LAST MINUTES PREPARATION - Aseemsir.inaseemsir.in/asset/uploads/media/1478855721ipcc audit...

LAST MINUTE PREPARATION

OF

IPCC

AUDITING & ASSURANCE

WITH

CA. ASEEM TRIVEDI

LMP PREPARED BY CA. ASEEM TRIVEDI

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TERMS USED IN STANDARDS

Audit A Systematic Independent examination of Financial Statements, records, documents and data with an object to form and express opinion that whether the Financial Statements are giving true and fair view or not.

Auditor The person Conducting Audit. As defined in SA-200 (Revised) “Auditor” is used to refer to the person or persons conducting the Audit, usually the engagement partner or other members of the engagement team, or, as applicable, the firm. Where a SA expressly intends that a requirement or responsibility be fulfilled by the engagement partner, the term “engagement partner” rather than “auditor” is used. “Engagement partner” and “firm” are to be read as referring to their public sector equivalents where relevant. Engagement Partner is defined in as per SQC-1 as “The partner or other person in the firm who is a member of the Institute of Chartered Accountants of India and is in full time practice and is responsible for the engagement and its performance, and for the report that is issued on behalf of the firm, and who, where required, has the appropriate authority from a professional, legal or regulatory body. Engagement Team means all personnel performing an Engagement, including any experts contracted by the firm in connection with that engagement.

Auditee The person required to get his accounts audited he may be a legal person also.

Financial Statements

(SA-200 Revised)A structured representation of historical financial informations, including related notes, intended to communicate an entity's economic resources or obligations at a point in time or the changes therein for a period of time in accordance with a financial reporting framework. The related notes ordinarily comprise a summary of significant accounting policies and other explanatory information. Usually it means and includes Balance sheet, Statement Profit and Loss, Cash Flow Statement (if required by law), Notes to the accounts and significant accounting policies. Preparation and presentation of financial statement is responsibility of management and those charged with governance. Auditors responsibility is just to examine for the True and Fair view of financial position of the entity.

Financial Reporting Framework

(SA-200 Revised)The Financial Reporting Framework adopted by management and, where appropriate, those charged with governance in the preparation and presentation of the Financial Statements that is acceptable in view of the nature of the entity and the objective of the Financial Statements, or that is required by law or regulation. For example under companies act the FRF is Schedule III and Accounting standards. In Banks the FRF means Financial Statements required in specific format and with RBI guidelines for Income Recognition ( Standard and NPA advances) and Asset classification (stand and doubtful, loss assets )

Audit Report

Opinion in a statement format (may be prescribed format like 3CD )

Auditors Opinion

Point of view of auditor on Financial Statement's truthfulness and fairness based on the conclusion drawn from the Audit evidences obtained.

Type of Opinion

Unqualified opinion- Where an auditor gives an opinion on the various matters without any reservations, it is an unqualified opinion. An example of an unqualified opinion would be a statement by the auditors that ‘in our opinion and to the best of our information and according to the explanations given to us, the Balance Sheet and the Statement of Profit and Loss give a true and fair view of the state of affairs and working results’. Qualified opinion-Where an auditor gives an opinion subject to certain reservations, he is said to have given a qualified opinion. For example, in an Audit of Financial Statements, an auditor may give his particular objection of reservation in the Audit report and state: ‘Subject to have above, we report that the Balance Sheet shows a true and fair view’. Adverse (or negative) Opinion- Where the auditor concludes, based on his examination that he does not agree with the affirmations to be made, he gives an adverse opinion. For example, in an


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Audit of Financial Statements, the auditor gives an adverse or negative opinion when he states that the Financial Statements do not present a true and fair view of the state of affairs and the working results of the enterprise. Disclaimer of opinion- Where an auditor fails to obtain sufficient and appropriate Audit evidences to warrant an expression of opinion, he makes a disclaimer of opinion. Accordingly, the auditor may state that he is unable to express an opinion because he has not been able to obtain sufficient and appropriate Audit evidences to form an opinion. An example of a disclaimer of opinion can be a statement by the auditors that ‘we have been unable to verify the existence and value of the fixed assets of the company. Hence, we are unable to state whether the Balance Sheet shows a true and fair view’

Meaning of True and Fair view

Financial statements should show the financial information’s which are truthfully recorded and fairly presented in the financial reporting framework. For example- Auditor found a supporting in relation to a furniture purchased and concludes that it is true that furniture is purchased , on the other hand he should ensure that furniture should not be debited in profit and loss account because fair presentation of such information could be achieved only by presenting the same in the Balance Sheet as a fixed asset.

Auditors Conclusion

Auditor applies examination and verification procedures over items of Financial Statements and concludes on the basis of Audit evidences obtained that whether those items are giving true and fair view or not . Such conclusions are known as Auditors Conclusions.

Audit Evidence

Audit evidence - Information used by the auditor in arriving at the conclusions on which the auditor's opinion is based. Audit evidence includes both information contained in the Accounting records underlying the Financial Statements and other information. For purposes of the SAs: (i) Sufficiency of Audit evidence is the measure of the quantity of Audit evidences. The

quantity of the Audit evidence needed is affected by the auditor's assessment of the risks of material misstatement and also by the quality of such Audit evidence.

(ii) Appropriateness of Audit evidence is the measure of the quality of Audit evidences; that is, its relevance and its reliability in providing support for the conclusions on which the auditor's opinion is based.

For example to conclude whether cash at bank appearing in the financial statement is true and fair auditor need to obtain following Audit evidences - Copy of bank statement certified by bank manager, Copy of Bank Reconciliation statement approved by accounts manager of auditee , and evidence of reconciliation effects in the books of accounts

Management & Governance

According to SA-200 (Revised) the term Management refers to the person(s) with executive responsibility for the conduct of the entity's operations. Usually the board of directors are management. Those charged with governance referes to the person(s) or organisation(s) (e.g., a corporate trustee) with responsibility for overseeing the strategic direction of the entity and obligations related to the accountability of the entity. This includes overseeing the financial reporting process. Usually in a group of entities the steering committee of the group is known as those charged with governance. Hence, we can conclude that those charged with governence are supervising management activities and directing them.

Misstatement

According to SA-200 (Revised) Misstatement means 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.

Misstatements can arise from error or fraud. When the auditor expresses an opinion on whether the Financial Statements are presented fairly, in all material respects, or give a true and fair view, misstatements also include those adjustments of amounts, classifications, presentation, or disclosures that, in the auditor's judgment, are necessary for the Financial Statements to be presented fairly, in all material respects, or to give a true and fair view.


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Premise Premise here means prerequsites required to conduct an independent Audit. According to SA-200 (revised) The management and, where appropriate, those charged with governance have the following responsibilities that are fundamental to the conduct of an Audit in accordance with SAs. That is, responsibility: (i) For the preparation and presentation of the Financial Statements in accordance with the applicable financial reporting framework; this includes the design, implementation and maintenance of internal control relevant to the preparation and presentation of Financial Statements that are free from material misstatement, whether due to fraud or error; and (ii) To provide the auditor with: a. All information, such as records and documentations, and other matters that are relevant to the preparation and presentation of the Financial Statements; b. Any additional information that the auditor may request from management and, where appropriate, those charged with governance; and c.UnrestrictedaccesstothosewithintheentityfromwhomtheauditordeterminesitnecessarytoobtainAuditevidence.

Audit Risk (SA-200 Revised)The risk that the auditor expresses an inappropriate Audit opinion when the Financial Statements are materially misstated. Audit risk is a function of ·

The risks of Material Misstatement

Detection risk

Risk of Material Miss Statement : The Risk that the Financial Statements are materially misstated prior to Audit. Components described as follow :

(i) Inherent risk:- The susceptibility of an assertion about a class of transaction, account balance or disclosure to a misstatement that could be material, either individually or when aggregated with other misstatements, before consideration of any related controls. Hence we can conclude that if we assume in an entity under Audit that there is no internal control, the risk of fraud or error for each item of the Balance Sheet and Statement of Profit and Loss is known as Inherent risk at assertion level.

(ii) Control risk:- The risk that a misstatement that could occur in an assertion about a class of transaction, account balance or disclosure and that could be material, either individually or when aggregated with other misstatements, will not be prevented, or detected and corrected, on a timely basis by the entity's internal control. Hence we can conclude that after assessment of controls adopted by the management to prevent misstatement, auditor feels that still misstatement can be there despite of controls it is known as control risk. ·

Detection risk : According to SA-200 (revised) The risk that the procedures performed by the auditor to reduce Audit risk to an acceptably low level will not detect a misstatement that exists and that could be material, either individually or when aggregated with other misstatements. Hence we can conclude that after assessment of risk of material misstatement auditor determines the nature timing and extent of the Audit procedure to be performed. If still auditor feels that there may be chances that despite of his Audit procedures some misstatements may remain undiscovered it is known as detection risk.


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Standards on Auditing

SA-200 (R): OVERALL OBJECTIVES OF THE INDEPENDENT AUDITOR AND THE CONDUCT OF AN AUDIT IN ACCORDANCE WITH STANDARDS ON AUDITING

Objective Of SA -200

To obtain reasonable assurance about FS as whole are free from material misstatement

resulting from either due to fraud or error

by this means enabling the Auditor to express an opinion on whether the F.S are prepared, in all material respects, in accordance with an applicable FRF

To report on the FS & communicate


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Requirement of SA-200 (R)

PARTICULARS PROFESSIONAL

SKEPTICISM

PROFESSIONAL

JUDGEMENT

INHERENT

LIMITATIONS OF AN

AUDIT

MEANING

An Attitude of the

Auditor which requires

Auditor’s alertness

towards information

Provided to him from

the auditee.

Judgment taken by the

Auditor out of his

professional experience

in a Audit

situation.

Limitations which can

not be overcome and

which are with the

subject since the

inception or evolution

of the subject.


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EXAMPLES

Professional Judgment

Requires in:

Materiality and Audit risk

The nature, timing and extent of Audit procedures.

Sufficient and appropriate Audit evidences have been obtained.

The evaluation of management's judgments in applying the entity's applicable FRFW.

Auditor's opinion being persuasive rather than conclusive

Nature of -

1) Financial

reporting

2) Audit

procedures

Audit to be conducted within a reasonable period of time and at a reasonable cost.

Scope (Area of work)

Auditor Management

1. Terms of engagement of Auditor 2. Requirement of legislation 3. SA & Other guidance by ICAI

1. Maintenance of books of accounts and records

2. Formulation and Implementation of Internal Control system

3. Selection and application of accounting policies

4. Estimation of accounting estimates 5. Preparation and presentation of

Financial Statements


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SA-210 (R): AGREEING THE TERMS OF AUDIT ENGAGEMENTS

Terms of Audit Engagement

(Auditor accept or continue an Audit engagement only when following terms present)

S.No. Subject Matter Discussion

1 SA 210 Auditor shall agree the terms of the Audit engagement with Mgt. or TCHWG, as appropriate. & Engagement letter contains the terms of Audit.

2 Who Send the Letter Auditor issue the letter

3 Contents of Letter of Audit engagement

1. The objective and scope of the Audit 2. The responsibilities of the Auditor; 3. The responsibilities of management; 4. Identification of the applicable FRF 5. Reference to the expected form and content of

any report to be issued by the Auditor and a statement that there may be circumstances in which a report may differ from its expected form and content

4 Situations when it is Required to send the New Audit engagement.

1. When Mgt. mis-understands the objective and scope of the Audit.

2. There is any agreement on revising the terms of Audit engagement.

3. If there is a change in

management or ownership

nature or size of the B/S

legal or regulatory requirements.

FRF

other reporting requirements. 4. If mgt requests to change the terms & Auditor

agrees to it.

Whether the preconditions for an

Audit are present There is a common understanding

b/w the Auditor & management


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SA-220 (R): QUALITY CONTROL FOR AN AUDIT OF FINANCIAL STATEMENTS

Factors should be considered for Incorporating QC.

1. Professional Requirements:

2. Skills & competence

3. Assignment

4. Delegation

5. Consultation

6. Acceptance and Retention of clients

7. Monitoring

Quality Control Policy

Direction: Audit assistants should be informed of the nature of business and possible accounting or auditing problems. They should be explained of what is expected from them and how to achieve it. They should be informed about the importance of Audit programme, time budgets and overall Audit plan.

Supervision: Persons carrying out supervisory responsibilities should Monitor the progress of Audit; Become informed of and address significant accounting and auditing questions raised during the Audit; Resolve the differences of professional judgment and consider the level of consultation as appropriate.

Review: Review of work of Audit staff should be carried out to ensure that the Work has been performed as per the Audit programme;


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SA-230 (R): AUDIT DOCUMENTATION

Meaning (terms such as “working papers” or “work papers” may be Used)

Audit documentation refers to the record of-

Audit procedures performed,

Relevant Audit evidences obtained, &

Conclusions the Auditor reached

Property It is the property of the Auditor.

Matters are required to be documented

The nature, timing, and extent of the Audit procedures performed

The results of the Audit procedures performed,

Significant matters arising during the Audit & Discussions of it with Mgt, TCHWG & others,

Advantages of Documentation

Effectively plan and perform the Audit

to direct and supervise the Audit Work

Engagement team to be accountable for its work.

Retaining a record of matter of continuing significance to future audits

Conduct of SQC reviews & inspections in accordance with SQC - 1

Conduct of external inspections in accordance with applicable legal, regulatory or other requirements

Can Auditor modify working Papers?

Yes,

But There is specific reasons for making them; &

When and by whom they were made and reviewed

Can Auditor Delete or Discard ?

Yes, but After retention Period. Retention Period- The retention period for Audit engagements ordinarily is not shorter than seven years (As per council meeting No. 289) from the date of the Auditor's report ( group Auditor's report if any)


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SA-240 (R): THE AUDITOR'S RESPONSIBILITIES RELATING TO FRAUD IN AN AUDIT OF FINANCIAL STATEMENTS

Meaning Intentional mistakes to get unjust advantage(s)

Definition An intentional act by one or more individuals among

Mgt,

TCHWG

Employees,

Or Third parties, Involving the use of deception to obtain an unjust or illegal advantage.”

Example Transactions that are not recorded in a complete or timely manner or are improperly recorded as to amount,

Accounting period, classification, or entity policy.

Unsupported or unauthorized balances or transactions.

Last-minute adjustments that significantly affect financial results.

Missing documents.

Documents that appear to have been altered.

Unavailability of other than photocopied or electronically transmitted documents when documents in original form are expected to exist.

Significant unexplained items on reconciliations

Who is responsible for Detection of Fraud

Primary responsibility for the prevention and detection of fraud rests with both those charged with governance of the entity and management

Responsibility of Auditor

Responsibility to communicate the matter with TCHWG & in some circumstances, when so required by laws or regulations, to regulatory & enforcement authorities also


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SA-250 (R): CONSIDERATION OF LAWS AND

REGULATIONS IN AN AUDIT OF FINANCIAL

STATEMENTS

Non-compliance Meaning It means acts of omission or commission by the entity, either intentional or unintentional, which are contrary to the prevailing laws or regulations

Example or matters indicating Non Compliance

Investigations by regulatory organizations & govt. departments or payment of fines or penalties.

Payments for unspecified services or loans to consultants, related parties, employees or government employees.

Purchasing at prices significantly above or below market price.

Unusual payments in cash, purchases in the form of cashiers’ cheques payable to bearer or transfers to numbered bank accounts.

Unusual payments towards legal and retainership fees.

Unusual transactions with companies registered in tax havens.

Payments for goods or services made other than to the country from which the goods or services originated.

Payments without proper exchange control documentation.

Unauthorised transactions or improperly recorded transactions.

Duties of Auditor to understand the entities environment

to obtain sufficient and appropriate Audit evidences

to perform audit procedures

to remain Alert

to obtain representations by mgt

Effect On Auditor’s Report 1. When Auditor has sufficient and appropriate Audit evidences that non-compliance exists:

-Qualified or adverse opinion 2. When Auditor has limitations on scope of Audit

-Qualified or disclaimer opinion


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SA 260: COMMUNICATIONS WITH THOSE

CHARGED WITH GOVERNANCE


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SA-265 (Newly issued) COMMUNICATING DEFICIENCIES IN INTERNAL CONTROL TO THOSE CHARGED WITH GOVERNANCE AND MANAGEMENT

FACTORS GOVERNING MODE OF

COMMUNICATION

whether to communicate orally or

in writing

whether to communicate in a

structured or unstructured manner

affected by various factors

such as size, operating structure,

control environment, and legal

structure of the entity

LETTER OF WEAKNESS

( 1) The Auditor does compliance procedure to

ascertain that the internal control systems exist

in the entity, it works effectively; it work

continuously in the entity during review period.

(2) When he comes across any weakness in the

control points, he issues letter of weakness.

(3) Letter of weakness is a report issued by

Auditor stating the weakness in internal control

mechanism.

(4) Lapses in operation of internal control too are

reported in the communication of weakness.

(5) The Communication of Weakness is reporting

to mgt of such weakness in design & operation of

IC as have come to notice of Auditor during his

auditing.

DEFICIENCY IN INTERNAL CONTROL

When internal controls required to prevent, detect or correct material misstatements on timely basis is either :- Missing ;or Fails


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SA-299: RESPONSIBILITIES OF JOINT AUDITORS

Jointly & Severally responsible Individually responsible

Audit work which is not Divided;

Decisions taken by all the joint auditors concerning the nature, timing or extent of the Audit

Procedures to be performed by any of the joint Auditor.

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;

For examining that the Financial Statements of the entity comply with the disclosure requirements of the relevant statute

Ensuring that the Audit report complies with the requirements of the relevant statute.

Determining the nature, timing and extent of Audit procedures to be applied in relation to the area of work allocated to him.

To review the Audit reports/returns of the divisions/ branches allocated to him and to ensure that they are properly incorporated into the accounts of the entity.

Exercise his judgment with regard to the necessity of visiting divisions/ branches in respect of which the work is allocated to him.

In cases where specific division, zones or units are allocated to different joint auditors, it is the separate and specific responsibility of each joint Auditor to management in respect of such divisions/ zones/ units and to evaluate the information and explanations so obtained by him.


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SA 500: AUDIT EVIDENCE Sufficient and Appropriate

Sufficient means to quantum of evidences, whereas appropriateness refer to quality. Evidences should be seen in totality

Obtaining the Evidences Following are the Audit procedures to be applied to obtain sufficient and appropriate Audit evidences. (a) Risk assessment procedures; and (b) Further Audit procedures, which comprise: (i) Tests of controls (previously known as Compliance Procedures), when required by the Standards on Auditing or when the Auditor has chosen to do so; and (ii) Substantive procedures, including tests of details and substantive analytical procedures. As Risk Assessment procedures are defined in SA - 315 and SA-330

Reliability of Evidences External Evidences more reliable.

Internal Evidences reliable if internal controls are effective.

Written are more reliable than oral

Consistency If evidences from one source are inconsistent with those obtained from other sources, auditor is required to perform extended procedures.

Methods a. Inspection – It involves examination of records, documents or assets, etc.

b. Observation – witnessing a process being performed by others. c. External Confirmation- Audit evidence obtained by the Auditor as a

direct written response to the Auditor from a third.

d. Recalculation- consists of checking the mathematical accuracy of documents or records.

e. Re-performance- involves the Auditor's independent execution of procedures or controls that were originally performed by management as part of the entity's internal control.

f. Analytical Procedures- Examination of significant ratios and trends.

g. Inquiry- consists of seeking information of knowledgeable persons, both financial and non- financial, within the entity or outside the entity


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SA-501 (R) AUDIT EVIDENCE – SPECIFIC

CONSIDERATION FOR SELECTED ITEMS Objective of Auditor under this SA

The objective of the Auditor is to obtain sufficient & appropriate Audit evidences regarding the: (a) Existence and condition of inventory; (b) Completeness of litigation and claims involving the entity; and (c) Presentation and disclosure of segment information in accordance with the applicable FRF. It should be noted that in the revised edition to this Long Term Investments are missing

Considerations required for

Audit evidences of

Inventory

shall obtain sufficient & appropriate Audit evidences regarding the existence and condition of inventory by: (a) Attendance at physical inventory counting, (unless impracticable) to: (i) Evaluate management's instructions and procedures for recording and controlling the results of the entity's physical inventory counting; (ii) Observe the performance of mgt's count procedures; (iii) Inspect the inventory; & (iv) Perform test counts; & (b) Performing Audit procedures over the entity's final inventory records to determine whether they accurately reflect actual inventory count results.

Consideration/ Steps of

Verification of litigations and

claims

Step-1 :- The Auditor shall design and perform Audit about existence of litigations and claims involving the entity which may give rise to a ROMMS, including: (a) Inquiry of management and, where applicable, others within the entity, including in-house legal counsel; (b) Reviewing minutes of meetings of those charged with governance and correspondence between the entity and its external legal counsel; & (c) Reviewing legal expense accounts. Step-2 Auditor found that other material litigations or claims may exist, the Auditor shall, seek direct communication with the entity's external legal counsel if: (a) management refuses to give the Auditor permission to communicate or meet with the entity's external legal counsel, or the entity's external legal counsel refuses to respond appropriately to the letter of inquiry, or is prohibited from responding; and (b) the Auditor is unable to obtain sufficient & appropriate Audit evidences by performing alternative Audit procedures. The Auditor shall modify the opinion in the Auditor's report in


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accordance with SA-705. Step-3 The Auditor shall request management and, where appropriate, TCHWG to provide written representations that (a) all known actual or possible litigations and claims whose effects should be considered by them in preparing and presenting the Financial Statements and (b) have been disclosed to the Auditor

Verify presentation and disclosure of segment information

By virtue of applicable FRF by( In India in case of Big Companies and Level I entities ; we have AS-17)

Obtaining an understanding of the methods used by management in determining segment information

Evaluating whether disclosure in accordance with the applicable Financial Reporting Framework;&

Performing analytical procedures or other Audit procedures appropriate in the circumstances


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A 505: EXTERNAL CONFIRMATIONS External Confirmation It is the process of obtaining and evaluating audit evidence through a

direct communication from a third party in response to a request for information about a particular item affecting assertions made by the management.

External Confirmation Formats suggested by SA.

A positive external confirmation request asks the respondent to reply to the Auditor in all cases either by indicating the respondent's agreement with the given information, or by asking the respondent to fill the information.

A negative external confirmation request asks the respondent to reply only in the event of disagreement with the information provided in the request

Process of External Confirmations:

a. Selecting the items for which confirmations are needed.

b. Designing the form of the confirmation request.

c. Communicating the confirmation request to the appropriate third party.

d. Obtaining response from third party.

e. Evaluating the information or absence thereof.

Situations where External Confirmations may be used:

Bank balances and other information from bankers.

Accounts receivable balances.

Stocks held by third parties.

Investments purchased but delivery not taken.

Loans from lenders.

Accounts payable balances.

Long outstanding share application money.

Reliability of evidence obtained by External Confirmations

It depends on - a. The application of appropriate procedures by the auditor in designing

the external confirmation. b. Performing external confirmation procedure and evaluating

the request of the external confirmation procedures. c. The control which the auditor exercises over confirmation request

and responses. d. The characteristics of respondents e. Any restrictions included in the response or imposed by

management.


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SA 510: [INITIAL ENGAGEMENTS – OPENING BALANCE] Initial Engagements :

When financial statements are audited for 1st time or

Some other auditor audited the financial statement for preceding period.

Opening Balance Ledger Account Balances existing at beginning of the period i.e. closing balance of preceding period B/f to current period.

It reflects the effect of : o Transaction / Events of preceding period, and o Accounting policies applied in preceding period.

Evidence Obtain sufficient app. evidence that (a) Correctly b/f. (b) Opening Balance don’t contain misstatements affecting

current pd. FS and (c) Consistent application of appropriate A/c. policy.

Audit Procedure He should consider (i) Accounting policy followed by entity. (ii) Type of preceding period’s. Audit Report – clean /

modified (iii) Nature of opening Balance – risk of misstatement. (iv) Materiality of opening balance for current FS

Audit Conclusion & Reporting

If unable to obtain sufficient app. evidence regarding opening balance – qualified / disclaimer.

If opening balance contains misstatement affecting C.Y. financial statement and which is not properly incorporated disclosed in financial statement – qualified / adverse.


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SA 520: ANALYTICAL PROCEDURES Nature and purpose of Analytical Procedures:

Analytical review procedures includes both inter-firm and intra firm comparisons. The latter is vis-a-vis:

a. Comparable information for prior periods. b. Predictive estimates prepared by auditor e.g. estimation of

depreciation change. c. Anticipated results of the entity such as budgets or

forecasts. d. Similar industry information - entity's ratio of sales to

debtors with industry averages. It depends on the auditor's judgment as to the nature of procedures, methods arid level of applications.

Purposes I stages of application of Analytical Review Procedures:

The analytical review procedures can be used by the auditor for the following purposes / at following stages: i. While planning the nature, timing and extent of other audit

procedures. ii. As a means of substantiating the financial assertion relating

to business transactions. iii. Overall review of the financial statements in the final

review stage of the audit.

Stage I - Planning the audit:

Analytical review procedures assist in understanding the business and in identifying areas of potential risk. It may indicate aspects of the business of which the auditor was not aware,

Stage II - Analytical review tasks as useful substantive procedures: The following are the factors that need to be considered while applying analytical procedures as substantive tests:

1. Extent of reliance that can be placed on analytical procedures and results derived thereof.

2. Nature and complexity of the business.

3. Reliability of information available

4. Relevance of information available.

5. Sources from which information is available i.e. internal/external sources.

6. Comparability of the information available.

7. Knowledge gained by the auditor in the previous year's audit.

8. Auditor's understanding of the effectiveness of the


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accounting and internal control systems and types of problems that in prior periods have given rise to accounting adjustments.

State III - Overall review at the end of the audit:

The auditor should apply analytical procedures at the end of the audit when of in overall conclusion as to the consistency financial statement with that of auditor's knowledge of the business. Where, based on analytical procedures, the auditor concludes that he has to apply further procedures before forming conclusions, then he has to apply such procedures which he considers deemed fit.

Factors which result in increase in Gross Profit

Undervaluation of opening stock;

Overvaluation of closing stock,

Changes in policy for valuation of closing stock,

Entry of fictitious sales to boost up the profits

Inclusion in the closing stock rejected goods due for return,

Inclusion in the closing stock goods received and unapproved

Understatement of direct wages and other direct expenses.

Change in sales mix if the entity is dealing in multi products and quantity of the goods sold with higher margin .


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SA 530 -AUDIT SAMPLING Meaning of Audit Sampling Application of audit procedure on Less than 100% of items

within population of Audit relevance such that all sampling units have a chance of selection in order to provide the Auditor with a reasonable basis on which to draw conclusions about the entire population

Steps involved in Audit sampling:

Step-1 Designing of sample Step-2 Determining the sample size Step-3 Selection of items to the sample Step-4 Performing Audit Procedures on selected sample Step -5 Analysis of Nature and Cause of Deviations and Misstatements Step-6 Projecting Misstatements Step-7 Evaluating Results of Audit Sampling

Sampling risk Sampling risk refers to the risk that the Auditor's conclusion based on a sample may be different from the conclusion if the entire population were subjected to the same Audit procedure.

Sampling risk can lead to two types of erroneous conclusions:

In the case of a test of controls, that controls are more effective than they actually are, or in the case of a test of details, that a material misstatement does not exist when in fact it does. The Auditor is primarily concerned with this type of erroneous conclusion because it affects Audit effectiveness and is more likely to lead to an inappropriate Audit opinion.

(ii) In the case of a test of controls, that controls are less effective than they actually are, or in the case of a test of details, that a material misstatement exists when in fact it does not. This type of erroneous conclusion affects Audit efficiency as it would usually lead to additional work to establish that initial conclusions were incorrect.


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SA-540 (R) AUDITING ACCOUNTING ESTIMATES INCLUDING FAIR VALUE ACCOUNTING ESTIMATES & RELATED DISCLOSURE Definition An approximation of a monetary amount in the absence of a precise means of

measurement”. Usually two kind of estimates are involved in preparing and presenting F.S.:- 1. Fair value Accounting estimates 2. Other Accounting estimates

Example Fair value accounting estimates:-

Estimate of Fair Market Value of Inventory - to apply accounting policy cost & Net Realisable Value which ever is less.

Complex financial instruments, which are not traded in an active and open market. (Future,options and derivatives)

Share-based payments.( ESOP )etc.

Property or equipment retired from active use & held for disposal - Under AS-10 they are valued as cost & NRV which ever is less.

Transactions involving the exchange of assets or liabilities b/w independent parties without monetary consideration.

Other accounting estimates:-

Allowance for doubtful accounts - How much debts are in doubtful category.

Inventory obsolescence - Slow moving or non moving inventory identification

Depreciation method or asset useful life.

Outcome of long term contracts.


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SA-550 (R) RELATED PARTIES

Or

AUDITOR’S DUTY

1. All F.S. Frameworks and Statutory compliances 2. Understand the entity's related parties relationships and transactions. 3. Evaluate Fraud Risk Factors in relation to related parties. 4. Have an attitude of Professional Skepticism. 5. In forming an opinion on the F.S. in accordance with SA -700(Revised), the Auditor shall

evaluate: (a) Whether the identified related parties relationships and transactions have been

appropriately accounted for and disclosed in accordance with the applicable FRF; &

(b) Whether the effects of the related parties relationships and transactions:

Prevent the F.S. from achieving true and fair presentation; or

Cause the F.S. to be misleading (for compliance frameworks).

Related Parties

It is as defined in the

applicable FRF

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 through

having:

i. Common controlling ownership;

ii. Owners who are close family members; or

iii. Common key management.


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SA-560 (R) SUBSEQUENT EVENTS Meaning of Subsequent Event Events occurring b/w the date of the F.S. & the date of the Auditor's

report, & facts that become known to the Auditor after the date of the Auditor's report

Objective of Auditor Obtain sufficient & appropriate Audit evidences about whether events occurring b/w the date of the FS & the date of the Auditor's report that require adjustment of, or disclosure in, the FS are appropriately reflected. (b) 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.


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SA-570 (R) GOING CONCERN

Going Concern Meaning (fundamental a/cing assumption)

It Means continuing in operation for the foreseeable future & is assumed that the enterprise has neither the intention nor the necessity of liquidation or of curtailing materially the scale of the operations

Procedures to be performed by the Auditor

1. Analyze and discuss cash flow, profit and other relevant forecasts with management.

2. Review events after the B/s date for items affecting the entity's ability to continue as a going concern.

3. Analyze and discuss the entity's latest available interim F/s.

4. Review the terms of debentures and loan agreements and determine whether any have been breached.

5. Read minutes of the meeting of shareholders, board of directors and important committees for reference to financing difficulties.

6. Review the status of matters under litigations and claims.

7. Consider the entity's position concerning unfilled customer orders.

Operating conditions that may cast doubt about going concern assumption

1. Mgt intentions to liquidate the entity or to cease operations.

2. Loss of key management without replacement. 3. Loss of a major market, key customer(s), franchise,

license, or principal supplier(s). 4. Labour difficulties. 5. Shortages of important supplies. 6. Emergence of a highly successful competitor.


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SA-580 (R) WRITTEN REPRESENTATIONS Meaning It is written statement by mgt, & where appropriate TCHWG provided to the

Auditor to confirm certain matters or to support other Audit evidences

Objective of Auditor To obtain written representations from mgt that it has fulfilled the fundamental responsibilities

To support other Audit evidences To respond appropriately to written representations provided by mgt

If mgt does not provide one or more of requested written representation

The Auditor shall discuss the matter with mgt. Re-evaluate the integrity of mgt. Evaluate possible effect on the opinion in the Auditor’s report.

Note: Written Representation can be treated as additional Audit evidence & not a substitute Audit evidence.


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SA-600 (R) USING THE WORK OF ANOTHER AUDITOR Who is another Auditor?

Another Auditor may be referred as a branch Auditor or Auditor of a Branch/Component.

As defined in Section 143 (8) of the Companies Act, 2013 the Auditor appointed to conduct the branch Audit is known as branch Auditor.

The main Auditor of the company in this case is called Principal Auditor

Duties of a principal Auditor

1. Advise the other Auditor- of the use of the work and report of other Auditor. of the significant a/cing, auditing and reporting requirements &

obtain representation as to compliance with them.

2. Should coordinate at the planning stage of the Audit.

3. Should share significant findings

4. Should inform the other Auditor(s), matters requiring special consideration.

5. Should suggest procedures for the identification of inter component transactions that may require disclosure.

6. Should decide the time-table for completion of Audit;

7. Should review a written summary


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SA-610 (R) USING THE WORK OF INTERNAL AUDITOR What do you mean by Internal Audit Function?

For purposes of the SA Internal audit function means – A function of an entity that performs

assurance and

consulting activities designed to

evaluate and

improve the effectiveness of the entity’s governance, risk management and internal control processes.

How to determining whether, in Which Areas and to What Extent the Work of the Internal

Audit Function Can Be Used

Evaluating the Internal Audit Function

The external auditor shall determine whether the work of the internal audit function can be used for

purposes of the audit by evaluating the following:

1. The extent to which the internal audit function’s organizational status and relevant policies and procedures support the objectivity of the internal auditors;

2. The level of competence of the internal audit function; and 3. Whether the internal audit function applies a systematic and disciplined approach, including

quality control.

The external auditor shall not use the work of the internal audit function if the external auditor

determines that:

1. The function’s organizational status and relevant policies and procedures do not adequately support the objectivity of internal auditors;

2. The function lacks sufficient competence; or 3. The function does not apply a systematic and disciplined approach, including quality control.

Determining the Nature and Extent of Work of the Internal Audit Function that Can Be


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Used

As a basis for determining the areas and the extent to which the work of the internal audit function

can be used, the external auditor shall consider the nature and scope of the work that has been

performed, or is planned to be performed, by the internal audit function and its relevance to the

external auditor’s overall audit strategy and audit plan.

The external auditor shall also evaluate whether, in aggregate, using the work of the internal audit

function to the extent planned would still result in the external auditor being sufficiently involved

in the audit, given the external auditor’s sole responsibility for the audit opinion expressed.

The external auditor shall, in communicating with those charged with governance an overview of

the planned scope and timing of the audit in accordance with SA 260,7 communicate how the

external auditor has planned to use the work of the internal audit function.

What considerations required while using the Work of the Internal Audit Function?

If the external auditor plans to use the work of the internal audit function, the external auditor shall

discuss the planned use of its work with the function as a basis for coordinating their respective

activities.

The external auditor shall read the reports of the internal audit function relating to the work of the

function that the external auditor plans to use to obtain an understanding of the nature and extent

of audit procedures it performed and the related findings.

The external auditor shall perform sufficient audit procedures on the body of work of the internal

audit function as a whole that the external auditor plans to use to determine its adequacy for

purposes of the audit, including evaluating whether:

a) The work of the function had been properly planned, performed, supervised, reviewed and documented;

b) Sufficient appropriate evidence had been obtained to enable the function to draw reasonable conclusions; and

c) Conclusions reached are appropriate in the circumstances and the reports prepared by the function are consistent with the results of the work performed.

The nature and extent of the external auditor’s audit procedures shall be responsive to the external

auditor’s evaluation of:

a) The amount of judgment involved; b) The assessed risk of material misstatement; c) The extent to which the internal audit function’s organizational status and relevant policies

and procedures support the objectivity of the internal auditors; and d) The level of competence of the function; e) and shall include re performance of some of the work.


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How to use work of Internal Auditors to Provide Direct Assistance?

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 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 direct, supervise and review the work performed by internal auditors on

the engagement in accordance with SA 220 In so doing:

a) The nature, timing and extent of direction, supervision, and review shall recognize that the internal auditors are not independent of the entity and be responsive to the outcome of the evaluation of the factors in paragraph 29 of this SA; and

b) The review procedures shall include the external auditor checking back to the underlying audit evidence for some of the work performed by the internal auditors.


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SA-620 (R) USING THE WORK OF AN AUDITOR'S EXPERT

What are the considerations Auditor required prior to engage

an expert?

Shall evaluate whether the Auditor's expert has the necessary competence, capabilities &

objectivity for the Auditor's purposes as well as independence of the expert.

Shall obtain a sufficient understanding of the field of expertise of the Auditor's expert to enable

the Auditor to:

(a) Determine the nature, scope and objectives of that expert's work for the Auditor's purposes;

and

(b) Evaluate the adequacy of that work for the Auditor's purposes.

An individual or organisation possessing expertise in a field other than Accounting or Auditing, whose work in that field is used

By the entity to assist the

entity in preparing the FS

By the Auditor to assist the

Auditor in obtaining S&A

Audit evidences


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SA-700 (R) Forming an Opinion and reporting on Financial Statements

Audit Report A report is a statement of collected and considered facts, so drawn up

as to give clear and concise information to persons who are not in

possession of full facts of the subject matter of the report. The

document through which the Auditor conveys his opinion about the

fairness of the Financial Statements is called Auditor's report.

An Auditor, under Section 143(2) of the Companies Act, 2013, is

required to make a report to the shareholders of the company whether

the books of accounts examined by him exhibit 'true and fair' view of

the state of affairs of the business.

The statutory Auditor of a company has to express his professional

opinion about the truth and fairness of the state of affairs of the

company as shown by the Balance Sheet and of the profit or loss as

shown by the Statement of Profit and Loss in addition to several other

information in his report.

An Auditor's report is, therefore, a written statement of the

Auditor, containing his independent professional

opinion about the truth and correctness of accounts and Financial

Statements examined by him and other

specific information, which the Auditor submits to his client at the

conclusion of Audit. Elements of Auditor Report First of all according to SA-700 (Revised)The Auditor's report shall be

in writing. With following basic elements

1.Title The Auditor's report shall have a title that clearly indicates that it is the

report of an independent Auditor.

2. Addressee The Auditor's report shall be addressed as required by the

circumstances of the engagement i.e. depending on

Appointing authority.

3. Introductory Paragraph

The introductory paragraph in the Auditor's report shall

(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 that comprises the Financial

Statements;

(d) Refer to the summary of significant accounting policies and other

explanatory informations; and

(e) Specify the date or period covered by each financial statement

comprising the Financial Statements.

4. Management's Responsibility for the Financial Statements This section of the Auditor's report describes the responsibilities of

those in the organisation that are responsible for the preparation of the

Financial Statements.

5. Auditor's Responsibility The Auditor's report shall state that the responsibility of the Auditor is


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to express an opinion on the Financial

Statements based on the Audit.

6.Auditor's Opinion When expressing an unmodified opinion on Financial Statements

prepared in accordance with a fair presentation framework, the

Auditor's opinion shall, unless otherwise required by law or regulation,

use one of the following phrases, which are regarded as being

equivalent:

(a) The Financial Statements present fairly, in all material respects, in

accordance with [the applicable Financial

Reporting Framework]; or

(b) The Financial Statements give a true and fair view in accordance

with [the applicable Financial Reporting

Framework].

Special Note :- . If the Auditor addresses other reporting

responsibilities in the Auditor's report on the Financial

Statements that are in addition to the Auditor's responsibility under the

Standards on Auditing to report on the

Financial Statements Like in company section 143(1), (2), (3), (4), of

Companies Act, 2013 these other reporting

responsibilities shall be addressed in a separate section in the Auditor's

report that shall be sub-titled

“Report on Other Legal and Regulatory Requirements,”

7. Signature of the Auditor The Auditor's report shall be signed.

8.. Date of the Auditor's Report The Auditor's report shall be dated no earlier than the date on which

the Auditor has obtained sufficient &

appropriate Audit evidences on which to base the Auditor's opinion on

the Financial Statements, including

evidences that:

(a) All the statements that comprise the Financial Statements,

including the related notes, have been prepared;

and

(b) Those with the recognised authority have asserted that they have

taken responsibility for those financial

statements.

9. Place of Signature The Auditor's report shall name specific location, which is ordinarily

the city where the Audit report is signed.


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SA-705 Modifications to the Opinion in the Independent Auditor's Report

What do you mean by

modification to the

opinion

When the Auditor is not giving Unmodified opinion it said he is modifying

his opinion. According to SA-706(Revised) Modified opinion refers to a

qualified opinion, an adverse opinion or a disclaimer of opinion When Auditor will

decide to modify his

opinion

According to SA-705, The Auditor shall modify the opinion in the

Auditor's report when:

(a) The Auditor concludes that, based on the Audit evidences obtained,

the Financial Statements as a whole are

not free from material misstatement; or

(b) The Auditor is unable to obtain sufficient & appropriate Audit

evidences to conclude that the Financial Statements as a whole are free

from material misstatement. When an Auditor shall

express a qualified

opinion

The Auditor shall express a qualified opinion when:

(a) The Auditor, having obtained sufficient & appropriate Audit evidences,

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

evidences on which to base the opinion, but the

Auditor concludes that the possible effects on the Financial Statements of

undetected misstatements, if any,

could be material but not pervasive. When an Auditor shall

express an adverse

opinion

The Auditor shall express an adverse opinion when the Auditor have

obtained sufficient & appropriate Audit evidences, concludes that

misstatements, individually or in the aggregate, are both material and

pervasive to the Financial Statements. When an Auditor shall

express a disclaimer of

opinion

The Auditor shall disclaim an opinion when the Auditor is unable to obtain

sufficient & appropriate Audit evidences on which to base the opinion, and

the Auditor concludes that the possible effects on the Financial

Statements of undetected misstatements, if any, could be both material and

pervasive.

The Auditor shall disclaim an opinion when, in extremely rare

circumstances involving multiple uncertainties,

the Auditor concludes that, notwithstanding having obtained sufficient &

appropriate Audit evidences regarding each of the individual uncertainties,

it is not possible to form an opinion on the Financial Statements due to the

potential interaction of the uncertainties and their possible cumulative

effect on the Financial Statements


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SA-706 Emphasis of Matter Paragraphs & Other Matter Paragraphs in the Independent Auditor's Report What do you mean by

emphasis of matter

paragraphs in Audit report

According to SA-706 A paragraph included in the Auditor's report that refers

to a matter appropriately presented or disclosed in the Financial

Statements that, in the Auditor's judgment, is of such importance that it is

fundamental to users' understanding of the Financial Statements. When

the Auditor includes an Emphasis of

Matter paragraph in the Auditor's report, the Auditor shall:

(a) Include it immediately after the Opinion paragraph in the Auditor's

report; (b) Use the heading “Emphasis of Matter”, or other appropriate heading;

(c) Include in the paragraph a clear reference to the matters being

emphasised and to where relevant disclosures

that fully describe the matter can be found in the Financial Statements; and

(d) Indicate that the Auditor's opinion is not modified in respect of the matter

emphasised.

For Example: If there is uncertainty relating to a pending exceptional

litigation matter. This is highlighted in

the Auditor's report by an Emphasis of Matter paragraph. After opinion paragraph following shall be added “We draw attention to

Note X to the Financial Statements which describes the uncertainty related to

the outcome of the lawsuit filed against the Company by XYZ Company.

Our opinion is not qualified in respect of this matter.” What do you mean by other

matter paragraphs in the

independent auditors report

A paragraph included in the Auditor's report that refers to a matter other than

those presented or disclosed in the Financial Statements that, in the Auditor's

judgment, is relevant to user's understanding of the Audit, the

Auditor's responsibilities or the Auditor's report.

If the Auditor considers it necessary to do so he should include a paragraph

in the Auditor's report, with the

heading “Other Matter”, or other appropriate heading. The Auditor shall

include this paragraph immediately

after the Opinion paragraph and any Emphasis of Matter paragraph, or

elsewhere in the Auditor's report if the

content of the Other Matter paragraph is relevant to the Other Reporting

Responsibilities section

For example : In case of Auditor of CFS The report includes an Other

Matter paragraph in respect of the Auditor's responsibility in respect of

subsidiaries not audited by him but which form part of the consolidated

Financial Statements under report.

Other Matter Paragraph “We did not Audit the Financial Statements of certain subsidiaries, whose

Financial Statements reflect total assets (net) of Rs. XXXX as at March 31,

20XX, total revenues of Rs. XXXX and net cash outflows amounting to Rs.

XXXX for the year then ended. These Financial Statements have been

audited by other auditors whose reports have been furnished to us by the

Management, and our opinion is based solely on the reports of the other

auditors. Our opinion is not qualified in respect of this matter.”


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SA-710 (R ) Comparative Information :- Corresponding Figures and Comparative Financial Statements

Comparative information

and its types According to SA-710(Revised) Comparative information means 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. Mainly these can be presented in either of the following way

By way of 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 detail presented in the

corresponding amounts and disclosures is dictated primarily by its

relevance to the current period figures.

By way of comparative Financial Statements Comparative informations

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. The level of information

included in those comparative Financial Statements is comparable with that

of the Financial Statements of the current period. Objective of Auditor According to SA -710 (Revised)The objectives of the Auditor are:

(a) To obtain sufficient & appropriate Audit evidences about whether the

comparative informations included in the Financial Statements has been

presented, in all material respects, in accordance with the requirements for

comparative informations in the applicable Financial Reporting Framework;

and

(b)To report in accordance with the Auditor's reporting responsibilities. requirements of Audit

reporting under this SA In relation to Corresponding Figures following maybe the different

situation:-

Situation-1 Current years report is unqualified and previous Auditor's

report was also unqualified: - When corresponding figures are presented,

the Auditor's opinion usually shall not refer to the corresponding figures .

Unqualified opinion as such implies auditors satisfaction related to

corresponding figures.

Situation -2 If the Auditor's report on the prior period, as previously

issued, included a qualified opinion, a disclaimer of opinion, or an

adverse opinion and the matter which gave rise to the modification is

resolved:-

The Auditor shall modify the Auditor's opinion on the current period's

Financial Statements.

Situation -3 If the Auditor obtains Audit evidences that a material

misstatement exists in the prior period Financial Statements on which

an unmodified opinion has been previously issued :- The Auditor shall

verify whether the misstatement has been dealt with as required under the

applicable Financial Reporting Framework and, if that is not the case, the

Auditor shall express a qualified opinion or an adverse opinion in the

Auditor's report on the current period Financial Statements, modified

with respect to the corresponding figures included therein.


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Situation -4 If the prior period Financial Statements were not audited:-

the Auditor shall state in an Other Matter paragraph in the Auditor's report

that the corresponding figures are unaudited. Such a statement does not,

however, relieve the Auditor of the requirement to obtain sufficient &

appropriate Audit evidences that the opening balances do not contain

misstatements that materially affect the current period's Financial

Statements. As in Indian Financial Reporting Framework no corresponding

Financial Statements are there we are not discussing


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SA-720 The Auditor's Responsibility in Relation to Other Information in Documents Containing Audited Financial Statements

What do you mean by other information?

According to SA-720 other information refers to financial and non-financial information (other than the

Financial Statements and the Auditor's report thereon) which is included, either by law, regulation or custom, in a

document containing audited Financial Statements and the Auditor's report thereon.

What is objective of Auditor in this SA?

The objective of the Auditor is to respond appropriately when documents containing audited Financial

Statements and the Auditor's report thereon include other information that could undermine the credibility of

those Financial Statements and the Auditor's report.

What are steps involved in responding to other information?

The Auditor shall read the other information to identify material inconsistencies, if any, with the audited

Financial Statements. The Auditor shall make appropriate arrangements with management or those charged with

governance to obtain the other informations prior to the date of the Auditor's report. If it is not possible to obtain

all the other informations prior to the date of the Auditor's report, the Auditor shall read such other information as

soon as practicable. If, on reading the other informations, the Auditor identifies a material inconsistency, the

Auditor shall determine whether the audited Financial Statements or the other informations needs to be revised.


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Company Audit and CARO 2016

QUALIFICATIONS OF AN AUDITOR (Section 141(1) & 141(2)

Only the following are eligible to get appointment as an auditor:

1. In case of an individual, if he is a practicing chartered accountant in India.

2. In case of a partnership firm (including LLP), majority of the partners should be practicing

chartered accountants in India.

DISQUALIFICATIONS OF AN AUDITOR (Section 141(3) & 141(4))

1. Person is a body corporate, except LLP;

2. He is the officer or employee of the company;

3. He is partner or employee of the officer or employee of the company;

4. In case of auditee being a company, its holding, its subsidiary, its associate or its holding’s

subsidiary:

a. He himself or his partner, holds security or interest;

b. His relatives, holds security or interest worth INR 1 lacs or more.

c. He himself or his partner or his relative, are indebted for an amount of 5 lacs or more;

d. He himself or his partner or his relative, have given guarantee or provided security for a third

person worth INR 1 lacs or more.

e. He or his firm has direct or indirect business relationship.

5. His relative is a director or in employment of the company as a key managerial person.

6. He or his firm is auditor of more than 20 companies;

o Following not included in 20 companies:

One person companies;

Dormant companies;

Small companies;

Private companies with paid up share capital less than INR 100 crores.

o Following are included in 20 companies:

Public companies;

Private companies with paid up share capital of INR 100 crores or more;

Subsidiary of public company.

7. He is convicted by court for fraud in less than 10 years before the date of appointment;

8. Provides following services (section 144):


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a. Accounting and bookkeeping;

b. Internal audit;

c. Design & implementation of financial information system;

d. Actuary;

e. Investment advisor;

f. Investment banker;

g. Outsourced financial services provider;

h. Management services;

i. Any other prescribed services.

Through

a. Himself;

b. His relative;

c. His partner;

d. Network firms;

e. Associate entity;

f. Subsidiary.

APPOINTMENT OF AUDITORS

FIRST AUDITOR COMPANY OTHER THAN GOVERNMENT

COMPANY (Section 139(6)) GOVERNMENT COMPANY (Section 139(7))

1. By board within 30 days of registration of company.

2. If board fails they should inform members who shall within 90 days make appointment in EGM.

3. Tenure: till conclusion of 1st AGM.

1. By C&AG within 60 days of registration of company.

2. If C&AG fails then by board within next 30 days.

3. If board fails they should inform members who shall within 60 days make appointment in EGM.

4. Tenure: till conclusion of 1st AGM.

SUBSEQUENT AUDITOR COMPANY OTHER THAN GOVERNMENT

COMPANY (Section 139(1)) GOVERNMENT COMPANY (Section 139(5))

1. Appointed by: members at 1st AGM. 2. Tenure: till conclusion of 6th AGM.

1. Appointed by C&AG within 180 days from 01-04-FY for that particular FY.

2. Tenure: till conclusion of next AGM.

PROCEDURAL FORMALITIES BY AUDITOR BY COMPANY

Following to be obtained from auditor: 1. Inform auditor in writing about his


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1. Written consent. 2. Certificate stating:

1. His eligibility for appointment & that he is not disqualified under CA Act, 1949.

2. Appointment is as per terms of companies act and within the prescribed limits.

3. List of proceedings for misconducts against any partner or form and a statement that they are true and correct.

appointment. 2. File form ADT-1 with registrar within 15 days

of auditor’s appointment.

CAUSAL VACANCY

Reasons:

1. Death;

2. Resignation;

3. Disqualification under the company’s act, 2013;

4. Disqualification under the Indian Contract act, 1872;

5. Disqualification under the Chartered Accountant’s act, 1949;

6. Dissolution of firm;

7. Non ratification of appointment at AGM;

8. Any disqualification obtained post appointment.

FULFILLMENT OF CASUAL VACANCY

COMPANY OTHER THAN GOVERNMENT COMPANY GOVERNMENT COMPANY

Reasons other than resignation

Due to resignation Due to any reason

By board within 30 days from occurrence of vacancy.

Company in general meeting to approve the recommendation of board within 3 months of occurrence of vacancy.

By C&AG within 30 days from such vacancy.

Tenure: till conclusion of next AGM. Tenure: till conclusion of next

AGM

REMOVAL OF AUDITOR

BEFORE EXPIRY OF TERM AFTER EXPIRY OF TERM 1. Board to pass a resolution in this regard. 2. Within 30 days of above resolution, obtain

approval of CG in form ADT-2. 3. Hold general meeting within 60 days of

approval of CG. 4. Pass special resolution to that effect. o The auditor should be given reasonable

opportunity of being heard before his removal.

SPECIAL NOTICE** – SPECIAL POINTS

1. Who can give:

1. Special notice** is required to pass a

resolution, if: a. Appointing any other person than the

retiring auditor. b. Providing expressly that retiring auditor

shall not be reappointed. 2. Copy of notice to be sent to auditor

immediately. 3. Auditor to make written representation of

reasonable length. 4. The representation should be notified to all


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a. members holding 1% or more of total voting power; or

b. paid up share capital of INR 5 lacs or more,

on the date of notice.

2. Time limit of notice: to be sent to the company from 3 months to 14 days before the meeting.

members, unless received too late by board. 5. Receipt of representation to be mentioned in

notice of meeting. 6. Representation to be sent to members along

with notice of meeting. 7. Auditor may demand reading his

representation at meeting if it is not send to members because of: a. Received too late by company. b. Default by company to send it.

8. Tribunal may restrict the representation to be sent to members or read at the meeting, if satisfied that auditor is abusing his right: a. On application of company; or b. Any aggrieved party.

RIGHTS OF AN AUDITOR

1. To inspect & access all of the books of accounts, all supporting documents, cost records, during

normal business hours at any time while he holds the office of the auditor. (section 143(1)).

2. To obtain any information or explanation from any officer or employee of the company as he

thinks necessary for discharge of his duties. (Section 143(1)).

3. To access records of subsidiary in so far as related to consolidated financial statements. 4. In respect of any general meeting, right to:

a. Receive notices & other communications;

b. Right as well as duty to attend the meeting himself or through authorized representative;

c. Heard at the meeting for businesses concerning him as auditor.

Intentional omission to send the notice to auditor may result in invalid meeting.

5. In case of removal, right to:

a. Receive the special notice;

b. Make written representation & get it circulated amongst members;

c. If not circulated the representation shall be read out at meeting;

d. Be heard at the meeting.

6. Right to receive remuneration.

DUTIES OF THE AUDITOR

1. To enquire about the certain matters & report only if :

a. Has any special comment to specify;

b. Not satisfied with results of enquiry.

2. Matters are:

a. Secured Loans & Advances


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i. whether properly secured;

ii. Terms not prejudicial to the interest of company and members.

b. Transactions represented by book entries whether prejudicial to the interest of company.

c. Sales & investment, whether any of the shares debentures or other securities are sold at a price

less than the purchase price.

d. Whether all loans & advances made by company, not shown as deposits.

e. Whether personal expenses of directors (other than perquisites are part of service contract)

charged to revenue account.

f. For shares allotted for cash, whether cash has actually been received or not.

AUDIT REPORT

1. The auditor shall make a report to the members on F/S of the company to be laid before the

general meeting after examining the book of accounts of the company taking into account:

a. Provisions of the act;

b. AS & SA;

c. matters required to be induced in audit report under the provisions of companies act & rules

made there under

that, “to the best of his information & knowledge the said accounts & F/S give true & fair view of

state of companies affairs & its financial positions for the year under audit.

2. The auditors shall also state:

a. Whether he obtained all information & explanation necessary to the best of his knowledge &

belief.

b. Books of accounts as required by law are maintained or not.

c. Proper returns received for branches not visited.

d. Branch auditor’s reports received & dealt in manner required, while preparing his report.

e. F/S are in agreement with books of accounts.

f. Any observations or comment on transactions or matter having adverse effect on functioning

of the company.

g. Disqualifications of directors’ u/s 164(2) of companies act, 2013.

h. Any qualifications reservations or adverse remark relating to books of accounts.

i. Adequacy of internal financial control system.

Companies Auditor’s Report Order (CARO), 2016

The Ministry of Corporate Affairs (MCA) has notified the Companies Auditor’s Report Order

(CARO), 2016 vide Order dt. 29th March, 2016,

APPLICABILITY:

CARO 2016 shall applies to every company including a foreign company as defined in clause

(42) of section 2 of the Companies Act, 2013, except the following class of companies–


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1) a banking company as defined in clause (c) of section 5 of the Banking Regulation Act,

1949

2) an insurance company as defined under the Insurance Act,1938;

3) a company licensed to operate under section 8 of the Companies Act;

4) a One Person Company as defined under clause (62) of section 2 of the Companies Act

and a small company as defined under clause (85) of section 2 of the Companies Act;

and

5) A private limited company if the following criteria are met

•not being a subsidiary or holding company of a public company, having a paid

up capital and reserves and surplus not more than rupees 1 crore as on the

balance sheet date and

•which does not have total borrowings exceeding rupees 1 crore from any bank

or financial institution at any point of time during the financial year and

•which does not have a total revenue as disclosed in Scheduled III to the

Companies Act, 2013 (including revenue from discontinuing operations)

exceeding rupees 10 crore during the financial year as per the financial

statements.

REPORTING:

Fixed Assets [3(i)]

(a) whether the company is maintaining proper records showing full particulars, including

quantitative details and situation of fixed assets;

(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;

(c) Whether the title deeds of immovable properties are held in the name of the

company. If not, provide the details thereof;

Inventories [3(ii)]

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;

Reporting on repayment of loans granted by the company [3(iii)]

Whether the company has granted any loans, secured or unsecured to companies, firms,

Limited Liability Partnerships 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;


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(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;

Compliance of Section 185 and 186 [3(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.

Acceptance of Deposit [3(v)]

in case, the company has accepted deposits, whether the directives issued by the Reserve Bank

of India and the provisions of sections 73 to 76 or any other relevant provisions of the

Companies Act, 2013 and the rules framed thereunder, where applicable, have been complied

with? If not, the nature of such contraventions be stated; If an order has been passed by

Company Law Board or 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?

Cost Records [3(vi)]

Whether maintenance of cost records has been specified by the Central Government under

sub-section (1) of section 148 of the Companies Act, 2013 and whether such accounts and

records have been so made and maintained.

Statutory Dues [3(vii)]

(a) 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;

(b) 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. (A mere representation

to the concerned Department shall not be treated as a dispute).

Default in repayment of Dues [3(viii)]

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 the amount of default to be reported (in case of defaults to banks,

financial institutions, and Government, lender wise details to be provided).

Money raised by public offer and loans [3(ix)]


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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;

Reporting of Fraud [3(x)]

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;

Managerial Remuneration [3(xi)]

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;

Nidhi Company [3(xii)]

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;

Related Parties Transactions [3(xiii)]

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;

Private Placements and Preferential allotment [3(xiv)]

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;

Non-cash Transactions [3(xv)]

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;

Registration with RBI [3(xvi)]

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.


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CRUX OF SPECIALIZED AUDIT

AUDIT OF HOSPITAL

S.no. Areas to be covered Auditor's Duty

1 Internal Check 1. Investigate the internal check with regards to issues and receipts of stores, lines, apparatus, clothing, instruments, etc.

2. Confirm that the purchase is made appropriately and is recorded

3. In the Stock Register and the issue is made only against an appropriate authorization.

2 Income from Services 1. Verify the Bill Register of patients and also the copies of bills issued to them.

2. Test check some of the bills with the attendance records of the patients to see that the bills are correctly prepared.

3. Verify that the bills are issued to all the patients who have paid any amount according to the rules of the hospital.

4. Get satisfactory explanations of the unbilled and concessional billing cases, if applicable.

3 Collection of Cash 1. Verify collection of cash from Cash Book along with receipt

2. Counterfoils and other evidences such as copies of patient's bills, dividend warrants, rent bills, etc.

3. Carry unexpected cash verification at all cash handling locations on the same day.

4. Verify whether there is an existence of procedure for deposit of all cash collections on the same day and also that the procedures have been followed.

4 Grants and Donations 1. Verify whether the receipts of grants, it any, are duly accounted for determine that the legacies and donations received for specific purpose are so applied.

2. Confirm that appropriate classification between Revenue and Capital with respect to various grants have been made.

5 Income from Investment 1. Analyze the Property and Investment Registers to check that collections of income have been made through rent from properties, dividend and interest on securities, etc.

2. Verify whether the dues collectible are properly followed up with the concerned parties.

6 Purchase and Expenses 1. Verify Purchase store items and expenses. 2. Verify staff salary 3. Verify the Capital Expenditure 4. Make comparison of the total value of various items of income


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and expenditure with the budgeted amount for them.

7 Balance Sheet Items 1. Verify the fixed assets and confirm that sufficient depreciation has been provided for.

2. Examine in detail the accounts of sundry creditors for goods, 3. auditors for services and also analyses if there are any abnormal

movements verify Share Capital, Reserves and surplus, Secured 4. Loans and Unsecured Loans.

AUDIT OF CINEMAs


1 Internal Control System Verify that adequate and proper internal control system and procedures have been designed and fulfilled i.e. with regards to tickets for entrance in hall to be pre-printed for each show and class and serially numbered and bound into books having separate series for advance booking issued and are Under the charge of a responsible official.

2 Cash Collection Reconcile the statement of tickets sold with the collection of cash at the end of the show referring to the counterfoils collected at the entrance to the Hall.

3 Free Pass Verify that appropriate authority prevails for Free Passes.

4 Entertainment Tax Verify the entertainment tax collected with the total tickets issued for each class.

5 Advertisement Slides 1. Vouch other income from advertisement slides referring the relevant registers and agreements.

2. Cross verify the advertisement income based on the Slides Register and shots exhibited kept at cinema

6 Expenditure Verification 1. To verify that the expenditure incurred on advertisement and repairs and maintenance are not capitalized accounted as deferred revenue expenditure.

2. Check that appropriate depreciation on fixed assets has been charged with regards to the useful life of the assets having respective reference to the asset of hotel industry.

3. Affirm strongly the expenditure incurred on film hired with relevant bills of distributors with reference to agreements.

AUDIT OF CHARITABLE INSTITUTIONS


1 Formation 1. Determine the formation of charitable institution and note down the financial powers of the executives and managing committee.

2. Verify the relevant bye-laws or trust deed for determining the powers and duties of the Managing Committee or Board of trustees

2 Functions 1. Determine the functions being carried on by the institution and verify whether they are within the


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permitted object of institution. 2. Scrutinize the minutes book of the Managing Committee

regarding 3. various financial decisions constituting the decision on sale

or purchase of investment, acquisition or disposal of fixed assets, donation receipts, endowment, etc.

3 Funds 1. Note the specific conditions attached to the funds operated by the trust.

2. Confirm whether the objectives in operating each fund are fulfilled.

4 Subscriptions and Donations

1. Determine the changes if any, with regards to annual or life membership subscription for during the year.

2. Determine that there is sufficient internal control over the issue of official receipts, custody of receipt books not used, printing of receipt books, etc.

3. Verify the internal check system regarding the money received from box collection, flag days, etc.

4. Ensure proper control system over collections and also ensure that they have been properly accounted.

5. Verify the total subscription and donation received with the figures published in the issued reports of Charitable Institutions.

5 Legacies Verify the amount received with the agreement in this regard and other available information.

6 Grants Verify the amount received with the relevant correspondence receipts and minute books and gain a certificate from the responsible official indicating the amount of grant received.

7 Income from Investment 1. Affirm strongly the amount received with interest and dividend, counterfoils and computation of interest on securities for sale or purchase of investment.

2. Ensure that appropriate dividend is received, 3. Also compare the dividend received with the investment

list to confirm that dividend has been received with respect to all investment.

8 Rents 1. Check the rent roll and tenancy agreements with respect to rent amount and due date.

2. Also, affirm strongly the rent receipts with rent roll, cash book and counterfoils of receipt book.

9 Income Tax Refunds Verify the refund of TDS on dividend or interest from the Income Tax Authorities as Charitable Institutions are provided exemption from income tax.

10 Expenditure 1. Affirm strongly the payment of grants and it should be paid only for charitable purpose.

2. Verify the schedules of securities held and inventories of properties held.

3. Confirm that the trustees or any officials are not benefitted out of the charitable institution.

4. Carry physical verification of securities, title deeds and


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movable properties. 5. Verify the cash and bank balances. 6. Confirm that any fund contributed for a specific purpose is

used for that particular purpose only.

AUDIT OF EDUCATIONAL INSTITUTIONS


1 Constitution 1. Examine the Trust Deed or Regulations and 2. Determine the constitution of the organization. 3. Also note down the provisions affecting accounts,

contained in the Regulations.

2 Minutes Book 1. Examine the minutes of the Managing Committee's or Governing Body's meetings, noting down the resolutions affecting the accounts.

2. Confirm that the decisions undertaken are duly complied with, for operation of Bank accounts, approval of expenditure.

3 Fees obtained from Students

1. Verify the names entered into the Student's Fees Register for each term or month, along with the class, registers showing the students name on roll and testing the amount of fees charged.

2. Verify the fees received by the comparison of counterfoils of receipts provided with the entries in the Cash Book.

3. Mark out the collections in the Fees Register to ensure that the revenue earned from such source has been duly accounted for.

4. Determine whether the fees paid in advance is duly considered under the approval of proper authority.

5. Check the admission fees with admission slips duly signed by the College Principal and ensures that the amount is credited to a Capital Fund or Separate Account decided by the Managing Committee.

6. Verify whether the fines for late payment, absence, etc. have been either collected or foregone under proper authority.

7. Determine whether hostel dues were recovered before the closure of the student’s accounts and refund of their deposited caution money.

4 Other Incomes 1. Check the rental income earned from landed property with Rent Receipts and Agreements.

2. Affirm the income from endowments and legacies and also the dividend and interest from investment and verify the securities with respect to investment held.

5 Expenditures 1. Determine the operation of internal control system over the various heads of expenditures.

2. Affirm the various items of expenditure, noting down the abnormal or heavy items, if any.

6 Taxation 1. Verify that tax exemptions under the Income Tax Act are


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enjoyed by the institutions. 2. In case of TDS from rents, interest, etc. check whether the

refund claim has been made. 3. Verify that the conditions subject to which exemption has

been granted, have been followed or complied with.

7 Financial Information Verify whether the form and manner of presenting financial information comply with the Accounting Standards and applicable legal requirements.

AUDIT OF HOTEL


1 Internal Control- Room Sales

1. Verify the Room Sales, Collection from the guest register. 2. Sometimes, daily occupancy reports and exit reports are

prepared. In such case test check a few reports with the guest register and with the individual guest's bill to ensure proper billing.

3. See whether standard room rates have been charged in different guests bills.

4. In case there are variation, get the satisfactory explanation and sanction for the same.

3 Internal Control- Restaurant, Billing and Sales

1. All Sales points in a hotel make both cash and credit sales. 2. The auditor must see the internal control system as

regards.

Procedure for billing customers for room services and sundry services.

Procedure for issue of provisions and commodities.

Reconcile the total sales reported with the total of the bills issued by the sale point.

Check the numerical control system to ensure that all bills are included in the total.

Trace the cash elements of sales in the cash book and the credit sales in total and detail to tile guests bills.

4 Internal Control- Stocks 1. Examine the documentation procedure in respect of stock since hotel stock are readily (a) portable & (b) saleable.

2. Perform compliance tests to ensure that all such documentation is accurately processed.

3. Ensure that movements of provision & goods in or out of the stores take place only after proper authorization and recording.

4. Supervise the physical stock taking and test checking pricing calculations.

5 Casual Labour Generally the hotels employ casual labour to a very large extent. Hence the auditor should Examine the wage payment registers and attendance records to see whether any manipulation has been made.


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AUDIT OF PARTNERSHIP FIRM


1 Appointment Letter

Ensure that the appointment letter, signed by a partner, duly authorized, clearly specifies the nature and scope of audit.

2 Partnership Deed Verify the partnership deed duly signed by all the partners and its registration with the register of firm.

3 Minutes Book Verify the minutes book, if any, maintained to record the policy decision undertaken by the partners

4 Agreement Verify that the business in which the partnership is involved is authorized by the partnership agreement, or by any extension or modification of that agreed to subsequently.

5 Books of Accounts Investigate whether the books account are reasonable and considered adequate pertaining to the nature of partnership business.

6 Interest 1. Verify that the interest of non-partner has suffered unreasonably by an activity involved in the partnership which it was not authorized to do under

2. Partnership deed or by violating any pervasion in the partnership agreement.

7 Provision for Tax 1. Ensure that a provision for tax of the firm payable by the partnership has been made in the accounts prior to arrival at the amount of profit divisible among the partners.

2. Also check various requirements of the legislation 3. applicable to the partnership firm such as Section 44 (AB)

of the Income tax 4. Act, 1961 have been complied with

7 Profit Sharing Verify that the profits or losses are distributed among or losses are distributed among the partners in the profit sharing ratio as agreed.


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IMPORTANT DIFFERENCES

Audit risk refers to the risk of not detecting material misstatements and it can be divided into:

Inherent risk Control risk Detection risk

Inherent risk is the risk of failure to detect material misstatements due to

absence of internal controls.

Control risk is the risk of failure to detect material misstatements due to lack of

internal control system or failure of the accounting and internal control system to

detect internal control weaknesses.

Detection risk is the risk of failure t o d e t e c t m a t e r i a l misstatements

due to failure of substantive procedures to detect material Misstatements.

Difference between Accounting, Auditing and Investigation

Difference between Report and Certificates

Basis Accounting Auditing Investigation Scope Recording of

transactions Overall examination of financial statements

Specific verification of certain areas

Objective Preparation of financial statements

Expression of opinion on financial statements

Detection of frauds and errors

Legal Statutory Statutory requirement Not statutory when required by law

Reporting No Reporting Reporting in prescribed manner

Reporting required but no form is prescribed Time limit Year end No time prescribed No time prescribed

Suspicion There is no presumptions of frauds and errors

It presumes existence of frauds and errors

No. Report Certificate 1. Involves Expression of opinion No expression of opinion and it is only

statement of fact

2. It has a prescribed form No prescribed form. 3. Overall opinion on financial statements Specific statement of fact 4. It covers a particular financial period It can be issued for any period


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Difference between Check list and Internal Control Questionnaire

Contents of Current Audit File and Permanent File

No Current Audit file Permanent Audit file

1 Letter of appointment M.O.A and A.O.A, partnership deed

2 Resolution for appointment Minutes of meetings

3 Audit programme Previous years audited accounts, Directors' report and Auditor's report

4 Correspondence with the Analysis of ratios

5 Letter of representation Letter of weakness

6 Queries and observations Written communication with the previous auditor

7 Branch audit report Copies of contracts and agreements

8 Internal Audit Report Legal opinions and valuation reports

Difference between Vouching and Verifications

Difference between Audit Principles and Audit Technique

No. Check list Internal Control Questionnaire

1 Answered by the audit staff Answered by the management

2 It can be issued only after completion of audit Can be issued at any point of time

3 Covers only one area – separate checklist is required for each area

Can cover more than one area

4 Objective is to detect internal control weakness and evaluate performance

Verify compliance by the management, and detect internal control weakness.

Vouching Verification

Establishes the genuineness of a transaction

Establishes existence and ownership of assets and liabilities

Applies to income and expenditure Applies to assets and liabilities

Examines internal control, accounting and recording aspects and disclosure aspects

Concerned with physical, documentary and legal verification

Audit principles Audit Techniques

They are principles to be followed in performing an audit given in SAs

They are methods of applying audit in procedures.

The auditor should ensure compliance with Audit principles

Use of methods is based on auditor‟s professional judgement

Principles do not differ from audit to audit Techniques differ from audit to audit

Not influenced by motive, size or legal form of the entity

Choice of methods is influenced by such factors


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Difference between Test Checking and Statistical Sampling

Test checking Statistical Sampling Selective verification of transactions Drawing a sample from population

Does not involve statistical technique Statistical techniques can be used

Size of the checking may not be fixed The size of the sample is fixed

Based on auditors judgment- biased Not influenced by auditor judgment

Involves more audit risk Comparatively the audit risk is less

No specific methods of applying test check Various methods of sampling are employed

Write Short notes on IMPORTANT TERM

1. Errors of Commission: When a transaction has been mis-recorded either wholly or partially

it is called as a error of commission 2. Operational Audit: Operational Audit involves examination of all operations and activities

of the entity. Operational audit is considered as a specialised management information tool to

fill the void that conventional information sources fail to fill

3. Inherent limitations of audit: Audit has the following limitations: Audit is test natured

Audit evidence is more persuasive rather than conclusive

Limitations of Internal control system

Use of judgment

The risk of a failure to detect a material misstatement arising out of a fraud is more than the risk of a

failure to detect a material misstatement arising out of an error.

Responsibility for detection of frauds and errors is primarily on those charged with Governance

and management. The management should establish a good internal control system for prevention and

detection of frauds and errors. The auditor is expected to exercise reasonable skill and care and the

audit procedures followed by the auditor should normally be capable of detecting frauds and errors.

Existence of frauds and errors affects the true and fair view of the financial statements.

4. Cut off Procedure: It is a procedure for segregating the transaction at the end of the year for

identifying these transactions, which have taken place after the balance sheet date but which relate to

the period prior to the Balance sheet date. In this procedure the cut-off date is to be fixed and the

transactions, which relate to the current year, should be accounted only in the current year. 5. Auditor's Independence: Independence is the keystone upon which the respect and

dignity of a profession is based. Independence implies that the judgement of a person is not

subordinate to the wishes or directions of another person who might have engaged him or to

his own self interest


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6. True and Fair View: The phrase “true and fair” in the auditor’s report signifies that the

auditor is required to express his opinion as to whether the state of affairs and the results of

the entity as ascertained by him in the course of his audit are truly and fairly represented in

the accounts under audit.

7. Accounting Policies: Accounting policies refers to the specific accounting principles and the

methods of applying those principles adopted by the enterprise in the preparation and

presentation of financial statements

8. Fundamental Accounting Assumptions: AS 1 states that certain fundamental

accounting assumptions underlie the preparation and presentation of financial statements.

They are usually not specifically stated because their acceptance and use are assumed.

Disclosure is necessary if they are not followed. The following have been generally accepted as

fundamental accounting assumptions:

a. Going Concern

b. Consistency

c. Accrual.

9. Audit Techniques: For collection and accumulation of audit evidence, certain methods and

means are available and these are known as audit techniques. Some of the techniques

commonly adopted by the auditors are the following:

1. Posting checking 2. Casting checking

3. Physical examination and count 4. Confirmation

5. Inquiry 6. Year-end scrutiny

7. Re-computation 8. Bank Reconciliation

9. Tracing in subsequent period

10. Audit Sampling: “Audit Sampling” means the application of audit procedures to less than

100% of items within a population of audit relevance such that all sampling units have a

chance of selection in order to provide the auditor with a reasonable basis on which to draw

conclusions about the entire population.

11. Audit Note-book: An audit note book is usually a bound book in which a large variety of

matters observed during the course of audit are recorded. Audit note books form part of audit

working papers and for each year a fresh audit note book is maintained. In case an auditor

classifies his working paper into permanent and current, then audit note book shall form part

of the current file.

12. Continuous Audit: A continuous audit is one in which the auditor’s staff is engaged continuously

in checking the accounts of the client, during the whole year round or when for the purpose,

the staff attends at quite frequent intervals say weekly basis during the financial period.

13. Surprise checks: Surprise checks are a part of normal audit procedures. An element of surprise

can significantly improve the audit effectiveness. Wherever practical, an element of surprise

should be incorporated in the audit procedures. Surprise checks are mainly intended to

ascertain whether the internal control system is working effectively and whether the

accounting and other records are kept up to date as per the statutory regulations. Surprise

checks can exercise good moral check on the client’s staff.

14. Knowledge of Client's business: Knowledge of Client’s Business: As per SA 315 “Identifying

and Assessing the Risk of Material Misstatement Through Understanding the Entity and its

Environment”, an auditor can obtain this information from-


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(i) Clients annual report to shareholders;

(ii) Minutes of shareholders/board of directors;

(iii) Internal financial management reports of current & previous year;

(iv) Previous year audit working papers;

(v) Discussion with client;

(vi) Clients policy and procedure manual;

(vii) Publications like trade journals, magazines, news papers; and

(viii) Visit to client’s premises.

15. 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 applicable laws and

regulations. The term “controls” refers to any aspects of one or more of the components of

internal control.

16. Internal check: Internal check has been defined by the Institute of Chartered Accountants of

England and Wales as the “checks on day to day transactions which operate continuously as

part of the routine system whereby the work of one person is proved independently or is

complementary to the work of another, the object being the prevention or early detection of

errors or fraud”.

17. Examination in Depth: It implies examination of a few selected transactions from the

beginning to the end through the entire flow of the transaction, i.e., from initiation to the

completion of the transaction by receipt or payment of cash and delivery or receipt of the

goods.

18. Audit Trail: An audit trail refers to a situation where it is possible to relate ‘one-to-one’ basis,

the original input along with the final output.

19. Computer Aided Audit Techniques (CAATs): The use of computers may result in the design of

systems that provide less visible evidence than those using manual procedures. CAATs are

such techniques applied through the computer which are used in the verifying the data being

processed by it

20. Independence of Internal Auditor: As per section 138 of the Companies Act, 2013, the internal

auditor, who shall either be a chartered accountant whether engaged in practice or not or a

cost accountant, or such other professional as may be decided by the Board to conduct

internal audit of the functions and activities of the companies auditor may or may not be an

employee of the company. Further, the Audit Committee of the company or the Board shall, in

consultation with the Internal Auditor, formulate the scope, functioning, periodicity and

methodology for conducting the internal audit. It may also be noted that the Central

Government may, by rules, prescribe the manner and the intervals in which the internal audit

shall be conducted and reported to the Board

21. Letter of Weakness: Letter of weakness is a report issued by auditor stating the weakness in

internal control mechanism. It also suggests measures by which the weakness in the system be

corrected and the control system be made better protected. The auditor does compliance

procedure to ascertain that the internal control system exists in the entity; it works effectively;


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it work continuously in the entity during review period. When he comes across any weakness

in the control points, he issues letter of weakness

22. Internal Control Questionnaire: Internal control questionnaire is a comprehensive series of

questions concerning internal control. It is the most widely used form for collecting information

about the existence, operation and efficiency of internal control in the organisation.

23. Cut-off arrangement: It the arrangement where the transactions of one period would be

separated from those in the ensuing period so that the results of the working of each period

can be correctly ascertained.

24. Vouching: The act of examining vouchers is referred to as vouching. It is the practice

followed in an audit, with the objective of establishing the authenticity of the transaction

recorded in the primary books of account. It essentially consists of verifying a transaction

recorded in the books of account with the relevant documentary evidence and the authority

on the basis of which the entry has been made; also confirming that the amount mentioned in

the voucher has been posted to an appropriate account which would disclose the nature of

transaction on its inclusion in the final statements of account. After examination, each voucher

is marked in a manner to ensure that it may not be presented again in support of another

entry.

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