Referencer For Auditing & Ethics
Referencer For Auditing & Ethics
Revision
Final Course Paper-3:
Advanced Auditing and
Professional Ethics
A compendium of subject-wise capsules published in the
monthly journal “The Chartered Accountant Student”
Board of Studies
(Academic)
ICAI
INDEX
Page Edition of Students’
Topics
No. Journal
Internal Audit, Management Audit and
1-4 September 2018
Operational Audit
5-6 September 2018 Due Diligence
7-9 September 2018 Investigation
10-13 September 2018 Forensic Audit
13-18 September 2018 Professional Ethics
19-24 September 2018 The Auditor’s Report on Financial Statements
25-28 November 2018 Audit of Public Sector Undertakings
28-31 November 2018 Peer Review
31-32 November 2018 Quality Review
33-41 March 2019 Audit of Consolidated Financial Statements
42-49 March 2019 Audit under Fiscal Laws
50-52 March 2019 Liabilities of Auditor
ADVANCED AUDITING AND PROFESSIONAL ETHICS
FINAL NEW COURSE PAPER 3- ADVANCED AUDITING AND PROFESSIONAL ETHICS:
A CAPSULE FOR QUICK REVISION
It has always been the endeavour of Board of Studies to provide quality academic inputs to the students of Chartered
Accountancy Course.
Keeping in mind this objective, BoS has decided to come out with a Crisp & Concise Capsule of each subject to facilitate
students in quick revision before examination.
This series of capsules is on Paper 3: Advanced Auditing & Professional Ethics of Final Course. It may be mentioned that this
capsule is a tool for quick revision of some significant areas of Auditing subject, this should not be taken as a substitute for
the detailed study of the subject. Students are advised to refer to the relevant Study Material and RTP for comprehensive
study & revision.
Applicability of Provisions of Internal Audit: As per section 138 of the Companies Act, 2013, following class of companies
(prescribed in Rule 13 of Companies(Accounts) Rules, 2014) shall be required to appoint an internal auditor which may be either
an individual or a partnership firm or a body corporate, namely-
(a) every listed company;
(b) every unlisted public company having- (iii) outstanding loans or borrowings from banks or public financial institutions
(i) paid up share capital of fifty crore rupees or exceeding one hundred crore rupees or more at any point of time during
more during the preceding financial year; or the preceding financial year; or
(ii) turnover of two hundred crore rupees or (iv) outstanding deposits of twenty five crore rupees or more at any point of
more during the preceding financial year; or time during the preceding financial year; and
(c) every private company having- (ii) outstanding loans or borrowings from banks or public financial institutions
(i) turnover of two hundred crore rupees or exceeding one hundred crore rupees or more at any point of time during
more during the preceding financial year; or the preceding financial year.
Who can be Appointed as Internal Auditor: The internal auditor shall either be a chartered accountant or a cost accountant (whether
engaged in practice or not), or such other professional as may be decided by the Board to conduct internal audit of the functions and
activities of the companies. The internal auditor may or may not be an employee of the company.
In addition, 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.
The Chartered Accountant Student September 2018 07
1
ADVANCED AUDITING AND PROFESSIONAL ETHICS
Scope of Internal Auditor’s Work
include review of -
2
ADVANCED AUDITING AND PROFESSIONAL ETHICS
Determining the Nature & Extent of work of If the external auditor uses internal auditors to provide
Internal Audit function that can be used direct assistance on the audit, the external auditor shall
include in the audit documentation:
1. Objectivity of the internal audit functions. (c) Who reviewed the work performed and the date and
2. Level of competence of internal audit function. extent of that review in accordance with SA 230 Audit
3. Whether a systematic & disciplined approach is Documentation;
applied including quality control.
(d) The written agreements obtained from an authorised
representative of the entity and the internal auditors; and
Determining Whether, in Which Areas, and to What Extent
Internal Auditors Can Be Used to Provide Direct Assistance
(e) The working papers prepared by the internal auditors
Nature & Extent of work that can be who provided direct assistance on the audit engagement.
assigned to Internal auditors providing
Direct Assistance
Finally, a review of the internal audit function in specified
companies has become a statutory responsibility for the
statutory auditor.
The E.A. shall not use
internal auditors to Management Audit: “In a management audit, the auditor
The E.A. shall consider :
provide direct assistance to will look to see whether management is getting information
perform procedures that :
relevant to the decisions and actions which it must take. This
will require a much more intensive analysis of information
needs and the efficiency of the existing system in meeting them.
Involved in making Amount of The auditor will not have to decide whether management is
significant judgements judgement wrt: making the right strategic and operative decisions but rather
in the audit a) Planning & whether management has available to it and is using the relevant
performing information and techniques necessary to evaluate rationally the
relevant audit various alternatives that exist”.
Relate to higher procedures
assessed risks of b) Evaluation of the
material misstatement audit evidence Organising the Management Audit
where the judgement gathered.
required is more than
limited. Devising the statement of policy
Assessed risk
Relate to work of material Location of audit function within the organisation
which is reported to misstatement
management or TCWG Allocation of personnel
by Internal audit
function Evaluation of
existence & Staff training programme
significance of threats
Relate to decisions Time and other aspects
the E.A. makes in
accordance with SA.
Frequency
* EA = External Auditor
IA = Internal Auditor
The Chartered Accountant Student September 2018 09
3
ADVANCED AUDITING AND PROFESSIONAL ETHICS
Before starting The management Before writing The final report The management Where
the report, the auditor should the final report, should be auditor should management has
auditor should supplement his report the auditor written only review whether not acted upon his
ask himself, by such documents should prepare when the auditor follow-up action suggestions or not
“What do I want and data which a draft report. is completely is taken by implemented his
to tell the reader adequately and satisfied with the management on recommendations,
about this audit? convincingly support draft report. the basis of his the auditor should
The answer will the conclusions. report. If no action ascertain the
enable him to Supporting information is taken within a reasons therefor.
communicate may include the reasonable time,
effectively.” relevant standards or he should draw
regulations. management’s
attention to it.
Operational Audit : Operational auditing is a systematic process involving logical, structured and organised series of procedures.
Its primary objective is to highlight weaknesses and deficiencies of the organisation. It includes a review of how well or badly the
management functions of planning, organising, directing and controlling are being performed. The questionnaire provides a means
for evaluating an organisation’s ongoing operations by examining its major functional areas. There are three possible answers to the
management audit questions
4
ADVANCED AUDITING AND PROFESSIONAL ETHICS
There are many reasons for carrying out due Financial Due Diligence
diligence including:
• To confirm that the business is what it appears to be; In order to achieve its objective, the due diligence process can
include any or all of the following objectives for individual
• To identify potential ‘deal killer’ defects in the target and
areas of the verification:
avoid a bad business transaction;
• Brief description of the history of business
• To gain information that will be useful for valuing assets,
defining representations and warranties, and/or negotiating • The background of promoters
price concessions; and • Accounting policies and practices
• To verify that the transaction complies with investment or • Management information systems
acquisition criteria. • Details of management structure
• Trading results, both past and the recent past
Classification of Due-Diligence • Assets and liabilities as per latest balance sheet
• Current status of Income tax assessments including appeals
Commercial Performed by the concerned acquire
pending against tax liabilities assessed by tax authority
or Operational enterprise involving an evaluation
Due Diligence from commercial, strategic and • Cash flow patterns
operational perspectives. • The projection of future profitability
Over-Valued Assets
♣ Uncollected/uncollectable receivables.
♣ Obsolete, slow non-moving inventories or inventories Talk to customers, suppliers, business partners,
valued above NRV; huge inventories of packing materials and employees are great resources.
etc., with name of company.
♣ Underused or obsolete Plant and Machinery and their
spares; asset values which have been impaired due to
sudden fall in market value etc. Take a risk management approach. So, while
♣ Assets carried at much more than current market value you want to do your research, you also want to
due to capitalisation of expenditure/foreign exchange make sure that you do not antagonise the team
fluctuation, or capitalisation of expenditure mainly in the of people of the target company by bogging
nature of revenue. them down with loads of questions.
♣ Litigated assets and property.
♣ Investments carried at cost though realisable value is
much lower.
♣ Investments carrying a very low rate of income / return. Prepare a comprehensive report detailing the
♣ Infructuous project expenditure/deferred revenue compliances and substantive risks/issues.
expenditure etc.
♣ Group Company balances under reconciliation etc.
♣ Intangibles of no value.
Work Approach to Due diligence : The purchase of business in
many instances is the largest and most expensive assets purchase Contents of a Due Diligence Report: The contents of a due
in life time and therefore some caution should be exercised diligence report will always vary with individual circumstances.
through the due diligence process. Therefore, assessing the Following headings are illustrative:
businesses fair value passes through.
Example of Headings of a Due Diligence Report
Reviewing and reporting Assessing the business Executive Summary Comments on properties, terms of
on the financials first hand by a site visit leases, lien and encumbrances
submitted by the target (if applicable). Introduction Assessment of operating results
company.
Background of Target Assessment of taxation and statutory
Working through the liabilities
due diligence process Helping prepare an offer Objective of due Assessment of possible liabilities
with the acquisitioning based on completion of diligence on account of litigation and legal
company or investor by due diligence. proceedings against the company
defining the key areas.
Terms of reference and Assessment of net worth
scope of verification
How to Conduct Due Diligence
Brief history of the Interlocking investments and
company financial obligations with group
Start with an open mind. Do not assume that / associates companies, amounts
anything wrong will be found and look for it. receivables subject to litigation, any
What needs to be done is to identify trouble other likely liability which is not
spots and ask for explanations. provided for in the books of account
Share holding pattern SWOT Analysis
Get the best team of people. If you do not have a Observations on the Comments on future projections
group of people inside your firm that can do the review
task (e.g. lack of staff, lack of people who know
the new business because you are acquiring Assessment of Status of charges, liens, mortgages,
a business in an unrelated areas, etc.), there management structure assets and properties of the company
are due diligence experts that you can hire. Assessment of financial Suggestion on ways and means
When hiring such professionals, look for their liabilities including affidavits, indemnities, to
experience record in the industry. be executed to cover unforeseen and
undetected contingent liabilities
Get help in all areas like finance, tax accounting, Assessment of Suggestions on various aspects to
legal, marketing, technology, and any others valuation of assets be taken care of before and after the
relevant to the assignment so that you get a proposed merger/acquisition.
360-degree view of the acquisition candidate.
6
ADVANCED AUDITING AND PROFESSIONAL ETHICS
Types of Investigation: The different types of investigation that a chartered accountant is usually called upon to carry out are given
hereunder:
Types of Investigation
Statutory Non-statutory
Investigation on behalf of an
Investigation into the Investigation of ownership of a incoming partner
affairs of a company company (Section 216)
Investigation for valuation of
shares in private companies
By inspector through an order of the Central Government (Section
210) on the receipt of report of registrar or on intimation of a Investigation on behalf of a bank
special resolution passed by a company that the affairs of the
company ought to be investigated; or in public interest. proposing to advance loan to a company
Investigation of frauds
By Serious Fraud Investigation Office (Section 212) on receipt
of a report of the Registrar or inspector; or on intimation of a Investigation on behalf of an individual
special resolution passed by a company; or in public interest; or or a firm proposing to buy a business
on request from the Department of the Central Government, or a
State Government.
Investigation in connection with review
Other cases (Section 213) of profit / financial forecast
Who can be appointed as an Inspector - A firm, body (iv) Framing of Programme: The next step is the
corporate or other association cannot be appointed as an investigator/inspector should frame his programme for
inspector. Thus, a firm of professional accountant cannot be investigation in a systematic manner.
appointed as inspector but an individual accountant can be
so appointed. (v) Using the work of Experts: He should also consider
whether assistance of other experts like engineers,
PROCEDURE, POWERS ETC., OF INSPECTORS – Section lawyers, etc., is necessary.
217 of the Companies Act, 2013 states the procedures, powers of
the Inspectors as follows: (vi) Legal requirements and investigation Report: Only
after he has completed the steps in the investigation
Duty of officers and employees of the company towards programme and has marshaled all the information that
inspector to preserve and to produce all books and papers he needed should he prepare his report. He, however,
relating to the company or the person; and to provide can also make interim report as provided under
assistance in connection with the investigation which they section 223 of the Companies Act. Before he makes his
final report he should obtain and keep on record the
are reasonably able to give.
evidence relied upon by him. He should make his report
Inspector may ask information from any body corporate in accordance with the provisions of the section 223 of
the Companies Act, 2013.
Not to keep Books and Papers in custody for more than
Investigation of Frauds: In the Companies Act, 2013 meaning
180 days of fraud has been considered in two specific sections viz. Section
Examine on oath 143(10), where the SAs specified by the ICAI are deemed to be
the auditing standards for purposes of the Act, which, inter alia,
Inspector to possess all the Powers of Civil Court under define fraud, and in section 447, where punishment for fraud has
been prescribed.
the Code of Civil Procedure, while trying a suit in respect of
specified matters.
Fraud has been defined in paragraph 11(a) of SA 240, “The
Assistance of Officers of Government to Inspector to Auditor’s responsibilities Relating to Fraud in an Audit
provide necessary assistance to the inspector for the purpose of Financial Statements” as ‘an intentional act by one or
of inspection, investigation etc. more individuals among management, those charged with
Evidence from place outside India: If in the course of an governance, employees, or third parties, involving the use of
investigation into the affairs of the company, an application is deception to obtain an unjust or illegal advantage.’
made to the competent court in India by the inspector stating
that evidence may be available in a country or place outside In the context of stating the provisions for punishment for
India, such court may issue a letter of request to a court or an fraud, section 447 of the Act has explained the term ‘fraud’ as
authority in such country or place for seeking such evidence. “fraud in relation to affairs of a company or any body corporate,
includes any act, omission, concealment of fact or abuse of
It may be noted that the letter of request shall be transmitted
position committed by any person or any other person with the
in such manner as the Central Government may specify in this
behalf. connivance in any manner, with intent to deceive, to gain undue
advantage from, or to injure the interests of, the company or its
INSPECTOR’S REPORT - Under section 223 of the Companies shareholders or its creditors or any other person, whether or not
Act, 2013, an inspector shall, if so directed by the Central there is any wrongful gain or wrongful loss.”
Government, submit interim reports to that Government,
and on the conclusion of the investigation, shall submit a final Types of Frauds: Frauds may broadly be categorised as –
report to the Central Government. Every report made, shall be
in writing or printed as directed by the Central Government. A
Fraudulent Financial Mis-appropriation of Assets
copy of the report may be obtained by making an application to
the Central Government. Reporting
♣ Alteration or falsification ♣ Embezzlement of receipts
Investigation under sections 210 and 213 do not call for
of records & documents. in respect of written-off
any special approach. Approach/Steps for pursuing the
♣ Misrepresentation in or accounts.
investigation are:
intentional omission of ♣ Stealing physical assets or
events, transactions or intellectual properties.
(i) Clarity of Terms of Reference: The inspector information. ♣ Introduction of fictitious
should ensure that the terms of reference are clear, ♣ Intentional misapplication vendors.
unambiguous and in writing. of accounting principles. ♣ Payment of factitious
♣ Fictitious Journal Entries. employees.
(ii) Scope of Investigation: Next step is to determine the scope ♣ Adjusting assumptions ♣ Using entities assets for
of the investigation on the basis of the terms of reference. and changing Judgments. personal use.
♣ Omitting, advancing or
(iii) Period for investigation: He should also have regard to delaying the recognition
the period over which the investigation should stretch. of events or transactions.
8
ADVANCED AUDITING AND PROFESSIONAL ETHICS
Indicators of Fraud
Several indications of possible frauds can be listed as follows :-
i. Discrepancies in Accounting Records including non-
recording or partial recording or incorrect recording or
delayed recording of amounts, misclassifications, etc. Auditor needs to assess fraud risk factors for material
misstatement or misappropriation of assets due to fraud,
ii. Conflicting or missing evidence including missing such as incentive / pressures, opportunities and attitudes /
documents, altered documents, significant unexplained rationalisations.
items in reconciliations, discrepancies between entity’s
records and confirmations received etc. The responses to fraud will include communications
iii. Unacceptable management responses such as – denial of to management and those charged with governance,
access to records/facilities/employees, undue time pressure communication to regulatory and enforcement authorities
to resolve complex issues, unusual delays in providing and appropriate documentation on his assessment of the
requested information, denial for use of Computer Assisted risks of material misstatement.
Audit Techniques, unwillingness to address identified
deficiencies in internal control etc.
iv. Other indications such as – Accounting Policies in variance Auditor’s ability to detect fraud depends on factors such as –
with Industry Norms, Frequent changes in accounting
estimates etc. - the skillfulness of the perpetrator
- the frequency & extent of manipulation
Responses to Fraud : SA 330 states the auditor’s responses to
assessed risks. Response to the risks related to management - the degree of collusion involved
override of controls includes testing the appropriateness of - the relative size of individual amounts manipulated; and
journal entries and other adjustments made in preparation
- the seniority of those individuals involved
of the Financial Statements, review of accounting estimates
for biases and also review the significant transactions that are Detection of Fraud depends upon effectiveness of Audit
outside the normal course of business for the entity or that Procedure. Detection risk, however, can only be reduced, not
otherwise appear to be unusual. eliminated.
FORENSIC AUDITOR : A Forensic Auditor is often retained to analyse, interpret, summarise and present complex financial and
business related issues in a manner which is both understandable and properly supported. Forensic Accountants are trained to look
beyond the numbers and deal with the business reality of the situation.
10
ADVANCED AUDITING AND PROFESSIONAL ETHICS
A Forensic Auditor is often involved in:
In order to properly perform these services, a Forensic Auditor must be familiar with legal concepts and procedures and have expertise
in the use of IT tools and techniques that facilitate data recovery and analysis. In addition, a Forensic Auditor must be able to identify
substance over form when dealing with an issue.
Forensic Auditors are retained by:
Government
Police Insurance Courts Business
Lawyers Regulatory Bodies and Banks
Forces Companies and Community
Agencies
The services rendered by the forensic accountants are in great demand in the following areas:
Forensic accountants render such services
Matters relating to financial implications
both when called upon to investigate
the services of the forensic accountants are
specific cases as well for a review of or for
availed of. The report of the accountants is
implementation of Internal Controls. Another
considered in preparing and presentation as Fraud area of significance is Risk Assessment and
Criminal evidence. Investigation
Investigation Risk Mitigation.
and Risk/
Control Reviews
Professional negligence cases are taken up by
the forensic accountants. Non-conformation Insurance companies engage forensic
to Generally Accepted Accounting Standards accountants to have an accurate assessment
(GAAS) or non-compliance to auditing of claims to be settled.
Professional practices or ethical codes of any profession.
They are needed to measure the loss due to In case of policyholders seek the help of
Negligence such professional negligence or shortage in a forensic accountant when they need to
Cases services. Settlement of challenge the claim settlement as worked
insurance claims out by the insurance companies. A forensic
accountant handles the claims relating to
consequential loss policy, property loss due
to various risks, fidelity insurance and other
Forensic accountants render arbitration types of insurance claims.
and mediation services for the business
community. Their expertise in data collection Business firms engage forensic accountants
and evidence presentation makes them sought to handle contract disputes, construction
Arbitration after in this specialised practice area. claims, product liability claims, infringement
service of patent and trade marks cases, liability
Dispute arising from breach of contracts and so on.
settlement
Process of Forensic Accounting : Each Forensic Accounting assignment is unique. Accordingly, the actual approach adopted and
the procedures performed will be specific to it. However, in general, many Forensic Accounting assignments will include the steps
detailed below.
Step 2 Step 3
Step 1 Identify Possible Frauds Catalog Possible Fraud
Understand The Business That Could Exist Symptoms
Analytical Steps:
Keep the reader uppermost in mind ♣ Translate technical matters to layman’s language
♣ To visualise the reader’s viewpoint
Impact of the report ♣ The probable reaction to reporting. Whether action or decision will follow
in quickest possible time or to be treated as of academic interest only.
♣ To remember the universal saying - “don’t jump to conclusions”
12
ADVANCED AUDITING AND PROFESSIONAL ETHICS
The main factors to be considered for the various ways of presentations of written reports are
Sample Table of Contents of a Forensic Audit Report may (iii) Obtain management approval for scope
include the following: 3.2. Collect Evidence
1. EXECUTIVE SUMMARY
3.3. Conduct Interviews
1.0 Background
1.1 Origin of the Audit 3.4. Analyse findings
1.2 Audit Objective 3.5. Validate Inferences and conclusions
1.3 Proposed Audit Outputs 4. EVIDENCE OF RISK EVENTS
1.4 Audit Implementation Approach
2. RISK ANALYSIS 4.1 Conflicts of interest
4.2 Bribery
2.1 Internal 2.2 External Environment
Environment Risk Forces 4.3 Extortion
4.4 Theft
2.1.1 Financial 2.2.1 Influence of Economics
Management and relevant Market 4.5 Fraudulent transactions
2.1.2 Customers, Products 2.2.2 Political and Legal 4.6 Inventory frauds
and Competitors Scenario 4.7 Misuse of assets
2.1.3 Information 2.2.3 Technology in the 4.8 Financial Statement frauds
technology Sector
2.1.4 Business Process 5. AUDIT RECOMMENDATIONS
2.1.5 Human Resource 5.1 Logical Framework Approach
Management 5.2 Preconditions and Risks
3. AUDIT PROCESS 6. GOVERNANCE ON RECOMMENDATION
3.1.
Preliminary understanding of scope and incident IMPLEMENTATION
coverage 6.1 Stakeholders
(i) Identification of all related data elements 6.2 Budget Considerations
(ii) Preparation of a List of “persons of interest” for
LIST OF ANNEXURES
interview
Fundamental Principles: The fundamental principles as discussed in Code of Ethics of ICAI, to be complied, are given below:
Professional
Integrity Objectivity Competence Confidentiality Professional
and Due Care Behaviour
14
ADVANCED AUDITING AND PROFESSIONAL ETHICS
Flow Chart of Discipline Procedure Mechanism
Disciplinary Directorate
Accepted Rejected
Advice the Director
Accepted Rejected
(Discipline) to further
Conduct enquiry Close the matter investigate
Conduct enquiry Close the matter
Found guilty May proceed with the
Found guilty matter, if it is allied to the
First Schedule
Yes No
Yes No Refer the matter to the
It can, Disciplinary Committee,
(i) reprimand the member if it is allied to the
It can, Second Schedule or Both
(ii) remove name of the member (i) reprimand the member
upto period of 3 months (ii) remove name of the member
(iii) impose fine upto ` 1,00,000 permanently or for any
duration, it thinks fit
(iii) impose fine upto ` 5,00,000
Appellate Authority
It can,
(i) Confirm, modify or set aside the order.
(ii) Impose, Set aside, Reduce or enhance penalty.
(iii) Remit the case to the Board of Discipline or Disciplinary
Committee for reconsideration.
(iv) Pass such order as the Authority thinks fit.
Part IV: Other misconduct in There are No sharing of fees between Goodwill of a proprietary
relation to Members of the two or more Legal Representative of firm of chartered
single member firm and accountant can be sold/
Institute generally partners and purchaser of Goodwill transferred to another
(No. of Clauses: 2) one of them of the firm on the death eligible member of
dies of the Sole Proprietor of the Institute, after the
the firm death of the proprietor
Part I: Professional misconduct Payments may be made concerned.
in relation to Chartered Legal in instalments, provided * The Council permitted
Accountants in practice the agreement of the sale the sale/transfer of
Representative of goodwill contains such goodwill for such cases in
(No. of Clauses: 10) (say, widow) of the following manner:
provision
Part II: Professional misconduct the deceased
Second in relation to Members of the partner can Death of Death of Death of
Schedule Institute generally continue to proprietor proprietor proprietor
(No. of Clauses: 4) receive a share concerned concerned concerned had
of the firm, occurred on or occurred occurred on
after 30.8.1998 on or after or before 29th
Part III: Other misconduct in only if 30.8.1998 and
partnership August, 1998
relation to Members of the there existed
Institute generally agreement a dispute as
Provided such sale to the legal
(No. of Clause: 1) contains such is completed in all heir of the
provision aspects within a deceased
year of the death
of such proprietor proprietor
The implications of the different clauses in the schedules are concerned.
discussed below: Provided the Provided such
The name of the information as sale/transfer
concerned firm to the existence is completed/
would be kept of the dispute effected and
THE FIRST SCHEDULE in abeyance (i.e.
not removed is received by the Institute’s
on receipt of the Institute permission
Where the Director (Discipline) is of the opinion that member information within a year to practice in
about the death of the death of the deceased’s
is guilty of any professional or other misconduct mentioned in the proprietor proprietary
of the proprietor firm name is
the First Schedule; he shall place the matter before the Board of as is being done concerned.
Discipline. at present) only The name of sought for by
upto a period of concerned firm 28th August,
1 year from the shall be kept 1999 and the
PART I - Professional misconduct in relation to Chartered death of proprietor in abeyance firm name
concerned as till 1 year from concerned is
Accountants in practice the date of still available
aforesaid settlement of with the
A Chartered Accountant in practice is deemed to be guilty dispute Institute
of professional misconduct if he:
Clause (1) allows any person to practice in his name as a chartered * In case of a partnership firm when all the partners die at
accountant unless such person is also a chartered accountant in the same time, the above Council decision would also be
practice and is in partnership with or employed by him. applicable.
Clause (3) accepts or agrees to accept any part of the profits
Who can be allowed to of the professional work of a person who is not a member of
practice in a CA’s name? the Institute.
Clause (4) enters into partnership, in or outside India, with
Non- Chartered Chartered Accountant any person other then Chartered Accountant in practice or
Accountant in practice such other person who is a member of any other professional
body having such qualifications as may be prescribed,
Not allowed Partner Employee Others including a resident who but for his residence abroad would
be entitled to be registered as a member under close (V)
of sub-section (1) of section 4 or whose qualifications are
Allowed Allowed Not Allowed recognised by the Central Government or the Council for the
purpose of permitting such partnerships.
16
ADVANCED AUDITING AND PROFESSIONAL ETHICS
Clause (5) Secures either through the services of a person
who is not an employee of such Chartered Accountant or Regulation 192. Restriction on fees - No Chartered
who is not his partner or by means which are not open to a Accountant in practice shall charge or offer to charge,
Chartered Accountant, any professional business. accept or offer to accept, in respect of any professional work,
fees which are based on a percentage of profits, or which
Provided that nothing herein contained shall be construed as are contingent upon the findings or results of such work,
prohibiting any agreement permitted in terms of item (2), (3) provided that:
and (4) of this part. (a) In the case of a receiver or a liquidator, the fees may be
Clause (6) Solicits clients or professional work either based on a percentage of the realisation or disbursement
directly or indirectly by circular, advertisement, personal of the assets;
communication or interview or by any other means. (b) In the case of an auditor of a co-operative society, the fees
Provided that nothing herein contained shall be construed as may be based on a percentage of the paid up capital or the
preventing or prohibiting - working capital or the gross or net income or profits;
(i)Any Chartered Accountant from applying or requesting (c) In the case of a valuer for the purposes of direct taxes and
for or inviting or securing professional work from another duties, the fees may be based on a percentage of the value
chartered accountant in practice; or of property valued;
(ii)A member from responding to tenders or enquiries issued (d) In the case of certain management consultancy services
by various users of professional services or organisations from as may be decided by the resolution of the Council from
time to time and securing professional work as a consequence. time to time, the fees may be based on percentage basis
However, as per the guideline issued by the Council of the which may be contingent upon the findings, or results of
Institute of Chartered Accountants of India, a member of the such work;
Institute in practice shall not respond to any tender issued (e) In the case of certain fund raising services, the fees may
by an organisation or user of professional services in areas be based on a percentage of the fund raised;
of services which are exclusively reserved for chartered (f ) In the case of debt recovery services, the fees may be
accountants, such as audit and attestation services. However, based on a percentage of the debt recovered;
such restriction shall not be applicable where minimum fee of
the assignment is prescribed in the tender document itself or (g) In the case of services related to cost optimisation, the
where the areas are open to other professionals along with the fees may be based on a percentage of the benefit derived;
Chartered Accountants. and
Clause (7) Advertises his professional attainments or services, (h) Any other service or audit as may be decided by the
or uses any designation or expressions other than the Council.
Chartered Accountant on professional documents, visiting Clause (11) Engages in any business or occupation other than
cards, letter heads or sign boards unless it be a degree of a the profession of chartered accountant unless permitted by
University established by law in India or recognised by the the Council so to engage.
Central Government or a title indicating membership of the Provided that nothing contained herein shall disentitle a
Institute of Chartered Accountants or of any other institution chartered accountant from being a director of a company
that has been recognised by the Central Government or may (Not being managing director or a whole time director)
be recognised by the Council. unless he or any of his partners is interested in such company
Provided that a member in practice may advertise through a as an auditor.
write up, setting out the service provided by him or his firm Clause (12) Allows a person not being a member of the
and particulars of his firm subject to such guidelines as may institute in practice or a member not being his partner to sign
be issued by the Council. on his behalf or on behalf of his firm, any balance sheet, profit
Clause (8) Accepts a position as auditor previously held by and loss account, report or financial statements.
another chartered accountant or a certified auditor who has
been issued certificate under the Restricted Certificate Rules, PART II - Professional misconduct in relation
1932 without first communicating with him in writing. to members of the Institute in service
Clause (9) Accepts an appointment as auditor of a company A member of the Institute (other than a member in practice)
without first ascertaining from it whether the requirements shall be deemed to be guilty of professional misconduct, if he
of section 225 of the Companies Act, 1956, in respect of such being an employee of any company, firm or person:
appointment have been duly complied with.
(Now section 139 and 140 read with section 141 of the Companies
Act, 2013. Students may note that till the time Code of Ethics
etc. bare documents get updated from Ethical Standard Board Clause (1) pays or Clause (2) accepts or agrees
allows or agrees to pay to accept any part of fees,
of ICAI in pursuance of the Companies Act, 2013, students are profits or gains from a lawyer, a
directly or indirectly to
required to understand the basic nature of the provision and any person any share in chartered accountant or broker
quote the same along with the new corresponding provisions.) the emoluments of the engaged by such company, firm
employment undertaken or person or agent or customer
Clause (10) Charges or offers to charge, accepts or offers to of such company, firm or
by him.
accept in respect of any professional employment fees which person by way of commission
are based on a percentage of profits or which are contingent or gratification
upon the findings, or results of such employment, except as
permitted under any regulations made under this Act.
The Council of the Institute has however framed Regulation [Note: A member in the foregoing circumstances would be guilty
192 which exempts members from the operation of this clause of misconduct regardless of the fact that he was in whole-time
in certain professional services. The said Regulation 192 is or part-time employment or that he was holding Certificate of
reproduced - Practice along with his employment.]
The Chartered Accountant Student September 2018 23
17
ADVANCED AUDITING AND PROFESSIONAL ETHICS
Clause (4) Expresses his opinion on financial statements
PART III - Professional misconduct in relation
to members of the Institute generally of any business or enterprise in which he, his firm, or a
partner in his firm has a substantial interest.
A member of the Institute, whether in practice or not, shall be
deemed to be guilty of professional misconduct, if he: Clause (5) Fails to disclose a material fact known to
him which is not disclosed in a financial statement, but
Clause (1) not being a fellow of the Institute, acts as a fellow
of the Institute. disclosure of which is necessary in making such financial
statement not misleading where he is concerned with that
financial statement in a professional capacity.
Clause (2) does not supply the information called for, or does Clause (6) Fails to report a material misstatement known
not comply with the requirements asked for, by the Institute,
Council or any of its Committees, Director (Discipline), to him to appear in a financial statement with which he is
Board of Discipline, Disciplinary Committee, Quality concerned in a professional capacity.
Review Board or the Appellate Authority.
Clause (7) Does not exercise due diligence, or is grossly
negligent in the conduct of his professional duties.
Clause (3) while inviting professional work from another
chartered accountant or while responding to tenders Clause (8) Fails to obtain sufficient information which is
or enquiries or while advertising through a write up, or
anything as provided for in items (6) and (7) of Part I of this necessary for expression of an opinion or its exceptions
Schedule, gives information knowing it to be false. are sufficiently material to negate the expression of an
opinion.
Clause (9) Fails to invite attention to any material
PART IV- Other misconduct in relation to departure from the generally accepted procedure of audit
members of the Institute generally
applicable to the circumstances.
A member of the Institute, whether in practice or not, shall be
deemed to be guilty of other misconduct, if he: Clause (10) Fails to keep moneys of his client other than
fees or remuneration or money meant to be expended
(1)
is held guilty by any (2)
in the opinion of the
civil or criminal court Council, brings disrepute in a separate banking account or to use such moneys for
for an offence which to the profession or the purposes for which they are intended within a reasonable
is punishable with Institute as a result of his time.
imprisonment for a term action whether or not
not exceeding six months. related to his professional
work.
18
ADVANCED AUDITING AND PROFESSIONAL ETHICS
5. Going Concern: Where applicable, the auditor shall report in accordance with SA 570.
6. Key Audit Matters For audits of complete sets of general purpose financial statements of listed entities, the auditor shall
communicate key audit matters in the auditor’s report in accordance with SA 701.
7. Responsibilities for the Financial Statements:
This section of the auditor’s report shall describe management’s responsibility for:
(a) Preparing the financial statements in accordance (b) Assessing the entity’s ability to continue as a going
with the applicable financial reporting framework, and concern and whether the use of the going concern
for such internal control as management determines basis of accounting is appropriate as well as disclosing,
is necessary to enable the preparation of financial if applicable, matters relating to going concern. The
statements that are free from material misstatement, explanation of management’s responsibility for this
whether due to fraud or error; and assessment shall include a description of when the use
of the going concern basis of accounting is appropriate.
(II) The Auditor’s Responsibilities for the Audit of the Financial Statements section of the auditor’s report shall further:
To exercise professional judgment and maintain professional skepticism throughout the audit as per SAs;
To identify and assess the risks of
material misstatement of the FS
Auditor’s Responsibilities in
(III) The Auditor’s Responsibilities for the Audit of the Financial Statements section of the auditor’s report also shall:
(a) State that the auditor communicates with those charged with governance regarding, among other matters:
♣ the planned scope and timing of the audit and
♣ significant audit findings,
♣ including any significant deficiencies in internal control that the auditor identifies during the audit;
(b) State that the auditor provides those charged with governance with a statement that the auditor has:
♣ complied with relevant ethical requirements regarding independence and
♣ communicate with them all relationships and
♣ other matters that may reasonably be thought to bear on the auditor’s independence, and where applicable,
related safeguards; and
(c) For audits of financial statements of all such entities for which key audit matters are communicated in accordance
with SA 701, state that, from the matters communicated with those charged with governance, the auditor determines
those matters that were of most significance in the audit of the financial statements of the current period and are
therefore the key audit matters.
In accordance with the requirements of SA 701, the auditor describes these matters in the auditor’s report unless
law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, the auditor
determines that a matter should not be communicated in the auditor’s report because the adverse consequences of
doing so would reasonably be expected to outweigh the public interest benefits of such communication.
9. Location of the description of the auditor’s responsibilities for the audit of the financial statements: The
description of the auditor’s responsibilities for the audit of the financial statements required by this SA shall be included:
When the auditor refers to a description of the auditor’s responsibilities on a website of an appropriate authority, the auditor shall
determine that such description addresses, and is not inconsistent with, the requirements of this SA.
20
ADVANCED AUDITING AND PROFESSIONAL ETHICS
10. Other Reporting Responsibilities (9)
A description of management’s responsibilities for
11. Signature of the Auditor: The auditor’s report shall be the preparation of the financial statements and an
signed. identification of those responsible for the oversight of
♣ The report is signed by the auditor (i.e. the engagement the financial reporting process that addresses, and is not
partner) in his personal name. inconsistent with, the requirements.
♣ Where the firm is appointed as the auditor, the report is
signed in the personal name of the auditor and in the name (10) A reference to Standards on Auditing and the law or
of the audit firm. regulation, and a description of the auditor’s responsibilities
♣ The partner/proprietor signing the audit report also needs to for an audit of the financial statements that addresses, and
mention the membership number assigned by the Institute is not inconsistent with, the requirements.
of Chartered Accountants of India. They also include the (11) The auditor’s signature.
registration number of the firm, wherever applicable, as
allotted by ICAI, in the audit reports signed by them. (12) The Place of signature
12. Place of Signature: The auditor’s report shall name specific (13) The date of the auditor’s report.
location where the audit report is signed.
13. Date of the Auditor’s Report: The auditor’s report shall Auditor’s Report for Audits Conducted in Accordance with
be dated no earlier than the date on which the auditor has Both Standards on Auditing Issued by ICAI and International
obtained sufficient appropriate audit evidence on which Standards on Auditing or Auditing Standards of Any Other
to base the auditor’s opinion on the financial statements, Jurisdiction. In this case, the auditor’s report may refer to
including evidence that: Standards on Auditing in addition to the International Standards
on Auditing or auditing standards of such other jurisdiction, but
(a) All the statements that comprise the auditor shall do so only if:
the financial statements, including the
related notes, have been prepared; and (a) There is no conflict between the requirements in the ISAs
or such auditing standards of other jurisdiction and those
in SAs that would lead the auditor:
(a ) Those with the recognised (i) to form a different opinion, or
authority have asserted that they have (ii) not to include an Emphasis of Matter paragraph or Other
taken responsibility for those financial Matter paragraph that,
statements. in the particular circumstances, is required by SAs; and
(b) The auditor’s report includes, at a minimum, each of the
elements set out in Auditor’s Report Prescribed by Law
Auditor’s Report Prescribed by Law or Regulation: If the or Regulation discussed above when the auditor uses the
auditor is required by law or regulation applicable to the entity layout or wording specified by the Standards on Auditing.
to use a specific layout, or wording of the auditor’s report, the However, reference to “law or regulation” in above
auditor’s report shall refer to Standards on Auditing only if the paragraph shall be read as reference to the Standards on
auditor’s report includes, at a minimum, each of the following Auditing. The auditor’s report shall thereby identify such
elements: Standards on Auditing.
(1) A title. When the auditor’s report refers to both the ISAs or the
(2) An addressee, as required by the circumstances of the auditing standards of a specific jurisdiction and the Standards
engagement. on Auditing issued by ICAI, the auditor’s report shall clearly
identify the same including the jurisdiction of origin of the
(3) An Opinion section containing an expression of opinion other auditing standards.
on the financial statements and a reference to the
applicable financial reporting framework used to prepare Supplementary Information Presented with the Financial
the financial statements. Statements
(4) An identification of the entity’s financial statements that If supplementary information that is not required by the
have been audited. applicable financial reporting framework is
(5) A statement that the auditor is independent of the entity in presented with the not considered an integral part of
accordance with the relevant ethical requirements relating audited financial the audited financial statements,
to the audit, and has fulfilled the auditor’s other ethical statements, the auditor the auditor shall evaluate whether
responsibilities in accordance with these requirements. The shall evaluate whether, in such supplementary information is
statement shall refer to the Code of Ethics issued by ICAI. the auditor’s professional presented in a way that sufficiently
(6) Where applicable, a section that addresses, and is not judgment, supplementary and clearly differentiates it from
information is nevertheless the audited financial statements.
inconsistent with, the reporting requirements of SA 570.
an integral part of the If this is not the case, then the
(7) Where applicable, a Basis for Qualified (or Adverse) financial statements due auditor shall ask management
Opinion section that addresses, and is not inconsistent to its nature or how it to change how the unaudited
with, the reporting requirements of SA 570 (Revised). is presented. When it is supplementary information is
an integral part of the presented. If management refuses
(8) Where applicable, a section that includes the information financial statements, to do so, the auditor shall identify
required by SA 701, or additional information about the the supplementary the unaudited supplementary
audit that is prescribed by law or regulation and that information shall be information and explain in
addresses, and is not inconsistent with, the reporting covered by the auditor’s the auditor’s report that such
requirements in that SA 701. opinion. supplementary information has
not been audited.
SA-701 Communicating Key Audit Matters in Determining Key Audit Matters: The auditor shall determine,
the Independent Auditor’s Report from the matters communicated with those charged with
governance, those matters that required significant auditor
Objective • To enhance the communicative value attention in performing the audit. In making this determination,
of the auditor’s report by providing the auditor shall take into account the following:
greater transparency about the audit
that was performed.
• To assist the user in understanding (a) Areas of (b) Significant (c) The effect
auditor judgments on the audit of
those matters that, in the auditor’s higher assessed
relating to areas significant events
professional judgment, were of most risk of material in the financial or transactions that
significance in the audit of the financial misstatement, or statements that occurred during
statements of the current period. significant risks involved significant the period.
identified in management
Definition Key Audit matter are those matters that, judgment,
accordance with including
of Key Audit in the auditor’s professional judgment, SA 315 accounting
Matters were of most significance in the audit of estimates that have
the financial statements of the current been identified
period. Key audit matters are selected from as having high
estimation
matters communicated with those charged uncertainty.
with governance.
Scope:
Communicating a substitute for the Communicating The introductory language in this section
a substitute for auditor expressing Key Audit of the auditor’s report shall state that:
key audit disclosures in a modified opinion Matters:
matters in the the financial when required by
auditor’s report (a) Key audit matters are those matters
statements; the circumstances
is not: that, in the auditor’s professional
of a specific audit judgment, were of most significance in
engagement in the audit of the financial statements [of
accordance with SA the current period]; and.
705;
22
ADVANCED AUDITING AND PROFESSIONAL ETHICS
Types of Types of (i) Qualified Opinion If management refuses to remove the limitation, the auditor
Modified Modified shall communicate the matter to those charged with
Opinions as (ii) Adverse Opinion
Opinion governance, unless all of those charged with governance are
per SA 705: (iii) Disclaimer of Opinion involved in managing the entity, and determine whether it is
possible to perform alternative procedures to obtain sufficient
The decision regarding which type of
modified opinion is appropriate depends appropriate audit evidence.
upon:
(a) The nature of the matter giving rise to the If the auditor is unable to obtain sufficient appropriate
modification, that is, whether the financial audit evidence, the auditor shall determine the
statements are materially misstated or, in implications as follows:
the case of an inability to obtain sufficient
appropriate audit evidence, may be (a) If the auditor concludes that the possible effects on
materially misstated; and the financial statements of undetected misstatements,
(b) The auditor’s judgment about the
if any, could be material but not pervasive, the auditor
pervasiveness of the effects or possible
effects of the matter on the financial shall qualify the opinion; or
statements. (b) If the auditor concludes that the possible effects on
the financial statements of undetected misstatements,
Circumstances When a Modification to the Auditor’s
if any, could be both material and pervasive so that a
Opinion is Required:
qualification of the opinion would be inadequate to
The auditor shall modify the opinion in the auditor’s report
when: communicate the gravity of the situation, the auditor
shall:
The auditor concludes that, The auditor is unable to (i) Withdraw from the audit, where practicable and
based on the audit evidence obtain sufficient appropriate possible under applicable law or regulation; or
obtained, the financial audit evidence to conclude (ii) If withdrawal from the audit before issuing the
statements as a whole are that the financial statements auditor’s report is not practicable or possible,
not free from material as a whole are free from disclaim an opinion on the financial statements.
misstatement; or material misstatement.
Nature of Matter Giving Rise to the Auditor’s judgment about the Pervasiveness of the Effects or Possible Effects on the
Modification: Financial Statements
Material but not pervasive Material and pervasive
Financial Statements are materially Qualified Opinion Adverse Opinion
misstated
Inability to obtain Sufficient appropriate Qualified Opinion Disclaimer of Opinion
audit evidence
SA-706
Emphasis of Matter Paragraphs and Other Matter Paragraphs in
the Independent Auditor’s Report
Scope
♣ This SA deals with additional communication in the auditor’s report when the auditor considers it necessary to draw users’
attention to a matter or matters
(a) presented or disclosed in the financial statements that are of such importance that they are fundamental to users’
understanding of the financial statements; or
(b) other than those presented or disclosed in the financial statements that are relevant to users’ understanding of the
audit, the auditor’s responsibilities or the auditor’s report.
Objectives
♣ The objective of the auditor, having formed an opinion on the financial statements, is to draw users’ attention, when in the
auditor’s judgment it is necessary to do so, by way of clear additional communication in the auditor’s report, to:
♣ A matter, although appropriately presented or disclosed in the financial statements, that is of such importance that it is
fundamental to users’ understanding of the financial statements; or
♣ As appropriate, any other matter that is relevant to users’ understanding of the audit, the auditor’s responsibilities or the
auditor’s report.
Definitions
♣ Emphasis of Matter paragraph : 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.
♣ Other Matter paragraph : 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 users’ understanding of the audit, the
auditor’s responsibilities or the auditor’s report.
24
ACADEMIC UPDATES
ADVANCED AUDITING AND PROFESSIONAL ETHICS
The September 2018 issue of the Students' Journal had carried a Capsule on Paper 3 Advanced Auditing and
Professional Ethics. Some chapters were not considered at that time. Now we are providing herewith a crisp and
concise capsule on Chapter 15: Audit of Public Sector Undertakings and Chapter 19 : Peer Review and Quality
Review.
form part and parcel Printing Press, Canteen philosopher and guide' of the Committees.
of government Stores Department, etc. (i) His Reports generally form the basis of the Committees'
activities working, although they are not precluded from examining
issues not brought out in his Reports;
(ii) He scrutinises the notes which the Ministries submit to
Government the Committees and helps the Committees to check the
companies and correctness of submissions to the Committees and facts and
deemed government figures in their draft reports;
companies set up
under the Companies (iii) The Financial Committees present their Report to the
Act, 2013 Parliament/ State Legislature with their observations and
recommendations.
(iv) The various Ministries / Department of the Government are
Corporations set up required to inform the Committees of the action taken by
under the specific For example, Life them on the recommendations of the Committees (which are
Acts Insurance Corporation, generally accepted) and the Committees present Action Taken
of the legislature Unit Trust of India, etc. Reports to Parliament / Legislature;
(v) In respect of those Audit Reports, which could not be
discussed in detail by the Committees, written answers are
obtained from the Department / Ministry concerned and
As defined under section 2(45) of the Companies Act, 2013, are sometimes incorporated in the Reports presented to the
a “Government Company” is: Parliament / State Legislature.
This ensures that the Audit Reports are not taken lightly by the
≥ 51% of the paid- Central Government Government, even if the entire report is not deliberated upon by
up share capital
held by the Committee.
Government Any State Government
Company or Governments
[section 2(45)]
Includes subsidiary Partly by the Central Audit Conducted
company of a Government and by C&AG
Government partly by one or more
company State Governments
25
ACADEMIC UPDATES
(b) Subject matter, criteria and subject matter information. Diagram showing provisions of the Compa-
nies Act, 2013 related to Government Audit
Subject
matter { This refers to the information, condition or activity
that is measured or evaluated against certain criteria. Audit of Government Companies
Criteria
{ These are the benchmarks used to evaluate the
subject matter. Section 143(5) Section 143(6) Section 143(7)
{
Subject This refers to the outcome of evaluating or Appointment of auditor by C&AG's right to- C&AG may, by
matter measuring the subject matter against the criteria. C&AG as per section 139(5) * Conduct an order, cause
information or 139(7) supplementary test audit
+ audit
* Comment
Directions by C&AG, the upon or
(c) Types of engagement - Attestation Engagements and Direct manner in which accounts shall
Reporting Engagement. supplement
be audited such audit
+ report
In attestation engagements, the responsible party Submission of Auditor's Report
measures the subject matter against the criteria and to C&AG including-
Attestation presents the subject matter information, on which * Directions issued, if any
Engagements: the auditor then gathers sufficient and appropriate
audit evidence to provide a reasonable basis for * Action taken thereon
expressing a conclusion. * Impact on Accounts
Direct Reporting
In direct reporting engagements, it is the auditor Financial audit is primarily conducted to:
who measures or evaluates the subject matter
Engagement: against the criteria. express an audit opinion on the financial statements; and
enhance the degree of confidence of intended users in the
financial statements.
The C&AG shall express an opinion as to whether the financial
Principles of PSU Audits statements are prepared, in all material respects, in accordance
The principles of PSU Audits constitute the general standards that apply
to SAI India’s personnel as auditors and are fundamental to the conduct with the applicable financial reporting framework.
of all types of PSU Audits.
The principles are categorised into two distinct groups as below: Compliance audit is the independent assessment of whether
I. General Principles a given subject matter is in compliance with the applicable
authorities identified as criteria. Compliance audit is concerned
II. Principles related to the Audit Process
with:
General Principles
Regularity- adherence Propriety- observance of the
of the subject matter general principles governing
Ethics & Professional Quality Audit Audit Materiality Documen- Commun- to the formal criteria sound financial management
Indepen- Judgement, Control Team Risk tation ication emanating from relevant and the ethical conduct of public
dence due care Manage-
and ment & laws, regulations and officials.
skepticism Skill agreements applicable to
the entity.
Financial audits are always attestation engagements, as they are based on financial information presented by the responsible party. Performance
audits and compliance audits are generally direct reporting engagements.
27
ACADEMIC UPDATES
Propriety Audit It may be stated that it is the responsibility of the executive departments
to enforce economy in public expenditure. The function of audit is to
E. L. Kohler has defined the term propriety as “that which meets the bring to the notice of the proper authorities of wastefulness in public
tests of public interest, commonly accepted customs, and standards administration and cases of improper, avoidable and infructuous
of conduct, and particularly as applied to professional performance, expenditure.
requirements of law, Government regulations and professional Audit Report of the Comptroller and Auditor General
codes”. To facilitate a proper consideration, the reports of the C&AG on
the audit of PSUs are presented to the Parliament in several parts
Propriety requires the transactions, and more particularly expenditure,
consisting of the following:
to conform to certain general principles. These principles are:
(c) Resume of the company
(i) that the expenditure is not prima facie more than the occasion (b) Results of comprehensive auditors’ reports submitted
demands and that every official exercises the same degree of appraisals of selected by them under the directions
vigilance in respect of expenditure as a person of ordinary undertakings conducted by issued by the C&AG and that of
prudence would exercise in respect of his own money; the Audit Board; comments on the accounts of the
Government companies; and
(ii) that the authority exercises its power of sanctioning expenditure
to pass an order which will not directly or indirectly accrue to (a) Introduction
its own advantage; containing a general (d) Significant
(iii) that funds are not utilised for the benefit of a particular person review of the working results of audit of
or group of persons and results of Government the undertakings not
Audit Report of
companies, deemed taken up for appraisal
(iv) that, apart from the agreed remuneration or reward, no other C&AG
by the Audit Board.
Government companies
avenue is kept open to indirectly benefit the management
and corporations;
personnel, employees and others.
♣ The examination and review of a practice unit would be carried out by a "reviewer", i.e., a member, selected from a panel of reviewers
maintained by the Board.
♣ The term "practice unit" means members in practice, whether practising individually or as a firm of Chartered Accountants.
♣ The word Board means Peer Review Board.
The main objective of Peer Review is to ensure that in carrying out the assurance service assignments, the members of the
Institute-
(a) comply with Technical, Professional and Ethical Standards as applicable Thus, the primary objective of peer
Objectives of including other regulatory requirements thereto and review is not to find out deficiencies
Peer Review but to improve the quality of
(b) have in place proper systems including documentation thereof, to amply services rendered by members of the
demonstrate the quality of the assurance services. profession.
Stage– I: Planning
START
PEER REVIEW BOARD (BOARD) SELECTS THE PRACTICE UNIT (PU) FOR PEER REVIEW OR PU VOLUNTARY APPLIES FOR
UNDERGOING PEER REVIEW
PU WILL BE NOTIFIED BY THE BOARD AND WILL BE SEND A QUESTIONNAIRE FOR COMPLETION ALONGWITH THE PANEL OF
ATLEAST THREE REVIEWERS
A COMPLETED QUESTIONNAIRE ENCLOSING A COMPLETE LIST OF ASSURANCE SERVICES CLIENTS SENT TO SELECTED
REVIEWER WITHIN 15 DAYS
PU WILL BE NOTIFIED OF THE SELECTION OF INITIAL SAMPLE TWO WEEKS IN ADVANCE OF COMMENCEMENT OF REVIEW
29
ACADEMIC UPDATES
Stage– II: Execution
START
COMPLIANCE REVIEW OF GENERAL CONTROLS (FIVE KEY CONTROLS INDEPENDENCE MAINTENANCE OF PROFESSIONAL SKILLS &
STANDARDS OUTSIDE CONSULTATION STAFF SUPERVISION & DEVELOPMENT AND OFFICE ADMINISTRATION
FINAL SELECTION OF ASSURANCE SERVICES ENGAGEMENTS & CLIENT FILES TO BE REVIEWED ON RANDOM SELECTION BASIS
REVIEW OF RECORDS
PROPER CONTROL NO
PROCEDURES EXIST? A
DETERMINE NATURE TIMING AND EXTENT OF
SUBSTANTIVE PROCEDURES - MORE EXTENSIVE
YES
INTEND TO RELY ON NO
A
CONTROL PROCEDURES
YES
NO
REVIEWER SENDS A PRELIMINARY REPORT TO PU. THE PU SUBMIT ITS REPRESENTATION ON DEFICIENCIES/ NON – COMPLIANCE,
IF ANY, TO REVIEWER WITHIN 15 DAYS OF RECEIPT OF PRELIMINARY REPORT
SUBMIT FINAL
REPORT TO BOARD
IS REVIEWER SATISFIED WITH YES
ALONGWITH
REPRESENTATION PRELIMINARY REPORT
AND PU’S SUBMISSIONS
NO
SUBMIT FINAL REPORT TO BOARD INCORPORATING REASONS FOR DISSATISFACTION ALONGWITH PRELIMINARY REPORT AND
PU’S SUBMISSIONS
31
ACADEMIC UPDATES
Independence and Qualifications of Technical Reviewers: For
being a technical reviewer: Basic Elements of the Reviewer's Report
A member should not have disciplinary proceeding under the
Chartered Accountants Act, 1949 pending against him/her or The report should contain:
any disciplinary action under the Chartered Accountants Act,
1949 / penal action under any other law taken/pending against (a) Elements relating to audit quality of companies:
you during last three financial years and/or thereafter.
i. A reference to the description of the scope of the
review and the period of review of audit firm conducted
A member or his/her firm or any of the network firms or any alongwith existence of limitation(s), if any, on the review
of the partners of the firm or that of the network firms should conducted with reference to the scope as envisaged.
not have been the statutory auditor of the company, as specified,
ii. A statement indicating the instances of lack of compliance
or have rendered any other services to the said company/entity
during last three financial years and /or thereafter. with technical standards and other professional and
ethical standards.
iii. A statement indicating the instances of lack of compliance
A member or his/her firm or any of the network firms or any of with relevant laws and regulations.
the partners of the firm or that of the network firms should not
have had any association with the specified statutory audit firm,
during the last three financial years and /or thereafter. (b) Elements relating to quality control framework adopted
by the audit firm in conducting audit:
i. An indication of whether the firm has implemented a
A member to comply with all the eligibility conditions laid down
for appointment as an auditor of a company u/s 141(3) of the system of quality control with reference to the quality
Companies Act, 2013 which apply mutatis mutandis in respect control standards.
of the review of the quality of statutory audit of the company/ ii. A statement indicating that the system of quality control
entity, as specified, so far as applicable. is the responsibility of the reviewed firm.
iii. An opinion on whether the reviewed firm's system
The report of the Review Group shall expressly state the following: of quality control has been designed to meet the
requirements of the quality control standards for
attestation services and whether it was complied with
during the period reviewed to provide the reviewer
Particulars of the Enterprise; with reasonable assurance of complying with technical
standards in all material respects.
A detailed description of the non- iv. Where the reviewer concludes that a modification in
compliance with the matters stated in the
Terms of Reference, if any; the report is necessary, a description of the reasons for
modification. The report of the reviewer should also
A detailed description of the evidences contain the suggestions.
that support the non-compliance; and v. A reference to the preliminary report.
vi. An attachment which describes the quality review
Review Group’s recommendations about
the actions that are required to be taken conducted including an overview and information on
in a particular case. planning and performing the review.
Referring the case to the Director (Discipline) of the Institute for necessary action under the Chartered Accountants Act, 1949;
Informing the details of the non-compliance to the regulatory bod(y)/ies relevant to the enterprise;
Intimating the concerned auditor as to the findings of the Report as well as action initiated under (a) and/or (b) above;
Consider the matter complete and inform the audit firm/auditor accordingly.
It has always been the endeavour of Board of Studies to provide quality academic inputs to the students of Chartered
Accountancy Course. Keeping in mind this objective, BoS has decided to come out with a Crisp & Concise Capsule of
each subject to facilitate students in quick revision before examination. In continuation to September and November,
2018 this capsules is on Paper 3: Advanced Auditing & Professional Ethics of Final Course. It may be mentioned that this
capsule is a tool for quick revision of some significant areas of Auditing subject, this should not be taken as a substitute for
the detailed study of the subject. Students are advised to refer to the relevant Study Material and RTP for comprehensive
study & revision.
Consolidated Financial
Statements includes
• CFS are presented, to the extent possible, in the same format as adopted by the parent for its separate financial statements.
• The formats for preparation of balance sheet, statement of profit and loss and a statement of change in equity (if applicable) are
prescribed under the Schedule III of the Companies Act, 2013.
The requirement related to preparation of consolidated financial statements shall not apply to a company if it meets the
following conditions:
i) it is a wholly-owned subsidiary, or is a partially-owned subsidiary of another company and all its other members, including
those not otherwise entitled to vote, having been intimated in writing and for which the proof of delivery of such intimation is
available with the company, do not object to the company not presenting consolidated financial statements;
ii) it is a company whose securities are not listed or are not in the process of listing on any stock exchange, whether in India or
outside India; and
iii) its ultimate or any intermediate holding company files consolidated financial statements with the Registrar which are in
compliance with the applicable Accounting Standards.
As per sub-section 6 of the section 129 of the Companies Act, 2013, the Central Government may exempt any class or classes of
companies from complying with any of the requirements of section 129 or the rules made thereunder,
The Chartered Accountant Student March 2019 07
33
ADVANCED AUDITING AND PROFESSIONAL ETHICS
An investment entity need not present CFS if it is required, in accordance with Ind AS 110, to measure all of its subsidiaries at fair
value through profit or loss. A parent shall determine whether it is an investment entity.
An investment entity is an entity that:
(a) obtains funds from one (b) commits to its investor(s) (c) measures and evaluates
or more investors for the that its business purpose is to the performance of
purpose of providing those invest funds solely for returns substantially all of its
investor(s) with investment from capital appreciation, investments on a fair value
management services; investment income, or both; basis.
and
RESPONSIBILITY OF PARENT
The responsibility for the preparation and presentation of consolidated financial statements, among other things, is that of the
management of the parent. This includes:
(a) identifying components, and including the financial information of the components to be included in the consolidated financial
statements;
(b) where appropriate, identifying reportable segments for segmental reporting;
(c) identifying related parties and related party transactions for reporting;
(d) obtaining accurate and complete financial information from components;
(e) making appropriate consolidation adjustments;
(f ) harmonisation of accounting policies and accounting framework; and
(g) GAAP conversion, where applicable.
Further, the parent ordinarily issues instructions to the management of the component specifying the parent’s requirements relating
to financial information of the components to be included in the consolidated financial statements. The instructions ordinarily
cover the accounting policies to be applied, statutory and other disclosure requirements applicable to the parent, including the
identification of and reporting on reportable segments, and related parties and related party transactions, and a reporting timetable.
The auditor's objectives in an audit of CFS are:
(a) to satisfy himself (b) to enable (c) to enquire (d) to report on the matters given in the (e) to validate the
that the consolidated himself to express into the matters clauses (a) to (i) of section 143(3) of the requirement of
financial statements an opinion on as specified in Companies Act, 2013 for other matters preparation of CFS
have been prepared the true and fair section 143(1) of under section 143(3)(j) read with rule 11 for the company
in accordance with view presented by the Companies of the Companies (Audit and Auditors) as per applicable
the requirements of the consolidated Act, 2013; and. Rules, 2014, to comment on the matters financial reporting
applicable financial financial specified in sub-rule (a),(b) and (c) to framework.
reporting framework; statements; the extent applicable;
While conducting the audit of CFS the auditors, are, inter alia, expected to:
34
ADVANCED AUDITING AND PROFESSIONAL ETHICS
Audit Considerations: The following features of consolidated financial statements have an impact on the related audit
procedures:
CFS are prepared on the basis of separate The auditor of the CFS may use the work of
financial statements of the parent and other auditors as per requirement of Standards
its components, using the consolidation on Auditing unless the auditor of consolidated
procedures prescribed by Accounting financial statements is also the auditor of the
Standards under applicable financial reporting other components of the group.
framework; and
m When an auditor accepts the audit of consolidated financial statements, the auditor should assess whether based on his work
alone he would be able to express an opinion on the true and fair view presented by the consolidated financial statements. If the
auditor is of the view that his own participation may not be enough or sufficient, he should consider using the work of ‘other
auditors’.
m Such ‘other auditors’ might be the statutory auditors of the separate financial statements of one or more of the components or
the auditors appointed specifically for assisting the auditor of the consolidated financial statements (the principal auditor).
m Where the statutory auditors of one or more of the components of the parent are also requested to assist the principal auditor,
the work to be performed by such statutory auditors for use by the principal auditor would constitute an assignment separate
from the assignment to conduct the statutory audit of the respective component.
Standard on Auditing (SA) 600, ‘Using the Work of Another Auditor’ In carrying out the audit of the standalone financial
statements, the computation of materiality for the purpose of issuing an opinion on the standalone financial statements of each
component would be done component-wise on a standalone basis. However, with regard to determination of materiality during the
audit of CFS, the auditor should consider the following:
The auditor is required to The parent auditor can The principal auditor The principal auditor
compute the materiality for also use the materiality also computes materiality also obtains certain
the group as a whole. This computed on the group for each component and confirmations from
materiality should be used to level to determine whether communicates to the component auditor
assess the appropriateness the component's financial component auditor, if he like independence,
of the consolidation statements are material believes is required for true code of ethics, certain
adjustments (i.e. to the group to determine and fair view on CFS. information required
permanent consolidation whether they should scope for consolidation and
adjustments and current in additional components, disclosure requirements
period consolidation and consider using the etc.
adjustments) that are made work of other auditors as
by the management in the applicable.
preparation of CFS.
However, while considering the observations (for instance modification and /or emphasis of matter in accordance with SA 705/706)
of the component auditor in his report on the standalone financial statements, the concept of materiality would not be considered.
Thus, the component auditor's observations, if any, on the component’s financial statements, irrespective of whether the auditors
of the component are also the auditors of the CFS or not, are required to be included in the parent auditor's report on the CFS,
regardless of materiality.
Before commencing an audit of consolidated financial statements, the auditor should plan his work to enable him to conduct an
effective audit in an efficient and timely manner.
(a) Understanding of (b)understanding of (c) determining and (d) determining the (e)coordinating the
the group structure and accounting policies programming the extent of use of other work to be performed.
group-wide controls of the parent and its nature, timing, and auditor’s work in the
including assessment of components as well as extent of the audit audit; and
Information Technology of the consolidation procedures to be
(IT) system and related process including the performed based on the
general and applications process of translation of assessment of the risk of
IT related controls financial statements of material misstatement
(manual and automated) foreign components; in consolidation process;
for consolidation process;
Special Consideration
Adjustments that are These are: Determination Adjustments that are These relate to
made only on the first of Goodwill or capital made in the accounting elimination of intra-
occasion or subsequent reserve as per applicable period for which the group transactions and
occasions in which accounting standard. consolidation of financial account balances.
there is a change in Determination of statements is done.
the shareholding of a amount of equity
particular entity which is attributable to minority/
consolidated. non- controlling
interests.
Verify the pre- Verify the In case the parent company has net off
Verify that the acquisition reserves changes in such the capital reserve and goodwill arising
calculations and its allocation adjustments in case of different subsidiaries, the
are made between the parent on account of auditor should verify the gross amount
appropriately. and the minority subsequent of goodwill and capital reserve arising
interest of the acquisition or on acquisition of various subsidiaries
subsidiary. disposal in the has been disclosed in the notes to the
subsequent years. consolidated financial statements.
36
ADVANCED AUDITING AND PROFESSIONAL ETHICS
Events or transactions that provide Events or transactions that did not exist
additional evidence about conditions at the date of the financial statements
that existed at the date of the financial but arose subsequent to that date (Non-
statements (Adjusting Event) adjusting Event)
m Adjustments for the effects of significant transactions or other events that occur between the date of the components balance
sheet and the date of auditor’s report when the financial statements of the component are not drawn upto the same balance
sheet date as that of the parent;
m In case of a foreign component, adjustments to convert component’s audited financial statements from local GAAP to the
GAAP under which the consolidated financial statements are prepared;
m Determination of movement in equity attributable to the minorities interest since the date of acquisition.
Current Period Consolidation Adjustments: Audit Procedures In case any impairment loss has been
Verify that the intra group determined, verify the fairness of such amount and
transactions and account Verify the procedures followed the procedures followed to arrive at such amount.
balances have been eliminated. by the management to make such In case such loss is determined in foreign currency,
adjustments. verify if any loss in local currency is to be adjusted
from currency translation reserve.
Verify that the
consolidated financial
statements have been prepared In case where the minority interests’ share of
using uniform accounting Verify that income and losses exceeds its share of equity, verify if it has
policies. In case of application expenses of subsidiary are been accounted for in accordance with the relevant
of different accounting included from the date it gains accounting standards.
policies, verify that adequate control until the date when entity
disclosure has been made. ceases to control the subsidiary.
Disclosure Requirements:
m Appropriate notes required by the applicable standards for presenting
a true and fair view have been included in the consolidated financial
statements.
m The additional statutory information having a bearing on the true
and fair view of the consolidated financial statements have also been
disclosed.
m In case of consolidation adjustments, these are either disclosed as a
single line item separately or adjusted in the information disclosed
for the parent and its each component.
m Following information is also required to be disclosed in the
consolidated financial statements separately for the parent and each
of its components:
m Amount of net assets and net assets as a percentage of consolidated
net assets;
m Amount of share in profit or loss and the percentage share in profit
or loss as a percentage of consolidated profit or loss;
m Amount in other comprehensive income and the percentage of OCI
as a percentage of consolidated OCI.
Source from which bonus All unutilised monies out of the issue Disclosures required under
shares are issued indicating the investment of such funds MSME Act, 2006
Value of imports calculated Expenditure in foreign currency for Value of imported raw materials,
on C.I.F for raw materials, royalty, know- how, professional fees, spare parts and components and
components and capital interest the percentage of each to total
goods consumption
Statement of investments classifying trade and other investments, showing the names of body corporate in whose
shares and debentures investments have been made and the nature and extent of such investment.
Management Representations : SA 580, “Written Representations” requires the auditor to obtain written representations from
management and if required, those charged with governance.
The auditor has to obtain evidence that the management acknowledges its responsibility for a true and fair
presentation of the consolidated financial statements in accordance with the financial reporting framework applicable
to the parent.
Verify that parent management has approved the consolidated financial statements.
Obtain the written representations from parent management on matters material to CFS.
38
ADVANCED AUDITING AND PROFESSIONAL ETHICS
Reporting : The auditor while preparing the report should consider the requirements of following Standards of Auditing:
Reporting
Audit Procedures
Whether the Parent’s Auditor is also the Auditor of all its Components:
Whether principles and procedures for Auditor should issue an audit report Where Cash flow statement also
preparation and presentation of Consolidated expressing opinion whether the forms a part of Consolidated Financial
Financial Statements as laid down in the relevant Consolidated Financial Statements Statements, auditor should also give his
accounting standards have been followed. give a true and fair view of the state opinion on the true and fair view of the
In case of any deviation, give appropriate of affairs of the Group. cash flows.
disclosures.
Whether the Parent’s Auditor is not the Auditor of all its Components
The Auditor’s report should disclose clearly the magnitude Such reference should not be construed as a qualification of the
of the portion of the financial statements audited by the other opinion but rather as indication of the divided responsibility
auditor(s). This may be done by stating aggregate rupee amounts between the auditors of the parent and its subsidiaries.
or percentages of total assets, revenues and cash flows.
When the Component(s) Auditor Reports on Financial Statements under an Accounting Framework Different than that of
the Parent:
When the Component(s) Auditor Reports under an Auditing Framework Different than that of the Parent: In such a case,
the components’ financial statements should also be audited under a framework that corresponds to Indian GAAS.
Components not Audited : When financial statements of one or more components continue to remain unaudited,
the auditor should consider the In such cases, the auditor should evaluate both This evaluation is necessary since
unaudited components in evaluating qualitative and quantitative factors on the possible the auditor has not been able to
a possible modification to his report. effect of such amounts remaining unaudited when obtain sufficient appropriate audit
reporting on the consolidated financial statements. evidence.
principal auditor
When the uses the work to determine how The principal auditor He may also decide
principal of another the work of the may consider it as to application of
auditor auditor, other auditor will appropriate to discuss supplementary that
affect the audit. with the other auditor supplemental tests
and the management of the records or the
of the component, the financial statements of
I. Consideration by an auditor before acceptance as audit findings or other the component are if
Principal Auditor: matters affecting the necessary. Such tests
financial information may, depending upon
(a) the materiality of the portion of the financial of the components. the circumstances,
information be performed by the
principal auditor or
(b) degree of knowledge regarding the business of the the other auditor.
components;
40
ADVANCED AUDITING AND PROFESSIONAL ETHICS
IV Reporting Considerations
1. Principal auditor to express a qualified opinion or 2. If the other auditor issues a Modified Report
disclaimer of opinion in case of a limitation on the scope
of audit.
When the principal auditor concludes, based on his procedures, In all circumstances, if the other auditor issues, or intends to
that the work of the other auditor cannot be used and the issue, a modified auditor's report, the principal auditor should
principal auditor has not been able to perform sufficient consider whether the subject of the modification is of such
additional procedures regarding the financial information nature and significance, in relation to the financial information
of the component audited by the other auditor, the principal of the entity on which the principal auditor is reporting that it
auditor should express a qualified opinion or disclaimer of requires a modification of the principal auditor's report.
opinion because there is a limitation on the scope of audit.
V. Division of Responsibility
When the principal auditor has to base his opinion on the financial information of the entity as a whole relying upon the statements
and reports of the other auditors, his report should state clearly the division of responsibility for the financial information of the
entity by indicating the extent to which the financial information of components audited by the other auditors have been included
in the financial information of the entity, e.g., the number of divisions/branches/subsidiaries or other components audited by other
auditors. However, if the Principal Auditor notices any material discrepancies the same has to be brought to the knowledge of other
Auditor. This should be incorporated in the Audit Report.
GST
GST Law or any
other law;
Audit of Accounts [sub-section 5 of Section 35(5) read alongwith section 44(2) and rule 80 of the CGST Rules, 2017]
(i) Every registered person must get his accounts (ii) Such registered person is required to furnish electronically through the
audited by a Chartered Accountant or a Cost common portal alongwith Annual Return a copy of:
Accountant if his aggregate turnover during a • Audited annual accounts
FY exceeds r 2 crores. • A Reconciliation Statement, duly certified, in prescribed FORM GSTR-9C.
Threshold for Audit: Section 35(5) begins with the expression “every registered person whose turnover during a financial
year exceeds the prescribed limit” whereas the relevant Rule 80(3) uses the expression “every registered person whose
aggregate turnover during a financial year exceeds two crore rupees”. It must be noted that the word turnover has not been
defined whereas the expression aggregate turnover has been defined. One may note that the expression turnover in State or
turnover in the Union territory is defined. In this backdrop the following understanding is relevant:
Aggregate turnover It is therefore, reasonable For the financial year 2017-18, the GST period consists of 9 months whereas
is PAN based while to interpret that the the relevant Section 35(5) uses the expression financial year; Therefore, in the
turnover in a State/ word turnover used in absence of clarification from the government, and to avoid any cases of default,
UT, though similarly Section 35(5) ought to be it is reasonable to understand that to reckon the turnover limits prescribed
worded, is limited to understood as aggregate for audit i.e., r 2 crores one has to reckon the turnovers for the whole of the
turnover in a State / turnover. financial year which would also include the first quarter of the financial year
UT, which is limited 2017-18.
to a State;
Reconciliation Statement will reconcile the value of supplies declared in the return furnished for the financial year with the
audited annual financial statement and such other particulars, as may be prescribed.
RECONCILIATION
Value of supplies declared in Annual return Value of supplies declared in audited Annual
Financial Statement
42
ADVANCED AUDITING AND PROFESSIONAL ETHICS
Preparation / Steps for the GST Audit:
GSTR 9A
{ to be filed by the persons registered under composition scheme under GST.
Should be by the taxpayers whose annual turnover exceeds r 2 crores during the financial year
GSTR 9C
{ alongwith audited annual accounts and reconciliation statement of tax already paid and tax
payable as per audited accounts alongwith GSTR 9C.
Form GSTR 9C
(SI No. 1 - 4) (SI No. 5 to 8) (SI No. 9 to 11) (SI No. 12 to 16)
Sl. No. 1 : Financial Sl. No. 2 : GSTIN: Sl. No. 3A and 3B: Legal Name Sl. No. 4 : Are you liable to audit
Year : requires means “Goods and Trade Name: The word “trade” under any Act?: It is possible
disclosure of the and Services tax is not only limited to occupation or that an entity could be subjected
“financial year” Identification business. It could be a connotation. to audit under several statutes.
to which the Number” of the The word “trade” ought to be Example : a Proprietary Concern
Reconciliation tax payer or the understood in its ordinary sense, could be subject to audit under the
Statement in Part A Registered Person without any reference to “business”. Income tax Act, 1961 and a Private
relates to. Example : “Indigo” could be a Limited Company could be subject
trade name while the legal name is to the statutory audit under the
“InterGlobe Aviation Limited”. Companies Act, 2013 as well as
under the Income tax Act.
Sl. No.5E. Credit notes issued Sl. No. 5F. Trade Sl. No. 5G: Sl. No. 5H. Sl. No. 5I Less:
after the end of the financial discounts accounted turnover from Unbilled revenue Unadjusted Advances
year but reflected in the annual for in the audited April 2017 to at the end of at the beginning of
return.: This Sl. No. mandates Annual Financial June 2017: In Financial Year: the Financial Year:
reporting of the aggregate value Statement but are not terms of this Sl. Unbilled revenue Value of all advances
of credit notes which were issued permissible under No. the turnovers which was for which GST has not
after Mar 31, 2018 in respect GST: Clause 5F requires included in the recorded in the been paid but the same
of any supply accounted in the disclosure of trade audited financial books of accounts has been recognised as
current financial year (2018-19) discounts which have statement for the on the basis of revenue in the audited
but for credit notes were reflected been given effect to, in period April 2017 accrual system of Annual Financial
in the annual return (GSTR –9 for the audited financial to June 2017 shall accounting during Statement shall be
statements but which be declared and the current declared here.
the financial year 2017-18). But,
are not permissible deducted from the financial year,
it is uncommon, although not
as part of deductions annual turnover but GST was not
impossible, for credit notes dated from the value of supply payable on such
to arrive at the
beyond Apr 1, 2018 to be given under the GST Laws. revenue in the
turnover as per the
effect in the financial accounts. GST Laws. same financial
This Sl. No. applies only in such year shall be
rare cases. For the most part, this declared here.
Sl. No. may well be ‘nil’.
Sl. No. - 5J. Credit notes accounted for in the audited Annual Financial Statement but are not permissible under GST: This Sl. No.
has to be filled up with the information available in the audited Financial Statements whereas such amounts have not been adjusted against
the supplies in the GST returns. All the adjustments made to the turnover where there is an effect of reduction due to a Credit Note issued
have to be quantified for the purpose of reconciliation between the books of accounts and the GST returns to be filed. There could be an
adjustment made to the receivable and payable in the books of accounts. Care should be exercised to extract the information of credit note
that only calls for reduction of the turnover.
Auditor has to disclose the practice adopted for collating relevant information from the books of accounts and the basis for
determining the adjustments eligible for reconciliation purposes.
44
ADVANCED AUDITING AND PROFESSIONAL ETHICS
Sl. No. 5K. Adjustments on account of supply of goods by SEZ units to DTA Units: Such outward supplies are not required to be reported
by SEZ units in their GST Returns and hence the data cannot be retrieved from the returns filed by such SEZ units.
SEZ units are required to maintain records of the assets / goods admitted into the SEZ unit and also the details of disposal of such goods.
Such records can assist an Auditor in identifying the outward supply made by the SEZ unit. Additionally, disposal of capital goods would be
disclosed as deletion in the Fixed Asset Registers
Sl. No. 5L. Turnover for the period under composition scheme: There may be cases where Registered Persons might have opted
out of the composition scheme during the year. Their turnover as per the audited Annual Financial Statement would include turnover
both as composition taxpayer as well as normal taxpayer. Therefore, the turnover for which GST was paid under the composition
scheme shall be declared under this Sl. No. 5L.
Sl. No. 5M. Adjustments in turnover under section 15 and rules thereunder: There may be cases where the taxable value and
the invoice value differ due to valuation principles under section 15 of the CGST Act, 2017 and rules thereunder. Therefore, any
difference between the turnover reported in the Annual Return (GSTR 9) and turnover reported in the audited Annual Financial
Statement due to difference in valuation of supplies shall be declared here.
Sl. No. 5R: non-reconciled turnover (Q-P): The un-reconciled turnover at Sl. No. 5R is the difference between the ‘Annual turnover
after adjustments as above’ at Sl. No. 5P and ‘turnover as declared in the Annual Returns (GSTR 9)’ as declared at Sl. No. 5Q. The
difference would be auto generated.
Sl. No. 6- Reasons for Un - Reconciled difference in Annual Gross turnover : This portion of GSTR 9C identifies the turnover
differences to be placed on record for explaining the differences between the GST Returns and the Audited Financials.
Sl. No. 7B. Value of Exempted, Nil rated, Non-GST supplies, No-Supply turnover
7 RECONCILIATION OF TAXABLE TURNOVER
7A Annual Turnover after Adjustments (From 5P Above) <Auto>
7B Value of Exempted, Nil Rated, Non-GST supplies, No-Supply Turnover
Clause 7B requires reduction of value of Exempted, Nil rated, Non-GST supplies, No-Supply turnover from the Annual turnover
after adjustments to arrive at taxable turnover.
Sl. No. 7C. Zero rated supplies without payment of tax: Clause 7C of GSTR 9C requires disclosure of value of zero-rated supplies
without the payment of tax which forms part of the ‘Annual turnover after adjustments (from 5P above)’ at Sl. No. 5P.
The source of information for zero-rated supplies shall be obtained from the outward supply statement in GSTR – 1 and revenue
register forming part of books of accounts. The outward supply statement filed in GSTR -1 shall be correlated with the zero-rated
supplies declared in the monthly returns in GSTR – 3B.
Sl No. 7D - Supplies on which tax is to be paid by recipient on reverse charge: Section 2(98) defines reverse charge to mean a
case where liability to pay tax is on recipient of supply of goods or service instead of supplier u/s 9(3) and 9(4) of CGST/ SGST Act
or S.5(3) or 5(4) of IGST Act.
The Auditor has to verify if the supplier has more than one vertical. One of them vertical must be on forward charge and one on
reverse charge. The vertical on reverse charge should be taken under ‘supplies on which tax is to be paid by recipient on reverse
charge basis’.
Sl. No. 7E - taxable turnover as per adjustment above (A-B-C-D)
Sl. No. 7F - taxable turnover as per liability declared in Annual Return: Clause 7F of GSTR 9C requires that the taxable
turnover as per the liability should be declared in the Annual Return (GSTR 9).
Instruction as per GSTR 9C - taxable turnover as declared in Table 4N of the Annual Return (GSTR 9) shall be declared here. The
information must flow from GSTR 9 which contains supplies and advances on which tax is paid. The turnover arrived at Part II Sl.
No. 8F of Form GSTR 9C should match the turnover as declared in the Annual Return.
PART III: RECONCILIATION OF TAX PAID : After reconciling the turnover declared and reported in the Audited Financial
Statement with turnover declared in Annual Return along with reasons for reconciliation if any, the relevant Part III of Form 9C
requires an Auditor to reconcile the rate-wise liability of tax, total amount payable thereon with tax actually paid as declared in the
Annual Return and recommendation of additional tax payable due to non-reconciliation of the taxable value.
From the scheme of Table 9 it is clear that the Auditor is required to report the GST payable rate wise dissected total
taxable turnover calculated in Table 7E under Part II of GSTR 9C. Once the taxable value is reported under various rates as
specified in sub-parts A, C, E, G, I, J, and K, the relevant amount of tax shall be calculated by the system.
The values that are to be reported in Table 9 should be taxable value as reported under Table 7E of GSTR 9C, i.e. Adjusted
Total turnover for the FY 2017-18 under the GST and the amount of tax (rate wise) should be derived mathematically.
7E Taxable turnover as per adjustments above (A-B-C-D) <Auto>
The details of adjusted Total turnover needs to be broken down in accordance with the GST rates based on the reports
generated from the books of accounts and necessary adjustments made in Part II of GSTR 9C which have not impacted the
books of accounts of the Registered Person should also be considered rate-wise for the purpose of finding the taxable value.
Once all the details are entered, and the difference in tax payable as per the books with actual tax payable is identified, the
amounts of non-reconciliation shall be raised as per CGST, SGSTM IGST and Cess wise. On these amounts the Auditor shall
be required to disclose the reasons in Table 10.
The given table mandates the Auditor to identify and disclose the reasons for un- reconciled payment of amount of tax,
Interest, Penalty, Cess and Others. Reasons, amounts along with description of reason needs to be disclosed.
46
ADVANCED AUDITING AND PROFESSIONAL ETHICS
Sl. No. 11: Additional amount payable but not paid (due to reasons specified under Tables 6, 8 and 10 above)
11 Additional amount payable but not paid (due to reasons specified
under Tables 6,8 and 10 above)
To be paid through Cash
Description Taxable Central State Tax/ Integrated Cess, if
Value Tax UT Tax Tax applicable
1 2 3 4 5 6 In the Table 11 under Part III of the GSTR
5% 9C, the amount of tax, interest, penalty,
12% late fees and their dues which are payable
18% in accordance with the non-reconciliation
28% reported under Table 6, 8 and 10 but not
3%
actually paid as declared in Annual Return
in GSTR 9 are to be reported with rate-wise
0.25%
bifurcation.
0.10%
Interest
Late Fee
Penalty
Others
(please
specify)
SI. No. 14. Reconciliation of ITC declared in Annual Return (GSTR 9) with ITC availed on expenses as per audited Annual
Financial Statement or books of account
14 Reconciliation of ITC declared in Annual Return (GSTR9) with ITC availed
on expenses as per audited Annual Financial Statement or books of account
Description Value Amount of Amount of
Total ITC eligible ITC
availed
1 2 3 4
A Purchases
B Freight / Carriage
C Power and Fuel
D Imported goods (Including received from
SEZs) This table is for reconciliation of ITC
E Rent and Insurance declared in the Annual Return (GSTR 9)
F Goods lost, stolen, destroyed, written against the expenses booked in the audited
off or disposed of by way of gift or free Annual Financial Statement or books of
samples account. This point calls for examination
G Royalties
of ITC detailed by the Auditor to
H Employees' Cost (Salaries, wages, Bonus
etc.)
determine the available ITC as booked
I Conveyance charges in ledgers of various expenses and in the
J Bank Charges books of accounts viz a viz the ITC availed
K Entertainment charges by the Registered person. In case the
L Stationery Expenses (including postage Auditor finds any ineligible or unavailable
etc.) ITC as per the books of accounts, suitable
M Repair and Maintenance disclosures are to be made in this regard.
N Other Miscellaneous expenses
O Capital goods
P Any other expense 1
Q Any other expense 2
R Total amount of eligible ITC availed <<Auto>>
S ITC claimed in Annual Return (GSTR9)
T Un-reconciled ITC ITC 2
SI. No. 15. Reasons for un-reconciled difference in ITC: Reasons for non-reconciliation between ITC availed on the various
expenses declared in Table 14R and ITC declared in Table 14S shall be specified here
48
ADVANCED AUDITING AND PROFESSIONAL ETHICS
SI. No. 16. Tax payable on un-reconciled difference in ITC (due to reasons specified in 13 and 15 above): Any amount which is
payable due to reasons specified above shall be declared here.
Part V to GSTR 9C: Auditor’s Recommendation on additional liability due to non-
reconciliation
Pt. V Auditor's recommendation on additional Liability due to non-reconciliation
To be paid through Cash
Description Value Central State Tax/ Integrated Cess, if
Tax UT Tax Tax applicable
1 2 3 4 5 6
5%
12%
Part V consists of the auditor’s
18%
28% recommendation on the additional liability
3% to be discharged by the taxpayer due to
0.25% non-reconciliation of turnover or non-
0.10%
Input Tax Credit reconciliation of input tax credit.
Interest
Late Fee
Penalty
Any other amount
paid for supplies not
included
in Annual Return
The auditor shall also recommend if there Any refund which has been erroneously taken Any other outstanding demands which is
is any other amount to be paid for supplies and shall be paid back to the Government shall recommended to be settled by the auditor
not included in the Annual Return. also be declared in this table. shall be declared in this Table.
Part B - GSTR 9C – Certification
Module I – Certification in cases where the reconciliation statement (FORM GSTR 9C) is drawn up by the person who had
conducted the audit and GST audit certification. Hierarchy of Clauses for Certification
Step 1: Step 2: Based Step 3: Report the following Step 4: State Step 5: Step 6: Signature
‘Examine’ the on such observations / comments / whether Particulars and Stamp
‘financials’ ‘audit’, report discrepancies / inconsistencies, GSTR 9C and in GSTR 9C and Seal of the
that books if any: other relevant are ‘true and Auditor duly
of account, Step 3(b): Report further documents are correct’ subject disclosing the
etc., under whether: annexed to observations date, place and
the GST Acts Step 3(b) (A): Information and or qualifications: full address
have or have explanations has / has not been [5(a) to
not been obtained which were necessary 5(c)]……. refer
maintained Step 3(b)(B): Proper books of list of matter’s
accounts have / have not been for Auditor’s
kept Step attention listed
3(b)(C): Financials are/are not in below………
agreement with the books
Module II – Certification in cases where the reconciliation statement in (GSTR 9C) is drawn up by a person other than the
person who had conducted the audit of the accounts: Hierarchy of Clauses for Certification
Professional Negligence Civil Liability Criminal Liability Liability under Income tax Act
Lord Justice Topes once famously remarked that “The Auditor is a watchdog and not bloodhound.”
(a) existence of duty or responsibility owed by one party to another to perform some act with certain degree of care and
competence;
(b) occurrence of a breach of such duty; and
(c) loss or detriment, being suffered by the party to whom the duty was owed as a result of negligence.
Professional negligence would constitute failure to perform duties according to “accepted professional standards”, resulting in
some loss or damage to a party to whom the duty is owed.
Civil Liabilities under the Companies Act: A civil action against the auditor may either take the form of claim for damages on
account of negligence or that of misfeasance proceeding for breach of trust or duty:
Damages for negligence: Misstatement in prospectus under section 35 of the Companies Act, 2013, are where a person has
subscribed for securities of a company acting on any statement included, or the inclusion or omission of any matter, in the
prospectus which is misleading and has sustained any loss or damage as a consequence thereof, the company and every person
who—
is a director of the has authorised himself to be named and is a promoter has authorised is an expert
company at the time is named in the prospectus as a director of the the issue of the referred to in
of the issue of the of the company or has agreed to become company; prospectus and sub-section (5)
prospectus; such director either immediately or after of section 26,
an interval of time;
shall, without prejudice to any punishment to which any person may be liable under section 36, be liable to pay compensation to
every person who has sustained such loss or damage.
Notwithstanding anything contained in this section, where it is proved that a prospectus has been issued with intent to defraud
the applicants for the securities of a company or any other person or for any fraudulent purpose, every person referred to in
sub-section (1) shall be personally responsible, without any limitation of liability, for all or any of the losses or damages that
may have been incurred by any person who subscribed to the securities on the basis of such prospectus.
50
ADVANCED AUDITING AND PROFESSIONAL ETHICS
Liability for misfeasance: The term “misfeasance” implies a breach of trust or duty, where the auditor of a company would be guilty
of misfeasance if he has been guilty of any breach of trust or negligence in the performance of his duties which has resulted in some
loss or damage to the company or its property.
• Apart from the liability for professional negligence, in the discharge of duties, an auditor also may be penalised under section
147 of the Companies Act, 2013 for failure to comply with any of the provisions contained in sections 143 and 145 of the Act.
• Further, as per Sec. 143 of Companies Act, 2013 if auditor does not report any matter of fraud involving such amounts as may
be prescribed he will be liable for punishment.
As per section 447 of the Companies Act, 2013, without prejudice to any liability including repayment of any debt
under this Act or any other law for the time being in force, any person who is found to be guilty of fraud [involving
an amount of at least ten lakh rupees or one per cent of the turnover of the company, whichever is lower] shall be
punishable with imprisonment for a term which shall not be less than six months but which may extend to ten years
and shall also be liable to fine which shall not be less than the amount involved in the fraud, but which may extend
to three times the amount involved in the fraud:
where the fraud in question where the fraud involves an amount less than ten lakh rupees or one per cent
involves public interest, the of the turnover of the company, whichever is lower, and does not involve public
term of imprisonment shall interest, any person guilty of such fraud shall be punishable with imprisonment
not be less than three years. for a term which may extend to five years or with fine which may extend to fifty
lakh rupees or with both.
A person who has been “If a person abets or induces in If an accountant or a merchant banker or a registered
convicted of any offence any manner another person to valuer, furnishes incorrect information in a report or
connected with any Income make and deliver an account certificate under any provisions of the Act or the rules
Tax proceeding or on or a statement or declaration made thereunder.
whom a penalty has been relating to any income [or any
imposed under the said Act fringe benefits] chargeable to tax
(except under clause (ii) of which is false and which he either
sub section (1) of section knows to be false or does not
271) is disqualified from believe to be true or to commit The AO or the Commissioner (Appeals) may direct
representing an assesses. an offence under sub-section (1) him to pay a sum of ten thousand rupees for each such
of section 276C report or certificate by way of penalty.
CA has conducted an examination of such records, he has
also to submit a report on the scope and results of such
examination. The report to be submitted will be a statement
within the meaning of section 277 of the Income Tax Act. Thus
if this report contains any information which is false and which
the Chartered Accountant either knows or believes to be false
or untrue,
52