Auditing Notes - CS Exe PDF
Auditing Notes - CS Exe PDF
Of any entity whether profit making or not, irrespective of its size & legal
structure,
Scope of an The auditor decides the scope of his audit having regard
audit to:
The requirement of the relevant legislation.
The pronouncements of the institute (ICAI)
Terms of engagement.
However, the terms of engagement cannot override the
pronouncement of the institute or the provisions of
relevant legislation.
BASIC PRINCIPLES GOVERNING AN AUDIT (Nov 2008, Nov 2009, May 2011)
Integrity, The Auditor should be straight forward, honest and sincere in his
Objectivity and approach to his professional work.
Independence He must be fair and must not allow bias to override his objectivity.
He should maintain an impartial attitude and both be and appear to be
free of any interest which might be regarded as being incompatible with
integrity and objectivity.
Skills and The audit should be performed and the report prepared with due
Competence professional care by person who have adequate training, experience and
competence in auditing.
The auditor requires specialized skills and competence which are
acquired through a combination of general education, knowledge
obtained through study and formal courses concluded by qualifying
examination recognized for this purpose and practical experience under
proper supervision.
In addition, the auditor requires a continuing awareness of developments
including pronouncements of ICAI on accounting and auditing matters
and relevant regulations and statutory requirements.
Work performed When the auditor delegates work to assistants or uses work performed by
Documentation The auditor should document matters which are important in providing
evidence that the audit was carried out in accordance with basic principles.
Planning The auditor should plan his work to enable him to conduct an effective audit
in an efficient and timely manner. Plans should be based on knowledge of
the client‟s business. Plans should be made to cover, among other things:
(a) Acquiring knowledge of the client‟s accounting system, policies and
internal control procedures;
(b) Establishing the expected degree of reliance to be placed on internal
control;
(c) Determining and programming the nature, timing and extent of the audit
procedures to be performed and
(d) Coordinating the work to be performed.
Audit Evidence The auditor should obtain sufficient appropriate audit evidence through the
performance of compliance and substantive procedures to enable him to
draw reasonable conclusions therefrom on which to base his opinion on the
financial information.
Accounting The auditor should gain an understanding of the accounting system and
system and related internal controls and should study and evaluate the operation of
Internal Control those internal controls upon which he wishes to rely in determining the
nature, timing and extent of other audit procedures.
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.
Explanation What constitutes “true and fair” has not been defined in any legislation.
Sec 129 of the Companies Act, 2013states that the financial statements
shall give a true & fair view of the state of affairs of the company or
companies, comply with the accounting standards notified under section
133 and shall be in the form or forms as may be provided for different
class or classes of companies in schedule III.
Sec 128(1) of the companies Act, 2013 also contemplates that every
company shall prepare and keep books of account which give a true &
fair view of the state of the affairs of the company and explain its
transactions.
In more specific Assets That the assets are neither undervalued or overvalued
terms, to ensure according to the applicable accounting principles;
true & fair view, (Valuation)
an auditor has to
see No material asset is omitted; (Omission)
Schedule III The Profit and Loss account and Balance Sheet
discloses all the matters required to be disclosed as per
Schedule VI; (Disclosure)
INDEPENDENT AUDIT
Meaning Independence means that the judgement of a person is not subordinated
to wishes of another person.
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It requires that he should not act under any influence.
Thus, he can work in a complete unbiased manner.
Advantages of
independent Memory technique:
audit
(May 2012)
Protection of interest It safeguards the financial interest of persons who
are not associated with the management of the
organisation whether they are partners or
shareholders.
Moral check It acts as a moral check on the employees from
committing defalcations.
Tax liability Audited statements of accounts are helpful in
setting liability for taxes.
The auditor considers materiality from the point of view of both the
following:
Overall financial information
Individual account balances
Procedure to 1. The Auditing and Assurance Standards Board identifies the areas where
issue SAs auditing standards need to be formulated and the priority in regard to their
selection.
3. On the basis of the work of the study groups, an Exposure Draft of the
proposed auditing standard is prepared by the Board and issued for
comments of the members.
4. After taking into the comments received, the draft of the proposed
auditing standard is finalized by the Board and submitted to the Council of
the Institute.
5. The Council considers the final draft of the proposed auditing standard
and, if necessary, modifies the same in consultation with the Board. The
auditing standard is then issued under the authority of the Council.
While formulating the auditing standards, the Board also takes into
consideration the applicable laws, customs, usages and business
environment in the country.
With effect from 1st April, 2008, the AASB re-categorised and re-numbered
the existing Auditing and Assurance Standards on the lines as followed by
the IAASB. With this change, all auditing and assurance standards (AAS)
were renamed as standards on Auditing (SAs)
STATUTORY AUDIT
Provided that a firm whereof majority of partners practicing in India are qualified for
appointment as aforesaid may be appointed by its firm name to be auditor of a
company.
(3) Under sub-section (3) of section 141 along with Rule 10 of the Companies (Audit and
Auditors) Rule, 2014 (hereinafter referred as CAAR), the following persons shall not be
eligible for appointment as an auditor of a company, namely:- (Disqualifications)
Student may note that for the purpose of clause (e) above, the
term “business relationship” shall be construed as any
transaction entered into for a commercial purpose, except –
(i) commercial transactions which are in the nature of
professional services permitted to be rendered by an auditor or
audit firm under the Act and the Chartered Accountants Act,
1949 and the rules or the regulations made under those Acts;
(Dec 2014) Section 144 of the Companies Act, 2013 is a new provision
which prescribes certain services not to be rendered by the
auditor. An auditor appointed under this Act shall provide to
the company only such other services as are approved by the
Board of Directors or the audit committee, as the case may be,
but which shall not include any of the following services
(whether such services are rendered directly or indirectly to the
company or its holding company or subsidiary company),
namely:
(i) accounting and book keeping services;
(ii) internal audit;
(iii) design and implementation of any financial information
system;
(iv) actuarial services;
(v) investment advisory services;
(vi) investment banking services;
(vii) rendering of outsourced financial services;
(viii) management services; and
(ix) any other kind of services as may be prescribed.
APPOINTMENT OF Section139(1) of the Companies Act, 2013 provides that every company
SUBSEQUENT shall, at the first annual general meeting appoint an individual or a
AUDITOR/REAPPO firm as an auditor who shall hold office from the conclusion of that
INTMENT OF
meeting till the conclusion of its sixth annual general meeting and
AUDITOR IN CASE
OF COMPANIES
thereafter till the conclusion of every sixth meeting.
OTHER THAN
GOVERNMENT The following points need to be noted in this regard-
COMPANY (i) The company shall place the matter relating to such appointment of
ratification by member at every Annual General Meeting.
(iii) The certificate shall also indicate whether the auditor satisfies the
criteria provided in section 141.
(iv) The company shall inform the auditor concerned of his or its
appointment, and also file a notice of such appointment with the
Registrar within 15 days of the meeting in which the
Auditor is appointed.
FILLING OF A As per Section 139(8), any casual vacancy in the office of an auditor
CASUAL shall-
VACANCY
COMPANIES OTHER THAN GOVERNMENT COMPANY:
(i) In the case of a company other than a company whose accounts are
subject to audit by an auditor appointed by the Comptroller and
Auditor-General of India, be filled by the Board of Directors within
thirty days.
If such casual vacancy is as a result of the RESIGNATION OF AN
AUDITOR, such appointment shall also be approved by the company at
a general meeting convened within three months of the
recommendation of the Board and he shall hold the office till the
conclusion of the next annual general meeting;
GOVERNMENT COMPANY:
(ii) In the case of a company whose accounts are subject to audit by
an auditor appointed by the Comptroller and Auditor-General of India,
be filled by the Comptroller and Auditor-General of India within thirty
days:
CASUAL As per section 140 (2) the auditor who has resigned from the company
VACANCY BY shall file within a period of thirty days from the date of resignation, a
RESIGNATION: statement in the prescribed form ADT–3 (as per Rule 8 of CAAR) with
the company and the Registrar, and
In case of failure the auditor shall be punishable with fine which shall
not be less than fifty thousand rupees but which may extend to five
lakh rupees as per section 140 (3).
ROTATION OF AUDITORS
Applicability of section 139(2) Rotation of Auditor: (Dec 2014) As per rules prescribed in
Companies (Audit and Auditors) Rules, 2014, for applicability of section 139(2) the class
of companies shall mean the following classes of companies excluding one person
companies and small companies:-
(I) all unlisted public companies having paid up share capital of rupees ten crore or more;
(II) all private limited companies having paid up share capital of rupees twenty crore or
more;
(III) all companies having paid up share capital of below threshold limit mentioned in (a)
and (b) above, but having public borrowings from financial institutions, banks or public
deposits of rupees fifty crores or more.
As per Section 139(2) , No listed company or a company belonging to such class or classes
of companies as mentioned above, shall appoint or re-appoint-
(a) an individual as auditor for more than one term of five consecutive years; and
(b) an audit firm as auditor for more than two terms of five consecutive years: Provided
that -
(i) an individual auditor who has completed his term under clause (a) shall not be eligible
for re-appointment as auditor in the same company for five years from the completion of
his term;
(ii) an audit firm which has completed its term under clause (b), shall not be eligible for
re-appointment as auditor in the same company for five years from the completion of such
term.
2. Every company, existing on or before the commencement of this Act which is required
to comply with provisions of this sub-section, shall comply with the requirements of this
sub-section within three years from the date of commencement of this Act:
3. It has also been provided that right of the company to remove an auditor or the right of
the auditor to resign from such office of the company shall not be prejudiced.
4 Subject to the provisions of this Act, members of a company may resolve to provide that-
(a) In the audit firm appointed by it, the auditing partner and his team shall be rotated at
such intervals as may be resolved by members; or
(b) The audit shall be conducted by more than one auditor.
(1) The Audit Committee shall recommend to the Board, the name of an individual auditor
or of an audit firm who may replace the incumbent auditor on expiry of the term of such
incumbent.
(2) Where a company is required to constitute an Audit Committee, the Board shall
consider the recommendation of such committee, and in other cases, the Board shall itself
consider the matter of rotation of auditors and make its recommendation for appointment
of the next auditor by the members in annual general meeting.
(4) Where a company has appointed two or more individuals or firms or a combination
thereof as joint auditors, the company may follow the rotation of auditors in such a
manner that both or all of the joint auditors, as the case may be, do not complete their
term in the same year.
AUDITOR’S As per section 142 of the act the remuneration of the auditor of a
REMUNERATION company shall be fixed in its general meeting (Members) or in such
manner as may be determined therein.
(3) The company shall hold the general meeting within sixty days of
receipt of approval of the Central Government for passing the special
resolution. It is important to note that before taking any action for
removal before expiry of terms, the auditor concerned shall be given a
reasonable opportunity of being heard.
APPOINTMENT OF Section 140 lays down procedure to appoint an auditor other than
AUDITOR OTHER retiring auditor who was removed:
THAN RETIRING
AUDITOR: 1. Special notice shall be required for a resolution at an annual
general meeting appointing as auditor a person other than a retiring
auditor, or providing expressly that a retiring auditor shall not be re-
appointed, except where the retiring auditor has completed a
consecutive tenure of five years or as the case may be, ten years, as
provided under sub-section (2) of section 139.
(d) Whether loans and advances made by the company have been
shown as deposits;
(f) Where it is stated in the books and documents of the company that
any shares have been allotted for cash, whether cash has actually
been received in respect of such allotment, and if no cash has
actually been so received, whether the position as stated in the
account books and the balance sheet is correct, regular and not
misleading.
DUTY TO AUDIT As per sub section 3 of section 143, the auditor‟s report shall also
REPORT (CARO state –
2003)
(a) Whether he has sought and obtained all the information and
explanations which to the best of his knowledge and belief were
necessary for the purpose of his audit and if not, the details thereof
and the effect of such information on the financial statements;
(c) Whether the report on the accounts of any branch office of the
company audited under sub-section (8) by a person other than the
company‟s auditors has been sent to him under the proviso to that
sub-section and the manner in which he has dealt with it in
preparing his report;
(d) Whether the company‟s balance sheet and profit and loss account
dealt with in the report are in agreement with the books of account
and returns;
(e) Whether, in his opinion, the financial statements comply with the
accounting standards;
(ii) Whether the company has made provision, as required under any
law or accounting standards, for material foreseeable losses, if any,
on long term contracts including derivative contracts;
In case the auditor fails to get any reply or observations from the
Board or the Audit Committee within the stipulated period of
forty-five days, he shall forward his report to the Central
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Government alongwith a note containing the details of his report
that was earlier forwarded to the Board or the Audit Committee
for which he failed to receive any reply or observations within the
stipulated time.
AUDITOR TO Section 146 of the Companies Act 2013, provides that all notices of,
ATEND AGM and other communications relating to, any general meeting shall be
forwarded to the auditor of the company, and the auditor shall,
unless otherwise exempted by the company, attend either by himself
or through his authorised representative, who shall also be qualified
to be an auditor, any general meeting and shall have right to be
heard at such meeting on any part of the business which concerns
him as the auditor.
PENALTY FOR Any person who is found guilty of fraud involving an amount of at least
FRAUD U/S 447 10 Lakhs or 1% of turnover of company, whichever is lower, shall be
punishable with imprisonment not less than 6 months but not more
than 10 years and shall also be liable for fine of not less than the
amount involved in the mis-statement, but not more than 3 times the
amount involved.
Provided further that where the fraud involves an amount less than ten
lakh rupees or one per cent. of the turnover of the company, whichever
is lower, and does not involve public interest, any person guilty of such
fraud shall be punishable with imprisonment for a term which may
extend to five years or with fine which may extend to twenty lakh
rupees or with both.
Provided that all or any of the books of account aforesaid and other
relevant papers may be kept at such other place in India as the
Board of Directors may decide and where such a decision is taken,
the company shall, within seven days thereof, file with the Registrar a
notice in writing giving the full address of that other place:
Provided further that the company may keep such books of account
or other relevant papers in electronic mode in such manner as may
be prescribed.
When using the work of another auditor, the principal auditor should
ordinarily perform the following procedures:
(a) Advise the other auditor of the use that is to be made of the other
auditor's work and report and make sufficient arrangements for co-
ordination of their efforts at the planning stage of the audit. The
principal auditor would inform the other auditor of matters such as
areas requiring special consideration, procedures for the
identification of inter-component transactions that may require
disclosure and the time-table for completion of audit; and
The principal auditor might discuss with the other auditor the audit
procedures applied or review a written summary of the other
auditor‟s procedures and findings which may be in the form of a
completed questionnaire or check-list. The principal auditor may
also wish to visit the other auditor. The nature, timing and extent of
procedures will depend on the circumstances of the engagement and
the principal auditor's knowledge of the Professional competence of
the other auditor. This knowledge may have been enhanced from the
review of the previous audit work of the other auditor.
COST AUDIT
CONCEPT It is an audit process for verifying the cost of manufacture or
production of any article, on the basis of accounts as regards
utilisation of material or labour or other items of costs, maintained by
the company.
LEGAL PROVISIONS Cost Audit is covered by Section 148 of the Companies Act, 2013.
The audit conducted under this section shall be in addition to the
audit conducted under section 143.
WHO CAN BE COST The audit shall be conducted by a Cost Accountant in Practice who
AUDITOR shall be appointed by the Board of such remuneration as may be
determined by the members in such manner as may be prescribed:
Provided further that the auditor conducting the cost audit shall
comply with the cost auditing standards ("cost auditing standards"
mean such standards as are issued by the Institute of Cost and
Works Accountants of India, constituted under the Cost and Works
Accountants Act, 1959, with the approval of the Central
Government).
APPOINTMENT OF As per rule 14 of the Companies (Audit and Auditors) Rules, 2014
COST AUDITOR
(a) in the case of companies which are required to constitute an
audit committee-
(i) the Board shall appoint an individual, who is a cost accountant in
practice, or a firm of cost accountants in practice, as cost auditor on
the recommendations of the Audit committee, which shall also
recommend remuneration for such cost auditor;
SUBMISSION OF A company shall within 30 days from the date of receipt of a copy of
COST AUDIT the cost audit report prepared (in pursuance of a direction issued by
REPORT Central Government) furnish the Central Government with such
report along with full information and explanation on every
reservation or qualification contained therein. If, after considering the
cost audit report referred to under this section and the, information
and explanation furnished by the company as above, the Central
Government is of the opinion, that any further information or
explanation is necessary, it may call for such further information and
explanation and the company shall furnish the same within such
time as may be specified by that Government.
INTERNAL AUDIT
Applicability of Sec. 138 shall apply only to such class or classes of companies as
Sec. 138 may be prescribed. As per Rule 13 of the Companies Rules, 2014,
following class of companies shall be covered u/s 138:
(Dec 2016) (a) every listed company;
Legal If an existing company satisfies any of the criteria laid down under
Requirements for Rule 13 (i.e. falls under prescribed class of companies for the purpose
Existing of Sec. 138), it shall within six months of commencement of section
Companies 138, comply with the requirements of Sec. 138 and Rule 13.
STATUTORY AUDITOR INTERNAL AUDITOR
1. The extent of the work undertaken by It is statutory requirement too as per section 138
statutory auditor arises from the of the Companies Act, 2013 where the Audit
responsibility placed on him by the Committee of the company or the Board shall, in
statutes. consultation with the Internal Auditor,
Formulate the scope, functioning, periodicity and
methodology for conducting the internal audit.
2. The approach of this auditor is The approach of this auditor is with a view to
governed by his statutory duty to satisfy satisfy that the accounting system is efficient, so
himself that the accounts to be presented that the accounting information presented to the
to the shareholder show a true and fair management is accurate and discloses material
view of the financial position. facts.
4.External auditor is not the employee of If internal auditor is an employee of the company.
the company so he has independent He cannot enjoy independence that statutory
status. auditor has.
C & AG Audit 1. In India, government audit is performed by an independent
constitutional authority, i.e. Comptroller and Audit General of India
(C&AG), through the Indian Audit and Accounts Department.
4. Article 151 of the Constitution requires that the audit reports of the
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C&AG relating to the accounts of the Central/State Government
should be submitted to the President/Governor of the State who shall
cause them to be laid before Parliament/State Legislative.
1st Time, the Companies Act, 2013 gives statutory recognitions to the
Secretarial Audit. As per section 204 of the Companies Act, 2013, every
listed company and other class of companies as notified have to annex
a Secretarial Audit Report.
JOINT AUDIT Meaning of Joint Audit: when two or more auditors are appointed for
the execution of same audit assignment, it is termed as joint audit.
Joint auditors are mainly appointed for audit assignment of public
enterprises and big companies.
(a) In respect of the audit work which is not divided among the joint
auditors and is carried out by all of them;
(b) In respect of 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 auditors. It may, however, be clarified that all the joint
auditors are responsible only in respect of the appropriateness of the
decisions concerning the nature, timing or extent of the audit
procedures agreed upon among them; proper execution of these audit
procedures is the separate and specific responsibility of the joint
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auditor concerned;
(c) In respect of matters which are brought to the notice of the joint
auditors by any one of them and on which there is an agreement
among the joint auditors;
(d) For examining that the financial statements of the entity comply
with the disclosure requirements of the relevant statute; and
(e) For ensuring that the audit report complies with the requirements
of the relevant statute.
If any matters of the nature referred above are brought to the attention
of the entity or other joint auditors by an auditor after the audit report
has been submitted, the other joint auditors would not be responsible
for those matters. Subject to paragraph (b) above, it is the
responsibility of each joint auditor to determine the nature, timing and
extent of audit procedures to be applied in relation to the area of work
allocated to him; The issues such as appropriateness of using test
checks or sampling should be decided by each joint auditor in relation
to his own area of work. This responsibility is not shared by the other
joint auditors.
Each joint auditor is entitled to assume that the other joint auditors
have carried out their part of the audit work in accordance with the
generally accepted audit procedures. It is not necessary for a joint
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auditor to review the work performed by other joint auditors or perform
any tests in order to ascertain whether the work has actually been
performed in such a manner. Each joint auditor is entitled to rely upon
the other joint auditors for bringing to his notice accounting principles
or any material error noticed in the course of the audit. Where separate
financial statements of a division/branch are audited by one of the
joint auditors, the other joint auditors are entitled to proceed on the
basis that such financial statements comply with all the legal and
professional requirements regarding the disclosures to be made and
present a true and fair view of the state of affairs and of the working
results of the division/branch concerned, subject to such observations
as may be communicated by the joint auditor concerned.
Auditor’s report Every report made by the auditor under section 143 of the Companies Act,
to contain 2013 on the accounts of every company audited by him, to which this
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matters Order applies, for the financial years commencing on or after 1st April,
specified in 2015, shall in addition, contain the matters specified in paragraphs 3 and
paragraphs 3 4, as may be applicable:
and 4 Provided the Order shall not apply to the auditor‟s report on consolidated
financial statements.
Matters to be The auditor‟s report on the accounts of a company to which this Order
included in the applies shall include a statement on the following matters, namely:-
auditor’s report (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;
(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;
(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;
(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;
(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.
(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?
(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.
(vii) (a) whether the company is regular in depositing undisputed statutory
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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).
(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).
(ix) 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;
(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;
(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;
(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;
(xiii) whether all transactions with the related parties are in compliance
with sections 177 and 188 where applicable and the details have been
disclosed in the Financial Statements etc., as required by the applicable
accounting standards;
(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;
(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 have been complied with;
(xvi) whether the company is required to be registered under section 45-IA
Reasons to be (1) Where, in the auditor‟s report, the answer to any of the questions
stated for referred to in paragraph 3 is unfavourable or qualified, the auditor‟s report
unfavourable or shall also state the basis for such unfavourable or qualified answer, as the
qualified case may be.
answers (2) Where the auditor is unable to express any opinion on any specified
matter, his report shall indicate such fact together with the reasons as to
why it is not possible for him to give his opinion on the same.
2. A continuous Exercise:
Internal Audit is a continuous and systematic process of examining
and reporting the operations and records of a concern by its
employees or external agencies specially assigned for this purpose. It
is, in essence, auditing for the management and its scope may vary
depending upon the nature and size of the concern.
3. A Control System:
It is a control system concerned with examination and appraisal of
other control mechanisms.
Objectives (1) To verify the accuracy and authenticity of the financial accounting
and statistical records presented to the management.
(4) To confirm that liabilities have been incurred only for the
legitimate activities of the organisation.
7. Internal Audit can break through the power ego and personality
factors and possible conflicts of interest within the organization.
FUNCTIONS & Major roles and responsibilities of internal auditor are summarized
RESPONSIBILITIES below:
OF INTERNAL 1. To work with board and management to ensure that a system is in
AUDITOR place which ensures that all major risks are identified and analyzed.
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Evaluate and provide reasonable assurance that risk management,
control, and governance systems are functioning as intended and will
enable the organisation‟s objectives and goals to be met.
ORGANISATION Where there is an internal audit function, its status is derived from
STRUCTION OF the needs of the organisation and should be set at the top of the
INTERNAL AUDIT organisation, i.e. by the board and the audit committee. There is no
FUNCTION single model for internal audit and each organisation will determine
what is appropriate to suit its requirements. In general, internal
audit could, if agreed by the audit committee, seek assurance that:
The audit committee should consider the role that has been set for
internal audit within the organisation‟s overall assurance framework.
The evaluation of internal audit role should be on an ongoing basis
(at least annually).
ROLE OF The Internal auditor should examine and contribute to the ongoing
INTERNAL AUDIT effectiveness of the internal control system through evaluation and
IN INTERNAL recommendations. However, the internal auditor is not vested with
CONTROL management‟s primary responsibility for designing, implementing,
maintaining and documenting internal control. Internal audit
functions add value to an organization‟s internal control system by
bringing a systematic, disciplined approach to the evaluation of risk
and by making recommendations to strengthen the effectiveness of
risk management efforts.
PROPRIETY AUDIT 1. Kohler has defined propriety as that which meets the test of public
interest, commonly accepted customs and standard of conduct and
particularly as applied to professional performance, requirements of
Government regulations and professional codes.
EFFICIENCY AUDIT 1. In essence, efficiency indicates how well an organization uses its
resources to produce goods and services.
Limitations:
1. Cost effectiveness Cost of implementation of control may be more
than its benefits.
Thus, management usually doesn‟t implement
best controls.
Accounting and Internal Control so far as Financial and Accounting aspects are
Financial concerned aims at:
Controls Breaking the chain of the work in a manner so that no single person
can handle a transaction from the beginning to the end.
Segregation of accounting and custodial functions.
Securing proper documentation at each stage.
Safeguarding of assets.
Making errors and frauds difficult.
Evolving standardized records.
Preparation of periodical accounting and financial report.
Employment of persons of quality.
Formulating a cut-off procedure to separate transactions of two
consecutive years.
Building up a system to locate the deviations and departures from
the prescribed procedures and to detect frauds and errors
automatically without much loss of time
Fixing responsibility for the work and the responsibility for
deviations.
(iv) Whether any administrative control has a bearing on his work (for
example, if the control over worker recruitment and enrolment is weak,
there is a likelihood of dummy names being included in the wages sheet
and this is relevant for the auditor);
(vi) How far and how adequately the management is discharging its
function in so far as correct recording of transactions is concerned;
(vii) How reliable the reports, records and the certificates to the
management can be;
(ix) What would be appropriate audit technique and the audit procedure
in the given circumstances?
(x) What are the areas where control is weak and where it is excessive;
and
Tools to review
Internal Control Tools to review IC system
2) CHECK LIST This is a series of instructions and/or questions which a member of the
auditing staff must follow and/or answer.
INTERNAL CHECK
Meaning Checks on the day-to-day transaction.
Operating continuously as a part of the routine system.
Whereby work of each person is automatically checked by another.
Relation with I.C. Internal Check is part of overall Internal Control System & operates as a
System built in device.
General (1) No single person should have an independent control over any
considerations in important aspect of the business. All dealings and acts of every employee
framing a system should, in the ordinary course, come under the review of another.
of internal check
(2) The duties of members of the staff should be changed from time to
time without any previous notice so that the same officer or subordinate
does not, without a break, perform the same function for a considerable
length of time.
AUDIT IN DEPTH Audit in depth as the name implies means checking a transaction
extensively from origin to end. It is an audit technique which is used to
evaluate the effectiveness of internal control system in an organisation.
It is used in investigation exercises whereby the objective is to thorough
examination of transactions or records. In this technique all aspects
relating to the transaction are checked such as sanctity of transaction,
validity of transaction, adherences of prescribed procedures, arithmetical
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accuracy of transaction, accounting treatment of transaction etc. It is
also called vertical vouching as against horizontal vouching.
4. Receipt of goods and entry of goods in store ledger: check whether the
goods receipt is as per specification given in the purchase order. If not
check whether the deviations have been recorded and the
communication has been made to the supplier or not. Check whether
the goods receipt have been properly recorded in store ledger or not.
6. Payment of supplier invoice: Check whether the supplier bill have ben
paid correctly. Check whether all deduction for short receipt of goods,
late delivery of goods, inferior quality of goods, advance payment for the
goods have been done or not.
That the entire test operation has an objective and scientific basis makes
it possible for different auditors to participate independently in the same
test and for the results to be combined as though accomplished by one
auditor.
PHYSICAL Once the purchases are done, it is necessary to secure the materials in a
CONTROL OVER safe location. To ensure that the resources are accounted for, it is
ASSETS necessary to periodically verify the inventory and compare the results
with the books.
To ensure security of assets, it is advisable to –
(i) Secure goods received in a restricted area.
(ii) Restrict inventory access to appropriate staff.
(iii) Lock goods and materials, and provide key or combination to as few
people as possible.
(iv) Keep inventory records and periodically calculate beginning and
ending inventory amounts.
If physical control over assets does not exists, it may result into theft of
goods, inventory shortages, additional costs incurred for replacement of
goods.
REVIEW & Review and reconciliation is a very important part of purchase internal
RECONCILIATION control system. Timely review of supplier‟s invoice, packing slips, and
purchase orders is very necessary to ensure accuracy of the information
for prior payment, correct quantity ordered, and price charged. Monthly
ledger reconciliation enables to find improper
charges and validate appropriate financial transactions.
It is advisable to –
(i) Review supplier invoices for accuracy by comparing charges to
purchase orders.
(ii) Verify that the goods and services purchased have been received.
(iii) Perform monthly reconciliations of operating ledgers to ensure
accuracy and timeliness of expenses.
AUDIT PROGRAMME
Meaning An audit programme is a predetermined detailed plan of auditing
work to be performed, specifying the procedure to be followed in
verification of each item in the financial statement, allocation of
the audit staff and the time framed to be followed in conducting
the audit.
Vouching is the acid test of audit. It tests the truth of the transaction
recorded in the books of accounts. It is an act of examining
documentary evidence in order to ascertain the accuracy and
authenticity of the entries in the books of accounts.
From the above it becomes clear that vouching means testing the
truth of entries appearing in the primary books of accounts. In short,
vouching means to examine the evidence in support of any
transaction or entry recorded in the books of accounts. Vouching
does not merely see that the entries and transactions are supported
by proper documentary evidence. The auditor should be satisfied that
they are properly maintained, they are supported by all evidence and
they are correctly recorded in the books of accounts.
Examples Of Vouchers
A bill, a receipt, an invoice, goods received note, salaries and wages
sheets, goods inward and outward register, stores records, counterfoil
of a cheque book, counterfoil of pay-in-slip book, bank statement,
bank pass book, delivery challans, agreements, a material requisition
slip, copy of purchase order, minute book, memorandum and articles
of association, partnership deed, trust deed, prospectus etc. are the
examples of vouchers.
VERIFICATION Spicer and Pegler have defined verification as, “it implies an inquiry
into the value, ownership and title, existence and possession and the
presence of any charge on the assets”. Verification is a process by
which an auditor satisfies himself about the accuracy of the assets
and liabilities appearing in the Balance Sheet by inspection of the
documentary evidence available. Verification means proving the truth,
or confirmation of the assets and liabilities appearing in the Balance
Sheet.
2. Possession: The auditor has to verify that the assets are in the
possession of the company on the date of balance sheet.
5. Record: The auditor should confirm that all the assets and
liabilities are recorded in the books of account and there is no
omission of asset or liability.
6. Audit report: Under CARO the auditor has to report whether the
management has conducted physical verification of fixed assets and
stock and the difference, if any, between the physical inventory and
the
inventory as per the book.
7. Event after balance sheet date: The auditor should find out
whether any event after the date of balance sheet has affected any
items of assets and liabilities.
SCOPE OF VERIFICATION
Verification includes information on the following:-
1. That the assets were in existence on the date of the balance sheet.
2. That the assets had been acquired for the purpose of business
only.
3. That the assets had been acquired under a proper authority.
4. That the right of ownership of the assets vested in the organization.
5. That the assets were free from any charge.
6. That the assets were properly valued and disclosed in the balance
sheet.
OBJECTS OF VERIFICATION
Following are the objects of verification of assets and liabilities.
1. To show correct valuation of assets and liabilities.
2. To know whether the balance sheet exhibits a true and fair view of
the state of affairs of the business.
3. To find out the ownership and title of the assets.
4. To find out whether assets were in existence.
5. To detect frauds and errors, if any.
6. To find out whether there is an adequate internal control regarding
acquisition, utilisation and disposal of assets.
7. To verify the arithmetic accuracy of the accounts.
8. To ensure that the assets have been recorded properly.
ADVANTAGES OF VERIFICATION
Advantages of verification are as under:-
1. It avoids manipulation of accounts.
2. It guards against improper use of assets.
3. It ensures proper recording and valuation of assets.
4. It exhibits true and fair view of the state of affairs of the company.
TECHNIQUES OF VERIFICATION:
1. Inspection: It means physical inspection of the assets i.e. company
cash in the cash box, physical inventory, inspection of shares
certificates, documents etc.
2. Observation: The auditor may observe or witness the inspection of
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assets done by others.
3. Confirmation: It means obtaining written evidence from outside
parties regarding existence of assets.
FORM & The form and content of audit documentation should be designed to
CONTENT meet the circumstances of the particular audit. The information
contained in audit documentation constitutes the principal record of
the work that the auditors have performed in accordance with
standards and the conclusions that the auditors have reached. The
quantity, type, and content of audit documentation are a matter of
the auditors‟ professional judgment. The Audit documentation
therefore is not restricted to being only on papers, but can also be on
electronic media.
PERIOD OF The auditor should retain the working papers for a period of time
RETENTION sufficient to meet the needs of his practice and satisfy any pertinent
legal or professional requirements of record retention.
OWNERSHIP & Working papers are the property of the auditor. The auditor may, at
CUSTODY his discretion, make portions of or extracts from his working papers
available to his client.
They should also show the nature and scope of the work performed.
7. Initial and Date – Put your initials and date on every working paper.
Current Current audit files which contain information relating primarily to the
audit file audit of a single period.
Q. 5. (a) Mention the areas in which all the joint auditors are jointly and severally responsible.
(b) What is the process of issuing audit standards by Auditing and Assurance Standards
Board (AASB)?
(c) Differentiate between „internal audit‟ and „statutory audit‟. (5 marks each)
Q. 6. (a) Despite numerous benefits, internal audit has got some limitations. Discuss.
(b) Distinguish between „internal control system‟ and „internal check system‟.
(c) What are the objectives of review of management information system (MIS) of an
organization? (5 marks each)
Q. 6. (A) (i) Explain the objectives of investigation and also list out business situations where
investigation may be considered necessary.
(ii) Explain the provisions of section 139(1) of the Companies Act , 2013 regarding
appointment of auditors.
(iii) What are the important points to be considered while reviewing the „process of taking
insurance during transit‟? (5 marks each)
Q. 5. (a) What do you mean by „efficiency audit‟? How does it help the management of an
enterprise?
(c) An auditor appointed under Rule 3 of the Companies (Audit and Auditors) Rules, 2014 is
required to submit a certificate and notice to the Registrar of Companies. State the matters to
be covered in the certificate and name of the form of the notice required to be submitted.
(5 marks each)
Q. 6. (a) What is the difference between „inter – firm comparison‟ and „intra – firm comparison‟?
Explain the usefulness of ratio analysis in inter – firm comparison.
(b) Draft an internal control questionnaire for review of goods receiving procedures and
controls.
(c) Audit documentation is pivotal to auditing process. In this context, mention any ten
documents and records which should be kept in permanent audit file. (5 marks each)
Q. 6. (A) (i) Following data is extracted from the books of Right Ltd., an unlisted company for
the accounting year 2014 – 15:
- Equity share capital : Rs.40 crore (80% of equity shares are held by the Central
Government)
- Outstanding term
loans from various
banks on balance : Rs.85 crore (maximum outstanding balance during preceding
sheet date accounting year was Rs.118 crore)
- Turnover for the year : Rs.1,750 crore.
Considering the above, answer the following questions with brief reasoning –
(a) Should the company be subject to CAG audit?
(b) Is the company required to appoint internal auditor?
(c) Is the company required to appoint secretarial auditor?
(d) Can the company appoint statutory auditor?
(e) Is it compulsory for the company to appoint cost auditor? (5 marks)
(iii) In the course of audit of Growth Ltd. you want to review the internal control in the area of
sales return. Mention the aspects which are to be specifically looked into to ascertain its
soundness.
(5 marks)
Q. 5. (a) Explain the penal provisions applicable to auditors under the Companies Act, 2013.
(b) What are the important matters which an auditor should ensure to ascertain and establish
true and fair view?
(c) Differentiate between „secretarial audit‟ and „internal audit‟. (5 marks each)
Q. 6. (a) Explain the procedure of fraud reporting by an auditor as per the Companies Act,
2013.
(b) What are the techniques of internal control system? Discuss with examples.
(c) What is audit in – depth? Mention the various stages in purchase of goods. (5 marks each)
Q. 6. (A) (i) What are the points for consideration in audit planning in relation to the audit
engagement?