum of one on-site visit to the Statutory Audit firm which shall
4.10
not extend beyond seven days or, in exceptional circumstances, such other
extended period, for specific reasons to be recorded in writing, with the prior
approval of the Chairperson, Quality Review Board, which shall not, in any
case, extend beyond fourteen days. During the course of onsite review, the
technical reviewer shall try to collect required information through
interviewing, making enquiries and performing such other procedures
The Technical Reviewer could take the assistance of not more than three
assistants who:
 Shall be Chartered Accountant;
 Do not attract any of the disqualifications prescribed under the Chartered
Accountants Act, 1949;
 Shall also have to sign the statement of confidentiality in a prescribed
format;
 Shall have no direct interface either with the audit firm under review or the
Board;
 Should have been working with them for at least one year as a
member/a partner in the CA firm;
 Should not have been associated with the Statutory auditor/audit firm
under review and the company/ entity selected during last three financial
years and/or thereafter.
The Rules also provide that where the Board does not receive the information
called for by it from any member of the Institute, the Board may request the
Institute to obtain the information from the member and furnish the same to the
Board.
Confidentiality
Confidentiality of information pertaining to the quality review assignments is of
paramount importance. All persons involved with the entire review process
including members of Board/Group, Technical Reviewers, his/her assistants and
QRB secretariat shall maintain confidentiality of information obtained during reviews
and also appropriately disclose to the Board, from time to time, their interests or that
of the partners of their firm or their relatives, if any, in relation to statutory audit firm
being reviewed by Board or entity concerned whose audit was selected for review.
Preliminary Report
6) Technical Reviewer to send the preliminary report to Audit firm.
The reviewer, after completion of his review, is required to submit a preliminary
report to the audit firm before submitting the final report to the Board.
Submission of Representations by Audit Firm
7) Audit firm to submit representation on the preliminary report to the Technical
Reviewer.
Submission of Final Report
8) Technical Reviewer to submit final report along with a copy of Annual
report of the company/entity for the year, to the Board in the specified format,
within 45 days from the date of acceptance of the assignment.
4.11
The Technical reviewer or Quality review team may note a non- compliance
with one or more standards on auditing or accounting standards or disclosure
requirements. In such a case the Technical reviewer is required to evaluate the
finding in the light of the following considerations:
 The responses given by the engagement team;
The responses given by the engagement team are also important to determine the
extent of non - compliance. The Technical reviewer must consider the responses
provided by the engagement team. These responses may help the Technical
reviewer in understanding the perspective and the circumstances in which the
audit procedures were carried out.
 Materiality of the items of the financial statements involved;
 Accounting and auditing practices applicable to the industry to which the audit
client belongs; and
 If the findings are related to non-compliance with the procedures required
to be performed in accordance with the Standards on Auditing, whether the
engagement team carried out alternative procedures to obtain sufficient
appropriate audit evidence in relation to the financial statement assertion under
question.
Basic Elements of the Reviewer's Report:
The Report should contain:
A. Elements relating to audit quality of companies:
 A reference to the following:
1) Scope of the review
2) Period of review
3) Limitation(s) if any, encountered in the review.
 Instances of non-compliance with:
1) Technical standards and other professional and ethical standards.
2) Relevant laws and regulations.
B. Elements relating to quality control framework adopted by the audit
firm in conducting audit:
 A statement indicating that the system of quality control is the responsibility of
the reviewed firm.
 An opinion on whether the system of quality control:
1) Has been designed to meet the requirements of SQC 1 for attestation
services and
2) Complied with during the period reviewed
 Where the reviewer concludes that a modification in the report is necessary, a
description of the reasons for modification. The report of the reviewer should
also contain the suggestions.
A reviewer may qualify the report due to one or more of the following:
4.12
 Non-compliance with technical standards;

 Non-compliance with relevant laws and regulations;
 Quality control system design deficiency;
 Non-compliance with quality control policies and procedures; or
 Non-existence of adequate training programmes for staff.
 A reference to the preliminary report.
 An attachment describing the quality review conducted including an overview on
planning and performing the review.
The Quality Review Report should be issued on the reviewer's (individual)
letterhead and signed by the reviewer.
The report should be addressed to the Board and should be dated as of the
date of the conclusion of the review.
9) Technical Reviewer should also send a copy of their final report to the
Statutory Auditor/Audit firm, requesting the firm to send their
submissions thereon to the Board within 7 days of receipt of the final report
with a copy to Technical Reviewer.
Upon receipt of their final submission, Technical Reviewer shall submit within next
7 days a summary of their findings, reply of the audit firm thereon along with their
final comments in the specified format.
10) Quality Review Group to consider the report of the Technical Reviewer and
responses of the Audit firm and make recommendations to Quality Review
Board.
If the Board decides against the recommendations made by the Review Group in its
report, the Board shall record the reasons for doing so.
ACTIONS THAT MAY BE RECOMMENDED BY THE QUALITY REVIEW
BOARD
The actions that may be recommended by the Board include one or more of the following:
 Referring the case to the Director (Discipline) of the Institute for necessary
action under the Chartered Accountants Act, 1949;
 Informing the details of the non-compliance to the regulatory bod(y)/ies relevant
to the enterprise;
 Intimating the concerned auditor as to the findings of the Report as well as action
initiated under (a) and/or (b) above;
 Consider the matter complete and inform the audit firm/auditor accordingly.
DOCUMENTATION
The reviewer is required to documents the following matters:
 Whether the policies and procedures that constitute the reviewed firm's system of
quality control for its attestation services have been designed to ensure quality
control to provide the firm with reasonable assurance of complying with technical
standards.
4.13
 Whether personnel of the reviewed firm complied with such policies and
procedures in order to provide the firm with reasonable assurance of complying with
technical standards.
 Whether independence of audit firm/ auditors is maintained in conducting audit.
 Whether the firm has instituted adequate mechanism for training of staff.
 Whether the skill and competence of assistants are considered before
assignment of attestation engagement.
 Whether the progress of attestation service is monitored and work performed by
each assistant is reviewed by the service incharge and necessary guidance is
provided to assistants.
 Whether the audit firm has established procedure to record the audit plan,
the nature, timing and extent of auditing procedures performed and the
conclusions drawn from the evidences obtained.
 Whether the audit firm maintains the permanent file and the current file as
per the standards laid down by the ICAI.
 Whether the audit firm verifies compliance with laws and regulations to the
extent it has material effect on financial statement.
Illustrative Qualifications – Non –compliance with Standards on

Auditing
Independence declaration from audit members received on sign off date
of auditors report. Independence confirmation not received from all
members.
No process of maintaining standard checklists, manuals, working papers to
ensure consistency in the quality of each engagement.
No audit evidences for evaluation of estimates made by the management.
No presentations were made to the Audit Committee about the audit plan,
audit strategy and the audit findings.
It was difficult to conclude whether fraud risk factors were considered during
the audit of the Company’s financial statements. Audit process in relation to
fraud inquiry procedures were not performed and hence not documented.
As envisaged by Para 13 of SA 250 that the firm shall obtain sufficient
appropriate audit evidence, however no copy of legal advice was available in
auditor’s file with regard to the legal advice obtained against crystallization
of liability on account of demand raised by fiscal authorities which had been
disputed.
There was no documentation to substantiate communication by the auditor
with management in writing, about significant deficiencies in internal
control
to that the auditor
communicate has communicated
to those charged with or intends unless it would be
governance,
inappropriate to communicate directly to management in the circumstances.
No hard copies were kept for identification to obtain sufficient and
appropriate audit evidence for all subsequent events up to the date of the
auditor’s report that
No confirmation requireshave
of balances adjustments/ disclosures
been obtained in to
pertaining theparties
financial
to
statements.
Debtors, Creditors, Advances and related party balances.
Management representation letter had been obtained for the general points
covering the financial statements not on other specific items of the financial
statements.
Provisions of AS-10 and AS-16 had not been complied with, however, the
auditor in their audit report under the head Basis for Qualified opinion and
in addition to this para 2(d) of report on other legal and regulatory
requirements had stated that qualification constitutes departure from
accounting standards but in the report there was no clear mention of which
AS were not complied with. 4.14
Illustrative Qualifications – Non –compliance with Accounting

Standards
Significant Accounting Policies did not include disclosures of policies in
respect of:
Recognition of Insurance claims.
Accounting of Leases.
Treatment of IPO Expenses.
Inventory of traded goods was not shown separately from that of finished
goods.
Method of preparation of cash flow statement had not been disclosed in
standalone financial statements and consolidated financial statements.
Company had not disclosed the components of Cash and Cash Equivalent in
the Cash Flow
Accounting Statement
policy in consonance
on revenue of thedid
recognition AS 3.
not capture the point of
recognition where significant risks and rewards were transferred.
In respect of derivative contracts, premium paid, gain/losses on settlement
and provision for losses on restatement were recognized along with the
underlying transactions and charged to statement of profit and loss which
was not in
Amount accordance
provided with AS 11.in value of investments was not disclosed.
for diminution
AS 15 detailed disclosures like assumptions, movements in P&L, movements
in Balance sheet had not been provided.
Disclosures relating to previous year figures in regard to related parties were
not given.
Basic & Diluted Earnings per share had not been separately disclosed on the
face of the Statement of Profit and Loss as per AS-20, even though both were
same.
Measurement of Deferred tax assets and liabilities was on the basis of
effective tax rate instead of the tax rates and tax laws that have been enacted
or substantively enacted by the balance sheet date.
Quality Control Framework (SQC-1): Failure to implement various elements of the system of
quality control was the most common finding. Other findings included failure to set out
criteria for determining the need for safeguards to reduce the familiarity threat to an
acceptable level when using the same senior personnel on an assurance engagement over a
long period of time; failure to establish policies and procedures designed to provide
reasonable assurance that the firm and its personnel comply with relevant ethical
requirements; failure to establish policies and procedures designed to provide with
reasonable assurance that firm has sufficient personnel with the capabilities, competence
and commitment to ethical principles necessary to perform its engagements in accordance
with professional standards and regulatory and legal requirements.
QUALITY REVIEW CHECKLIST
In addition to compliance with the statutory provisions and technical standards, the
following checklist should be used for quality reviews:
Question Response
Whether the company has prepared and presented the financial
statements in the format relevant to it?
Are all the accounting policies in accordance with the
requirements of the applicable accounting standards and
Guidance Notes, issued by the ICAI?
4.15
Whether all significant accounting policies that should have been

disclosed are disclosed?
Whether the auditor has appropriately dealt with in his report
the deviations from accounting standards?
Verify whether the disclosures required by the law/regulations,

requirements prescribed by the regulations and those required
by the accounting standards have been made.
Where the audit report is qualified:
Whether the qualifications have been made in a clear and
unambiguous manner;
Whether the qualifications made have been quantified? If not,
whether adequate justification is provided for the same;
Whether the auditor has considered the overall effect of the
qualifications on the true and fair view presented by the financial
statements.
Whether the auditor has complied with the requirements of the
Auditing Standard SA- 700, The Auditor’s Report on Financial
Statements, and the Statement on Qualifications in Auditor’s
Report, in the preparation of audit report.
Examine the financial statements with a view to ascertain
whether there is any unusual accounting treatment/accounting
entry? If yes, comment on how it has been dealt with in the
Does the auditor/audit firm has a policy to ensure independence,
objectivity and integrity, on the part of partners and staff? Who
is responsible for this policy?
Does auditor monitor compliance with policies and procedures
relating to independence?
Does the auditor/audit firm has an established recruitment
policy? Does the auditor conduct programmes for developing
expertise in specialised areas and industries?
Does auditor/audit firm has established procedures for record
retention, including security aspects?
Does the auditor/audit firm evaluate the accounting and internal
control systems of the auditee?
Whether the procedures followed ensure that audit report is in
accordance with the relevant authoritative requirements or
technical standards including accounting standards?
What is the difference between a technical review and a peer review?

SIMILARITIES
4.16
Both reviews are initiated by the ICAI and aims to improve the quality of audit and
acceptability of the financial statements. The reviewers, in both cases, are chartered
accountants with experience, trained to carry out the work.
Reviews are carried out on the work performed by the Auditors.
DIFFERENCES
Authority:
Peer review is directed by the peer review board of the ICAI, whereas technical review is
under the aegis of the QRB of the ICAI. Thus, though both are carried out by the ICAI, they
are carried out by two different arms.
Subject of review:
Peer review is carried out on the practice unit, which is essentially a firm of Chartered
Accountants whereas technical review is carried out on the financial statements and
reporting.
Appointment:
The practice unit chooses from among three names suggested to it by the peer review board.
The technical reviewer is appointed by the FRRB.
Periodicity of review:
Peer review is an ongoing process, done once in a three-year time period while there is no
such time measure for technical review. Technical review is carried out on a financial
statement and reporting as on a particular date.
Objective of review:
Peer review is carried out with the aim of improving the overall performance of the practice
unit. Technical review is to examine the financial statements and reports of the statutory
auditor. During peer review, the reviewer examines the functioning of the firm, audit plans
and programmes, bases of accepting or rejecting an audit evidence, adherence to standards
of auditing, training of the audit staff, maintenance of records by the practice unit, etc.
Technical reviewer works on a different set of information, such as the format of the
financial statements, notes to accounts, compliance with the broad framework of
accounting, audit report, content of report, assurances obtained by the auditor for
comments and statements in the report, etc.
Period under review:
The peer reviewer delves into the records of the practice unit over a period of three years
whereas the technical review is confined to just one financial statement.
Size of the study:
The Peer reviewer selects certain samples from the clients, papers, documents of the
practice unit. The technical review is confined to one financial statement reporting, which is
a single document.
Modalities of working:
The peer reviewer goes into the working of the firm. Thus it is more into substantive
procedures. Technical review is more into the format, disclosure and compliance
procedures. Peer reviewer covers all types of the work performed by the practice unit which
includes tax audits, internal audits also. Technical review confines itself only to the financial
reporting.
4.17
ICAI view:
The ICAI considers peer review as a hand-holding exercise where one member of the ICAI
helps another in improving the standards of auditing. In the case of a technical review, the
implications are not the same.
4.18
5
AUDIT OF BANKS
Lending constitutes a major activity of a bank. The banking business revolves primarily
around generating funds through acceptance of deposits for the purpose of onward
lending.
Banks have certain characteristics distinguishing them from most other commercial
enterprises.
1. Custody of large volumes of monetary items, including cash and negotiable
instruments, whose physical security has to be ensured. This applies to
storage and the transfer of monetary items, making banks vulnerable to
misappropriation and fraud, necessitating establishment of format operating
procedures and rigorous systems of internal control.
2. Engagement in a large volume and variety of transactions in terms of number
and value which requires complex accounting and widespread use of
Information Technology.
3. Operation through a wide network of geographically dispersed branches
necessitating a greater decentralization of authority and dispersal of accounting
and control functions with difficulties in maintaining uniform operating
practices and accounting systems, particularly when the branch network
transcends national boundaries.
4. Assumption of significant commitments without any transfer of funds.
These items, may at times not involve accounting entries and the failure to record
such items may be difficult to detect.
5. Direct initiation and completion of transactions by the customer without any
intervention by the bank‟s employees. For example, over the internet or
mobile or through ATM.
6. Regulatory requirements by governmental authorities often influence accounting
and auditing practices in the banking sector.
Legal Framework
The principal enactments which govern the functioning of several types of banks are:
1. Banking Regulation Act, 1949
2. State Bank of India Act, 1955
3. Companies Act, 2013
4. Regional Rural Banks Act, 1976
5. Information Technology Act, 2000
6. Prevention of Money Laundering Act, 2002
7. Securitisation and Reconstruction of Financial Assets and Enforcement of Security
Interest Act, 2012 (SARFAESI Act)
FORM AND CONTENT OF FINANCIAL STATEMENTS
Every banking company is required to prepare a Balance Sheet and a Profit and Loss
Account in the forms set out in the Third Schedule to the Act or as near thereto as the
circumstances admit. Form A of the Third Schedule to the Banking Regulation Act,
5.1
1949, contains the form of Balance Sheet and Form B contains the form of Profit
and Loss Account.
Every banking company needs to comply with the disclosure requirements under
the various Accounting Standards, as specified under section 133 of the Companies
Act, 2013, read with Rule 7 of the Companies (Accounts) Rules 2014, in so far as they
apply to banking companies or the Accounting Standards issued by the ICAI.
AUDIT OF ACCOUNTS
Sub-section (1) of section 30 of the Act requires that the balance sheet and profit and
loss account of a banking company should be audited by a person duly qualified
under any law for the time being in force to be an auditor of companies.
Most banks, especially nationalised banks appoint four or more (depending upon their size
and Board decision, as per RBI guidelines) firms of chartered accountants to act jointly as
statutory central auditors (SCAs).
Appointment of Auditor
The auditor of a banking company is to be appointed at the annual general
meeting of the shareholders, whereas the auditor of a nationalized bank is to be
appointed by the bank concerned acting through its Board of Directors.
In either case, approval of the Reserve Bank is required before the appointment is
made. The auditors of the State Bank of India are to be appointed by the
Comptroller and Auditor General of India in consultation with the Central
Government. The auditors of regional rural banks are to be appointed by the bank
concerned with the approval of the Central Government.
Remuneration of Auditor
The remuneration of auditor of a banking company is to be fixed in accordance with
the provisions of section 142 of the Companies Act, 2013 (i.e., by the company in
general meeting or in such manner as the company in general meeting may
determine). The remuneration of auditors of nationalised banks and State Bank of
India is to be fixed by the Reserve Bank of India in consultation with the Central
Government.
Powers of Auditor
The auditor of a banking company or of a nationalised bank, State Bank of India, or a
regional rural bank has the same powers as those of a company auditor in the
matter of access to the books, accounts, documents and vouchers.
VERIFICATION OF ITEMS OF BALANCE SHEET
FIXED ASSETS
The Third Schedule to the Banking Regulation Act, 1949 requires fixed assets to be
classified into two categories in the balance sheet, viz., Premises and Other Fixed
Assets. The assets taken on lease and intangible assets should be shown separately to
comply with the requirements of the Accounting Standards (AS‟s).
5.2
Audit Procedures
In carrying out the audit of fixed assets, the auditor is concerned, primarily, with obtaining
evidence about their existence and valuation. For this purpose, the auditor should
review the following:
Premises
1. Verify the opening balance of premises with reference to schedule of fixed assets,
ledger or fixed assets register.
2. Acquisition of new premises should be verified with reference to authorisation,
title deeds etc. In case the title deeds are held at the head office or some other
location, the branch auditor should obtain a written representation to this effect
from the branch management and should bring this fact to the notice of the
central statutory auditor through a suitable mention in the report.
3. Self-constructed fixed assets should be verified with reference to authorisation
and documents such as, contractors‟ bills, work order records and record of
payments.
4. Examine whether the balances as per the fixed assets register reconcile with those
as per the ledger and the final statements.
5. In the case of leasehold premises, capitalisation and amortisation of lease
premium, if any, should be examined. Any improvements to leasehold premises
should be amortised over their balance residual life.
6. Where premises are under construction, it should be seen that they are shown
under a separate heading, e.g., „premises under construction‟.
7. Where the premises (or any other fixed assets) are re-valued, the auditor should
examine whether the treatment of resultant revaluation surplus or deficit is in
accordance with relevant Accounting Standard.
8. Examine that no immovable properties other than those required for the own use of
the bank have been included in fixed assets (own use would cover use by employees
of the bank, e.g., residential premises provided to employees). The branch auditor
should also obtain a written representation to the above effect from the branch
management.
CASH
Cash related Internal Controls
1. Cash should be kept in the joint custody of two responsible officials
2. Cash should be test-checked daily and counted in full occasionally by a
responsible officer other than those handling the cash. Actual cash in hand
should agree with the balance shown by the day book every day.
3. The cashier should have not access to customer‟s ledger and Day book.
4. High value cash receipts and payments should be verified by a higher
officer/branch manager and should be remitted to currency chest according to
branch‟s retention limit on daily basis.
5. Payments should be made only after the vouchers have been passed for
payment by the authorized officer and have been entered in the customer‟s
account.
5.3
Audit Procedures
 The auditor should physically count the cash balance at the close of business on
the last working day of the year or before the commencement of business
on the next day.
 Ensure that physical balance of cash agrees with balance shown in the Cash
Book and Cash Balance Book.
 Where it is not possible to carry out physical verification of cash balance as
aforesaid, then he should carry out the physical verification of cash as close to the
balance sheet date as possible. In this case, the auditor should work
forward/backward (as the case may be) to reconcile the results of his verification
with the cash balance at the balance sheet date as shown by the books.
 Sometimes the branch may follow the system of depositing a large portion of its
cash balance with the Reserve Bank of India or the State Bank of India or any
other bank on the closing day. In such a case, it is necessary for the auditor to verify
the entries in the respective bank statements.
BALANCE WITH RESERVE BANK OF INDIA
Some select branches of the bank are designated to have account with the Reserve Bank.
Thus, this item would not appear in the balance sheet of every branch.
 Compare the balances in the ledger with confirmation certificates received
from RBI and reconciliation statements as at the year-end.
 Review the reconciliation statements. The auditor should pay special
attention to the following items appearing in the reconciliation statements:
1. Cash transactions remaining un-responded;
2. Revenue items requiring adjustments/write-offs; and
3. Old outstanding balances remaining unexplained/ unadjusted for over
one year.
 Obtain a written explanation from the management as to the reasons for old
outstanding transactions in bank reconciliation statements remaining unexplained /
unadjusted for over one year.
MONEY AT CALL AND SHORT NOTICE
 Money at call and short notice represents short-term investment of surplus
funds in the money market.
 Money lent for one day is money at „call‟ while money lent for a period of more
than one day and up to fourteen days is money at „short notice‟.
Audit Procedures
1. Verify whether proper authorization is obtained by the bank before lending.
2. Ensure that the branch had actually complied with the instructions or guidelines
laid-down by the head office in this regard.
3. Verify and ensure that the limits on lending in respect of inter-bank call money
market, if any, have been adhered to.
4. Vouch the call loans with call loan receipts held by the bank.
5. Verify call loan register. Ensure that all call loans have been properly reflected
therein.
5.4
6. Ensure that the aggregate balances of call loans in the call loan register tallies with
balance of call loan account in general ledger.
7. Examine subsequent repayments received from borrowing banks to ensure that
the amounts shown under this head as at the year-end are correct.
8. Ensure that call loans made by the bank were not netted-off against call loans
received.
INVESTMENTS
The following is the disclosure requirements of Investments in the balance sheet of a bank
as per Third Schedule to the Banking Regulation Act, 1949.
I. Investments in India in
(i) Government securities
(ii) Other approved securities
(iii) Shares
(iv) Debentures and Bonds
(v) Subsidiaries and/or joint ventures
(vi) Others (to be specified)
II. Investments outside India in
(i) Government securities (including local authorities)
(ii) Subsidiaries and/or joint ventures abroad
(ii ) Other investments (to be specified)
TERMS COMMONLLY USED
Government Security
A government security is an instrument issued by the Central or a State Government,
which is redeemable after a fixed period and may either be coupon bearing or
issued at discount to face value.
Approved Securities
These are the securities in which a trustee may invest money under clauses (a) to (d) and (f)
of section 20 of the Indian Trusts Act, 1882. Approved securities comprise primarily the
securities issued or guaranteed by the Central or State Government, or any other
security expressly authorised by the Central Government by notification in the official
gazette.
Bank Receipt (BR)
Bank receipt is acknowledgement from the selling bank to the buying bank that
the former has received payment for certain securities, which it will deliver the securities
within a certain time. BR is non-transferable.
BR‟s may be issued by a bank in the following circumstances:
1. The issuer is yet to issue the scrips and the bank holds the allotment advice; or
2. The underlying security is physically held at different centres and the bank is in a
position to physically transfer the security and effect delivery within a short period;
or
5.5
3. The underlying security has been lodged for transfer/interest payment and the
bank holds necessary records of such lodgement and it would be in a position to
effect physical delivery of the security within a short period.
Portfolio Management Scheme (PMS)
In a portfolio management scheme, the bank administering the scheme makes investments
on behalf of clients for a „management fee‟. Any profit or loss arising on this activity
belongs to the client.
Prudential Exposure Limits
The RBI from time to time prescribes the limits up to which investments in any one
type of security or in any industry group or in any one company/group of companies, etc.,
can be made by a bank. Such limits are technically called as “Prudential Exposure
Limits”.
Subsidiary General Ledger (SGL)
This is a ledger maintained by the Public Debt Office (PDO) of RBI in which accounts of
different banks are maintained regarding their holding of select government
securities. On a purchase or a sale of the securities, the transaction is recorded when the
purchasing bank sends to PDO the Subsidiary General Ledger Form (SGL Form), signed on
behalf of both the transferor and the transferee banks. PDO acts like a depository in
respect of government securities.
Treasury Bills
Treasury bills are government securities representing obligations, which mature in
one year or less and are issued at a discount to the face value.
Objectives of Audit
Generally investments constitute a material portion of the total assets of a Bank. The
following are the objectives behind verification of Investments by the auditor:
 To satisfy about the existence of investments
 To satisfy about the correctness of valuation of Investments and
 To satisfy about compliance with statutory and regulatory requirements
relating to investments. This is very much important because, non compliance, if
any, may have a direct and material affect on the financial statements.
Audit procedures for Verification of Investments
The following are the audit Procedures to be followed by the auditor for verification of
Investments of a Bank.
 Review investment policy of the bank to ascertain that the policy conforms to
the guidelines issued by RBI and statutory provisions applicable to the
bank. Every bank is required to design an investment policy which should be strictly
drawn in conjunction with master circular issued by RBI.
 Examine whether the internal controls relating to investments are effective. As a
part of internal controls, banks do follow the procedure of taking authorization from
Board of Directors or ALCO of Investment Committee in respect of purchase/sale
transactions relating to investments.
 Verify and ensure that the bank is maintaining separate records for
5.6
 Investments held on their own account

 On account of Portfolio Management Scheme (PMS)
 On behalf of other constituents
 The auditor should go thorough the audit report given by an external auditor on
the Investments held by the bank under PMS.
 Examine the transactions of purchase/sale of investments with supporting
documentary evidences available in the form of Authorization, broker‟s contract
notes, receipts issued by the broker etc..
 Ensure that profit/loss of sale of investments is properly accounted for.
 Physically verify the securities on the date of Balance Sheet.
 Where it is not possible to carry out physical verification on the date of Balance
Sheet, then it should be carried out as near to the balance sheet date as
possible. In such a case, he should take into consideration any adjustments for
subsequent transactions of purchase, sale, etc.
 Obtain confirmation of Subsidiary General Ledger balances with the public
debt office.
 Ensure that there is proper justification in respect of investments held by
third parties e.g., shares may be held by brokers for the purpose of transfer or
splitting-up etc.,
 Obtain confirmation of counter party banks in respect of Bank Receipts issued
by such banks. Where any BR‟s have been outstanding for an unduly long
period, the auditor should obtain written explanation from the management for
the reasons thereof. Also examine whether the securities represented by BR‟s issued
by the bank and outstanding at the year-end have been excluded from investments
disclosed in the balance sheet.
 Where the investments were held at branch offices, ensure that the same have
been physically verified by the branch auditors.
 In respect of scripless dealings in investments the auditor should verify year-end
confirmation certificates of the depository organisation.
Guidelines for Classification and Valuation of Investments
A. Categorisation :
(1) The entire investment portfolio of the Bank will be classified under three categories
viz. „Held to Maturity‟ (HTM). „Available for sale‟ (AFS) and „Held for
Trading‟ (HFT)
The securities acquired by the Bank with the intention to hold them till
maturity will be classified under Held to Maturity.
The securities acquired by the Bank with the intention to trade by taking
advantage of the short-term price/interest rate movements etc. shall be classified
under Held for Trading.
The securities which do not fall within the above two categories will be classified
under Available for sale.
(2) Bank should decide the category of the investment at the time of acquisition
and the decision should be recorded on the investment proposals.
5.7
(3) The investments included under “Held to Maturity” should not exceed 25 per
cent of the total investments. Banks are permitted to exceed the limit of 25%
under this category provided:
a. The excess comprises of only SRL Securities and
b. Total SLR securities held in the HTM category is not more than 22% of their
Demand and Time Liabilities.
(4) The following investments will be included under “Held to Maturity” but will not
be counted for the purpose of ceiling of 25% for the category.
(a) Investment in the equity of subsidiaries and joint ventures. [A joint
venture would be one in which the Bank, along with its subsidiaries, holds
more than 25% of the equity.]
(b) The investments in long-term bonds with a minimum maturity of 7 years
issued by companies engaged in infrastructure activities, which are deemed
to be in the nature of an advance.
These bonds will be subject to the usual prudential norms
applicable to advances.
(5) Profit on sale of investments in this category should be first taken to the Profit &
Loss Account and thereafter be appropriated to the „Capital Reserve
Account‟. Loss on sale will be recognised in the Profit & Loss Account.
Available for Sale & Held for Trading
(6) The investments classified under Held-for-Trading category would be those from
which the Bank expects to make a gain by the movement in the interest rates/market
rates. These securities are to be sold within 90 days. If the Bank is not able to
sell the security within 90 days due to exceptional circumstances such as
liquidity conditions, or extreme volatility, or market becoming unidirectional, the
security should be shifted to the Available for Sale category subject to item
(10) and (11) below.
(7) Profit or loss on sale of investments in both the categories will be taken to the
Profit & Loss Account.
B. Shifting among categories:
(8) Bank may shift investments to/from Held to Maturity category with the approval
of the Board of Directors once a year. Such shifting will normally be allowed at the
beginning of the accounting year. No further shifting to/form this category will
be allowed during the remaining part of that accounting year.
(9) Bank may shift investment from Available for Sale category to Held-for-Trading
category with the permission of Directors/ALCO/Investment Committee. In case of
exigencies, such shifting may be done with the approval of the Chief Executive of the
FI / Head of the ALCO, but should be ratified by the Board of Directors/ALCO.
(10) Shifting of investments from Held-for-Trading category to Available for Sale
category is generally not allowed. However, it will be permitted only under
exceptional circumstances as mentioned at item 6 above, with the approval of
the Board of Directors/ALCO/Investment Committee.
(11) Transfer of scrips to another, under all circumstances, should be done at the
acquisition cost/Book value/market value on the date of transfer, whichever
5.8
is the least and the depreciation, if any, on such transfer should be fully provided
for.
C. VALUATION
(12) Investments classified under Held to Maturity category need not be marked to
market and will be carried at acquisition cost unless it is more than the face
value, in which case the premium should be amortized over the period
remaining to maturity.
(13) The individual scrips in the Available for Sale category will be marked to
market at quarterly or at more frequent intervals.
The book value of the individual securities would not undergo any
change after the marking of market.
(14) In the event, provisions created on account of depreciation in the „AFS‟ or „HFT‟
categories are found to be in excess of the required amount in any year, the excess
should be credited to the P&L Account and an equivalent amount (net of taxes, if any
and net of transfer to Statutory Reserves as applicable to such excess provision)
should be appropriated to an IRA Account
The provisions required to be created on account of depreciation in the AFS and HFT
categories should be debited to the P&L Account and an equivalent amount (net of
tax benefit, if any, and net of consequent reduction in the transfer to Statutory
Reserve), may be transferred from the IRA to the P&L Account. Illustratively, banks
may draw down from the IRA to the extent of provision made during the year
towards depreciation in investment in AFS and HFT categories (net of taxes, if any,
and net of transfer to Statutory Reserves as applicable to such excess provision). In
other words, a bank which pays a tax of 30 per cent and should appropriate 25 per
cent of the net profits to Statutory Reserves, can draw down Rs.52.50 from the IRA,
if the provision made for depreciation in investments included in the AFS and HFT
categories is Rs.100.
(15) The individual scrips in the Held for Trading category will be revalued at monthly
or at more frequent intervals and provided for as in the case of those in AFS
category. Consequently, the book value of the individual securities would not
undergo any change after the revaluation.
Market value
(16) The „market value‟ for the purpose of periodical valuation of investments included in
the Available for Sale and the Held for Trading categories would be the mi the trades/quo
on the stock exchanges, price of SGL Account transactions, price list of RBI etc.
ADVANCES
The third schedule to the Act requires classification of advances made by a bank from three
different angles, viz., nature of advance, nature and extent of security and place of
making advances.
The advances made by the bank are to be classified in the balance sheet as follows (Based on
Place of making advances).
A. (i) Bills purchased and discounted
(ii) Cash Credits, Overdrafts and Loans repayable on demand
(iii) Term loans
B. (i) Secured by tangible assets
5.9
(ii) Covered by bank/government guarantees

(iii) Unsecured
C. I. Advances in India
(i) Priority sectors
(ii) Public sector
(iii) Banks
(iv) Others
II. Advances outside India

(i) Due from banks
(ii) Due from others
(iii) Bills purchased and discounted
(iv) Syndicated loans
(v) Others
Evaluation of Internal Controls over Advances
The auditor should examine the efficacy of various internal controls over advances to
determine the nature, timing and extent of substantive procedures to be followed. In
general, the internal controls over advances should include, inter-alia, the following:
1. The bank should make an advance only after satisfying itself as to the credit
worthiness of the borrower and after obtaining sanction from the appropriate
authorities of the bank. The sanction for an advance should specify, among
other things, the limit of borrowing, nature of security, margin to be kept,
interest, terms of repayment etc. It also needs to be ensured that the loans
sanctioned are as per the Loan Policy of the bank and adhere to the
regulatory (RBI) norms unless a specific exemption is taken in this regard.
2. All the necessary documents (e.g., agreements, demand promissory notes,
letters of hypothecation, etc.) should be executed by the parties before
advances are made.
3. The compliance with the terms of sanction and end use of funds should be
ensured.
4. Sufficient margin as specified in the sanction letter should be kept against
securities taken so as to cover for any decline in the value thereof. The
availability of sufficient margin needs to be ensured at regular
intervals.
5. All securities requiring registration should be registered in the name of the bank
or otherwise accompanied by documents sufficient to give title to the bank.
6. In the case of goods in the possession of the bank, contents of the
packages should be test checked at the time of receipt. The godowns should be
frequently inspected by responsible officers of the branch concerned, in addition
to the inspectors of the bank.
7. Surprise checks should be made in respect of hypothecated goods not in the
physical possession of the bank.
8. As soon as any increase or decrease takes place in the securities or their
5.10
value, proper entries should be made in the Drawing Power Book and Daily
Balance Book. These entries should be checked by an officer.
9. The accounts should be kept within both the drawing power and the
sanctioned limit.
10. All the accounts which exceed the sanctioned limit or drawing power or
are otherwise irregular should be brought to the notice of the controlling
authority regularly.
11. The operation of each advance account should be reviewed at least once a
year, and at more frequent intervals in the case of large advances.
NON-PERFORMING ASSETS (NPA)
When an asset ceases to generate income to the bank, such an asset shall become non-
performing asset.
With effect from March 31, 2004, a non-performing asset shall be a loan or an advance
where:
(i) A Term Loan account is treated as NPA if Interest and/or installment of
principal remain overdue for a period of more than 90 days;
Any amount due to the bank under any credit facility becomes overdue, if
not paid on the due date fixed by the bank.
Illustrations:
i). If interest due for the month ended 30th September is not paid, it becomes
NPA on 29th December.
ii) If interest due for the month ended 31st October is not paid, it becomes
NPA on 29h January .
iii). If instalment towards principal due on 15th October is not paid, it
becomes NPA on 13th January
(ii) A Cash Credit/Overdraft account is treated as NPA if it remains „Out of
order‟s for 90 days;
An account should be treated as „out of order‟ if:
 The outstanding balance remains continuously in excess of the
sanctioned limit/drawing power for a continuous period of 90 days
prior to the balance sheet date.
 Where the outstanding balance in the principal operating account is less
than the sanctioned limit/drawing power but:
i. There are no credits continuously for 90 days as on the date of
Balance Sheet or
ii. Credits are not enough to cover the interest debited during that
period.
Ex. 1: If liability under Overdraft/Cash Credit (after notionally adding devolved
Liability Under BG paid account) remains continuously in excess of sanctioned limit
or drawing power, whichever is less, on all days during the period 1.11.18 to 29.01.19 ,
it becomes NPA on 29.01.19 (i.e. continuously overdrawn for 90 days).
5.11
Ex. 2: If an Overdraft/Cash Credit account is within limit and drawing power but
there are no credits continuously (from 2nd January to 31st March in the case of leap
years and 1st January to 31st March in case of other years), the account becomes
NPA on 31st March (i.e. no credits continuously for 90 days).
Ex. 3: If an overdraft/cash credit account is within limit and drawing power but the
credits received during the period (from 2nd January to 31st March in case of leap
years and 1st January to 31st January to 31st March in the case of other years are not
sufficient to cover the interest debited during the period, the account becomes NPA
on 31st March.
(iii) A Bill is treated as NPA if it remains overdue for a period of more than 90
days;
Ex: A cheque discounted on 25.10.17 becomes due for payment on 31.10.17
(expected to be realized within 7 days). It becomes NPA on 29.01.18 (i.e. more than
90 days from the due date) if it remains unpaid.
(iv) Any amount to be received remains overdue for a period of more than 90 days in
respect of other accounts.
(v) Agricultural Advances: If the installment of principal/interest remains
overdue for 2 crop seasons for short duration crops and overdue for 1
crop season in case of long duration crops.
For the purpose of above norms, “Long During Crops” would be crops with
crop season longer than 1 year and crops which are not “long duration” crops
would be treated as “Short duration” crops.
The above NPA norms would also be made applicable to agricultural term
loans.
ACCOUNTS WITH TEMPORARY DEFICIENCIES
1. Where the borrower fails to provide stock statements regularly in respect of a Cash
Credit account and where the bank relied upon the stock statements older than
3 months for calculation of drawing power, such a cash credit account may be
treated as a Non Performing Asset.
2. An account which has not been reviewed/renewed within 180 days from the due
date, the account may be treated as NPA.
Ex.1: If a regular CC limit, the validity of which has expired on 31st July, is not
renewed or reviewed up to 26th January, it will slip to NPA on 26th January.
However, where the auditor observes these temporary deficiencies in an advance account,
whether to classify such an account as NPA or not shall be decided purely based on
the record of recovery rather than based on the temporary deficiencies. In other words,
where there is a threat of loss or the recoverability of the advance is in doubt, the asset
should be treated as NPA.
OTHER ASPECTS
Regularization Near About Balance Sheet
In a case where the auditor observes a solitary or few credits in the accounts just before
or near about the balance sheet date and where the account indicates inherent weakness,
such an account shall be deemed as NPA.
5.12
Asset classification to be borrower-wise and not facility-wise

Where a borrower is enjoying more than one credit facility with the bank, even if one
account becomes irregular and becomes NPA, then all such credit facilities shall be treated
as NPA.
Advances under Consortium
Asset classification of accounts under consortium should be based on the record of
recovery of the individual member banks and other aspects having a bearing on the
recoverability of the advances.
Where the remittances by the borrower under consortium lending arrangements are
pooled with one bank and/or where the bank receiving remittances is not parting with the
share of other member banks, the account should be treated as not serviced in the books of
the other member banks and therefore, an NPA.
The banks participating in the consortium, therefore, need to arrange to get their share of
recovery transferred from the lead bank or to get an express consent from the lead bank for
the transfer of their share of recovery, to ensure proper asset classification in their
respective books.
Credit facilities Guaranteed by Central/State Government
(i) The credit facilities backed by guarantee of the Central Government though
overdue should be treated as NPA only when the government repudiates its
guarantee when invoked. This exemption from classification of Central
Government guaranteed advances as NPA is not for the purpose of recognition of
income.
(ii) State Government guaranteed advances would attract classification and
provisioning norms, if interest and/or principal or any other amount due to the bank
remains overdue for more than 90 days irrespective of the fact whether the
guarantee have been invoked or not.
Advances against Term Deposits, NSC‟s, KVPs/IVPs etc
These advances need not be treated as NPA‟s provided adequate margin is
available in the account.
Erosion in Value of Securities/ Frauds Committed by Borrowers
In respect of accounts where there are potential threats for recovery on account of erosion
in the value of security or non-availability of security and existence of other factors
such as frauds committed by borrowers, such accounts need not go through the stages
of asset classification. In such cases, the asset should be straightaway classified as
doubtful or loss asset, as appropriate. Further,
1. Erosion in the value of securities by more than 50% of the value assessed by the
bank or accepted by RBI inspection team at the time of last inspection, as the case
may be, would be considered as “significant”, requiring the asset to be classified as
doubtful straightaway and provided for adequately.
2. The realizable value of security as assessed by bank/approved valuers/RBI is
less than 10% of the outstanding in the borrowal accounts, the existence of the
security should be ignored and the asset should be classified as loss asset. In such
cases the asset should either be written off or fully provided for.
5.13
Asset Classification
Classification
The Banks should classify their assets into the following broad groups, Viz.
(i) Standard Assets
(ii) Sub-standard Assets
(iii) Doubtful Assets
(iv) Loss Assets
Standard Assets
Standard Asset is one which does not disclose any problems and which does not carry
more than normal risk attached to the business. Such an asset should not be an NPA.
Sub-standard Assets
With effect from March 31, 2005 an asset would be classified as substandard if it remained
NPA for a period of less than or equal to 12 months.
Doubtful Assets
With effect from March 31, 2005, an asset is required to be classified as doubtful, if it has
remained NPA for more than 12 months.
Loss Assets
A loss asset is one where loss has been, identified by the bank or internal or external
auditors or by the Reserve Bank of India but the amount has not been written, off, wholly or
partly. In other words, such an asset is considered un-collectible and of such little value
that its continuance as a bankable asset is not warranted although there may be
some salvage or recovery value.
INCOME RECOGNITION
Income from non-performing assets (NPA) is not recognised on accrual basis but is
booked as income only when it is actually received. Therefore, banks should not take
to income account interest on non-performing assets on accrual basis.
However, interest on advances against term deposits, NSCs, IVPs, KVPs and
Life policies may be taken to income account on the due date, provided
adequate margin is available in the accounts.
If Government guaranteed advances become „overdue‟ and thereby NPA, the
interest on such advances should not be taken to income account unless the
interest has been realised.
Reversal of Income on Accounts Becoming NPAs
If any advance becomes NPA as at the close of any year, interest accrued and credited to
income account in the corresponding previous year, should be reversed. This will apply to
Government guaranteed accounts also.
If interest income from assets in respect of a borrower becomes subject to non-accrual, fees,
commission and similar income with respect to same borrower that have been accrued
should ceased to accrue in the current period and should be reversed or provided for with
respect to past periods, if uncollected.
5.14
Partial Recovery of NPA‟s

Interest realised on NPA‟s may be taken to income account provided the credits in the
accounts towards interest are not out of fresh/ additional credit facilities
sanctioned to the borrower concerned.
Verification of Provision for Non-performing assets
An important aspect of audit of advances relates to their classification and provisioning. The
Reserve Bank has prescribed norms for determining the quantum of provisions required in
respect of advances.
These norms should be construed as laying down the minimum provisioning
requirements and wherever a higher provision is warranted in the context of the
threats to recovery, such higher provision should be made.
Provisioning Norms
The provisions required to be created in respect of NPA‟s is dependent on the classification
of assets.
Loss Asset - The entire asset has to be written off. If the assets are permitted to remain in
the books for any reason, 100% of the outstanding need to be provided for.
Doubtful Assets – (i) 100% on unsecured portion
Provision in respect of Secured potion
Period for which the advance Provision Requirement (%)

Has remained in doubtful
Category
Upto 1 year 25
More than 1year up to 3 years 40
More than 3 years 100
Sub-Standard Assets – A general provision of 15% in respect of Secured portion and 25%
in respect of unsecured portion is required to be made.
Standard Assets – 0.25% to 0.40% on outstanding balance.
Audit Procedures
1. Examine whether the classification made by the branch is appropriate.
2. Examine whether the secured and the unsecured portions of advances have been
segregated correctly and provisions have been calculated properly.
3. Drawing Power Calculation
a. Ensure that DP is calculated as per the extant guidelines formulated by

the Board of the respective bank.
b. The report submitted by the Stock Auditor shall be reviewed giving
special focus to the comments made by the stock auditors on valuation
of security and calculation of drawing power.
SALE / PURCHASE OF NPA BY BANK
In case of Sale of NPA by Bank, the auditor should examine
5.15
1. The policy laid down by the Board of Directors in this regard relating to procedures,
valuation and delegation of powers.
2. Only such NPA has been sold which has remained NPA in the books of the bank
for at least 2 years.
3. Subsequent to the sale of the NPA, the bank does not assume any legal,
operational or any other type of risk relating to the sold NPAs.
4. The NPA has been sold at cash basis only.
On sale of NPA, the auditor should also ensure that:
 he same has been removed from the books of the account.
 the shortfall in the net book value has been charged to the profit and loss
account.
 where the sale is for a value higher than the NBV, no profit is recognised and
the excess provision has not been reversed but retained to meet the shortfall/
loss because sale of other non-performing financial assets.
In case of purchase of NPA‟s, the auditor should verify that:
1. The NPA purchased has been subjected to the provisioning requirements
appropriate to the classification status in the books of the purchasing bank.
2. Any recovery in respect of an NPA purchased from other banks is first adjusted
against its acquisition cost and only the recovered amount in excess of the
acquisition cost has been recognised as profit.
3. For the purpose of capital adequacy, banks have assigned 100% risk weights to the
NPAs purchased from other banks.
4. The bank should not purchase an NPA which it had originally sold.
VERIFICATION OF OTHER LOANS
Advances against gold ornaments
 Verify the weight of some ornaments on test basis.
 Verify the assayer‟s certificate (Valuer‟s Certificate) regarding gold content of the
ornaments and their valuation.
 Valuation should also be checked with reference to the current market price of
gold.
 In respect of gold and silver bars, the auditor should inspect the bars on a test
basis and see that the mint seals are intact. The weights mentioned on the bars may
generally be accepted as correct.
Advances against Life Insurance Policies
 Verify the surrender value certificate issued by the Insurance Company and loan is
granted on the basis of such certificate.
 If the surrender value certificate is subject to payment of certain premium,
ensure that the amount of such premium has been deducted from the surrender
value.
 Ensure that the policies in respect of which advances are granted are assigned in
favour of the bank.
5.16
Bank‟s Own Deposit Certificates

The auditor should verify the following in respect of loans granted against bank‟s own
deposit certificates:
4. Verify whether the Fixed Deposit Receipt has been properly discharged.
5. In case the FD Receipt is in the name of Joint Holders, verify whether all
the joint holders have discharged the FD Receipt.
6. In case the FD Receipt is in the name of the minor, ensure that the FD
Receipt is discharged by the Guardian.
7. Ensure that the bank had maintained adequate margin.
8. Verify whether the lien is noted on the face of the certificates as well as in the
relevant register of the bank.
Non-banking assets acquired in satisfaction of the claims
These are the immovable properties/tangible assets, which the bank has acquired in
satisfaction of debts due and are being held with the intention of being disposed
off.
According to Section 9 of the Banking Regulation Act, a banking company is prohibited
from holding any immovable property except required for its own use, however,
acquired (i.e. whether acquired by way of satisfaction of claims or otherwise) for any
period exceeding 7 years from the date of acquisition thereof. RBI has the power to
extend the period by another 5 years. The requirements discussed above are applicable
only for a banking company and not for a nationalized bank.
At the date of acquisition, the assets should be recorded at amount lower of the net
book value of the advance or net realisable value of asset acquired. At each
balance sheet date, net realisable value of such assets may be re-assessed and necessary
adjustments may be made.
The auditor should verify such assets with reference to the relevant documentary
evidence, e.g., terms of settlement with the party, order of the Court or the
award of arbitration, etc.
He should satisfy himself that the ownership of the property has legally vested in the
bank.
DONATIONS
Donations by profit making banks
The profit making banks may make donations during a financial year aggregating up to one
per cent of the published profit of the banks for the previous year.
In some cases, banks create some specific funds to encourage research and development in
banking related fields. The Board of the banks may determine the amount of contribution to
be made to such funds. The contribution so made by the bank to such funds in a year
will be reckoned for computation of the 1% ceiling.
However, donation made to Prime Minister‟s National Relief Fund is to be excluded
for calculation of ceiling of 1%:
Any un-utilized portion of the limit of 1% should not be carried forward to the next
year.
Donations by loss making banks
5.17
Loss-making banks can make donations up to a maximum of Rs.5 lakh only in a

financial year. The donations which are required to be excluded for calculation of ceiling in
respect of profit making banks are required to be included for this purpose.
The Board of Directors of the Bank should consider the limits as specified above while
formulating policy relating to donations.
CRR, SLR, REPO AND REVERSE REPO RATE
The primary function of RBI is to control the supply of money in the economy as well as cost
of credit. In other words, RBI has to decide about how much money the economy is needed
and accordingly should take decisions. It is also required to decide about what is the price
that the economy has to pay to borrow that money. These two aspects of control are
technically called as liquidity and interest rates.
To have a control over these two factors the following are the tools available for RBI:
REPO RATE
Repo rate is a rate at which banks borrow from RBI for short periods up to 7 or 14 days.
RBI manages this repo rate which is the cost of credit for the bank. This becomes a floor
below which the short-term interest rates don‟t go.
Higher the repo rate means the cost of short-term money is very high. Higher repo rate will
have a negative impact on the economy and the economic growth may slowdown.
Lower the repo rate means the cost of short-term rate is low. Low repo rate results in
enhanced economic growth.
REVERSE REPO RATE
Reverse Repo rate is the rate at which the RBI borrows money from commercial
banks. Any increase in the reverse repo rate will decrease the money supply and vice-
versa. In other words, an increase in reverse repo rate means that commercial banks will
get more interest to park their funds with RBI thereby decreasing the supply of money in
the market.
CASH RESERVE RATIO (CRR)
Section 42 of RBI act requires that a scheduled bank should maintain with RBI an
average daily balance of at least 3% of its total time and demand liabilities in
India. In other words, CRR is the minimum amount of funds that banks have to keep with
RBI. This % of CRR can be increased by RBI up to 15%.
The amount specified as the CRR is held in cash and cash equivalents, is stored in
bank vaults or kept in the current account with the Reserve Bank of India.
Therefore the banks cannot use this amount for any economic or commercial activity or
cannot lend this money. The objective behind imposing restrictions as to the maintenance
of minimum CRR by banks is to ensure that banks do not run out of cash to meet the
payment demands of their depositors.
If the central bank decides to increase the CRR, the available amount with the banks comes
down. The RBI uses the CRR to drain out excessive money from the system.
STATUTORY LIQUIDITY RATIO (SLR)
Section 24 of the Banking Regulation Act requires that every scheduled commercial bank
in India shall maintain liquid assets which shall be at a prescribed percentage (i.e. 20-40%)
5.18
of the total net demand and time liabilities in India. The ratio of liquid assets to demand
and time liabilities is known as Statutory Liquidity Ratio (SLR).
In other words, statutory liquidity ratio is the amount of money that is invested in certain
specified securities predominantly central government and state government securities.
The prescribed percentage is to be maintained in the form of
 Cash or
 Gold valued at a price not exceeding the current market price or
 Unencumbered investments such as prescribed Central Government and State
Government securities, Treasury Bills and Government guaranteed bonds.
Demand Liabilities can be defined as those liabilities that are required to be paid by the
bank on demand. The following is the list of demand liabilities:
 Current Deposits
 Demand liabilities portion of savings bank deposits
 Margins held against letters of credit/guarantees
 Balances in Overdue Fixed Deposits
 Recurring Deposits
 Outstanding Telegraphic Transfers, Demand Drafts
 Unclaimed Deposits
 Credit Balance in Cash Credit account
Time Liabilities can be defined as those liabilities which a bank has to pay after a specific
time period. The following is the list of Time Liabilities:
 Fixed Deposits
 Cash Certificates
 Time liabilities portion of savings bank deposits
 Staff Security Deposits
 Deposits held as security for advances not payable on demand
 Gold Deposits
Let us look at this combination of CRR and SLR. That is the amount of money which
remains blocked for statutory reasons and is not available for investment in various other
high earning avenues like loans are securities markets or other bonds.
CAPITAL ADEQUACY NORMS
The fundamental objective behind introduction of the Capital Adequacy norms is to
strengthen the soundness and stability of the banking system.
All Indian Scheduled Commercial banks as well as foreign banks operating in India have to
maintain the prescribed capital adequacy ratio ranging from 9% to 15%. The Capital
Adequacy Ratio is computed as follows:
CRAR = Capital Funds ( Tier I + Tier II Capital) x100

Risk weighted assets and off balance sheet items
The term capital fund has two tiers – Tier I and Tier II
5.19
Tier I Capital
Tier I Capital is core capital which includes equity capital and disclosed reserves. In other
words, Tier 1 capital comprises of:
 Paid up Capital
 Statutory Reserves
 Other disclosed free reserves
 Capital Reserves
 Investment Fluctuation Reserve
 Perpetual non-cumulative preference shares
 minus
 Equity Investments in Subsidiaries
 Intangible Assets
 Losses (Current Period+ past losses carried forward)
Tier I capital should at no point of time be less than 50% of the total capital. This implies
that Tier II capital cannot be more than 50% of the total capital.
Tier II Capital
Tier II capital can be called as subordinate or supplemental capital which should comprise
of the following:
 Undisclosed reserves
 Cumulative perpetual preference shares
 General Provisions and loss reserves
 Bonds
 Long Term Unsecured Loans
 Debt Capital Instruments
 Redeemable cumulative preference shares
Risk weighted assets - Fund Based
Risk weighted assets mean fund based assets such as cash, loans, investments and other
assets. Degrees of credit risk expressed as percentage weights have been assigned by RBI to
each such assets.
CONCURRENT AUDIT
Concurrent Audit is an audit or verification of transactions or activities of an organization
concurrently as the transaction or activity takes places. It is not a pre audit. The concept of
concurrent audit is to verify the authenticity of transaction or activity within the
shortest possible time after the same takes place. It is similar to internal audit
which is a concept recognized under the Companies Act. The RBI has issued certain
guidelines in this respect which requires that all the banks are required to cover 50%
of total deposits and 50% of total advances under this audit.
Concurrent Audit programme for certain key areas is discussed below:
CASH:
 Review of daily cash transactions with specific reference to abnormal items of
receipts and payments;
 Proper accounting of inward and outward cash remittances;
 Expenses incurred by cash payment involving sizeable amount
5.20
INVESTMENT
 Ensure compliance with H.O. instructions and delegated authority regarding
purchase and sale of securities;
 Ensuring the physical existence of securities;
 Ensure compliance with RBI/HO guidelines regarding banker‟s receipt, delivery of
scripts documentation and accounting;
 Ensure that sale and purchase transactions are at rates beneficial to the bank.
DEPOSIT
 Check transaction of receipt and payment of deposits;
 Check interest calculation on large deposits;
 Check for any abnormal or unusual transactions in accounts.
ADVANCES
 Check whether there is proper sanctioning of advances;
 Check for compliance with RBI & HO instructions;
 Verify securities and documents in relation to advances;
 Ensure regular follow up regarding stock statements, installments, renewal of
limits, etc.;
 Ensure proper follow up of overdue bills of exchange;
 Advances in the form of Letter of Credit or Guarantees should be ascertained for
proper sanction and genuineness of trade transactions;
 Verify whether claims have been timely submitted to DIGGC or ECGC;
 Compliance with RBI guidelines on classification and income recognition on
advances;
FOREIGN EXCHANGE TRANSACTIONS
 Check foreign bills negotiated under letters of credit;
 Check FCNR and other non resident accounts;
 Check whether the inward or outward remittances have been duly accounted;
 Ensure compliance with RBI & HO instructions;
 Ensure verification / reconciliation of NOSTRO and VOSTRO A/c. Transaction /
Balances.
HOUSEKEEPING
 Ensure that maintenance and balancing of account, ledgers and registers
including claims is proper;
 Ensure timely reconciliation of outstanding entries in inter branch and inter
bank account, suspense accounts, sundry deposits, drafts accounts, etc.
 Check the calculation and proper apportionment of interest, discounts, commissions
etc.;
 Check transactions in staff accounts;
5.21
 Detection and prevention of revenue leakages through close examination of income

and expenditure items;
 Check cheques returned/bills register and look for possible reasons;
 Checking inward and outward remittances (DDs, MTs & TTs)
OTHER ITEMS
 Execution of Government business as per Government / RBI / HO instructions;
 Compliance with internal inspection / audit reports;
 Proper dealing with client‟s complaints;
 Verification of statements, returns, statutory returns.
VOSTRO AND NOSTRO ACCOUNTS
Banks maintain stocks of foreign currencies in the form of Bank Accounts with their
overseas branches/correspondents. Such foreign currency accounts maintained by
Indian banks at other overseas centres are designated by it as “Nostro
Account”. For example, all banks in India would be maintaining a US Dollar Account with
their New York office/branch/correspondents, such account would be designated by the
Indian office as Nostro Account.
“Vostro Account” is the opposite of Nostro accounts. Here a foreign bank in
another country maintains stocks of Indian rupees with their Indian branch/
correspondent/local bank. Such Indian Rupee Accounts are designated as a Vostro Account.
For example, a German Bank might maintain a Vostro Account in rupees in terms with
Indian Bank.
While examining the transaction in foreign exchange, the auditor should also pay
attention to reconciliation of Nostro Accounts with the respective minor account.
Unreconciled Nostro Accounts, on an examination, may reveal unauthorized payments
from the foreign currency account, unauthorized withdrawals, and unauthorized debit to
minor account. The auditor should also evaluate the internal control with regard to inward/
outward messages. The inward/ outward messages should be properly authenticated and
discrepancies noticed, should be properly dealt with, in the books of accounts.
PRACTICAL QUESTIONS
1. The bank is a consortium member of Cash Credit Facilities of 50 crores to X
Ltd. Bank's own share is 10 crores only. During the last two quarters against a
debit of 1.75 crores towards interest the credits in X Ltd's account are to
the tune of 1.25 crores only. Based on the certificate of lead bank, the bank has
classified the account of X Ltd as performing.
The bank is a consortium member of cash credit facilities of 50 crores to X Ltd. Bank's own
share is 10 crores only. During the last two quarters against a debit of l.75 crores
towards interest, the credits in X Ltd's account are to the tune of 1.25 crores only.
Sometimes, several banks form a group (the 'consortium') under the leadership of a 'lead
bank' to make advance to a large customer on same conditions and security with
proportionate rights. In such cases, each bank may classify the advance given by it
according to its own experience of recovery and other factors. Since in the last two quarters,
the amount remains outstanding and, thus, interest amount should be reversed. This is
despite the certificate of lead bank to classify that the account as performing. Accordingly,
the amount should be shown as non-performing asset.
5.22
2. What do you understand by Long-form Audit Report?

Long Form Audit Report: The long form Audit Report has to be furnished by the auditor of
a bank in addition to the audit report as per the statutory requirement. The matters which
the banks require their auditor to deal with in the form of Long Form Audit Report have
been specified by Reserve Bank of India.
3. As the concurrent auditor of Nagpur Main Branch of XYZ Bank Ltd. state the
issues which have to be considered in the audit of advances.
The items to be covered in the concurrent audit of advances of a bank are as follows-
 Ensure that loans and advances have been sanctioned properly (i.e. after due
scrutiny and at the appropriate level).
 Verify whether the sanctions are in accordance with delegated authority.
 Ensure that securities and documents have been received and properly charged/
registered.
 Ensure that post disbursement supervision and follow-up is proper, such as
receipt of stock statements, installments, renewal of limits, etc.
 Verify whether there is any mis-utilisation of the loans and whether there are
instances indicative of diversion of funds.
 Check whether the letters of credit issued by the branch are within the
delegated power and ensure that they are for genuine trade transactions.
 Check the bank guarantees issued, whether they have been properly worded and
recorded in the register of the bank. Whether they have been promptly renewed on
the due dates.
 Ensure proper follow-up of overdue bills of exchange.
 Verify whether the classification of advances has been done as per RBI
guidelines.
 Verify whether the submission of claims to DICGC and ECGC is in time.
 Verify that instances of exceeding delegated powers have been promptly
reported to controlling/Head Office by the branch and have been got
confirmed or ratified at the required level.
4. How do you examine claims against the Bank not acknowledged as debts?
The auditor should examine the relevant evidence, for example correspondence with
lawyers, claimants, workers/officers and workmen‟s/officer‟s unions. The auditor should
also review the minutes of the meeting of the Board of directors/committees of the Board,
contracts, agreements and arrangements, list of pending legal cases and correspondence
relating to taxes, duties etc., to identify claims against the bank. The auditor should
ascertain from the management the status of claims outstanding as at the end of previous
year. A review of subsequent events would also provide evidence about completeness and
valuation of claims.
5. As a bank branch auditor, what aspects will be considered while reporting
on credit appraisal, sanctioning /disbursement and documentation in respect
of advances in the LFAR?
Verification of Advances in the Long Form Audit Report (LFAR): The auditor has to
comment on various specific issues as mentioned in the Long Form Audit Report of the
5.23
bank. While evaluating the efficacy of internal controls over advances, the auditor should
particularly examine those aspects on which he is required to comment in his long form
audit report.
Thus, he should examine-
 Whether the loan applications are complete and in prescribed form;
 Procedural instructions regarding grant/ renewal/ enhancement of facilities
have been complied with;
 Sanctions are within delegated authority and disbursements are as per
terms of the sanction;
 Documentation is complete; and supervision is timely, effective and as per
prescribed guidelines.
6. In course of audit of Good Samaritan Bank as at 31st March 15 you observed
the following:
In a particular account there was no recovery in the past 18 months. The bank
has not applied the NPA norms as well as income recognition norms to this
particular account. When queried the bank management replied that this
account was guaranteed by the central government and hence these norms
were not applicable. The bank has not invoked the guarantee. Please respond.
Would your answer be different if the advance is guaranteed by a State
Government ?
The bank‟s advance portfolio comprised of significant loans against Life Insurance
Policies. Write suitable audit program to verify these advances.
If a government guaranteed advance becomes NPA, then for the purpose of income
recognition, interest on such advance should not to be taken to income unless interest is
realized. However, for purpose of asset classification, credit facility backed by Central
Government Guarantee, though overdue, can be treated as NPA only when the Central
Government repudiates its guarantee, when invoked.
Since the bank has not revoked the guarantee, the question of repudiation does not arise.
Hence the bank is correct to the extent of not applying the NPA norms for provisioning
purpose. But this exemption is not available in respect of income recognition norms. Hence
the income to the extent not recovered should be reversed.
The situation would be different if the advance is guaranteed by State Government because
this exception is not applicable for State Government Guaranteed advances, where advance
is to be considered NPA if it remains overdue for more than 90 days.
In case the bank has not invoked the Central Government Guarantee though the amount is
overdue for long, the reasoning for the same should be taken and duly reported in LFAR.
5.24
6
AUDIT OF INSURANCE COMPANIES
AUDIT OF LIFE INSURANCE COMPANIES

INTRODUCTION
Insurance is a contract between two parties whereby one party agrees to undertake the risk
of another in exchange for consideration known as premium and promises to pay a fixed
sum of money to the other party on happening of an uncertain event (death) or after the
expiry of a certain period (in case of life insurance) or to indemnify the other party on
happening of an uncertain event (in case of general insurance). The party bearing the risk is
known as the „insurer‟ or „assurer‟ and the party whose risk is covered is known as the
„insured‟ or „assured‟.
Important points of distinction between Life Insurance and General
Insurance
Life Insurance General Insurance

Term may be fixed or variable. Term is fixed (usually 1 year).
Pay-outs are certain either as Pay-outs are uncertain as claims may or
claims or maturity benefits. may not arise.
Multi-purpose (e.g. investment, tax solely for the purpose of insurance.
benefits, insurance).
LEGAL FRAMEWORK
The primary legislations which deal with the insurance business in India are the
Insurance Act, 1938 and the IRDA Act, 1999. Various aspects relating to audit are
dealt with around the framework of the following statutes and rules made
thereunder:
1. The Insurance Act, 1938 as amended by Insurance Laws (Amendment) Act, 2015
2. The IRDA Act, 1999 as amended by Insurance Laws (Amendment) Act, 2015
3. The Insurance Regulatory and Development Authority Regulations framed under
the IRDA, Act, 1999
4. The Companies Act, 2013; and
5. IRDA Investment Regulations, 2013 (as amended from time to time).
REGISTRATION
Section 3 of the Insurance Act, 1938 requires every insurer to obtain a certificate of
registration before commencement of insurance business in India. The section empowers
the Authority to make regulations for registration of insurers. It may be noted here that no
insurer other than an Indian insurance company can commence the insurance business
after the enactment of the IRDA Act, 1999. The registration of Indian insurance companies
is done in accordance with the IRDA (Registration of Indian Insurance Companies)
Regulations, 2000.
6.1
MINIMUM PAID UP CAPITAL

The minimum paid-up equity share capital of an Indian insurance company
carrying on insurance business should be Rs.100 crores excluding preliminary
expenses incurred in the formation and registration of company. The insurer may
enhance the same in accordance with the provisions of the Companies Act, 2013, SEBI
Act, 1992 and the rules, regulations or directions issued thereunder or any other law for
the time being in force.
FORM AND CONTENTS OF FINANCIAL STATEMENTS
Section 11 of the Insurance Act, 1938 provides that every insurer, on or after the date
of the commencement of the Insurance Laws (Amendment) Act, 2015, in respect of
insurance business transacted by him and in respect of his shareholders' funds, shall, at
the expiration of each financial year, prepare with reference to that year, balance
sheet, a profit and loss account, a separate account of receipts and
payments, a revenue account in accordance with the regulations as may be specified.
The Authority, in pursuance of the powers conferred to it by the provisions of section 114
A of the Insurance Act, 1938, has issued regulations for the preparation of the
financial statements and auditor‟s report of companies carrying on insurance business.
The Regulations contain three schedules.
Schedule A is applicable to companies carrying on Life Insurance business.
Schedule B is applicable to Companies carrying on General Insurance

business.
Schedule C to the Regulations lays down the matters to be dealt with by the
auditor‟s report of an insurance company. Schedule C is applicable to
insurers carrying on general insurance business as well as life insurance
business.
AUDIT OF ACCOUNTS
Under section 12 of the Insurance Act, 1938, the financial statements of every insurer are
required to be audited annually by an auditor.
Section 2(4) of the Insurance Act, 1938 defines the term „auditor‟ as a person qualified
under the Chartered Accountants Act, 1949 to act as an auditor of a company. The
auditor, for audit of financial statements, has the powers to exercise the rights vested in,
and discharge the duties and be subject to the liabilities and penalties imposed on
auditors of companies under the Companies Act, 2013. (there is also a requirement by
IRDAI that half year accounts ended September 2016 need to be reviewed by the
statutory auditor)
The provisions of section 12 of the Insurance Act, 1938 apply only in a case where the
financial statements of the insurer are not subject to audit under the Companies Act,
2013. A company carrying on general insurance business is subject to audit requirements
laid down under the Companies Act, 2013.
APPOINTMENT OF AUDITORS
The appointment of statutory auditors in the General Insurance Corporation of
India, and its subsidiaries and the divisions is made by the Comptroller and
6.2
Auditor General of India, as in the case of other public sector undertakings (For
example, in the case of New India Assurance Company Ltd., United India Insurance
Company Ltd.).
However, in the case of others, auditor is appointed at the AGM after ensuring that
the auditor satisfies the compliance requirements with the relevant sections of the
IRDAI Guidelines on Corporate Governance. These guidelines pose certain restrictions
on the number of insurance companies a statutory auditor can audit. Currently, an
auditor can conduct audit only for three insurance companies and not more than 2 life
or 2 general. The Guidelines also mandate a mandatory joint audit for all insurance
companies.
REMUNERATION OF AUDITOR
The remuneration of auditor of an insurance company is to be fixed in accordance with the
provisions of section 142 of the Companies Act, 2013 in the general meeting or in such
a manner as the company in general meeting may determine.
DIRECTIONS OF CAG
The Comptroller and Auditor General of India has the power to direct the manner in
which the accounts shall be audited and give such instructions in regard to any matter
relating to performance of functions by the auditor and to conduct the supplementary
or test audit of the accounts of such companies by such person or persons as may be
authorised in this behalf. For the purposes of such audit, the C&AG may require
information or additional information on such matters and in such form as may be
directed by him in terms of Section 143(5) and 143(6) of the Companies Act, 2013. The
statutory auditors are required to submit a copy of their report to the C&AG who has
the right to comment upon or supplement the audit report.
TAX AUDIT
It is necessary for general insurance companies to get their accounts audited under
Section 44 AB of the said Act. For this purpose, the tax auditor(s) may be appointed by
the company itself by means of a resolution of the Board of Directors or by the
Chairman/ Managing Directors if so authorised in this behalf. The company is expected
to fix separate remuneration for the auditor(s) appointed for this purpose.
The Form of tax audit report applicable would be Form 3CB and the prescribed
particulars would have to be given in Form 3CD, in accordance with Rule 6G of the
Income Tax Rules, 1962, pursuant to Section 44AB of the Income Tax Act, 1961.
TYPES OF LIFE INSURANCE PRODUCTS
Term / Protection: Term life Insurance is traditional form of Life Insurance Product.
Term Insurance generally takes care of pure income replacement needs rather than
Capital appreciation requirements. Term Insurance covers the policy holder for specific
period and pays the death benefits only if the policy holder dies during the policy period.
Endowment/ Pure Endowment: Endowment policies cover the risk for a specified
period and at the end of the policy the sum assured is paid back to the policyholder along
with all bonus accumulated during the policy term.
Money Back Plan: Money Back policies are t ype of Endowment policies which
provides periodic payments of partial benefits during the term of policy so long as the
policy holder is alive. Peculiar nature of these policies is that, in event of death at any
time during policy term, the death claim would comprise of full sum assured without
6.3
deduction of any survival benefit amounts. Also, bonus is calculated on sum assured.
Whole Life Insurance Product: It provides cover throughout the life time of the person.
Unlike Endowment plans they do not carry any maturity value and sum assured is paid to
the family in case of unfortunate death of the policyholder
Unit Linked Insurance Plan (ULIP): Unit Linked Insurance Plans are such Insurance
plans where the value of the policy changes as per the underlying Investment Assets. It
allows protection and flexibility in Investment. The Premium paid is used for the purchase
of units in Investment assets.
Pension or Retirement Plans: A pension plan is retirement solution where
policyholder decides the age retirement age and agrees to pay premium till the time of the
retirement and thereafter he has option to commute the a part of his fund value and take
an annuity for the balance. Pension plan provides Income protection as well as the Life
Cover.
Annuities: Annuity is a contract where Insurer in return for the payment at regular
intervals till fixed date make series of agreed payments at regular intervals from fixed
date.
Group Insurance: Group Insurance is an insurance that covers a group of people, who
are the members of the societies, employees of an organisation or professionals in
common group.
AUDIT OF LIFE INSURANCE COMPANIES
AUDIT OF PREMIUM
Premium shall be recognized as income when due. Premium accounting
refers to recognizing the premium earned by the insurer as income in the accounting
system.
Income is recognized as:
(1) New business premium – premium received for the first policy year and
(2) Renewal premium – premium received for subsequent policy years.
Premium received but not identifiable against any policy would be treated as „unallocated
premium‟/„suspense amount‟.
When the new policy is issued by the Insurer, new business premium is
recognised on the realisation of premium. Generally, Policy is underwritten only
after the receipt of the first premium. However, in certain cases, policies are
issued awaiting realisation of premiums, for eg policies are issued subject to
realisation of cheques issued by the Insured. Auditors are required to check these cases
and ensure proper accounting of the same.
1. Renewal income is recognized:
(1) On realization of the premium amount or
(2) When premium is due but not received up to the end of grace period.
2. As a part of verification of Internal Controls over Premium, the auditor shall
check whether there is daily reconciliation process to reconcile the
amounts collected, entered into the system and deposited into the bank.
6.4
3. Check that premium is recognised only on the basis of „Issued Policies‟ and not
on underwriting dates.
4. Verify whether the system is capable of identifying regular and advance
premium.
5. Also ensure that the system is capable of adjusting advance premium to
premium dues, if any.
CLAIMS
Checking of accuracy of processing and accounting of claims lodged with the Insurer, is the
primary objective of Audit of Life Insurance Companies.
Claims payouts would include a wide variety of customer benefits including:
Death Maturity Health Rider Policy Other

Claims Claims Annuities Claims Claims surrende Survival
rs benefits.
AUDIT OF CLAIMS INCLUDING PROVISION FOR CLAIMS

1. Ensure that the insurer maintains a register of claims. Such register shall
contain details such as date of claim, date on which the claim was discharged etc.
in respect of every claim received.
2. Ensure that appropriate KYC documents have been collected and discrepancies
if any are intimated to the policyholders within 15 days of intimation of claim.
3. Ensure that payment of claim has been properly authorized by a responsible
official.
4. Vouch the payment of claims into bank disbursement book.
5. In case the claim is rejected, the reasons for rejections should be closely
reviewed.
6. Ensure that the company has complied with applicable IRDA Regulations
and relevant sections of Insurance Act, 1938.
7. Also verify and ensure that appropriate provisioning has been made in respect
of claims intimated but not paid. Provision is required to be created net of
reinsurance, if any.
8. Also ensure that while creating provision for claims, claim settlement costs
were also included.
9. Provision is also required to be created in respect of IBNR claims.
6.5
Free Look Cancellation (FLC)

FLC is an option provided to the policyholder wherein he has a period of 15 days from the
date of receipt of the policy document to review the Terms and Conditions of the policy and
in case of disagreement to any of the terms & conditions, the policy holder has the option to
return the policy stating the reasons for policy cancellation.
Audit Procedure
1. Check whether the FLC requests are received within 15 days from the date of
receipt of policy document by the policyholder.
2. Check whether the signature of the policy holder on FLC request tallies with the
signature in the original proposal form.
3. Verify the refund with debit entries in the bank statement and other relevant
documentary evidences.
POLICY LAPSE AND REVIVAL
“Lapse” is the discontinuance of the policy owing to non-payment of premium dues. To
keep the policy in force, the policyholder is required to pay premium when it is due. If
payment is missed, the insurer allows a grace period of 15/30 days. If the policyholder does
not make the payment within the grace period, the policy gets “lapsed”.
The lapsed policy may be revived during the life time of the life assured.
Audit Procedures
1. The auditor should verify and ensure that the due dates for payment of premiums are
monitored and policies are marked as “lapsed” properly.
2. In case of revival of the policy, the auditor should ensure that the amounts
outstanding on the lapsed policy were recovered fully.
3. Also ensure that the insurer had obtained adequate documents in case of
revival.
POLICY SURRENDER
Surrender of an insurance policy refers to the voluntary termination of the insurance
contract before the expiry of the term of the contract. A policy becomes eligible for
surrender on completion of 3 years from the commencement of the policy provided that
the 3 years premiums have been paid within the due dates. The policy can be surrendered
only when the insured person is alive.
Audit Procedures
1. Ensure that the surrendered policy has completed the 3 years period.
2. Also ensure that premium for 3 years has been received within the due dates.
3. Ensure that the insurance company has received a request from the policyholder
for surrender of policy accompanied by Original Policy Document.
4. Ensure that the surrender amount is paid only to the policyholder.
6.6
AUDIT OF GENERAL INSURANCE COMPANIES
PREMIUM
BOOKS:
Books relating to premium:
1. Cash Receipt Register
2. Premium Register
3. Commission Register
4. Policies Issued Register
5. GST Register
6. Co-insurers Register
7. Cover Note Control Register
8. General Ledger
GENERAL
1. Premium is the consideration received by an insurer for bearing certain
sum of risk on behalf of the insured.
2. Premium may be received by an insurance company from 3 sources. They are
(a) Direct Business
(b) Reinsurance Business
(c) Share of Co-insurance
3. Generally premium collections are credited to a separate bank account and
such collections are transferred to Regional Office or Head office.
4. The Insurance Company will start to assume the risk once it accepts the
proposal form and issues a cover note/policy document.
5. As per section 64VB of the Insurance Act, 1938 an insurance company should not
assume any risk unless
(a) Premium is received or
(b) Premium is guaranteed to be paid within such time as may be prescribed.
6. Premium may be accepted in
(a) Cash (b) Cheque
(c) Demand Draft (d) pay - order
(e) Bank guarantee (f) Cash Deposit etc.
7. Upon issuance of a policy, the entry relating to it is made in the Register of
policies showing all relevant details.
8. Premium Revenue Recognition
Premium revenue recognition is generally based on pattern of risk to which the
insurer is exposed. Most insurers account for the premium on the basis of passage of
time. This is generally appropriate where the risk of events occurring that give raise to
claims is more or less uniform throughout the policy period.
6.7
AUDIT PROCEDURE
I. Internal Control
Before commencing verification of premium income, the auditor should examine the
Internal Controls over premium established by the Insurance Company. In this
regard, the auditor may look into following controls.
i. Verify whether there exists a system for correct calculation of premiums.
ii. Verify whether there exists a system of verification of premium input by a
person other than the persons who inputs the same and also verify whether
monetary limits were established for this purpose.
iii. Proper control over insurance policy forms.
iv. Each reversal entry is properly authorized.
iv. The application system should be able to identify and report erroneous
inputs and processing of policy transactions by unauthorized personnel.
v. Maintenance and periodic reconciliation of various records like premium
register, general ledger, cash receipts etc.
vi. Verify whether there exists a system of collection of the premium before
assumption of the risk.
viii. Proper appropriation of premium income over time periods.
Based on the results of evaluation of internal controls, the auditor has to
decide the extent of substantive checking to be carried out.
II. Accounting of premium
(a) Verify whether premium in respect of risks assumed during the accounting year
were accounted properly as premium income.
(b) Vouch the premium with copies of Insurance policies, premium register, Cover
Notes, Policy Register, Counterfoils of receipts etc.
III. Premium received in advance
Pay particular attention to year-end transactions, to ensure that amount received
during the year for which risk commencing on or after the 1st day of the next financial
year were not credited to premiums but to premium received in advance
In order to identify whether premium is received in advance or not, the auditor may
pay particular attention to a column called "commencement of risk" in the
premium register maintained by the company
IV. Collections through Agents after Balance Sheet Date
Verify the collections lodged by agents after the balance sheet date to ensure that all
collections pertain to risk commencing in the following year.
V. Co-insurance Business
a. Ensure that company's share of premium has been accounted for on the basis
of available information. This is particularly important because, in most of the
cases, the share of premium income is not booked even though the risk has
commenced during the relevant year because of non-availability information
from the leader.
6.8
b. Verify the communication between the company and the leader wherein the
leader will advise the company with regard to the share of premium income.
Where the company under audit is the leader
Ensure that only company's own share of premium has been shown as income and
the accounts of other companies have been credited with their share of premium.
VI. Reconciliation with General Ledger
Verify whether the figures mentioned in the premium register tallies with those in
general ledger.
VII. Premium under Installments
Where policies have been issued with a provision to collect premium on installment
basis, ensure that premium is collected on the due dates.
Any installment falling due on or before the balance sheet date should be accounted
for as premium income irrespective of the fact whether they were received or not.
VIII. Cancellation of Policies
In case of cancellation of policies/cover notes issued, the auditor should ensure that
the company has assumed no risk between the date of issue and date of cancellations.
IX. Refund of Premium
Where premium originally received has been refunded, verify whether the agency
commission paid on such premium has been recovered.
X. GST
Examine whether GST at the rates in force is charged from the insured.
a. On total premium for all classes of business other than those exempted under
GST Law, if any.
b. For co-insurance business, on whole premium by the leader.
XI. Issue of Policy Document
Ensure that the company had not issued the policy documents in the following cases
a. Where premium has not been collected
b. Cheque for payment of premium dis-honoured
PROVISIONS FOR CLAIMS

A provision for claims may have to be created in respect of:
(a) Direct Business
(b) Reinsurance business
(c) Co-insurance
Records maintained in respect of Claims
(1) Claims intimation Register
(2) Claims paid Register
(3) Claims disbursement bank Book
6.9
(4) Claims docket which normally contain the following

(a) Claim intimation
(b) Claim form
(c) Particulars of policy
(d) Survey Report
(e) Photograph showing damage
(f) Repairer‟s Bills
(g) Police Report
(h) Fire Service Report
(i) Claim Settlement Note
(j) Salvage Report
(5) Salvage Register
Audit Procedure
 Obtain a schedule of provision for claims including the information relating to each
class of business, value-wise bifurcation of claims.
 Since it is not possible for the auditor to verify each and every claim, it is advisable to
follow Statistical Sampling technique.
 While selecting, due importance should be given to claim provisions of higher
value.
1. Intimation of Loss
(a) Ensure that intimation of loss is received by the company within a
reasonable time.
(b) Ascertain the reasons for any undue delay in such intimation.
2. Provision for Unsettled Claims
(a) Verify whether provision is created in respect of all unsettled claims as
at the end of the year.
(b) Verify the existence of unsettled claims with the help of claims
lodged/communicated by the parties. This can also be done by comparing
Claims Intimation and Claims Paid Register.
(c) Ensure that date of loss taken into account for the purpose making a
provision.
(d) Ensure that provision is also created in respect of claims incurred but not
reported (IBNR).
3. Limited to Amount Insured
(a) Ensure that the provision created is not in excess of the amount insured.
(b) Ensure that the provision includes survey fee and other direct expenses.
4. Salvage
Ensure that provision is made only after taking into account any salvage value where
applicable.
6.10
5. Co-insurance
Where there exists a co-insurance arrangement with other insurers, ensure that the
provision is created only in respect of company‟s share of anticipated liability.
6. Net of Payment
Where certain payments were already made "on account", ensure that provision
is made only for net amount after deducting the payments made from the total
anticipated liability.
7. Average Clause
Verify whether "average clause" has been applied while creating a provision.
8. Net of Deposits
Where any claim is in dispute and the insurance company deposited certain amount
either with courts or with such other authorities, ensure that while making a
provision, such deposit should not be deducted. In other words, such deposits
should be stated separately as assets and provision is to be made at gross value.
9. Claim Status Report
Review "Claim Status Report" prepared by the insurance company for
determining excess/ short provisions. This report is generally prepared in respect of
large claims outstanding at the year end. Review of Claim Status Report helps the
auditor to take a fair view of the provision made.
10. Claims under Litigation
Where any claim is under litigation, ensure that provision is made only after taking
the opinion of the legal advisor.
11. Events After Balance sheet Date
Ensure that the insurance company had taken into accounts the effect of events
occurred after the Balance Sheet date while making a provision. The events that, can
materially affect the provision already made may be as under.
(a) Claims paid by co-insurance company and intimation made by them only after
the B/s date where such other company is the leader in co-insurance.
(b) Claims settled for materially higher/lower amount after B/s date.
12. Claims lodged at other offices
Ensure that adequate provision has been made in respect of claims lodged at an
office other than the one from where the policy was taken. For example, claims
ledged at Chennai office in respect of policy taken at Mumbai office.
CLAIMS PAID
“Claim” can be defined as a demand for payment of policy benefit because of occurrence of
an insured event.
The following are the audit procedures to be followed by the auditor in respect of claims
paid by the General Insurance Company.
1. Verify Internal Controls
Before starting the process of verifying the claims paid, the auditor is required to
evaluate the internal controls listed below.
6.11
 Established procedures for proper processing and payment of claims.

 Adequate procedures to identify and investigate suspicious claims.
 Laying down procedures to ensure proper recovery of salvage value of assets.
 Monetary limits are established for review of claims paid by senior officer.
 Significant variances between expected and actual claims are identified and
investigated.
 Reinsurance claims if any are duly lodged with the re-insurer.
 There are adequate cut off date procedures.
2. Duly Sanctioned
Verify whether the payment of claims have been duly sanctioned by the concerned
authority.
3. Acknowledged by Claimant
Ensure that claims paid were duly acknowledged by the claimants.
4. Unqualified Discharge Note
Verify whether claimant has given an unqualified discharge note in case of final
settlement of claims assuring that the company will not be involved in further
liability in respect of the claim.
5. Due accounting of Salvage Value
Ensure that salvage value recovered has been duly accounted for in accordance with
the procedure applicable to the company.
6. Co-insurance - Share
Where claims were paid in accordance with co-insurance arrangement, ensure that
the amount paid is only in respect of company's share and the balance has been
debited to other insurance companies.
7. Co-insurance - Premium
Where the company under audit is not the leader in co-insurance, ensure that the
company had actually received its share of premium from the leader when the claims
were paid on the basis of advices from the leader.
9. Partly Paid Claims
Vouch the payment made against claims partially settled. In such cases, the
sanctioning authority should be the same as the one which has powers in respect of
the total claimed amount.
VERIFICATION OF COMMISSION
Insurance business is solicited by insurance agents. Commission is the consideration
payable for getting the insurance business. This is calculated by applying a % to the
premium collected by the agent. The commission so payable to agents shall be debited
to commission on direct business account. The following are the records that are
maintained in respect of commission.
1. Register of Agents
6.12
2. Premium Register - Commission Column

3. Commission Bill Copies
4. Agents Ledger
5. Disbursement Voucher
6. TDS File
7. Bank Disbursement Book
OBJECTIVE
To ensure that commission paid is
a. in accordance with the rules and regulations of the company.
b. in accordance with the agreement with agents.
c. complied with the statutory requirements.
AUDIT PROCEDURE
1. Review internal controls relating to commission.
2. Based on the results of evaluation of internal control, determine the nature, timing
and extent of substantive procedures to be followed.
3. Verify whether commission vouchers are properly authorized by the officers-in-
charge as per the delegated powers.
4. Test check the correctness of commission.
5. Ensure that commission is calculated as per rates allowable by IRDAI.
6. Vouch the payment of commission with relevant vouchers such as disbursement
voucher, bank disbursement book etc.
7. Cross check the same with the help of commission bills and commission
statements.
8. Ensure that tax is deducted at source at correct rates.
9. Ensure that adequate provision is made for "commission accrued but not
paid.
10. Review agents' ledger to identify the accounts having debit balances and ensure
that necessary action has been initiated in respect of adjustment of these
balances.
AUDIT OF EXPENSES OF MANAGEMENT/OPERATING EXPENSE
1. All the administrative expenses of an insurance company are broadly classified

under 13 heads as mentioned in Schedule 4 (OPERATING EXPENSES
RELATED TO INSURANCE BUSINESS). This schedule is part of the revenue
account to be prepared for insurance business.
2. Section 40C of the Insurance Act, 1938 lays down the limits for expenses on
management (Also called Operating Expenses) in general insurance business
and therefore an insurer is not allowed to spend an amount in excess of the
limits prescribed under this section.
6.13
3. Any amount spent in excess of the limits laid down may be approved by IRDA
after consultation with the executive committee of such general insurance council
constituted u/s.64F of the Act. The term expenses of management means all
charges, direct or indirect including commission payments of all kinds.
4. Schedule 4 states that any expenditure amounting to Rs.5 lacs or in excess of
1% of net premium which ever is higher is required to be shown separately.
5. All the operating expenses incurred by an insurance company are aggregated first
and then apportioned to revenue account of each class of business on a
reasonable and equitable basis.
6. The accounting policy should clearly indicate the basis of apportionment if
these expenses to the respective revenue account (i.e. fire, marine, miscellaneous)
7. The insurance company is required to incorporate a certificate in their revenue
account which should be signed by the Chairman and 2 Directors and by the
Principal Officer and by an auditor certifying that all expenses of management have
been fully debited in the revenue account as expenses.
AUDIT PROCEDURE:
1. Review internal control procedures.
2. Verify whether all the administrative expenses are classified in accordance with the
requirement of schedule 4 of Insurance Act, 1938.
3. Examine whether these expenses are first aggregated and then apportioned to
revenue account of each class of business on a reasonable and equitable basis.
4. Ensure that expenses of Rs.5 lakhs or in excess of 1% of Net Premium, whichever is
higher, is shown separately.
5. Ensure that accounting policies indicates the basis of apportionment to revenue
account.
CO-INSURANCE
Co-insurance can be defined as sharing of a risk by more than one insurer. In cases of
large risks, the business is shared between more than one insurer under co-insurance
arrangements at agreed percentages.
The insurance companies may chose to be the members of Insurance Council. Members of
the Insurance Council could arrive at mutually agreeable terms of entering into co-
insurance agreement and the norms for settlement of dues.
There are two parties to a co-insurance arrangement. They are
a. Lead Insurer
b. Co-Insurer
The following are the responsibilities of a Lead Insurer
1. Issue of Policy Document
2. Collection of premium
3. Settlement of Claims
6.14
4. Providing statement of account to co-insurers

5. Settlement of balances in periodical meetings and exchange of statements
VERIFICATION OF INCOMING CO-INSURANCE
1. Verify whether premium account is credited as per the agreed upon terms and
on the basis of statements received from the Leading Insurer.
2. Ensure that premium income is accounted for on the basis of advices received
from the Leading Insurer in cases where statements were not received.
3. Obtain a written confirmation to the effect that all incoming advices have been
accounted for.
4. Examine claims provisions and claims paid with reference to advice received
from the Leading Insurer.
5. Ensure that balances pertaining to other companies relating to premiums and
claims are accounted under co-insurance as "Amounts due to/due from other
insurance companies”.
VERIFICATION OF OUTGOING CO-INSURANCE
The auditor should scrutinize the transactions relating to the outgoing business i.e. where
the company is the leader. These should be checked with reference to the relevant risks
assumed under policies and correspondingly for debits arising to the co-insurer on account
of their share of claims.
UNEXPIRED RISK RESERVE
The need for unexpired risk reserve arises from the fact that all policies are reviewed
annually except in specific cases where short period policies are issued. The insurers close
their accounts on a particular date and not all risks under policies expire on that date. Many
policies extend beyond that closing date into the following year during which risk continue.
Therefore, unexpired liability under various policies may occur during the term of the policy
beyond the year end.
According to the provisions of the Income Tax Act, 1961 an insurance company is allowed to
make a provision for unexpired risk reserve to the extent of 50% of net premium income in
respect of fire and miscellaneous business and at 100% of the net premium income in
respect of marine insurance business. In view of this, generally reserves are created at the
rates allowed under the Income Tax Act.
RE-INSURANCE
Meaning
When one insurance company passes on a part or whole of the risk undertaken to another
insurance company, the insurance is said to be ceded. The company which passes on (cede)
the risk to another company is called ceding company and the company to whom the risk is
passed on is called the acceptor of re-insurance.
Definition
In other words, a transaction of re-insurance is defined as an agreement between a 'ceding'
company and 're-insurer' whereby the former agrees to cede and the latter agrees to accept a
certain specified share of risk or liability upon terms as set out in the agreement.
6.15
Types of Re-insurance
1. Facultative Re-insurance, is that in which particulars of risk to be re-insured are
submitted to re-insuring companies who may either accept or decline the business.
2. Treaty Re-insurance, is that in which the re-insurance company will have to
accept the risk on the terms and conditions of the Treaty without the option to
decline it.
VERIFICATION OF RE-INSURANE INWARD (RE-INSURER)
1. Verify whether re-insurance inward is as per the norms and guidelines prescribed
by the Insurance Act, 1938 and IRDA Regulations.
2. The auditor should verify the reinsurance inward transactions are as per the
arrangements with re-insurers.
3. Also ensure that these arrangements were entered into by following prescribed
parameters applicable for the particular year.
4. The auditor should examine the accounting treatment given by the company with
regard to reinsurance business received, premium received and payment of
commission etc.
5. Obtain confirmation of closing balances from all the companies in respect of re-
insurance transactions.
6. The auditor should examine the foreign currency transactions and ensure that
they comply with Accounting Standards (AS) 11, Accounting for Effects of Changes
in Foreign Exchange rates.
7. Verify whether foreign inward accounts balances have been re-stated at the
prevailing value at the year end and that difference arising out of re-statement has
been taken to Profit and Loss account.
8. Ensure that proper provisions for outstanding claims is made for all
reinsurance arrangements accepted on the basis of loss information advices received
from brokers/ cedants and where such advices have not been received, on an
actuarial estimation basis.
9. Obtain confirmation of outstanding claims in respect of all inward
arrangements.
VERIFICATION OF RE-INSURANE OUTWARD (CEDING COMPANY)
1. The auditor should verify that reinsurance outward transactions are as per the norms
and guidelines prescribed in the Insurance Act, 1938, IRDA Regulations.
2. The auditor should verify that insurances have been ceded as per agreements entered
into with various companies.
3. See whether commission on cession has been calculated as per the terms of
the agreement with the re-insurers.
4. Accounting aspects of the re-insurance cession premium, commission receivable,

paid claims recovered, and outstanding losses recoverable on cessions have to be
checked.
6.16
5. See whether provision for outstanding losses recoverable, have been

confirmed by the re-insurers and in the case of major claims, documentary
support should be verified.
6. Obtain confirmations in respect of the balances with re-insurers.
7. Verify events after the Balance Sheet date which might have wider impact on
claim recovery both paid and outstanding.
8. The auditor should examine the foreign currency transactions and ensure that they
comply with Accounting Standard (AS) - 11.
9. He should verify any old outstanding claims paid or outstanding at the end of
the year.
INVESTMENTS
The primary objective in an audit of investments is to satisfy about the existence
and valuation of investments. The auditor should also satisfy about the compliance
with regulatory requirements and study the impact of non-compliances. The auditor
should
1. Obtain separate lists of securities held physically and those held in
dematerialization form.
2. Physically verify the securities on the balance sheet date or a date as near as
possible. He should prepare a reconciliation statement where verification is carried
out on date other than balance sheet date. When investments were held in
dematerialization form, the auditor should verify the Certificate of Holdings
issued by Depository Participant.
3. In case where the Investments were held at Branches, request the Branch
auditors to issue a certificate in this behalf.
4. Where certificates are held by other persons such as nominees, share transfer
agents etc, the auditor should obtain written certificates from such person. The
receipt originally issued by such person is not adequate for the purposes of audit.
5. Examine in detail investments on which income has not been received for a
long period and those which have not been redeemed even after redemption
date.
6. Examine whether income from investments is properly accounted for
7. Ensure that certificates of Tax Deducted at source are properly maintained.
8. Examine that the norms relating to valuation and disclosure in financial
statements have been complied with.
Norms for Valuation of Investments
1. Real Estate – Investment Property
These are valued at Historical Cost less Accumulated Depreciation and impairment
loss. Residual value shall be taken at Zero. No revaluation is permissible.
Impairment loss shall be recognized as an expense in the Revenue/Profit and Loss
account immediately.
6.17
2. Debt Securities including Government Securities

These are considered as “held to maturity” securities and shall be measured at
historical cost subject to amortization.
3. Equity Securities that are traded in active markets
They shall be measured at fair value as at the Balance Sheet Date. Fair value is the
lowest of last quoted closing price.
CASH AND BANK BALANCES

The auditor should apply the following audit procedures for verification of cash
1. Physically verify cash balances at the year end. Where physical verification is
not possible on the balance sheet date, then the same can be done at a subsequent
date. In such a case, proper reconciliation should be drawn between the date of
verification and balance sheet data.
2. Check whether late receipt of cheques on the last working day of the financial
year which were not deposited into bank account on the same day have been
identified and booked as Cheques in Hand Account.
3. Test check the deposit and withdrawals transactions and check whether the account
is operated by authorized persons only.
4. Check the Bank Reconciliation statement and enquire into the reasons for long
outstanding entries.
5. Obtain confirmation certificate in respect of closing balances of all operative and
inoperative accounts.
6. Physically verify the Term Deposit Receipts issued by the Bankers.
6.18
7
AUDIT OF NON-BANKING FINANCIAL COMPANIES
Definition of NBFC
Section 45 I(f) of Reserve Bank of India (Amendment) Act, 1997 defines a non-banking
financial company as:
 A financial institution which is a company;
 A non banking institution which is a company with principal business of receiving
of deposits, under any scheme or arrangement or in any other manner, or lending in
any manner;
 Such other non-banking institution or class of such institutions, as the Reserve Bank
with the previous approval of the Central Government may specify by notification in
the Official Gazette.
The principle business of NBFC is:
 receiving deposits or
 lending or
 investment in securities or
 hire purchase finance or
 equipment leasing.
Net Owned Funds
Net Owned Fund is defined in the Explanation to Section 45-IA of the RBI Act, 1934 as
follows –
(a) the aggregate of the paid-up equity capital and free reserves as disclosed in the
latest balance sheet of the company after deducting there from-
(i) accumulated balance of loss;
(ii) deferred revenue expenditure; and
(iii) other intangible assets; and
(b) further reduced by the amounts representing-
(1) investments of such company in shares of-
(i) its subsidiaries;
(ii) companies in the same group;
(iii) all other non-banking financial companies; and
(2) The book value of debentures, bonds, outstanding loans and advances (including hire-
purchase and lease finance) made to, and deposits with-
(i) subsidiaries of such company; and
(ii) companies in the same group, to the extent such amount exceeds ten per cent, of
(a) above
Registration and Regulation of NBFC
Under Section 45–IA of the Reserve Bank of India (Amendment) Act, 1997, in order to
commence the business, the non-banking financial company
7.1
 Shall have net owned funds of Rs.2 crores but not in excess of Rs.100 crores
and
The RBI has been empowered to notify different amounts of net owned
funds for different categories of NBFC’s.
 Shall obtain a certificate of registration issued by the Reserve Bank of India.
To obtain certificate of registration, a company incorporated under the Companies Act can
apply to Reserve Bank of India in prescribed form along with necessary documents for
registration.
The Reserve Bank of India has issued directions to non-banking financial companies
on acceptance of public deposits, prudential norms like capital adequacy, income recognition,
asset classification, provision for bad and doubtful debts etc. which are required to be
adhered to by NBFC.
Classification
NBFC‟s, normally fall into following categories:
(i) Asset Finance Companies – An Asset Finance Company is a company which is a
financial institution carrying on as its principal business the financing of physical
assets such as automobile, tractors, earth moving and material handling equipments
etc. The following types of companies fall under the category AFC.
Equipment Leasing Company engaged in equipment leasing or financing of such
activity.
Hire purchase finance company engaged in hire-purchase transaction or
financing of such transactions. Examples: Magma Fincorp. Ltd.
(iii) Investment Company (IC) engaged in acquisition of securities and trading in such
securities to earn a profit. Ex. Tata Investment Corporation Ltd.
(iv) Loan Company engaged in providing finance by making loans or advances, or
otherwise for any activity.
The above 4 types of NBFC’s are technically called as “Investment and Credit
Company”
(v) Infrastructure Finance Company which:
 Deploy a minimum of 75% of its total assets in infrastructure loans and
 The net owned funds of this category of NBFC‟s should be 300 crores and
 A minimum credit rating of “A” or its equivalent and
 Capital to Risk-weighted assets ratio (CRAR) is 15%.
(vi) Systematically important Core Investment Company (CIC-ND-SI)
“Systemically important core investment company” means a Core Investment
Company having total assets of not less than Rs.100 crore either individually or
in aggregate along with other Core Investment Companies in the Group. These are
NBFC‟s which carry on the business of acquisition of shares and securities in
group companies and which satisfies all the following 4 conditions as on the
date of last audited Balance Sheet :
a. It holds not less than 90% of its Net Assets in the form of Investment in equity
shares, preference shares, debt or loans in group companies; “Net Assets” means
7.2
Total assets minus cash and bank balances, deferred tax, advance payment of taxes
and investment in mutual funds. Here “Total Assets” means the total of all
assets appearing on the assets side of the Balance Sheet.
b. Its investments in the equity shares (including instruments compulsorily
convertible into equity shares with in a period not exceeding 10 years from the date
of issue) in group companies constitutes not less than 60% of its total assets.
c. It does not trade in its investments in shares, debt or loans in group companies
except through block sale for the purpose of dilution or disinvestment.
d. It does not carry on any other financial activity except investment in bank
deposits, money market instruments, government securities.
(vii) Infrastructure Debt Fund – IDF NBFC
IDF‟s are funds set up to facilitate the flow of long-term debt into
infrastructure projects. The IDF will be set up either as a trust or as a company. A
trust based IDF would normally be a Mutual Fund while a company based IDF would
normally be a NBFC. Examples: India Infra Debt Ltd., L & T Infra Debt Fund
Ltd. IDFC Infra Debt Fund Ltd. It should have a minimum net owned fund of
Rs.300 crores.
(viii) Non-Banking Financial Company – Factors (NBFC-Factors)
NBFC-Factor is a non-deposit taking NBFC engaged in the principal business of
factoring. The financial assets in the factoring business should constitute at least 50
percent of its total assets and its income derived from factoring business should not be
less than 50 percent of its gross income. Examples: SBI Global Factors Ltd.,
India Factoring Solutions Pvt. Ltd.
(ix) Mortgage Guarantee Companies (MGC): MGC are financial institutions for which at
least 90% of the business turnover is mortgage guarantee business or at least 90% of
the gross income is from mortgage guarantee business and net owned fund is ₹100
crores. Example: India Mortgage Guarantee Corporation
(X) Non-Banking Financial Company – Micro Finance Institution (NBFC-
MFI): NBFC-MFI is a non-deposit taking NBFC which has at least 85% of its
assets in the form of microfinance. Such microfinance should be in the form of
loan given to those who have annual income of Rs.1,00,000 in rural areas and
Rs.1,60,000 in urban or semi urban areas. The tenure of such loans should not be
less than 24 months. Further, the loan has to be given without collateral.
Loan repayment is done on weekly, fortnightly or monthly installments at the choice
of the borrower. Example: SKS Microfinance Limited
DIFFERENCES BETWEEN BANKS AND NBFC’S
NBFCs lend and make investments and hence, their activities are akin to that of
banks, however, there are a few differences as given below:
 NBFC cannot accept demand deposits.
 NBFC do not form part of the payment and settlement system and cannot issue
cheques drawn on itself.
 Deposit insurance facility of DICGC is not available to depositors of NBFCs, unlike
in case of banks.
7.3
AUDIT PROCEDURES
1. Ascertain the Business of the Company
The auditor should ascertain the principal line of business of the company by going
through the MOA and AOA of the company.
2. Evaluation of Internal Controls
The auditor should gain an understanding of internal controls to determine the
nature, timing and extent of audit procedures to be followed. He should pay particular
attention to those internal controls relating to loans to ensure that an effective
system of periodical review of advances is in place the absence of which may result in high
level of NPA‟s.
3. Registration with RBI
An NBFC cannot commence its business without first obtaining a registration
certificate as per section 45-IA of RBI Act. Therefore, the auditor should obtain a copy
of certificate of registration granted by RBI. When certificate is not granted, he
should verify the application form filed with RBI. The auditor should also ensure that the
NBFC is maintaining minimum net owned funds of Rs.2 crores.
However, it should be noted here that the following types of companies are exempted
from the requirements of registration under 45-IA since they are governed by other
Acts/regulated by other regulators:
a. Merchant Banking Companies (Regulated by SEBI)
b. Companies which are engaged in the business of stock broking (Regulated by SEBI)
c. Venture Capital Companies (Regulated by SEBI)
d. Nidhi Companies (Regulated by MCA)
e. Insurance Companies (Regulated by IRDA)
f. Housing Finance Companies (Regulated by NHB)
g. Chit Fund Companies (Regulated by State Government)
NBFC PUBLIC DEPOSIT DIRECTIONS
All NBFC‟s are either deposit taking or non-deposit taking. If they are non-deposit
taking, ND is suffixed to their name.
The auditor should ascertain whether the company has complied with the following aspects
in relation to the activity of mobilisation of public deposits.
a. Ensure that acceptance of public deposits was done only after invitation for the
same by issuing an advertisement as per provisions of Non-Banking Financial
Companies and Miscellaneous Non Banking Companies (Advertisement) Rules 1977.
b. Where the company has accepted public deposits without issuing any
advertisement, ensure that a statement in lieu of advertisement has been filed
with the RBI.
c. An NBFC cannot accept public deposits unless it has obtained minimum
investment grade (also called as credit rating) given to the company by an
approved credit rating agency.
7.4
d. Obtain a copy of the credit rating, assigned to NBFC and check whether the
public deposits accepted/held by it are in accordance with the level of credit
rating assigned to it.
A Non-banking financial company shall accept public deposit only when it has
obtained minimum investment grade or other specified credit rating for fixed
deposits from any one of the approved credit rating agencies at least once a
year and a copy of the rating is sent to the Bank (RBI) along with return on prudential
norms.
Approved Credit Rating Agencies and Minimum Investment Grade Credit Rating: The
names of approved credit rating agencies and the minimum investment grade credit
rating are as follows:-
Minimum Investment
Name of the agency
Grade Credit Rating
(a) The Credit Rating Information
FA- (FA Minus)
Services of India Ltd. (CRISIL)
(b) ICRA Ltd. MA- (MA Minus)
(c) Credit Analysis & Research Ltd.
CARE BBB (FD)
(CARE)
(d) Fitch Ratings India Private Ltd. tA-(ind)(FD)
(e) Brickwork Ratings India Pvt. Ltd.
BWR FBBB
(Brickwork)
(f) Acuite Ratings & Research Limited ACUITE A
(g) Infomerics Valuation and Rating
IVR BBB
Private Limited (IVRPL)
e. The Quantum of Public Deposits that can be accepted by as Asset Finance

Company or a Loan Company or an Investment Company or a Factor is limited to
1.5 time of its Net Owned Funds.
f. Where the credit rating has been downgraded, verify whether the NBFC had
reduced its public deposits in accordance with the revised credit rating assigned to
it within a specified time frame.
In the event of downgrading of credit rating below the minimum specified investment
grade as provided above, a non-banking financial company, shall regularise the excess
deposit as provided hereunder;
(a) with immediate effect, stop accepting fresh public deposits and renewing
existing deposits;
(b) all existing deposits shall run off to maturity; and
(c) report the position within fifteen working days, to the concerned Regional Office
of the Bank where the NBFC is registered.
g. A NBFC can accept or renew a deposit which shall be repayable after a period of
twelve months but not later than sixty months from the date of acceptance or
renewal
h. Test-check the brokerage calculations with the bills and vouchers and ensure that
brokerage paid is not in excess of 2%.
7.5
i. Ensure that reimbursement of out of pocket expenses is not in excess of a
maximum of 0.50%.
j. Ensure that NBFC accepted/renewed public deposits only after receipt of a written
application form from the depositor.
k. Verify the deposit register and test check the particulars entered therein with
application form/fixed deposit receipts issued to the depositors.
Every non-banking financial company shall keep one or more registers in respect of all
deposits in which shall be entered separately in the case of each depositor the
following particulars, namely: -
 name and address of the depositor,
 date and amount of each deposit,
 duration and the due date of each deposit,
 date and amount of accrued interest or premium on each deposit,
 date of claim made by the depositor,
 date and amount of each repayment, whether of principal, interest or premium,
 the reasons for delay in repayment beyond five working days and
 any other particulars relating to the deposit.
l. Test check the interest calculations on public deposits mobilized to ensure that the
interest paid is not in excess as per specifications. (The existing rate being
12.5%)
m. Check whether the NBFC is regularly paying its deposits on due dates and in the
case of a delay/default, the reasons for the delay/default and the actual date of
payment.
n. In the case of NBFC‟s accepting/holding public deposits ascertain whether
audited statement of accounts together with a copy of the auditor’s report and
director’s report thereon have been submitted to RBI within 15 days from the
date of holding the Annual general meeting.
o. In case of NBFC‟s not accepting/holding public deposits, check whether a
board resolution has been passed with in 30 days of the commencement of each
financial year to the effect that it has neither accepted any public deposits nor would it
accept any public deposits during the year.
NBFC PRUDENTIAL NORMS DIRECTIONS
(i) Ensure that the company had complied with prudential norms in relation to
income recognition, asset classification, provisioning for bad and doubtful debts,
capital adequacy norms etc.
(ii) In case of Non Performing Assets, ensure that the unrealized income in respect of
such assets has not been taken to the Profit & Loss Account on an accrual basis.
Income from NPA‟s should be accounted for on realization basis only.
(iii) In case of up-gradation of NPA accounts, specifically examine such accounts to
ascertain whether the account has become regular and the same can be treated
as performing as per the Directions.
7.6
Income Recognition
1. Income including interest/ discount/ hire charges/ lease rentals or any other charges
on NPA shall be recognised only when it is actually realised.
2. Any such income recognised before the asset became non-performing and remaining
unrealised shall be reversed.
Asset classification:
The asset classification norms as given below shall apply to every applicable NBFC:
Every NBFC shall classify its lease/hire purchase assets, loans and advances and any other
forms of credit into the following classes, namely:
 Standard assets;
 Sub-standard assets;
 Doubtful assets; and
 Loss assets.
Standard Asset shall mean the asset in respect of which, no default in repayment of
principal or payment of interest is perceived and which does not carry more than
normal risk attached to the business.
Sub-Standard Asset shall mean an asset which has been classified as non-
performing asset for a period not exceeding 12 months.
Doubtful Asset shall mean:
 a term loan, or
 a lease asset, or
 a hire purchase asset, or
 any other asset
which remains a sub-standard asset for a period exceeding 12 months.
Loss Asset shall mean:
 An asset which has been identified as loss asset by the applicable NBFC or its
internal or external auditor and
 An asset which is adversely affected by a potential threat of non-recoverability due to
either erosion in the value of security or non-availability of security or due to
any fraudulent act or omission on the part of the borrower
Non-Performing Asset shall mean:
 an asset, in respect of which, interest has remained overdue for a period of 3
months or more;
 a term loan inclusive of unpaid interest, when the instalment is overdue for a
period of 3 months or more or on which interest amount remained overdue for a
period of 3 months or more;
 a demand or call loan, which remained overdue for a period of 3 months or more from
the date of demand or call or on which interest amount remained overdue for a period
of 3 months or more;
 a bill which remains overdue for a period of 3 months or more;
7.7
 the interest in respect of a debt or the income on receivables under the head „other
current assets‟ in the nature of short term loans/advances, which facility remained
overdue for a period of 3 months or more;
 any dues on account of sale of assets or services rendered or reimbursement of
expenses incurred, which remained overdue for a period of 3 months or more;
 the lease rental and hire purchase instalment, which has become overdue for a period
of 3 months or more;
 in respect of loans, advances and other credit facilities (including bills purchased and
discounted), the balance outstanding under the credit facilities (including accrued
interest) made available to the same borrower/beneficiary when any of the above
credit facilities becomes non-performing asset.
PROVISIONING REQUIRMENTS
The provisioning requirement in respect of loans, advances and other credit facilities
including bills purchased and discounted shall be as under:
Loss Assets
The entire asset shall be written off. If the assets are permitted to remain in t he books for any
reason, 100% of the outstanding shall be provided for;
Doubtful Assets
(a) 100% provision to the extent to which the advance is not covered by the realisable value of
the security to which the applicable NBFC has a valid recourse shall be made. The realisable
value is to be estimated on a realistic basis;
(b) In addition to item (a) above, depending upon the period for which the asset has
remained doubtful, provision on secured portion (i.e. Estimated Realisable value of the
outstanding) shall be made on the following basis:
Period for which the asset has been considered asPercent of

doubtful provision
Up to one year 20
One to three years 30
More than three years 50
Sub-standard assets
A general provision of 10 percent of total outstanding shall be made.
Standard asset
Every applicable NBFC shall make provisions for standard assets at 0.40 per cent of the
outstanding, which shall not be reckoned for arriving at net NPA‟s. The provision towards
standard assets need not be netted from gross advances but shall be shown separately as
„Contingent Provisions against Standard Assets‟ in the balance sheet.
AUDIT OF INVESTMENT COMPANIES (IC)
The main business of this company is to deal in securities.
Purchase
7.8
 Verify the minutes of the Board of Directors in respect of purchase and sale of
investments.
 In respect of purchase of Investment, check the same with bills/contract notes
received from brokers.
 Verify whether the NBFC follows Prudential Norms stipulated in respect of
investments. As per NBFC Prudential Norms, the ceiling on investment in shares
by a NBFC in a single entity has been fixed at 15% and the aggregate of
investments in a single group of entities is 25% and the total investment in a
single entity or single group of entities is fixed at 40% of net owned fund of
concerned NBFC.
 Obtain a list of subsidiary/group companies from the management and verify the
investments made in subsidiary/group companies during the year. Ascertain the
basis for arriving at the price paid for the acquisition of such shares to evaluate
the reasonableness.
Physical Verification
 Physically verify all the shares and securities held by a NBFC.
 In respect of shares/securities held through a depository, obtain a confirmation
from the depository regarding the shares/securities held by it on behalf of the NBFC.
 Where any security is lodged with a bank or any institution, a certificate from the
bank/institution to that effect must be verified.
Income on Investment
 Ensure that dividend declared by a company, has been duly received by NBFC and
interest wherever due has been duly accounted for. According to the prudential
norms of NBFC, dividend income on shares and units of mutual funds shall be
recognized on cash basis. Where, dividend is declared by a company in its
AGM, such a dividend can be accounted for on accrual basis.
Valuation
 Ascertain whether the investments so acquired are current investments or long
term investments by reviewing the Resolution passed by the Board of Directors or
by obtaining a certificate from the management.
 Check whether the investments have been valued in accordance with Para 6 of
the NBFC Prudential Norms Directions and adequate provision for fall in the
market value of securities, wherever applicable, have been made there against, as
required by the Directions.
 An auditor will have to ascertain whether the requirements of AS 13 “Accounting for
Investments” (to the extent they are not inconsistent with the Directions) have been
duly complied with by the NBFC.
 Check whether investments in unquoted debentures/bonds have not been
treated as investments but as term loans for the purposes of income recognition
and asset classification.
Accounting of Investments – Paragraph 6 of Prudential Norms Directions – AS
13 of ICAI – Mandatory sub-classification into long term and current
investments:
7.9
As per the provisions of NBFC Prudential Norms Directions, all accounting standards
issued by ICAI are mandatory for all NBFC’s. They are permitted to value their
long term investments as per AS-13 of ICAI. The following are the rules and regulations
that should be followed by NBFC in this regard.
 The Board of directors of the NBFC should frame and implement investment policy for
the company;
 Each investment should be classified into current and long term at the time of
making investment. The criteria to classify the investments into current and long
term should be spelt out in the investment policy of the company as
approved by the Board.
 There would be no inter-class transfer
 The inter-class transfer can take place only at the beginning of each year/half
year as on 1 April or 1 October with the approval of the Board; and
 The investments are to be transferred scrip-wise at lower of book value or
market value from long term to current or vice versa. The depreciation, if
any, in each of the scrip, should be fully provided for and appreciation should
be ignored. Further, the depreciation in one scrip cannot be set off
against appreciation in another scrip at the time of such inter-class
transfer.
AUDIT OF LOAN COMPANY (LC)
The main business of such companies is to make loans and advances (not for assets but for
other purposes such as working capital finance etc.)
1. Examine whether each loan or advance has been properly sanctioned.
2. Review the loan agreement and note down the important terms and
conditions of loan agreement such as limit on borrowings, nature of security,
interest, terms of repayment, etc.
3. Ensure that NBFC has not lent in excess of the specified limits as per NBFC
Prudential Norms Directions.
4. Ensure that loan was not granted against security of its own shares.
5. Verify the security obtained and ascertain the nature and value of security and the
net worth of the borrower/guarantor to determine the extent to which an advance
could be considered realizable.
6. Obtain balance confirmations from the concerned parties.
7. Check the classification of loans and advances (including bills purchased and
discounted) made by a NBFC into Standard Assets, Sub-Standard Assets, doubtful
assets and loss assets and the adequacy of provision for bad and doubtful debts as
required by NBFC Prudential Norms Directions.
8. Verify whether provision for bad and doubtful debts have been disclosed
separately in the Balance Sheet and the same have not been netted off against the
income or against the value of assets as required by the NBFC Prudential Norms
Directions.
AUDIT OF ASSET FINANCE COMPANY
The principal business of these companies is to finance the assets such as machines,
automobiles, generators, material equipments, industrial machines etc. Principal business for
7.10
this purpose is defined as aggregate of financing real/physical assets supporting economic
activity and income arising there from is not less than 60% of its total assets and total income
respectively.
I. AUDIT OF HIRE PURCHASE FINANCE COPMPANY
1. Ascertain whether the NBFC has an adequate appraisal system for extending hire
purchase finance. The system of appraisal should include - obtaining information
regarding the credit worthiness of the hirer, his experience in the field, assets owned,
his past track record and future projections of his income.
2. Ensure that payment for acquiring an asset is made directly to the
supplier/dealer.
3. Ensure that the assets given on hire purchase have been adequately insured
against.
4. If the hire purchase finance is against vehicles, check whether the registration
certificate contains an endorsement in favor of the hire purchase company.
5. Ensure that hire purchase installments are being received regularly as and when
they fall due.
6. Check whether adequate provision has been made for overdue hire purchase
installments as required by the NBFC Prudential Norms directions.
7. In case the goods are repossessed by the hire purchase finance company on account
of non-payment of hire purchase installments, verify whether repossessed goods have
been valued on a realistic basis by the hire purchase finance company.
8. Physically verify the asset in possession of the hirers when the auditor got any
doubt as regards the genuineness of the transaction.
9. Ensure that the NBFC has a system of periodical physical verification of hire
purchase assets to satisfy that the hirers have not sold the assets or otherwise
encumbered them.
10. In the case of high value hire purchase transactions relating to
machinery/equipment, verify valuation reports and installation reports in this
regard.
2. AUDIT OF EQUIPMENT LEASING FINANCE COMPANY
1. Ascertain whether the NBFC has an adequate appraisal system for extending
equipment leasing finance.
2. Verify the lease agreement entered into with the lessee in respect of the
equipment given on lease.
3. Verify whether there exists adequate system for ensuring satisfactory installation of
assets.
4. Ascertain whether the NBFC has an adequate system for monitoring whether the
assets have been adequately insured against and regular maintenance of the leased
assets is being carried out by the lessee.
5. Verify whether there exists adequate system of periodical physical verification.
6. In respect of some major transactions, an auditor should arrange for physical
verification of the leased assets so as to dispel any doubts that equipment leasing
finance was not extended without the corresponding assets being created.
7.11
7. An auditor should verify whether the AS-19 issued by the Institute of Chartered
Accountants of India in respect of “Accounting for Lease” has been compulsorily
followed.
Monitoring of frauds in NBFC (Reserve Bank) Directions, 2016 - Reporting of
Frauds to RBI
These directions shall apply to all deposit taking non-banking financial companies and
NBFC-ND-SI.
Frauds involving Rs.1 lakh and above
1. Where the amount involved in fraud is less than Rs.1 crore, report shall be sent to
the Regional Office of the Department of Non-Banking Supervisions of RBI
within 3 weeks (21 days) from the date of detection of the fraud.
2. Fraud involving Rs.1 lakh and above perpetrated in any manner through
a. Misrepresentation
b. Breach of trust
c. Manipulation of books of account
d. Fraudulent encashment of FDR‟s
e. Un authorized handling of securities charged
f. Embezzlement
g. Misappropriation of funds
h. Cheating
i. shortages
shall be reported in the form of case-wise quarterly progress reports to Regional
Office of the Department of Non-Banking Supervisions of RBI within 15 days of the
end of the quarter to which it relates.
3. These reports are also required to be submitted where central investigating
agencies have initiated criminal proceedings suo-moto.
4. Frauds perpetrated in subsidiaries and affiliates/joint ventures should also be
reported.
5. The NBFC is permitted to close the fraud cases only when actions are complete and
prior approval is obtained from the respective regional office of Department of Non-
banking supervision.
Frauds involving RS. 1 crore and above
Where the amount involved in fraud is Rs. 1 crore and above, the reports shall be sent within
3 weeks from the date of detection of the fraud to:
 Central Fraud Monitoring Cell, RBI and
 Regional Office of the Department of Non-Banking Supervision of the RBI.
 Chief general manager-in-charge of Department of Banking Supervision of the RBI,
Fraud monitoring cell, Central Office, Bengaluru and a copy shall be endorsed to
Chief General Manager-in-charge of the Department of Non-Banking Supervision of
the RBI, Central Office within a week of such frauds coming to the notice of
applicable NBFC.
The letter should contain details such as:
7.12
1. Amount involved
2. Nature of fraud
3. Modus-operandi in brief
4. Name of the branch/office
5. Names of parties involved (Proprietor/partner/director)
6. Names of officials involved
7. Whether complaint has been lodged with police.
Frauds committed by unscrupulous borrowers
Frauds committed by unscrupulous borrowers including companies, partnership
firms/proprietary concerns and/or their directors/partners by various methods including the
following.
a. Fraudulent discount of instruments
b. Fraudulent removal of pledged stocks/disposing of hypothecated stocks without the
NBFC‟s knowledge/inflating the value of stocks in the stock statement and drawing
excess finance.
c. Diversion of funds outside the borrowing units, lack of interest or criminal neglect on
the part of borrowers, their partners, etc. and also due to managerial failure leading to
the unit becoming sick and due to laxity in effective supervision over the operations in
borrowal accounts on the part of the NBFC functionaries rendering the advance
difficult of recovery.
CLASSIFICATION OF FRAUDS BY NBFC
In order to have uniformity in reporting, frauds have been classified as under based mainly
on the provisions of the Indian Penal Code:
1. Misappropriation and criminal breach of trust.
2. Fraudulent encashment through forged instruments, manipulation of books of
account or through fictitious accounts and conversion of property.
3. Unauthorised credit facilities extended for reward or for illegal gratification.
4. Negligence and cash shortages.
5. Cheating and forgery.
6. Irregularities in foreign exchange transactions.
7. Any other type of fraud not coming under the specific heads as above.
Cases of “negligence and cash shortages “ and irregularities in foreign exchange
transactions”:
The above two cases are required to be reported as fraud if the intention to
cheat/defraud is suspected/proved.
However, in the following cases although the fraudulent intention is not
suspected/proved, at the time of detection, will be treated as fraud and to be reported
accordingly.
1. Cases of cash shortages more than Rs.10000 (although reported) and
2. Cases of cash shortages more than Rs.5000 if detected by
management/auditor/inspecting officer not reported on the occurrence by the
person handling cash.
7.13
NBFC AUDITOR’S REPORT (RESERVE BANK) DIRECTIONS, 2016
These directions are applicable for every auditor of NBFC.
Submission of additional report to Board of Directors by the auditor
In addition to the Report made by the auditor under Section 143 of the Companies Act, 2013
for every financial year, the auditor shall also make a separate report to the Board of
Directors of the Company on the matters specified below.
Material to be included
(A) In the case of all Non-Banking Financial Companies
1. The auditor shall examine and report whether the company has obtained a
Certificate of Registration (COR) from Reserve Bank of India.
If the company is engaged in the business of non-banking financial institution as
defined in section 45-I (a) of the RBI Act and meeting the Principal Business
Criteria (Financial asset/income pattern) as laid down, the auditor shall examine
whether the company has obtained a Certificate of Registration (COR) from
the Bank.
The asset and income pattern as evidenced from the last audited balance sheet of
the company shall be considered.
1) Financial assets are more than 50 per cent of its total assets (netted off by
intangible assets) and
2) Income from financial assets should be more than 50 per cent of the gross
income.
2. Every non-banking financial company shall submit a Certificate from its
Statutory Auditor to the Regional Office of the Department of Non-Banking
Supervision, within one month from the date of finalization of the balance
sheet and in any case not later than December 30th of that year. In such
certificate, the auditor shall specify whether the company is entitled to
continue to hold COR. This certificate shall be issued by the auditor with
reference to the position of the company as at end of the financial year ended
March 31.
3. Whether the non-banking financial company is meeting the required net owned
fund requirement as laid down in Master Directions, 2016 issued by RBI.
(B) In the case of a non-banking financial companies accepting/holding public
deposits
Apart from the matters enumerated in (A) above, the auditor shall include a statement on the
following matters, namely:-
1. Whether the public deposits accepted by the company together with other
borrowings are within the limits admissible to the company as per the provisions of
the Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank)
Directions, 2016.
2. Whether the public deposits held by the company in excess of the quantum of
such deposits permissible to it under the provisions of Non-Banking Financial
Companies Acceptance of Public Deposits (Reserve Bank) Directions, 2016 are
regularised in the manner provided in the said Directions;
7.14
3. Whether the non banking financial company is accepting "public deposit”
without minimum investment grade credit rating from an approved credit rating
agency as per the provisions of Non-Banking Financial Companies Acceptance of
Public Deposits (Reserve Bank) Directions, 2016.
4. Whether the capital adequacy ratio as disclosed in the return submitted to the
Bank in terms of the Non-Banking Financial Company - Systemically Important Non-
Deposit taking Company and Deposit taking Company (Reserve Bank) Directions,
2016 has been correctly determined and whether such ratio is in
compliance with the minimum CRAR prescribed therein;
Every NBFC-ND-SI, NBFC-D, NBFC-MFI, NBFC-IFC shall maintain a minimum
CRAR of 15 percent.
CRAR = Tier I + Tier II Capital/Aggregate Risk Weighted Assets
The total Tier I capital, at any point of time shall not be less than 10 per cent.
5. In respect of non-banking financial companies referred to in point 3 above,
(a) Whether the credit rating, is in force; and
(b) Whether the aggregate amount of deposits outstanding as at any point during
the year has exceeded the limit specified by such Credit Rating Agency;
6. Whether the company has violated any restriction on acceptance of public
deposit as provided in Non-Banking Financial Companies Acceptance of Public
Deposits (Reserve Bank) Directions, 2016. (Can accept upto 1.5 times of NOF)
7. Whether the company has defaulted in paying to its depositors the interest and /or
principal amount of the deposits after such interest and/or principal became due;
8. Whether the company has complied with the prudential norms on income
recognition, accounting standards, asset classification, provisioning for bad and
doubtful debts and concentration of credit/investments as specified in the Directions
issued by the Bank.
9. Whether the company has complied with the liquid assets requirement as
prescribed by the Bank in exercise of powers under section 45-IB of the RBI Act and
whether the details of the designated bank in which the approved securities are held is
communicated to the office concerned of the Bank through filing a return in form No.
NBS 3.
The minimum level of liquid assets to be maintained by NBFCs is 15 per cent of
public deposits outstanding as on the last working day of the second preceding
quarter. Of the 15%, NBFCs are required to invest not less than ten percent in
approved securities and the remaining 5% can be in unencumbered term
deposits with any scheduled commercial bank.
10. Whether the company has furnished to the Bank within the stipulated period
the return on deposits as specified in the NBS 1 to – Non- Banking Financial
Company Returns (Reserve Bank) Directions, 2016
11. Whether the company has furnished to the Bank within the stipulated period
the quarterly return on prudential norms as specified in the Non-Banking
Financial Company Returns (Reserve Bank) Directions, 2016.
7.15
12. Whether, in the case of opening of new branches or offices to collect deposits or in
the case of closure of existing branches/offices or in the case of appointment of
agent, the company has complied with the requirements contained in the Non-
Banking Financial Companies Acceptance of Public Deposits (Reserve Bank)
Directions, 2016.
(C) In the case of a non-banking financial company not accepting public
deposits
Apart from the aspects enumerated in (A) above, the auditor shall include a statement on the
following matters, namely: -
1. Whether the Board of Directors has passed a resolution for non- acceptance of
any public deposits;
2. Whether the company has accepted any public deposits during the relevant
period/year.
3. Whether the company has complied with the prudential norms relating to
income recognition, accounting standards, asset classification and provisioning for
bad and doubtful debts as applicable.
4. In respect of Systemically Important Non-deposit taking NBFCs:
(a) Whether the capital adequacy ratio has been correctly arrived at and whether
such ratio is in compliance with the minimum CRAR prescribed by the Bank;
(b) Whether the company has furnished to the Bank the annual statement of
capital funds, risk assets/exposures and risk asset ratio (NBS-7) within the
stipulated period.
5. Whether the non banking financial company has been correctly classified as NBFC
Micro Finance Institutions (MFI) as defined in the Non-Banking Financial Company –
Non-Systemically Important Non-Deposit taking Company (Reserve Bank) Directions,
2016 and Non-Banking Financial Company - Systemically Important Non-Deposit
taking Company and Deposit taking Company (Reserve Bank) Directions, 2016
(D) In the case of a company engaged in the business of non-banking financial
institution not required to hold CoR subject to certain conditions
Apart from the matters enumerated in (A)(I) above where a company has obtained a
specific advice from the Bank that it is not required to hold CoR from the Bank, the
auditor shall include a statement that the company is complying with the conditions
stipulated as advised by the Bank.
Reasons to be stated for unfavourable or qualified statements
Where, in the auditor‟s report, the statement regarding any of the items referred to above is
unfavourable or qualified, the auditor‟s report shall also state the reasons for such
unfavourable or qualified statement, as the case may be.
Where the auditor is unable to express any opinion on any of the items referred to in
paragraph 3 above, his report shall indicate such fact together with reasons there for.
7.16
Applicability of Indian Accounting Standards (Ind AS) on NBFCs
From 01.04.2019, all listed NBFCs, unlisted NBFCs having a net worth of Rs.250 crore or
more but less than Rs.500 crore and holding, subsidiary, joint venture or associate
companies of such NBFCs are required to comply with Indian Accounting Standards.
The networth shall be calculated in accordance with the standalone financial statements of
the NBFCs as per last audited Financial Statements.
7.17
8
MANAGEMENT AUDIT
Management Audit can be defined as “an audit of Management”.
In other words, Management Audit can be defined as
a. systematic independent appraisal activity
b. within an organization
c. for review of Management’s Efficiency
d. in its decision-making function
Management Audit is concerned with
a. appraising management’s accomplishment of organizational objectives
b. management functions of planning, organizing, directing, and controlling;
and
c. the adequacy of management’s decisions and actions in attaining its
stated objectives.
DISTINCTION BETWEEN FINANCIAL AUDIT AND MANAGEMENT AUDIT
Aspects Financial Audit Management Audit

1. Legal It is compulsory in the case of There is no legal compulsion as
Requirement enterprises like Companies, Trusts, regards Management Audit. It is
Societies, etc. voluntary.
2. Periodicity Financial Audits are conducted Management Audits are conducted
annually. once in 2 or 3 years.
3. Time Period It covers business transactions of There is no limitation as to the period
Covered the past financial year. to be covered.
4. Scope To express an opinion on the true To express an opinion on
and fair view of the financial performance of the
statements. Management during a particular
period and to suggest remedial
measures, if required.
5. Reporting The Statutory Auditor reports to The Management Auditor reports
Authority the owners, i.e. Shareholders in to the Management.
case of the Company.
NEED/DESIRABILITY OF MANAGEMENT AUDIT
The importance of management audit may be understood from the following points:
1. Detecting Managerial Deficiencies:
Management Audit is required for detecting and overcoming current managerial deficiencies
and the resulting problems in ongoing operations. If certain managers are ineffective in their
present positions, appropriate corrective action can be taken.
Moreover, management audit represents a positive, forward-looking approach when
compared with financial audit which is back-ward looking. This audit evaluates
a. How well Management accomplishes its stated organizational
objectives.
8.1
b. How effective Management is in planning, organizing, directing and

controlling the organization’s activities, and
c. How appropriate Management’s decisions are for reaching the stated
organization objectives.
A Management Audit questionnaire helps to evaluate managerial performance. This
questionnaire helps in understanding the follow of systems, procedures and method of
work within the organization. This helps in identifying managerial problems and
related operational difficulties can be spotted immediately unlike a financial audit. Periodic
management audits pinpoint problems as they develop from a small scale. When
these problems are detected at later stages, they results in higher costs to the
organization.
2. Assist the management in accomplishing desired objectives
Management audit is a tool to assist the organization in accomplishing desired objectives by
pinpointing important problem areas that relates to managing an organization.
Problem identification is very difficult aspect which cannot be undertaken by the
management because of time constraints. Once, management auditor identifies the
problems, the management may follow the suggestions given by the management auditor to
overcome those problems thereby management can achieve the desired objectives. In this
way, management audit helps in accomplishing desired objectives.
3. Helpful for ailing industries
It helps ailing industries to identify their problems. In case of ailing industries, it is very
important to properly diagnose the financial health and specific reasons that caused
to the decline in the business. If the management is not efficient, any amount of money
pumped in may go waste.
4. Helpful for Sound entities:
Management Audit also helps a sound entity to further improvement in its operations.
Brewing or latent problems may be detected and analyzed and opportunities can be
known.
ORGANIZING THE MANAGEMENT AUDIT
The following are the steps involved in Organizing the management audit.
1. Devising the Statement of Policy
2. Location of Audit Function
3. Allocation of Personnel
4. Staff Training
5. Time and other aspects
6. Frequency
1. DEVISING THE STATEMENT OF POLICY:
a. Management’s support for audit must be reflected clearly in the company’s
policy statement
b. The policy statement should spell out clearly the
i. scope of management audit
ii. its authority to carryout audits
iii. issue reports
iv. make recommendations
8.2
v. initiate corrective action
c. The statement should clearly state that Management Auditor is capable of
reviewing administrative and management controls over any activity
within the company.
d. Management Auditor should not be expected to evaluate the performance of
professional and technical activities calling for specialized knowledge and
skill.
e. This policy statement becomes the charter under which the Management Auditors
should operate.
2. LOCATION OF AUDIT FUNCTION:
a. It is desirable to establish a separate department for conducting management
audit and head of this department should report directly to the top executive.
b. The function should be as independent as possible so that pressures from various
groups in the enterprise can be avoided. The greater the independence, greater is
the freedom to work effectively.
c. The management auditor is expected to make a report, to the person who can
command prompt consideration of auditor’s opinions and
recommendations.
d. In other words, reporting should be done to Managing Director or Finance
Director or to an audit committee.
3. ALLOCTION OF PERSONNEL:
a. All the persons selected and assigned for audit should possess good
understanding of
i. Auditing Theory
ii. Thorough Knowledge of the fundamentals of Organization and
Management
iii. Knowledge of commercial practices of the enterprise
iv. Basic knowledge of commerce, law, taxation, cost accounting,
economics, quantitative methods and EDP Systems.
b. This knowledge helps the auditor to identify problems and to determine
steps to be taken when the problems is identified.
c. He should have ability to write and express clearly and logically.
4. STAFF TRAINING PROGRAMME:
a. The management auditor must keep abreast of new ways to improve auditing
standards.
b. An effective and continuous training program enables staff to conduct audit more
effectively.
8.3
5 TIME AND OTHER ASPECTS:
a. The time required to carry out management audit will vary and is dependent
upon the extent and nature of assignment.
b. Generally in a very big organization, conducting management audit may take several
months. The time required to complete the audit is also dependent upon
number of auditors assigned to perform the work.
c. In a study of the results of sales contracts, one might require to study the expenses
reports and other costs incurred in making contracts.
6. FREQUENCY:
a. The frequency of management audit depends upon the nature of the
organization.
b. Where the organization is subject to rapid changes, a two year basis might be
adequate.
c. For those organizations which are in stable industry, the frequency may be once
in three years.
d. In any case, the frequency of the audit shall not exceed 3 years.
CONDUCTING A MANAGEMENT AUDIT

The following are the steps involved in conducting the management audit.
1. Getting the facts through interviews
2. Measuring performance through the Management Audit Questionnaire
3. Concluding the Management Audit
I. GETTING THE FACTS THROUGH INTERVIEWS:

1. To avoid waste time and effort, adequate audit planning is necessary in
management auditing just as in financial auditing.
2. The management auditor should know what information is desired and
should ask a number of direct questions to get the desired information.
Reference can be had to the management audit questionnaire for specific
questions.
3. The auditor should select proper managers for interview to get pertinent
information.
4. The persons to be interviewed must be notified beforehand, they should be
informed what reports, records, or other documentation should be made available
at the time of the interview.
5. State the purpose of audit before starting the interview.
6. The auditor should be friendly and interview should be conducted in an open
atmosphere to encourage free exchange of ideas.
7. The auditor should be tactful and diplomatic at all times, otherwise it may
result in getting only part of the desired information.
8. The auditor should listen to tentative solutions offered by managers for
problems identified and as far as practicable these solutions should find a place in
8.4
the final recommendations. When manager sees that his solutions are
included in the final report, he is supposed to support those recommendations.
9. After the conclusion of the interview, the management auditor is expected to verify
the accuracy of information by requesting the person interviewed to read the
notes taken and place his or her initials thereon. This makes the individual feel an
important part of management audit
II. MEASURING PERFORMANCE THORUGH THE MANAGEMENT AUDIT
QUESTIONNAIRE:
 A Management Audit Questionnaire (MAQ) aims at a comprehensive and
constructive examination of an organisation's Management and its assigned tasks.
 MAQ helps to define problems in terms of specific situations in which they exist.
 MAQ is concerned with the appraisal of Management actions in accomplishing
organisation objectives. Its primary objective is to highlight weakness and
deficiencies of the organisation for possible improvements.
The following aspects are covered in a MAQ for any business function
 Long Term Plans
 Medium and Short Term Plans
 Organization Structure
 Leadership
 Communication and
 Control.
There are three possible answers to the Management Audit Questionnaires –
 “YES” - the specific area, function, or aspect under study is fulfilling in an acceptable
manner. No written explanation is needed in that case.
 “NO”- indicates unacceptable performance and should be explained in writing.
Remarks for negative answers provide documentation for future reference and
background information for undertaking remedial action.
 “NOT APPLICABLE”- Those questions that are not applicable to the given situation
are ignored.
III. CONCLUDING MANAGEMENT AUDIT:
Concluding the audit means preparation of management audit report which include the
findings and recommendations of the management auditor.
In order to prepare the report, management auditor, normally meet with the management
and other concerned personnel for the purpose of discussing any finding of the audit.
I. ORAL RECOMMENDATIONS FOR IMPROVEMENT
Generally, there is an oral presentation of specific recommendations to members of the top
management team who approved the audit.
Upon completion of the presentation, oral recommendations become an integral part of the
final report.
In the oral presentation, recommendations having feasible solutions that can be accepted
by the management without much difficulty are discussed initially.
While presenting the recommendations, the auditor should back his recommendations with a
cost/benefit analysis that flows from implementing the recommendations.
8.5
If certain recommendations are not accepted during the oral presentation, it is wise to
offer alternatives.
By this oral presentation and after having discussions with appropriate personnel, the
management auditor may be in a position to determine when and where the
recommendations can be put into operation. This assists the auditor to draw up an
implementation time-table for inclusion in the final report.
MANAGEMENT AUDIT REPORTS
The written report is the medium by which the comments, criticisms and recommendations
of management auditor are to be conveyed to the Board, to function directors.
TYPES/CLASSIFICATION OF REPORTS:
a. ORAL REPORTS
b. INTERIM WRITTEN REPORT
c. REGULAR WRITTEN REPORT
d. SUMMARY WRITTEN REPORT
ORAL REPORTS
It is an informal way of communicating the Audit findings to the Auditee / department head.
In many situations, management auditor is required to report the results on an oral basis.
This is because of a result of emergency action needs. The main limitation of this
method is that there is no permanent record. This will result in misunderstandings at
a later stage. Moreover, the oral reports may not be taken seriously.
Therefore, the auditor should take care to ensure that matters covered by emergency oral
reporting, should be followed up immediately by a written report giving reference
to oral reporting.
For example, a management auditor, if he has come across any embezzlement, should
immediately inform the concerned management orally, so that steps may be immediately
taken to prevent further embezzlement.
INTERIM WRITTEN REPORTS
Where it is necessary to inform management about significant developments during the
course of audit, the auditor may have to issue interim report. This report should contain only
significant problems where there is a need for early consideration. This report
can also be issued where the auditor observes very exceptional developments.
Normally, interim reports are fully covered in the final regular reports unless certain
matters included in the interim report have been cleared/rectified to the auditor’s
satisfaction.
REGULAR WRITTEN REPORTS
These reports are submitted at the end of Management Audit work. The form and content of
such written reports will vary widely.
The work done by the Auditor will become worthless if his report is unable to hold the
interest of a reader.
Planning the Audit Report
Before starting the report, the auditor should ensure that the following points were taken care
of.
8.6
Supporting information:
(a) The Management Auditor should supplement his report by such documents and data,
which support his conclusions.
(b) Supporting information may include relevant provisions of law, standards, regulations,
etc.
Draft Report:
The Auditor's draft report will help him to –
(a) find out the most effective manner of presenting his report, and
(b) analyse whether there is any superfluous information or a gap in reasoning.
Writing and issuing the Final Report:

(a) Before issuing the Final Report, he should discuss conclusions and recommendations
with appropriate levels of Management.
(b) The report should be duly signed and dated.
Follow-up of the Audit Report:
(a) The Management Auditor should review whether the Management has taken
appropriate follow-up action on the basis of his report.
(b) If no action is taken within a reasonable time, he should draw Management's attention
to it.
The following are the general guidelines, which should be kept in mind by the
management auditor while preparing a written report.
1. Title: The title should be short but descriptive so that its subject matter can be easily
identified.
2. Objectives: The objects and purposes of the Audit assignment should be described.
3. Scope: A brief description of the activities performed, areas covered, persons with whom
discussions etc. have been made will help in better appreciation of the report.
4. Findings, conclusion and opinions: All facts and data pertaining to the situation
should be assembled, classified and analysed. Each finding should be discussed
comprehensively and correlated with other findings. Tables or graphs may be used for the
presentation of statistical data. The findings may be given either department wise or in the
order of importance.
5. Recommendations: A Management Audit report may include recommendations for
potential improvements. The remedial measures for system or procedural defects may be
pointed out.
6. Auditee's views: The draft report should be discussed with the departmental chiefs to
check accuracy. The Auditee's views about Audit conclusions or recommendations may be
included in the final report in appropriate circumstances.
7. Summary: A summary of conclusions and recommendations may be given, in case of
long reports.
8.7
SUMMARY WRITTEN REPORT
Summary Written Reports are also called "Flash" Reports. Annual (or sometimes more
frequent) report summarizing the various individual reports issued, and describing the range
of their content -
 Useful to top-level managers who are interested in summary data and do not actively
review the individual reports.
Advantages/Disadvantages of written reports over oral reports
Advantages:
1. Permanent record or evidence is created.
2. Since Management is required to initiate corrective action, it will be taken seriously.
3. Easy for follow-up,
4. Avoids misunderstanding since communication is made clear.
Disadvantages:
1. Too formal and lacks personal touch.
2. Useless if immediate action is required
BEHAVIOURAL ASPECTS ENCOUNTERED IN A MANAGEMENT AUDIT
One of the biggest difficulties involved during the course of management audit is that people
working in the organization do not wish to accept any change.
While conducting interviews, it seems that people working are amenable to change but at the
time of actual implementation they come up with stiff resistance.
Another fear is that the management auditor’s recommendations may lead to their removal or
reshuffling in the process.
During the course of audit management auditor may come into contact with the following:
a. Colleagues in their own department
b. Staff of the department whose functioning they audit
c. Top management who authorize them to perform audit
Therefore, the management auditor must develop and maintain good relations with auditees
to gain information. Yet, the general image about the auditor is that he is a critic, fault finder
or private spying authority of the top management.
The following are the causes of behavioural problems that the management auditor is likely to
face in the discharge of duties.
1. Staff/line conflict:
The staff/line relationship is inherently prone to conflict. Management auditors are staff.
The members of other departments may regard the management auditor in the same way
they regard other staff people. Management auditor may think that their approach is
correct and they tend to discount the difficult people may face. They may feel that they
must point out defects to prove themselves to top management. In this scenario, there will
arise a conflict between line and staff.
8.8
2. Contorl:
Under this heading, the cause of conflict may arise because of the following:
a. Fear of criticism stemming from adverse audit findings
b. Fear of changes in day-to-day working habits because of changes resulting from audit
recommendations
c. Punitive action by superiors
d. When the auditor is overly critical, focusing on deficiencies only
e. Hostile Audit Style - Lack of understanding of the auditee’s problems, superiority,
excessive concentration on insignificant errors, a prosecutional tone when asking
questions etc.
OPERATIONAL AUDIT
Operational auditing is “a systematic process of evaluating an organizations
effectiveness, efficiency and economy of operations under management’s control
and reporting to appropriate persons the results of the evaluation along with
recommendations for improvements”.
Operational audit concentrates on effectiveness, efficiency and economy of operations and
therefore it is future oriented.
Operational audit is an audit for the management. It is undertaken at the instance of
the management. It aims to provide the information required by the management to
appraise their operations and activities. In other words, operational audit focus on
quality of operations.
Qualities of operational auditor
1. He should ask - who, why and how of everything. He should try to visualize
whether simpler alternative means are available to do a particular work.
2. He should possess an attitude of skepticism.
3. He should not give up or feel satisfied easily. He should follow a constructive
approach rather than a fault-finding approach and should give a feeling that
his efforts are to help attaining improvement in operations and not merely
fault finding. This leads to getting co-operation of the persons who are involved in
the operations.
Why Operational audit
Operational audit is considered as a specialized management information tool. It
helps to fill the void that conventional information sources fail to fill. The
following are said to be conventional sources of information to management:
 Departmental managers
 Routine performance report
 Internal audit reports and
 Periodic special investigations.
8.9
These conventional sources fail to provide information for the best direction of the
departments all of whose activities doe not come under direct observation of managers. The
shortcomings of these sources are:
1. Executives and managers are preoccupied with implementation of plans and
achieving targets. They are left with no time or very little time to collect
information and locate problems. They may come across problems that have
come to surface but they may not be aware of problems that are brewing
and potential.
2. The information transmitted by managers is not necessarily objective –
often it may be biased for various reasons.
3. Conventional internal audit reports are often routine and mechanical in
character and have a definite leaning towards accounting and financial
information.
4. Department managers can afford time only to glance over the performance
reports, cannot be expected to make an integrated reading of several reports or
to undertake an analysis of such reports.
Examples:
i. Sales may be shown at a higher monetary value compared to the
previous year and this may apparently suggest that the functioning of the
sales department is satisfactory. But this may have been caused by a number
of factors inspite of a really bad performance on the sales front. This fact
may not be readily known unless a careful analysis of the sales data is
carried out by reference to notes and explanations to the accounts and other related
accounting data. Even a study of this nature may not fully reveal the weakness, it is
quite possible that the established market for sales has been lost partly while
some fortuitous sales have compensated the loss.
ii. The routine weekly production report may include production that is
subsequently rejected by the quality control staff, or to avoid showing a bad
production performance; even the partly produced goods may also be
included. All this can happen inspite of specific management instructions
about the basis on which the production report is to be made out.
5. Surveys and special investigations, no doubt, are very useful but these are at
the best occasional in character. Also, they are costly, time consuming. These
are basically an attempt to carry out a post-mortem rather than to enlighten the
management about the ways on improvement or to give a signal for dangers and
disasters to come.
Objectives of Operational Audit
Like internal auditing, the scope and quality of operational auditing is predominantly
dependent upon management attitudes. An open minded management with broad
vision can appreciate the need of operational auditing and to give it the necessary
freedom to perform what it is capable of performing. Generally, operational audit
objectives include:
I. Appraisal of Controls
Internal controls, ensure proper performance in each functional or organisational area for
accomplishing the desired organisational objective. If controls are weak or breaking down,
8.10
however well- equipped or well-manned the organisation may be, it will fail to operate
effectively. Therefore, the operational auditor is responsible for
evaluation/appraisal of internal controls.
Appraisal of Organisational Structure
Organisational structure provides the line of relationships and delegation of authority and
tasks. This is an important element of the internal control design. Therefore, the
operational auditor should also appraise this also as a part of evaluation of internal controls.
The following aspects may be considered in this regard:
 Is the organisational structure in conformity with management objectives?
 Whether the delegation of responsibility and authority at each stage is clear
and overlapping are avoided?
II. Evaluation of Performance
For carrying out the task of performance evaluation, an operational auditor depends upon
acceptable standards. The operational auditor is required to design his evaluation
programme to ascertain how well or how poorly the department has fared by reference to
applicable standards, procedures, rules, policies and plans.
The principal basis of performance evaluation can be productivity, personnel, workload,
cost and quality.
Productivity
In the area of productivity, the operational auditor can undertake such tests as input-
output ratios for materials and labour in quantitative terms.
Personnel
Personnel is perhaps the most important factor in performance evaluation. Unless the
organisation has a sound personnel policy consistent with its requirements, the
facilities, materials and equipment that are available in the organisation may not be utilised
properly to obtain optimum performance.
Work load measurement
Work load measurement can be another significant area where operational auditor can be of
use because of ready availability of quantitative data. There can be measures like volume or
quantity of work handled and/or performed volume of new work, backlog of
work, etc.
Quality of work
The Operational Auditor can follow some quantitative measures to judge the quality
of work. These can be:
a. Number of customers’ complaints
b. Rejections by quality control department
c. Number of workers’ grievances
d. Number of errors in invoicing or recording transactions
e. Quantity of scrap and wastages, etc.
Cost
8.11
Cost is an indicator of performance. Costs are classified and recorded for a proper
assimilation of their implications on performance.
Review of Systems and Procedures
Systems
The definition can be better understood with reference to a complex biological system of
human beings which consists of various sub-systems, e.g. nervous system, digestive system,
respiratory system, blood circulation system, reproductive system, etc. Each sub-system in
turn, may be treated as a complete system in itself. For example, digestive system
consists of various organs, say stomach, intestines, etc. which are interdependent
and interrelated, so that failure of any part will lead to failure of the digestive
system.
Similarly, a business organisation may perform/carry various operations-manufacturing,
purchasing, marketing, accounting and finance, research and development, personnel -
comprise a system.
Procedures
Procedure is nothing but specifying precise uniform action to be taken by a large number
of people in respect of repetitive jobs. In other words, procedures are detailed
prescriptions of how things are to be done. Most often, procedures entail the use of
documents which contain precise instructions or methods to be used. By establishing
standard procedures, the element of discretion is reduced as far as possible and they
also ensure that each person understands what he is to do.
The operational auditor is required to review the systems and procedures established in the
organization to improve the methods, to get away from the old ways and traditional
routines and to reduce the cost in completing and processing the paper work -
eliminating waste, duplication and inefficiencies.
Operational Audit Questionnaire
Production Area
1. Relationship with suppliers and staff
2. Inventory management and control
3. Alternate sources of raw material
4. Maintenance procedures
5. Employee training programs
6. Technology
7. Environmental Protection Policies
Sales
1. Product Pricing
2. Sales Channels
3. Sales Personnel
Customer Services
1. Quality of customer service personnel responses
2. Feed back to determine customer satisfaction levels
8.12
3. Customer complaints and its position
Differences between Financial and Operational Auditing
The major differences between financial and operational auditing can be described as
follows:
Purpose
The financial auditing is basically concerned with the opinion that whether the historical
information recorded is correct or not, whereas the operational auditing emphasizes on
effectiveness and efficiency of operations for future performance.
Area
Financial audits are restricted to the matters directly affecting the
appropriateness of the presented financial statements but the operational
auditing covers all the activities that are related to efficiency and effectiveness of
operations directed towards accomplishment of objectives of organization.
Reporting
The financial audit report is sent to all stock holders, bankers and other persons having
stake in the organisation. However the operational audit report is primarily for the
management.
End Task
The financial audit has reporting the findings to the persons getting the report as its end
objective, however, the operational auditing is not limited to reporting only but includes
suggestions for improvement also.
Relationship between Internal Audit and Operational Audit

The internal auditing need not be confined to financial transactions and its scope may be
extended to the task of reviewing whether the resource utilization of the enterprise is efficient
and economical. For this, some times, the internal auditor may have to review the operations
carried out by the enterprise. In such a case, since the scope of the work carried out by the
internal auditor extended into operational areas also, such an internal auditor may also be
called as Operational Auditor.
8.13
AUDIT OF CONSOLIDATED FINANCIAL STATEMENTS
The objective behind introduction of AS21 “Consolidated Financial Statements” and Ind
AS 110, “Consolidated Financial Statements” is to lay down the principles and
procedures for preparation and presentation of consolidated financial statements.
According to Section 129(3) of the Companies Act, 2013, where a company has one or more
subsidiaries (foreign subsidiaries also), including associate company and joint venture, it
shall, in addition to its own financial statements, prepare consolidated financial statements
of the company and of all the subsidiaries in the same form and manner as that of its own.
For this purpose, financial statements of the parent and its subsidiaries should be combined
on a line by line basis by adding together like items of assets, liabilities, income and
expenses.
Section 129(4) of the said Act, provides that the provisions applicable to the preparation,
adoption and audit of the financial statements of a holding company shall, mutatis
mutandis, also apply to the consolidated financial statements.
The term “Consolidated Financial Statements” includes:
a. Consolidated Balance Sheet
b. Consolidated Statement of Profit and Loss
c. Consolidated Cash Flow Statement
d. Consolidated Statement of Changes in Equity (if applicable) and
e. Any explanatory notes annexed to, or forming part thereof.
AS per AS 21, a subsidiary should be excluded from consolidation when control
is intended to be temporary because the subsidiary is acquired and held exclusively
with a view to its subsequent disposal in the near future. Such investments should be
accounted for in accordance with AS 13. But this rule is not there in Ind AS 110.
These consolidated financial statements shall also be approved by the Board of Directors
before they are signed on behalf of the Board and shall be laid before the annual
general meeting of the company like their standalone financial statement.
According to the Companies (Accounts) Rules, 2014, the consolidation of financial
statements of the company shall be made in accordance with the provisions of Schedule III
to the Act and the applicable accounting standards. However, a company which is not
required to prepare consolidated financial statements under the Accounting Standards, it
shall be sufficient if the company complies with provisions of consolidated financial
statements provided in Schedule III of the Act.
As per sub-section 6 of the section 129 of the Companies Act, 2013, the Central Government
may, on its own or on an application by a class or classes of companies, by notification,
exempt any class or classes of companies from complying with any of the requirements of
section 129 or the rules made there under, if it is considered necessary to grant such
exemption in the public interest and any such exemption may be granted either
unconditionally or subject to such conditions as may be specified in the notification.
An investment entity need not present consolidated financial statements if it is required, in
accordance with Ind AS 110, to measure all of its subsidiaries at fair value through profit or
loss. A parent shall determine whether it is an investment entity.
An investment entity is an entity that:
11.1
a. Obtains funds from one or more investors for the purpose of providing those
investor(s) with investment management services;
b. Commits to its investor(s) that its business purpose is to invest funds solely for
returns from capital appreciation, investment income, or both; and
c. Measures and evaluates the performance of substantially all of its
investments on a fair value basis.
However, as per Ind AS 110, parent of an investment entity shall consolidate all entities that
it controls, including those controlled through an investment entity subsidiary, unless the
parent itself is an investment entity.
Consolidation of Financial Statement of a Subsidiary: Case Study
Parent Ltd acquired 51% shares of Child Ltd during the year ended 31-3-2018.
During the financial year 2018-19, 20% shares of Child Ltd were sold by Parent
Ltd. Parent Ltd while preparing the financial statements for the year ended 31-
3-2018 and 31-3-2019 did not consider the financial statements of Child Ltd for
consolidation. As a statutory auditor how would you deal with it?
Provisions & Explanation: Accounting Standard 21 “Consolidated Financial Statements”,
states that a subsidiary should be excluded from consolidation when control is
intended to be temporary because the shares are acquired and held exclusively with a
view to its subsequent disposal in the near future.
AS-13 also states that such investments in such subsidiaries should be accounted for in
accordance with AS 13 “Accounting for Investments”.
In case where it is stated by the entity that the intention is temporary, the auditor
should verify whether the parent has an intention to dispose of the subsidiary in
the near future, existed at the time of acquisition of the subsidiary. The auditor
should also verify that the reasons for exclusion are given in the consolidated
As per Ind AS 110, there is no such exemption for „temporary control‟, or “for
operation under severe long-term funds transfer restrictions” and
consolidation is mandatory for Ind AS compliant financial statement in this
case.
However, as per section 129(3) of the Companies Act, 2013 where a company having
subsidiary, which is not required to prepare consolidated financial statements under the
applicable Accounting Standards, it shall be sufficient if the company complies with the
provisions of consolidated financial statements provided in Schedule III to the Act.
Conclusion: In the given case, Parent Ltd acquired 51% shares of Child Ltd during the
year ended 31.03.2018 and sold 20% shares during the year ended 31.03.2019. Parent Ltd
did not consolidate the financial statements of Child Ltd for the year ended 31.03.2018 and
31.03.2019.
The intention of Parent Ltd is quite clear that the control in Child Ltd is temporary as the
former company disposed off the acquired shares in the next year of its purchase. Therefore,
Parent Ltd is not required to prepare consolidated financial statement as per AS
21, however, for the compliance of provisions related to consolidation of financial
statements given under section 129(3) of the Companies Act, 2013, Parent Ltd is required to
make disclosures in the financial statements as per the provisions contained in Schedule III
to the Companies Act 2013.
11.2
However, if the Parent Ltd is required to prepare its financial statements under
Ind AS, it shall have to prepare Consolidated Financial Statements as
exemption for „temporary control‟, or “for operation under severe long-term funds
transfer restrictions” is not available under Ind AS 110. It also states that
“Consolidation of an investee shall begin from the date the investor obtains control of the
investee and cease when the investor loses control of the investee”.
RESPONSIBILITY OF THE AUDITOR OF CONSOLIDATED FINANCIAL
STATEEMNTS
Section 129(4) of the Companies Act, 2013 requires that the provisions of the Act
applicable to the preparation, adoption and audit of the financial statements of a holding
company shall, mutatis mutandis, apply to the consolidated financial statements.
Besides other matters, the principal auditor of the consolidated financial
statements is responsible for expressing an opinion on whether the
consolidated financial statements are prepared, in all material respects, in
accordance with the financial reporting framework under which the parent
prepares the consolidated financial statements in addition to reporting on the
additional matters as required under the Companies Act, 2013 and any other
statute to the extent applicable.
Therefore, the auditor's objectives in an audit of consolidated financial statements are:
 to satisfy himself that the consolidated financial statements have been prepared in
accordance with the requirements of applicable financial reporting
framework;
 to enable himself to express an opinion on the true and fair view presented
by the consolidated financial statements;
 to enquire into the matters as specified in section 143(1) of the Companies
Act, 2013; and.
 to report on the matters given in the clauses (a) to (i) of section 143(3) of
the Companies Act, 2013 for other matters under section 143(3)(j);
SPECIAL CONSIDERATIONS
Permanent Consolidation Adjustments
Permanent consolidation adjustments are those adjustments that are made only on the first
occasion or subsequent occasions in which there is a change in the shareholding of a
particular entity which is consolidated. Permanent consolidation adjustments are:
1. Determination of Goodwill or Capital Reserve as per applicable accounting standard
2. Determination of amount of equity attributable to minority/non-controlling interest
1. Determination of Goodwill or Capital Reserve (also called as bargain
purchase price under Ind AS 103)
As per Ind AS 103
the acquirer shall recognize the excess of (a) over (b) below as goodwill as of the
acquisition date.
a. The fair value of consideration transferred + the amount of non-controlling interest
in the subsidiary;
How to calculate non-controlling interest
11.3
i. Fair Value Method

NCI = Fair Value of Consideration/ % of shares acquired x (100-% of Shares
Acquired)
ii. Proportionate Share method
NCI = Value of Identifiable Net Assets x Non-controlling Shareholding
b. the acquisition-date amounts of the net-identifiable assets (INA)
The excess of (b) over (a) is treated as bargain purchase price(Capital Reserve)
as of the acquisition date.
Under AS 21
Goodwill – Costs of parent‟s investment in subsidiary > Parent‟s portion of equity on the
date of investment.
Capital Reserve - Costs of parent‟s investment in subsidiary < Parent‟s portion of equity on
the date of investment.
Duties of the Auditor
1. Pay particular attention to the determination of pre-acquisition reserves of the
components. Date of investment in components assumes importance in this
regard.
2. Examine whether the pre-acquisition reserves have been allocated
appropriately between the parent and the minority interests/non-controlling
interests of the subsidiary.
3. Verify changes that might have taken place in these permanent
consolidation adjustments on account of subsequent acquisition of
shares in the components, disposal of the components in the subsequent years.
It may happen that while working out the permanent consolidation adjustments, in the
case of one subsidiary, goodwill arises and in the case of another subsidiary,
capital reserve arises. The parent may choose to net off these amounts to disclose
a single amount in the consolidated balance sheet where permitted by the applicable
financial reporting framework. In such cases, the auditor should verify that the
gross amounts of goodwill and capital reserves arising on acquisition of various
subsidiaries have been disclosed in the notes to the consolidated financial statements.
Current Period Consolidation adjustments
Current period consolidation adjustments primarily relate to elimination of intra-group
transactions and account balances including:
a. intra-group interest paid and received, or management fees, etc.;
b. unrealised intra-group profits on assets acquired/ transferred from/ to other
subsidiaries;
c. record deferred taxes on unrealised intercompany profits elimination in
accordance with Ind AS 12;
d. intra-group indebtedness;
e. adjustments related to harmonising the different accounting policies being
followed by the parent and its components;
11.4
f. adjustments to the financial statements (of the parent and the components being
consolidated) for recognized subsequent events or transactions that occur
between the balance sheet date and the date of the auditor‟s report on the
consolidated financial statements of the group.
There are two types of subsequent events:
 adjusting events
 non-adjusting events
Events occurring after balance sheet date which do not require adjustments would
not normally require disclosure, although they may be of such significance that they
may require a disclosure in the report of approving authority in the case of
accounting standards and in the financial statements in case of Ind AS. For such
events, the following shall be disclosed:
i. The nature of the event; and
ii. An estimate of its financial effect or a statement that such an estimate cannot
be made.
g. adjustments for the effects of significant transactions or other events that
occur between the date of the components balance sheet and not already
recognised in its financial statements and the date of the auditor‟s report on
the group‟s consolidated financial statements when the financial
statements of the component to be used for consolidation are not drawn up
to the same balance sheet date as that of the parent;
h. In case of a foreign component, adjustments to convert a component‟s audited
financial statements prepared under the component‟s local GAAP to the GAAP
under which the consolidated financial statements are prepared;
i. determination of movement in equity attributable to the minorities
interest/non-controlling interest since the date of acquisition of the subsidiary. It
should also be noted that under Ind AS, non-controlling interest can also result in
negative balance. Unlike earlier AS, as per paragraph 28 of Ind AS 27, if the net
worth of subsidiary is negative, non-controlling interest could have deficit balance;
The adjustments required for preparation of consolidated financial statements are
made in memorandum records kept for the purpose by the parent. The auditor
should review the memorandum records to verify the adjustment entries made in
the preparation of consolidated financial statements.
The auditor while auditing the consolidated financial statements should verify and ensure
that all the current period adjustments were correctly made.
The financial statements of the components used in the consolidation should be
drawn up to the same reporting date as that of the parent. If it is not practicable
to draw up the financial statements of one or more components to such date and,
accordingly, those financial statements are drawn up to different reporting dates,
adjustments should be made for the effects of significant transactions or other
events that occur between those dates and the date of the parent‟s financial
statements.
11.5
In any case, the difference between reporting dates should not be more than six
months in case of financial statements under AS and three months in case of
financial statements under Ind AS.
Reporting date
The financial statements of the parent and its subsidiaries used in the preparation of the
consolidated financial statements shall have the same reporting date.
When the end of the reporting period of the parent is different from that of a subsidiary, the
subsidiary prepares, for consolidation purposes, additional financial information as of the
same date as the financial statements of the parent to enable the parent to consolidate the
financial information of the subsidiary, unless it is impracticable to do so.
If it is impracticable to do so, the parent shall consolidate the financial information of the
subsidiary using the most recent financial statements of the subsidiary adjusted for the
effects of significant transactions or events that occur between the date of those financial
statements and the date of the consolidated financial statements.
In any case, the difference between the date of the subsidiary‟s financial statements and that
of the consolidated financial statements shall be no more than three months, and the length
of the reporting periods and any difference between the dates of the financial statements
shall be the same from period to period.
REPORTING
When the Parent’s Auditor is also the Auditor of all its Components
While drafting the audit report, the auditor should report:
i. Whether principles and procedures for preparation and presentation of
consolidated financial statements as laid down in the relevant accounting
standards have been followed.
ii. In case of any departure or deviation, the auditor should make adequate
disclosure in the audit report so that users of the consolidated financial statements
are aware of such deviation.
iii. Auditor should issue an audit report expressing opinion whether the
consolidated financial statements give a true and fair view of the state of
affairs of the Group as on balance sheet date and as to whether consolidated
profit and loss statement gives true and fair view of the results of consolidated profit
or losses of the Group for the period under audit.
iv. Where the consolidated financial statements also include a cash flow statement,
the auditor should also give his opinion on the true and fair view of the cash
flows presented by the consolidated cash flow statements
When the Parent’s Auditor is not the Auditor of all its Components
In such a case, the auditor of the consolidated financial statements should consider the
requirement of SA 600.
As prescribed in SA 706, if the auditor considers it necessary to make reference to the
audit of the other auditors, the auditor‟s report on the consolidated financial statements
should disclose clearly the magnitude of the portion of the financial statements
audited by the other auditor(s).
11.6
This may be done by stating aggregate rupee amounts or percentages of total

assets, revenues and cash flows of components included in the consolidated
financial statements not audited by the parent‟s auditor.
Total assets, revenues and cash flows not audited by the parent‟s auditor
should be presented before giving effect to permanent and current period
consolidation adjustments.
Reference in the report of the auditor on the consolidated financial statements to the fact
that part of the audit of the group was made by other auditor(s) is not to be construed as
a qualification of the opinion but rather as an indication of the divided
responsibility between the auditors of the parent and its subsidiaries.
When the Component(s) Auditor Reports on Financial Statements under an
Accounting Framework Different than that of the Parent
The parent may have components located in multiple geographies outside India
applying an accounting framework (GAAP) that is different than that of the parent
such as US GAAP or IFRS in preparing its financial statements. Local component
auditors may be unable to report on financial statements prepared using the parent‟s
GAAP because of their unfamiliarity with such GAAP.
In such a case, the parent‟s management shall perform a conversion of
framework used by the component to the framework under which the
consolidated financial statements are prepared. The conversion adjustments
are audited by the principal auditor to ensure that the financial information of the
component(s) is suitable and appropriate for the purposes of consolidation.
However, in some cases a component may prepare financial statements on the basis of the
parent‟s accounting policies, as outlined in the group accounting manual, which
normally contain all accounting policies, including relevant disclosure
requirements, which are consistent with the FRF under which the group‟s
consolidated financial statements are prepared. In such a case, the local component
auditor can audit and issue audit report accordingly. The principal/parent auditors should
perform procedures necessary to ensure that such Financial Statements are prepared in
accordance with group accounting policies. This ensures that the component‟s financial
statements will be directly usable for the preparation of consolidated financial
statements by the parent entity.
The Principal auditor can then decide whether or not to rely on the
components‟ audit report and make reference to it in the auditor‟s report on
the consolidated financial statements.
When the Component(s) Auditor Reports under an Auditing Framework
Different than that of the Parent
Normally, audits of financial statements, including consolidated financial statements, are
performed under auditing standards generally accepted in India (“Indian GAAS”).
In order to maintain consistency of the auditing framework and to enable the parent
auditor to rely and refer to the other auditor‟s audit report in their audit report on the
consolidated financial statements, the components‟ financial statements should also
be audited under a framework that corresponds to Indian GAAS.
Components Not Audited
11.7
Where the financial statements of one or more components continue to remain

unaudited, the auditor may be able to obtain sufficient appropriate audit evidence in
relation to such consolidated amounts/balances. In such cases, the auditor should
evaluate the possible effect when reporting on the consolidated financial
statements using the guidance provided in SA 705, “Modifications to the Opinion in the
Independent Auditor‟s Report”
APPENDIX
Problems on calculation of Goodwill/Capital Reserve
1. A Ltd. acquired 80% of B Ltd. at a valuation of Rs. 130 crore by payment of
cash of Rs.120 crore. Assume that the value of identifiable net assets is Rs.130
crore. Calculate Goodwill/bargain purchase price (capital reserve) where Non-
controlling interest is to be calculated by following:
i) Fair Value Method
ii) Proportionate Share Method
Answer
Fair Value Method
Fair Value of Consideration transferred = Rs. 120 crore
Amount of Non-controlling Interest = Rs. 30 crore
NCI = 120 crore/80x20 = Rs.30 crore
a. The aggregate of the above two is Rs. 150 crores
b. The value of net identifiable assets is Rs. 130 crore

Since (a) calculated above is more than (b) the goodwill in this case is Rs. 20 crore.
The accounting entry to be passed in this case is as follows:
INA 130
Goodwill (Balancing Figure) 20
To Cash 120
To NCI 30
Proportionate Share Value Method
NCI = 130 x 20% = Rs.26 crores
INA 130
To Cash 120
To NCI 26
2. XYZ purchased 80% shares of ABC Ltd. on 01/04/11 for Rs. 140000. The
Issued Capital is Rs.100000. The fair value of the net identifiable assets is
Rs.150000. Calculate the amount of NCI and amount of Goodwill/Capital
Reserve as on 01/04/11 using
11.8
a. Fair Value Method

b. Proportionate Share Method
Fair Value Method
Fair Value of Consideration transferred = Rs. 1,40,000
Amount of Non-controlling Interest = Rs. 35,000
NCI = 140000/80x20 = Rs.35,000
a. The aggregate of the above two is Rs. 175000
b. The value of net identifiable assets is Rs. 150000
Since (a) calculated above is more than (b) the goodwill in this case is Rs. 25000

INA 150000
To Cash 140000
To NCI 35000
NCI = 150000 x 20% = Rs.30000
INA 150000
To Cash 140000
To NCI 30000
3. Ram Ltd. acquires Shyam Ltd. by purchasing 60% of its equity for Rs. 15
lakh in cash. The fair value of non-controlling interest is determined as Rs.10
lakh. The net aggregate value of identifiable assets and liabilities, as measured
in accordance with Ind AS 103 is determined asRs.5 lakh.
How much goodwill is recognized based on two measurement bases of non-
controlling interest (NCI)?
Fair Value Method
Amount of Non-controlling Interest = Rs.10,00,000
NCI = 1500000/60x40 = Rs.10,00,000

Since (a) calculated above is more than (b) the goodwill in this case is Rs. 20,00,000
11.9
INA 500000
To Cash 1500000
To NCI 1000000
NCI = 500000 x 40% = Rs.2,00,000
INA 500000
To Cash 1500000
To NCI 200000
4. Seeta Ltd. acquires Geeta Ltd. by purchasing 70% of its equity for Rs.15 lakh
in cash. The fair value of NCI is determined as Rs.6.9 lakh. Management have
elected to adopt full goodwill method and to measure NCI at fair value as well
as at proportionate share value method. The net aggregate value of the
identifiable assets and liabilities, as measured in accordance with the standard
is determined as Rs.22 lakh. (Tax consequences being ignored).
Fair Value Method

Amount of Non-controlling Interest = Rs.6,90,000 (Given in the Question)

Since (b) calculated above is more than (a) the bargain purchase gain is Rs. 10,000
INA 2200000
To Cash 1500000
To NCI 690000
To Bargain Purchase Gain
(Balancing Figure) 10000
NCI = 2200000 x 30% = Rs.6,60,000
INA 2200000
To Cash 1500000
To NCI 660000
To Bargain Purchase Gain
(Balancing Figure) 40000
11.10
Uniform Accounting Policies

A parent shall prepare consolidated financial statements using uniform accounting policies
for like transactions and other events in similar circumstances.
If a member of the group uses accounting policies other than those adopted in the
consolidated financial statements for like transactions and events in similar circumstances,
appropriate adjustments are made to that group member‟s Financial Statements in
preparation of Comparative Financial Statements to ensure conformity with group‟s
accounting policies.
PQR Ltd. is the subsidiary company of MNC Ltd. In the individual financial
statements prepared in accordance with Ind AS, PQR Ltd. has adopted
Straight-line method (SLM) of depreciation and MNC Ltd. has adopted
Written-down value method (WDV) for depreciating its property, plant and
equipment. As per Ind AS 110, Consolidated Financial Statements, a parent
shall prepare consolidated financial statements using uniform accounting
policies for like transactions and other events in similar circumstances.
How will these property, plant and equipment be depreciated in the
consolidated financial statements of MNC Ltd. prepared as per Ind AS?
Solution
As per Ind AS 16, „Property, Plant and Equipment‟, a change in the method of
depreciation shall be accounted for as a change in an accounting estimate as per
Ind AS 8, „Accounting Policies, Changes in Accounting Estimates and Errors‟.
Therefore, the selection of the method of depreciation is an accounting estimate
and not an accounting policy.
The entity should select the method that most closely reflects the expected pattern of
consumption of the future economic benefits embodied in the asset. That method should be
applied consistently from period to period unless there is a change in the expected pattern
of consumption of those future economic benefits in separate financial statements as well as
consolidated financial statements.
Therefore, there can be different methods of estimating depreciation for property, plant and
equipment, if their expected pattern of consumption is different. The method once
selected in the individual financial statements of the subsidiary should not be
changed while preparing the consolidated financial statements.
Accordingly, in the given case, the property, plant and equipment of PQR Ltd. (subsidiary
company) may be depreciated using straight line method and property, plant and
equipment of parent company (MNC Ltd.) may be depreciated using written down value
method, if such method closely reflects the expected pattern of consumption of future
economic benefits embodied in the respective assets.
H Limited has a subsidiary, S Limited and an associate, A Limited. The three companies are
engaged in different lines of business.
These companies are using the following cost formulas for their valuation in accordance
with Ind AS 2, Inventories:
Name of the Company Cost formula used

H Limited FIFO
11.11
S Limited, A Limited Weighted average cost

Whether H Limited is required to value inventories of S Limited and A Limited also using FIFO
formula in preparing its consolidated financial statements?
Solution
Ind AS 110 states that if a member of the group uses accounting policies other than those
adopted in the consolidated financial statements for like transactions and events in similar
circumstances, appropriate adjustments are made to that group member‟s financial
statements in preparing the consolidated financial statements to ensure conformity with
the group‟s accounting policies.
It may be noted that the above mentioned paragraph requires an entity to apply uniform
accounting policies “for like transactions and events in similar circumstances”. If any
member of the group follows a different accounting policy for like transactions and events
in similar circumstances, appropriate adjustments are to be made in preparing consolidated
Ind AS 8 defines accounting policies as “the specific principles, bases, conventions, rules
and practices applied by an entity in preparing and presenting financial statements.”
Ind AS 2 requires inventories to be measured at the lower of cost and net realisable value. It
also states that that the cost of inventories shall be assigned by using FIFO or weighted
average cost formula. An entity shall use the same cost formula for all inventories having a
similar nature and use to the entity. For inventories with a different nature or use,
different cost formulas may be justified.
It also requires disclosure of “the accounting policies adopted in measuring
inventories, including the cost formula used”. Thus, as per Ind AS 2, the cost
formula applied in valuing inventories is also an accounting policy.
As mentioned earlier, as per Ind AS 2, different cost formulas may be justified for
inventories of a different nature or use. Thus, if inventories of S Limited and A Limited
differ in nature or use from inventories of H Limited, then use of cost formula (weighted
average cost) different from that applied in respect of inventories of H Limited (FIFO) in
consolidated financial statements may be justified. In other words, in such a case, no
adjustment needs to be made to align the cost formula applied by S Limited
and A Limited to cost formula applied by H Limited.
How should assets and liabilities be classified into current or non-current in
consolidated financial statements when parent and subsidiary have different
reporting dates?
Paragraphs B92 and B93 of Ind AS 110 require subsidiaries with reporting period end
different from parent, to provide additional information or details of significant
transactions or events if it is impracticable to provide additional information to enable the
parent entity to consolidate such financial information at group‟s reporting period end.
The appropriate classification of the assets and liabilities as current or non-current in the
consolidated financial statements has to be determined by reference to the reporting period
end of the group. Accordingly, when a subsidiary‟s financial statements are for a different
reporting period end, it is necessary to review the subsidiary's balance sheet to ensure that
items are correctly classified as current or non-current as at the end of the group's reporting
period.
11.12
For example, a subsidiary with the financial year end of 31st December, 20X1 has a payable
outstanding that is due for payment on 1st January, 20X3, and has accordingly classified it
as non- current in its balance sheet. The financial year end of the parent‟s consolidated
financial statements is 31st March 31, 20X3. Due to the time lag, the subsidiary's payable
falls due within 12 months from the end of the parent's reporting period.
Accordingly, in this case, the payable should be classified as a current liability in the
consolidated financial statements of the parent because the amount is repayable within nine
months of the end of the parent's reporting period.
11.13
10
LIABILITIES OF THE AUDITOR
A member of the accounting profession, when he is in practice, offers to perform a larger
variety of professional services and he also holds himself out to the public as an accountant
qualified to undertake these assignments. When, therefore, he is appointed under a statue
or under an agreement to carry out some professional work, it is to be presumed that he
shall carry his work with care and diligence expected of a member of the
profession.
Civil Liabilities under the Companies Act
A civil action against the auditor may either take the form of
 claim for damages on account of negligence or
 that of misfeasance proceeding for breach of trust or duty:
Damages for negligence
To charge a professional man with breach of duty or negligence, it is necessary to
prove that there has been a deviation from the standards of care which he was
expected to exercise in the performance of his duties. An auditor cannot give any
guarantee about the success of his professional effort. However, he must exercise a
reasonable degree of care and skill while performing his duties.
In other words, he must carry out the audit according to „accepted professional standards”.
If he fails, he would be guilty of negligence and liable to reimburse losses to the
extent caused due to his negligence.
The auditor however, is not expected to be a detective nor he is required to approach
his work with a suspicious or pre-conceived notion that there is something wrong. He is a
watch-dog but not a “bloodhound”. However, if there is any thing that excites
suspicion, he should delve deep into the matter. But in the absence thereof, he is
only required to be reasonably cautious and careful.
CIVIL LIABILITY FOR MISSTATEMENT IN PROSPECTUS UNDER SECTON 35

OF THE COMPANIES ACT, 2013.
A prospectus is a document which invites deposits from the public or invites or offers from
the public for the subscription of shares in or debentures of a company. Where a person
has subscribed for securities of a company acting on any statement included, or
the omission of any matter, in the prospectus which is misleading and has
sustained any loss or damage as a consequence thereof, the company and every person
who—
1. is a director of the company at the time of the issue of the prospectus;
2. has authorized himself to be named and is named in the prospectus as a
director of the company or has agreed to become such director either
immediately or after an interval of time;
3. is a promoter of the company;
4. has authorised the issue of the prospectus; and
5. is an expert referred to in sub-section (5) of section 26,
shall be liable to pay compensation to every person who has sustained such loss or
damage.
10.1
It may be noted that the term “expert” as defined in Section 2(38) of the Companies Act,
2013 includes an engineer, a valuer, a chartered accountant, a company secretary, a cost
accountant and any other person who has the power or authority to issue a certificate in
pursuance of any law for the time being in force.
The prospectus issued by a company shall include some reports specified by the act such as
Auditor‟s Report which shall include information relating to the profits and losses, assets
and liabilities as well as the dividend paid by the company during the 5 financial years
preceding the issue of prospectus.
The liability would arise if the written consent of the auditor to the issue of the
prospectus, including the report purporting to have been made by him as an “expert” has
been obtained.
No person shall be liable under sub-section (1), if he proves—
1. that, having consented to become a director of the company, he withdrew his
consent before the issue of the prospectus, and that it was issued without his
authority or consent; or
2. that the prospectus was issued without his knowledge or consent, and that on
becoming aware of its issue, he forthwith gave a reasonable public notice that it
was issued without his knowledge or consent.
Where it is proved that a prospectus has been issued with intent to defraud the
applicants for the securities of a company or any other person or for any fraudulent
purpose, every person referred to in subsection (1) shall be personally responsible,
without any limitation of liability, for all or any of the losses or damages that may have
been incurred by any person who subscribed to the securities on the basis of such
prospectus.
A misstatement in the prospectus can invoke Criminal (Section 34) and Civil
(Section 35) liabilities. It may also lead to punishment for fraud under Section
447.
LIABILITY FOR MISFEASANCE
The term “misfeasance” implies a breach of trust or duty by the auditor, resulting in a
loss to the company or its property. The auditor of a company would be guilty of
misfeasance if he has been guilty of any breach of trust or negligence in the performance of
his duties which has resulted in some loss or damage to the company or its
property. In such a case, the company can take direct action against the auditor.
In The London and General Bank, (1895), held - The auditor who does not report, to the
shareholders the facts of the case, when the balance sheet is not properly drawn up, is guilty
of misfeasance.
The charge against the auditor in this case was that though he had submitted a detailed
report to the directors, as regards loans and overdrafts granted to customers, in respect of
which the security lodged was wholly insufficient and had expressed his misgivings as
regards recovery of interest on these accounts, included in the Profit and Loss Account, he
had neither disclosed the position to the shareholders nor he had made any reference to the
report which he had laid before the directors.
CRIMINAL LIABILITY UNDER THE COMPANIES ACT
For Misstatement in Prospectus
10.2
As per Section 34 of the Companies Act, 2013, where a prospectus, issued, circulated or
distributed includes any statement which is untrue or misleading in form or
context in which it is included or where any inclusion or omission of any matter is likely to
mislead, every person who authorises the issue of such prospectus shall be liable
under section 447.
Untrue statement means and includes any statement which is not only a false
statement but also a statement which creates a wrong impression of actual
fact. Concealment of material fact is also treated as mis-statement or untrue
statement.
This section shall not apply to a person if he proves that such statement or omission
was immaterial or that he had reasonable grounds to believe, and did up to the time
of issue of the prospectus believe, that the statement was true or the inclusion or
omission was necessary.
In The Institute of Chartered Accountants of India v. Mukesh Gang, Chartered Accountant,
Referred Case. No.2 of 2011, the High Court of Andhra Pradesh noted that the prospectus is
a special document and a false certificate is issued by the auditor would amount to
his failure to discharge his statutory duties. The court added that he must be
presumed to be aware of the consequences that flow from such gross negligence of a false
certification because the public subscribe to the shares based on the invitation (Prospectus).
The court further observed that as per Section 65 of the Companies Act, 1956 untrue
statements in the prospectus will result in liability for the loss or damage sustained by a
person while subscribing for shares or debentures based on such statements in the
Prospectus. Here, the court found that the certification by the statutory auditor has resulted
in misleading the general public into subscribing to the shares of the company by placing
faith on such a certificate. Therefore, the court suspended the respondent from practising as
a Chartered Accountant for a period of three years under Section 21(5) of the Chartered
Punishment for false statement/omission of a material fact
According to Section 448 of the Companies Act, 2013 if in any return, report, certificate,
financial statement, prospectus, statement or other document required by, or for, the
purposes of any of the provisions of this Act or the rules made there under, any person
makes a statement —
 which is false in any material particulars, knowing it to be false; or
 which omits any material fact, knowing it to be material, he shall be liable
under section 447.
Punishment for Fraud
As per Section 447 of the Companies Act, 2013, without prejudice to any liability including
repayment of any debt under this Act or any other law for the time being in force, any
person who is found to be guilty of fraud involving an amount of at least Rs.10 lacs or
1% of the Turnover of the company whichever is lower, shall be punishable with
imprisonment for a term which shall not be less than six months but which
may extend to ten years and shall also be liable to fine which shall not be less
than the amount involved in the fraud, but which may extend to three times the
amount involved in the fraud.
Provided further that where the fraud involves an amount of less than Rs.10 lacs or 1% of
Turnover of the Company whichever is lower, and does not involve public interest, any
10.3
person guilty of such fraud shall be punishable with imprisonment for a term which may
extent to 5 years or with fine which may extent to Rs.50 lacs or with both.
It may be noted that where the fraud in question involves public interest, the term of
imprisonment shall not be less than three years.
Direction by Tribunal in case auditor acted in a fraudulent manner
As per sub-section (5) of the section 140, the Tribunal either suo-moto or on an
application made to it by the Central Government or by any person concerned, if it is
satisfied that the auditor of a company has, whether directly or indirectly, acted
in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the
company or its directors or officers, it may, by order, direct the company to change
its auditors.
However, if the application is made by the Central Government and the Tribunal
is satisfied that any change of the auditor is required, it shall within fifteen days
of receipt of such application, make an order that he shall not function as an
auditor and the Central Government may appoint another auditor in his place.
It may be noted that an auditor, whether individual or firm, against whom final order
has been passed by the Tribunal under this section shall not be eligible to be
appointed as an auditor of any company for a period of five years from the date
of passing of the order and the auditor shall also be liable for action under section 447.
Liabilities under Income Tax Act 1961
In connection with proceedings under the Income Tax Act 1961, a Chartered Accountant
often acts as the authorized representative of his clients and attends before an Income Tax
Authority or the appellate tribunal. His liabilities under the Income Tax Act of 1961 are as
below:
Under Section 288
Auditor's liabilities
under the Income Under Section 278
Tax Act, 1961
Under Rule 12A of

the Income Tax
Rules
Under Section 288

According to Section 288(5) of the Income Tax Act, 1961, A Chartered Accountant
found guilty of professional misconduct in his professional capacity by the Council of the
Institute of Chartered Accountants of India, can not act as an authorized
representative (for any matter within the definition of a member in practice) for such
time that the order of the Council disqualifies him from practicing.
According to Section 288(4) of the Income Tax Act, 1961:
 a person who has been convicted of any offence connected with any Income
Tax proceeding or
 a person on whom a penalty has been imposed under the said Act (except under
clause (ii) of sub section (1) of Section 271)
10.4
is disqualified from representing an assesses.

Section 271
If a person:
a. has concealed the particulars of his income or
b. has furnished inaccurate particulars of such income
is disqualified from representing an assesses.
The Chief Commissioner/Commissioner of Income Tax has been given powers to
determine the period of such disqualification of a person.
Under Section 278

Any person who acts or induces, in any manner another person to make and deliver to
the Income Tax Authorities a false account, statement, or declaration, relating to
any income chargeable to tax which he knows to be false or does not believe to be
true.
Case law:
A partnership firm filed return of income and during the course of assessment, the
Assessing Officer found that value of closing stock in trade of the firm as per its Profit
& Loss account was different from the closing stock shown in the statement
given to the bank. The return of income of the firm was accompanied by the
report of the auditors prepared on the basis of statement made by assessee firm without
confirming and verifying the statement of account from the bank.
The Assessing Officer also found that the firm had claimed benefit under section 80
HHC of the Income Tax Act, 1961 (the Act) as worked out by the auditors without
creating, corresponding equal reserves.
The court held that the Chartered Accountant who had audited and verified the return
abated the firm and its partners to evade tax, interest and penalty by signing the statement
without verifying the actual amount of cost of stock in trade and committed offence U/s
278 of Income Tax Act, 1961.
Under Rule 12A of the Income Tax Rules
Under this rule a Chartered Accountant who as an authorized representative under
Section 288(2) has prepared the return filed by the assessee, has to furnish to the
Assessing Officer, the particulars of accounts, statements and other documents
supplied to him by the assessee for the preparation of the return.
Where the Chartered Accountant has conducted an examination of such records, he has
also to submit a report on the scope and results of such examination. The report to be
submitted will be a statement within the meaning of Section 277 of the Income Tax Act.
Thus if this report contains any information which is false and which the
Chartered Accountant either knows or believes to be false or untrue, he would
be liable to rigorous imprisonment which may extend to seven years and to a
fine.
Mr. Arjun, a newly qualified Chartered Accountant started his practice wants
to specialise in Audits of corporates and requires your advice on criminal
liabilities of an auditor under the Companies Act, 2013. Kindly guide him. (4
10.5
Marks) Nov. 2013 & May, 2016 ( RTP May 2015 & 16)
Criminal Liability of an Auditor under the Companies Act, 2013: The circumstances in
which an auditor can be prosecuted under the Companies Act and the penalties to which he
may be subjected are briefly stated below-
Criminal liability for Misstatement in Prospectus- As per section 34 of the Companies Act,
2013, where a prospectus, issued, circulated or distributed includes any statement which is
untrue or misleading in form or context in which it is included or where any inclusion or
omission of any matter is likely to mislead, every person who authorises the issue of such
prospectus shall be liable for punishment u/s 447.
Punishment for False Statement- According to section 448 of the Companies Act, 2013, if in
any return, report, certificate, financial statement, prospectus, statement or other document
required by, or for, the purposes of any of the provisions of this Act or the rules made
thereunder, any person makes a statement which is false in any material particulars,
knowing it to be false; or which omits any material fact, knowing it to be material, he shall
be liable for punishment u/s 447.
As per the provisions of the Companies Act 2013, the person involved in abovementioned
criminal liabilities or fraud shall be punishable with imprisonment and shall also be liable
to fine which shall not be less than the amount involved in the fraud.
Mr. Ram, a Chartered Accountant has appeared before the Income Tax
Authorities as the authorized representative of his client and delivers to the
Income Tax Authorities a false declaration. What are the liabilities of Mr. Ram
under Income Tax Act, 1961? 4 Marks – MAY 2017
False Declaration as Authorized Representative: In connection with proceedings under the
Income Tax Act 1961, a Chartered Accountant often acts as the authorised representative of
his clients and attends before an Income Tax Authority or the appellate tribunal.
Any person who acts or induces, in any manner another person to make and deliver to the
Income Tax Authorities a false account, statement, or declaration, relating t o any income
chargeable to tax which he knows to be false or does not believe to be true will be liable
under section 278 of the Income Tax Act 1961. Further, in case of submission of any
information which is false and which the Chartered Accountant either knows or believes to
be false or untrue, he would be liable to rigorous imprisonment which may extend to seven
years (in other cases two years) and/or to a fine.
In the instant case, Mr. Ram, a chartered accountant has appeared before the Income Tax
Authorities as the authorized representative of his client and delivered a false declaration,
thus, he would be liable under section 278 of the Income Tax Act, 1961.
State the nature of liability as provided in the Companies Act, 2013 of an
auditor for not appropriately dealing with a misstatement appearing in
audited financial statements or a false statement in Audit Report. (4
Marks) NOV.2018
Nature of Liability as per the Companies Act, 2013-: Under section 448 of the Companies
Act, 2013, an auditor is liable for criminal prosecution, if he, in any return, certificate,
balance sheet, prospectus, statement or other documentrequired by or for the purpose of
the Act, makes a statement (a) which is false in any material particular knowing it to be
false; or (b) which omits any material fact knowing it to be material.
If convicted, he can be punished with imprisonment and also with fine as provided under
section 447 of the said Act.
10.6
Thus, in view of above, an auditor will be held liable for criminal prosecution for not
appropriately dealing with a misstatement appearing in audited financial statements or a
false statement in Audit Report assuming that it was known to auditor.
In assessment procedure of M/s. Cloud Ltd., Income Tax Officer observed
some irregularities. Therefore, he started investigation of Books of Account
audited and signed by Mr. Old a practicing chartered accountant. While going
through books, he found that the company used to maintain two sets of books
of account, one is the official set and other is covering all the transactions.
Income Tax Department filed a complaint with the ICAI saying Mr. Old had
negligently performed his duties. Comment
It is the responsibility of the auditor to audit the statement of accounts and prepare tax
returns on the basis of books of accounts produced before him. Also, if he is satisfied with
the books produced to him, he can give his opinion on the basis of those books only by
exercising requisite skill and care and observing the laid down audit procedures.
Mr. Old, the auditor was not under a duty to prepare books of account of the assessee and
he should, of course, neither suggest nor assist in the preparation of false accounts. He is
responsible for the books produced before him for audit. He completed his audit work with
official set of books only. In this situation, as Mr. Old, performed the auditing with due skill
and diligence, and therefore, no question of negligence arises.
What are the liabilities of a Chartered Accountant under Income Tax Act, 1961
for furnishing an incorrect statement in any report or certificate required to be
submitted by him under the Act? NOV. 2018 (5 Marks)
10.7
11
AUDIT COMMITTEE AND CORPORATE GOVERNANCE
Meaning
The word Corporate is associated by legal enactment for conducting/transacting a
business. Similarly, the word Governance means exercise of authority, direction or
control. Thus, the concept of Corporate Governance is the system by which the
management of a business entity directs and controls the activities of the entity in
the best interest of its stakeholders.
Applicability
SEBI notified LODR (Listing Obligations and Disclosure Requirements) Regulations,
2015. LODR requirements deal with only post-listing and exclude all pre-listing
requirements. Some amendments to LODR regulations were made in 2019.
These regulations are applicable for entities who have listed their any of the following
designated securities on recognized stock exchange:-
(a) Specified securities listed on main board or SME Exchange or institutional trading
platform;
(b) Non-convertible debt securities, non-convertible redeemable preference shares,
perpetual debt instrument, perpetual non-cumulative preference shares;
(c) Indian Depository Receipts;
(d) Securitised Debt Instruments;
(e) Units issued by mutual funds;
(f) Any other securities as may be specified by the Board .
AUDIT COMMITTEE
Qualified and Independent Audit Committee [Regulation 18 (1)]
Every listed entity shall constitute a qualified and independent audit committee in
accordance with the terms of reference, subject to the following:
 The Audit Committee shall have minimum three directors as members. Two-
thirds of the members of audit committee shall be independent directors.
However, in case of a listed entity having outstanding superior rights equity
shares, the audit committee shall only comprise of Independent Directors.
 All members of Audit Committee shall be financially literate i.e. the ability to
read and understand basic financial statements i.e. Balance Sheet, Profit and Loss
account, Cash Flow Statement etc. and at least one member shall have
accounting or related financial management expertise.
A member will be considered to have accounting or related financial
management expertise if he or she possesses experience in finance or
accounting, or requisite professional certification in accounting, or any other
comparable experience or background which results in the individual’s financial
sophistication, including being or having been a chief executive officer, chief
financial officer or other senior officer with financial oversight
responsibilities.
11.1
 The Chairperson of the Audit Committee shall be an independent director

and he shall be present at Annual General Meeting to answer shareholder
queries.
 The Company Secretary shall act as the secretary to the committee.
 The Audit Committee at its discretion shall invite the finance director or the
head of the finance function, head of internal audit and a representative
of the statutory auditor and any other such executives to be present at the
meetings of the committee, provided that occasionally, the Audit Committee may
meet without the presence of any executives of the listed entity.
Meeting of Audit Committee [Regulation 18 (2)]
Number of Meetings
The Audit Committee shall meet at least four times in a year and not more than one
hundred and twenty days shall lapse between two meetings.
Quorum
The quorum shall be either two members or one third of the members of the Audit
Committee whichever is greater, but there should be a minimum of two
independent directors present.
Powers of Audit Committee [Regulation 18 (2)]
The Audit Committee shall have powers, which should include the following:
 To investigate any activity within its terms of reference
 To seek information from any employee
 To obtain outside professional/legal advice
 To secure the attendance of outsiders with relevant expertise, if it considers
necessary
The auditor should check whether the terms of reference of the Audit Committee
have been suitably framed mentioning the above powers. It is mandatory for the
above-mentioned four powers to be vested in the Audit Committee. The Board may
delegate/vest further powers to the committee.
Role of Audit Committee [Part C (A) of Schedule II]
The role of the Audit Committee shall include the following:
1. Oversight of the listed entity’s financial reporting process and the disclosure
of its financial information to ensure that the financial statement is correct, sufficient
and credible;
2. Recommendation for appointment, remuneration and terms of appointment of
auditors of the listed entity;
3. Approval of payment to statutory auditors for any other services rendered by
the statutory auditors;
4. Reviewing, with the management, the annual financial statements and
auditor's report thereon before submission to the Board for approval,
with particular reference to:
a. Matters required to be included in the Director’s Responsibility Statement to be
included in the Board’s report in terms of clause (c) of sub-section 3 of section 134 of
the Companies Act, 2013;
11.2
b. Changes, if any, in accounting policies and practices and reasons for the same;
c. Major accounting entries involving estimates based on the exercise of judgment
by management;
d. Significant adjustments made in the financial statements arising out of audit
findings;
e. Compliance with listing and other legal requirements relating to financial
statements;
f. Disclosure of any related party transactions;
g. Modified opinion(s) in the draft audit report;
6. Reviewing, with the management, the quarterly financial statements before
submission to the Board for approval;
7. Reviewing, with the management, the statement of uses/application of funds
raised through an issue (public issue, rights issue, preferential issue, etc.), the
statement of funds utilized for purposes other than those stated in the offer
document/ prospectus/ notice and the report submitted by the monitoring agency
monitoring the utilisation of proceeds of a public or rights issue, and making
appropriate recommendations to the Board to take up steps in this matter;
8. Reviewing and monitoring the auditor’s independence and performance, and
effectiveness of audit process;
9. Approval of any subsequent modification of transactions of the listed entity
with related parties;
10. Scrutiny of inter-corporate loans and investments;
11. Valuation of undertakings or assets of the listed entity, wherever it is necessary;
12. Evaluation of internal financial controls and risk management systems;
13. Reviewing, with the management, performance of statutory and internal auditors,
adequacy of the internal control systems;
14. Reviewing the adequacy of internal audit function, if any, including the
structure of the internal audit department, staffing and seniority of the official
heading the department, reporting structure coverage and frequency of internal
audit;
15. Discussion with internal auditors of any significant findings and follow up there
on;
16. Reviewing the findings of any internal investigations by the internal auditors
into matters where there is suspected fraud or irregularity or a failure of
internal control systems of a material nature and reporting the matter to the
Board;
-
17. Discussion with statutory auditors before the audit commences, about the
nature and scope of audit as well as post-audit discussion to ascertain any area of
concern;
18. To look into the reasons for substantial defaults in the payment to the
depositors, debenture holders, shareholders (in case of non-payment of
declared dividends) and creditors;
19. To review the functioning of the Whistle Blower mechanism;
11.3
20. Approval of appointment of Chief Financial Officer after assessing the

qualifications, experience and background, etc. of the candidate;
21. Carrying out any other function as is mentioned in the terms of reference of the
Audit Committee.
If the company has set up an Audit Committee as per section 177 of the
Companies Act, 2013, the company must ensure that the said Audit Committee
has such additional functions / features as are contained in the LODR
Regulations.
ROLE OF AUDITOR IN AUDIT COMMITTEE AND CERTIFICATE OF
COMPLIANCE OF CONDITIONS OF CORPORATE GOVERNANCE
1. A representative of the statutory auditor, when required, shall be invited
to the meetings of the audit committee. The auditor of a company has a right to be
heard in such meetings.
2. The auditor shall communicate frequently with the Audit Committee on key
accounting or auditing issues which give rise to a greater risk of material
misstatements.
3. He should advise the audit committee on:
a. Improving corporate governance
b. Implementation of accounting policies and practices
c. Compliance with accounting standards
d. Strengthening of the Internal Control systems etc.
Review of information by Audit Committee
The audit committee shall mandatorily review the following information.
1. Management Discussion and analysis of financial condition and results of operations
2. Statement of significant related party transactions submitted by management.
3. Management letters/letters of internal control weaknesses issued by the statutory
auditor.
4. Internal audit reports relating to internal control weaknesses
5. The appointment, removal and terms of remuneration of the Chief Internal Auditor
shall be subject to review by audit committee
6. Statement of deviations
Compliance with code of corporate governance
Separate Section on Corporate Governance
 Clause 49 of the Listing Agreement prescribes that there shall be a separate section
on Corporate Governance in the Annual Reports of company. Under this
heading, the company should include a detailed compliance report on
Corporate Governance.
 Where, the company has not complied with any of the mandatory requirements
specified in the listing agreement, it shall provide the reasons thereof.
 If the company has adopted any non-mandatory requirements, the extent to
which they have been adopted, should be specifically highlighted.
11.4
 The entity is required to obtain a certificate from its Statutory Auditor to the
effect that it has complied with the conditions of Corporate Governance as stipulated in
that clause.
 SEBI sets up a monitoring cell which will assess whether the companies are
complying with the requirements of Clause 49 of the Listing Agreement. Any non-
compliance identified by it shall be reported to SEBI within 60 days from
the end of each quarter.
Matters addressed in Clause 49 regarding Corporate Governance: Matters
addressed in Clause 49 regarding Corporate Governance are -
 Board’s Director including its composition and compensation;
 Provisions regarding Board’s Committee including composition and functioning of
Audit Committee which is an important pillar of the Corporate Governance;
 Management of subsidiary companies;
 Disclosures of important issues regarding related party transactions accounting
policies, principle of risk management, accounting for proceeds from public issues,
right issues, preferential issues, etc;
 Content of management discussion and analysis;
 Information to shareholders;
 CEO/ CFO certification;
 Report of Corporate Governance and compliance certificate.
VERIFICATION OF COMPOSITION OF BOARD (REGULATION 17 AND 17A)
 The auditor should ascertain whether, through out the reporting period, the
Board of Directors comprises of an optimum combination of Executive
Directors and Non-Executive Directors with at least one woman director (The
Board of Directors of Top 500 listed entities shall have at least one
independent women director and top 1000 listed entities by 01/04/2020.
The top 500/1000 listed entities shall be determined on the basis of
market capitalization as at the end of the immediate previous financial
year)
 Not less than 50% of the directors shall be Non-Executive Directors. A non-
executive director who has attained the age of 75 years cannot be appointed/
continued as such unless a special resolution is passed.
A non-executive director is a director who does not engage in the day-to-day
management of the organization, but is involved in policy making exercises.
 The auditor should also verify that where the Chairperson of the Board is a Non-
Executive Director, at least 1/3rd of the Board should comprise of
Independent Directors and in case the company does not have a regular
Non-Executive Chairperson, i.e. in case the chairman is an Executive Director, at
least half of the Board should comprise Independent Directors. From 01/04/2020,
in case of listed company having outstanding SR equity shares, the auditor shall
check and ensure that at least half of the board of directors comprises of
independent directors.
In determining the number of requisite independent directors or Non-Executive
Director, the fraction, if any, should be rounded off to the next integer. For example,
in a Board headed by a Non-Executive Director Chairman and comprising of 6 other
11.5
directors (i.e. seven directors), the number of independent directors in the Board
should be three or more.
An Executive Director can be either a Whole-time director or a Managing
Director. In contrast, a Non-Executive Director is neither a whole time director nor
a managing director.
 Further, if the regular Non-Executive Chairperson is a promoter of the
company or is related to any promoter or person occupying management positions at
the Board level or at one level below board level, at least one-half of the Board of the
company shall consist of Independent Directors.
 With effect from 01/04/2020, the Chairperson of the board of top 500 listed
entities shall be:
a. a non-executive director
b. not related to the MD or the CEO as per the definition of relative under
Companies Act, 2013
 The auditor should ensure that the Board of Directors of the top 1000 listed
entities (and the top 2000 listed entities with effect from 01-04-2020) shall
comprise of not less than 6 directors.
 The minutes of the meetings of Board of Director’s should be verified to ascertain
whether a director is an executive director or a non-executive director.
Remuneration of Directors (Part C of Schedule V)
Non-executive Directors
All fees/compensation, if any paid to Non-Executive Directors, including
Independent Directors, shall be fixed by the Board of Directors and shall require
previous approval of shareholders in general meeting. The shareholders’ resolution
shall specify the limits for the maximum number of stock options that can be granted to
Non-Executive Directors, in any financial year and in aggregate.
Approval of shareholders by special resolution shall be obtained every year in case
the annual remuneration payable to a single Non-Executive Director exceeds
50% of total annual remuneration payable to all Non-Executive Director’s.
However, this requirement of taking prior approval of shareholders shall not apply to
payment of sitting fees to non-executive directors, if made within the limits
prescribed under Companies Act, 2013. An Independent director shall not be entitled
to any stock option.
Executive Directors
The fees or compensation payable to executive directors who are promoters or members of
the promoter group, shall be subject to he approval of the shareholders by special resolution
in general meeting, if –
i. the annual remuneration payable to such executive director exceeds
Rs.5 crore or 2.5% of the net profits of the listed entity, whichever is
higher; or
ii. where there is more than one such director, the aggregate annual
remuneration to such directors exceeds 5% of the net profits of the listed
entity.
TATA STEEL LIMITED Registered Office Bombay House 24 Homi Mody Street
11.6
Fort Mumbai 400 001 India Corporate Identity Number

L27100MH1907PLC000260
Criteria of making payments to Non-Executive Directors
Overall remuneration should be reflective of the size of the Company, complexity of
the sector/industry/company’s operations and the company’s capacity to pay the
remuneration.
Independent Directors ("ID") and Non-Independent Non- Executive Directors ("NED")
may be paid sitting fees (for attending the meetings of the Board and of committees
of which they may be members) and commission within regulatory limits. Quantum of
sitting fees may be subject to review on a periodic basis, as required.
Within the parameters prescribed by law, the payment of sitting fees and commission
will be recommended by the NRC and approved by the Board.
Overall remuneration (sitting fees and commission) should be reasonable and sufficient
to attract, retain and motivate Directors aligned to the requirements of the Company
(taking into consideration the challenges faced by the Company and its future growth
imperatives).
Overall remuneration practices should be consistent with recognised best practices.
The aggregate commission payable to all the NEDs and IDs will be recommended by
the NRC to the Board based on Company’s performance, profits, return to investors,
shareholder value creation and any other significant qualitative parameters as may be
decided by the Board.
The NRC will recommend to the Board, the quantum of commission for each Director
based upon the outcome of the evaluation process which is driven by various factors
including attendance and time spent in the Board and committee meetings, individual
contributions at the meetings and contributions made by Directors other than in
meetings.
In addition to the sitting fees and commission, the Company may pay to any Director
such fair and reasonable expenditure, as may have been incurred by the Director while
performing his/her role as a Director of the Company. This could include reasonable
expenditure incurred by the Director for attending Board/Board committee meetings,
general meetings, court convened meetings, meetings with shareholders/creditors/
management, site visits, induction and training (organised by the Company for
Directors) and in obtaining professional advice from independent advisors in the
furtherance of his/her duties as a director.
OBLIGATIONS WITH RESPECT TO EMPLOYEES INCLUDING SENIOR
MANAGEMENT, DIRECTOR AND PROMOTER /BOARD PROCEDURE
Number of Board Meetings
 The board shall meet at least four times a year, with a maximum time gap of
120 days between any two meetings.
11.7
Quorum
 The quorum for Top 1000 listed entities is 1/3rd of its total strength or 3
directors whichever is higher with at least one independent director.
(Also for Top 2000 listed companies with effect from 01/04/2020) Participation
through video conferencing shall also be counted for the purpose of quorum.
Top 1000/2000 companies shall be determined on the basis of market capitalization,
as at the end of the immediate previous financial year.
Number of Directorships
 A person shall not be a director of more than 8 listed entities whose equity
shares are listed on a stock exchange and shall not be a director of more than 7 listed
entities from 01/04/2020.
 A person shall not serve as an independent director in more than 7 listed
entities.
 Any person who is serving as a whole-time director or managing director in any
listed entity shall serve as independent director in not more than 3 listed
entities.
Number of Committees
 A director shall not:
a. be a member in more than ten committees or
b. act as a Chairperson of more than five committees across all companies
in which he is a director.
 For the purpose of considering the limit of the committees on which a director can
serve, all public limited companies, whether listed or not, shall be
included and all other companies including private limited companies, foreign
companies and companies under section 8 of the Companies Act, 2013 shall be
excluded. This restriction is applicable only in respect of
Chairperson/membership of the Audit Committee and the Stakeholder’s
Relationship Committee only.
Intimation
 Every director shall inform the company about the committee positions he
occupied in other companies and notify changes as and when they take place.
Removal/Replacement of an Independent Director
 An Independent Director who resigns or is removed from the Board of the
company shall be replaced by a new Independent Director at the earliest but
not later than the immediate next board meeting or three months from
the date of such vacancy, whichever is later.
 Provided that where the company fulfils the requirements of Independent
Directors in its board even without filling the vacancy created by such resignation
or removal, as the case may be, the requirement of replacement by a new
Independent Director shall not apply.
Disclosures
 Non-executive directors shall be required to disclose their shareholding
(both own or held by / for other persons on a beneficial basis) in the listed entity
in which they are proposed to be appointed as directors, prior to their
11.8
appointment. These details should be disclosed in the notice to the general

meeting called for appointment of such director.
 Senior management shall make disclosures to the board relating to all
material financial and commercial transactions, where they have personal
interest that may have a potential conflict with the interest of the company at large.
 No employee including key managerial personnel or director or promoter of a
listed entity shall enter into any agreement for himself or on behalf of any other
person, with any shareholder or any other third party with regard to compensation
or profit sharing in connection with dealings in the securities of such listed
entity, unless prior approval for the same has been obtained from the Board
of Directors as well as public shareholders by way of an ordinary resolution:
CODE OF CONDUCT
 The Board shall lay down a code of conduct for all Board members and senior
management of the listed entity. The term “senior management” shall mean
personnel who are members of its core management team excluding Board of
Directors. Normally, CFO, CS and all members of management one level below the
CEO/MD/WTD/Manager are considered as Senior Management.
 All Board members and senior management personnel shall affirm compliance
with the code on an annual basis.
 The annual report of the company shall contain a declaration to this effect
signed by CEO.
 The code of conduct shall be posted on the website of the company.
WHISTLE-BLOWING/VIGIL MECHANISM
Whistle-blowing means calling the attention of the top management to some
wrongdoing occurring within an organization.
I. Every listed entity shall establish a vigil mechanism for directors and
employees.
II. The details of establishment of such mechanism shall be disclosed by the company
on its website and in the Board’s Report.
III. All employees and directors who are associated with the company can raise concerns
regarding malpractices and events which may negatively impact the company such
as:
1. Inaccuracy in maintaining the company’s books of account and financial records
2. Financial misappropriation and fraud
3. Procurement fraud
4. Conflict of interest
5. Misuse of company’s assets and resources
6. Inappropriate sharing of company’s sensitive information
7. Corruption and Bribery
8. Insider trading
9. Child labour
10. Non-adherence to safety guidelines etc.
11.9
IV. Any employee/director shall submit a report of the genuine concerns or grievances
to the audit committee. In exceptional cases, the vigil mechanism shall be
provided with direct access to the Chairperson of the audit committee.
V. The mechanism shall also provide safeguards against victimization of
employees and directors of such whistle-blower.
SUBISIDIARY OF LISTED ENTITY
Director
At least one independent director on the Board of Directors of the holding company
shall be a director on the Board of Directors of an unlisted material subsidiary
whether incorporated in India or not. For the purpose of this clause, a “material
subsidiary” shall mean a subsidiary, whose income or net worth exceeds twenty per
cent of the consolidated income or net worth respectively, of the holding
company and its subsidiaries in the immediately preceding accounting year.
Review of Financial Statements
The Audit Committee of the listed holding company shall also review the financial
statements, in particular, the investments made by the unlisted subsidiary company.
Review of Minutes
The minutes of the Board meetings of the unlisted subsidiary company shall be placed at the
Board meeting of the listed holding company.
Significant Transactions
The management should periodically bring to the attention of the Board of Directors of the
listed holding company, a statement of all significant transactions and arrangements
entered into by the unlisted subsidiary company.
The term ―significant transaction or arrangement‖ shall mean any individual transaction or
arrangement that exceeds or is likely to exceed 10% of the total revenues or total expenses
or total assets or total liabilities, as the case may be, of the material unlisted subsidiary for
the immediately preceding accounting year.
Sale of Shares
No company shall dispose of shares in its material subsidiary which would reduce its
shareholding (either on its own or together with other subsidiaries) to less than 50% or
cease the exercise of control over the subsidiary without passing a special resolution
in its General Meeting except in cases where such divestment is made under a scheme
of arrangement duly approved by a Court/Tribunal.
Sale of Assets
Selling, disposing and leasing of assets amounting to more than twenty percent of
the assets of the material subsidiary on an aggregate basis during a financial year shall
require prior approval of shareholders by way of special resolution, unless the
sale/disposal/lease is made under a scheme of arrangement duly approved by a
Court/Tribunal.
Where a listed holding company has a listed subsidiary which is itself a holding company,
the above provisions shall apply to the listed subsidiary insofar as its subsidiaries are
concerned.
11.10
Secretarial Audit
Every listed entity and its material unlisted subsidiaries incorporated in India shall
undertake secretarial audit and shall annex with its annual report, a secretarial
audit report, given by a company secretary in practice, in such form as may be
specified.
NOMINATION AND REMUNERATION COMMITTEE
The Board of Directors shall constitute the Nomination and Remuneration
Committee which shall comprise at least three directors, all of whom shall be non-
executive directors and at least half shall be independent. However, in case of a
listed entity having outstanding SR equity shares ( equity shares of an issuer having
superior voting rights compared to all other equity shares issued by that issuer which are
generally issued to promoters/founders), 2/3rd shall comprise of independent directors.
Chairperson of the committee shall be an independent director.
The quorum shall be either 2 members or 1/3rd of the members of the committee,
whichever is greater, including at least 1 independent director in attendance.
The role of such committee shall, inter-alia, include the following:
 Formulation of the criteria for determining qualifications and
independence of a director and recommend to the Board of Directors a
policy, relating to the remuneration of the directors, key managerial personnel
and other employees;
 Formulation of criteria for evaluation of performance of independent directors
and the Board of Directors.
 Devising a policy on Board diversity;
 Identifying persons who are qualified to become directors and who may be appointed
in senior management in accordance with the criteria laid down, and recommend to
the Board their appointment and removal;
 Whether to extend or continue the term of appointment of the
independent director, on the basis of the report of performance evaluation of
independent directors.
 The nomination and remuneration committee shall meet at least once in a year.
 The Chairperson of the Nomination and Remuneration Committee may be
present at the Annual General Meeting, to answer the shareholders' queries.
STAKEHOLDER’S RELATIONSHIP COMMITTEE
The listed entity shall constitute a Stakeholders Relationship Committee to specifically look
into the mechanism of redressal of grievances of shareholders, debenture holders and
other security holders.
 There should be minimum 3 members with at least one independent
director. However, in case of a listed entity having outstanding SR equity shares,
at least 2/3rd of the committee shall comprise of independent directors.
 The chairperson of this Committee shall be a non-executive director and shall
be present at the Annual General Meeting to answer queries of the security
holders.
 The committee shall meet at least once in a year.
11.11
 The Board of Directors shall decide other members of this Committee

 The role of the committee shall include:
a. Resolving grievances of the security holders including complaints
relating to transfer/transmission of shares, non-receipt of annual
report, non-receipt of declared dividends, issue of new/duplicate
certificates etc.
b. Review of measures taken for reducing the quantum of unclaimed
dividends and ensuring timely receipt of dividend warrants/annual
reports/notices.
c. Review of measures taken for effective exercise of voting rights by
shareholders.
d. Review of adherence to the service standards adopted by the listed
entity in respect of various services being rendered by the Registrar &
Share Transfer Agent.
The auditor should ascertain from the minutes book of the Board meetings whether a
Shareholders/ Investors Grievance Committee has been set up under the chairmanship of
a non-executive director. Further the auditor should also ascertain from the minutes book
about whether such committee is prima facie functioning.
The auditor should also verify the investors’ grievances pending up to the date of
certificate of compliance of conditions of corporate governance.
RISK MANAGEMENT COMMITTEE
The Board of Directors shall constitute a Risk Management Committee.
 The Chairperson of the Risk Management Committee shall be a member of the Board
of Directors and senior executives of the listed entity may be members of the
committee.
 The majority of members of Risk Management Committee shall consist of members
of the Board of Directors. However, in case of a listed entity having outstanding
SR equity shares, at least 2/3rds of the Risk Management Committee shall
comprise of independent directors.
 The committee shall meet at least once in a year.
 The Board of Directors shall define the role and responsibility of the Risk
Management Committee and may delegate monitoring and reviewing of the risk
management plan to the committee and such other functions as it may deem fit.
 The provisions of this regulation shall be applicable to top 500 listed entities,
determined on the basis of market capitalisation, as at the end of the immediate
previous financial year.
 These procedures shall be periodically reviewed to ensure that executive
management controls risk through means of a properly defined framework.
STATEMENT OF DEVIATIONS/VARIATIONS
The listed entity shall submit to stock exchange the following statements on
quarterly basis for public issue, rights issue, preferential issue etc,.
11.12
a. Indicating deviations, if any, in the use of proceeds from the objects stated in
the offer document or explanatory statement to the notice for general meeting as
applicable;
b. Indicating category-wise variation (capital expenditure, sales and marketing,
working capital etc.) between projected utilization of funds made by it in its
offer document or explanatory statement to the notice for the general meeting, as
applicable and the actual utilization of funds.
2. The statements shall be continued to be given till such time the issue proceeds
have been fully utilized or the purpose for which these proceeds were raised
has been achieved.
3. Where an entity has raised funds through preferential allotment or QI
Placements, the listed entity shall disclose every year the utilization of such
funds during that year in its annual report until such funds are fully
utilized.
The audit committee shall mandatorily review:
a. Quarterly statement of deviations submitted to stock exchanges.
b. Annual statement of funds utilized for purposes other than those stated
in the offer document/prospectus/notice.
INFORMATION TO SHAREHOLDERS
In case of the appointment of a new director or re-appointment of a director the
shareholders must be provided with the following information:
 A brief resume of the director
 Nature of his expertise in specific functional areas
 Disclosure of relationships between directors inter-se
 Names of listed entities in which the person also holds the directorship
and the membership of Committees of the Board; and
 Share- holding of non- executive directors.
The auditor should ascertain from the communications sent, whether in the case of
appointment of a new director or re-appointment of a director, the shareholders have
been provided with the information stipulated above.
COMPLIANCE CERTIFICATE (CEO/CFO CERTIFICATION)
The CEO and the CFO shall certify to the Board that:
 They have reviewed financial statements and the cash flow statement for the
year and that to the best of their knowledge and belief:
 These statements do not contain any materially untrue statement or omit
any material fact or contain statements that might be misleading;
 These statements are in compliance with existing accounting standards,
 There are, to the best of their knowledge and belief, no transactions entered in to
by the listed entity during the year which are fraudulent, illegal or violative of
the listed entity’s code of conduct.
 They accept responsibility for establishing and maintaining internal
controls for financial reporting and that they have evaluated the effectiveness
11.13
of the internal control systems of the listed entity pertaining to financial reporting
and they have disclosed to the auditors and the Audit Committee, deficiencies
in the design or operation of internal controls, if any, of which they are aware
and the steps they have taken or propose to take to rectify these deficiencies.
 They have indicated to the auditors and the Audit committee:
 Significant changes in internal control over financial reporting during the
year;
 Significant changes in accounting policies during the year and that the same
have been disclosed in the notes to the financial statements; and
 Instances of significant fraud of which they have become aware and the
involvement therein, if any, of the management or an employee having a
significant role in the listed entity’s internal control system over financial
reporting.”
Part B of Schedule II clearly brings out that -
The CEO/CFO Certification has to assert that they have evaluated the effectiveness of
internal control systems of the listed entity pertaining to financial reporting.
The CEO/CFO Certification will further state the manner in which deficiencies (if any) in
the design or operation of such internal controls has been disclosed to the auditors
and the Audit Committee.
The CEO/CFO Certification will also state the steps they have taken or propose to take to
rectify these deficiencies in the design or operation of such internal controls
pertaining to financial reporting
In the context of internal controls, the auditor should ensure that a process exists in the
listed entity whereby all significant changes in the accounting policies and in the system of
internal controls are communicated to the Audit Committee and the auditors.
In situations where negative or adverse comments or exclusions/disclaimers are contained
in the CEO/CFO Certification, the auditor should consider the same in the Audit Report
and/or the certificate of compliance of conditions of corporate governance.
DISCLOSURES – MANAGEMENT DISCUSSION AND ANALYSIS
As part of the directors’ report or as an addition thereto, a Management Discussion
and Analysis report should form part of the Annual Report to the shareholders.
This Management Discussion & Analysis should include discussion on the following matters
within the limits set by the company’s competitive position:
 Industry structure and developments.
 Opportunities and Threats
 Segment–wise or product-wise performance.
 Outlook
 Risks and concerns
 Internal control systems and their adequacy.
 Material developments in Human Resources / Industrial Relations front, including
number of people employed etc.
 Details of significant changes (i.e. change of 25% or more as compared to the
immediately previous financial year) in key financial ratios, along with detailed
explanation therefore, including:
11.14
ii. Debtors Turnover

iii. Inventory Turnover
iv. Interest Coverage Ratio
v. Current Ratio
vi. Debt-Equity Ratio
vii. Operating Profit Margin (%)
viii. Net Profit Margin (%)
 Details of any change in Return on Net Worth as compared to immediately previous
financial year along with a detailed explanation thereof.
The auditor is required to review the compliance with disclosure requirements
and to verify the particular facts as disclosed by the management.
Other Disclosures
Related Party Disclosures
 Listed entity to submit a quarterly compliance report within 15 days from close of the
quarter wherein the details of all material transactions with related parties shall be
disclosed.
 Such report shall be signed by Compliance Officer/CEO.
 Shall disclose the transactions with any person or entity belonging to the
promoter/promoter group which holds 10%or more shareholding in the listed entity,
in the format prescribed in the relevant accounting standard for annual results.
 Shall submit with in 30 days from the date of publication of standalone and
consolidated results for the half year all related party transactions in the format
prescribed in the relevant accounting standard for annual results to the stock
exchange and shall publish the same on its website.
Disclosure in relation to the Sexual Harassment of Women at Workplace
The following should be disclosed in the section on Corporate Governance of the Annual
Report about number of complaints:
a. Filed during the financial year
b. Disposed during the financial year
c. Pending as on end of the financial year
REPORT ON CORPORATE GOVERNANCE
1. The listed entity shall submit a quarterly compliance report on corporate
governance in the format as specified by the Board from time to time to the
recognised stock exchange(s) within 15 days from the close of quarter.
In such quarterly compliance report, the company shall disclose all material
transactions with related parties. The company should also disclose the policy on
dealing with related party transactions on its website and a web-link thereto shall be
provided in the annual report.
2. It is also required to submit a compliance report at the end of a financial year (for the
whole financial year) as well as within 6 months from the end of the financial year.
4. The report shall be signed either by the Compliance Officer or the Chief
Executive Officer of the listed entity.
11.15
5. The auditor should ascertain whether the Board of Directors have

included in the Annual Report of the listed entity, a separate section on
corporate governance with a detailed compliance report on corporate
governance.
6. Any data in the report on corporate governance should not be
inconsistent with that contained in the financial statements.
AUDITOR’S CERTIFICATE
As per Schedule V, a listed entity shall obtain a compliance certificate from either the
auditors or practicing company secretaries regarding compliance of conditions of
corporate governance and shall annex it to the Directors’ Report.
Adverse or Qualified Statement : Depending upon the facts and circumstances, some
situations may require an adverse or qualified statement or a disclosure without necessarily
making it a subject matter of qualification in the Auditors’ Certificate, in respect of
compliance of requirements of corporate governance for e.g.,
1. The number of non-executive directors is less than 50% of the strength of Board of
directors.
2. A qualified and independent audit committee is not set up.
3. The Chairman of the audit committee is not an independent director.
4. The Audit Committee does not meet four times a year.
5. The necessary powers in terms of Part C of Schedule II have not been vested by the
Board in the Audit Committee.
6. The time gap between two Board meetings is more than one hundred and twenty
days.
7. A director is a member of more than ten committees or acts as Chairman of more
than five committees across all companies in which he is a director.
8. The information of quarterly results is neither put on the listed entity’s website nor
sent in a form so as to enable the stock exchange on which the entity’s securities are
listed to enable such stock exchange to put it on its own website.
9. The power of share transfer is not delegated to an officer or a committee or to the
registrar and share transfer agents.
A proforma of Auditor’s Certificate regarding compliance of conditions of Corporate
Governance is shown below:
CERTIFICATE
To,
The Members of................ (Name of the entity)
We have examined the compliance of conditions of Corporate Governance by ( name of the
entity ) for the year ended on ......... as stipulated in clause 49 of the listing Agreement of the
said Stock Exchange(s)
The compliance of conditions of Corporate Governance is the responsibility of the
management. Our examination was limited to procedures and implementation thereof,
adopted by the company for ensuring the compliance of the conditions of the Corporate
Governance. It is neither an audit nor an expression of opinion on the financial statement of
the company.
11.16
In our opinion, and to the best of our information and according to the explanations given
to us, subject to the following:
1)
2)
We certify that the company has complied with the conditions of Corporate Governance as
stipulated in the above mentioned listing Agreement.
We state that no / ...... investor grievance(s) is / are pending for a period exceeding one
month against the company as per the records maintained by the shareholders / investors
Grievance Committee.
We further state that such compliance is neither an assurance as to the future viability of the
company nor the efficiency or effectiveness with which the management has conducted the
affairs of the company.
For & on behalf of XYZ & Co.

Chartered Accountants
(Partner / Proprietor)
Place..........
Date............

M/s All-in-One Limited is a large-sized listed Indian Company with focus on
design and delivery of custom made Information Technology applications for
various business entities in India and abroad. The Management wants to
know whether they are required to constitute Risk Management Committee
as per LODR, 2015 and if so, required, what should be its composition? Advise.
(5 Marks) MAY 2018
Constitution of Risk Management Committee: As per regulation 21 of LODR 2015, provision
relating to constitution of risk management committee is applicable to top 100 listed
entities, determined on the basis of market capitalisation, as at the end of the immediate
previous financial year. In the instant case, All-in-One Limited, is a large sized listed Indian
Company with focus on design and delivery of custom made IT applications for various
business entities in India and abroad. As per fact of the case it is a large sized listed Indian
company, assuming that it is included in top 100 listed entities, All – in – One Limited is
required to constitute risk management committee.
Answer:
REFER TO RISK MANAGEMENT COMMITTEE TOPIC IN THE MATERIAL
Comment on the following in the light of certificate of compliance of
conditions of Corporate Governance to be issued for a listed company where
the Board consists of 10 directors including a non-executive director as its
chairman and further:
There were 5 meetings held during the year as follows 01/04/2017, 01/06/2017,
01/09/2017, 03/01/2018, 25/03/2018.
There are 4 independent directors. One of them resigned on 25/05/2017. A new
independent director was appointed on 01/09/2017.
11.17
The Chairman of Audit Committee did not attend the Annual General meeting
held on 14/09/2017.
The internal audit reports were obtained by Audit Committee on quarterly
basis. Quarter 1 internal audit report commented on certain serious
irregularities as regards electronic online auction of scrap. The agenda of
Audit Committee did not deliberate or take note of the issue. (4 Marks)
NOV. 2018
Compliance of conditions of Corporate Governance in case of Listed Company: As per
Listing Obligation and Disclosure Requirements Regulations 2015, depending upon the
facts and circumstances, some situations may require an adverse or qualified statement or a
disclosure without necessarily making it a subject matter of qualification in the Auditors’
Certificate, in respect of compliance of requirements of corporate governance for example:
The Audit Committee shall meet at least four times in a year and not more than one
hundred and twenty days shall lapse between two meetings. The number of days between
the meetings held on 1.9.2017 and 3.01.2018 is more than 120 days. Hence it is a non-
compliance and would require qualification in certificate of corporate governance
Since the Chairman is the non-executive director, there should be 1/3rd of directors
(rounded to next integer) to be independent. In this case, 4 directors need to be
independent. Any vacancy during shortfall of independent directorship should be filled
within next 3 months or before the start of next meeting, whichever is later. In the instant
case, since the independent director was appointed after lapse of 3 months (i.e. on 1.9.2017)
and after next first meeting 1/6/2017, there is default which would require qualification in
certificate on corporate governance.
Chairman shall be present at Annual General Meeting to answer shareholder queries. In the
given scenario, Chairman of Audit Committee did not attend the Annual General Meeting
held on 14/09/2017 which is not in order/compliance.
The Audit Committee shall mandatorily review the Internal audit reports relating to
internal control weaknesses as per Part C (B) of Schedule II and the auditor should
ascertain from the minutes book of the Audit Committee and other sources like agenda
papers, etc. whether the Audit Committee has reviewed the above-mentioned information.
In the given situation, the agenda of Audit Committee did not deliberate or take note of
serious irregularity mention in Internal Audit Report which is again not in compliance of
conditions of Corporate Governance and warrant audit qualification in certificate on
corporate governance.
The auditor of Mould Limited made an adverse statement in his certificate as

the Audit Committee of the company did not meet four times a year. Discuss
few circumstances which require an adverse or qualified statement in the
auditor’s certificate in respect of compliance of the requirements of Corporate
Government. (4 Marks) NOV. 2016
Discuss any eight (8) adverse or qualified statement or disclosure, which you
would like to make in respect of non-compliance with requirements of
Corporate Governance of a company. (4 Marks) MAY 2018
Answer:
Refer to the heading Auditor’s Certificate in the given material
Matters addressed in Clause 49 regarding Corporate Governance. (4 Marks)
NOV. 2015
11.18
Refer to the given material.
Dishonest Limited, a company incorporated in India has six members in its

Audit Committee. Due to recessionary conditions in India the revenue of the
company is going down and there is slow down in other activities of the
company. Therefore, it was expected that there would not be significant work
for members of the Audit Committee. Considering the overall recession in the
company and the economy, the members of the Committee decided
unanimously to meet once in a year only on March 31, 2014. They reviewed
monthly information system of the Company and found no errors. As an
auditor of Dishonest Limited would you consider the decision taken by the
Audit Committee is in line with the Clause 49 of the (SEBI) Listing Agreement?
The Audit Committee should meet at least four times in a year and not more than four
months shall elapse between two meetings. The quorum shall be either two members or one
third of the members of the audit committee whichever is greater, but there should be a
minimum of two independent members present.
Besides, there is a mandatory review requirement and to review only monthly information
system is not sufficient. Here the audit committee members reviewed only monthly
information system of the company and the same is not sufficient as per clause 49.
The Audit Committee shall mandatorily review the following information as per Clause 49:
1. Management discussion and analysis of financial condition and results of operations;
2. Statement of significant related party transactions (as defined by the Audit
Committee), submitted by management;
3. Management letters / letters of internal control weaknesses issued by the
statutory auditors;
4. Internal audit reports relating to internal control weaknesses; and
5. The appointment, removal and terms of remuneration of the Chief internal auditor
shall be subject to review by the Audit Committee.
Applying the above, the decision taken by the audit committee is not in line with LODR
Regulations.
11.19
12
INVESTIGATIONS
The term investigation implies a systematic and in-depth examination or inquiry to
establish a fact or to evaluate a specific situation. In other words, investigation
means inquiry into facts".
It covers areas of financing decisions, investment decisions, fraud or profitability
determination or cost determination etc.
AUDIT VERSUS INVESTIGATION
Investigation differs substantially from an audit assignment. The scope of audit is
broad based and general in nature whereas investigation is narrow and specific.
The difference is tabulated below:
BASIS OF INVESTIGATION AUDIT

DIFFERENCE
OBJECTIVE An investigation aims at The main objective of an audit

establishing a fact or a is to verify whether the
happening or at assessing a financial statements display a
particular situation. true and fair view of the
state of affairs and the working
results of an entity.
SCOPE The scope of investigation may be The scope of audit is wide and
governed by a Statute or it in case of statutory audit the
may be non-statutory. scope of work is determined
by the provisions of
relevant law.
PERIODICITY It may cover several years, as The audit is carried out either
the outcome of the same is not at quarterly, half-yearly or
certain. yearly intervals.
NATURE Requires a detailed study and Involves test checking or

examination of facts and figure. sample technique to draw
evidences for forming a
judgment and expression of
opinion.
INHERENT No inherent limitations owing Audit suffers from inherent

LIMITATIONS to the nature of engagement. limitations.
EVIDENCE It seeks conclusive evidence. Audit is mainly concerned with

prima-facie evidence.
12.1
REPORTING The outcome is reported to the The outcome is reported to the

person (s) on whose behalf owners of the business entity.
investigation is carried out.
The approach to an investigation is different from that followed in an audit. An

investigation involves a more detailed examination of the selected areas than
what is required in an audit. An investigator does not accept a stated fact as correct
until it is substantiated.
INVESTIGATION UNDER COMPANIES ACT
Section 210 of Companies Act, 2013
The Central Government may order an investigation into the affairs of the
company, either:
 On receipt of a report from Registrar or Inspector ( According to Section 206 if
the registrar/inspector satisfied that the business of a company is being carried
on for a fraudulent or unlawful purpose or not in compliance with the
provisions of this act may carry out such inquiry as he deems fit and may submit
a report to the Central Government recommending for further investigation into the
affairs of the company) or
 On intimation of a Special Resolution passed by the company that the affairs of
the company ought to be investigated or
 In public interest or
 On an order passed by a court requiring investigation
 On an order passed by Tribunal requiring investigation
For the purpose of carrying out investigation, the Central Government may appoint
one or more persons as inspectors. Such inspectors shall carry out
investigation and shall submit a report to the Central Government in such manner
it may direct.
The Central Government, may, by an order assign the investigation, into the affairs
of the company, to the Serious Fraud Investigation Office (SFIO), when it
considers necessary to investigate into the affairs of the company:
 On receipt of a report of the Registrar or inspector; or
 on intimation of a special resolution passed by the company or
 in the public interest or
 on a request from Government Departments (Central/State)
If the case is assigned to SFIO for investigation, no other investigating agency of
Central Government or any State Government shall proceed with investigation in
such case.
Where the reports states that the fraud has taken place in a company and due to such
fraud any director, key managerial personnel, or other officer of the company or any other
person or entity, has taken undue advantage or benefit, whether in the form of any
asset, property or cash or in any other manner, the Central Government may file an
application before the Tribunal for appropriate orders for holding such director,
12.2
key managerial personnel, other officer or any other person liable personally without any
limitation of liability.
The tribunal may order an investigation into the affairs of a company:
i) on receipt of an application made by specified numbers of members along
with evidence or
ii) on an application made by any other person or
if it is satisfied that there are circumstances like:
a. the business of the company is being conducted with an intent to
defraud creditors or
b. the company was formed for any fraudulent or unlawful purpose or
c. the members of the company have not been given all the information
with respect to its affairs etc.
The investigation may be ordered after giving a reasonable opportunity of being
heard to the parties concerned.
If any of the above points were proved in the investigation, then every officer of the
company who is in default and the person or persons concerned in the formation of the
company or the management of the affairs shall be punishable for fraud.
The term affairs of a company was considered in R.V.Board of Trade Ex. Parte St.Martin
Preserving Co. ltd. It was held that it can cover investigation into all aspects of its business;
its assets including goodwill, profits and losses, contracts and transactions, investments and
rather property interests and control of subsidiary companies and transactions of a receiver
and manager of a company.
SPECIAL ISSUES IN INVESTIGATION
Whether an investigator is required to undertake a cent per cent verification
approach or whether he can adopt selective verification
It depends on the exact circumstances of the case under investigation. While
establishing the amount of cash defalcated by the cashier, he has to carefully examine
all the cash vouchers and related transactions. On the other hand, if he is to arrive at the
profitability of a concern, he may verify constituent transactions on a selective basis
taking extreme care to see that no material transaction that affects profit has remained
concealed from his eyes.
Whether the investigator can put reliance on the already audited statement of
account
It depends on the exact circumstances of the case under investigation. If the investigation
has been ordered because of some doubt in the audited statement of account,
there would be no question of reliance on the audited statement of account in such a
case.
If it has been ordered to establish value of a business or a share or the amount of
goodwill payable by an incoming partner, the investigator can rely on audited
materials made available to him unless, in the course of his test verification, he finds
the audit to have been carried on very casually or unless his terms of appointment
clearly require to test everything afresh.
If the statements of account produced before the investigator were not audited by a
12.3
qualified accountant, then of course there arises a natural duty to get the figures in the
accounts properly checked and verified.
Whether an investigator necessarily requires assistance of expert
 For proper conduct of investigation, some times, the investigator may decide to
make use of an expert.
 For this purpose, the investigator shall get written general consent from his
client to refer special matters to the expert.
Basis of opinion of an investigator
The investigator should refrain from issuing speculative opinion. He should confine
his opinion to the established facts and nothing more. If the facts, as conveyed through the
books, records, papers and other evidence, are not capable of being properly established, he
should not express an opinion or, if at all he expresses any opinion, he should qualify the
opinion appropriately. This problem may particularly arise in cases where
incomplete books and records are produced for investigation.
Whether an investigator can make futuristic statements
The investigator should refuse to be futuristic. He may assume that the established
trend in the business will continue in the near future, in the absence of any contrary
evidence, in arriving at the present value of a business. He, however, should not
project the trend into any future years to establish a value.
Whether to retain working papers or not
Another important precaution is that the investigating accountant should retain, on his
files full notes of the work carried out, copies of schedules and all working papers, record of
conversations and the like.
SPECIAL ASPECTS IN CONNECTION WITH BUSINESS INVESTIGATIONS
Statement of Profit and Loss
 Compare each item in Statement of Profit & Loss account with
corresponding figures.
 To facilitate comparison, he has to prepare a summary for P&L account for 5 to 7
years in a columnar form.
TURNOVER
 Break down the sales between various products. Breaking down the sales
will help the investigator to find out the products the sales of which have been
increasing and the sales of which have been falling.
 Prepare list of customers and go through the Order book to identify whether
the business has a very large turnover with a few customers or a small
turnover with several customers.
WAGE STRUCTURE
Rate
The method of computing wages and the rates of wages should be examined. On
occasions a business may have to pay higher wages than those prevailing in other business
in the same neighbourhood in pursuance of an industrial award.
Relationship
12.4
Another factor which is important to consider in this connection is the relationship of the
business with its workers. A business which has suffered several industrial
disputes, strikes, etc. and has had its working interrupted by them frequently cannot be
expected to prosper unless a proper settlement is reached with workers’ unions.
DEPRECIATION
Adequacy & consistency
The charge on account of depreciation and maintenance of machinery and other assets
included in the accounts of different years should be compared to ensure about the
following:
 Adequately provided for
 Basis for calculation is consistent
Revaluation
Further, if assets have been revalued, it should be confirmed that depreciation on the
increased valuation has been adjusted.
Compliance with AS
Further, compliance of relevant AS should also be verified.
MANAGERIAL REMUNERATION
It should be verified that the remuneration payable to various members of managerial
personnel is not excessive in relation to the profits of the business after taking into
account the time devoted by each of them. However, it could also be that no or only a
nominal remuneration has been charged in the accounts. In either case, an
adjustment should be made to arrive at true profitability of the concern. Further,
in case of company, requirement of relevant section of Companies Act, 2013 is to
be seen.
EXCEPTIONAL AND NON-RECURRING ITEMS
It is customary to adjust exceptional items in the summary of Statement of Profit and
Loss in order that they may not obscure the trend of the profits.
In this connection, it is worthwhile to examine the income tax assessment orders of
the business to find out the items which have been treated as revenue but have been
regarded by the taxing authority as inadmissible. Where the effect of these has been
abnormal on the tax paid by the company from year to year, suitable adjustments should be
made in the figures of taxes paid, as well as in the assets amounts.
Likewise, adjustments should be made in respect of exceptional profits and losses.
REPAIRS AND MAINTENANCE
It is one of the recurring expenses of a business. Occasionally it is noticed that this
expenditure is unduly heavy in some of the years, while quite low in some others.
Generally, companies, as a matter of routine undertake major repairs, overhauls and
maintenance programme at an interval of 3 or 4 years while running repairs and
maintenance continue in the usual manner which gives rise to fluctuating charges in the
accounts unless periodic major expenses are treated as deferred expenditure.
Besides, due to wrong allocation of expenses between capital and revenue,
repair charges may appear to be heavy or low. If fluctuating and abnormal charges
for repairs is noticed, it would be the duty of the investigating accountant to scrutinise this
12.5
head thoroughly to establish correct and normal charge for repairs.

UNUSUAL YEAR
A company’s record of profitability may show a trend of increasing or decreasing
profit or loss or it may be highly erratic and fluctuating. Where a definite trend is
established, the job of the investigating accountant is somewhat simplified. He can adopt
recent years’ record of profitability as the basis for estimating future
maintainable profit having regard to the inflationary state in the economy.
But if the same is fluctuating, it may even be necessary to take into consideration results
of past 9 to 10 years with a view to iron out the fluctuation. If, however, it is noticed that
results of one or more years under scrutiny were materially vitiated by exceptional
factors like a long term industrial dispute, natural calamities, fire, war, ravage etc., the
investigating accountant should eliminate such year / years from consideration
altogether since they do not reflect the results obtained through normal business.
BALANCE SHEET
FIXED ASSETS
Fixed assets, usually, are shown in accounts at cost less depreciation but the accounts do
not show the ages of different assets. It is desirable, therefore, to obtain age analysis of
various items of fixed assets. Assets which are old or are obsolete would naturally have
to be replaced. It should be seen that their values are not in excess of the value of service
that they could be expected to render to the business during the balance period of their
active life and the amount they would fetch on sale as scrap.
In addition, from a study of the maintenance expenses incurred from year to year, it
should be judged whether the assets have been properly maintained. If not, it might
be necessary to incur heavy expenditure on repairs to put them in a proper working order.
In such a case, an allowance for this factor should be made in the value of assets.
INVESTMENTS
Investments should be broadly classified into long term investments and current
investments. A current investment is by its nature readily realisable and is intended to be
held for not more than one year. All other investments are long term investments.
Current investments are valued on the basis of lower of cost and fair value determined
either on an individual investment basis or by category of investment but not on an overall
basis.
Long-term investments are usually carried at cost. However, when there is a
permanent decline in the value of long-term investments, the carrying amount should
be reduced to recognise the decline. The carrying amount of long term investments is
determined on an individual investment basis. Interest, dividends and rentals receivable in
connection with investment are generally regarded as income. However in some cases, such
receipts represent recovery of cost and should therefore be reduced from, the cost of
investment (e.g. dividend out of pre-acquisition profits).
INVENTORIES
It should be seen that inventories have been valued consistently and that the basis of
valuation was such that the value placed on inventories did not include any element of
profit. Also, there should be due allowance for damaged, obsolete and slow moving
inventories.
12.6
TRADE RECEIVABLES
In assessing their value, the following should be taken into account:
 The length of the credit period allowed throughout the period under
investigation, to determine whether it has been necessary to increase continually the
credit period in order to effect the sales. If it has been so, it would indicate that the
demand for the goods manufactured by the concern in the market has been
diminishing gradually.
 Debts should be classified according to their age. This would disclose the
character of the parties with whom the company trades and the amount of
working capital that will be necessarily blocked on this account in the course of
business.
OTHER LIQUID ASSETS
It should be ascertained that the assets so described are readily realisable. Money with a
bank in liquidation should be taken only to the extent guaranteed by Deposit Insurance
Scheme.
IDLE ASSETS
On a scrutiny, it may appear that certain assets are remaining idle and are not being
properly applied in the business. These may come from all sections of assets. For example,
certain plant and machinery may have been put to use after a considerable period of time
after acquisition. Some of the fixed assets may be awaiting installation even at the valuation
time. The company may hold large cash and bank balances, not warranted by the need of
the business. Then again, there may be instances of obsolete and slow moving inventories of
large value in the accounts of the company. It would be the duty of the investigating
accountant to eliminate these idle assets, if any, after proper identification from the
net worth of the business. However, proper value of these assets may be separately
added to the value of the business.
LIABILITIES
The important matter to investigate in this regard is whether those are stated fully or
understated or overstated. In other words, whether the profits of the business have
been inflated by suppression of liabilities or there are any free reserves included in the
liabilities. In either case, an adjustment would be necessary. Secondly, it should be
ascertained that liabilities are not unduly large or are not outstanding for a long
time, in such cases, it would be necessary to pay off some of them which would cause a
drain on the liquid resources of the concern. The fact should be stated in the report.
Taxation
Orders in respect of assessments completed should be studied and it should be verified that
adequate provision has been made in respect of liabilities for taxes which have not
been assessed. Also, it should be seen that in the past there has been no reopening of
assessments. If so, the company may be liable for an undisclosed sum of taxes plus
penalties.
Capital
In this regard, it is necessary to ascertain:
Whether the capital is well balanced. This would not be the case if the amount of
debentures and preference share capital are disproportionately large as compared to the
equity capital, for this would be a handicap to the company in raising further equity capital,
on favourable terms for financing the business or to pay off capital commitment.
12.7
Interpretation of figures
Fixed Assets
The amount of capital expenditure which would be necessary in the future for the
continuation of the business, in its existing stage, should be assessed having regard to the
under-mentioned factors:
 the amount required for the replacement of assets when these would become
worn out or obsolete;
 the expenditure which will be necessary to replace obsolete machinery by more
sophisticated machinery for manufacturing different types of goods for which
there is demand.
Turnover
In assessing the turnover which the business would be able to maintain in the future,
the following factors should be taken into account:
Trend
Whether in the past sales have been increasing consistently or they have been
fluctuating. A proper study of this phenomenon should be made.
Marketability: Is it possible to extend the sales into new markets or that these have
been fully exploited? Product wise estimation should be made.
Political and economic considerations
Are the government policies likely to promote the extension of the market for goods to other
countries? Whether the sales in the home market are likely to increase or decrease as a
result of various emerging economic trends?
Competition
 What is the likely effect on the business if other manufacturers enter the same
field?
 Is the demand for competing products increasing?
 Is the company’s share in the total trade constant or has it been
fluctuating?
WORKING CAPITAL
In making assessment of the working capital requirements in the future, the following
matters should be taken into account:
 Has the ratio of inventory to turnover been increasing and if so, is it a
continuing or only a temporary trend?
 Are the trade payables being paid promptly or is there a backlog which will
have to be dealt with?
Sometimes, Chartered Accountants may be called upon to investigate certain matters such
as:
INVESTIGATION ON BEHALF OF A BANK PROPOSING TO ADVANCE LOAN
TO A COMPANY
The objective behind ordering investigation by a bank is to ascertain things such as:
12.8
a. The purpose of Loan

b. Sources of Repayment of Loan
c. Securities available
The Investigating accountant is required to collect the following information in this respect:
1. Whether the company is authorized by its memorandum and articles to borrow
money.
2. The purpose for which the loan is required, for example, whether to finance the new
project or ongoing project.
3. The time and the manner of repayment. Particular attention should be given to
the assumptions made by the company while forecasting the annual profits.
4. The adequacy of security intended to be offered.
5. The financial standing and the reputation that the company possesses in the
market, among customers, its suppliers etc.
6. Whether the company has taken a loan in past from other institutions or banks,
if yes, the performance of company as to its repayment with that bank or
institution and the reason for switching to another bank.
7. The history of growth and development of company for the last 5 years.
8. The possible affect on the economic position of the company due to the economic,
political and social changes that might take place during the period of loan.
9. Investigate the profitability of the company by preparing a condensed income
statement and computing important ratios like stock turnover ratio, fixed assets
turnover ratio, equity to fixed assets, current ratio, liquid ratio, return on capital
employed etc.
INVESTIGATION ON BEHALF OF AN INDIVIDUAL OR A FIRM PROPROSING
TO BUY A BUSINESS
The matters which require investigator’s attention are as follows:
a. General particulars of the business such as date of formation, promoters,
customers and markets, plants and their location, production capacity, technological
soundness etc.
b. The organization structure as to the qualifications and experience of its
directors.
c. The availability of raw material and labour.
d. Financial position of the entity through statements of changes in financial position,
ratio analysis and so on.
e. The tax liability of the enterprise.
f. The existence of internal controls, accounting system, the policies of the
enterprise as regards its assets like cash, debtors, inventories, investments etc.
g. The details of fixed assets as to the type of fixed assets, depreciation, market value,
any encumbrances, leases etc.
h. Amount of loans specifying interest component separately, the summary of long term
debts, contingent liabilities etc.
12.9
i. The composition of company’s capital, reserves and surplus and dividend policies
INVESTIGATION ON BEHALF OF AN INCOMING PARTNER
Some times the incoming partner appoints the investigator to examine the affairs of
the partnership firm to judge whether the terms and conditions offered to him are
reasonable or not.
1. The history of inception and growth of the firm should be ascertained.
2. Investigate the reasons as to why the business needs a new induction.
3. Obtain a draft copy of the proposed partnership agreement to ensure that
there is nothing in the agreement which is detrimental to the interests of the
incoming partner.
4. Examine the profitability of the firm as well as its rate of return and compare this
with alternative business avenues.
5. Examine the valuation of goodwill.
6. Ascertain that adequate provisions for doubtful debts, tax liabilities etc. have
been made.
7. The values of various assets and liabilities appearing in the books should also be
examined to ascertain the proposed values to be brought in the books of a new firm.
8. Position of orders on hand and the range and quality of clientele should be
thoroughly examined.
9. Have knowledge about specializations, if any, attained by the firm in any of its
activities.
10. Study the composition and quality of key personnel employed by the firm and the
likelihood of their leaving the organization in near future.
11. Whether any of the existing partners is likely to retire in near future and what
will be the effects of retirement on the firm’s business.
12. The standing and reliability of the existing partners and their personal
reputation should be properly judged.
13. Pay particular attention to the partner’s remuneration which may be excessive or
inadequate in relation to the nature and profitability of the business, qualifications and
expertise of the partners and such other factors as may be relevant.
DUE DILIGENCE
Due diligence implies a general duty to exercise care in any transaction.
Due diligence aims to take “the care that a reasonable person should take” before
entering into an agreement or a transaction with another party.
Due diligence is a process of investigation, performed by investors, into the details of
potential investment before acquiring a controlling interest in a company.
(Also Called as Target Business).
CLASSIFICATION OF DUE DILIGENCE
Commercial or Operational Due Diligence
It is generally performed by the concerned acquiring enterprise involving an evaluation
from commercial, strategic and operational perspectives. For example, studying
whether, the proposed merger would create operational synergies.
12.10
Financial Due Diligence

It involves analysis of the books of account and other information pertaining to financial
matters of the entity. It should be performed after completion of commercial due
diligence.
Tax Due Diligence (direct and indirect)
It is a separate due diligence exercise but since it is an integral component of the financial
status of a company, it is generally included in the financial due diligence. The accountant
has to look at the tax effect of the merger or acquisition.
Information System Due Diligence
Whether, information system of target entity is providing right information, to the
right management at the right time in the right quantity. It pertains to all
computer systems and related matters of the entity.
Legal Due Diligence
This may be required where legal aspects of functioning of the entity are reviewed. For
example, the legal aspects of property owned by the entity or compliance with
various statutory requirements under various laws.
Environmental Due Diligence
It is carried out in order to study the entity’s environment, its flexibility and
adaptiveness to the acquirer entity.
Personnel Due Diligence
It is carried out to ascertain that the entity’s personnel policies are in line or can be
changed to suit the requirements of the restructuring.
AREAS COVERED IN FINANCIAL DUE DILIGENCE
If a full-fledged financial due diligence is conducted, it would include the following matters:
BRIEF HISTORY OF THE TARGET AND BACKGROUND OF ITS PROMOTERS
 The details of how the company was set up and who were the original promoters have
to be gone into, before verification of financial data in detail.
 An eye into the history of the target may reveal its turning points, survival
strategies adopted by the target from time to time, the market share enjoyed by
the target and changes therein and product life cycle.
ACCOUNTING POLICIES
 The accountant should study the accounting policies being followed by the target
and should ascertain their appropriateness.
 The accountant should also see the effects of the recent changes in the
accounting policies. The target might have changed its accounting policies in the
recent past keeping in view its intention of offering itself for sale.
 The areas in which differing accounting policies are being followed by the target
entity and the acquiring enterprise and the effect of such differences.
REVIEW OF FINANCIAL STATEMENTS
 The accountant should examine whether the financial statements of the target
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have been prepared in accordance with the statute governing the target,
framework for preparation and presentation of the financial statements and the
relevant accounting standards.
 Review the operating results of the target in detail, as the price of the target would
be largely based upon is operating results.
 The accountant should consider the presence of an extraordinary item of income
or expense that might have affected the operating results of the target.
 It is advisable to compare the actual figures with the budgeted figures for
the period under review and those of the previous accounting period.
 Consider the basis upon which assets have been valued and liabilities have been
recognized.
 Check whether the net worth of the business has been arrived at by taking into
account the impact of over/under valuation of assets and liabilities.
The accountant should pay particular attention to the valuation of intangible assets. The
objective of the due diligence exercise will be to look specifically for any hidden liabilities or
over-valued assets.
Examples of Hidden Liabilities are:
+
 The company may not have shown any show cause notices which have not matured
into demands, as contingent liabilities. These may be material and important.
 The company may have sold some subsidiaries/businesses and may have agreed to
take over and indemnify all liabilities and contingent liabilities of the same prior to
the date of transfer. These may not be reflected in the books of account of the
company.
 Long pending sales tax assessments
 Agreement to buy back shares sold at a stated price.
 Huge labour claims under negotiation when the labour wage agreement has already
expired.
Examples of overvalued assets could be:
 Uncollectible receivables
 Obsolete/slow or non-moving inventories valued above NRV;
 Huge inventory of packing material with name of the company
 Underused or obsolete plant and machinery and their spares
 Asset values which have been impaired due to sudden fall in the market value
 Litigated assets and property
 Investments carried at cost though realizable value is much lower
 Intangibles of no value
TAXATION
 It is important to check if the company is regular in paying various taxes to the
government.
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 The accountant has to look at the tax effects of the merger or acquisition.
CASH FLOW
 A review of historical cash flows and their pattern would reflect the cash
generating abilities of the target company and should highlight the major trends.
 It is important to know if the company is able to meet its cash requirements
through internal accruals or does it have to seek external help from time to time.
It is necessary to check:
1. Is the company able to honour its commitments to its trade payables,
to the banks, to government and other stakeholders
2. How well is the company able to turn its trade receivables and inventories
3. How well does it deploy its funds
4. Are there any funds lying idle or is the company able to reap maximum
benefits out of the available funds.
FINANCIAL PROJECTIONS
 The accountant should obtain from the target company the projections for the
next 5 years with detailed assumptions and workings
 He should ask the target company to give projections on optimistic, pessimistic
and most likely basis.
 The accountant should evaluate the appropriateness of assumptions used in
the preparation and presentation of financial projections.
 If, the accountant is of the opinion that assumptions used by the target is
unrealistic, the accountant should consider its impact on the overall
valuation of the company. In case he feels the projections provided by the target
are not achievable or aggressive he has to mention this in his report.
MANAGEMENT AND EMPLOYEES
 Check whether all employee benefits like PF, ESI, gratuity, leave and
superannuation have been properly paid/ provided for.
 In the case of PF, ESI etc. the accountant has to see if all eligible employees
have been covered.
 It is very important to consider the pay package of the key employees as this can
be a crucial factor in future costs.
 It is also important to identify the key employees who may not continue after
the acquisition either because they are not willing to continue or because they
are to be transferred to another group company of the target.
STATUTORY COMPLIANCE
 It is important to make a list of laws that are applicable to the entity as well as to
make a checklist of compliance required from the company under those laws.
 If the company has not been regular in its legal compliance it could lead to
punitive charges under the law.
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FORENSIC AUDIT
The corporate accounting scandals are accelerating all over the world. In India, the
best example of such accounting scandal is the case of Satyam Computer Services.
This led the regulators and experts to shift their focus from traditional auditing
techniques to investigation based techniques called as Forensic
Auditing/Accounting.
A Forensic Audit is an examination of a company’s financial records to derive
evidence which can be used in a court of law or legal proceeding.
For example, A Ltd. on the recommendation of its Chief Financial Officer (CFO),
entered into a contract with B LTD for the supply of carts. At the time, B Ltd. was not
authorized to conduct business, as its license was suspended due to certain
irregularities in taxes paid. The CFO had knowledge of this fact, but
still recommended that A Ltd. enter into a contract with B Ltd. because he was
secretly receiving compensation from B Ltd. for doing so.
A forensic audit can reveal such cases of fraud.
In other words, forensic audit will try to resolve the allegations of fraud and
embezzlement through performing thorough investigation and helps in prosecuting a
party for fraud, embezzlement or other financial claims.
“Forensic” means “suitable for use in the court of law”. Forensic Auditing includes
the use of accounting, auditing and investigative skills to assist in legal matters.
Why is a forensic audit conducted?
Forensic audit/investigations are made for several reasons, including the following:
Corruption
In a Forensic Audit, while investigating fraud, an auditor would look out for:
Conflicts of interest – When fraudster uses his/her influence for personal gains
detrimental to the company. For example, if a manager allows and approves
inaccurate expenses of an employee with whom he has personal relations. Even
though the manager is not directly financially benefitted from this approval, he is
deemed likely to receive personal benefits after making such inappropriate
approvals.
Bribery – As the name suggests, offering money to get things done or influence a
situation in one’s favor is bribery. For example, A Ltd. bribing an employee of B Ltd.
to provide certain data to aid A Ltd. in preparing a tender offer to B Ltd.
Extortion – If a company demands money in order to award a contract to another
company, then that would amount to extortion.
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Asset Misappropriation
This is the most common and prevalent form of fraud. Misappropriation of cash,
raising fake invoices, payments made to non-existing suppliers or employees, misuse
of assets, or theft of Inventory are a few examples of such asset misappropriation.
Financial statement fraud
Companies get into this type of fraud to try to show the company’s financial
performance as better than what it actually is. The goal of presenting fraudulent
numbers may be to improve liquidity, ensure top management continue receiving
bonuses, or to deal with pressure for market performance.
Some examples of the form that financial statement fraud takes are the intentional
forgery of accounting records, omitting transactions – either revenue or expenses,
non-disclosure of relevant details from the financial statements, or not applying the
requisite financial reporting standards.
Procedure for a forensic audit investigation
A forensic auditor is required to have special training in forensic audit techniques and
in the legalities of accounting issues.
A forensic audit has additional steps that need to be performed in addition to regular
audit procedures.
Plan the investigation – When the client hires a Forensic auditor, the auditor is
required to understand what the focus of the audit is. For example, the client might
be suspicious about possible fraud in terms of quality of raw material supplied. The
forensic auditor will plan their investigation to achieve objectives such as:
 Identify what fraud, if any, is being carried out
 Determine the time period during which the fraud has occurred
 Discover how the fraud was concealed
 Identify the perpetrators of the fraud
 Quantify the loss suffered due to the fraud
 Gather relevant evidence that is admissible in the court
 Suggest measures that can prevent such frauds in the company in future
Collecting Evidence – By the conclusion of the audit, the forensic auditor is required
to understand the possible type of fraud that has been carried out and how it has
been committed. The evidence collected should be adequate enough to prove the
identity of the fraudster(s) in court, reveal the details of the fraud scheme, and
document the amount of financial loss suffered and the parties affected by the fraud.
A logical flow of evidence will help the court in understanding the fraud and the
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evidence presented. Forensic auditors are required to take precautions to ensure

that documents and other evidence collected are not damaged or altered by anyone.
Common techniques used for collecting evidence in a forensic audit include the
following:
Substantive techniques – For example, doing a reconciliation, review of documents,
etc.
Analytical procedures – Used to compare trends over a certain time period or to get
comparative data from different segments
Computer-assisted audit techniques – Computer software programs that can be
used to identify fraud.
Understanding internal controls and testing them so as to understand the loopholes
which allowed the fraud to be perpetrated.
Interviewing the suspect(s)
While collecting evidence, the forensic auditor should concentrate on the following:
Personal Records
The personal background of a suspected offender can reveal patterns that may be
indicative of fraud. For instance, the suspect may have a litigation history or past
bankruptcy filings. Other checklist items include criminal history or arrest records.
Background checks can also include a person’s Internet search history, employment
history and education verification. These items alone do not confirm fraud, but when
paired with financial evidence, irregularities may be evident.
Financial Investigation
Upon launching a forensic audit, a forensic accountant meticulously gathers
information and reviews it to determine if and how fraud occurred, when it occurred
and the financial amount involved. Under this heading, the auditor shall check credit
reports, real estate transactions, stocks, domestic and foreign bank accounts,
retirement plans etc. Financial evidence may reveal hidden assets or a lifestyle
inconsistent with income.
Others
All the relevant documents and bank accounts of a company suspected to be
involved in fraudulent activities are to be collected from the company directly. These
documents are examined to trace out the utilization of various funds of the company
collected from the public, banks and financial institutions and to examine whether
that has been done as per the declared objectives of the company. After these
examinations, patterns and connections of financial transactions are discovered
which may be prejudicial to the interest of the company and its stakeholders but
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benefiting any particular promoter or employee of the company or its related

concerns.
Fraudulent activities of a company can also be traced by collecting information from
diverse sources such as capital market, statements of bank accounts of the company,
its related business concerns, promoters, directors and employees of the company
obtained from banks, various records of companies available with different
Government agencies i.e. Income tax, Customs & Central Excise, Director General of
Revenue Intelligence (DGRI) etc.
Disgruntled employees and trading partners can be very good source for gathering
intelligence and collecting evidence. Pattern of deteriorating financial condition of
the company and flourishing economic condition of promoters, employees, directors
and related concerns of the company can be analysed to detect possible fraud.
REPORTING
A report is required so that it can be presented to a client about the fraud. The report
should include:
 The findings of the investigation
 A summary of evidence
 An explanation of how the fraud was perpetrated and
 Suggestions on how internal controls can be improved to prevent such frauds
in future.
The report needs to be presented to a client so that they can proceed to file a legal
case if they so desire.
Court Proceedings – The forensic auditor needs to be present during court
proceedings to explain the evidence collected and how the suspect was identified.
They should simplify the complex accounting issues and explain in layman’s language
so that people who have no understanding of the accounting terms can still
understand the fraud that was carried out.
12.17
12.18
13
AUDIT UNDER FISCAL LAWS
AUDIT OF PUBLIC TRUSTS
According to Section 12A of the Income Tax Act, the income of any trust or institution is
exempted from Income tax under sections 11 and 12 of the said Act provided the following
conditions are satisfied:
Clause (a) of section 12A requires a charitable or religious trust or institution to make an
application for registration to the Commissioner of Income Tax. There is no prescribed
time limit with in which this application is required to be filed. After due scrutiny of such
application, the Commissioner may grant exemption from the assessment year relevant to
the financial year in which the application is made.
Where the total income of the trust or institution as computed under this Act, without giving
effect to the provisions of Sections 11 and 12 exceeds Rs.250000 for the A.Y. 2016-17,
the accounts of such trust or institution for that year have to be audited by a Chartered
Accountant and the report of the Chartered Accountant in Form No.10B shall be filed by the
assessee along with the return of income.
The audit programme is outlined in the following paragraphs:

PRELIMINARY
1. Obtain copy of a resolution passed by the trust for appointment of the auditor. Such
resolution shall also specify the scope of audit.
2. Obtain a letter of appointment from the trust.
3. Communicate with the previous auditor in writing as per the requirements of Clause 8
of Part I of First Schedule to the Chartered Accountants Act, 1949.
4. Obtain a certificate as to the opening balances of assets and liabilities and the fund.
5. Obtain a list of books of accounts maintained by the trust.
6. Obtain from the trust a list of the institutions/ activities run/carried out by it.
7. Obtain a certificate from the trust as to the system of accounting and internal control.
8. Obtain a copy of Trust Deed.
ROUTINE CHECKING
1. Check the books of account and other records having regard to the system of
accounting and internal control.
2. Vouch the transactions of the trust to satisfy that:
a. the transaction falls within the ambit of the trust;
b. the transaction is properly authorized by the trustees or other delegated
authority as may be permissible in law;
c. all incomes due to the trust have been properly accounted for on the basis of
the system of accounting followed by the trust;
13.1
d. all expenses and outgoings appertaining to the trust have been recorded on
the basis of the system of accounting followed by the trust;
e. amounts shown as applied towards the object of the trust are covered by the
objects of the trust as specified in the document governing the trust.
3. Obtain a trial balance on the closing date certified by the trustees.

4. Obtain the Balance Sheet and Profit & Loss Account of the trust authenticated by
the trustees and check the same with the trial balance with which they should agree.
ACCOUNTING PRINCIPLES
The auditor should follow, i.e., generally accepted accounting principles and ascertain the
accuracy, truth and fairness of the Balance Sheet and Profit & Loss Account. In particular,
the auditor will scrutinize and ensure that:
 all assets of the trust are verified
 the assets of the trust have been properly valued and depreciation duly provided for
 all liabilities of the trust are properly accounted for;
 the investments of the trust are properly classified and indicated and market values
shown; and
 Outstanding due to the trust are properly accounted for and their recoverability
examined and provision made for irrecoverable.
ANNEXURE TO THE AUDIT REPORT
1. Obtain a list of persons covered by Section 13(3).
2. Obtain from the trustees, a statement enlisting the various items specified in the
Annexure to Form No. 10B and giving the information against each item together with
explanatory or supporting schedules.
3. Verify the information supplied by the trustees in the statement in the light of available
material. Where a list of persons specified in Section 13(3) is not available, indicate
against Sections II and III of the items specified in the annexure the appropriate
qualifying remarks.
The audit report is required to be furnished to the relevant year. Failure to furnish the
report will disentitle the trust or institution to the benefit of Sections 11 and 12.
TAX AUDIT UNDER SECTION 44AB
There are various kinds of audits conducted under different laws such as company audit.
Similarly, income tax law also mandates an audit called ―Tax Audit‖. Section 44AB provides
for the compulsory audit of accounts of certain persons carrying on business or
profession.
The section reads as under:
“Audit of accounts of certain persons carrying on business or profession”.
Every person –
13.2
(a) carrying on business, shall, if his total sales, turnover or gross receipts, in
business exceeds 1 crore rupees during the previous year.
Provided that in the case of a person whose aggregate of all amount received including
amount received for sales, turnover or gross receipts during the previous years, in
cash, does not exceed five per cent of the said amount; and the aggregate of all
payments made including amount incurred for expenditure, in cash, during the
previous year does not exceed five per cent of the said payment, this clause shall have
effect as if for the words ―one crore rupees‖, the words “five crore rupees” had been
substituted. …Applicable from AY 20-21.
(b) Carrying on profession, shall, if his gross receipts, exceed 50 lakhs rupees in
any previous year
(c) carrying on the business shall, if the profits and gains from the business are deemed
to be the profits and gains of such person under section 44AE or 44BB or 44BBB as
the case may be, and he has claimed his income to be lower than the profits
or gains so deemed to be the profits and gains of his business, as the case may be, in
any previous year,
(d) carrying on the profession shall, if the profits and gains from the profession are
deemed to be the profits and gains of such person under section 44ADA, and he has
claimed such income to be lower than the profits and gains so deemed to be the profits
and gains of his profession and his income exceeds the maximum amount which is not
chargeable to income tax in any previous year or
(e) carrying on the business shall, if the provisions of sub-section (4) of section 44AD
are applicable in his case and his income exceeds the maximum amount which is not
chargeable to income tax in any previous year.
Note: Sub-section (4) of section 44AD states that where an eligible assessee declares
profit for any previous year in accordance with the provisions of this section and he
declares profit for any of the 5 assessment years relevant to the previous year
succeeding such previous year not in accordance with the provisions of sub-section (1)
of section 44AD, he shall not be eligible to claim benefit of the provisions of this
section for 5 assessment years subsequent to the assessment year relevant to the
previous year in which the profit has not been declared in accordance with the
provisions of sub-section (1) of section 44AD.
get his accounts of such previous year audited by a chartered accountant before the
specified date ( i.e. September 30 ) and furnish by that date the report of such audit in
the prescribed form duly signed and verified by such accountant and setting forth such
particulars as may be prescribed.
The proviso to section 44AB lays down that where the accounts of an assessee
are required to be audited by or under any other law, it shall be sufficient
compliance with the provisions of this section, if such person gets the accounts
of such business or profession audited under such other law before the
specified date and furnishes by that date the report by an “accountant” as
required under section 44AB.
It may be noted that after amendment by the Finance Act, 2001, tax audit can be
carried out by an accountant only. Accordingly, in case of any assessee like a co-
operative society where the accounts under the relevant law have been audited
13.3
by a person other than a chartered accountant, the tax audit will have to be
conducted by the “accountant” as defined under section 44AB.
The report of such audit, duly signed and verified by the chartered accountant is required to
be given in such form and setting forth such particulars as prescribed by the Board. Rule 6G
provides that such audit report and particulars should be given in Form No. 3CA/3CB as
may be applicable and the statement of particulars should be given in Form
No.3CD.
How to appoint Tax Auditor
The appointment of the auditor for tax audit in the case of a company need not be
made at the general meeting of the members. It can be made by the Board of
Directors or even by any officer, if so authorised by the Board in this behalf. The
appointment in the case of a firm or a proprietary concern can be made by a partner
or the proprietor or a person authorised by the assessee. It is possible for the assessee to
appoint two or more chartered accountants as joint auditors for carrying out the
tax audit, in which case, the audit report will have to be signed by all the chartered
accountants. In case of disagreement, they can give their reports separately.
Who can be appointed as tax auditor
"Accountant" means a chartered accountant who holds a valid certificate of practice.
Section 44AB stipulates that only Chartered Accountants should perform the tax audit. This
section does not stipulate that only the statutory auditor appointed under the
Companies Act or other similar Statute should perform the tax audit. As such the tax
audit can be conducted either by the statutory auditor or by any other chartered
accountant in full time practice.
Who cannot be appointed
 A chartered accountant who is responsible for writing or the maintenance of the
books of account of the assessee should not audit such accounts. This principle
will apply to the partner of such a member as well as to the firm in which he is a
partner.
 The audit of accounts of a professional firm of chartered accountants,
under section 44AB cannot be conducted by any partner or employee of
such firm.
 An internal auditor of the assessee cannot conduct tax audit if he is an
employee of the assessee.
In this section, ―accountant‖ means a chartered accountant as defined in clause (b) of sub-
section (1) of section 2 of the Chartered Accountants Act, 1949 who holds a valid certificate of
practice under sub-section (1) of section 6 of that Act, but does not include [except for the
purposes of representing the assessee under sub-section (1)]-
(a) in case of an assessee, being a company, the person who is not eligible for appointment
as an auditor of the said company in accordance with the provisions of sub-section (3) of
section 141 of the Companies Act, 2013; or
(b) in any other case,-
(i) the assessee himself or in case of the assessee, being a firm or association of persons or
Hindu undivided family, any partner of the firm, or member of the association or the family;
13.4
(ii) in case of the assessee, being a trust or institution, any person referred to in clauses
(a), (b), (c) and (cc) of sub-section (3) of section 13;
(iii) in case of any person other than persons referred to in sub-clauses (i) and (ii), the
person who is competent to verify the return under section 139 in accordance with the
provisions of section 140;
(iv) any relative of any of the persons referred to in sub-clauses (i), (ii) and (iii);
(v) an officer or employee of the assessee;
(vi) an individual who is a partner, or who is in the employment, of an officer or employee of
the assessee;
(vii) an individual who, or his relative or partner-
(I) is holding any security of, or interest in, the assessee:
Provided that the relative may hold security or interest in the assessee of the face value not
exceeding one hundred thousand rupees;
(II) is indebted to the assessee:
Provided that the relative may be indebted to the assessee for an amount not exceeding one
hundred thousand rupees;
(III) has given a guarantee or provided any security in connection with the
indebtedness of any third person to the assessee:
Provided that the relative may give guarantee or provide any security in connection with the
indebtedness of any third person to the assessee for an amount not exceeding one hundred
thousand rupees;
(viii) a person who, whether directly or indirectly, has business relationship with the
assessee of such nature as may be prescribed;
(ix) 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.‘;
Another Explanation has been added to section (7) to define relatives as under:
‗Explanation. —For the purposes of this section, ―relative‖ in relation to an individual, means-
(a) spouse of the individual;
(b) brother or sister of the individual;
(c) brother or sister of the spouse of the individual;
(d) any lineal ascendant or descendant of the individual;
(e) any lineal ascendant or descendant of the spouse of the individual;
(f) spouse of a person referred to in clause (b), clause (c), clause (d) or clause (e);
(g) any lineal descendant of a brother or sister of either the individual or of the spouse of the
individual
Removal of Tax Auditor
A question may arise whether an assessee can remove a tax auditor appointed under section
44AB. The answer depends upon the facts and circumstances of the case. It is,
however, possible for the management to remove a tax auditor where there are valid
13.5
grounds for such removal. This may arise where the tax auditor has delayed the
submission of audit report under section 44AB for an unreasonable period and if it
is found that there is no possibility of getting the audit report uploaded before the
specified date. In such cases, the management may be justified in removing the tax
auditor. However, the tax auditor cannot be removed on the ground that he has given
an adverse audit report or the assessee has an apprehension that the tax auditor is likely
to give an adverse audit report. If there is any unjustified removal of tax auditors, the
Ethical Standards Board constituted by the Institute can intervene in such cases. No
other chartered accountant should accept the audit assignment in such cash.
Ceiling on Number of Tax Audit Assignments
1. The maximum number of tax audit assignments that can be accepted by a member in
practice shall not exceed 60 assignments except audit of accounts of persons covered by
Sections 44AD, 44ADA, 44AE, 44BB or 44BBB. Therefore, before accepting a tax audit,
the chartered accountant should take into consideration the ceiling on tax audit
assignments imposed by the ICAI as specified above.
2. The audit of head office and branch offices of the assessee shall be regarded
as one tax audit assignment.
3. The audit of one or more branches of the same concern by one chartered
accountant shall be construed as only one tax audit assignment.
As per para 6 of Chapter VI of council guidelines , a member of the institute
shall not accept more than specified number of tax audit assignments under
section 44AB of the Income Tax Act.
Provided that in case of a firm of chartered accountants, the specified number shall be
construed as the specified number of tax audit assignments for every partner of the firm.
Provided further that where any partner of the firm is also a partner of any other firm or
firms, the number of tax audit assignments which may be taken for all the firms together in
relation to such partner shall not exceed the specified number in aggregate.
Provided further that where any partner of a firm accepts one or more tax audit assignments
in his individual capacity, the total number of such assignments which may be accepted by
him shall not exceed the specified number in the aggregate.
Provided further that audits conducted under 44AD, 44ADA, 44AE of the Income Tax Act
shall not be taken into account for the purpose of reckoning the specified number. A
member in practice shall be deemed to be guilty of professional misconduct if he accepts in a
financial year more than 60 tax audit assignments.
Failure to Upload Return by Tax Auditor
It is the professional duty of the tax auditor to upload the tax audit report using digital
signature with in the due date. Where, the tax auditor fails to do the same with in the due
date, whether he can be made responsible is dependent on the facts and circumstances of the
case. If there is any unreasonable delay on his part, he is answerable to the Institute if
a complaint is made by the client. However, if the delay in the completion of audit is
attributable to his client, the tax auditor cannot be held responsible. It is, therefore,
necessary that no chartered accountant should accept audit assignments which he
cannot complete within the above time frame.
13.6
AUDIT PROCEDURES
In the case of an audit, the tax auditor is required to express his opinion as to whether the
financial statements give a true and fair view of the state of affairs of the assessee in
the case of the balance sheet and in the case of the profit and loss account/ income and
expenditure account, of the profit/loss or income/expenditure.
As regards the statement of particulars to be annexed to the audit report, he is required
to give his opinion as to whether the particulars are true and correct.
He will have to conduct the audit by applying the generally accepted auditing
procedures which are applicable for any other audit. The tax auditor will also have to keep
in mind the concept of materiality depending upon the circumstances of each case.
AUDIT REPORT
Section 44AB requires the tax auditor to submit the audit report in the prescribed form and
setting forth the prescribed particulars. Sub-rule 1 of rule 6G provides that the report of audit
of accounts of a person required to be furnished under Section 44AB shall -
-- in the case of a person who carries on business or profession and who is required by or
under any other law to get his accounts audited, be in Form No. 3CA;
-- in the case of a person who carries on business or profession, but not being a person
referred to in clause (a), be in Form No. 3CB.
Sub-rule (2) of Rule 6G further provides that the particulars which are required to be
furnished under Section 44AB shall be in Form No. 3CD.
Particulars to be furnished in Form No. 3CD
PART – A
1. Name of the assesse

2. Address
3. Permanent Account Number
4. Whether the assessee is liable to pay indirect
tax like excise duty, service tax, sales tax,
Goods and services tax, customs duty, etc. If yes, please furnish the
registration number or GST Number or any other identification
number allotted for the same
5. Status
6. Previous year from ________
7. Assessment year to ________
8. Indicate the relevant clause of section 44AB
under which the audit has been Conducted
The requirements of clauses 1 to 8 of Part-A are discussed as follows:

1. The name of the assessee whose accounts are being audited under section 44AB should
be given. However, if the tax audit is in respect of a branch, name of such branch
should be mentioned along with the name of the assessee.
2. The address communicated by the assessee to the Income-tax Department for assessment
purposes shall be mentioned. If the tax audit is in respect of a branch or a unit, the
13.7
address of the branch or the unit should be given. In the case of a company, the
address of the registered office should also be stated. In the case of a new assessee,
the address should be that of the principal place of business.
3. The permanent account number (PAN) allotted to the assessee should be indicated.
4. The auditor should mention the registration number or any other identification
number, if any, allotted, in case the assessee is liable to pay indirect taxes like excise
duty, service tax, sales tax, Goods and services tax, customs duty, etc. In case
the assessee is liabile to GST, the GST registration number shall be furnished. Where an
assessee has multiple GSTIN numbers, all the GSTN numbers allotted to the assessee
need to be mentioned.
5. The status of the assessee is to be mentioned namely, individual, Hindu undivided
family, company, firm, an association of persons or a body of individuals, a
local authority or artificial juridical person.
6. Specify the previous year for which the audit is conducted.
7. Specify the assessment year relevant to the previous year for which the accounts are
being audited should be mentioned.
8. Specify the relevant clause of section 44AB under which the audit has been conducted
such as clause (a), clause (b), clause (c) or clause (d) or clause (e).
9(a): If firm or Association of Persons, indicate names of partners/members
and their profit sharing ratios.
Where the assessee is a firm or association of persons (AOP) or body of individuals, the
names of partners of the firm or members of the association of persons or body of
individuals and their profit sharing ratios (%) have to be stated.
In case where the partner of a firm or the member of AOP/ BOI acts in a representative
capacity, the name of the beneficial partner/member should be stated.
9(b): If there is any change in the partners or members or in their profit

sharing ratio since the last date of the preceding year, the particulars of such
change.
All the changes occurring during the entire previous year must be stated.
The auditor should verify the changes in the partnership with supporting documentary
evidences such as partnership deed or agreement of association of persons etc as well as
the minutes of the meetings of the partners in which decision relating to change of
partnership was taken. He can also verify whether:
 The relevant documents have been filed with authorities concerned;
 Notice of changes has been given to the registrar of firms. For this purpose,
obtain certified copies of acknowledgment evidencing filing of documents.
10(a): Nature of business or profession (if more than one business or profession
is carried on during the previous year, nature of every business or profession).
10(b): If there is any change in the nature of business or profession, the
particulars of such change.
13.8
Under this heading, the principal line of each business is to be stated, i.e. the sector
in which the business or profession falls such as manufacturing, trading, commission agent,
builder, contractor, professionals, service sector, financial service sector or entertainment
industry. In case of a person belongs to service sector the nature of each type of service
should be broadly stated. Thereafter, the auditor is required to mention the sub-sector
pertaining to the sector selected.
Any material change in the nature of business should be precisely set out. The change will
include change from manufacturer to trader as well as change in the principal line
of business.
11(a): Whether books of account are prescribed under section 44AA, if yes, list
of books so prescribed.
According to Section 44AA of the Income Tax Act, 1961, every person (Individual, HUF,
firm, Company, BOI/AOP) carrying on Legal, Medical, Engineering, Architectural,
Accountancy, Technical Consultancy, Interior Decoration are mandatorily required to
keep and maintain specified books of account such as Cash Book, Journal, Ledger etc. If
the above persons opt for Section 44ADA, then they are not required to keep
and maintain books of account.
In this connection it should be noted that books have been prescribed only for
professionals.
11(b): List of books of account maintained and the address at which the books of
account are kept.
In case books of account are maintained in a computer system, mention the books of
account generated by such computer system. If the books of accounts are not kept at one
location, please furnish the addresses of locations along with the details of books of
accounts maintained at each location.
11(c): List of books of account and nature of relevant documents examined.
In case, where books of accounts are maintained and generated through computer
system, the auditor should obtain from the assessee the details of address of the place
where the server is located or the principal place of business/Head office or registered
office by whatever name called and mention the same accordingly in clause 11(b).
The tax auditor should obtain a complete list of books of account maintained by the
assessee (both financial and non-financial records) and make appropriate marks of
identification to ensure the identification of the books and records produced before him for
audit. In case of manufacturing/trading, the auditor should verify whether the assesse
maintained quantitative records of stores, raw materials and finished goods.
.
12: Whether the profit and loss account includes any profits and gains
assessable on presumptive basis, if yes, indicate the amount and the relevant
sections (44AD, 44AE, 44AF, 44B, 44BB, 44BBA, 44BBB, Chapter XII-G, First
Schedule or any other relevant section).
Where the profits and gains of the business are assessable to tax under presumptive basis
under any of the sections mentioned abvoe, the amount of such profits and gains
credited/debited to the profit and loss account should be indicated under this clause:
13.9
If the profit and loss account does not include profit assessable on presumptive basis,
then, there is no requirement to furnish the particulars under this clause. The
amount to be mentioned under this clause means the amount included in the
profit and loss account. The tax auditor is not required to indicate as to whether
such amount corresponds to the amount assessable under the relevant section
relating to presumptive taxation.
To give relief to small taxpayers from the tedious job of maintenance of books of account and
from getting the accounts audited, the Income-tax Act has framed the presumptive taxation
scheme under sections 44AD, section 44ADA and section 44AE.
A person adopting the presumptive taxation scheme can declare income at a prescribed rate
and, in turn, is relieved from tedious job of maintenance of books of account and also from
getting the accounts audited.
Presumptive Taxation Scheme of Section 44AD
The presumptive taxation scheme of section 44AD is applicable to Resident Individuals,
HUF and Partnership Firms (Other than LLP) engaged in any business (except the
business of plying, hiring or leasing of goods carriages referred to in section 44AE).
This scheme can be opted by the eligible persons, if the total turnover or gross receipts from
the business do not exceed Rs. 2 crore rupees. In other words, if the total turnover or gross
receipt of the business exceeds Rs. 2 crore rupees, then the scheme of section 44AD cannot be
adopted.
In case of a person adopting the provisions of section 44AD, income will be computed on
presumptive basis, i.e., @ 8% of the turnover or gross receipts of the eligible business for the
year. (6% in case of Digital Receipts)
Income at a higher rate, i.e., at a rate higher than 8% or 6% can also be declared.
No need to maintain books of account as prescribed under section 44AA
A person can declare income at lower rate (i.e., at less than 8%), however, if he does so, and
his income exceeds the maximum amount which is not chargeable to tax, then he is required
to maintain the books of account as per the provisions of section 44AA and has to get his
accounts audited as per section 44AB.
Presumptive Taxation Scheme of Section 44ADA
A person resident in India engaged in following professions can take advantage of
presumptive taxation scheme of section 44ADA:-
1) Legal
2) Medical
3) Engineering or architectural
4) Accountancy
5) Technical consultancy
6) Interior decoration
7) Any other profession as notified by CBDT
In case of a person adopting the provisions of section 44ADA, income will be computed on
presumptive basis, i.e. @ 50% of the total gross receipts of the profession. However such
person can declare income higher than 50%.
13.10
If a person declares income at lower rate (i.e. less than 50%), and his income exceeds the
maximum amount which is not chargeable to tax, then he is required to maintain the books
of account as per the provisions of section 44AA and has to get his accounts audited as per
section 44AB.
Presumptive Taxation Scheme of Section 44AE
The provisions of section 44AE are applicable to every person (i.e., an individual, HUF, firm,
company, etc.).
The presumptive taxation scheme of section 44AE can be adopted by a person who is
engaged in the business of plying, hiring or leasing of goods carriages and who does not own
more than 10 goods vehicles at any time during the year.
A person who owns more than 10 goods vehicles cannot adopt the presumptive
taxation scheme of section 44AE.
Income will be computed @ Rs. 7,500 per month or part thereof during which the goods
vehicle is owned by the taxpayer during the year. Part of the month would be considered as
full month.
Note: If the actual income is higher than the presumptive rate, i.e., higher than Rs. 7,500,
then such higher income can be declared.
In respect of heavy goods vehicle, income will be computed at Rs.1000 per ton of gross
vehicle weight for every month or part of a month during which the heavy goods vehicle is
owned by the assesse.
13 (a) Method of accounting employed in the previous year.
Section 145 of the Income Tax Act, 1961 provide that the income chargeable under the head
“Profits and gains of business or profession” or “Income from other sources”
must be computed in accordance with either cash or mercantile system of
accounting regularly employed by the assessee
13 (b) Whether there had been any change in the method of accounting
employed vis-a-vis the method employed in the immediately preceding previous
year.
Where there has been any change in the method of accounting employed vis-à-vis the method
employed in the immediately preceding previous year is to be stated. As already noted, an
assessee can follow either cash or mercantile system of accounting.
13 (c) If answer to (b) above is in the affirmative, give details of such change,
and the effect thereof on the profit or loss.
Serial number Particulars Increase in profit (`) Decrease in profit

(`)
Where there is any change, the effect thereof i.e. increase or decrease in profits has to be
stated under this clause. So far as the question o f effect of such change on the profit or loss is
concerned, the concept of materiality is the basic governing factor. If it is not possible to
quantify the effect of the change in the method of accounting, appropriate disclosure should
be made under this clause.
13.11
13 (d) Whether any adjustment is required to be made to the profits or loss for
complying with the provisions of income computation and disclosure standards
notified under section 145(2).
13(e) If answer to the above is in the affirmative, give details of such
adjustments like Increase/Decrease in profit including net effect on the profit.
The tax auditor has to report the details of the deviations in the method of accounting from
the AS (IT) (now being called as Income Computation and Disclosure Standards (ICDS)) and
the effect thereon on the profit or loss. As per AS (IT)-II, paragraph 10, any change in an
accounting policy which has a material effect is required to be disclosed. Any change in the
method of valuation of closing stock would amount to a change in an accounting policy and
has to be stated in the financial statements. The tax auditor should ensure that in case the
same is not stated in the financial statements, the fact should suitably be stated under clause
13(d).
13(f) Disclosures as per ICDS
14 (a) Method of valuation of closing stock employed in the previous year.
In sub-clause (a) of clause 14 of Form No.3CD, the reference is made to "closing stock". The
expression "stock-in-trade" means finished goods and raw materials. Since sub-clause (b)
refers to section 145A where the term "inventories" is used, the term "closing stock" will
include all items of inventories Therefore, method of valuation of items of inventories will
have to be given under sub - clause (a).
14 (b) Details of deviation, if any, from the method of valuation prescribed
under section 145A, and the effect thereof on the profit or loss, please furnish:
Serial number Particulars Increase in profit (`) Decrease in profit

(`)
The method of valuation of closing stock is to be stated under this clause.

The tax auditor should study the procedure followed by the assessee in taking the inventory
of closing stock at the end of the year and the valuation thereof. He should obtain the
inventory of closing stock, indicating the basis of valuation thereof, for reporting on the
method of valuation of closing stock under this clause.
The method of stock valuation must be consistently followed from year to year and
the method followed must be brought out clearly. It is necessary to ensure that the method
followed for valuation of stock results in disclosure of correct profit and gains.
The details of deviation, if any, from the method of valuation prescribed under section
145A, and the effect thereof on the profit or loss have to be stated under clause 14(b).
15: Give the following particulars of the capital asset converted into stock-in-
trade:-
a. Description of capital asset;
b. Date of acquisition;
c. Cost of acquisition;
d. Amount at which the asset is converted into stock-in-trade.
13.12
16: Amounts not credited to the profit and loss account, being,-
a. the items falling within the scope of section 28;
b. the proforma credits, drawbacks, refund of duty of customs or excise or service tax, or
refund of sales tax or value added tax, where such credits, drawbacks or refunds are
admitted as due by the authorities concerned;
c. escalation claims accepted during the previous year;
d. any other item of income;
e. capital receipt, if any.
Capital subsidy received in the form of Government grants which are in the nature of
promoters contribution i.e., they are given with reference to the total investment of the
undertaking or by way of contribution to its total capital outlay. For e.g. Capital Investment
Subsidy Scheme.
17: Where any land or building or both is transferred during the previous year
for a consideration less than value adopted or assessed or assessable by any
authority of a State Government referred to in section 43CA or 50C, please
furnish:
Details of property Consideration Value adopted or assessed

received or accrued or assessable
Where any land or building or both is transferred during the previous year for a
consideration less than value adopted or assessed or assessable by any authority of a State
Government referred to in section 43CA or 50C, the auditor is required to furnish the
following details:
 Details of property
 Consideration received or accrued
 Value adopted or assessed or assessable
For reporting the value adopted or assessed or assessable, obtain a copy of the registered sale
deed in case, the property is registered. In case the property is not registered, the auditor may
verify relevant documents from relevant authorities or obtain third party expert like lawyer,
solicitor representation to satisfy the compliance of section 43CA/ section 50C of the Act.
43CA deals with transfer of an asset being land or building or both (not being a capital asset)
50C deals with transfer of an asset being land or building or both (being a capital asset)
18: Particulars of depreciation allowable as per the Income-tax Act, 1961 in
respect of each asset or block of assets, as the case may be, in the following
form:-
a. Description of asset/block of assets.
b. Rate of depreciation.
c. Actual cost or written down value, as the case may be.
d. Additions/deductions during the year with dates; in the case of any addition of an
asset, date put to use; including adjustments on account of –
13.13
 Central Value Added Tax credits claimed and allowed under the Central Excise
Rules, 1944, in respect of assets acquired on or after 1st March, 1994,
 change in rate of exchange of currency, and
 subsidy or grant or reimbursement, by whatever name called.
e. Depreciation allowable.
f. Written down value at the end of the year.
To ascertain when the asset has been put to use, the tax auditor could call for basic records
like production records/installation details/excise records/service tax records/records
relating to power connection for operating the machine and any other relevant evidence.
19: Amounts admissible under sections:
Section Amount Amounts admissible as per the provisions of

debited the Income-tax Act, 1961 and also fulfills the
to conditions. If any specified under the relevant
profit and provisions of Income-tax Act, 1961 or Income-
loss account tax Rules, 1962 or any other guidelines,
circular, etc., issued in this behalf.
32AC
32AD
33AB
33AB
33ABA
35(1)(i)
35(1)(ii)
35(1)(iia)
35(1)(iii)
35(1)(iv)
35(2AA)
35(2AB)
35ABB
35AC
35AD
35CCA
35CCB
35CCC
35CCD
35D
35DD
35DDA
35E
The assessee can claim deduction under the above sections subject to the terms and
conditions mentioned in these Sections.
13.14
Indicate the amount debited to the Profit & Loss Account and the amount
actually admissible in accordance with the applicable provisions of law.
20(a): Any sum paid to an employee as bonus or commission for services
rendered, where such sum was otherwise payable to him as profits or dividend.
[Section 36(1)(ii)].
20(b): Details of contributions received from employees for various funds as
referred to in section 36(1)(va):
Serial Nature Sum Due date The actual The actual date of
number of fund received for amount payment to the
from payment paid concerned authorities
employees
Section 36(1)(ii) provides for deduction of any sum paid to an employee as bonus or
commission for services rendered where such sum would not have been payable to him as
profit or dividend, if it had not been paid as bonus or commission.
Under Clause 20(b), the requirement is only in respect of the disclosure of the amount and
the tax auditor is not expected to express his opinion about its allowability or otherwise.
Clause 21(a): Please furnish the details of amounts debited to the profit
and loss account, being in the nature of Capital, personal, advertisement
expenditure etc:
Nature Serial number Particulars Amount in `
Capital Expenditure
Personal Expenditure
Advertisement expenditure
in any souvenir, brochure,
tract, pamphlet or the like
published by a political
party
Expenditure incurred at
clubs being entrance fees
and subscriptions
Expenditure incurred at
clubs being cost for club
services and facilities used.
Expenditure by way of
penalty or fine for violation
of any law for the time being
force
13.15
Expenditure by way of any

other penalty or fine not
covered above
Expenditure incurred for
any purpose which is an
offence or which is
prohibited by law
Expenditure of Capital nature:
Capital expenditure is not allowable in computing business income unless specifically
provided in any sections of the Act.
The details of capital expenditure, if any, debited to the profit and loss account should be
maintained in a classified manner stating the amount under various heads separately.
Expenditure of personal nature:
Personal expenses debited to the profit and loss account are to be specified under this sub -
clause as they are not deductible in the computation of total income under section 37.
Section 143(1)(e) of the Companies Act 2013 specifically requires the auditor to inquire
whether personal expenses have been charged to revenue account. In the case of a person
whose accounts of the business or profession have been audited under any other law, the tax
auditor will have to report in respect of personal expenses debited in the profit and loss
account.
Expenditure on advertisement in any souvenir, brochure, tract, pamphlet or the
like, published by a political party:
Section 37(2B) provides that no allowance shall be made in respect of expenditure incurred
by an assessee on advertisement in any souvenir, brochure, tract, pamphlet or the like
published by a political party. Therefore, the expenditure of this nature should be segregated
and reported under this clause.
Expenditure incurred at clubs being cost for club services and facilities used,
entrance fees and subscriptions:
The amount of payments made to clubs by the assessee during the year being cost for club
services and facilities used should be indicated under this clause. The payments may be for
entrance fees as well as membership subscription and for catering and other
services by the club, both in respect of directors and other employees in case of companies
and for partners or proprietors in other cases. The fact whether such expenses are incurred
in the course of business or whether they are of personal nature should be
ascertained. If they are personal in nature, they are to be shown separately under
Clause 21(a) referred to earlier.
Expenditure by way of penalty or fine for violation of any law for the time being
in force
This clause requires separate reporting of penalty or fine for violation of any law for the time
being in force, and any other penalty or fine.
Clause 21(b): Amounts inadmissible under section 40(a):
i - as payment to non-resident referred to in sub-clause (i)
13.16
A. Details of payment on which tax is not deducted:

 date of payment
 amount of payment
 nature of payment
 name and address of the payee
B. Details of payment on which tax has been deducted but has not been paid during
the previous year or in the subsequent year before the expiry of time prescribed under
section 200(1)
 date of payment
 amount of payment
 nature of payment
 name and address of the payee
 amount of tax deducted
ii. - as payment referred to in sub-clause (ia)
A. Details of payment on which tax is not deducted:
 Date of payment
 Amount of payment
 Nature of payment
 Name and address of the payee
B. Details of payment on which tax has been deducted but has not been paid on or before
the due date specified in sub-section (1) of section 139.
- Date of payment
- Amount of payment
- Nature of payment
- Name and address of the payer
- Amount of tax deducted
- Amount out of (V) deposited, if any
iii. Under sub-clause (ic) [wherever applicable]
iv. Under sub-clause (iia)
v. Under sub-clause (iib)
vi. Under sub-clause (iii)
- Date of payment
- Amount of payment
- Name and address of the payee
vii.Under sub-clause (iv)
viii. Under sub-clause (v)
21(c): Amounts debited to profit and loss account being, interest, salary, bonus,
commission or remuneration inadmissible under section 40(b)/40(ba) and
computation thereof.
13.17
The tax auditor is required to state the inadmissible amount under section 40(b)/40(ba) and
such information is also required to be given in respect of interest/ remuneration paid to a
member of an Association of persons (AOP)/Body of individuals (BOI).
Clause 21(d): Disallowance/deemed income under section 40A(3).
A. On the basis of the examination of books of account and other relevant
documents/evidence, whether the expenditure covered under section 40A( 3)
read with rule 6DD were made by account payee cheque drawn on a bank or
account payee bank draft. If not, please furnish the details:
Serial Date of Nature Amount Name and Permanent

Number Payment of Account Number of the
Payment payee, if available
For the purpose of furnishing the above particulars, the tax auditor should obtain a list of
all cash payments in respect of expenditure exceeding Rs. 10,000 made by the assessee
during the relevant year which should include the list of payments exempted in terms of Rule
6DD with reasons. This list should be verified with the books of account in order to
ascertain whether the conditions for specific exemption granted under clauses (a) to (l) of
Rule 6DD are satisfied. Details of payments which do not satisfy the above
conditions should be stated under this clause.
B. On the basis of the examination of books of account and other relevant
documents/evidence, whether the payment referred to in 40A(3A) read with
rule 6DD were made by account payee cheque drawn on a bank or account
payee bank draft. If not, please furnish the details of amount deemed to be the
profits and gains of business or profession under Section 40A(3A);
Serial Date of Nature Amount Name and Permanent

Number Payment of Account Number of the
Payment payee, if available
Clause 21(e): provision for payment of gratuity not allowable under section
40A(7).
As per section 40A(7), the deduction shall be allowed in relation to any provision made
by the assessee for the purpose of payment of a sum by way of any contribution towards
an approved gratuity fund, or for the purpose of payment of any gratuity, that
has become payable during the previous year.
The tax auditor should call for the order of the Commissioner of Income-tax granting
approval to the gratuity fund, verify the date from which it is effective and also verify whether
the provision has been made as provided in the trust deed.
In case the provision made for payment of gratuity is not allowable under section 40A(7), the
same is to be stated under this sub-clause.
21(f): any sum paid by the assessee as an employer not allowable under section
40A(9).
13.18
Under section 40A(9) any payment made by an employer towards the setting up or
formation of or as contribution to any fund, trust, company, association of persons,
body of individuals, society registered under the Societies Registration Act, 1860, or other
institutions (other than contributions to recognised provident fund or approved
superannuation fund or notified pension scheme or approved gratuity fund) is not
allowable. The tax auditor should furnish the details of payments which are not allowable
under this section.
21(g): particulars of any liability of a contingent nature.
The assessee is required to furnish particulars of any liability of a contingent nature debited
to the profit and loss account. The tax auditor may not be able to immediately ascertain the
details of contingent liabilities debited to the profit and loss account without a detailed
scrutiny of various account heads e.g. outstanding liabilities, provision etc. Wherever
necessary, a suitable note should be given by the tax auditor as to the non-availability of such
particulars relating to the contingent liabilities.
21(h): Amount of deduction inadmissible in terms of section 14A in respect of
the expenditure incurred in relation to income which does not form part of the
total income.
The tax auditor shall examine the details of amount of inadmissible expenditure as furnished
by the assessee.
21(i): amount inadmissible under the proviso to section 36(1)(iii).
The provisions of section 36(1)(iii) provide that the amount of the interest paid in respect of
capital borrowed for the purposes of the business or profession would be allowed as a
deduction in computing the income referred to in section 28 of the Act.
The proviso there under provides that any amount of the interest paid, in
respect of capital borrowed for acquisition of an asset for extension of existing
business or profession (whether capitalized in the books or account or not) for
any period beginning from the date on which the capital was borrowed for
acquisition of the asset till the date on which such asset was put to use, shall not
be allowed as a deduction.
22: Amount inadmissible under section 23 of the Micro, Small and Medium
Enterprises Development Act, 2006.
The tax auditor is required to state the amount of interest inadmissible under section 23 of
the Micro, Small and Medium Enterprises Development Act, 2006.
Section 23 of the MSME Act lays down that an interest payable or paid by the buyer shall not
be allowed as a deduction for the purposes of the computation of income under the Income-
tax Act,1961.
Section 15 of the MSME Act, requires the buyer to make payment on or before the date
agreed upon in writing, or where there is no agreement in this behalf, before the appointed
day. It also provides that the period agreed upon in writing shall not exceed forty five
days from the day of acceptance or the day of deemed acceptance. Accordingly, where a
buyer fails to make payment of the amount to the supplier, as required under section 15, the
buyer shall , notwithstanding anything contained in any agreement between the buyer and
the supplier or any law for the time being in force, be liable to pay compound interest
with monthly rests to the supplier on that amount from the appointed date or, as the case
13.19
may be, from the date immediately following the date agreed upon, at three times of the
bank rate notified by the Reserve Bank.
The tax auditor while reporting in respect of clause 22 should take the following steps:
- Obtain a full list of suppliers of the assessee which fall within the purview of the
definition of ―Supplier‖ under section 2(n) of the Micro, Small and Medium Enterprises
Development Act, 2006. It is the responsibility of the auditee to classify and identify
those suppliers who are covered by this Act.
- Review the list so obtained.
- Verify from the books of account whether any interest payable or paid to the buyer in
terms of section 16 of the MSME Act has been debited or provided for in the books of
account.
- Verify the interest payable or paid as mentioned above on test check basis.
If on test check basis, the auditor is satisfied, then the amount so debited to the profit and
loss account should be reported under clause 22.
Where the tax auditor, upon due verification, finds that the auditee has neither provided for
nor paid any interest payable under the MSME Act, the no amount is inadmissible under
section 23 of MSME Act. In such a case, appropriate reporting should be made against this
clause in the format provided in the e-filing utility.
Clause 23: Particulars of payments made to persons specified under section
40A(2)(b).
Section 40(A)(2) provides that expenditure for which payment has been or is to be made to
certain specified persons listed in the section may be disallowed if, in the opinion of the
Assessing Officer, such expenditure is excessive or unreasonable having regard to:
- the fair market value of the goods, services or facilities for which the payment is made; or
- for the legitimate needs of business or profession of the assessee; or
- the benefit derived by or accruing to the assessee from such expenditure.
24: Amounts deemed to be profits and gains under section 32AC, 32 AD, 33AB
or 33ABA or 33AC.
25: Any amount of profit chargeable to tax under section 41 and computation
thereof.
The tax auditor should obtain a list containing all the amounts chargeable under section 41
with the accompanying evidence, correspondence, etc. He should in all relevant cases
examine the past records to satisfy himself about the correctness of the information provided
by the assessee. The tax auditor has to state the profit chargeable to tax under this section.
This information has to be given irrespective of the fact whether the relevant amount has
been credited to the profit and loss account or not. The computation of the profit chargeable
under this clause is also to be stated.
26: In respect of any sum referred to in clause (a), (b), (c), (d), (e) (f) or (g) of
section 43B, the liability for which:-
(a) pre-existed on the first day of the previous year but was not allowed in
the assessment of any preceding previous year and was
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 paid during the previous year;

 not paid during the previous year;
(b) was incurred in the previous year and was
 paid on or before the due date for furnishing the return of income of
the previous year under section 139(1);
 not paid on or before the aforesaid date.
(State whether sales tax, customs duty, excise duty or any other indirect tax,
levy, cess, impost etc. is passed through the profit and loss account.)
In the case of an assessee maintaining its accounts on the mercantile system, the tax auditor
should verify the aforesaid particulars of section 43B from the books of account for the year
under audit as well as from the books of account, vouchers and documents of the
immediately succeeding assessment year as well as return of income for the earlier
assessment years so that the information about the aforesaid payments made in the
subsequent year can be furnished.
The tax auditor, in his tax audit report, should clearly distinguish the liability incurred during
the previous year in respect of all the specified sums referred to in clauses (a) to (f) from the
liability that pre-existed on the first day of the relevant previous year.
27(a): Amount of Central Value Added Tax credits availed of or utilized during
the previous year and its treatment in the profit and loss account and treatment
of outstanding Central Value Added Tax credits in the accounts.
CENVAT credit is available on eligible inputs, input services and capital goods. Such credits
are utilized for the payment of the excise duty and service tax liability.
The tax auditor should verify that there is a proper reconciliation between balance of
CENVAT credit in the accounts and relevant excise and service tax records.
In so far as the reporting of accounting treatment of CENVAT credit is concerned the clause
requires that its treatment in profit and loss account and the treatment of outstanding
CENVAT credit in the account have to be reported upon.
27(b): Particulars of income or expenditure of prior period credited or debited
to the profit and loss account.
It may be noted that information under this clause would be relevant only in those cases
where the assessee follows mercantile system of accounting. The tax auditor should obtain
the particulars of expenditure or income of any earlier year debited or credited to the profit
and loss account of the relevant previous year when mercantile system of accounting is
followed.
28: Whether during the previous year the assessee has received any property,
being share of a company not being a company in which the public are
substantially interested, without consideration or for inadequate consideration
as referred to in section 56(2)(viia), if yes, please furnish the details of the same.
Section 56(2)(viia) is applicable if following conditions are satisfied :-
1. Assessee is a Firm or a Company not being a company in which public are
substantially interested.
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2. Assessee receives Shares of another unlisted Company from any Person.

3. The Shares are received without consideration or for a consideration less than
Fair market value of shares, so received.
4. Aggregate FMV of shares so received is > Rs. 50,000/- in case of without
consideration or difference is > Rs. 50,000/- in case consideration is less than
FMV, such consideration shall be chargeable to income-tax under the head
“Income from other sources”
5. FMV shall be calculated by Net Assets Method as explained in sub-clause (b) to
Rule 11UA(1)(c) of the Income Tax Rules 1962.
29: Whether during the previous year the assessee received any consideration
for issue of shares which exceeds the fair market value of the shares as referred
to in section 56(2)(viib), if yes, please furnish the details of the same.
Section 56(2)(viib) is applicable if following conditions are satisfied :-
1. Assessee is a Company not being a company in which public are substantially
interested.
2. Assessee receives consideration for the issue of its Shares from resident person.
Shares are issued at a price which is higher than the Face value.
3. Aggregate consideration received exceeds the FMV of shares issued.
The aggregate consideration received for such shares as exceeds the fair market
value of the shares shall be chargeable to income-tax under the head ―Income
from other sources‖.
4. FMV shall be calculated by Net Assets Method or Discounted Cash Flow method
as explained in Rule 11UA(2) of the Income Tax Rules 1962.
The provisions of this clause are not applicable where the consideration is received by a
venture capital undertaking from a venture capital company or a venture capital fund by
a company from a class or classes of persons as may be notified by the Central Government in
this behalf.
29A: (a) Whether any amount is to be included as income chargeable under the
head “income from other sources” as referred to in clause (ix) of sub-section (2)
of section 56? (Yes/No)
(b) If yes, please furnish the following details:
(i) Nature of Income
(ii) Amount thereof
Section 56(2)(ix) provides for taxability of any sum of money received as an advance or
otherwise in the course of negotiations for transfer of a capital asset, if such sum is
forfeited and the negotiations do not result in transfer of such capital asset.
29B: (a) Whether any amount is to be included as income chargeable under the
head “income from other sources” as referred to in clause (x) of sub-section (2)
of Section 56? (Yes/No)
(i) Nature of Income
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(ii) Amount thereof

Clause (x) is inserted in section 56(2) to provide that the following receipts during a previous
year would be taxable as income in the hands of any person, under the head ‗Income from
Other Sources‘:
 Any sum of money without consideration, in aggregate exceeding 50,000 during the
financial year; or
 Any immovable property without consideration, the stamp duty value of which
exceeds 50,000; or
 Any immovable property for a consideration which is less than stamp duty value by an
amount exceeding 50,000; or
 Any movable property (as defined and specified) without consideration where
aggregate fair market value whereof exceeds 50,000; or
 Any movable property (as defined and specified) for consideration which is less than
fair market value by an amount exceeding 50,000.
 The sum of money or property received from any relative would not be liable to tax.
Property is defined to mean immovable property being land or building or both and other
movable properties, i.e., shares and securities, jewellery, archaeological collections, drawings,
paintings, sculptures, any work of art or bullion.
30: Details of any amount borrowed on hundi or any amount due thereon
(including interest on the amount borrowed) repaid, otherwise than through an
account payee cheque. [Section 69D].
Details of the amount borrowed on hundi (including interest on such amount borrowed) and
details of repayment otherwise than by an account payee cheque, are required to be indicated
under this clause.
For this purpose, the tax auditor should obtain a complete list of borrowings and repayments
of hundi loans otherwise than by account payee cheques and verify the same with the books
of account.
30A. Whether primary adjustment to transfer price, as referred to in sub-
section 1 of Section 92CE, has been made during the previous year? (Yes/No)
i) Under which clause of sub-section 1 of Section 92CE primary
adjustment is made?
ii) Amount in Rs. of Primary Adjustment
iii) Whether the excess money available with the associated
enterprise is required to be repatriated to India as per the
provisions of sub-section 2 of section 92CE? (Yes/No)
iv) If yes, whether the excess money has been repatriated within the
prescribed time (Yes/No)
v) If no, the amount (in Rs.) of imputed interest income on such
excess money which has not been repatriated within the
prescribed time;
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30B. (a) Whether the assessee has incurred expenditure during the previous
year by way of interest or of similar nature exceeding one crore rupees as
referred to in sub-section (1) of section 94B? (Yes/No)
(b) If yes, please furnish the following details:-
(i) Amount (in Rs.) of expenditure by way of interest or of similar nature incurred:
(ii) Earnings before interest, tax, depreciation and amortization (EBITDA) during the
previous year (in Rs.):
(iii) Amount (in Rs.) of expenditure by way of interest or of similar nature as per (i)
above which exceeds 30% of EBITDA as per (ii) above:
(iv) Details of interest expenditure brought forward as per sub-section (4) of section
94B:
A.Y. Amount (in Rs.)
(v) Details of interest expenditure carried forward as per sub-section (4)of section
94B:
A.Y. Amount (in Rs.)
30C. (a) Whether the assessee has entered into an impermissible avoidance
arrangement, as referred to in section 96, during the previous year? (Yes/No)
(b) If yes, please specify:-
(i) Nature of the impermissible avoidance arrangement:
(ii) Amount (in Rs.) of tax benefit in the previous year arising, in aggregate, to all
the parties to the arrangement:
31 (a)* Particulars of each loan or deposit in an amount exceeding the limit
specified in section 269SS taken or accepted during the previous year:-
 name, address and permanent account number (if available with the assessee) of the
lender or depositor;
 amount of loan or deposit taken or accepted;
 whether the loan or deposit was squared up during the previous year;
 maximum amount outstanding in the account at any time during the previous year;
 whether the loan or deposit was taken or accepted otherwise than by an account payee
cheque or an account payee bank draft.
*(These particulars need not be given in the case of a Government company, a
banking company or a corporation established by a Central, State or Provincial Act.)
Section 269SS prescribes the mode of taking or accepting certain loans and deposits. As per
this section, no person shall take or accept from any other person any loan or
deposit otherwise than by an account payee cheque or account payee bank draft
if,-
 the amount of such loan or deposit or the aggregate amount of such loan and deposit;
or
 on the date of taking or accepting such loan or deposit, any loan or deposit taken or
accepted earlier by such person from the depositor is remaining unpaid (whether
13.24
repayment has fallen due or not), the amount or the aggregate amount remaining
unpaid; or
 the amount or the aggregate amount referred to in clause (a) together with the amount
or the aggregate amount referred to in clause (b),
is twenty thousand rupees or more.
If the total of all loans/deposits from a person is Rs.20,000 or more but each individual item
is less than Rs.20,000/-, the information will still be required to be given in respect of all
such entries starting from the entry when the balance reaches Rs.20,000/- or more and until
the balance goes down below Rs.20,000/. As such the tax auditor should verify all
loans/deposits taken or accepted where balance has reached Rs.20,000 or more during the
year for the purpose of reporting under this clause.
The Finance (No.2) Act, 2014 has allowed the ―use of electronic clearing system
through a bank account” as a permissible mode for the purposes of section 269SS.
31(b) - Details of any specified sum taken or accepted in an amount exceeding
limit specified in section 269SS
Specified sum means any sum of money receivable, whether as advance or otherwise in
relation to transfer of an immovable property, whether or not the transfer takes place.
Details to be reported under this sub-clause include:
Whether the specified sum was taken or accepted by cheque or bank draft or use of electronic
clearing system through a bank account
In case the specified sum was taken or accepted by cheque or bank draft, whether the same
was taken or accepted by an account payee cheque or an account payee bank draft
Other Points
Not only advance but any sum received in relation to transfer of immovable property
(including payment received at time of sale) is covered under this clause.
(ba) Particulars of each receipt in an amount exceeding the limit specified in
section 269ST, in aggregate from a person in a day or in respect of a single
transaction or in respect of transactions relating to one event or occasion from
a person, during the previous year, where such receipt is otherwise than by a
cheque or bank draft or use of electronic clearing system through a bank
account:-
(i) Name, address and Permanent Account Number (if available with the assessee) of
the payer;
(ii) Nature of transaction;
(iii) Amount of receipt (in Rs.);
(iv) Date of receipt;
The reporting is required to be made if the amount received is Rs. 2 Lakhs or more for any of
the following:
• in aggregate from a person in a day; or
• in respect of a single transaction; or
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• in respect of transactions relating to one event or occasion from a person.
(bb) Particulars of each receipt in an amount exceeding the limit specified in

section 269ST, in aggregate from a person in a day or in respect of a single
transaction or in respect of transactions relating to one event or occasion from
a person, received by a cheque or bank draft, not being an account payee cheque
or an account payee bank draft, during the previous year:-
the payer;
(ii) Amount of receipt (in Rs.);
(bc) Particulars of each payment made in an amount exceeding the limit

specified in section 269ST, in aggregate to a person in a day or in respect of a
single transaction or in respect of transactions relating to one event or occasion
to a person, otherwise than by a cheque or bank draft or use of electronic
clearing system through a bank account during the previous year:-
the payee;
(ii) Nature of transaction;
(iii) Amount of payment (in Rs.);
(iv) Date of payment;
(bd) Particulars of each payment in an amount exceeding the limit specified in
section 269ST, in aggregate to a person in a day or in respect of a single
transaction or in respect of transactions relating to one event or occasion to a
person, made by a cheque or bank draft, not being an account payee cheque or
an account payee bank draft, during the previous year:-
(i) Name, address and Permanent Account Number (if available with the assessee) of the
payee;
(ii) Amount of payment (in Rs.);
(Particulars at (ba), (bb), (bc) and (bd) need not be given in the case of receipt
by or payment to a Government company, a banking Company, a post office
savings bank, a cooperative bank or in the case of transactions referred to in
section 269SS or in the case of persons referred to in Notification No. S.O.
2065(E) dated 3rd July, 2017)]
(c) Particulars of each repayment of loan or deposit or any specified advance in
an amount exceeding the limit specified in section 269T made during the
previous year:-
(i) name, address and Permanent Account Number (if available with the assessee) of the
payee;
(ii) amount of the repayment;
(iii) maximum amount outstanding in the account at any time during the previous year;
(iv) whether the repayment was made by cheque or bank draft or use of electronic clearing
system through a bank account;
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(v) in case the repayment was made by cheque or bank draft, whether the same was repaid
by an account payee cheque or an account payee bank draft.
(d) Particulars of repayment of loan or deposit or any specified advance in an
amount exceeding the limit specified in section 269T received otherwise than by
a cheque or bank draft or use of electronic clearing system through a bank
account during the previous year:-
payer;
(ii) repayment loan or deposit or any specified advance received otherwise than by a cheque
or bank draft or use of electronic clearing system through a bank account during the
previous year.
(e) Particulars of repayment of loan or deposit or any specified advance in an
amount exceeding the limit specified in section 269T received by a cheque or
bank draft which is not an account payee cheque or account payee bank draft
during the previous year:-
payer;
(ii) repayment loan or deposit or any specified advance received by a cheque or a bank draft
which is not an account payee cheque or account payee bank draft during the previous
year.
(Particulars at (c), (d) and (e) need not be given in the case of a repayment of
any loan or deposit or any specified advance taken or accepted from the
Government, Government company, banking company or a corporation
established by the Central, State or Provincial Act)]
32(a) Details of brought forward loss or depreciation allowance, in the
following manner, to the extent available:
Sr. Assessment Nature of Amount as Amount as Remarks

No. Year loss / returned assessed (give
allowance (in rupees) reference to
(in rupees) relevant order)
The amount of brought forward loss or depreciation allowance is required to be quantified as

per return and assessment orders.
32(b) Whether a change in shareholding of the company has taken place in the
previous year due to which the losses incurred prior to the previous year cannot
be allowed to be carried forward in terms of section 79.
Section 79 of the Act provides that, notwithstanding anything contained in Chapter VI of the
Act, in the case of a closely held company, not being a company in which the public are
substantially interested, where a change in shareholding has taken place in a previous
year, then no loss incurred in any year prior to the previous year shall be carried
forward and set off against the income of the previous year unless on the last
day of that previous year and on the last day of the previous year in which the
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loss was incurred, the shares of the company carrying not less than 51% of the
voting power were beneficially held by the same persons.
32(c) Whether the assessee has incurred any speculation loss referred to in
section 73 during the previous year, If yes, please furnish the details of the
same.
Section 73 of the Act provides for the treatment of losses in speculation business.
Section 73(1) provides that any loss, computed in respect of a speculation business carried on
by the assessee, shall not be set off except against profits and gains, if any, of
another speculation business.
32(d) Whether the assessee has incurred any loss referred to in section 73A in
respect of any specified business during the previous year, if yes, please furnish
details of the same.
Section 73A provides for provisions relating to carry forward and set off of losses by specified
business. It provides that any loss, computed in respect of any specified business
referred to in section 35AD shall not be set off except against profits and gains, if
any, of any other specified business.
Under clause 32(d), the tax auditor has to verify from the books of accounts and other
relevant documents as to whether the assessee is carrying on specified business as referred to
under section 35AD. In case the auditor is of the opinion that the assessee is carrying on such
specified business, he has to furnish the details of the loss incurred, if any, in respect of any
specified business during the previous year. In case the assessee carries on more than one
specified businesses and loss has been incurred in both the business, the details of the loss
incurred with respect of each business is to be specified separately.
32(e) In case of a company, please state that whether the company is deemed to
be carrying on a speculation business as referred in explanation to section 73, if
yes, please furnish the details of speculation loss if any incurred during the
previous year.
The Explanation to section 73 provides that where any part of the business of a
company (other than a company whose gross total income consists mainly of income which
is chargeable under the heads "Interest on securities", "Income from house property",
"Capital gains" and "Income from other sources" or a company the principal business of
which is the business of trading in shares or banking or the granting of loans and advances)
consists in the purchase and sale of shares of other companies, such company
shall, for the purposes of this section, be deemed to be carrying on a speculation
business to the extent to which the business consists of the purchase and sale of such
shares.
Under this clause, the tax auditor has to furnish the details regarding the speculation losses
incurred, if any, as referred in explanation to section 73. The auditor may obtain information
in the following format from the assessee and verify the same from the books of account,
income tax returns of earlier years and other relevant documents.
33: Section-wise details of deductions, if any, admissible under Chapter VIA or

Chapter III (Section 10A, Section 10AA).
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Section under which Amounts admissible as per the provision of the Income
deduction is claimed Tax Act, 1961 and fulfils the conditions, if any, specified
under the relevant provisions of Income Tax Act, 1961 or
Income Tax Rules,1962 or any other guidelines, circular,
etc, issued in this behalf.
34 (a) Whether the assessee is required to deduct or collect tax as per the
provisions of Chapter XVII-B or Chapter XVII-BB, if yes please furnish:
While reporting under this clause the tax auditor may exercise his judgement in the light of
the applicable laws and report accordingly about the applicability of the provisions of Chapter
XVII-B or XVII-BB with regard to the auditee. The tax auditor may rely upon the judicial
pronouncements while taking any particular view.
The auditor should obtain a copy of the TDS/TCS returns filed by the assessee which
shall form the basis of reporting under this clause, to the extent possible. Further, in view of
the voluminous nature of the transactions, the tax auditor can apply test checks and
compliance tests on the transactions reported in the TDS return by the assessee for verifying
the information required to be provided under this clause.
34 (b) Whether the assessee is required to furnish the statement of tax deducted
or tax collected. If yes, please furnish the details:
Under clause 34(b), the tax auditor has to ascertain and report as to whether the assessee has
furnished the statement of tax deducted or tax collected at source within the
prescribed time.
34(b) also requires the auditor to report the transactions with regard to each TAN for which
tax has been deducted but the return has either not been filed or has been filed after the
expiry of the prescribed time.
With regard to each TAN, the auditor is required to mention the ―Type of form‖ that was
applicable like Form 24, 24G, 24Q, 26, 26A, 26B, 26Q etc, due date of furnishing such
statement and the actual date of furnishing, if the statement(s) has been furnished.
Lastly, the auditor is required to state as to whether the statement of tax deducted or
collected, which has been furnished contains information about all the transactions which are
required to be reported.
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34 (c) whether the assessee is liable to pay interest under section 201(1A) or
section 206C(7). If yes, please furnish:
Tax deduction and Amount of interest under Amount paid out of column (2)
collection Account section 201(1A)/206C(7) is along with date of payment.
Number (TAN) payable
Under this clause, the auditor is required to furnish detailed information in case the assessee
is liable to pay interest under section 201(1A) or section 206C(7) of the Act.
Section 201(1A) provides for payment of interest at a specified rate in case the tax has
not been deducted wholly or partly or after deducting has not been paid to the credit of
Central Government as required by the Act.
Similarly, section 206C(7) provides for payment of interest at a specified rate in case
the tax is not collected wholly or partly or if collected not paid to the credit of the
Central Government as required by the Act.
The reporting as to whether the assessee is liable to pay such interest, should be in
consonance with the reporting under clause 34(a) where the details of non-deduction are
required to be reported by him.
35 (a) In the case of a trading concern, give quantitative details of the principal
items of goods traded:
(i) Opening stock;
(ii) Purchases during the previous year;
(iii) Sales during the previous year;
(iv) Closing stock;
(v) shortage / excess, if any.
The tax auditor should obtain certificates from the assessee in respect of the principal items
of goods traded, the balance of the opening stock, purchases, sales and closing stock and the
extent of shortage/ excess/damage and the reasons thereof.
35 (b) In the case of a manufacturing concern, give quantitative details of the
principal items of raw materials, finished products and by-products:
A. Raw materials:
(i) opening stock;
(ii) purchases during the previous year;
(iii) consumption during the previous year;
(iv) sales during the previous year;
(v) closing stock;
(vi) yield of finished products;
(vii) percentage of yield;
(viii) shortage / excess, if any.
B. Finished products / By-products:
(i) opening stock;
(ii) purchases during the previous year;
(iii) quantity manufactured during the previous year;
(iv) sales during the previous year;
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(v) closing stock;

(vi) shortage / excess, if any.
This information should be given only in respect of those items where it is practicable to do
so, having regard to the records maintained by the assessee.
This clause requires that quantitative details of “principal items” of raw materials and
finished goods should be given. Therefore, information about petty items need not be
given.
36: In the case of a domestic company, details of tax on distributed profits
under section 115-O in the following form:-
(a) total amount of distributed profits;
(b) amount of reduction as referred to in section 115-O(1A)(i);
(c) amount of reduction as referred to in section 115-O(1A)(ii);
(d) total tax paid thereon;
(e) dates of payment with amounts.
Section 115-O deals with tax on distributed profits of domestic companies. This section
provides that every domestic company is required to pay dividend distribution tax (CDT) in
addition to income tax on any amount declared/distributed/paid by way of dividends
whether interim or final and whether out of current year‘s profits or accumulated profits @
15% with in 14 days of declaration/distribution/payment, whichever is earliest.
Section 115-O(1A)(i) - If the holding company is in receipt of dividend from its
subsidiary, the dividend distributed by the holding company in the same year, to that extent,
shall not be subject to CDT.
Section 115-O(1A)(ii) - Dividend paid to New Pension System (NPS) is not liable to CDT.
36A. (a) Whether the assessee has received any amount in the nature of
dividend as referred to in sub-clause (e) of clause (22) of section 2? (Yes/No)
(b) If yes, please furnish the following details:-
(i) Amount received (in Rs.):
(ii) Date of receipt:
According to Section 2(22)(e), when a company in which the public are not substantially
interested ( a closely held company), extends a loan or an advance to:
a. any of its shareholders who has more than 10% voting power in the company or
b. to any concern in which such shareholder is substantially interested or
c. for the individual benefit of such shareholder or
d. on behalf of such shareholder
to the extent the company has accumulated profits, such payment would be deemed as a
dividend under Section 2(22)(e).
Payment under circumstances specified below will not be treated as deemed dividend.
a. Loan given by a company involved in money lending, where loans have been
extended in the ordinary course of business.
b. Loan extended to shareholders, subsequently adjusted against dividend
declared and distributed later.
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37: Whether any cost audit was carried out, if yes, give the details, if any, of
disqualification or disagreement on any matter/item/value/ quantity as may be
reported/identified by the cost auditor.
38: Whether any audit was conducted under the Central Excise Act, 1944, if yes,
give the details, if any, of disqualification or disagreement on any
matter/item/value/quantity as may be reported/ identified by the auditor.
39: Whether any audit was conducted under section 72A of the Finance Act,
1994 in relation to valuation of taxable services, if yes, give the details, if any, of
disqualification or disagreement on any matter/item/value/quantity as may be
reported/ identified by the auditor.
Audit Procedures to be followed in respect of Clauses 37, 38, 39
 Ascertain whether any Excise/Service Tax audit was carried out
 Obtain a copy of the audit report.
 Include the disqualifications or disagreement on any matter/item/value/quantity as
may be reported by such auditor in the tax audit report under this clause.
 When the excise audit/service tax audit which might have been ordered is not
completed by the time the tax auditor issues his report, the same shall be reported.
40: Details regarding turnover, gross profit, etc., for the previous year and
preceding previous year:
These ratios have to be calculated only for assessees who are engaged in manufacturing or
trading activities Moreover, the ratios have to be given for the business as a whole and
need not be given product wise.
41: Please furnish the details of demand raised or refund issued during the
previous year under any tax laws other than Income Tax Act, 1961 and Wealth
tax Act, 1957 along with details of relevant proceedings.
Audit Procedures
1. Obtain a copy of all the demand/refund orders issued by the governmental
authorities during the previous year. The demand/refund order pertaining to any
year but received in the previous year shall also be reported.
2. Report all those demand/refunds issued.
3. If there is any adjustment of refund against any demand, the same shall also be
reported under this clause.
42. (a) Whether the assessee is required to furnish statement in Form No.61
or Form No. 61A or Form No. 61B? (Yes/No)
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(b) If yes, please furnish:
Income-tax Type of Due date Date of Whether the Form

Department Form for furnishing, contains
Reporting furnishing if information
Entity furnished about all details/
Identification transactions which
Number are required to be
reported. If not,
please furnish list
of
the
details/transactions
which are not
reported.
43. (a) Whether the assessee or its parent entity or alternate reporting entity is
liable to furnish the report as referred to in sub-section (2) of section 286
(Yes/No)
(b) if yes, please furnish the following details:
(i) Whether report has been furnished by the assessee or its parent entity or an alternate
reporting entity
(ii) Name of parent entity
(iii) Name of alternate reporting entity (if applicable)
(iv) Date of furnishing of report
44. Break-up of total expenditure of entities registered or not registered under the GST:
Sl. Total Expenditure in respect of entities registered Expenditure

No. amount of under GST relating to
Expenditure entities not
incurred registered
during the under GST
year
Relating Relating to Relating to Total
to entities other payment
goods or falling registered to
services under entities registered
exempt composition entities
from scheme
GST
13.33
14
AUDIT OF PUBLIC SECTOR UNDERTAKINGS
Introduction
Public sector undertakings (PSU’s) in India are fundamentally owned or controlled by
Central Government, or any State Government or governments, or partly by the
central government and one or more state governments.
These enterprises are industries supplying basic inputs to industry and agriculture,
such as coal, oil, steel, minerals and metals, cement, chemicals and fertilizers and heavy
equipment.
Public utilities like the railways, postal and telecom services, electricity generation and
supply, road transport, etc. constitute another class of public enterprises.
Framework for Government Audit
In India, audit of such PSU’s is performed by an independent constitutional authority i.e.
Comptroller & Auditor General of India (C & AG) through the Indian Audit and
Accounts Department.
Articles 148 to 151 of the Constitution, prescribes the role of C & AG as follows:
Article 148
 Appointment of C & AG by the President.
 Special procedure for removal of C & AG, only on the ground of proven misbehavior
or incapacity.
 Statutory and other conditions of service to be determined by Parliament.
Article 149
 Performs such duties and exercise such powers in relation to the accounts of the Union
and States and of any other authority or body as may be prescribed by or under any
law made by the Parliament.
The number of organisations subject to the audit of C & AG of India is very large. This
includes:
1. All the Union and State Government departments and offices including the Indian
Railways and Posts and Telecommunications.
2. Public commercial enterprises controlled by the Union and State Government i.e.
Government Companies and Corporations.
3. Non-Commercial autonomous bodies and authorities owned or controlled by the Union or
the State
4. Authorities and bodies substantially financed from Union or State Government.
 The C&AG‟s (Duties, Powers and Conditions of Service) Act, 1971 defines these powers
in detail. It prescribes that:
 The C&AG shall hold office for a term of six years or up to the age of 65
years, whichever is earlier.
 The Constitution of India gives special status to the C & AG and contains
provisions to safeguard his independence.
14.1
 He can resign at any time through a resignation letter addressed to the
President.
 The Act also assigns the duties regarding the audit to be followed by C&AG.
AUDIT OF GOVERNMENT COMPANIES (Commercial Audit)
As defined under section 2(45) of the Companies Act, 2013, a “Government company” is a
company in which not less than 51% of the paid-up share capital is held by the Central
Government or by any State Government or Governments or partly by the Central
Government and partly by one or more State Governments, and includes a company which is
a subsidiary company of such a Government company.
There is a special arrangement for the audit of companies where the equity participation by
Government is 51 percent or more. The auditors of these companies are Chartered
Accountants, appointed/reappointed by the Comptroller & Auditor General. C &
AG may direct the appointed auditor on the manner in which the accounts of the
Government company are required to be audited. The auditor so appointed has to
submit a copy of the audit report to the C & AG. This report shall also include the directions,
if any, issued by C & AG, the action taken thereon. This report is in addition to the reports
issued by the statutory auditors.
The C & AG, within 60 days from the date of receipt of the audit report have a right to:
Conduct a supplementary audit [Section 143(6) of Companies Act, 2013] of such
companies. Any comments given by C & AG upon the audit report issued by the statutory
auditor shall be sent by the company to every person entitled to copies of audited financial
statements and be placed before the AGM of the company at the same time and in the same
manner as the audit report.
Conduct a test audit [Section 143(7) of the Companies Act, 2013] if considered
necessary, by an order, cause test audit to be conducted.
The supplementary audit and test audit conducted by C & AG is in the nature of
efficiency-cum-performance audit.
OBJECTIVE AND SCOPE OF PUBLIC ENTERPRISES AUDIT
The scope and extent of audit of PSU‟s is determined by C & AG.
The audit conducted by C & AG can be classified broadly into the following categories:
1. Financial Audit
2. Compliance Audit
3. Performance Audit
4. Propriety Audit
COMPLIANCE AUDIT
The CAG‟s Regulations on Audit and Accounts, 2007 define compliance audit as
“an assessment as to whether the provisions of the Constitution of India,
applicable laws, rules and regulations made there under and various orders and
instructions issued by the competent authority are being complied with”.
Compliance audit includes:
1. Audit against Rules and Orders and
14.2
2. Audit Against Sanctions
1. Audit Against Rules and Orders
Under this heading, the auditor shall try to verify whether the transactions relating to
expenditure, receipt, assets, liabilities of the entity under audit complied with the laws,
rules, regulations, orders and instructions issued by a competent authority.
Examples
I. In a compliance audit of procurement of material, the auditor shall concentrate on the
following:
 Whether procurement was carried out as per extant rules and in accordance with
delegated financial powers.
 Whether financial propriety was ensured during the stages of tendering, evaluation
and award of contract.
II. In a compliance audit of establishment expenses, the auditor shall have to verify
whether payments in respect of salaries and other entitlements were made in
accordance with the relevant rules and instructions.
III. In compliance audit of Tax Receipts, the auditor shall have to verify whether:
 Assessments were made in accordance with the relevant tax laws and rules
thereunder
 The demands were collected and properly accounted for
IV. In compliance audit of Plant efficiency, the auditor shall verify whether:
 The Plant shutdowns are as per approved norms
 The installed capacity of the plant is designed as per regulatory approvals
 The operation of plant complies with environmental norms.
It also includes verifying whether the rules, regulations etc. are:
 Intra-vires of the provisions of the Constitution of India and the laws (Legality);
 sufficiently comprehensive and ensure effective control over Government
receipts, expenditure, assets and liabilities with sufficient safeguards against loss due
to wastage, misuse, mismanagement, errors, frauds and other irregularities
(Adequacy);
 Clear and free from ambiguity and promote observance of probity in decision making
(Transparency);
 Effective and achieve the intended objectives and aims (Effectiveness).
2. Audit against Sanctions
Under this heading the auditor shall verify whether the sanction is:
 Within the general or express powers delegated to the sanctioning authority.
 Not split to avoid obtaining sanction of a higher authority.
The essence of “Compliance Audit” is in assessing the extent to which laws and
regulations have been respected.
14.3
PROPRIETY AUDIT
Another aspect of audit relates to questions of propriety. This audit is directed towards an
examination of management decisions in sales, purchases, contracts, etc. to see
whether these have been taken in the best interests of the undertaking and conform to
accepted principles of financial propriety.
Propriety audit stands for verification of transactions/actions with a special
emphasis on public interest and commonly accepted customs and standards of
conduct. It is also seen whether every officer has exercised the same vigilance in
respect of expenditure incurred from public money, as a person of ordinary prudence
would exercise in respect of expenditure of his own money under similar circumstances.
In „propriety audit‟, the auditors try to bring out cases of improper, avoidable
expenditure even though the expenditure has been incurred in conformity with the existing
rules and regulations. A transaction may satisfy all the requirements of regularity audit
insofar as the various formalities regarding rules and regulations are concerned, but may still
be highly wasteful. For example, a school building may be constructed but used after five
years of its completion is a case of avoidable expenditure.
Propriety requires the transactions, and more particularly expenditure, to conform to certain
general principles. These principles are:
 that the expenditure is not prima facie more than the occasion demands and
that every official exercises the same degree of vigilance in respect of expenditure as a
person of ordinary prudence would exercise in respect of his own money;
 that the authority exercises its power of sanctioning expenditure to pass an order
which will not directly or indirectly accrue to its own advantage; In other
words, no authority shall pass an order which directly or indirectly benefits him.
 that funds are not utilised for the benefit of a particular person or group of
persons and
 that, apart from the agreed remuneration or reward, no other avenue is kept open to
indirectly benefit the management personnel, employees and others. For example, the
travelling allowance granted by government shall not be a source of profit to the
recipient.
“Propriety audit” has an inherent element of subjectivity because it is very difficult to
establish standards of public interest, commonly accepted customs etc. To take care of this, C
& AG has developed the above norms of propriety for government expenditure.
Relevant provisions in the Companies Act, 2013
The Parliament and Government, with a view to knowing the standards of efficiency,
propriety, cost consciousness and economy, have already come up with some provisions in
the Companies Act, having direct or indirect bearing on propriety; These provisions are:
 Section 143(1) requiring enquiry into certain specified matters.
 Section 143(6) and 143(7) requiring a supplementary audit and test audit respectively
in respect of the Government companies on matters specified.
All these are applicable to Government Companies. The requirement of the provisions of
section 143(1) is essentially propriety-oriented.
Areas of propriety audit under the provisions of Section 143(1) may be following:
14.4
 Whether the terms on which secured loans and secured advances have
been made are prejudicial to the interests of the company or its members.
It may be appreciated that the terms of loans include such matters as security,
interest, repayment period and other business considerations. The auditor has to
inquire whether the terms are such that they can be adjudged as prejudicial to the
legitimate interest of the company or of its shareholders. This is a process of judging a
situation by reference to certain objective standards or reasonableness whether the
terms entered into are prejudicial or not, not only to the company but also to the
shareholders.
 Whether transactions of the company which are represented merely by
book entries are prejudicial to the interests of the company.
This proposition has got to be inquired into by reference to the effects of the book
entries, unsupported by transactions, on the legitimate interests of the company. The
auditor has to exercise his judgment based on certain objective standards. It is also
possible that some transactions may not adversely affect the interests of the company.
The auditor has to judiciously consider what does and does not constitute the interest
of the company.
 Whether investment of companies, other than a banking or an investment
company, in the form of shares, debentures and other securities have
been sold at a price lower than the cost.
Apparently, this is a matter of verification by the auditor. The intention, however, is
not to know whether loss has occurred due to the sale. The auditor is required to
inquire into circumstances of sale of investments that resulted in loss. Obviously, the
duty cast on him is propriety based, i.e., reasonableness of the decision to sell at
a loss. It involves exercise of judgment having regard to the circumstances in which
the company was placed at the time of making the sale.
 Whether loans and advances made by the company have been shown as
deposits.
Again, considering the propriety element, rationalizing the proper disclosure of loans
and advance given by company is made.
 Whether personal expenses have been charged to revenue.
It is an accepted principle that expenses which are not business expenses should not
be charged to revenue. The effect of charging personal expenses to the business is to
distort the profitability of the company and to secure a personal gain at the cost of the
company. Obviously, propriety is involved in this; charging personal expenses to
business account is highly improper and abusive hence this provision.
 In case it is stated in the books and papers of the company that shares
have been allotted for cash, whether cash has actually been received in
respect of such allotment, and if no cash actually received, whether the
position in books of account and balance sheet so stated is correct, regular
and not misleading.
A control has been set up to verify the receipt of cash in case of allotment of shares for
cash. Further, if cash is not received, the books of accounts and statement of affairs
shows the true picture.
14.5
The implications of the Companies (Auditor‟s Report) Order, 2016 and the provisions of the
section 143(6) and the directions issued by the Comptroller and Auditor General also contain
significant elements of propriety.
Propriety elements under CARO, 2016
1. If the company has granted any loans, secured or unsecured, to companies, firms
limited liabilities partnerships or other parties covered in the register maintained
under section 189 of the Companies Act, whether the terms and conditions of the
grant of such loans are not prejudicial to the company’s interest, whether the
repayment of the principal amount and interest are stipulated and whether
repayments or receipts are regular. For this, the auditor should take note of repayment
schedule. The dates of receipt of principal amount and interest thereof needs to be
verified with reference to the books of accounts of the company to come to the
conclusion whether such receipts are regular.
2. If the amount is overdue, state the total amount overdue for more than ninety days,
and whether reasonable steps have been taken by the company for recovery of the
principal and interest.. In making this examination, the auditor would have to
consider the facts and circumstances of each case, including the amounts involved. It
is not necessary that steps to be taken must necessarily be legal steps. Depending upon
the circumstances, period of delay and other similar factors, issue of reminders or
sending of advocate‟s or solicitor‟s notice may amount to reasonable steps. The auditor
should ask the management to give in writing the steps which have been taken. The
auditor should arrive at his opinion only after consideration of the management‟s
representations.
3. Whether the company is regular in depositing undisputed statutory dues
including provident fund, employees' state insurance, income-tax, sales-tax, service
tax, duty of customs, duty of excise, value added tax, cess and any other statutory dues
to the appropriate authorities and if not, the extent of the arrears of outstanding
statutory dues as on 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 addition, where dues of income tax or sales tax or service tax or duty of customs or
duty of excise or value added tax have not been deposited on account of any dispute,
then the amounts involved and the forum where dispute is pending shall be mentioned
by the auditor. It may be noted that mere representation to the concerned Department
shall not be treated as a dispute.
4. If the company has defaulted in repayment of loans or borrowing to a financial
institution, bank, Government or dues to debenture holders? If yes, the period and the
amount of default to be reported (in case of defaults to banks, financial institutions,
and Government, lender wise details to be provided).The auditor should obtain a
schedule of repayments to banks, financial institutions and debenture holders from
the management of the company. He should examine the agreement or other
documents containing the terms and conditions of the loans and borrowings of the
company from banks and financial institutions. The auditor should also examine the
debenture trust deed. This examination would enable the auditor in verifying the
amount and due dates of the payments mentioned in schedule of repayments provided
by the management of the company. The auditor should then verify whether the
repayments as per the books of account are in accordance with the terms and
conditions of the relevant agreement. The auditor should also satisfy himself that the
repayment have actually been made to the party concerned.
14.6
5. Whether the term loans were applied for the purpose for which the loans were
obtained. The auditor should examine the terms and conditions subject to which the
company has obtained the term loans. The auditor may also examine the proposal for
grant of loan made to the bank. The auditor should compare the purpose for which
term loans were sanctioned with the actual utilisation of the loans. He should obtain
sufficient appropriate audit evidence regarding the utilisation of the amounts raised.
6. Whether moneys raised by way of initial public offer or further public offer (including
debt instruments) and term loans were applied for the purposes for which those are
raised. If not, the details together with delays or default and subsequent
rectification, if any, as may be applicable, be reported;
7. Whether any fraud by the company or any fraud on the Company by its officers or
employees has been noticed or reported during the year; If yes, the nature and the
amount involved is to be indicated;
8. Whether the company has entered into any non-cash transactions with directors or
persons connected with him and if so, whether the provisions of section 192 of
Companies Act, 2013 have been complied with;
9. Whether managerial remuneration has been paid or provided in accordance with the
requisite approvals mandated by the provisions of section 197 read with Schedule V to
the Companies Act?
10. In respect of loans, investments, guarantees, and security whether provisions of
section 185 and 186 of the Companies Act, 2013 have been complied with. If not,
provide the details thereof.
FINANCIAL AUDIT
Financial audit is primarily conducted to express an audit opinion on a set of financial
statements.
It includes:
 Examination and evaluation of financial records and expression of opinion on
Financial Statements;
 Evaluation of compliance with applicable statutes and regulations which affect the
accuracy and completeness of accounting records; and
 Audit of internal control and internal audit functions that assist in safeguarding assets
and resources and assure the accuracy and completeness of accounting records.7
PERFORMANCE AUDIT
“Performance audit is an independent assessment or examination of the extent to which an
organisation, programme or scheme operates economically, efficiently and effectively.”
A performance audit is an independent, objective and systematic examination of whether
public sector undertakings systems, operations, programmes are operating in accordance
with the principles of economy, efficiency and effectiveness.
Performance audit in PSUs is conducted by Comptroller and Auditor General of India
through various subordinate offices of Indian Audit and Accounts Department
(IAAD). In conducting performance audit, the subordinate offices are guided by manual and
auditing standards prescribed by CAG.
According to the guidelines issued by the C&AG of India, Performance Audits usually address
the issues of:
14.7
Economy
Economy implies minimizing the cost of resources used for an activity without compromising
with quality and quantity. Under this heading, the auditor shall verify whether the PSU had
acquired and deployed the human, physical (material) and financial resources:
 Economically
 at appropriate quantity, quality and
 In due time
The performance auditor needs to examine whether the means chosen results in
reasonable economical use of public funds.
Efficiency
Efficiency can be defined as “the relationship between resources employed and
outputs delivered; in terms of quantity, quality and timing”. Efficiency is how well
a process turns inputs into outputs.
The principle of efficiency means getting the most from the available resources.
Efficiency exists where the use of financial, human, physical and information resources is
such that output is maximised for any given set of resource inputs, or input is minimised for
any given quantity and quality of output.
In conducting an efficiency audit, C & AG is required to check matters such as whether the
entity:
1. Established and followed sound procurement policies
2. Resources are properly protected and maintained
3. The objectives of public sector programmes are met
4. Efficient operative procedures are used
Effectiveness
Effectiveness refers to meeting the objectives set and achieving the intended results. It is an
appraisal of the performance of the programmes/schemes/projects with
reference to the overall target objectives.
In other words, while carrying out an effectiveness audit, the core areas to be concentrated
include:
 The extent to which objectives are achieved and
 Comparison of the intended and the actual impact
of an activity.
In auditing effectiveness, performance audit may, for instance:
 Determine the extent to which a program achieves a desired level of program
results;
 Assess and establish with evidence whether the observed direct or indirect social and
economic impacts of a policy are due to the policy or to other causes;
 Assess whether the programme complements, duplicates, overlaps or counteracts
other related programmes;
 Determine whether management has considered alternatives for carrying out the
program that might yield desired results more effectively or at a lower cost;
14.8

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CA FINAL - ADVANCED AUDITING & PROFESSIONAL ETHICS - PAPER 3

By C.V. SHARMA Sir

S.No. Chapter Name Pg. No.

1 STANDARDS ON AUDITING 1.1 to 1.153

2 PROFESSIONAL ETHICS 2.1 to 2.90

3A COMPANY AUDIT 3.1 to 3.72

3B CARO, 2016 3.1 to 3.15

4 PEER REVIEW & QUALITY REVIEW 4.1 to 4.18

5 AUDIT OF BANKS 5.1 to 5.24

6 AUDIT OF INSURANCE COMPANIES 6.1 to 6.18

7 AUDIT OF NBFC 7.1 to 7.17

8 MANAGEMENT AUDIT 8.1 to 8.13

9 AUDIT OF CONSOLIDATED FINANCIAL STATEMENTS 9.1 to 9.13

10 LIABILITIES OF THE AUDITOR 10.1 to 10.7

11 AUDIT COMMITTEE & CORPORATE GOVERNANCE 11.1 to 11.19

12 INVESTIGATION & DUE DILIGENCE 12.1 to 12.18

13 AUDIT UNDER FISCAL LAWS 13.1 to 13.33

14 AUDIT OF PUBLIC SECTOR UNDERTAKINGS 14.1 to 14.8

5. Application and Other Explanatory material

 To communicate the breaches to the engagement partner or other relevant

2. Firm personnel have experience with relevant regulatory or reporting

 Ensuring that the engagement partner has the appropriate capabilities,

2. The review shall have to be conducted in a timely manner at appropriate stages

engagement documentation available to clients, provided such disclosure does not

SA 200 – OVERALL OBJECTIVES OF THE INDEPENDENT AUDITOR AND THE

2. To report on the Financial Statements

Fair Presentation Framework

To achieve the objective of maintaining confidentiality of information, the ―Professional

Appropriateness refers to the relevance of audit evidence.

COMMON UNDERSTANDING OF THE TERMS OF THE AUDIT ENGAGEMENT

I / We refer to the letter dated _________ informing me / us about my / our (re)

 Proper maintenance of accounts and other matters connected therewith;

(f)To provide me / us, inter-alia, with:

Yours faithfully, (signature)

SA - 230 – AUDIT DOCUMENTATION

 Audit evidence obtained and

CONTENTS OF AUDIT DOCUMENTATION

II. THE RESULTS OF THE AUDIT PROCEDURES PERFORMED AND THE

SA 240 - THE AUDITOR‟S RESPONSIBILITIES RELATING TO FRAUD IN AN

Two types of intentional misstatements are relevant to the auditor– misstatements

Why Frauds take place

Evaluation of Fraud Risk Factors

further classified based on the three conditions generally present when

 Significant operations located or conducted across international borders in

o Promotions, compensation, or other rewards inconsistent with

at least a written representation in respect of fraud on/by the company. For

 To identify instances of non-compliance with other laws and regulations that

Non-compliance with applicable laws and regulations may result in material

or regulation is involved, the possible legal consequences, including the possibility of

SA - 260 (R) – COMMUNICATION WITH THOSE CHARGED WITH

SA - 265 - COMMUNICATING DEFICIENCIES IN INTERNAL CONTROL TO

Indicators of Significant Deficiencies in Internal Control

SA – 299 (R) : JOINT AUDIT OF FINANCIAL STATEMENTS

d) Presentation and Disclosure of the Financial Statements as required by the applicable

SA 315 – IDENTIFYING AND ASSESSING THE RISKS OF MATERIAL

The risk assessment procedures shall include the following:

Analytical procedures performed as risk assessment procedures may identify and

 Constrains on the availability of capital and credit

SA 320 - MATERIALITY IN PLANNING AND PERFORMING AN AUDIT