Audit and Assurance Notes
Audit and Assurance Notes
Meaning of Audit:
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controls in the organisations and reports weaknesses, inadequacies, etc., in
them.
Employees:
(e) It acts as a moral check on the employees from committing defalcations or
embezzlement.
Creditors/Lenders:
(f) Evaluate credit worthiness to negotiate loans and credit period
Government:
(g) Government may require audited and certified statement before it
✓ gives assistance or
✓ issues a license for a particular trade.
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✓ taxation,
✓ economics, etc.
Both practical training and theoretical education are equally necessary for the
development of professional competence of an auditor for undertaking any kind of
audit assignment.
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Q5. Explain types of audit of financial statement
(i) Statutory Audit- Audit required under law: The organisations which require
audit under law are the following:
(a) companies governed by the Companies Act, 2013;
(b) banking companies governed by the Banking Regulation Act, 1949;
(c) electricity supply companies governed by the Electricity Supply Act, 1948;
(d) co-operative societies registered under the Co-operative Societies Act,
1912;
(e) public and charitable trusts registered under various Religious and
Endowment Acts;
(g) corporations set up under an Act of Parliament or State Legislature such
as the Life Insurance Corporation of India.
(h) Specified entities under various sections of the Income-tax Act, 1961.
(ii) Voluntary Audit- In the voluntary category are the audits of the accounts of
proprietary entities, partnership firms, Hindu undivided families, etc. In respect
of such accounts, there is no basic legal requirement of audit.
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cannot, reduce audit risk to zero and cannot therefore obtain absolute
assurance that the financial statements are free from material misstatement
due to fraud or error.
1. Planning: The auditor should plan his work to enable him to conduct an
effective audit in an efficient and timely manner. Plans should be based on
knowledge of the client’s business.
2. Accounting system and Internal Control: The auditor should gain an
understanding of the accounting system and related controls and should study
and evaluate the operation of those internal controls upon which he wishes to
rely in determining the nature, timing and extent of other audit procedures.
3. Work performed by others: When the auditor delegates work to assistants or
uses work performed by other auditors and experts, he continues to be
responsible for forming and expressing his opinion on the financial information.
However, he will be entitled to rely on work performed by others, provided he
exercises adequate skill and care and is not aware of any reason to believe
that he should not have so relied.
4. Audit evidence: The auditor should obtain sufficient appropriate audit evidence
through the performance of compliance and substantive procedures to
enable him to draw reasonable conclusions there from on which to base
his opinion on the financial information.
5. Audit Conclusions and Reporting: The auditor should review and assess
the conclusions drawn from the audit evidence obtained and from his
knowledge of business of the entity as the basis for the expression of his
opinion on the financial information.
6. Confidentiality: The auditor should respect the confidentiality of information
acquired in the course of his work and should not disclose any such
information to a third party without specific authority or unless there is a legal
or professional duty to disclose.
7. Documentation: The auditor should document matters which are important in
providing evidence that the audit was carried out in accordance with the basic
principles.
9. Skills and Competence: The audit should be performed and the report
prepared with due professional care by persons who have adequate
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training, experience and competence in auditing. The auditor requires
specialised skills and competence along with a continuing awareness of
developments on accounting and auditing matters, and relevant regulations and
statutory requirements.
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reporting framework
f. Selection and application of accounting policies should be as per
accounting standards
g. Any extraordinary or non-recurring item should be separately disclosed
Auditing and Accounting: It has been pointed out earlier that both accounting and
auditing are closely related with each other as auditing reviews the financial
statements which are nothing but a result of the overall accounting process.
Auditing and Law: The relationship between auditing and law is very close one.
Auditing involves examination of various transactions from the view point of whether
or not these have been properly entered into.
Auditing and Production: Regarding production function, it may be stated that a
good auditor is one who understands the client and his business. While carrying out
the audit activity, the auditor is required to evaluate transactions from the accounting
aspect in relation to the process through which it has passed through as accounting
for by-products; joint-products may also require to be done.
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Auditing and Financial Management: Auditing is also closely related with other
functional fields of business such as finance, production, marketing, personnel and
other general areas of business management. With the overgrowing field of auditing,
the financial services sector occupies a dominant place in our system
Auditing and Economics: As, it is well known, accounting is concerned with the
accumulation and presentation of data relating to economic activity. From the
auditing view point, the auditors are more concerned with Micro economics rather
than with the Macro economics.
Auditing and Statistics & Mathematics: With the passage of time, test check
procedures in auditing have become part of generally accepted auditing procedures.
With the emergence of test check procedure, discipline of statistics has come quite
close to auditing as the auditor is also expected to have the knowledge of statistical
sampling so as to arrive at meaningful conclusions. The knowledge of mathematics is
also required on the part of auditor particularly at the time of verification of
inventories.
Auditing and Behavioural Science: The discipline of behavioural science is closely
linked with the subject of auditing. While it may be said that an auditor, particularly
the financial auditor, deals basically with the figures contained in the financial
statements but he shall be required to interact with a lot of people in the organisation.
The knowledge of human behaviour is indeed very essential for an auditor so as to
effectively discharge his duties
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engaged him or to his own self interest
5) It is not only important to be independent but it is also important to appear as
independent i.e. independence of mind and independence of appearance
should co-exist. Independence of auditor must not only exist in fact, but should
also appear to exist to all reasonable persons.
6) There are various threats to independence such as financial interest threat,
familiarity threat and self review threat where auditor’s judgment may come
under influence
7) In order to secure independence of auditor there are safeguards in the form of
statutory provisions mentioned in Companies Act, 2013 and Chartered
Accountants Act, 1949.
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The objective of the auditor is to accept or continue an audit engagement only when the basis upon
which it is to be performed has been agreed, through:
B. Confirming that there is a common understanding between the auditor and management
and, where appropriate, those charged with governance of the terms of the audit
engagement
PART B – Q & A
NO. QUESTION
1 Pre-conditions of an Audit?
2 What is an Audit Engagement letter? Explain principal contents.
3 Management responsibility para in EL?
4 Eng. Letter in case of recurring audits?
5 Acceptance of changes in terms of engagement?
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✓ Unrestricted access to persons within the entity from whom the auditor determines it
necessary to obtain audit evidence
NOTE:
If management or those charged with governance impose a limitation on the scope of the
auditor’s work in the terms of a proposed audit engagement such that the auditor believes
the limitation will result in the auditor disclaiming an opinion on the financial
statements, the auditor shall not accept such a limited engagement as an audit
engagement
3. C & Co., hired Mr. A, Chartered Accountant, to compile its financial statements for the interim
period ending on 31st December 2012. Kindly assist Mr. A in drafting scope of engagement
letter with specific focus on C & Co's responsibility.
Ans:
The engagement letter to be issued by Mr. A should state the following as management’s
responsibility:
the accuracy and completeness of the information supplied to us, including
maintenance of adequate accounting records and internal controls and selection and
application of appropriate accounting policies.
preparation and presentation of the financial statements of the entity, in accordance
with the applicable laws and regulations, if any.
safeguarding the assets of the entity and also establishing appropriate controls
designed to prevent and detect fraud and other irregularities.
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ensuring that the activities of the entity are carried in accordance with applicable laws
and regulations and that it institutes appropriate controls to prevent and detect any
non-compliance.
Ensuring complete disclosure of all material and relevant information to the
accountant.
4. P. an Auditor, decides not to send a new EL to G Ltd every year. Whether he is right in his
approach. State the circumstances where sending new EL, would be appropriate?
OR
R & Co, a firm of Chartered Accountants have not revised the terms of engagements and
obtained confirmation from the clients, for last 5 years despite changes in business and
professional environment. Please elucidate the circumstances that may warrant the revision
in terms of engagement.
Ans:
As per SA- 210 on “Agreeing the Terms of Audit Engagement”, the auditor may decide
not to send a new audit engagement letter or other written agreement each period.
However, the following factors may make it appropriate to revise the terms of the audit
engagement or to remind the entity of existing terms:
Any indication that the entity misunderstands the objective and scope of the audit.
Any revised or special terms of the audit engagement.
A recent change of senior management.
A significant change in ownership.
A significant change in nature or size of the entity’s business.
A change in legal or regulatory requirements.
A change in the financial reporting framework adopted in the preparation of the
financial statements.
A change in other reporting requirements.
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5. X, a Chartered Accountant was engaged by PQR & Co. Ltd. for auditing their accounts. He sent
his letter of engagement to the Board of Directors, which was accepted by the Company. In
the course of audit of the company, the auditor was unable to obtain appropriate sufficient
audit evidence regarding receivables. The client requested for a change in the terms of
engagement.
Ans:
The auditor would consider carefully the reason given for the request, particularly the implications
of a restriction on the scope of the engagement, especially any legal or contractual implications.
•the auditor and management shall agree on and record the new terms of the
If the auditor
engagement in an EL or other suitable form of written agreement.
concludes that
there is •if the audit work performed complied with the SAs applicable to the changed
reasonable engagement, the report issued would be appropriate for the revised terms of
justification to engagement. In order to avoid confusion, the report would not include reference to:-
change the •A) The original engagement; or
engagement •B) Any procedures that may have been performed in the original engagement
The auditor •and is not permitted by management to continue the original audit engagement, the
should not auditor shall:
agree to a
change of (a) Withdraw from the audit engagement where possible under applicable law or
engagement regulation; and
where there is (b) Determine whether there is any obligation, either contractual or otherwise, to
no reasonable report the circumstances to other parties, such as those charged with governance,
justification for owners or regulators. (Eg: Filing Form ADT -3)
doing so.
In the instant case, the auditor was unable to obtain sufficient evidence regarding
receivables. The client requested him for a change in the terms of the agreement to
avoid qualified / adverse opinion. Hence there is no reasonable justification for change
in the terms of engagement.
Thus, the auditor should not agree for change in the terms of engagement letter. If the
auditor is unable to agree to a change of the terms of the audit engagement and is not
permitted by management to continue the original audit engagement, the auditor shall
✓ Withdraw from the audit engagement where possible under applicable law or
regulation; and
✓ Determine whether there is any obligation, either contractual or otherwise, to
report the circumstances to other parties, such as those charged with governance,
owners or regulators.
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AND
The objective of the auditor is to implement quality control procedures at the engagement level that
provide the auditor with reasonable assurance that:
A. The audit complies with professional standards and regulatory and legal requirements
B. The auditor’s report issued is appropriate in the circumstances.
PART B – Q & A
NO. QUESTION
1 Elements of firm’s system of quality control?
2 Leadership responsibilities of EP?
3 Relevant ethical requirements?
4 Professional skepticism?
5 Acceptance/Continuance of Client relationship?
6 Human resource policies & procedures to address the foll?
7 Relying on Work Performed by others?
8 Engagement performance policies & procedures to address the foll?
9 Purpose of monitoring compliance with quality control policies and procedures?
1. The firm’s system of quality control should include policies and procedures addressing each
element. Explain. [RTP – N18]
Ans: As per Standard on Quality Control (SQC) 1 – “ Quality Control for Firms that Perform Audit and
Reviews of Historical Financial Information, and other Assurance and Related Services
Engagements” The firm’s system of quality control should include policies and procedures
addressing each of the following elements: A HELMET
a) Leadership responsibilities for quality within the firm.
b) Ethical requirements.
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2. As per SA 220, the engagement partner shall take responsibility for the overall quality on each
audit engagement to which that partner is assigned. While taking responsibility for the overall
quality on each audit engagement, analyse and explain the emphasis of the actions of the
engagement partner and appropriate messages to the other members of the engagement
team. Also define Engagement partner. [MTP – Aug 18]
Ans: As per SA 220 – “Quality controls for an audit of financial statements”, the engagement partner
(EP) shall take responsibility for the overall quality on each audit engagement to which that
partner is assigned.
As a part of this responsibility, the EP should emphasize (stress upon) on the following to the
Engagement team:
Performing work that complies with professional standards and regulatory and legal
requirements;
Complying with the firm’s quality control policies and procedures as applicable;
Issuing auditor’s reports that are appropriate in the circumstances; and
The engagement team’s ability to raise concerns without fear of reprisals; and
The fact that quality is essential & indispensible in performing audit engagements.
Definition of Engagement partner –
✓ The partner or other person in the firm
✓ who is a member of the Institute of Chartered Accountants of India and
✓ is in full time practice and
✓ is responsible for the engagement and its performance, and for the report that is issued
on behalf of the firm, and
✓ who, where required, has the appropriate authority from a professional, legal or
regulatory body. (Imp for MCQ)
3. Comment on the following – “The Auditor shall comply with relevant ethical requirements
including independence?
OR
Discuss fundamental principles to be possessed by an auditor?
OR
The IESBA Code related to an audit of financial statements establishes fundamental principles
of professional ethics relevant to the auditor when conducting an audit of financial statements.
Elucidate those principles.
Ans: The IESBA Code establishes the following as the fundamental principles of professional ethics
relevant to the auditor when conducting an audit of financial statements :
(a) Integrity;
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(b) Objectivity;
(c) Professional competence and due care;
(d) Confidentiality; and
(e) Professional behavior.
Independence of the auditor has not only to exist in fact, but also appear to so exist to all
reasonable persons (ie Independence of mind and independence of appearance). Independence
enhances the auditors ability to act with integrity to be objective and to maintain an attitude of
professional skepticism (attitude of maintaining a questioning mind).
Using inappropriate assumptions in determining the nature, timing, and extent of the audit
procedures and evaluating the results thereof.
5. As per SA 220, the auditor should obtain information considered necessary in the circumstances
before accepting an engagement with new client, when deciding whether to continue an
existing engagement and when considering acceptance of new engagement with existing
client. Explain. [RTP -M18]
Ans: As per SA 220 – “Quality controls for an audit of financial statements”, the information which
assists the auditor in accepting and continuing of client relationship may include the following:
The integrity of the principal owners, KMP and TCWG;
Whether the ET is competent to perform the audit engagement and has the necessary
capabilities, including time and resources;
Whether the firm and the ET can comply with relevant ethical requirements; and
Significant matters that have arisen during the current or previous audit engagement, &
their implications for continuing the relationship.
6. The firm should establish policies and procedures designed to provide it with reasonable
assurance that it has sufficient personnel with the capabilities, competence, and commitment to
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Addressing these issues enables the firm to ascertain the number and characteristics of the
individuals required for the firm’s engagements. The firm’s recruitment processes include
procedures that help the firm select individuals of integrity as well as the capacity to develop the
capabilities and competence necessary to perform the firm’s work.
7. M/s Sureshchandra & Co. has been appointed as an auditor of SC Ltd. for the financial year
2014-15. CA. Suresh, one of the partners of M/s Sureshchandra & Co., completed entire routine
audit work by 29th May, 2015. Unfortunately, on the very next morning, while roving towards
office of SC Ltd. to sign final audit report, he met with a road accident and died. CA. Chandra,
another partner of M/s Sureshchandra & Co., therefore, signed the accounts of SC Ltd., without
reviewing the work performed by CA. Suresh. [CA FINAL]
Required
State with reasons whether CA. Chandra is right in expressing an opinion on financial
statements the audit of which is performed by another auditor.
OR
Mr. X, a partner in X & Co, a firm of CAs, died on 31 March 2010 after completing routine audit
work of X & Co. Ltd. Mr. Y another partner of the firm of Cas signed the financial statements of
X & Co Ltd without reviewing finalization work done by assistants.[INTER – N10]
Ans:
Relying on Work Performed by others:
As per SA 220 “Quality Control for an Audit of Financial Statements”, an engagement partner
taking over an audit during the engagement may apply the review procedures such as the
following:
Work (ie Suresh’s work) has been performed in accordance with professional standards
and regulatory and legal requirements;
significant matters have been raised for further consideration;
appropriate consultations have taken place and the resulting conclusions have been
documented
the work performed supports the conclusions reached and is appropriately
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documented(SA 230);
the evidence obtained is sufficient and appropriate to support the auditor’s report; and
the objectives of the engagement procedures have been achieved.
Further, one of the basic principles, which govern the auditor’s professional responsibilities and
which should be complied with wherever an audit is carried, is that when the auditor delegates
work to assistants or uses work performed by other auditor and experts, he will continue to be
responsible for forming and expressing his opinion on the financial information.
However, he will be entitled to rely on work performed by others, provided he exercises adequate
skill and care and is not aware of any reason to believe that he should not have so relied. This is
the fundamental principle which is ethically required as per Code of Ethics.
However, the auditor should carefully direct, supervise and review work delegated. He should
obtain reasonable assurance that work performed by other auditors/experts and assistants is
adequate for his purpose.
Conclusion:
Here, CA. Chandra is allowed to sign the audit report, though, will be responsible for expressing
the opinion. He may rely on the work performed by CA. Suresh provided he further exercises
adequate skill and due care and reviews the work performed by him. If, CA Chandra does not
undertake the review procedures, he will be held negligent.
8. The firm should establish policies and procedures designed to provide it with reasonable
assurance that engagements are performed in accordance with professional standards and
regulatory and legal requirements, and that the firm or the engagement partner issues reports
that are appropriate in the circumstances. These policies & procedures should address few
issues. Explain.
Ans: Such policies and procedures address the following personnel issues:
✓ How engagement teams are briefed on the engagement to obtain an understanding of the objectives of
their work.
✓ Processes for complying with applicable engagement standards.
✓ Processes of engagement supervision, staff training and coaching.
✓ Methods of reviewing the work performed, the significant judgments made and the form of report being
issued.
✓ Appropriate documentation of the work performed and of the timing and extent of the review.
✓ Processes to keep all policies and procedures current
9. Explain the purpose of monitoring compliance with quality control policies and procedures?
[STUDY MATERIAL]
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Ans: The purpose of monitoring compliance with quality control policies and procedures
is to provide an evaluation of:
(a) Adherence to professional standards and regulatory and legal requirements;
(b) Whether the quality control system has been appropriately designed and effectively
implemented; and
(c) Whether the firm’s quality control policies and procedures have been appropriately applied,
so that reports that are issued by the firm or engagement partners are appropriate in the
circumstances.
Follow-up by appropriate firm personnel so that necessary modifications are promptly made to
the quality control policies and procedures.
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Ans
1. Relevant industry, regulatory and other external factors including the
applicable financial reporting framework
✓ the types of investments that the entity is making and plans to make,
including investments in special-purpose entities; and
✓ the way that the entity is structured and how it is financed;
to enable the auditor to understand the classes of transactions, account
balances, and disclosures to be expected in the financial statements.
4. The entity’s objectives and strategies, and those related business risks
thatmay result in risks of material misstatement
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• The process of establishing the overall audit strategy assists the auditor to
determine such matters as
✓ The resources to deploy for specific audit areas- such as the use of
appropriately experienced team members for high risk areas or the
involvement of experts on complex matters
✓ How such resources are managed- such as when team meetings are
expectedto be held, how engagement partner and manager reviews
are expected to take place (for example, on-site or off -site), and
whether to complete engagement quality control reviews.
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areas, such as the use of experienced team members for high-risk areas or the
involvement of experts on complex matters.
2. Allocation of Quantity of Resources:
Audit strategy helps in allocating the appropriate number of resources to
specific audit areas, such as the number of team members assigned to observe
the inventory count at material locations, the extent of review of other auditors'
work in the case of group audits, or the audit budget in hours to allocate to high-
risk areas.
3. Timing of Deployment of Resources:
Audit strategy helps in determining the timing of deploying the resources, such
as whether at an interim audit stage or at key cut-off dates.
4. Management of Resources:
Audit strategy helps in managing, directing, supervising the resources, such as
when team briefing and debriefing meetings are expected to be held, how
engagement partner and manager reviews are expected to take place (for
example, on-site or off-site), and whether to complete engagement quality
control reviews.
✓ Ascertain the reporting objectives of the engagement to plan the timing of the
audit and the nature of the communications required; example: The entity’s
timetable for reporting
Ans The relationship between overall audit strateg and audit plan.
✓ Audit strategy and audit plan are inter related to each other because change
in one would result into change in the other.
✓ The audit strategy is prepared before the audit plan. The audit plan Contains
more details than the overall audit strategy'.
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✓ The audit strategy provides the guidelines for developing the audit plan.
Once the overall audit strategy has been established, an audit plan can be
developed to address the various matters identified in the overall audit
strategy.
✓ Audit strategy establishes the scope , timing and direction of the audit and
thereby works as basis for developing a detailed audit plan.
✓ Detailed audit plan would include the nature, timing and extent of the audit
procedures so as to obtain sufficient appropriate audit evidence.
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Q11 The auditor shall update and change the overall audit strategy and the
audit plan as necessary during the course of the audit
Ans ✓ The auditor shall update and change the overall audit strategy and the
auditplan as necessary during the course of the audit
✓ This may be the case when information comes to the auditor’s attention that
differs significantly from the information available when the auditor planned
theaudit procedures.
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Ans ✓ An Audit programme is a detailed plan of work, prepared by the auditor for
carrying out audit.
✓ It is comprised of a set of techniques and procedures, which the auditor plans
to apply in the given audit for forming an opinion about the client's statement
of account.
✓ It not only constitutes the plan of the work but also provides a basis for the
supervision and control of the audit work
✓ The programme may also contain the audit objectives for each audit step.
✓ It should sufficient in detail to serve as a set of instructions to the audit staff
involved in the audit and also as a means to control the proper execution of
the work.
Ans For the purpose of programme construction , the following points should
be kept in mind :
✓ Stay within the scope and limitation of the assignment.
✓ Determine the evidence reasonably available and identify the best evidence
forderiving the necessary satisfaction.
✓ Apply only those steps and procedures which are useful in accomplishing
the verification purpose in the specific situation.
✓ Consider all possibilities of error.
✓ Co-ordinate the procedures to be applied to related items
Ans 1. It provides the assistant carrying out the audit with total and clear
set instructions of the work generally to be done.
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Ans 1. The work may become mechanical and particular parts of the programme
may be carried out without any understanding of the object of such parts in
the whole audit scheme.
2. The programme often tends to become rigid and inflexible following set
grooves; the business may change in its operation of conduct, but the old
programme may still be carried on. Changes in staff or internal control may
render precaution necessary at points different from those originally decided
upon.
3. Inefficient assistants may take shelter behind the programme i.e. defend
deficiencies in their work on the ground that no instruction in the matter is
contained therein.
4. A hard and fast audit programme may kill the initiative of efficient and
enterprising assistants.
Q18 How does an audit programme help to plan and perform the audt?
Q19 Evolving one audit programme applicable to all audit engagements under
all circumstances is not practicable. Explain
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• Evolving one audit programme applicable to all audit engagements under all
circumstances is not practicable due to following reasons:
✓ Businesses vary in nature, size and composition;
✓ Work which is suitable to one business may not Suitable to Others;
✓ Efficiency and operation of internal controls and the exact nature of the
service to be rendered by the auditor differs from assignment to
assignment.
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Q.1 The assessment of risks is a matter of professional judgment. Explain stating clearly what is
not included in Audit Risk?
Q.2 Risk of of material misstatement consists of two components" Explain clearly defining risk of
material misstatement.
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• The risk that a misstatement that could occur in an assertion about a class of transaction,
account balance or disclosure and that could be material, either individually or when
aggregated with other misstatements, will not be prevented, or detected and corrected, on a
timely basis by the entity's internal control.
• Control Risk is the risk that material misstatement will be not be prevented or detected and
corrected on a timely basis by the internal control system.
Q.3 "The SAs do not ordinarily refer to inherent risk and control risk separately, but rather to a
combined assessment of the "risks of material misstatement". Explain.
Q.4 Discuss in brief the types of audit risk and inter relationship of components of audit risk.
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There is an inverse relationship between detection risk and the combined level of inherent and
control risks, When inherent and control risks a high, acceptable detection risk needs to be low to
reduce auditi risk to an acceptably low level. When inherent and control risks are low, an
auditor can accept a higher detection risk and still reduce audit risk to an acceptably low level.
Q.5 Explain the inherent risk with reference relevant standard on auditing.
Or
Write short note on: Inherent Risk.
Ans.Inherent risk:
SA 200 "Overall Objectives of independent Auditor and Conduct of audit in accordance with
Standards on Auditing" defines inherent risk as the susceptibility of an assertion about a class of
transaction, account balance or disclosure to a misstatement that could be material, either
individually or when aggregated with other misstatements, before consideration of any related
controls.
Standards on Auditing do not ordinarily refer to inherent risk separately, but rather to a combined
assessment of inherent risk and control risk as "Risks of Material Misstatement".
As per SA 315 "Identifying and Assessing the Risk of Material Misstatement Through
Understanding the Entity and its Environment", auditor is required to assess the risk of material
misstatement be performing the following procedure;
• Identify risks throughout the process of obtaining an understanding of the entity of and its
environment.
• Assess the identified risks, and evaluate whether they relate more pervasively to the financial
statements as a whole and potentially affect many assertions.
• Relate the identified risks to what can go wrong at the assertion level, and
• Consider the likelihood of misstatement.
As per SA 330 "The Auditor's Responses to Assessed Risks" while designing the further audit
procedures to be performed, the auditor shall consider the reasons for the assessment given to the
risk of material misstatement at the assertion level for the likelihood of material misstatement due
to the particular characteristics of the relevant class of transactions, account balance, or disclosure
(i.e., the inherent risk) and obtain more persuasive audit evidence the higher the auditor's
assessment of risk.
Q.6 Doing a statutory audit is full of risk. Narrate the factors which causes the risk.
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1. Inherent Risk: Inherent risk arises on account of nature of financial reporting & auditing. Entire
process of auditing is based on the assessment of judgments made by the management of the
entity a well as evaluation of internal controls.
2. Control Risk: Control Risk arises on account of Inherent limitattons of Internal control. Internal
control can provide only reasonable, but not absolute, assurance on account of several inherent
limitations such as potential for human error, possibility of circumstances of control through
collusion, etc.
3. Detection Risk: Detection risk arises on account of judgment on part of auditor, test nature of
audit and nature of audit evidences collected. The auditor's work involves exercise of judgement in
many areas like deciding the extent of audit procedures and assessing the reasonableness of the
judgments and estimates made by management in preparing the financial statements. The auditor
normally relies upon persuasive evidence rather than conclusive evidence. Even in circumstances
where conclusive evidence is available, the cost of obtaining such an evidence may far exceed the
benefits.
Q.7 Discuss the following: Weaknesses in the design of the internal control system and non-
compliance with identifled control procedures amongst other conditions or events which
increase the risk of fraud or error.
Or
Mention briefly the conditions or events, which increase the risk of fraud or error leading to
material misstatements in financial statements.
Q.8 "Risk of material misstatement at the assertion level for classes of transactions, account
balances and disclosures need to be considered": Explain stating the different categories of
assertions used by the auditor.
Ans:
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• SA 315 "Identifying and Assessing Risk of Material Misstatements through understanding the
Entity and its Environment" requires the auditor to identify and assess the risks of material
misstatement, whether due to fraud or error, at the financial statement and assertion levels.
• Risks of material misstatement at the assertion level for classes of transactions, account balances
and disclosures need to be considered because such consideration directly assists in determining
the nature, timing, and extent of further audit procedures at the assertion level necessary to obtain
sufficient appropriate audit evidence.
• Assertions used by auditor with respect to transactions occurred during the year are:
1. Occurrence - transactions that have been recorded have occurred during the year.
2. Completeness - transactions have been recorded completely.
3. Accuracy - transactions have been recorded accurately.
4. Cut-off - transactions have been recorded in correct accounting period.
5. Classification - transactions have been properly classified into capital and revenue.
• Assertions used by auditor with respect to account balances at the period end are:
1. Existence - assets and liabilities shown in the balance sheet exists.
2. Rights and obligations - rights of the entity have been shown as assets and the
obligations have been shown as liabilities.
3. Completeness - assets and liabilities have been recorded completely.
4. Valuation and allocation - assets and liabilities are included in the financial statements at
appropriate amounts and any allocation adjustments are appropriately recorded.
• Assertions used by auditor with respect to Presentation and Disclosure are:
1. Occurrence and Rights and obligations- disclosed transactions have occurred and belong
to the entity.
2. Completeness - disclosures in the financial statements are complete.
3. Classification and understandability - financial information is appropriately presented
and disclosures are clearly expressed.
4. Accuracy and Valuation - financial and other information are disclosed fairly and at
5. appropriate amounts.
Q.9 Write short note on: Assertion about balance at the end of the reporting period.
Or
Discuss the following: The assertions used by auditor to consider potential misstatements about
account balances at the period end.
Ans: Assertions used by auditor about account balances at the period end:
SA 315 "Identifying and Assessing Risk of Material Misstatements through understanding the Entity
and its Environment" requires the auditor to identify and assess the risks of material
misstatement, whether due to fraud or error, at the financial statement and assertion levels.
Risks of material misstatement at the assertion level for classes of transactions, account balances,
and disclosures need to be considered because such consideration directly assists in determining
the nature, timing, and extent of further audit procedures at the assertion level necessary to obtain
sufficient appropriate audit evidence.
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Assertions used by auditor with respect account balances at the period end are:
1. Existence - assets and liabilities shown in the balance sheet exists.
2. Rights and obligations - rights of the entity have been shown as assets and the obligations have
been shown as liabilities.
3. Completeness - assets and liabilities have been recorded completely.
4. Valuation and allocation - assets and liabilities are included in the financial statements at
appropriate amounts and any allocation adjustments are appropriately recorded.
Q.10 In the context SA 315, state the assertions used by auditor consider the different types of
potential mis-statements that may occur w.r.t. classes of transactions and events for period
under audit.
Q.11 Write short note on: Assertions used by auditor to consider potential misstatements about
Presentation and disclosure at the period end.
Ans. Assertions used by auditor to consider the potential misstatement about presentation and
disclosure:
Q.12 The auditor shall identify and assess the risk of material misstatement at both levels to
provide a basis for designing and performing further audit procedures. For the purpose of
Identifying and assessing the risks of material misstatement the auditor shall Identify risks, assess
the identified risks, relate the identified risks and consider the likelihood of misstatement.
Explain the above in detail.
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(c) Relate the identified risks to what can go wrong at the assertion level, taking account of
relevant controls that the auditor intends to test; and
(d) Consider the likelihood of misstatement, including the possibility of multiple misstatements,
and the whether the potential misstatement is of magnitude that could result in a material
misstatement.
Q.13 Discuss what is included In risk assessment procedures to obtain audit evidence about the
design and implementation of relevant controls.
Ans: Risk Assessment procedure:
• SA 315- “Identifying and Assessing Risk of Material Misstatements through understanding the
Entity and its Environment” defines the term Risk Assessment procedure as audit procedure
performed to obtain an understanding of the entity and its environment, including the entity's
internal control,to identify and assess the risks of material misstatement, whether due to fraud or
error, at the financial statement and assertion levels.
Risk Assessment Procure includes following:
(a) Inquiries of management, and of others within the entity: Much of the information is obtained
by the auditor's through inquiry from management and others. However, the auditor may also
obtain information, or a different perspective in identifying risks of material misstatement, through
inquiries of others within the entity and other employees with different levels of authority.
(b) Analytical procedures: Analytical procedures may help identify the existence of unusual
transactions or events, and amounts, ratios, and trends that might indicate matters that have audit
implications.
(c) Observation and inspection: Observation and inspection may support inquiries of management
and others, and may also provide information about the entity and its environment.
Q.14 The auditor may exercise his Judgment to identify which risks are significant risks. Explain
the above in the context of SA 315.
Or
As part of the risk assessment, the auditor shall determine whether any of the risks identified
are, in the auditor's judgment, a significant risk.
In exercising judgment as to which risks are significant risks, state the factors which shall be
considered by the auditor.
Explain the above in context of SA-315.
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Q.16 Explain the concept of Internal Control. Also state the objectives of Internal Control.
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(a) Control Environment: The control environment includes the governance and management
functions and the attitudes, awareness, and actions of those charged with governance and
management concerning the entity’s s internal control and its importance in the entity. The control
environment sets the tone of an organization, influencing the control consciousness of its people.
(b) Risk Assessment Process: The entity's risk assessment process forms the basis for how
management determines the risks to be managed. If that process is appropriate to the
circumstances, including the nature, size and complexity of the entity, it assists the auditor in
identifying risks of material misstatement. Whether the entity's risk assessment process is
appropriate to the circumstances a matter of judgment.
(c) Information System: The information system relevant to financial reporting objectives which
includes the accounting system, consists of the procedures and records designed and established
to:
✓ Initiate, record, process, and report entity transactions:
✓ Resolve incorrect processing of transactions;
✓ Process and account for system overrides or bypasses to controls;
✓ Transfer information from transaction processing systems to the general ledger.
✓ Capture information relevant to financial reporting for events and conditions other than
transactions; such as the depreciation and amortisation of assets; and
✓ Ensure information required to be disclosed by the applicable FRF is accumulated,
recorded, processed, summarized and appropriately reported in the F.S.
(d) Control Activities relevant to Audit: Control activities are the policies and procedures that help
ensure that management directives are carried out. Control activities, whether within IT or manual
systems, have various objectives and are applied at various objectives and are applied at various
organisational and functional levels.
(e) Monitoring of Controls: Monitoring of controls is a process to assess the effectiveness of
internal control performance over time. It involves assessing the effectiveness of controls on a
timely basis and taking necessary corrective actions.
Q.19 "The auditor shall obtain an understanding of the control environment” Explain stating
what is included in control environment.
Or
The auditor ofXYZ Ltd, engaged In FMCG (Fast Moving Consumable Goods) obtains an
understanding of the control environment. As part of obtaining this understanding, the auditor
evaluates whether:
(i) Management has created and maintained a culture of honesty and ethical behaviour; and
(ii) The strengths in the control environment elements collectively provide an appropriate
foundation for the other components of internal control.
Advise what is included in control environment. Also explain the elements of control
environment.
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Q.20 "The auditor shall obtain an understanding of the major activities that the entity uses to
monitor internal control over financial reporting" Explain.
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Q.22 What is check list? Give few examples of check list Instruction.
Q.23 Explain briefly technique of "Internal Control Questionnaire” to facilitate the accumulation
of information necessary for proper evaluation of internal control.
Or
Write short note on: Internal Control Questionnaire.
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Q.24 Write short note on: Use of Flow Charts in evaluation of internal Control.
Or
A Flow Chart is a graphic presentation of each part of the company's system of internal control.
Explain elaborating each and every aspect about flow chart.
Q.25 Why tests of controls are performed? Also explain what does they include.
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(a) Inspection of documents supporting transactions and other events to gain audit evidence the
internal controls have operated properly
(b) Inquiries about and observation of internal controls which leave no audit trail.
(c) Re performance of internal controls.
(d) Testing of internal controls operating on specific computerised applications.
Q.26 “A satistactory control environment may help reduce the risk of fraud but is not an
absolute deterrent for fraud", Explain.
Ans : Impact of satisfactory control environment:
• The existence of a satisfactory control environment work as a positive factor when the auditor
assesses the RMM.
• But at the same time, is to be kept in mind that satisfactory control environment is not an
absolute deterrent to fraud. Deficiencies in the control environment may undermine the
effectiveness of controls, in particular in relation to fraud.
• As per SA 330, the control environment also influences the nature, timing, and extent of the
auditor's further procedures.
• The control environment in itself does not prevent, or detect and correct, a material
misstatement. It may, however, influence the auditor's evaluation of the effectiveness of other
controls (for example, the monitoring of controls and the operation of specific control
activities) and thereby the auditor's assessment of the risks of material misstatement.
Q.27 While obtaining audit evidence about the effective operation of internal controls, the
auditor considers how they were applied, the consistency with which they were applied during
the period and by whom they were applied. The concept of effective operation recognises that
some deviations may have occurred. Analyse and Explain.
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• The evaluation of deviations may result in the auditor concluding that the assessed level of
control needs to be revised. In such cases, the auditor would modify the nature, timing and extent
of planned substantive procedures.
• Before the of conclusion of the audit, based on the results of substantive procedures and other
audit evidence obtained by the auditor, the auditor should consider whether the assessment of
control risk is confirmed
• It has been suggested that actual operation of the internal control should be tested by the
application of procedural tests and examination in depth. Procedural tests simply mean testing of
the compliance with the procedures laid down by the management in respect of initiation,
authorisation, recording and documentation of transaction at each stage through which it flows.
Q.28 The auditor can formulate his entire audit programme only after he has had a satisfactory
understanding of the internal control systems and their actual operation. Analyse and explain.
Q.29 What are the specific risks related to internal controls in an IT Environment?
Or
The auditor should understand and consider the risks that may arise from the use of information
technology (IT) Systems.
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for example:
(a) Reliance on systems or programs that are inaccurately processing data, processing inaccurate
data or both
(b) Unauthorised access to data that may result in destruction of data or improper changes to data,
including the recording of unauthorized or non-existent transactions, or inaccurate recording of
transactions. Particular risk may arise when multiple users access a common database.
(c) The possibility of IT personnel gaining access beyond those necessary to perform their assigned
duties thereby breaking down segregation of duties,
(d) Unauthorised changes to data in Master files.
(e) Unauthorised changes to systems or programs.
(f) Failure to make necessary changes to systems or programs.
(g) In appropriate manual intervention
(h) Potential loss of data or inability to access data as required.
Q.30 Write short note on: Provisions for applicability of internal audit as per Companies Act,
2013
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Q.31 JKT (P) Ltd, having ₹40 lacs paid up capital, ₹9.50 crores reserves and turnover of last three
consecutive financial years, immediately preceding the financial year under audit, being ₹49
crores, ₹145 crores and ₹260 crores, but does not have any internal audit system. In view of the
management, internal audit system is not mandatory, Comment.
Q.32 “MMJ Ltd., an unlisted public company, did not appoint any internal auditor for the
financial year ending on 31st March, 2019. The company had paid up capital of ₹20 crores and
reserves ₹25 crores. Its turnover for the preceding 3 years were ₹75 crores for the year ended
31st March 2018, ₹150 crores for March, 2017 and ₹190 crores for March, 2016. The company
had availed term loan from the bank of ₹130 crores. The outstanding balance of the term loan as
on 31st March, 2018 is ₹90 crores."
As an auditor of the company, how would you deal with the above?
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appoint an Internal Auditor and mandatorily conduct internal audit. Statutory Auditor need to state
the fact in his report as to non-compliance of Sec. 138
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Q1 What do you understand by the term “Fraud”? Provide its meaning as per
SA 240
Ans: The Standard on Auditing (SA) 240 “The Auditor’s Responsibilities Relating to
Fraud in an Audit of Financial Statements” defines the term ‘fraud’ as-
“an intentional act by one or more individuals among management, those
charged with governance, employees, or third parties, involving the use of
deception to obtain an unjust or illegal advantage”.
Misstatements in the financial statements can arise from either fraud or error.
Fraud is intentional and error is unintentional
Q2 Why do Management/ Employees commit fraud? What induces Management/
Employees to commit fraud?
Ans: Following instances induce the management / employees to commit fraud:
➢ Financial obligations/ Pressure.
➢ Management’s unrealistic goals.
➢ Dissatisfied Employees or Lack of motivation among employees.
➢ Name game (eg. management using power of authority by asking employees to do
something illegal).
➢ Opportunity to commit fraud.
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However, it can also involve management who are usually more able to disguise or
conceal misappropriations in ways that are difficult to detect. Misappropriation of assets
can be accomplished in a variety of ways including
Mode Example
Embezzling misappropriating collections on accounts receivable or
receipts diverting receipts in respect of written-off accounts to
personal bank accounts
Stealing stealing inventory for personal use or for sale, stealing scrap
physical for resale, colluding witha competitor by disclosing
assets or technological data in return for payment).
intellectual
property
Causing an payments to fictitious vendors, kickbacks paid by vendors to
entity to pay the entity’s purchasing agents in return for inflating prices,
for goods payments to fictitious employees).
and services
not received
Using an using the entity’s assets as collateral for a personal loan or a
entity’s loan to a related party
assets for
personal use
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Ans: Goods can be anything in the premises; it may be machinery. It may even be the daily
necessities of the office like stationery. The goods may be removed by subordinate
employees or even by persons quite higher up in the management
Fraud in the form of misappropriation of goods is still more difficult to detect; for this,
management has to rely on various measures.
✓ Apart from the various requirements of record keeping about the physical
quantities and their periodic checks, there must be rules and procedures for
allowing persons inside the area where goods are kept.
Ans: (1) Teeming and Lading: Amount received from a customer being misappropriated;
also to prevent its detection the money received from another customer
subsequently being credited to the account of the customer who has paid earlier.
Similarly, moneys received from the customer who has paid thereafter being
credited to the account of the second customer and such a practice is continued
so that no one account is outstanding for payment for any length of time, which
may lead the management to either send out a statement of account to himor
communicate with him.
(2) Adjusting unauthorised or fictitious rebates, allowances, discounts, etc.
to customer’ accounts and misappropriating amount paid by them.
(3) Writing off as debts in respect of such balances against which cash has
already been received but has been misappropriated.
(4) Not accounting for cash sales fully.
(5) Not accounting for miscellaneous receipts, e.g., sale of scrap, quarters allotted to
the employees, etc.
(6) Writing down asset values in entirety, selling them subsequently and
misappropriating the proceeds.
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OR
After the completion of statutory audit of ABC Ltd, a fraud was detected at the
office of the auditee. The management of the company alleged that there is a
failure on the part of the auditor to detect the fraud and that auditor would be
responsible for not detecting fraud in the company. Comment
Ans: As per SA 240, the primary responsibility for the prevention and detection of
fraud rests with both those charged with governance of the entity and
management
Owing to the inherent limitations of an audit, there is an unavoidable risk that some
material misstatements of the financial statements will not be detected, even
though the audit is properly planned and performed in accordance with
the SAs.
The question of whether the auditor has adhered to the basic principles governing
an audit is determined by the adequacy of the procedures undertaken in the
circumstances and the suitability of the auditor’s report based on the results of
these procedures.
✓ The liability of the auditor for failure to detect fraud exists only when such
failure is clearly due to not exercising reasonable care and skill.
✓ If the auditor can prove with the help of his papers (documentation) that he
has followed adequate procedures necessary for the proper conduct of an
audit, he cannot be held responsible for the same. If however, the
same cannot be proved, he would be held responsible
If the auditor can prove with the help of his papers (documentation) that he has
followed adequate procedures necessary for the proper conduct of an audit, he
cannot be held responsible for the same. If however, the same
cannot be proved, he would be held responsible.
Although the auditor may suspect or, in rare cases, identify the
occurrence of fraud, the auditor does not make legal determinations of
whether fraud has actually occurred
Q13 Explain how would you deal as an auditor, If, as a result of a misstatement
resulting from fraud or suspected fraud, the auditor encounters exceptional
circumstances that bring into question the auditor’s ability to continue performing
the audit.
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Ans: If, as a result of a misstatement resulting from fraud or suspected fraud, the auditor
encounters exceptional circumstances that bring into question the auditor’s ability to
continue performing the audit, the auditor shall:
(a) Determine the professional and legal responsibilities applicable in the
circumstances, including whether there is a requirement for the auditor to report
to the person or persons who made the audit appointment or, in some cases, to
regulatory authorities;
(b) Consider whether it is appropriate to withdraw from the engagement, where
withdrawal is possible under applicable law or regulation; and
(c) If the auditor withdraws:
➢ Discuss with the appropriate level of management and those charged with
governance the auditor’s withdrawal from the engagement and the
reasons for the withdrawal; and
➢ Determine whether there is a professional or legal requirement to report
to the person or persons who made the audit appointment or, in some
cases, to regulatory authorities, the auditor’s withdrawal from the
engagement and the reasons for the withdrawal
Q14 Explain the manner of reporting fraud under Companies Act 2013
Ans: Section 143(12) of Companies Act, 2013 read with Rule 13 of CAAR,
2014
If an auditor of a company in the course of the performance of his duties has
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✓ the auditor shall report the matter to the Board or the Audit Committee, as
the case may be, immediately but not later than 2 days of his knowledge
of thefraud, seeking their reply or observations within 45 dayson receipt of
such reply or observations, the auditor shall forward his report and the
reply or observations of the Board or the Audit Committee along with his
comments (on such reply or observations of the Board or the Audit
Committee) to the Central Government within 15 days from the date of
receipt of such reply or observations
✓ in case the auditor fails to get any reply or observations from the Board or
theAudit Committee within the stipulated period of 45 days, he shall
forward his report to the Central Government along with a note containing
the details of his report that was earlier forwarded to the Board or the
Audit Committee forwhich he has not received any reply or observationsthe
report shall be sent to the Secretary, Ministry of Corporate Affairs in a
sealed cover by Registered Post with Acknowledgement Due or by
Speed Post followed by an e-mail in confirmation of the same the report
shall be on the letter-head of the auditor containing postal address,e-mail
address and contact telephone number or mobile number and be signed
by the auditor with his seal and shall indicate his Membership Number.
→In case of a fraud involving lesser than the amount specified [i.e. less than `
1 crore],
the auditor shall report the matter to Audit Committeeconstituted under section
177 or to the Board immediately but not later than 2 days of his knowledge of the
fraud and he shall report the matter specifying the following:
(a) Nature of Fraud with description;
(b) Approximate amount involved; and
(c) Parties involved.
→Company shall disclose the details about such frauds in the Board’s report
This Duty is also applicable to Cost auditor and Secretarial auditor of the
Company
Ans: Fraud Risk Factors may be defined as events or conditions that indicate an
incentive or pressure to commit fraud or provide an opportunity to commit
fraud.
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For each of these types of fraud, the risk factors are further classified based
on the three conditions generally present when material misstatements due to
fraud occur:
(a) incentives/pressures,
(b) opportunities, and
(c) attitudes/rationalizations
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Q.1 There is a growing realisation that the traditional approach to audit is economically wasteful
because all efforts are directed to check all transactions without exception. Explain.
Q.2 The extent of the checking to be undertaken is primarily a matter of judgment of the auditor.
It is in the interest of the auditor that if he decides to form his opinion on the basis of a part
checking, he should adopt standards and techniques which are widely followed. Explain.
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Q.3 What is the meaning and purposes of sampling? Explain in the light of SA 520 "Audit
Sampling?
Ans: Meaning and Purpose of Sampling:
As per SA 530 "Audit Sampling" Application of audit procedures to less than 100% of items within a
population of audit relevance such that all sampling units have a chance of selection in order to
provide the auditor with a reasonable basis on which to draw conclusions about the entire
population is known as audit sampling,
Sampling is of two types: Statistical and Non-Statistical. Statistical sampling involves Random
selection of the sample items and use of probability theory to evaluate sample results, including
measurement of sampling risk.
Purpose of sampling:
• As per SA 200 "Overall Objectives of Independent Auditor and conduct of audit in accordance
with SA the purpose of an audit is to enhance the degree of confidence of intended users in the
financial statements. This is achieved by the expression of an opinion by the auditor on whether the
financial statements are prepared, in all material respects, in accordance with an application
financial reporting framework.
• In conducting an audit of financial statements, the overall objective of the auditor is to obtain
reasonable assurance about whether the financial statements as a whole are free from material
misstatement, whether due to fraud or error, thereby enabling the auditor to express an opinion on
whether the financial statements are prepared, in all material respects, in accordance with an
applicable financial reporting framework.
• A complete checking of the transactions is necessarily time consuming and costly and even after
complete checking is done, one may not be sure that no error or fraud exists in the accounts.
• It has been found that necessary audit satisfaction can be obtained by checking a part only
because the part, if suitably selected, is supposed to possess the characteristics of the while
population.
• So, Audit sampling helps the auditor in obtaining reasonable assurance on the basis of
examination of properly selected financial items.
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ii. The use of probability theory to evaluate sample results, including measurement of
sampling risk.
This method is more scientific as it involves use of laws of probability. This method has reasonably
wide application where a population consists of a large number of similar items
Non-Statistical Sampling:
(i) A sampling approach that does not have characteristics of random selection and use of
probability theory is considered as non-statistical sampling.
(ii) In this method, the sample size and its composition are determined on the basis of personal
experience and knowledge of the auditor.
(iii) This method because of its simplicity in operation was in common application for many years.
Whatever may be the approach non-statistical or statistical sampling, the sample must be
representative. It implies that sample must be closely similar to the whole population although
not necessarily exactly the same. The sample must be large enough to provide statistically
meaningful results.
Q.6 "The auditor is faced with sampling risk in both tests of control and substantive procedures".
Comment on this statement with reference to SA 530 on Audit Sampling.
Or
While planning the audit of S Ltd., you want to apply sampling techniques. What are the risk
factors you should keep in mind?
Or
"Sampling risk can lead to erroneous conclusion" Justify.
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Q.7 Discuss the following: As per SA 530, meaning of audit sampling, sample design, sample size
and selection of items for testing.
Or
Discuss the following: With reference to SA 530, meaning of audit sampling and requirements
relating to sample design, sample size and selection of items for testing.
Ans : Meaning of Audit Sampling, Sample Design, Sample Size and Selection of items for testing.
Audit Sampling: Application of audit procedures to less than 100% of items within a population of
audit relevance such that all sampling units have a chance of selection in order to provide the
auditor with a reasonable basis on which to draw conclusions about the entire population is known
as audit sampling.
Requirement of SA 530 as to Sample Design, Size and Selection of Items for Testing
i. When designing an audit sample, the auditor shall consider the purpose of the audit
procedure and the characteristics of the population from which the sample will be drawn.
ii. The auditor shall determine a sample size sufficient to reduce sampling risk to an
acceptably low level.
iii. The auditor shall select items for the sample in such a way that each sampling unit in the
population has a chance of selection.
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population is divided is determined by the auditor on the basis of his judgment e.g. entire expense
vouchers may be divided into:
➢ Vouchers above ₹1,00,000
➢ Vouchers between ₹25,000 and ₹1,00,000
➢ Vouchers below ₹25,000
The auditor can then decide to check all vouchers above ₹1,00,000, 50% between 25,000 and
₹1,00,000 and 25% of those below ₹25,000.
The reasoning behind the stratified sampling is that for a highly diversified population, weights
should be allocated to reflect these differences. This is achieved by selecting different proportions
from each strata.
Q.9. XYZ Ltd. is engaged in trading of electronic goods and having, huge accounts receivables. For
analysing the whole accounts receivables, auditor wanted to use sampling technique. In
considering the characteristics of the population from which the sample will be drawn, the
auditor determines that stratification or value-weighted selection technique is appropriate. SA
530 provides guidance to the auditor on the use of stratification and value-weighted sampling
techniques. Advise the auditor in accordance with SA 530.
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• One benefit of this approach to defining the sampling unit is that audit effort is directed to the
larger value items because they have a greater chance of selection and can result in smaller sample
sizes.
This approach may be used in conjunction with the systematic method of sample selection and is
most efficient when selecting items using random selection.
Q.10 Discuss the following: The level of sampling risk that auditor is willing to accept affects the
sample size required. The lower the risk the auditor is willing to accept, the greater the sample
size will need to be. Explain stating the examples of factors that the auditor may consider when
determining the sample size for tests of controls.
The sample size can be determined by the application of a statistically-based formula or through
the exercise professional judgment. When circumstances are similar, the effect on sample size of
factors will be similar regardless of whether a statistical or non- statistical approach is chosen.
Explain stating the examples of factors that the auditor may consider when determining the
sample size for tests of controls.
Ans: Factors to be considered while determining sample size for tests of controls:
The level of sampling risk that the auditor is willing to accept affects the sample size required. The
lower the risk the auditor is willing to accept, the greater the sample size will need to be.
The sample size can be determined by the application of a statistically based formula or through
the exercise of professional judgement. When circumstances are similar, the effect on sample size
of factors will be similar regardless of whether a statistical or a non-statistical approach is chosen.
Examples of Factors Influencing Sample Size for Tests of Controls:
(i) An increase in the extent to which the auditor's risk assessment takes into account relevant
controls will increase the sample size,
(ii) An increase in the tolerable rate of deviation, will decrease the sample size.
(iii) An increase in the expected rate of deviation of the population to be tested, will increase the
sample size.
(iv) An increase in the auditor's desired level of assurance that the tolerable rate of deviation is not
exceeded by the actual rate of deviation in the population will increase the sample size.
Q.11. Discuss the following: Factors that should be considered for deciding upon the extent of
checking a sampling plan.
Or
Discuss the factors that should he considered for deciding upon the extent of checking on a
sampling
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i. An increase in the extent to which the auditor's risk assessment takes into account relevant
controls will increase the sample size.
ii. An increase in the tolerable rate of deviation, will decrease the sample size.
iii. An increase in the expected rate of deviation of the population to be tested, will increase
actual sample size
iv. An increase in the auditor's desired level of assurance that the tolerable rate of deviation is
not exceeded by the actual rate of deviation in the population will increase the sample size.
(B) Factors influencing extent of checking for Tests of Details:
i. An increase in the auditor's assessment of the risk of material misstatement will increase
the extent of checking.
ii. An increase in the use of other substantive procedures directed at the same assertion will
decrease the extent of checking.
iii. An increase in the auditor's desired level of assurance that tolerable misstatement is not
exceeded by actual misstatement in the population will increase the extent of checking.
iv. An increase in tolerable misstatement will decrease the extent of checking
v. An increase in the amount of misstatement the auditor expects to find in the population
will increase the extent of checking.
vi. Stratification of the population when appropriate will decrease the extent of checking.
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Q.1 Routine checks cannot be depended upon to disclose all the mistakes or manipulation may
exist in accounts, certain other procedures also have to be applied like trend and ratio analysis.
Analyse and Explain stating clearly the meaning of analytical procedures.
✓ Routine checks cannot be depended upon to disclose all the mistakes or manipulation
that may exist in accounts, due to which, certain other procedures also have to be applied
like trend and ratio analysis in addition to reasonable tests. These collectively are known
as overall tests.
✓ With the passage of time analysis procedures have acquired lot of significance as
substantive audit procedure.
✓ SA-520 on Analytical Procedures discusses the application of analytical procedures during
a audit. Meaning of Analytical Procedures; Refer Answer of Q. No. 2
Or
Explain what do you mean by Analytical procedures. How such procedures are helpful in auditing?
Or
Or
Analytical procedures use comparisons and relationships to assess whether account balances or
other data appear reasonable. Explain stating the purpose of analytical procedures.
SA 520 "Analytical Procedures" deals with the auditor's use of analytical procedures as substantive
procedures.
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(a) AP include the consideration of comparisons of the entity's financial information with
1. To assist the auditor in planning the nature, timing and extent of audit procedures.
2. As a substantive procedure when their use can be more effective or efficient than tests of
details in reducing detection risk for specific F.S. assertions; and
3. As an overall review of the FS. in the final review, stage of the audit.
Q.2 Use of substantive Analytical Procedures requires consideration of many factors. Explain those
factors.
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6. Sources: Some classes of transactions tend to more predictable because they consist of
numerous, similar transactions. Whereas the transactions recorded by non-routine and
estimation are often subject to management judgment and therefore more difficult to
predict.
7. Inherent Risk or “What Can Go Wrong” – When we are designing audit procedures to
address an inherent risk or “what can go wrong”, we consider the nature of the risk of
material misstatement in order to determine if a substantive analytical procedure can be
used to obtain audit evidence. When inherent risk is higher, we may design tests of details
to address the higher inherent risk. When significant risks have been identified, audit
evidence obtained solely from substantive analytical procedures is unlikely to be sufficient
Or
Ratio analysis is useful for analysing asset and liability accounts as well as revenue and
expenditure accounts. An individual balance sheet account is difficult to predict on its own, but its
relationship to another account is often more predictable (e.g., the trade receivables balance
related to sales)
Or
Or
The design of a substantive analytical procedure is limited only by the availability of reliable data
and the experience and creativity of the audit team. Explain clearly stating the techniques
available as substantive analytical procedures.
Technique
Trend analysis Trend analysis is most commonly Salary payment of last years vs current
used technique which involves year. An unusual increase in such
comparison of current data with the expense amount may indicate that
prior period balance or with a trend fraudulent payments are being made to
in two or more prior period balances fake employees.
Ratio analysis Ratio analysis involves analysing The statutory auditor can review the
revenue and capital items forming Gross profit ratio of the company for
part of balance sheet and profit and the year under audit. The auditor can
loss account. Ratios can also be further compare such GP ratio with the
compared over period of time or to GP ratio of the company in the earlier
the ratios of other entities within the years or the GP ratio of the other
industry companies in the same industry for the
year under audit
Reasonableness Unlike trend analysis, this analytical ✓ Interest expense against interest
tests procedure does not rely on events of bearing obligations
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Or
Ans:
Develop an expectation
A. Determine the suitability of particular substantive analytical procedures for given assertions,
taking account of the assessed risks of material misstatement and tests of details, if any,
for these assertions;
B. Evaluate the reliability of data from which the auditor’s expectation of recorded amounts
or ratios is developed, taking account of source, comparability, and nature and relevance of
information available, andcontrols over preparation;
C. Develop an expectation of recorded amounts or ratios and evaluate whether the expectation
is sufficiently precise to identify a misstatement that, individually or when aggregated with
other misstatements, may cause thefinancial statements to be materially misstated; and
D. Determine the amount of any difference of recorded amounts from expected values that is
acceptable without further investigation.
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Q.5 Substantive analytical procedures are generally more applicable to large volumes of
transactions that trends to be predictable over time. Explain.
Q6. What are the factors that determine the extent of reliance that the auditor places on results
of analytical procedures? Explain with reference to SA-520 on "Analytical procedures".
Or
What are the considerations to be kept in mind while performing analytical procedures on data
prepared by the client?
Or
The reliability of data is influenced by its source and nature and is dependent on the
circumstances under which it is obtained. Accordingly, what are the relevant criteria which
determine whether the data is reliable for the purposes of designing substantive analytical
procedures?
Or
CA A, auditor of ABC Ltd. wants to design substantive analytical procedure and for that he wants
to check whether the data is reliable or not. Mention the relevant points which he has to consider
whether data is reliable for purpose of designing the substantive analytical procedures.
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The application of analytical procedures is based on the expectation that relationships among data
exist and continue in the absence of known conditions to the contrary. The presence of these
relationships provides audit evidence as to the completeness, accuracy and validity of the data
produced by the accounting system.
Factors affecting the Reliability of Data on which analytical procedures are to be performed:
As per SA 520 “Analytical Procedures” facts that may affect the reliability of data are:
1. Source of the information available. For example, information may be more reliable when it
obtained from independent sources outside the entity.
2. Comparability of the information available: For example, broad industry data may to be
supplemented to be comparable to that of an entity that produces and sells specific
products
3. Nature and relevance of the information available: For example, whether budget have
been established as results to be expected rather than as goals to be achieved; and
4. Control over the preparation of the information that are designed to ensure its
completeness accuracy and validity. For example, controls over the preparation, review and
maintenance of budgets.
Q7. How does the auditor evaluate whether as a result of applying the analytical procedure,
expectation can be developed sufficiently precisely to identify a material mis-statement
misstatement
Ans:
Matters relevant to the auditor’s evaluation of whether the expectation can be developed
sufficiently precisely to identify a misstatement that, when aggregated with other misstatements,
may cause the financial statements to be materially misstated, include:
(i) The accuracy with which the expected results of substantive analytical procedures can
be predicted
For example, the auditor may expect greater consistency in comparing gross profit
margins from one period to another than in comparing discretionary expenses, such as
research or advertising.
(ii) The degree to which information can be disaggregated.
For example, substantive analytical procedures may be more effective when applied to
financial information on individual sections of an operation or to financial statements of
components of a diversified entity, than when applied to the financial statements of the
entity as a whole.
(iii) The availability of the information, both financial and non-financial.
For example, the auditor may consider whether financial information, such as budgets or
forecasts, and non-financial information, such as the number of units produced or sold,
is available to design substantive analytical procedures. If the information is available,
the auditor may also consider the reliability of the information.
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Q.10 The relationships between individual financial statements items traditionally considered in
the audit of business entities may not always be relevant in the audit of governments or other
non-business public sector entities. Analyse and Explain.
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Sec. Particulars
No
139 Appointment of Auditor etc
140 Removal and Resignation etc
141 Eligibility, Qualification and Disqualification
142 Remuneration
143 Rights and Duties of Auditor
144 Auditor not to render certain services
145 Duty to Sign Audit report
146 Right and Duty to attend General Meeting
147 Punishments
148 Cost Audit
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Section Particulars
Reference
Sec 141(1) A person shall be eligible for appointment as an auditor of a companyonly if
he is a chartered accountant:
Provided that a firm whereof majority of partners practising in India are
qualified for appointment as aforesaid may be appointed by its firmname
to be auditor of a company.
Sec 141(2) Where a firm including a limited liability partnership is appointed as an auditor
of a company, only the partners who are chartered accountants shall be
authorised to act and sign on behalf of the firm
Sec a body corporate other than a limited liability partnership registered under the
141(3)(a) Limited Liability Partnership Act, 2008
Note:
1. Although LLP is a separate legal entity but as discussed in Sec 141(1) and (2), it will be
considered as a firm eligible for appointment.
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1. officer” includes any director, manager or key managerial personnel or any person in
accordance with whose directions or instructions the Board of Directors or any one or more
of the directors is or are accustomed to act
2. If an individual is disqualified then his partners are also disqualified from auditing
such a company
There are various situations which are not covered in the disqualifications prescribed above.
However, requirement of independence is pre-requisite in audit and hence even though a person
may not be disqualified under companies act, 2013 however he needs to evaluate his
independence before accepting theassignment because it is not only important to be independent
but it is also important to appear as independent as per the guidance note given by The ICAI on
Independence.
Sec Sec 141(3) (c) a person who is a partner, or who is in the employment, of an officer or
employee of the company
Note:
This sub-section disqualifies the below mentioned persons from being appointedas auditor of a
company:
Note:
1. The value of shares of ` 1,00,000 that can be hold by relative is the face value not the
market value
2. The limit of ` 1,00,000 would be applicable where the securities are held by therelative of
an auditor and not where the securities are held by an auditor himself or his partner. In
case of an auditor or his partner, securities of even small valueshall be a disqualification
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3. Grace period of 60 days for corrective action shall apply only in respect of securities
held by relatives. This would not apply to auditor or his partner
5. It may also be noted that the condition of rupees one lakh shall, whereverrelevant, be also
applicable in the case of a company not having share capital or other securities
Note:
As per the Guidance note issued by the ICAI, audit fees received on progressive basis i.e. after
beginning the engagement is not treated as an advance of the fees and hence there is no
indebtedness involved.
Sec has given a guarantee or provided any security in connection with the in
141(3)(d)(iii) debtedness of any third person to the company, or its subsidiary, or its holding
or associate company or a subsidiary of such holding company, for such
amount as may be prescribed; (rupees one lakh)
Note:
Business Relationship means any relationship apart from statutory audit entered for commercial
purpose EXCEPT FOR-
- Commercial transactions which are in the nature of professional services permitted to be
rendered by an auditor or audit firm under the Act and the Chartered Accountants Act, 1949
(unless such services are prohibited u/s 144 of the act).
- commercial transactions which are in the ordinary course of business of the company at arm’s
length price - like sale of products or services to the auditor, as customer, in the ordinary course
of business, by companies engaged in thebusiness of telecommunications, airlines, hospitals,
hotels and such other similar businesses.
Note:
1. Person or Partner who is in whole time employment elsewhere cannot conduct audit of
companies
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5. The above exemption is not available if the company has not filed its annual statements
as required by Section 137 and Section 92 of Companies Act,2013.
Sec a person who has been convicted by a court of an offence involving fraud
141(3)(h) and a period of ten years has not elapsed from the date of such
conviction
Note:
If person or partner is convicted by court for offence involving fraud then we need
to check the eligibility of the membership under CA Act, 1949
Sec a person who, directly or indirectly, renders any service referred to in section
141(3)(i) 144 to the company or its holding company or its subsidiary company.
Explanation.—For the purposes of this clause, the term "directly or indirectly"
shall have the meaning assigned to it in the
Explanation to section 144.’.
Note:
Sec 144- auditor not to render these services to the company, its holding andsubsidiary
company.
Note:
2. Relative of person or partner is also not allowed to render the above services
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3. Person or Partner shall not provide such services through any other entity,whatsoever, in
which such person or partner has significant influence or control-
e.g. Firms working under common brand name, firms having common partners
etc
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(1) Subject to the provisions of this Chapter, every company shall, at the first annual general
meeting, appoint an individual or a firm as an auditor who shall hold office from the
conclusion of that meeting till the conclusion of its sixth
annual general meeting and thereafter till the conclusion of every sixth meeting and the
manner and procedure of selection of auditors by the members of the company at such
meeting shall be such as may be prescribed:
Provided further that before such appointment is made, the written consent of the
auditor to such appointment, and a certificate from him or it that the appointment, if
made, shall be in accordance with the conditions as may be prescribed, shall be
obtained from the auditor:
Provided also that the certificate shall also indicate whether the auditor satisfies the
criteria provided in section 141:
(a) the individual or the firm, as the case may be, is eligible for appointment andis not
disqualified for appointment under the Act, the Chartered Accountants Act, 1949 and
the rules or regulations made thereunder;
(b) the proposed appointment is as per the term provided under the Act;
(c) the proposed appointment is within the limits laid down by or under the authority
of the Act;
(d) the list of proceedings against the auditor or audit firm or any partner of the audit
firm pending with respect to professional matters of conduct, as disclosed in the
certificate, is true and correct.)
Provided also that the company shall inform the auditor concerned of his or its
appointment, and also file a notice (FORM ADT-1) of such appointment with the
Registrar within fifteen days of the meeting in which the auditor is appointed.
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reappointment.
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(6) Notwithstanding anything contained in sub-section (1), the first auditor of a company,
other than a Government company, shall be appointed by the Board of Directors within
thirty days from the date of registration of the company andin the case of failure of
the Board to appoint such auditor, it shall inform the members of the company, who
shall within ninety days at an extraordinary general meeting appoint such auditor and
such auditor shall hold office till the conclusion of the first annual general meeting.
(11) Where a company is required to constitute an Audit Committee under section 177, all
appointments, including the filling of a casual vacancy of an auditor under this section
shall be made after taking into account the recommendationsof such committee.
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Recommendation process
Provided that while considering the appointment, the Audit Committee or the Board, as
the case may be, shall have regard to any order or pending proceeding relating to
professional matters of conduct against theproposed auditor before the Institute of
Chartered Accountants of India or any competent authority or any Court.
(2) The Audit Committee or the Board, as the case may be, may call for such other information
from the proposed auditor as it may deem fit.
(3) Subject to the provisions of sub-rule (1), where a company is required to constitutethe Audit
Committee, the committee shall recommend the name of an individualor a firm as auditor
to the Board for consideration and in other cases, the Board shall consider and recommend
an individual or a firm as auditor to the members in the annual general meeting for
appointment.
4) If the Board agrees with the recommendation of the Audit Committee, it shall further
recommend the appointment of an individual or a firm as auditor to the members in the
annual general meeting. (5) If the Board disagrees with the recommendation of the Audit
Committee, it shall refer back the recommendationto the committee for reconsideration
citing reasons for such disagreement.
(6) If the Audit Committee, after considering the reasons given by the Board, decides not to
reconsider its original recommendation, the Board shall record reasons for its
disagreement with the committee and send its own recommendation for consideration of
the members in the annual general meeting; and if the Board agrees with the
recommendations of the Audit Committee, it shall place the matter for consideration by
members in the annual general meeting.
(7) The auditor appointed in the annual general meeting shall hold office from the conclusion
of that meeting till the conclusion of the sixth annual general meeting, with the meeting
wherein such appointment has been made being counted as thefirst meeting
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(ii) What if proposed auditor is not appointed at the AGM? Can retiring auditorbe
reappointed?- Sec 139(9) and (10)
(9) Subject to the provisions of sub-section (1) and the rules made thereunder, a
retiring auditor may be re-appointed at an annual general meeting, if—
(a) he is not disqualified for re-appointment;
(b) he has not given the company a notice in writing of his unwillingness to be re-
appointed; and
(c) a special resolution has not been passed at that meeting appointing some
other auditor or providing expressly that he shall not be re-appointed.
(10) Where at any annual general meeting, no auditor is appointed or re-appointed,
the existing auditor shall continue to be the auditor of the company.
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(2) No listed company or a company belonging to such class or classes of companies as may
be prescribed, shall appoint or re-appoint—
(a) an individual as auditor for more than one term of five consecutive years; and
(b) an audit firm as auditor for more than two terms of five consecutive years:
Provided that—
(i) an individual auditor who has completed his term under clause (a) shall not
be eligible for re-appointment as auditor in the same company for five years
from the completion of his term;
(ii) an audit firm which has completed its term under clause (b), shall not be
eligible for re-appointment as auditor in the same company for five years
from the completion of such term:
Provided further that as on the date of appointment no audit firm having a common
partner or partners to the other audit firm, whose tenure has expired in a company
immediately preceding the financial year, shall be appointed as auditor of the same
company for a period of five years:
Provided also that every company, existing on or before the commencement of this Act
which is required to comply with provisions of this sub-section, shall comply with the
requirements of this sub-section within three years from the date of commencement
of this Act:
Provided also that, nothing contained in this sub-section shall prejudice theright of
the company to remove an auditor or the right of the auditor to resign from such office
of the company
(3) Subject to the provisions of this Act, members of a company may resolve toprovide
that:
(a) in the audit firm appointed by it, the auditing partner and his team shall be
rotated at such intervals as may be resolved by members; or
(4) The Central Government may, by rules, prescribe the manner in which the companies
shall rotate their auditors in pursuance of sub-section (2).
Explanation.—For the purposes of this Chapter, the word “firm” shall include a limited
liability partnership incorporated under the Limited Liability Partnership Act, 2008.
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(a) all unlisted public companies having paid up share capital of rupees ten crore or more;
(b) all private limited companies having paid up share capital of rupees fifty crore or more;
(c) all companies having paid up share capital of below threshold limit mentioned in (a) and
(b) above, but having public borrowings from financial institutions, banks or public deposits
of rupees fifty crores or more
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(i) in the case of a company other than a company whose accounts are subject to audit by an
auditor appointed by the Comptroller and Auditor-General of India, be filled by the Board of
Directors within thirty days, but if such casual vacancy is as a result of the resignation of an
auditor, such appointment shall also be approved by the company at a general meetingconvened
within three months of the recommendation of the Board and he shall hold the office till the
conclusion of the next annual general meeting;
(ii) in the case of a company whose accounts are subject to audit by an auditor appointed by the
Comptroller and Auditor-General of India, be filled by the Comptroller and Auditor-General of
India within thirty days.
Provided that in case the Comptroller and Auditor-General of India does not fill the vacancy within
Auditor appointed under Casual Vacancy shall continue up to conclusion of Next AGM.
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Sec The remuneration of the auditor of a company shall be fixed in its general
142(1) meeting or in such manner as may be determined therein:
Provided that the Board may fix remuneration of the first auditor
appointed by it.
Sec The remuneration under sub-section (1) shall, in addition to the feepayable to
142(2) an
auditor, include the expenses, if any, incurred by the auditor in connection with
the audit of the company and any facility extended to himbut does not include
any remuneration paid to him for any other service
rendered by him at the request of the company
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Rule 7 of CAAR, 2014. Removal of the auditor before expiry of his term. —
(1) The application to the Central Government for removal of auditor shall be made in Form
ADT-2 and shall be accompanied with fees as provided for this purpose under the
Companies (Registration Offices and Fees) Rules, 2014.
(2) The application shall be made to the Central Government within thirty days of the
resolution passed by the Board.
(3) The company shall hold the general meeting within sixty days of receipt of
approval of the Central Government for passing the special resolution.
Sec Appointment of an auditor other than retiring auditor
140(4) (i) Special notice shall be required for a resolution at an annual general meeting
appointing as auditor a person other than a retiring auditor, or providing
expressly that a retiring auditor shall not be re-appointed, except where the
retiring auditor has completed a consecutive tenure of five years or, as the
case may be, ten years, as provided under sub-section (2) of section 139.
(ii) On receipt of notice of such a resolution, the company shall forthwith send a
copy thereof to the retiring auditor.
(iii) Where notice is given of such a resolution and the retiring auditor makes
with respect thereto representation in writing to the company (not exceeding
a reasonable length) and requests its notification to members of the
company, the company shall, unless the representation is received by it too
late for it to do so,—
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representation shall be read out at the meeting.
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to company
Company gives
copy to Auditor
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Rights of Auditor
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Sec 146 Right to attend General Meetings
The auditors of a company are entitled to attend any general meeting of the
company (the right is not restricted to those at which the accounts audited by
them are to be discussed); also to receive all the notices and other
communications relating to the general meetings, which members are entitled to
receive and to be heard at any general meeting in any part of the business of the
meeting which concerns them as auditors.
According to the section 146:“all notices of, and other communications relating
to, any general meeting shall be forwarded to the auditor of the company, and
the auditor shall, unless otherwise exempted by the company, attend either by
himself or through his authorised representative, who shall also be qualified to
be an auditor, any general meeting and shall have right to be heard at such
meeting on any part of
the business which concerns him as the auditor.”
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Duties of Auditor
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Clause b whether, in his opinion, proper books of account as required by law have been
kept by the company so far as appears from his examination ofthose books
and proper returns adequate for the purposes of his audit
have been received from branches not visited by him
Clause c whether the report on the accounts of any branch office of the company audited
under subsection (8) by a person other than the company’s auditors has been
sent to him under the proviso to that sub-section and
the manner in which he has dealt with it in preparing his report
Clause d whether the company’s balance sheet and profit and loss account dealt
with in the report are in agreement with the books of account and returns
Clause e whether, in his opinion, the financial statements comply with the
accounting standards
Clause i whether the company has adequate internal financial controls with reference to
financial statements" in place and the operating effectiveness of such controls
(Note: Clause (i) of Sub-Section (3) of Section143 shall not apply to a private
company:-(i) which is a one person company or a small company; or (ii) which has
turnover less than rupees fifty crores as per latest audited financial statement and
which has aggregate borrowings from banks or financial institutions or anybody
corporate at any point of time during the
financial year less than rupees twenty five crore)
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148(1) Cost Records Notwithstanding anything contained in this Chapter, the Central
Government
may, by order, in respect of such class of companiesengaged in
the production of such
goods or providing such services as may be prescribed, direct
that particulars relating to the utilisation of materialor labour
or to other items of cost as may be prescribed shall also be
included in the books of account kept by that class of companies.
Provided that the Central Government shall, beforeissuing such
order in respect of
any class of companies regulated under a special Act, consult the
regulatory body constituted or established under such special
Act.
Sec Cost Audit If the Central Government is of the opinion, that it is necessary
148(2) to do so, it may, by
order, direct that the audit of cost records of class ofcompanies,
which are covered under sub-section (1) and which have a net
worth of such amount as may be prescribed or a turnover of such
amount as may be prescribed, shall be conducted in the manner
specified in the order.
Sec Appointment of The audit under sub-section (2) shall be conducted by a Cost
148(3) Cost Auditor Accountant in practice who shall be appointed by the Board on
such remuneration as may be determined by the members in
such manner as may be prescribed:
Provided that no person appointed under section 139 asan
auditor of the company shall be appointed forconducting the
audit of cost records:
Provided further that the auditor conducting the cost audit shall
comply with the cost auditing standards.
Explanation.—For the purposes of this sub-section, the
expression “cost auditing Standards” mean such standards as
are issued by the Institute of Cost and Works Accountants of
India, constituted under the Cost and Works Accountants Act,
1959, with the approval of the
Central Government.
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Sec Cost audit An audit conducted under this section shall be in addition
148(4) clarification to the audit conducted under section 143.
Sec Qualifications The qualifications, disqualifications, rights, duties and
148(5) and obligations applicable to auditors under this Chapter shall, so far
disqualifications as may be applicable, apply to a cost auditor appointed under
of cost auditor this section and it shall be the duty of the company to give all
assistance and facilities to the cost auditor appointed under this
section for auditing the cost records of the company:
Provided that the report on the audit of cost records shall
be submitted by the cost accountant in practice to the Board of
Directors of the company.
Sec Cost audit A company shall within thirty days from the date of receipt of a
148(6) report copy of the cost audit report prepared in pursuance of a
direction under sub-section (2) furnish the Central Government
with such report along with full information and explanation on
every reservation or qualification
contained therein.
Sec Right of Central If, after considering the cost audit report referred to under this
148(7) Government section and the information and explanation furnished by the
company under sub-section (6), the Central Government is of
the opinion that any further information or explanation is
necessary, it may call for such further information and
explanation and the company shall furnishthe same within such
time as may be specified by that
Government.
Sec Punishment If any default is made in complying with the provisions of this
148(8) section,—
(a) the company and every officer of the company who is in
default shall be punishable in the manner as provided in sub-
section (1) of section 147;
(b) the cost auditor of the company who is in default shall be
punishable in the manner as provided in sub-sections
(2) to (4) of section 147.
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The requirement for cost audit under these rules shall not be applicable to a company
(i) Whose revenue from exports, in foreign exchange, exceeds 75% of its total
revenue; or
(ii) Which is operating from a special economic zone.
(iii) Which is engaged in generation of electricity for captive consumption through
Captive Generating Plant.
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Q.1 The functioning of banking industry in India is regulated by the Reserve Bank of India which
acts as the Central Bank of our country. Explain.
Q.2 Write short note on: Principal Enactments governing Bank Audit.
Ans. : Principal Enactments governing Bank Audit:
(a) Banking Regulation Act, 1949;
(b) Reserve Bank of India Act, 1934;
(c) Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970;
(d) State Bank of India Act, 1955;
(e) State Bank of India (Subsidiary Banks) Act, 1959;
(f) Regional Rural Banks Act, 1976;
(g) Companies Act, 2013
(h) Cooperative Societies Act, 1912 or the relevant State Cooperative Societies Acts;
(i) Information Technology Act, 2000,
(j) Prevention of Money Laundering Act. 2002;
(k) Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act,
2002.
(l) Credit Information Companies Regulation Act, 2005; and
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Q.3 In the case of a nationalised bank, the auditor is required to male a report to the Central
Government. The report of auditors of State bank of India is also to be made to the Central
Government and is almost identical to the auditor's report in the case of a nationalised bank,
Explain what would the auditor state in his report.
Q.5 "If an accounting professional, whether in the course of internal or external audit or in the
process of institutional audit finds anything susceptible to be fraud or fraudulent activity or act
excess power or smells any foul play in any transaction. he should refer the matter to the
regulator.
Any deliberate failure on the part of the auditor should render himself liable for action”. Analyse
and explain the above RBI Circular regarding liability of accounting and auditing profession.
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process of institutional audit finds anything susceptible to be fraud or fraudulent activity or act
of excess power or smell any foul play in any transaction, he should refer the matter to the
regulator Any deliberate failure on the part of the auditor should render himself liable for
action”
• This requirement is applicable to all scheduled commercial banks excluding Regional Rural
Banks. Auditor is not expected to look into each and every transaction but to evaluate the
system as a whole.
• While reporting such kind of matters as stated in the circular, auditor need to consider the
provisions of SA 250, “Consideration of Laws and Regulations in an Audit of Financial
Statements"
• SA 240, “The Auditor's Responsibilities Relating to Fraud in an Audit of Financial Statements"
further expounds the concept and states that an auditor conducting an audit in accordance
with SAs is responsible for obtaining reasonable assurance that the financial statements taken
as a whole are free from material misstatement, whether caused by fraud or error.
Q.6 Management develops controls and uses performance indicators to aid in managing key
business and financial risks. Explain in this reference the requirements of an effective risk
management system in a bank.
Or
Write short note on: Requirements of a Risk Management Process/System in a bank.
Or
Mr. Piyush, the Bank Manager develops controls to aid in managing key business and financial
risks. Discuss the various requirements for an effective risk management system in a bank.
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(e) Reliable information systems: Banks must have reliable information system that provide
adequate financial, operational and compliance information on a timely and consistent basis to
management and TCWG.
Q.7 "The engagement team should hold discussions to gain better understanding of the bank and
its environment, including internal control, and also to assess the potential for material
misstatement, of the financial statements. All these discussions should be appropriately
documented for future reference". Explain.
Or
The engagement team of FRN & Co.- Auditors of Bank of Baroda held discussions to gain better
understanding of the bank and its environment, including internal control, and also to assess the
potential for material misstatements of the financial statements.
The discussion between the members of the engagement team and the audit engagement
partner being done on the susceptibility of the bank's financial statements to material
misstatements These discussions are ordinarily done at the planning stage of an audit.
Analyse and Advise the matters to be discussed in the engagement team discussion.
Or
You are appointed as an auditor of Banking Co, and hold discussions with engagement team. List
out matters which you would discuss at planning stage of an audit to gain better understanding
of the bank and its environment.
Or
The discussion between members of the engagement team members and the audit engagement
partner should be done on the susceptibility of the bank’s financial statements to material
misstatements. Briefly discuss the points ordinarily included in discussion of the engagement
team.
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Q.8 An asset becomes NPA when it ceases to generate income for the Bank. Explain the criteria
for classification of advance as Non-Performing Advance.
Q.9 Shy & Co. had been allotted the branch audit of a nationalized bank for the year ended 31st
March, 2018. In the audit planning, the partner of Shy & Co. observed that the allotted branches
are pre-dominantly based in rural areas and major portion of the advances were for agricultural
purpose. He needs your assistance in incorporating the criteria prescribed for determination of
NPA norms in respect of agricultural advance.
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1. Long duration crops mean the crops with crop season longer than one year.
2. Short Duration Crops means the crops, other than long duration crops.
3. Crop season means the period up to harvesting of the crops, as determined by the State
level Bankers' Committee in each State.
4. The above norms should be made applicable to all direct agricultural advances as listed in
the Master Circular on Lending to Priority Sectors. In respect of all other agriculture loans
identification of NPAs would be done on the same basis as non-agricultural advance, which
at present, is the 90 days delinquency norm.
5. If natural calamities impair the repaying capacity of agricultural borrowers, banks may
decide on their own as a relief measure conversion of the short-term production loan into a
term loan or re-schedulement of the repayment period; and the sanctioning of fresh short-
term loan subject to guidelines issued by RBI.
Q.10 "Ramjilal & Co, had been allotted the branch audit of a nationalised bank for the year
ended 31st March, 2019. In the audit planning, the partner ofRamjilal & Co., observed that the
allotted branches are predominantly based in rural areas and major portion of the advances were
for agricultural purpose."
Now he needs your assistance on the following points so as to incorporate them in the audit plan:
(a) for determine of NPA norms for agricultural advances
(b) for accounts where there is erosion in the value of security/frauds committed by the borrowers.
Ans: (i) NPA Norms for agricultural advances:
An agricultural advance is classified as NPA is interest and/or instalment of principal is overdue for
• two crop seasons, in case loans granted for Short Duration crops,
• one crop season, in case loans granted for Long Duration crops (i.e. more than 1 year)
For this purpose, the following points are to be considered:
1. Long duration crops mean the crops with crop season longer than one year.
2. Short Duration Crops means the crops, other than long duration crops.
3. Crop season means the period up to harvesting of the crops, as determined by the State Level
Bankers' Committee in each State.
(ii) NPA Norms where there is erosion in the value of security/frauds committed by the borrowers.
In case there arise erosion in the value of security or any fraud is committed by Borrowers banks
can directly classify these accounts as Doubtful Assets or Loss Assets, irrespective of the period for
which the account has remained NPA.
(i) Erosion in the value of securities by more than 50% of the value assessed by the bank or
accepted by RBI inspection team at the time of last inspection, as the case may be, would be
considered as "significant", requiring the asset to be classified as doubtful straightaway and
provided for adequately.
(ii) The realisable value of security as assessed by bank/approved valuers/RBI is less than 10% of
the outstanding in the borrowal accounts, the existence of the security should be ignored and the
asset should be classified as loss asset. In such cases the asset should either be written off or fully
provided for.
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Q.11 State the internal controls in the areas of Loans and Advances of Banks.
Or
The auditor should examine the efficacy of various internal controls over advances in case of
Banks to determine the nature, timing and extent of his substantive procedures. Explain what is
included in the internal controls over advances.
Q.12 Your firm of Chartered Accountants has been appointed as the Auditor of two branches of
OBC which are located in the Industrial area.Considering that the location of the branches of
bank in Industrial area, these would be "advances oriented branches and audit of advances
would require the major attention of the auditors. Advise how would you proceed to obtain
evidence in respect of audit of advances.
Or
The auditor can obtain sufficient appropriate audit evidence about advances by study and
evaluation of internal controls relating to advances. Explain in the context of Audit of Banks.
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Q.13 Mr.A approaches a bank for financial assistance for his upcoming project. The bank branch
manager after verifying the proposal, is agreeable to financial Mr. A, but asks for the security of
be offered to the bank. Discuss the nature of securities required to be offered to the bank.
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regarding, quantity and value of hypothecated assets (like stocks, debtors, etc.) to the bank on the
basis of which the drawing power of the borrower is fixed.
(d) Lien: Lien is creation of a legal charge with consent of the owner, which gives lender legal right
to seize and dispose/liquidate the asset under lien.
Q.14 Advances generally constitute the major part of the assets of the bank. There are large
number of borrowers to whom variety of advances are granted. The audit of advances requires
the major attention from the auditors. In carrying out audit of advances, the auditor is primarily
concerned with obtaining evidence about, among other points, the amounts include in balance
sheet in respect of advances are outstanding at the date of the balance sheet. Explain.
Q.15 “There no difference in provisioning of NPA as regards to categories of NPA, whether the
debt is secured or unsecured." Critically evaluate the statement on the basis of provisioning
norms of NPA of nationalised bank.
Ans: Provisioning Requirements of NPA:
Statement that "There is no difference in provisioning NPA as regards to categories of NPA,
whether the debt is secured or unsecured" is not correct as the provisioning requirements for
substandard
and doubtful categories of NPA are different for secured and unsecured advances.
(a) For Substandard advances: Additional provision is required @ 10% (5% for infrastructure
advances).
(b) For Doubtful Advances: Provisioning requirements are given below:
Q.16 Newton Ltd. has made loans and advances on the basis of following securities to various
borrowers. As an' auditor what type of documents can be verifled to ensure that the company
holds a legally enforceable security?
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Q.17 Explain income recognition norms with respect to advances in case of a banking company,
Ans. Income Recognition norms w.r.t. Advances
• Any income which exceeds
• one per cent of the total income of the bank if the income is reckoned on a gross basis
Or
• one per cent of the net profit betore taxes if the income is reckoned net of costs,
should be considered on accrual as per AS-9 (subject to certainty as to their collection) Other
incomes may be recognised when received.
In case of NPA, RBI guidelines require that banks should not recognise income until it is actually
realised.
• Interest on advances against Term Deposits, National Savings Certificates (NSCs). Indra Vikas
Paras (iVPs), Kisan Vikas Patras (KVPs) and Life policies may be taken to income account on the due
date, provided adequate margin is available in the accounts,
• In the case of outstanding, bills purchased and discounted the discount received thereon should
be property apportioned.
• Fees and Commission earned by the bank as a result of rescheduling of advances should be
recognized on accrual basis over the period covered by the rescheduled extension of credit period.
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Q.19 In view of the signifcant uncertainty regarding ultimate collection of Income arising in
respect of non-performing assets, the guidelines require that banks should not recognize income
on non-performing assets until it is actually realised. When a credit facility is classified as non
performing
for the first time, interest accrued and credited to the income account in the corresponding
pervious year which has not been realised should be reversed or provided for. This will apply to
Government guarantee accounts also. Analyse and Explain
Q.20 How would you verify interest Expenditure while carrying out audit of a bank.
Ans: Verification of Interest Expenditure:
(a) Obtain from the bank an analysis of various types of deposits outstanding at the end of each
quarter and compute a weighted average interest rate. The rate so computed should be compared
with the actual average rate and enquire into the difference, if material.
(b) Compare the average rate of interest paid on deposits with the corresponding figures for the
previous years and enquire into the difference, if material.
(c) Verify the calculation of interest and ensure the following:
✓ Interest has been provided on all deposits upto the date of the balance sheet and
determine whether there is any excess or short credit.
✓ Interest rates are accordance with he bank's internal regulations, RBI directives and
agreements with the depositors;
✓ In relation to fixed deposits, examine whether the interest rate in the accounting system
are same as mentioned in the Fixed Deposit Receipt/Certificate.
✓ Interest on Savings Account should be checked on a test check basis in accordance with the
rules framed by the bank.
✓ Interest on inter-branch balances has been provided at the rates prescribed by head the
office.
✓ Interest on overdue/matured term deposits should be estimated and provided for.
(d) Ascertain whether there are any changes in interest rate on saving deposits and term deposits
during the period.
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Q.21 Write short note on: Audit procedures for verification of provisions and contingencies in
case of bank audit.
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