Audit Notes (Nikhil Gupta Sir)
Audit Notes (Nikhil Gupta Sir)
120
100
80
60
40
20
0
Total Marks in last 7 attempts exams
Auditing Concepts and types of Audit
Audit engagement, audit programme, audit working papers, audit notebook, audit evidence and audit report
Internal check, internal control, internal audit, Vouching and Verification
Company Audit
Cost Audit and Secretarial Audit
Audit Report
Miscellaneous Audit
- Coverage of the entire syllabus, strictly as per the curriculum prescribed by the ICMAI
- Lucid and practical examples to understand the applicability of the concepts
- Incudes summary notes (KPTR), on each chapter, to aid quick revision during examination
- More than 250 objective type questions to practice the MCQs
- Includes examination questions of last 10 attempts
- Pen drive of the video lectures (studio recording) also available
Earnest Gratitude
Chapter at a Glance
Jun-16
Jun-17
Jun-18
Jun-19
Dec-16
Dec-17
Dec-18
Definition, features, advantages and limitations of various types
Auditing Concepts and
of audit
types of Audit
Advantages of audit of a sole proprietorship and partnership firm
Evolution Of In the early days of commerce and business there was no existence of the concept of auditing.
Auditing This was, may be due to the small nature of business and day to day personal control of the
proprietor. Audit evolved after the industrial revolution (18th century) due to the following
reasons:
Scope Limitations
Auditor is not expected to perform duties which are beyond his scope of competence
Auditor is not supposed to prepare the financial statements but only audit it. Auditing
begins where accounting ends
The auditor can only draw a reasonable conclusion (on the basis of evidence gathered),
but not absolute certainty / assurance
Test Your
Case Study: M/s Badriprasad Ltd (BP) requested the auditor CA Mukund Madhav (MM) to
Knowledge
provide for absolute assurance in respect of its ten branches scattered in Delhi and confirm
that the financial statements are free from material misstatement due to fraud or error. Advise.
Analysis: The auditor is not expected to, and cannot, reduce audit risk to zero and cannot
therefore obtain absolute assurance that the financial statements are free from material
misstatement due to fraud or error. This is because there are inherent limitations of an audit,
which result in most of the audit evidence on which the auditor draws conclusions and bases
the auditor's opinion being persuasive rather than conclusive.
Conclusion: In view of the above, CA MM cannot provide audit absolute assurance to BP
Ltd in respect of its branches.
Distinction Accounting Auditing
between Analyze events and transactions Review client’s internal control system
accounting Management function Auditor’s function
and auditing Record and summarize data in accounting Obtain and evaluate evidence on statement
records assertions
1.3
Auditor is sceptical and not suspicious. Whereas an investigator starts with suspicion
(Positive mindset) and collects evidence to either confirm or
dispel that suspicion. (Negative mindset)
Auditing is a routine exercise (normally Investigation may spread over a gap period
conducted annually). longer than one year. It occurs as and when
required.
Aspects to be
(i) Accounting and Internal Control System:- The auditor should develop an
covered in
understanding of the accounting and the internal control system operating in the
audit
enterprise. Such an understanding will enable the auditor to ascertain the degree to which
reliance can be placed on the information obtained during the audit.
1.4
(ii) Examination of books, records etc: - The auditor should check the arithmetical
accuracy of the books of accounts as well as the authenticity and the validity of
transactions entered into the books of accounts. He should also check the underlying
papers, documents and other evidence.
(iii) Compliance with the relevant law (ie. Generally Accepted Accounting Standards) -
The financial statements should be prepared in accordance with the requirements of
applicable laws and the relevant Indian Accounting Standards, as well as the Companies
Act and the relevant Rules made there under.
(iv) Reporting - Once the audit is carried out, the audit findings need be communicated to
the appropriate personal body (e.g. shareholders in case of company).
Objectives of
Primary Objective: The main objective of an audit is to determine whether the financial
Auditing [SA
statements presents a “true & fair view” of the financial position and financial
200]
performance of a business during the period.
Secondary Objective: The auditor is also responsible for detecting frauds and errors in
the books of accounts and financial records of the client’s business. He is also to report
on the existence of such misstatement and their magnitude through his audit report.
Class Notes
Basic
Integrity, objectivity and independence:- The auditor should be straight-forward,
principles
honest, sincere and free form any influence on his audit work. He should maintain
governing an
impartiality and be free of any interest.
audit
Confidentiality: - He should not disclose the client’s information to anybody without
the client’s permission or under any regulatory requirement.
Skills and competence:- The audit should be performed and audit report be prepared by
adequately trained, experienced and competent person.
Work performed by others:- The auditor should carefully supervise the work
performed by others (such as his subordinates, other auditors, experts etc.) as he remains
responsible for the work delegated by him to his assistants, other auditors or experts.
Documentation:- Proper working papers should be maintained by the auditor to
evidence the audit work. Working paper which is maintained is to demonstrate that the
audit is in adherence to the basic principles.
Planning: - The auditor should obtain the knowledge about client’s business to
determine the nature, timing and the extent of the audit procedures.
Audit evidence: - The auditor should obtain sufficient appropriate audit evidence
through performing the compliance and substantive procedures.
Accounting system and internal controls: - An understanding of the accounting system
and the related internal controls help in determining the nature, timing and extent of other
audit procedures.
1.5
Audit conclusions and reporting:- On the basis of conclusions drawn from the audit
evidence obtained the auditor should give unqualified report or qualified report or
adverse report or the disclaimer report.
Significance
From legal point of view
of audit
Filing of Income Tax Return — Income Tax authorities generally accept the audited
financial statements while assessing the tax liability of any entity.
Borrowing of funds — Most of the financial institution sanctions various loans on the
basis of audited financial statements.
Statement of Insurance Claim — The insurance companies settle the claim for loss or
damages on the basis of audited accounts of the previous year.
Sales tax / GST payments — The audited books of accounts may generally be accepted
by the sales tax / GST authorities.
Action against bankruptcy — The audited accounts serve as a basis to determine action
in bankruptcy and insolvency cases.
Banks, Financial Institutions and Government require audited accounts before granting
any financial assistance to the enterprise.
Audited accounts are taken to be more helpful in the settlement of accounts between
the partners and thus avoiding any dispute amongst them.
Inherent
Audit is not as assurance as to the future viability of the enterprise or the efficiency
limitations of
or effectiveness with which the management has conducted the affairs of the enterprise.
audit
Audit does not guarantee that all the material misstatements will be detected
because of the following inherent limitations of audit:
a) Test nature of the audit;
b) The audit evidence available to the auditor is persuasive rather than conclusive
in nature;
c) Inherent limitations of internal control, e.g. management may be in a position to
override controls.
Professional skepticism — Auditor should be vigilant enough to ensure that if
something is wrong in the financials, it is detected. This behaviour of auditor may be
jeopardised due to a) risk of fraud or error, (b) reliability of management’s
representations etc. The auditor is entitled to accept the records and documents as
genuine unless there is some evidence to the contrary. This may cause a significant threat
on the scepticism of the auditor.
Materiality - Auditor has to report only material misstatements. Hence, the auditor has
to constantly evaluate which misstatement is material and which is not. However, what
is material in one circumstance, may not be material in another circumstances. Therefore,
changes need to be done accordingly. This subjectivity is a threat to audit.
Fundamental concepts of auditing – True and Fair view, Materiality and Accounting policies
True and fair
The phrase “true and fair” in auditor’s report signifies that the auditor is required to express
view
his opinion as to whether the state of affairs and the results of the entity are truly and fairly
represented in the accounts under audit.
This requires that the auditor should examine the accounts with a view to verify that:
assets are neither overvalued nor undervalued according to the applicable accounting
principles
No material asset is omitted
The charge, if any on assets are disclosed
Material liability should not be omitted
The financial statements have been prepared as per the applicable financial reporting
framework.
All unusual exception or non - recurring items have been disclosed separately.
What constitutes true and fair is a matter of an auditor’s judgement in the particular
circumstances of a case
True and correct view signifies ‘absolute assurance’, ie. 100% accuracy. However true and
fair view denotes ‘reasonable assurance’, less than 100% accuracy.
Materiality
This concept is applied by the auditor both at planning stage and performing stage.
(SA 320)
Material misstatement (either individually or put together) may influence the decision of
the users of the financial statements (Stakeholders)
Materiality is determined on the following factors:
Individually: It may be determined individually. E.g., a payment of Rs. 1000 may
be material in a small business, but even Rs.1 lac could be immaterial for a big
business entity.
Aggregate: It may be determined in aggregate. E.g., total income from investment
in mutual funds could be more material than looking into each individual investment.
1.7
Q.1 Auditor’s primary responsibility is to detect error and fraud. Comment [June 2009]
False – The primary responsibility of an auditor is to express an opinion on the financial statements. It is
the secondary responsibility to detect errors and fraud.
Q.2 Fraud is more difficult to detect than error. Comment [Dec 2012]
Q.3 The concept of True and Fair view is a fundamental concept in auditing [Dec 2014]
Q.4 State the difference between Audit and Investigation [MTP June 2019]
Q.5 Statutory Auditor cannot avoid the generally accepted fundamental assumption underlying the
preparation of financial statements. State such assumption and actions to be taken if not followed.
[Dec 2011 (4 marks)]
Types of Audit
Classification Basis Types of Audit
of various Organisational a) Voluntary Audit/ Private Audit – like audit of Sole
types of audits Structure Proprietorship, Partnership Firm, LLP/ NGOs
b) Statutory Audit
c) Government Audit
Objective a) Independent Financial Audit
b) Internal Audit
c) Cost Audit
d) Management Audit
e) Tax Audit
f) Secretarial Audit
g) Forensic Audit
h) Information Security Audit
i) Social Audit
j) Environment Audit
k) Performance Audit
l) Propriety Audit
m) Operational Audit
Timing a) Continuous Audit
b) Annual Audit
c) Interim Audit
d) Balance Sheet Audit
Scope a) Complete Audit
b) Partial Audit
c) Detailed audit
1.9
Voluntary Organisations for which audit is not mandatory, like proprietorship firms, partnership
audit or firms, may opt for voluntary audit
Private audit Such organisations opt for voluntary audit because of certain advantages of audit
These audits are non-statutory in nature
Advantages It evaluates the internal control system and highlights the weaknesses, if any.
of audit for It increases the reliability and authenticity of Financial Statements.
sole It helps in timely finalization of Annual Financial Statements and tax assessments.
proprietorship It keeps a moral check on the working of employees.
It helps them in obtaining funds easily from financial institutions, based on more
reliable Financial Statements available to the banks and financial institutions.
It helps in settling: a) Trade disputes; b) Labour disputes c) Insurance claims
Advantages It helps in settlement of accounts among the partners on the basis of more reliable
of auditing accounting records.
for It protects the interest of minors, sleeping partners/partners who are not involved in
partnership day to day operations, and keeps a check on persons who are working on behalf of
firms & others.
others It helps in partnership firms for settlement of goodwill at the time of admission,
retirement and death of partners.
It enables firm to get loans from banks, financial institutions as they rely on audited
accounts of firm.
Statutory Mandatory / Statutory in nature
Audit / They are provided for by the law of land, like as per the Companies Act, 2013, audit
Balance for mandatory for private and public companies.
Sheet audit Audit of insurance companies, banking companies and cooperative societies are also
compulsory under the specific statutes and IRDA/RBI respectively
In the case of audit of a government body, the scope and audit programmes are set
by the Comptroller and Auditor General (CAG) of India and the Companies Act,
2013.
Advantages The members/shareholders/stakeholders, for their economic decisions and for
of Statutory exercising their voting rights.
audit For timely tax assessments.
For determining the purchase or sale consideration in case of ongoing concern.
Settlement of partners’ accounts in case of admission, retirement or death of partner
on account of goodwill or otherwise.
Settlement of disputes with employees, creditors or debtors.
For determining the actual value of business or shares in case of merger, acquisition,
etc.
For getting financial assistance from financial institutions, banks or investors.
In case of non-profit organizations, for getting government grants and availing tax
exemptions.
Evaluation of the internal control systems and strengthening it by removing the
inherent weaknesses, and checking the efficacy of the internal checks.
For checking the integrity of the management which manages the funds and affairs
on behalf of the real owners or shareholders.
For other users of financial statements like creditors, investors and government
agencies, it ensures that any assertions in the Financial Statements are neither
overstated/understated nor misrepresented.
For the proper distribution of profits by way of payment of wages and other benefits.
For ensuring of proper distribution of profits as dividends.
For ensuring that all legal requirements are fulfilled and statutory compliances are
adhered.
For settlement of insurance claims or other recoveries from government bodies or
otherwise.
Basis Voluntary (Private) audit Statutory (mandatory) audit
1.10
Distinction Appointing The management of the company. Prescribed by different statute/ laws.
between Authority Discretionary audit. Mandatory audit.
voluntary
audit and Objective / Review of internal controls, Ensuring truthfulness and fairness of
statutory purpose Checks on employees, & the Financial Statements.
audit Checking financial or non-
financial operations.
Approach Proprietary oriented approach. Compliance oriented approach
Scope Decided by the management Prescribed by the governing law.
documented through the Letter of
Engagement.
Report Report is to be given to the Report is to be given to the
management within the stipulated shareholder or owner within the
time as mutually decided. stipulated time as stated by the statue
There is no specific format for The format is prescribed by the Law.
report.
Government Audit of financial statements of public entities
audit Audit is governed / supervised by the Comptroller & General of India (CAG)
Types of Transaction audit – An audit of specified transactions of a given government
Government company. Like expenditure audit, receipts audit etc
Audit Efficiency cum performance audit – This audit is specifically conducted to assess
the efficiency and performance of the organisation
Characteristic Audit against Rules & Orders: While conducting a government audit, the auditor
of government has to ensure that the expenditure is incurred in conformity to - a) the relevant
audit provisions of the statutory enactment and b) is in accordance with the financial rules
(particularly and orders framed by the competent authority.
transaction Audit of Sanctions: The auditor has to ensure that each item of expenditure is covered
audit) by a sanction / approval, by the competent person / authority. In case expenditure
exceeds the sanctioned limit, objection is raised.
Audit against Provision of Funds: It contemplates that amount of expenditure
should not exceed the provision of funds made for such expenditure. Further the
auditor should ensure that the money has been spent for the specified purpose.
Audit of financial propriety: The auditor has to ensure that the expenditure incurred
are with respect to the recognized standards of financial propriety i.e. quantity,
quality, morality and ethics.
Efficiency – It is an examination of the financial and operational performance of an entity.
cum- It goes beyond checking the financial statements only
performance It involves comparing the actual performance with the standards set by the entity.
audit (EPA)
Scope of EPA
i. Economy Audit - It ensures that entity has acquired the financial, human and
physical resources economically. It implies that resources have been procured in
appropriate quantity, quality and at minimum cost.
ii. Efficiency Audit - It ensures that the entity has utilised the financial, human and
physical resources efficiently and economically. It refers to the relationship
between inputs and output i.e. the goods and services produced and resources used
to produce them, yielding the expected results.
iii. Effectiveness - It is an appraisal of the performance of schemes and projects with
reference to the overall targeted objectives as well as efficiency of the ways and
methods adopted for the attainment of objectives.
Propriety A propriety audit is not just concerned with the truthfulness and fairness of the
audit Financial Statements, but also ensures that the transactions entered into by the client,
business practices and activities undertaken are not against public interest.
It is an essential element of a Government Audit.
1.11
The Comptroller and Auditor General (CAG) examines the propriety of all
government expenditures to ensure that they have been incurred in the interest of the
general public, and are not influenced by personal interests of the government
authorities sanctioning it.
Difference Basis Statutory Audit Government Audit
between Applicability Applicable to Applicable to
statutory audit (a) All private companies (a) Government departments
and (b) All co-operative societies (b) Statutory corporations
government (c) Proprietorship and (c) Government companies
audit partnership concerns in some
cases. E.g. Tax audit under
section 44AB of the Income
Tax Act, 1961.
Appointing (a) In case of private companies: (a) In case of government
Authority shareholders. departments: Comptroller and
(b) In case of sole proprietor and Auditor General
partnership: proprietor or partners. (b) In case of statutory
(c) In case of trust: trustee or corporation: as per the provisions
Managing Committee. of the special statute for that
(d) In case of co-operative corporation.
societies: Managing Committee (c) In case of government
with prior approval of the company: Company Law Board,
Registrar. on the advice of the Comptroller
and Auditor General.
Report Report is submitted to the owners/ Report is submitted to the
shareholders. shareholders and a copy is given to
the Comptroller and Auditor
General
ii) Spreading awareness among beneficiaries about the business’ efforts towards
attaining social objectives.
iii) Increasing efficacy and effectiveness of the organization’s Corporate Social
Responsibility (CSR) programmes.
iv) Scrutiny of policy decisions, keeping in view the interests of stakeholders.
Pre-audit activities:
i. Selection and scheduling of facility to audit.
ii. Selection of audit team.
iii. Contact with facility.
iv. Planning of the audit.
Site activities:
i. Understanding of internal controls.
ii. Assessment of internal controls.
iii. Gathering of audit evidence.
iv. Evaluation of audit findings.
v. Report of findings to facility.
Post audit activities:
i. Production of a draft report.
ii. Production of a final report.
iii. Preparation and implementation of an action plan.
Operational Operational Audit involves examination of all the operations and activities of the entity.
Audit
Objective
- Examination of the internal control structure of the entity.
- It provides an appraisal of whether the department is operating in conformity with
prescribed standards and procedures laid down by the management.
- It checks whether standards of efficiency and economy are maintained.
- It is concerned with formulation of plans and checking of the implementation of
systems and controls in respect of other departments of the entity.
- It checks whether capacity utilization in production department and achievement of
short term targets in marketing departments and other activities are achieved as per
the overall goals of the entity.
Scope
- Operational audit, in its initial stages, was developed as a branch of internal auditing.
- Internal audit focuses on accounting operations of the entity but operational audit has
a wider scope of working and covers all other operations, such as production and
marketing too.
Advantages
- Operational audit is one of the management tools to get first hand information.
- It is more useful in an entity where the management is at a distance from actual
operations.
- It is very useful in large organizations where management cannot control the actual
operations due to layers of delegation of responsibility.
- The management information system has various tools like routine performance
report from department heads, internal audit reports, surprise checks, periodic
inspections and investigation to control the managers responsible for their
departments.
- The operational audit is also one of the tools used in large or geographically vast
entities to control the operation at first stage and to fill up the gaps of information
provided by department heads through periodic reports.
Continuous Continuous audit may be defined as the examination of a firm’s financial transactions,
audit continuously throughout the year, at regular or irregular intervals.
Advantages
- Early location of errors and frauds: It helps in detecting errors and frauds
immediately on their occurrence, and not at the year end when it would become
difficult to install corrective control mechanisms.
- Quick rectification: rectification of errors at an early stage is possible.
- Guidance: Continuous guidance to client.
1.14
Features
- It does not interrupt with the regular functioning of the client’s accounting or
operations functions and ensures completion of work in one session due to continuity.
- The auditor may use statistical sampling methods and techniques which lead to time
effectiveness.
- The possibility of tampering with the books of accounts during the audit is
considerably reduced as the audit work starts only after the books are closed.
Q.6 Distinguish between Statutory Audit and Government Audit [June 2015]
Q.10 Distinguish between forensic audit and statutory audit [June 2014]
The objective is to express an opinion on the The objective is to determine the facts behind any
truthfulness and fairness of the FS suspected fraud / embezzlement
Substantive and compliance procedures may be used Alongwith the substantive and compliance
procedures, audit-in-depth, trend analysis, past-data
analysis, investigation is also done
Accounts related to the relevant accounting year are Accounts may be checked for past many number of
checked years, to detect the cause of fraud
Includes checking arithmetical accuracy and Focus is to find the depth and breadth of the
compliance with procedures suspected fraud
Qualification may be given in case of adverse The amount of fraud, people involved, legal
findings implications are mentioned in the report.
Q.12 Operational Audit is merely an extension of Internal Audit. Comment [June 2015]
The statement is true. In operational audit, the internal auditor goes beyond financial controls and looks
into operational areas also. Operational audit is therefore, an extension of internal audit.
Q.15 What are the matters to be specifically considered while conducting audit of a Partnership firm?
[December 2015]
The statement is incorrect. Auditing is as much a necessity as Accounting. Auditing is an essential aspect
of any business organisation. It is difficult to place reliance on the accounts unless they are audited.
In today’s era of complex business models containing multiple transactions and wide variety of structures,
it is important to get the accounts audited from a qualified person so that meaningful inter and intra firm
comparisons can be made, to arrive at accurate conclusions.
Q.18 State the differences between Statutory Auditor and Internal Auditor. [June 2017, Dec 2018 – 4
marks]
Appointing Statutory Auditor is appointed by the Internal Auditor is appointed by the Board
Authority shareholder in the general meeting.
Scope of the The scope of work is defined in the The scope of work includes the adherence of
work Companies Act. management policies and procedures and
identifies the weakness in the internal
control.
Removal of Statutory Auditor can be removed by the Internal Auditor can be removed by the
Auditor shareholders. Board
Audit Report It is submitted to the appointing Authority. It is submitted to the Board as a suggestion
to improve weakness in the internal control.
Definition of Audit Systematic and independent examination of financial information, of any entity
(whether profit making or not), with a view to express an opinion [SA 200]
Purpose / objective to express a true and fair view on the financial statements, after examining internal
of Audit and external evidences – primary objective
to detect errors and frauds – secondary objective
Features of Audit involves evaluation & verification of the supporting documents such as vouchers, etc.
involves review of systems of accounting & Internal Controls.
The information audited may be financial or non-financial
the auditor should be competent (possessing prescribed qualification) and
independent
Distinction between
accounting and Accounting Auditing
auditing Record the events and transactions in Evaluate evidence to verify the events
the books of accounts and transactions recorded in the books
Prepare financial statements like Determine fairness of statements in
Balance sheet, P&L account and the conformity with accounting principles
schedules Prepare the Audit report on findings
Make financial statement assertions Verify the assertions made by the
management
Distribute the audited financial Deliver audit report to the company
statements and audit report to
shareholders
Distinction between
audit and Audit Investigation
investigation Examination of records to ascertain Examination of records to ascertain
whether the financial statements are true whether a specified fact is true or not
and fair
Wide in scope as it covers checking Narrow in scope as it focuses on some
almost all the aspects of financials specific area only
Conducted in accordance with the Extends to more than only auditing
generally accepted auditing principles procedures. Like forensic analysis
Gathers persuasive evidence Gathers conclusive evidence
Auditor has a positive mindset Investigator has a negative mindset
It is a routine exercise It is a non-routine exercise.
Aspects to be Accounting and internal control system
covered while Books and records
Auditing Statutory and regulatory compliances
Reporting requirements
Significance of The audited financial statements are relied upon by the following outsiders:
auditing Income tax authorities for ascertaining the taxable income
GST authorities for ascertaining the tax due
The audited financial statements are also referred by the Management for:
for detection of errors and frauds
keeping a moral check on the employees so that they don’t embezzle funds
improving efficiency and effectiveness in the overall functioning of the organization
comparing past results with the current period result and inter-firm comparisons
settling the accounts of the deceased partner, in case of a firm
Distinction between
private audit and Private Audit Statutory Audit
statutory audit Appointed by management Appointed as per the relevant statute /
law
Scope is decided by the management Scope is decided by the relevant statute /
law
Objective is to review the internal Objective is to ensure truthfulness and
controls and the operations of the fairness of financial statements
business
Proprietary approach Compliance approach
Voluntary in nature Mandatory in nature
Audit report is given to the management Audit report is given to the shareholder /
owner
Distinction between
statutory audit and Statutory audit / Balance sheet audit Government audit
government audit
Social Audit Examination of whether an entity meets its social and ethical objectives
Review of the extent of community participation of the business entity, towards
environmental protection, customer satisfaction.
Environmental Examination of how well an entity interacts with its environment. Like monitoring
Audit emission to air, water and land.
Analysis of the legal constraints imposed on the entity
Operational Audit Examination of all the operations and activities of the entity
Examination of control structure of the enterprise
Evaluation of the whether operating standards are followed
Evaluation of the whether the overall target capacity utilization is met
Disadvantages:
Interim Audit Audit conducted between two final audits, generally during the mid-year like quarter
/ half-year
Chapter 2 – Audit engagement, audit programme, audit working papers, audit notebook, audit evidence
and audit report
Chapter at a Glance
Jun-16
Dec-16
Jun-17
Dec-17
Jun-18
Dec-18
Jun-19
Surprise Meaning, circumstances where relevant
checks Audit engagement, audit
programme, audit working
Audit evidence Meaning, need, types, methods of obtaining audit evidence papers, audit notebook,
audit evidence and audit
Audit Compliance procedures, substantive procedures report
procedures
Audit The engagement letter is the auditor’s contract with the client. It is the starting point,
Engagement and often times the ending point, for the relationship.
letter
Audit Engagement letter is given by Auditor to Company, explaining scope of work duties
& responsibilities of Auditor and that of management of Company.
Constituents of (a) Objective & scope of engagement
the (b) Management responsibility
engagement (c) Existence of inherent limitations of audit
letter (d) Need for use of Internal Auditor
(e) Management confirmation letter
(f) Restrictions & limitations of Auditor liabilities
(g) Basis of computation of Audit fees
(h) Billing arrangement
(i) Form of report & Other communications of engagement
(j) Validity of report
(k) Limits on submission of report to other authorities
Specimen copy
of an
engagement
letter1
1
Source: Google
Benefits of Avoids confusion - In case of a statutory audit the objective and scope of an audit is
engagement clearly described in the relevant law. However, in a non-statutory audit it has to be
letter stated with absolute clarity so as to avoid any kind of ambiguity as to the objective and
scope of audit.
Defines the responsibility of auditor and management - A misunderstanding may
arise about the responsibility of the work. For example, the client may be under an
impression that the auditor will prepare the accounts as well as conduct the audit also.
Therefore, in order to avoid any kind of misunderstanding or dispute it is in the interests
of both the auditor as well as the client to exactly define the respective responsibility
of the engagement in writing by way of audit engagement letter.
Protects the interest of the auditor against the allegation(s) of professional
negligence – When the management restricts the scope of the auditor, the signed
engagement letter will serve as an evidence before the court
Audit An audit programme is a detailed plan of:
Programme - the auditing work to be performed
(SA 300) - the procedures to be followed in verification of each item
- the estimated time required
- the estimated resource required, like qualified / unqualified staff
It is a description or memorandum of the work to be done during an audit. Audit programme
serves as a guide in arranging and distributing the audit work as well as checking against
the possibility of the omissions.
Specimen of
audit
programme
Types of audit Common audit programme - Programme common to all types of audit. For example,
programme checking of books of accounts
Special audit programme – Programme related to audit work specific to a particular audit
/ entity. For example, the audit programme for a partnership firm would contain steps for
checking of profit sharing ratio of the partner, which will not be there for a company.
Advantages of It serves as a ready check list of audit procedures to be performed.
Audit The audit work can be properly allocated to the audit assistants or the article clerks.
Programme The auditor may easily know the extent of work done at any point of time. Thus, the
progress of work done can be under the supervision and control of the auditor.
Audit programme would be useful to account for the individual responsibilities.
A uniformity of the work can be attained as the same programme would be followed
from time to time.
It is a useful basis for planning the programme for the following year it is useful
in selection of team members & delegation of responsibilities to them.
It may be used as evidence by the auditor in the event when any charge is brought
against him. He can prove that there has no negligence on his part and he exercised
reasonable care and skill while performing the task.
It is useful in selection of Team members and delegation of responsibilities to them.
Disadvantages The auditor’s task becomes mechanical and the auditors may lose interest and
of Audit initiative.
Programme Drawing up of an audit programme may be unnecessary for a small concern.
Though audit programme helps in fixing responsibilities but inefficient staff may
defend themselves by stating that the matter was not contained in the audit
programme.
Contents of
Name of the business enterprise.
audit notebook
Organisation structure.
Important provisions of Memorandum of Association (MOA) and Articles of
Association (AOA).
Communication with the previous auditor, if any.
Management representations and instructions.
List of books of accounts maintained by the enterprise.
Accounting methods, internal control systems followed by the enterprise, applicable
laws etc.
Key managerial personnel.
Errors and fraud discovered.
Matters requiring explanations or clarifications.
Special points that need attention in the audit report.
Audit Risk
Audit risk is the risk of a material misstatement of an item that is included in the
audited financial statements of an entity.
Audit risk is always greater than zero. There is always some risk of material
misstatement, due to the inherent limitations in both accounting and auditing.
Audit risk may emanate from either fraud or error
Types of audit
Inherent risk – It is the possibility of a material misstatement, either individually or
risk
when taken together with other misstatements, assuming that there were no internal
controls. Eg. complex calculations (like provision for gratuity) / estimates (like
provision of bad debts) involves judgement and hence are likely to be misstated
Control risk - It is the possibility of a material misstatement, either individually or
when taken together with other misstatements which will not be prevented / detected /
corrected on timely basis by the accounting and internal control systems. Eg. Weak
internal controls may lead to misstatement creeping into the financials
Detection risk - It is the risk that an audit procedures will not detect a material
misstatement, either individually or when taken together with other misstatements.
Risk of material misstatement (ROMM) is aggregate of inherent risk and control risk.
Surprise
An element of surprise can significantly improve the effectiveness of an audit and
checks
therefore, wherever practicable, an element of surprise should be incorporated into
the audit programme
The auditor / his staff may (once in a while) visit the client without prior intimation.
This will not give a chance to the client to be prepared, which is possible in a planned
audit.
Factors to be
Surprise checks should be considered as a desirable part of each audit.
considered
The areas over which surprise checks should be employed would depend upon the
while doing
circumstances of each audit but should normally include:
surprise checks
• Verification of cash and investments.
• Verification of stores and stocks and the records relating thereto.
• Verification of books of prime entry and statutory registers normally required to
be examined for the purposes of audit.
The frequency of surprise checks may be determined by the auditor in the
circumstances of each audit but should normally be at least once in the course of an
audit.
The results of the surprise checks should be communicated to the management if they
reveal weakness in the internal control system or the existence of fraud or error.
The auditor should satisfy himself that adequate action is taken by the management on
the matters communicated by him.
The results of surprise checks should be included in the audit report if they are material
and affect the true and fair view of the accounts on which the reporting is done.
Audit evidence
Audit evidence are the facts and reasons based on which the auditor arrives at his opinion
on the true and fair view of the financial statements.
The auditor should obtain sufficient and appropriate audit evidence so that reasonable
conclusion can be drawn therefrom.
Need for audit
Management makes assertion on the various elements of the financial statements. Eg. The
evidence
management may assert that it owns land and building worth Rs. 10 crores which are shown
in the Balance Sheet. The auditor has to evaluate these assertions so that he would be able
to express his opinion on the financial statements. Audit evidence provides the auditor a
reasonable assurance in respect of the assertions made by the management.
Different assertions made by the management can be as follows:
(a) Existence – that an asset or a liability exists at a given date;
(b) Rights and Obligations - that an asset is a right of the entity and a liability is an
obligation of the entity at a given date;
(c) Occurrence -that a transaction or event took place which pertains to the entity during
the relevant period;
(d) Valuation - that an asset or liability is recorded at an appropriate carrying value;
(e) Measurement -that a transaction is recorded in the proper amount and revenue or
expense is allocated to the proper period;
(f) Presentation and Disclosure - an item is disclosed, classified and described in
accordance with recognized accounting policies and practices and relevant statutory
requirements, if any.
While obtaining evidence through compliance procedures, the different assertions made by
the management can be as follows:
(i) Existence -that the internal controls exist;
(ii) Effectiveness - that the internal controls are operating effectively;
(iii) Continuity - that the internal controls have been so operated throughout the
period of intended reliance.
Types of audit
On the basis of source
evidence
Internal audit evidence – Evidence gathered from the management of the company, like
invoices, vouchers and other supporting evidences
External audit evidence – Evidence gathered from an independent third party like
confirmation from debtors/creditors, bank confirmation for balance in current accounts
External evidence are generally considered more reliable than internal evidence.
Compliance
Compliance procedures refers to checking of the Internal controls employed by the
procedures /
management.
test of controls
If the controls are effective, the auditor can place reliance on them and reduce the time
and effort in gathering audit evidence.
In the control testing stage, the auditor gathers evidence as to the effectiveness of
operation of those controls upon which the auditor has planned reliance.
Where the information system is computerized, evidence may also be gathered using
CAATs (Computer Assisted Audit Technique) such as a generalized audit software or
an embedded audit module.
Substantive
Substantive procedures (or substantive tests) are those activities which are performed
procedures
by the auditor to gather evidence as to the completeness, validity and/ or accuracy of
account balances and underlying classes of transactions.
Auditors, during the substantive testing stage of the audit, gather evidence about the
management’s assertions.
Important Questions – Audit engagement, audit programme, audit working papers, audit notebook, audit
evidence
Q.1 Distinguish between permanent and current audit file. [June 2015, December 2018 - 6 marks]
Q.2 Some material misstatement remain unreported by Auditors. Comment [December 2016 - 8
marks]
Materiality - The concept of materiality is applied by the auditor both in planning and performing the
audit, and in evaluating the effect of identified misstatements on the financial statements. Judgments
about materiality are made in the light of surrounding circumstances, and are affected by the auditor's
perception of the financial information needs of users of the financial statements, and by the size or
nature of a misstatement, or a combination of both. The auditor's opinion deals with the financial
statements as a whole and therefore the auditor is not responsible for the detection of misstatements
that are not material to the financial statements as a whole.
Risk of material misstatement - The risk that the financial statements are materially misstated prior to
audit. This consists of two components, described as follows at the assertion level:
(i) Inherent risk - The susceptibility of an assertion about a class of transaction, account balance or
disclosure to a misstatement that could be material, either individually or when aggregated with other
misstatements, before consideration of any related controls.
(ii) Control risk - The risk that a misstatement that could occur in an assertion about a class of
transaction, account balance or disclosure and that could be material, either individually or when
aggregated with other misstatements, will not be prevented, or detected and corrected, on a timely basis
by the entity's internal control.
Q.3 State the components of Audit risk. [June 2011, Dec 2014 – 2 marks,]
Q.4 What do you understand by audit evidence? [Dec 2013, June 2016 – 2 marks]
Q.5 Explain the significance of audit working papers. [Dec 2013 - 4 marks]
Q.6 Discuss the principles which are useful in assessing the reliability of audit evidence. [June 2014,
Dec 2017 – 4 marks]
The reliability of audit evidence depends on its source-internal or external, and on its nature-visual,
documentary or oral. While the reliability of audit evidence is dependent on the circumstances under
which it is obtained, the following generalisations may be useful in assessing the reliability of audit
evidence:
- External evidence (e.g. confirmation received from third party) is usually more reliable than
internal evidence.
- Internal evidence is more reliable when related internal control is satisfactory.
- Evidence in the form of documents and written representations is usually more reliable than oral
representations.
- Evidence obtained by the auditor himself is more reliable than that obtained through the entity.
Q.8 What is meant by audit notebook? State its importance. What is the contents of a typical notebook.
[June 2014, Dec 2016 – 8 marks]
Or
Audit notebook is a permanent record of the auditor. Comment [Dec 2014, Dec 2015 – 6 marks]
Q.9 What is audit programme? [Dec 2014, Dec 2015 – 2 marks]
Or
What is audit programme. State its advantages [June 2016, 2019 – 8 marks]
Q.10 An audit involves significant collection of audit evidence. Comment [June 2015 – 4 marks]
In any audit, the auditor examines the available evidences to him and gives the opinion based on such
examination. Moreover, he has to carry out the audit within the framework of standard auditing practices
and that too with ethical conduct. The auditor has to proceed in a systematic manner so that he would be
in a position to collect and review the purposeful evidences and also satisfy himself of the correctness of
the financial operations of the business. Usually, the whole audit process involves the following aspects,
namely:
Defining the scope of the audit work, i.e. preparation of the audit engagement letter
Obtaining the knowledge of the client‟s business and formulating the audit programme
Evaluation of the accounting and internal control system existing in the auditee enterprise
Determining the nature, timing and the extent of audit procedures keeping in mind the audit risk
and the materiality involved
Adequate documentation is also necessary i.e. preparation of audit note book and working papers
Formulation of opinion about the financial statements
Issuing of audit report.
Q.11 Define Audit engagement letter. What are the general contents of and audit engagement letter?
[June 2017 – 8 marks]
Q.13 Discuss the method of obtaining Audit Evidences. [Dec 2018 (6 marks)]
Q.12 Pankaj & Associates a Chartered Accountant firm in Kolkata has been appointed by XYZ
Company limited for conducting an audit. Draw an audit engagement letter that needs to be
furnished by XYZ Company limited for effecting this engagement.
<<On the letterhead of the Auditor Firm>>
To,
Dear Sirs,
I/We refer to the letter dated…………….informing me/us about my /our (re) Appointment/ratification as
the auditors of the Company. You have requested that I / we audit the financial statements of the Company
as defined in Section 2(40) of the Companies Act, 2013 (‘2013 Act’), for the financial year(s) beginning
April 1, 20XX and ending March 31, 20YY. The financial statements of the Company include, where
applicable, consolidated financial statements of the Company and of all its subsidiaries, associate
companies and joint ventures. I am / we are pleased to confirm my/ our acceptance and my / our
understanding of this audit engagement by means of this letter.
My / Our audit will be conducted with the objective of me / our expressing an opinion if the aforesaid
financial statements give the information required by the 2013 Act in the manner so required, and give a
true and fair view in conformity with the applicable accounting principles generally accepted in India, of
the state of affairs of the Company as at 31st March, 20YY, and its profit/loss and its cash flows for the
year ended on that date which, inter alia, includes reporting in conjunction whether the Company has an
adequate internal financial controls system over financial reporting in place and the operating
effectiveness of such controls. In forming my / our opinion on the financial statements, I / we will rely
on the work of branch auditors appointed by the Company and my / our report would expressly state the
fact of such reliance.
I / We will conduct my / our audit in accordance with the Standards on Auditing (SAs), issued by the
Institute of Chartered Accountants of India (ICAI) and deemed to be prescribed by the Central
Government in accordance with Section 143(10) of the 2013 Act. Those Standards require that I / we
comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free from material misstatements. An audit involves performing
procedures to obtain audit evidence about the amounts and the disclosures in the financial statements.
The procedures selected depend on the auditor’s judgment, including the assessment of the risks of
material misstatement of the financial statements, whether due to fraud or error. In making those risk
assessments, the auditor considers internal financial control relevant to the Company’s preparation of the
financial statements that give a true and fair view in order to design audit procedures that are appropriate
in the circumstances.
The terms of reference for my / our audit of internal financial controls over financial reporting carried out
in conjunction with our audit of the Company’s financial statements will be as stated in the separate
engagement letter for conducting such audit and should be read in conjunction with this letter. An audit
also includes evaluating the appropriateness of the accounting policies used and the reasonableness of
accounting estimates made by the Management, as well as evaluating the overall presentation of the
financial statements. Because of the inherent limitations of an audit, including the possibility of collusion
or improper management override of controls, there is an unavoidable risk that material misstatements
due to fraud or error may occur and not be detected, even though the audit is properly planned and
performed in accordance with the SAs. Also, projections of any evaluation of the internal financial
controls over financial reporting to future periods are subject to the risk that the internal financial control
over financial reporting may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
My / Our audit will be conducted on the basis that the Management and those charged with governance
(Audit Committee / Board) acknowledge and understand that they have the responsibility:
(a) For the preparation of financial statements that give a true and fair view in accordance with the
applicable Financial Reporting Standards and other generally accepted accounting principles in
India. This includes:
- Compliance with the applicable provisions of the 2013 Act;
- Proper maintenance of accounts and other matters connected therewith;
- The responsibility for the preparation of the financial statements on a going concern basis;
- The preparation of the annual accounts in accordance with, the applicable accounting standards
and providing proper explanation relating to any material departures from those accounting
standards;
- Selection of accounting policies and applying them consistently and making judgments and
estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs
of the Company at the end of the financial year and of the profit and loss of the Company for that
period;
- Taking proper and sufficient care for the maintenance of adequate accounting records in
accordance with the provisions of the 2013 Act for safeguarding the assets of the Company and
for preventing and detecting fraud and other irregularities;
- Laying down internal financial controls to be followed by the Company and that such internal
financial controls are adequate and were operating effectively; and
- Devising proper systems to ensure compliance with the provisions of all applicable laws and
those systems were adequate and operating effectively.
(b) Identifying and informing me / us of financial transactions or matters that may have any adverse
effect on the functioning of the Company.
(c) Identifying and informing me / us of:
- All the pending litigations and confirming that the impact of the pending litigations on the
Company’s financial position has been disclosed in its financial statements;
- All material foreseeable losses, if any, on long term contracts including derivative contracts and
the accrual for such losses as required under any law or accounting standards; and
- Any delay in transferring amounts, required to be transferred, to the Investor Education and
Protection Fund by the Company.
(d) Informing me / us of facts that may affect the financial statements, of which Management may
become aware during the period from the date of my / our report to the date the financial statements
are issued.
(e) Identifying and informing me / us as to whether any director is disqualified as on March 31, 20YY
from being appointed as a director in terms of Section 164 (2) of the 2013 Act. This should be
supported by written representations received from the directors as on March 31, 20YY and taken
on record by the Board of Directors.
(f) To provide me / us, inter alia, with:
- Access, at all times, to all information, including the books, accounts, vouchers and other records
and documentation of the Company, whether kept at the Head Office or elsewhere, of which the
Management is aware that are relevant to the preparation of the financial statements such as
records, documentation and other matters. This will include books of account maintained in
electronic mode;
- Access, at all times, to the records of all the subsidiaries (including associate companies and joint
ventures as per Explanation to Section 129(3) of the 2013 Act) of the Company in so far as it
relates to the consolidation of its financial statements, as envisaged in the 2013 Act;
- Access to reports, if any, relating to internal reporting on frauds (e.g., vigil mechanism reports
etc.), including those submitted by cost accountant or company secretary in practice to the extent
it relates to their reporting on frauds in accordance with the requirements of Section 143(12) of
the 2013 Act;
- Additional information that I / we may request from the Management for the purposes of my /
our audit;
- Unrestricted access to persons within the Company from whom I / we deem it necessary to obtain
audit evidence. This includes my / our entitlement to require from the officers of the Company
such information and explanations as I / we may think necessary for the performance of my / our
duties as the auditors of the Company; and
- All the required support to discharge my / our duties as the statutory auditors as stipulated under
the Companies Act, 2013/ ICAI standards on auditing and applicable guidance.
As part of my / our audit process, I / we will request from the Management written confirmation
concerning representations made to me / us in connection with my / our audit. My / Our report prepared
in accordance with relevant provisions of the 2013 Act would be addressed to the shareholders of the
Company for adoption of the accounts at the Annual General Meeting. In respect of other services, my /
our report would be addressed to the Board of Directors. The form and content of my / our report may
need to be amended in the light of my / our audit findings. In accordance with the requirements of Section
143(12) of the 2013 Act, if in the course of performance of my / our duties as auditor, I / we have reason
to believe that an offence involving fraud is being or has been committed against the Company by officers
or employees of the Company, I / we will be required to report to the Central Government, in accordance
with the rules prescribed in this regard which, inter alia, requires me / us to forward my / our report to the
Board or Audit Committee, as the case may be, seeking their reply or observations, to enable me / us to
forward the same to the Central Government. As stated above, given that I am / we are required as per
Section 143(12) of the Act to report on frauds, such reporting will be made in good faith and, therefore,
cannot be considered as breach of maintenance of client confidentiality requirements or be subject to any
suit, prosecution or other legal proceeding since it is done in pursuance of the 2013 Act or of any rules or
orders made thereunder.
I / We also wish to invite your attention to the fact that our audit process is subject to ‘peer review’ /
‘quality review’ under the Chartered Accountants Act, 1949. The reviewer(s) may inspect, examine or
take abstract of my / our working papers during the course of the peer review/quality review. I / We may
involve specialists and staff from our affiliated network firms to perform certain specific audit procedures
during the course of my / our audit. In terms of Standard on Auditing 720 - “The Auditor’s Responsibility
in Relation to Other Information in Documents Containing Audited Financial Statements” issued by the
ICAI and deemed to be prescribed by the Central Government in accordance with Section 143(10) of the
2013 Act , I / we request you to provide to me / us a Draft of the Annual Report containing the audited
financial statements so as to enable me / us to read the same and communicate material inconsistencies,
if any, with the audited financial statements, before issuing the auditor’s report on the financial
statements. {Other relevant Information} {Insert Other information, such as fee arrangements, billings
and other specific terms, as appropriate.} This letter should be read in conjunction with my / our letter
dated _ _ for the Audit of Internal Financial Controls Over Financial Reporting under the 2013 Act, in
respect of which separate fees have been fixed/will be mutually agreed.
I / We look forward to full cooperation from your staff during my / our audit. Please sign and return the
attached copy of this letter to indicate your acknowledgement of, and agreement with, the arrangements
for my / our audit of the financial statements including our respective responsibilities. Yours faithfully,
(Signature)
Pankaj Setia
Partner
Pankaj & Associates
Date: \
Place:
Acknowledged on behalf of
XYZ Limited
Advantages
Proper / systematic allocation of work to the audit assistants
Existence of checklist ensures that none of the audit procedure is omitted
Individual responsibility for work may be assigned
Serves as a guide for planning the audit of the subsequent years
Disadvantages
Same audit programme cannot be used for all the entities
Unnecessary for smaller concerns
If any procedure is missed from the programme, it will not be done
Audit Risk Risk that the auditor gives an inappropriate audit opinion
It is a factor of – Inherent risk, control risk and detection risk
Inherent risk is the risk of a misstatement, owing to the inherent nature of
the account balance. Eg complex calculations / estimates involves
judgement and hence are likely to be misstated
Control risks is the risk of a misstatement not being detected owing to weak
internal controls
Detection risk is the risk of a misstatement owing to worn audit procedures
being employed by the auditor
Audit evidence Audit evidence are the set of facts and reasons which are accumulated
during the audit process
They forms the basis of audit conclusions
Audit evidence should be reasonable and sufficient
Test of details This involves a complete checking of the validity and completeness of the
(Substantive accuracy of the financial accounts
procedures) Substantive procedures are of two types – analytical procedures and test of
details
Chapter 3 – Internal Check, Internal Control, Internal Audit; Vouching and Verification
Chapter at a Glance
Jun-16
Jun-17
Jun-18
Jun-19
Dec-16
Dec-17
Dec-18
Internal Audit Meaning, areas of operations, features, functions, need,
advantages, internal audit as a management tool. Internal check, internal
control, internal audit,
Vouching Meaning of Vouchers, Types of Vouchers, meaning of vouching, Vouching and Verification
Teeming and lading, audit of receipts, audit of expenditure
Internal
Internal check
control Internal
audit
Internal Check Internal check is a system where work of one individual is checked by the other in the
staff. Internal check is a valuable part of the internal control.
In other words, internal check is an arrangement of staff duties where no one is allowed to
carry out and record every aspect of a transaction single handedly. When a transaction
goes through the hands of multiple people, the possibilities of errors and frauds are
reduced.
Benefits / Aims of i. To fix responsibility of a definite persons for particular acts. This is done by the
internal checks segregation of tasks.
ii. To obtain confirmation of facts and entries, physical and financial, by the creation
and preservation of necessary records.
iii. To facilitate the “breakdown” of routine procedures that there is an even flow
of work and work doesn’t stop in the event of absenteeism of a person.
iv. To reduce to a minimum the possibility of fraud and error.
Auditors duty The auditor should apply a few test checks, i.e. he should check
with respect to - a few transactions on a random basis; or
internal check - check fully the accounts for a few months, and carry out a thorough check of the
system whole of a certain class of transactions taking place during that particular period
The existence of a good internal check system reduces (to a great extent) the work of the
auditor but does not reduce his liability.
Checklist Check list is usually a comprehensive list of all the aspects of internal check system,
designed to draw attention to important aspects of the system of internal check.
Internal Control The internal check system questionnaire is a list of systematically and logically
Questionnaires prepared questions designed to evaluate the effectiveness of the internal check
system.
The questionnaire are as comprehensive as possible to make sure that all aspects and
accounting transactions are covered.
During the course of the audit (pre-commencement of audit), statutory auditor submits
the questionnaire to the management, to which the managerial officials respond. The
replies by concerned official will help the auditor to form an opinion as to the
adequacy and reasonableness of the internal check system.
Specimen of Internal Control Checklist of a restaurant
Relationship Internal control system has two elements – internal check and internal audit.
between internal
audit, internal Internal Control = Internal Check + Internal Audit
control and
internal check
Distinction Basis Internal Audit Internal control Internal check
between internal Way of Each component of Work of one person is It operates in routine to
audit, internal Checking work is checked by automatically checked by doubly check every
control and the auditor. another. part of a transaction at
internal check the time of occurrence
and recording of the
same
Objective To evaluate the To ensure adherence to To ensure that no one
internal control management policies, employee has
system and to detect safeguarding of assets, exclusive control over
frauds and errors. prevention and detection any transaction or
of frauds and errors, group of transactions
accuracy and and their recording in
completeness of the books
accounting records.
Point of In an internal audit In an internal control Methods of recording
Time system, work is system, checking is done transactions are
checked after it is simultaneously with the devised where work of
done. conduct of work. Every an employee is
transaction is checked checked continuously
as soon as it is entered. by correlating it with
the work of others.
Thrust of The thrust of internal The thrust of internal The thrust of internal
system system is to detect check system is to prevent control lies in fixing
errors and frauds. errors. of responsibility and
division of work to
avoid duplication.
Cost In an internal audit The system proves to be It is a part of internal
Involvem system, work is costly in case of small control and a method of
ent checked specially; businesses because more division of work,
therefore cost is number of employees are therefore does not add
involved in addition engaged to the cost.
to accounting
Report The internal auditor Internal Controls provide The summary of day to
submits his report to for built in MIS reports day transactions work
the management as report for the senior.
Cut off Cut-off procedures are adopted to allocate revenues and costs to the proper accounting
procedures period.
Accounts payable and accounts receivable are the most susceptible to recording of
transactions in the wrong accounting period.
Serially numbered documents like invoice for sales or purchase bills are allocated to
the respective accounting periods by establishing cut-off points based on the serial
numbers.
Cut-off procedures require detailed testing by the auditor so as to ensure proper
accounting of assets and liabilities, which may arise without the corresponding
physical delivery of goods taking place.
Example: The purchase procedure involves a number of steps, like issuing purchase
requisitions, inviting quotations, selecting sellers and defining the terms of purchase,
entering agreement, receipt of goods, storage of goods, payment, etc. All the
documents and vouchers that substantiate the proof of authentication of these
transactions are serially numbered. It is the auditor’s duty to examine the cut-off
points and ensure that the transaction has been recorded in the period in which the
title in goods is transferred, irrespective of the period of physical delivery of goods
and to ensure compliance of the Indian Accounting Standards and the relevant Statute.
From the following extracts of sales register of the M/s Modern Paper Products Ltd, you are required
to ascertain which sales invoice should be recognized as income in the FY 2018-19. You may employ
the suitable cut-off procedures.
Sales Sales Invoice Date Party Name Amount Goods (risk and
Invoice No (In INR) rewards) delivered on
Class Notes
Internal Control The internal control system comprises all the methods and procedures adopted to:
- assist in achieving the objective of efficient conduct of business,
- ensure adherence to management policies,
- safeguarding of assets,
- prevention and detection of frauds and errors, and
- checking the accuracy and completeness of the accounting records.
Internal checks and internal audit are integral parts of the overall internal control system.
Essential Financial and other Organizational Plans: These plans specify the various duties
elements of an and responsibilities of both management and staff, stating the powers of authorisation
internal control that reside with various members.
system Competent Personnel: In any internal control system, personnel are the most
important element. When the employees are competent and efficient in their assigned
work, the internal control system can be worked and operated efficiently and
effectively even if some of the other elements of the internal control system are absent.
Division of Work: This refers to the procedure of division of work properly among
the employees of the organization. Each and every work of the organization should be
divided in different stages and should be allocated to the employees in accordance
with quality and skill.
Separation of operational responsibility from record keeping: If the operations
department of an organization is being asked to prepare its own records and reports,
there may be a tendency to manipulate results for showing better performance. So in
order to ensure reliable records and information, record- keeping function is separated
from the operational responsibility of the concerned department.
Separation of the custody of assets from accounting: To protect against misuse of
assets and their misappropriation, it is required that the custody of assets and their
accounting should be done by separate persons.
Authorization: In an internal control system, all the activities must be authorized by
a proper authority, depending upon the criticality of the ask and seniority of the
approving authority.
Managerial supervision and review: The internal control system should be
implemented and maintained in conformity with the environmental and elemental
changes of the concern.
Objectives of Operations related Objectives
Internal Control Compliance: To have compliance with law and the accounting practices generally
accepted and followed in the country.
Reliance: To increase the reliance on the internal systems, people and accounting
practices followed by the organization, so that the chances of frauds are reduced.
Security: To provide security to customers, employees and property of the
organization. Physical security systems like security guards, locks and anti-theft
devices are used for providing protection.
Increased efficiency: To assist in human resource and performance management,
and to keep proper control over business activities to achieve maximum levels of
efficiency.
Review and correction: To review the working of the business, locate weak points
in operations and to take corrective measures for proper working.
Authorization: To provide proper authority for purchase, sale, valuation,
verification and possession of assets.
Delegation: To provide for division of duties among the employees where all staff
members work cohesively.
Setting future Corporate Goals: An efficient system of internal control helps the
organization in goal setting. However, the organization should have certain policies,
rules and regulations in place to achieve the preset goals.
Types of Internal Preventive Controls are designed to discourage errors or irregularities from occurring.
Control Systems They are proactive controls that help to ensure departmental objectives are being met.
Examples of preventive controls are:
- Segregation of Duties: Duties are segregated among different people to reduce
the risk of error or inappropriate action. Normally, responsibilities for authorizing
transactions (approval), recording transactions (accounting) and handling the
related asset (custody) are divided amongst different clerks.
- Approvals, Authorizations, and Verifications: Management authorizes
employees to perform certain activities independently and without any approval
from the superiors. However, management specifies those activities or
transactions that need supervisory approval before they are performed or executed
by employees. A supervisor’s approval (manual or electronic) implies that he or
she has verified and validated that the activity or transaction conforms to
established policies and procedures.
- Security of Assets (Preventive and Detective): Access to equipment,
inventories, securities, cash and other assets is restricted; assets are periodically
counted and compared to amounts shown on control records.
Detective Controls are designed to find errors or irregularities after they have occurred.
Examples of detective controls are:
- Reviews of Performance: Management compares information about current
performance to budgets, forecasts, prior periods, or other benchmarks to measure
the extent to which goals and objectives are being achieved and to identify
unexpected results or unusual conditions that require follow-up.
- Reconciliations: An employee relates different sets of data to one another,
identifies and investigates differences, and takes corrective action, when
necessary.
- Physical Inventories
- Audits
Corrective Controls target at the correction of errors and irregularities as soon as they are
detected. Steps in Internal Control consists of:
- Control Environment: Establish Integrity & ethical value.
- Assessment of Risk: Establishment of plan to prevent risks.
- Control Activities: Formulating policies & procedures.
- Information & communication: Evaluation of employee performance.
- Monitoring: Assessing overall performance of the Organisation.
Nature of Internal It is an essential pre-requisite for efficient and effective management of any
Control organization.
It is, a primary responsibility of every management to establish and maintain an
adequate system of internal control appropriate to the size and nature of the business
of the entity.
As per SA 265 - “Communicating deficiencies in internal control to those charged
with Governance and Management”, the auditor should report the deficiencies, if
any, observed during the course of audit, to management.
Scope of Internal The control environment in an enterprise depends largely on the following factors:
Controls Entity’s organizational structure ie. methods of assigning authority and
responsibility (including segregation of duties and supervisory functions).
Functioning of the board of directors or the corresponding governing body and its
committees, e.g. how strong is the audit committee of the board of directors.
Management’s philosophy and operating style – Whether the management has
installed a strong control environment. Management’s control system including the
internal audit function, personnel policies and procedures.
It is clear from the above that the scope of internal controls is much beyond the accounting
controls
Email ID – [email protected]; Mob.: +91 96439 29913
YouTube Channel – CA CS CMA Nikkhil Gupta; - [email protected]
3.9
Responsibilities
Management: The primary responsibility for maintaining an appropriate internal
of management
controls system rests with the management. The responsibility of closely monitoring
and auditor w.r.t.
the system to ensure that it is in place, so as to facilitate the basic objectives of
the internal
installing it, also rests with the management.
controls
Auditor: To safeguard his own interests, the auditor might resort to examination and
evaluation of the internal controls that exist in the organization. The auditor should
bring the weaknesses of the internal control system, if any, to the management’s notice
through a “letter of weakness” or “management letter”.
Techniques for
Narrative Record: It is a complete and exhaustive description of the system. It is
Evaluation of
appropriate in the case of small businesses. Gaps in the control system are difficult to
Internal Control
identify using a narrative records only.
System by the
Check List: It is a series of instructions that a member of the audit staff is required
auditor
to follow. They have to be signed by the audit assistant as proof for having followed
the instructions given. A specific statement is required for every weakness area.
Flow Chart: It is a pictorial representation of the internal control system depicting
its various elements such as operations, processes and controls, which help in giving
a concise and comprehensive view of the organization’s working to the auditor.
Internal Control Questionnaire: This is the most widely used method for collecting
information regarding the internal control system. It involves asking questions to
various people at different levels in the organization about all relevant information.
The questions are formed in a manner that would facilitate obtaining full information
through answers in “Yes” or “No”.
Internal Audit Internal audit is an independent appraisal activity within the organization by the staff of
the entity or by an independent professional appointed for that purpose, for review of
accounting, financial and other operations and controls established within an organization
as a service to the organization.
Five Areas of
Financial and operating information: Internal auditors should review the reliability
operation / scope
and integrity of financial and operating information and the means used to
of internal audit
identify, measures, classify and report such information.
Laws, policies, plans, procedures and regulations: Internal auditor should review
the compliances of policies, plan and procedures, law and regulations and report any
mis-compliance thereof.
Assets: Internal auditors should verify the existence of assets and should review the
means of safeguarding assets.
Resources: Internal auditor should ensure the economic and efficient use of
resources available.
Objectives and goals for operations: Internal auditor should review operation or
programmes to ascertain whether established objectives and goals are being met.
Features of
It is an independent appraisal activity within the organization.
internal audit
It can be conducted by the staff of the entity or by an independent professional
appointed for that purpose.
It is conducted for review of accounting, financial and other operations and
controls established within an organization.
It is conducted as a service to the organization and is not a part of the organization.
It intends to furnish the analysis, appraisals, suggestions and information
concerning the activities reviewed to the management.
Internal auditing functions as a continuous effort for promoting effective control at
reasonable cost.
Functions of
An appraisal function: The internal auditor’s job is to appraise / assess the activity of
Internal Audit
others. For example, a person who spends his time checking employee expense claims is
not performing an internal audit function. But an employee who spends sometime
reviewing the system of checking employee expense claims may be performing an internal
audit function.
Service to the organization: The management requires that the auditor ensures that a) its
policies are fulfilled, b) the information it requires to manage effectively is reliable and
complete; c) the organisation’s assets are safeguarded, d) the internal control system is
well designed, e) the internal control system works effectively.
Other duties: other duties may include the following matters:
- Ensuring the implementation of social responsibility policies adopted by top
management.
- Acting as a training officer in internal control matters.
- Auditing the information given to management particularly interim accounts and
management accounting reports.
- Taking a share of the external auditor’s responsibility in relation to the figures in
the annual accounts and
- Being concerned with the compliance with external regulations such as those on
the environment, financial services, related parties etc.
Need of Internal Internal audit is in-demand due to the following reasons:
Audit / Internal i. Increased size and complexity of businesses.
Audit is an ii. Enhanced compliance requirements, like accounting standards.
important iii. Focus on risk management and internal controls to manage them.
management tool iv. Unconventional business models.
v. Improves efficiency of business operations
vi. Ensures authenticity data being used by management for decision making
vii. Intensive use of information technology.
viii. Stringent norms mandated by regulators to protect investors.
ix. An increasingly competitive environment.
x. Reporting under Companies (Auditors Report) Order, 2016
Advantages of
To the management:
Internal Audit
i. It gives a review of overall internal control system established by the
management.
ii. It furnishes the deviations in following the procedures adopted for
safeguarding assets.
iii. It appraises the organizational structure and management information system.
iv. It establishes that the policies, plans and strategies implemented are well in
place and gives suggestions on management information systems reports for
promoting effective control at reasonable cost.
To the statutory auditor in specific
i. It evaluates the internal control system, so the statutory auditor can reduce the
number of tests that he may have had to conduct in case there was no internal
audit
ii. It carries out physical stock taking procedures, so reliance on stock valuation
is increased.
iii. It helps in timely completion of accounts and accuracy of records.
iv. It evaluates the contingent liability existing at the year end.
v. It ensures correctness of financial statements through a system of pre-audit or
continuous audit.
To the organization as a whole and other stakeholders in general
i. The regular audit and checks result in accurate and efficient accounting
system.
Important Questions – Internal Check, Internal Control, Internal Audit - Industry Specific
Q.1 What are the differences between checklist and internal control questionnaire? [June 2014, June
2017 – 4 marks]
Q.2 Distinguish between internal audit and internal check. [Dec 2015 – 7 marks]
Q.3 An auditor can avoid checking of records where good internal check system exists. Comment [2
marks]
If the auditor is satisfied with the internal check / control system, he often curtails his audit procedures.
However, since the ultimate liability is of the auditor, he might choose to perform substantive procedures
in case to gain assurance on the financial information.
Q.5 Internal Audit is an important management tool. Comment [June 2009, Dec 2016 – 4 marks]
Q.6 Internal Audit plays an important role in detecting and preventing fraud. Comment [Dec 2009 – 2
marks]
The statement is correct. Internal auditing involves checking the day-to-day functioning of the
organisation, hence plays an important role in detecting and preventing fraud. It is an independent appraisal
activity for review of operations, including safeguarding of assets, preventing misappropriation of money
etc.
Q.7 Internal checks have some fundamental aims. Comment [June 2010 – 4 marks]
Q.8 What is auditing-in-depth? [June 2011 – 2 marks]
Q.9 A practicing cost accountant cannot be an Internal Auditor, as the Internal auditor is related to
financial accounting. Comment [June 2012 – 2 marks]
This statement is incorrect. Practicing cost accountant can also be the internal auditor provided he is not
the cost auditor
Q.10 Test checks may be applied to all the transactions. Comment [June 2012 – 2 marks]
This statement is incorrect. Only some transactions are subject to test checks. Eg. Cash/bank balance and
pass books should always be thoroughly checked.
Q.11 Internal control and internal check are same. Comment [June 2012 – 4 marks]
Or
Distinguish between Internal control and internal check [dec 2018 (6 marks)]
Q.12 What are the limitations of internal controls. [Dec 2013 – 4 marks]
Q.13 State the 5 areas of operations of Internal Audit and its features. [Dec 2013 – 8 marks]
Q.14 What is cut off procedure? Explain its significance in context of Auditing. [Dec 2013 – 4 marks]
Q.15 What is test checking in audit work? [June 2014, June 2015, June 2016 – 2 marks]
Q.16 There is no need to design better internal controls in an EDP or computerisation. Comment [June
2015 – 4 marks]
This is not true Computerization, automatically implies a constant review of the system to increase the
efficiency in producing reliable data. As a result the internal controls are normally better designed under
computerized systems. Automatic checks are instituted and the responsibilities of various people are clearly
stated.
Q.17 Internal check is a part and parcel of internal control. Comment [June 2015 – 4 marks]
Yes Internal control is a plan of organization and covers all methods and procedures adopted by
management to assist its objectives of ensuring the orderly and efficient conduct of business, its includes
physical and financial control and covers internal check and internal audit also. Hence internal check is
part of internal control.
Q.18 An auditor applies various techniques to evaluate the internal control system of an organisation.
Discuss. [Dec 2017 – 4 marks]
Q.19 Discuss different types of internal control systems with example. [June 2019 – 6 marks]
Teeming & lading/ Teeming & Lading is a commonly followed method of misappropriation of cash by
lapping concealing cash shortages and covering them through recoveries from another
customer.
E.g., a salesman recovers Rs. 10,000 from customer C and misappropriates the same,
but to conceal the misappropriation, he declares Rs.10,000 received later from another
customer D as received from C so that the balance of C confirms to the client’s debtor
list, and so on for recovery from E of same amount declared as from D.
Sale of Assets
i. Ensure that the entity internal control is in place in respect of authorisation for
making the sale.
ii. Ensure the means to sale the assets, is it is a direct sale or by means of agent. If
it is a direct sale then check the amount collected with reference of copy of
receipt issued and if it is by agent then examines terms with them.
iii. Ensure the sale value of assets is reasonable.
iv. Check that the amount of sale proceeds is duly accounted for.
v. The profit or loss arising from the sale of assets is duly reflected in the financial
statement.
Audit of expenditure Transactions with Directors
i. Compliance with Sec 188 of Co. Act, 2013: Check that any contract entered
into by the director or his relatives etc. with the company is approved by the
Board of Directors, in accordance with the provisions of section 188 of the
Companies Act, 2013.
ii. Disclosure of interest by Director: Every director of a company who is directly
or indirectly, concerned or interested in a contract or agreement entered or
proposed to be entered into with the company, must disclose his interest to the
company at the Board meeting (Section 184).
iii. Compliance with Sec 197 of Co. Act, 2013: The remuneration paid to the
directors of public companies or the private companies which are the
subsidiaries of public companies should be in accordance with the maximum
limits provided in section 197 of the Companies Act, 2013.
In case of capital items the auditor is required to go beyond Vouching and verify
Verification of assets
and liabilities the physical existence and evaluate the assets and liabilities to arrive at true and
fair view of the state of affairs of business.
Hence, verification may be defined as “An enquiry into the Value, Ownership,
Title, Existence and possession of any charge on the assets”. Verification means
“Proving the truth”.
Verification of liabilities is also as important as the verification and assets. If the
liabilities are overstated or understated, the balance sheet will not represent a
true and fair view of the state of affairs of the Company.
Importance of True and fair view of Balance Sheet – verification of assets and liabilities
Verification enables the auditor to comment on true and fair state of affairs of the business.
Valuation – verification enables the auditor to determine whether the assets or
liabilities are overstated or understated.
Omissions – verification facilitates the act of confirming the omission of any
asset or liability in the balance sheet.
Scope of Verification includes confirming of the following aspects:-
Verification whether the assets were in existence on the date of balance sheet,
whether assets had been acquired for the purpose of business only,
whether the assets had been acquired under a proper authority,
whether the right of ownership of the assets vested in the enterprise,
whether the assets were free from any charge, and
whether, the assets were properly valued and disclosed in the balance sheet.
Objects of To know whether the Balance-Sheet exhibits a true and fair view of the State of
Verification affairs of the business.
To find out whether the assets were in existence
To find out the ownership and title of the assets
To show correct valuation of assets and liabilities
To verify the arithmetical accuracy of the books of accounts
To ensure that the assets have been recorded properly
To detect frauds & errors, if any
To find out whether there is an adequate internal control regarding acquisition,
utilization and disposal of assets.
Advantages of It avoids manipulation of accounts
Verification It guards against improper use of assets
It ensures Proper recording and valuation of assets.
It exhibits true and fair view of the state of affairs of the Company
Technique of Inspection – This means physical inspection of the assets like counting cash in
Verification hand, measuring inventory, inspection of securities, share certificate etc.,
Observation – The auditor may observe or witness the inspection of assets done
by others.
Confirmation – This means obtaining written evidence from outside parties
regarding existence of assets like, confirmation from Debtors and Creditors about
the balance outstanding etc.
How to conduct the Examine the documentary evidence and see that the assets are properly recorded
verification work in the books of accounts.
Verify the opening balance from the schedule of fixed assets, ledger or register.
Verify acquisition on the basis of orders, invoices, title deeds etc.,
Verify the self constructed assets on the basis of contractors bill, work order etc.,
Ensure that the fully written off fixed assets are properly recorded.
See the authority of disposal of fixed assets.
Follow a proper procedure to ascertain the omissions, if any.
Verify ownership of the fixed assets on the basis of title deeds.
Verify existence of assets by physical verification. He should ensure that the
physical verification of assets is carried out by the management.
Test check the records of fixed assets with physical verification reports and see
that discrepancies, if any, are properly dealt with.
See whether the assets are charged. He should verify the Loan Agreements,
Register of charge, Board Resolution, Share Holders Resolution etc.,
Q.20 What are the special considerations to be kept in mind during vouching. [June 2009, June 2016 – 7
marks]
This is incorrect. Vouching is the fundamental stone on which accounting and auditing stand. Vouching is
helpful in detecting error and fraud. It also helps in compliances as required by law.
Q.22 Describe voucher and vouching. [Dec 2013, June 2015 – 2 marks]
Q.23 What are the objects of Verification of assets and liabilities. [June 2014, Dec 2015 – 4 marks]
Q.24 What do you understand by Teeming and Lading with respect to misappropriation of cash? Explain
the procedure that auditor has to follow for its timely detection. [June 2015 – 4 marks]
Internal
Internal check
control Internal
audit
Internal control
Objective / The internal control system comprises all the methods and procedures adopted with the
benefits of objective of :
internal control safeguarding of assets, prevention,
detection of frauds and errors,
checking the accuracy and completeness of the accounting records;
ensuring compliance with law
ensuring optimal utilization of resources
efficient conduct of business, and
ensure adherence to management policies,
Internal audit
internal audit system should be as per the size of the organization should be
employed
To be undertaken by qualified personnel
Should cover all the aspects / department of the business organization
Types of internal Preventive – designed to avoid errors and irregularities. Eg, segregation of
control duties, approvals and authorization etc.
Detective – designed to find errors or irregularities after they have incurred. Eg.
Reconciliations, physical verification of assets or inventory, review etc.
Corrective – designed to correct the errors and irregularities. Eg. Control
environment ie establish integrity and ethical value; establishing plans to
prevent risks, assessing the overall performance of the organization.
Nature and Pre-requisite for an efficient and effective conduct and management of any
scope of internal organization
control Ensures adherence to management policies
Safeguarding of organization assets
Prevention and detection of errors and frauds
Ensures accuracy and completeness of accounting records
Ensures timely preparation of reliable financial information
Techniques of Narrative records – Auditor can read this complete and exhaustive description
evaluation of of control system and gain an in-depth understanding of the controls
internal controls Check list – A comprehensive list of all the internal controls and the methods /
procedures of evaluating them
Internal check
Scope of internal System of checking whereby work of one individual is automatically checked
check by another individual
This is done by distributing the duties in such a way that no single individual is
allowed to carry out each and every aspect of a transaction all by himself.
This reduces possibility of errors and frauds
Auditor’s duty Auditor may place reliance on internal checks after performing the following
regarding procedures:
Internal check Apply a few test checks to ensure that the transactions are aptly recorded in the
system books of accounts
Verify a few class of transactions in detail to examine the validity of internal
checks
Internal control It is a list of questions which the auditors asks the auditee, to evaluate the
questionnaire effectiveness of the internal control system
Auditor should submit the questionnaire to the concerned official of the
organization, anytime during the course of the audit
Internal Audit
Scope of internal Appraisal of internal control system by the staff of the entity or by an
audit independent professional
Areas / functions Financial and operating information – To review the accuracy and
/ scope covered completeness of financial and operating information and make a report on it
in internal audit Compliances with law – To review that the systems established by the
organization ensures due compliances with laws and regulations.
Safeguarding the assets – To verify the existence and valuation of the assets
recorded in the books
Optimal utilization of resources – To ensure economic and efficient use of
the available resources
Achieving the goals and objectives of the organisation.
Technique of Inspection – This means physical inspection of the assets like counting cash in
Verification hand, measuring inventory, inspection of fixed assets, securities, share
certificate etc.,
Observation – The auditor may observe or witness the inspection of assets
done by others.
Confirmation – This means obtaining written evidence from outside parties
regarding existence of assets like, confirmation from Debtors and Creditors
about the balance outstanding etc.
Examine the system followed by the entity to deposit the cash sales in bank
account.
Examine the cancelled cash memos with its original copy to prevent
misappropriation.
Steps for audit of Check who has the authorisation for making the sale.
sales of fixed Check the amount collected with reference of copy of receipt issued.
assets Ensure the sale value of assets is reasonable.
Check that the amount of sale proceeds is duly accounted for.
The profit or loss arising from the sale of assets is duly reflected in the
financial statement.
Steps for audit of Authorization: The payment for acquisition of assets should be properly
payment for authorized and be duly supported by receipt for amount paid.
purchase of fixed Ownership: Check the title deeds in case of purchase of immovable properties
assets
to ensure that the ownership in case of the moveable asset has been registered
in the name the purchaser.
Existence: The auditor should also verify the existence, value and the title of
the assets acquired.
Capitalization of Assets: Check that the the asset has been properly recorded
in the books of account.
Chapter at a Glance
Section 128 Every company shall prepare and keep books of account (either physical or electronic
(Books of mode) and other relevant books and papers and financial statement for every financial
Accounts) year
at its registered office
which give a true and fair view of the state of the affairs of the company,
on accrual basis and according to the double entry system of accounting.
Section 139 Particulars Non-Government company [Sec. Government Company2 [Sec.
(Appointment of 139(6)] 139(7)]
the first auditor1) Appointed Board of Directors Comptroller and Auditor General of
by India3 [CAG]
Time limit of Within 30 days of date of Within 60 days of date of registration
appointment registration of the company of the company
Consequence In case the Board do not appoint the In case the CAG of India does not
of failure to first auditor on time, it shall inform appoint the first auditor on time, the
appoint the members of the company, who BOD of the company shall appoint
shall within 90 days at an EGM such auditor within next 30 days;
shall appoint the auditor. In the case of failure of the Board to
[Maximum time limit – 120 Days] appoint such auditor, it shall inform the
members of the company who shall
appoint such auditor within 60 days at
an EGM.
[Maximum time limit – 120 Days]
1 First auditors – Auditors who are appointed in the first year of incorporation of a Company
2 Government Company is company which is owned or controlled by:-
- Central Government
- State Government
- Partly by Central and / or one or more State Government
3 The Comptroller and Auditor General of India is an authority, established by Article 148 of the Constitution of India, which audits all
receipts and expenditure of the Government of India and the state governments, including those of bodies and authorities substantially
financed by the government - Wikipedia
Tenure of First auditor shall hold office till First Auditor shall hold office till the
auditor the conclusion of the first AGM conclusion of the first AGM.
Test Your Case Study: Managing Director of Parrot Ltd. himself wants to appoint CA. Ms. Koyal, a
Knowledge practicing Chartered Accountant, as first auditor of the company.
Analysis: As per the provisions of Section 139(6) of the Companies Act, 2013 the first
auditor of a company shall be appointed by the Board of Directors (within 30 days from the
date of registration of the company).
In the instant case, the proposed appointment of CA. Koyal, a practicing Chartered
Accountant, as first auditor by the Managing Director of Pigeon Ltd. by himself is in violation
of Section 139(6) of the Companies Act, 2013, which authorizes the Board of Directors to
appoint the first auditor of the company.
Conclusion: In view of the above, the Managing Director of Pigeon Ltd. should be advised
not to appoint the first auditor of the company.
Case Study: The first auditor of Bhartiya Ispat Ltd., a Government company, was appointed
by the Board of Directors in its meeting after 10 days from the date of registration.
Analysis: As per the provisions of Section 139(7) of the Companies Act, 2013, in the case of
a Government company, the first auditor shall be appointed by the Comptroller and Auditor-
General of India within 60 days from the date of registration of the company.
Hence, in the case of Bhartiya Petrol Ltd., being a government company, the first auditor
shall be appointed by the Comptroller and Auditor General of India.
Conclusion: Thus, the appointment of first auditor made by the Board of Directors of
Bhartiya Ispat Ltd., is null and void.
Sec. 139 – Particulars Non-Government company [Sec. Government Company [Sec. 139(5)]
Appointment of 139(1)]
subsequent Appointed Shareholders CAG
auditor4 by
Time limit of At the AGM Within 180 Days of commencement of
appointment the financial year ('FY')
Tenure of Till the conclusion of its 6th AGM Till the conclusion of the AGM.
auditor
Class Notes
Pre-requisite Before appointment of the auditor is made, following certificates are required to be obtained
before from the auditor:
appointment of - the written consent of the auditor to such appointment, and
auditor - that the appointment, shall be in accordance with the conditions as may be prescribed
by the Companies Act, 2013
- The certificate shall also indicate whether the auditor satisfies the criteria provided
in section 141.
4 Subsequent auditors are those who are appointed post the first year of incorporation of the company
The company shall inform the auditor concerned of his or its appointment, and also file a
notice of such appointment with the Registrar within 15 days of the meeting in which
the auditor is appointed.
Sec. 139(8) - Particulars Non-government company Government Company
Casual Vacancy5 New auditor Board of Directors CAG
(CV) appointed by
Time limit 30 days of the occurrence of vacancy 30 days of the occurrence of
vacancy. In case CAG doesn’t fill
the CV within the due date, Board
shall fill the vacancy till next 30
days.
Special The resigning auditor should file a The resigning auditor should
conditions in statement with - a) the company file a statement with a) the
case of CV and b) the Registrar stating the company, b) the Registrar and
on reasons for resignation c) CAG stating the reasons for
resignation The appointment of the new auditor resignation
of the auditor should be approved by the
[Refer Company at AGM.
Section Such new auditor holds the office
140(2) for till conclusion of the next AGM
details] only.
Sec. 139(9) – he is not be disqualified for re-appointment under the Act [like he should not suffer from
Conditions for disqualifications under section 141(3), 141(4) and 144];
re-appointment he has not given the company a notice in writing of his unwillingness to be re-appointed;
of retiring a special resolution has not been passed at that meeting appointing some other auditor
auditor or providing expressly that he shall not be re-appointed; and
he has not furnished a written certificate that he is eligible under the ceiling limit under
section 141(3)(g)
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.
Sec. 139(2) Applicability All listed companies
readwith Rule 5 – Unlisted public company having :
Rotation of - Paid up capital of INR 10 crores or more, or
Auditors - Borrowings from financial institutions / banks of INR 50 crores or more
Private company having :
- Paid up capital of INR 50 crores or more, or
- Borrowings from financial institutions / banks of INR 50 crores or more
Exclusions – One Person Company and Small Company
Type of Where an Individual is the Where a Firm / LLP is the auditor
Auditor Auditor
Tenure The retiring auditor (including the The retiring auditor (including the
auditor in the same network6) shall auditor in the same network) shall not
not be reappointed for more than be reappointed for more than two terms
one term of initial 5 years of initial 5 years
If a partner, who is in charge of an audit
firm and also certifies the financial
statements of the company, retires from
the said firm and joins another firm of
chartered accountants, such other firm
5 Vacancy which occurs after the appointment of the auditor, due to his death, resignation or disqualification etc. In such a case, a
new auditor is to be appointed
6 Network firms means – a) those having common partners; b) operating under common brand / trade name; and c) having common
control
Test Your Case Study: Find the lacuna in the following resolution passed in the AGM of M/s Carrot
Knowledge Ltd., a listed company:
“RESOLVED THAT M/s Rabbit & Associates, Chartered Accountants are appointed as the
auditors of the Company for two consecutive terms of 5 years each and 1 more year
thereafter, ie till the conclusion of 12th AGM.”
Analysis: As per the provisions of Section 139(1) an auditor shall be appointed till the
conclusion of 6th AGM. Further, as per the provisions of Section 139(2) readwith the
Companies (Audit and Auditors) Rules, 2014, a listed company cannot re-appoint the firm
of auditors beyond the initial two terms of 5 years each.
Conclusion: The appointment of M/s Rabbit & Associates is not valid as the appointment
can be made only for one term of five consecutive years and then another one more term of
five consecutive years. It can't be appointed for two terms in one AGM only.
Further, a cooling period of five years from the completion of term is required i.e. the firm
can't be re-appointed for further 5 years after completion of two terms of five consecutive
years.
Case Study: M/s XYZ & Co., is an audit firm having partner Mrs. X, Mr. Y and Mr. Z,
whose tenure has expired in the company immediately preceding the financial year. Would
M/s ABZ & Co., another audit firm in which Mr. Z is a common partner, will also be
disqualified for the same company for the period of five years?
Analysis: Firms / Network of firms having common partners are disqualified from auditing
the company for which any one firm of network has already audited the financials for two
consecutive term of 5 years
Conclusion: M/s ABZ would also be disqualified from auditing the company for next five
years. The tenure of XYZ & Co. is completed and the same will also be applicable on the
firms having common partners as XYZ & Co.
Case study: Manner of rotation will not be applicable to Company A which has a paid up
share capital of Rs. 15 crores and having a public borrowing, from a nationalized bank, of
Rs. 50 crores because it is a private limited company. Comment
Analysis: According to Section 139 of the Companies Act, 2013, the provisions related to
rotation of auditors are also applicable to a private limited company having a share capital of
Rs. 50 crores or more or having public borrowings of Rs. 50 crores or more.
Conclusion: In the current case, Company A is having a public borrowing of Rs. 50 crore.
Hence, the provisions of rotation are applicable to Company A.
Case Study: AMSHA Ltd, a subsidiary of NAMO Ltd, whose 20% shares have been held
by the CG, 25% by UP government, and 10% by MP Government. AMSHA appointed Mr.
R as statutory auditor for the year. Comment
Analysis: As per Section 139(7) of the Companies Act, 2013, the auditor of a Government
company shall be appointed by CAG of India.
Conclusion: NAMO Ltd has 55% shareholding by CG or the state governments. Therefore,
it is a Government Company. AMSHA Ltd is a subsidiary of NAMO Ltd, hence AMSHA is
alos covered in the definition of Government Company. Therefore, the auditor of AMSHA
Ltd. should be appointed by the CAG. Appointment of Mr. R is invalid.
Case Study: White Star Ltd. was incorporated on 01.08.2014 and Mr. T, who is a relative to
the Chairman and MD of the Company, is appointed as the statutory auditor by the Board of
Directors in their meeting on 04.09.2014. Comment
Analysis: There is two issues in this case – a) appointment of the first auditor and b) relation
of the auditor with the MD. As per Section 139(6) of the Companies Act, 2013, the first
auditor of company should be appointed by the BOD within 30 days of date of registration
of the Company. If the BOD fails to appoint the first auditor, it shall inform the members of
the Company, who shall within 90 days, at an EGM, make the appointment.
Conclusion: In the given case, appointment of Mr. T is not valid. Hence the second issue of
relationship with the CMD becomes redundant.
Case Study: Mr. A was appointed auditor of AAS Ltd. by the Board to fill the vacancy that
arose due to death of the auditor originally appointed in AGM. Subsequently, Mr. A also
resigned on health grounds during the tenure of appointment. The Board filled the vacancy
by appointing Mr. B through a duly passed Board resolution. Comment
Analysis: As per Section 139(8) of the Companies Act, 2013, any casual vacancy in the
office of the auditor shall be filled by the Board within 30 Days. However, if the casual
vacancy is on account of resignation, such appointment shall also be approved by the
Company at the general meeting convened within 3 months of the recommendation of the
Board. The auditor in such a case shall hold the office till next AGM.
Conclusion: In the instant case, Mr. B was appointed by the Board on resignation of Mr. A.
If the cause of vacancy is resignation, then the power of appointment shall vest with the
general meeting only. Hence the appointment by the Board is irrelevant.
Section 140(1) - a) Board resolution to be passed to remove the auditors before the expiry of their term
Removal before b) Application to be made to the central government within 30 days of the Board resolution
expiry of term c) The Company shall hold the general meeting within 60 days of receipt of approval of the
Central Government for passing the special resolution.
d) the auditor concerned shall be given a reasonable opportunity of being heard before
removal.
Section 140(2) – a) The auditor shall file (within a period of 30 days from the date of resignation), a statement
Resignation of with the company and the Registrar.
the auditor b) The auditor of a government company shall additionally file such statement with CAG,
indicating the reasons and other facts as may be relevant with regard to his resignation.
Section 140(3) – a) If the auditor does not comply with requirement of Sec. 140(2), he or it shall be punishable
Breach of section with fine of Rs. 50,000 to Rs. 5 Lacs.
140(2)
Section 140(4) - a) Unless the auditor has completed a consecutive tenure of five years or ten years as the
Removal after case may be, his removal shall be approved vide a resolution in the AGM after giving a
expiry of term special notice.
b) The special notice must contain the information on the representation (if any) made by
the retiring auditor.
c) A copy of the representation shall be sent to all the members
d) If a copy of the representation is not sent, because it was received too late or because of
the company’s default, the auditor may require that the representation shall be read out at
the meeting.
e) Company or any other aggrieved person may apply to Tribunal for not sending or reading
the representation, if this right is being abused by the auditor.
f) If the Tribunal is satisfied, that the auditor is misusing this power of representation, then,
the copy of the representation may not be sent and the representation need not be read out
at the meeting.
Class Notes
Section 140(5) – a) If Tribunal is satisfied that the auditor of a company has, acted in a fraudulent manner in
Direction by relation to, the company or its directors or officers, It may, by order, direct the company
Tribunal for to change its auditors.
removal of b) Such direction may be made:
auditor Suo moto (by its own will) by the Tribunal or
on an application made to Tribunal by the C.G. or by any person concerned
c) If the application is made by the C.G. and the Tribunal is satisfied that any change of the
auditor is required,
it shall within 15 days of receipt of such application, make an order that he shall not
function as an auditor; and
the C.G. may appoint another auditor in his place.
d) An auditor, against whom final order has been passed by the Tribunal under this section
shall not be eligible to be appointed as an auditor of any company for a period of five
years from the date of passing of the order
Section 141(1) a) A person shall be eligible for appointment as an auditor of a company only if he is a
and (2) - Chartered Accountant.
Eligibility to be b) A firm whereof majority of partners practising in India are qualified for appointment
appointed as as aforesaid may be appointed by its firm name to be auditor of a company.
auditor c) Where a firm including a LLP is appointed as an auditor of a company, only the
partners who are CA shall be authorised to act and sign on behalf of the firm.
Section 141(3) a) a body corporate other than a limited liability partnership registered under the Limited
readwith Rule 10 Liability Partnership Act, 2008;
– b) an officer or employee of the company;
Disqualifications c) a person who is a partner, or who is in the employment, of an officer or employee of
of an auditor the company;
d) a person who, or his relative7 or partner
Section 144 - is holding any security of or interest in the company or its subsidiary, or of its
Auditor not to holding or associate company or a subsidiary of such holding company:
render certain
services
7 Relative means - anyone who is related to another - as members of a Hindu Undivided Family; husband and wife; Father (including
step- father), Mother (including step¬mother), Son (including step- son), Son's wife, Daughter, Daughter's husband, Brother
(including step- brother), Sister (including step- sister)
Provided that the relative may hold security or interest in the company of face
value not exceeding Rs. 100,000.
Provided further that in the event of acquiring and security or interest by a
relative above the threshold limit, the corrective action to maintain the limits as
specified above shall be taken by the auditor within 60 days of such acquisition
or interest.
is indebted to the company, or its subsidiary, or its holding or associate company
or a subsidiary of such holding company, in excess of Rs. Five Lacs; or
has given a guarantee or provided any security in connection with the
indebtedness of any third person to the company, or its subsidiary, or its holding
or associate company or a subsidiary of such holding company, in excess of Rs.
One Lac;
e) a person or a firm who, whether directly or indirectly, has business relationship8 with
the company, or its subsidiary, or its holding or associate company or subsidiary of
such holding company or associate company of such nature as may be prescribed;
f) a person whose relative is a director or is in the employment of the company as a
director or key managerial personnel;
g) a person who is in full time employment elsewhere or a person or a partner of a firm
holding appointment as its auditor, if such persons or partner is at the date of such
appointment or reappointment holding appointment as auditor of more than twenty
(20) Companies, other than one-person company, dormant companies, small
companies and private companies having paid up capital less than 100 Crores
h) a person who has been convicted by a court of an offence involving fraud and a period
of ten years has not elapsed from the date of such conviction;
i) a person, who directly or indirectly, renders any service referred to in sec. 1449 to the
company or its holding company or its subsidiary company.
Class Notes
8 Business Relationship: According to the Companies (Audit and Auditors) Rules, 2014, the term "business relationship" shall be
construed as any transaction entered into for a commercial purpose, except:
- commercial transactions which are in the nature of professional services permitted to be rendered by an auditor or audit firm
under the Act and the Chartered Accountants Act, 1949 and the rules or the regulations made under those Acts;
- commercial transactions which are – a) in the ordinary course of business of the company and b) 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 the business of
telecommunications, airlines, hospitals, hotels and such other similar businesses.
9 Consulting and Specialised Services specified in Section 144 of Companies Act, 2013: a) accounting and book keeping services; b)
internal audit; (c) design and implementation of any financial information system; (d) actuarial services; e) investment advisory
services; (f) investment banking services; (g) rendering of outsourced financial services; (h) management services; and (i) any other
kind of services as may be prescribed
Test Your Case Study: Mr. A, a practicing Chartered Accountant, is holding securities of XYZ Ltd.
Knowledge having face value of Rs. 900. Whether Mr. A is qualified for appointment as an auditor
of XYZ Ltd.
Analysis: As per section 141(3)(d)(i), an auditor is disqualified to be appointed as an
auditor if he, or his relative or partner holding any security of or interest in the company
or its subsidiary, or of its holding or associate company or a subsidiary of such holding
company.
Conclusion: In the present case, Mr. A is holding security of Rs. 900 in XYZ Ltd.
Therefore, he is not eligible for appointment as an auditor of XYZ Ltd.
Case Study: Mr. P is a practicing Chartered Accountant and Mr. Q, the relative of Mr.
P, is holding securities of ABC Ltd. having face value of Rs. 90,000. Whether Mr. P is
qualified from being appointed as an auditor of ABC Ltd.
Analysis: As per section 141(3)(d)(i), a person is disqualified to be appointed as an
auditor if he, or his relative or partner is holding any security of or interest in the company
or its subsidiary or of its holding or associate company or a subsidiary of such holding
company. Further, as per proviso to this section, the relative of the person may hold the
securities or interest in the company of face value not exceeding oft 1,00,000.
Conclusion: In the present case, Mr. Q. (relative of Mr. P), is having securities of Rs.
90,000 face value in ABC Ltd., which is as per requirement of proviso to section 141
(3)(d)(i). Therefore, Mr. P will not be disqualified to be appointed as an auditor of ABC
Ltd.
Case Study: M/s RM & Co. is an audit firm having partners CA. R and CA. M. The firm
has been offered the appointment as an auditor of ENN Ltd. for the Financial Year 2016-
17. Mr. Bee, the relative of CA. R, is holding 5,000 shares (face value of Rs. 10 each) in
ENN Ltd. having market value of Rs. 1,50,000. Whether M/s RM & Co. is disqualified
to be appointed as audit of ENN Ltd.
Analysis: As per section 141(3)(d)(i), a person shall not be eligible for appointment as
an auditor of a company, who, or his relative or partner is holding any security of or
interest in the company or its subsidiary, or of its holding or associate company or a
subsidiary of such holding company. However, as per proviso to this section, the relative
of the person may hold the securities or interest in the company of face value not
exceeding of Rs. 1,00,000.
Conclusion: In the instant case, M/s RM & Co. is an audit firm having partners. CA. R
and CA. M. Mr. Bee is a relative of CA. R and he is holding shares of Enn Ltd. of face
value of Rs. 50,000 only (5,000 shares X Rs. 10 per share).
Therefore, M/s RM & Co. is not disqualified for appointment as an auditors. of ENN Ltd.
as the relative of CA. R (i.e. partner of M/s RM & Co.) is holding the securities in ENN
Ltd. which is within the limit mentioned in proviso to section 141(3)(d)(i) of the
Companies Act, 2013.
Case Study: CA. Pasha is providing the services of investment banking to C Ltd. Later
on, he was also offered to be appointed as an auditor of the company for the current
financial year.
Analysis: Section 141(3)(i) of the Companies Act, 2013 disqualifies a person for
appointment as an auditor of a company who is engaged as on the date of appointment in
consulting and specialized services as provided in section 144. Section 144 of the
Companies Act, 2013 prescribes certain services not to be rendered by the auditor which
includes investment banking services.
Conlusion: CA. Pasha is advised not to accept the assignment of auditing as the
investment banking service is specifically notified in the list of services not to be rendered
by him as per section 141(3)(i) read with section 144 of the Companies Act, 2013.
Section 141(4) – Where a person appointed as an auditor of a company incurs any of the disqualifications
Subsequent mentioned in sub-section (3) after his appointment, he shall vacate his office as such
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4.9
disqualification auditor and such vacation shall be deemed to be a casual vacancy in the office of the
of an auditor auditor.
Section 142 – First Auditor - The remuneration (including the out of pocket expenses) is fixed by board
Remuneration of of directors
the auditor Subsequent Auditor - The remuneration (including the out of pocket expenses) is fixed
in the general meeting or in the manner prescribed in such a meeting
However, this does not include any remuneration paid to him for any other service
rendered by him at the request of the company, like advisory services
Section 143 – Powers / Rights
Powers and Right of access to the books of account and vouchers of the company, at any time,
duties of whether kept at the registered office of the company or at any other place
Auditors Right to inquire / require from the officers of the company such information and
explanation as he may consider necessary for the performance of his duties as auditor,
Section 145 – To including the following matter:
sign the audit - Whether the loans and advances made by the company are fully secured and they
report are not prejudicial to the interest of the company
- Whether personnel expenses have been charged to P&L Account
Section 146 – To - Whether the position stated in the financial statements is correct and not
attend the misleading
general meeting - Whether any assets of the company are sold below the purchase price
In case of an audit of a holding company, the auditor may also access the records of
all the subsidiaries for consolidation purposes.
Right to receive notices, to attend and to be heard in the general meeting [Section
146]
Right to report to the members of the company on the accounts examined by him.
The report should conclude whether the financial statements give a true and fair view
of the state of the company's affairs
Right to Lien10 - auditor can exercise lien on books and documents placed at his
possession by the client for non-payment of fees, for work done on the books and
documents.
In case of Government companies, the CAG has the power to conduct a test audit /
supplementary audit, in addition to the regular statutory audit
Duties
To inquire into all the relevant matters before issuing the report. Examples of the
matters which is might look at are:
Whether loans and advances are made by the company on the basis of adequate
security or not
Whether the transactions of the company which are represented merely by book
entries are prejudicial to the interests of the company
Whether personal expenses have been charged to revenue account
Reporting is to be done if anything adverse is discovered in the course of audit
To report on all the relevant matters which affects the ‘true and fair’ view of the
financial statements. Especially on the matters specified in Companies (Auditor's
Report) Order, 2016 [‘CARO, 2016’].
To report on the adequacy of internal financial controls (IFC) of the company.
To state the reason for qualification or negative report – In case the auditor issues a
negative / qualified report, the report shall state the reasons there for
To report on the branch financials after considering the report of the branch auditor
10 ‘Lien’ means having the lawful possession of somebody else's property, in the event if non-payment of the dues
To report on Frauds – In case the auditor believes that an offence of fraud is being or
has been committed in the company by its officers or employees, the auditor shall take
the following steps:
Where the amount involved is Rs.1 crore or above - report the matter to the
Central Government within such time / manner as prescribed
Where the amount involved is less than Rs.1 crore - report it to the audit
committee or to the Board within such time / manner as prescribed.
Additionally, the details about such frauds should be disclosed in the Board's
report in such manner as prescribed.
Provisions related to fraud are equally applicable to the cost auditor as well as the
secretarial auditor.
To sign the Audit Report [Sec. 145] – The manner of signing of audit report is given in
Section 141(2), according to which - 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.
To comply with Auditing Standards
To report on any other matter specified by Central Government (in consultation with
the NFRA
Test Your Case Study: X Ltd. restrains its company auditor from visiting another branch at different
Knowledge location and having access to the inventory records maintained at that branch because the
branch is already audited by another auditor and the report has been received.
Analysis: It may be noted that the company auditor has right to visit the branch, even if
the branch accounts are audited by another auditor, if he considers it necessary to do so
for the performance of his duties as auditor.
Conclusion: In the given case the auditor has the right to access the branch of X Ltd.
Section 147 - For the auditor
Punishment for For unknowing defaults - fine of INR 25,000 to INR 500,000;
contravention of For knowing / willful defaults - fine of INR 100,000 to INR 2,500,000, and
sections 139-146 imprisonment for 0-1 year.
Where the cost auditor is convicted, he/she shall also be required to
a) refund the remuneration received by him; and
b) pay for damages to the company statutory bodies or authorities or to any other
persons for loss arising out of incorrect or misleading statements of particulars
made in his audit report..
- Evaluation of the internal financial control and risk management system of the entity.
- Evaluation of the use of the funds rose through public offers.
- Evaluation of any related party transaction.
Powers of the - to call for comments / observations of the Auditor about Internal Control Systems and
Audit Committee other matters.
- to review the Financial Statement before they are submitted to the Board.
- to discuss any issues with the Statutory & Internal Auditor and the Management of
the Company in relation to matter contained in the Financial Statement.
Q.2 Statutory Auditor can be appointed as the Internal Auditor of the same Company for the same
period. Comment [Dec 2008, June 2013 (2 marks)]
As per section 144, Statutory Auditor cannot be appointed as the Internal Auditor for the same company
for the same period. This is because of self-review threat, that the auditor will not be independent.
Q.3 Audit Committee is only a luxury for the Company. So you agree? [Dec 2008 (2 marks)]
Audit Committee is not a luxury. It serves as a communication channel among various departments and
has to interact with the management, internal auditor, statutory auditor and the public.
Q.4 Statutory Auditor of the company is legally bound to attend the AGM of the Company. State the
correct position [June 2009 (2 marks)]
Section 146 of the Companies Act, 2013 states that the auditor shall be entitled to attend and be heard in
an AGM. Whether he exercises his right or not, is up to him.
Q.5 M/s SS Associates, Chartered Accountants who were appointed as Auditor by the members in AGM
refuses to accept the appointment. In such cases CG only can appoint another Auditor. [Dec 2009
(2 marks)]
When the appointed auditor refuses to take up the assignment, the company should take recourse to Section
139 and hold an extra ordinary general meeting for appointment of auditor, as the Board has no powers to
appoint auditor in place of the resigned auditor. The refusal of auditor will tantamount to assuming that
he has resigned.
Q.6 Auditor is not liable in case of honorary (free of cost) audit. [June 2010 (2 marks)]
The Auditor has to conduct and conclude his audit as per the provisions of the Companies Act, 2013. The
quantum of fees does not decide the scope or liability of the audit. Hence it doesn’t matter whether the
auditor has charged fees for the audit or not, his liability remains as it is.
Q.7 The Articles of Association of ABC Ltd. provides that the Fixed deposit receipts should not be shown
to the statutory auditors. Accordingly, the Manager (Accounts) refuses to show it to the Auditor.
Analyse the legality. [June 2010 (2 marks)
The Auditor has to conduct and conclude his audit as per the provisions of the Companies Act, 2013. As
per the provisions of Section 143, auditor has the right to access the books and records thereon. If this
right is restricted, the auditor shall report it in the Auditor’s Report.
Q.8 The auditor demanded the notice for AGM but the Director of the Company refused. State the
legality [Dec 2010 (2 marks)]
Q.9 At the AGM, a resolution was passed by all the Shareholders restricting some of the powers of a
Auditor. State the validity of the Resolution. [Dec 2012 (2 marks)]
Certain specific rights & power have been conferred by the Companies Act, 2013 on the Auditor which
cannot be restricted or curtailed by the shareholders of the company. Hence any such resolution even if
passed by entire body of shareholders is ultra-vires (beyond law) and, therefore, not valid.
Q.10 A practicing cost accountant is appointed by the shareholders in general meeting as the Auditor of
a private limited company. Is the appointment valid? [June 2013, June 2014 (2 marks)]
Only a practicing Chartered Accountant is qualified for appointment as the Auditor of a Company, even
if the company is a private limited company. Hence, this appointment is not valid.
Q.11 Sec. 177 of Companies Act 1956 lays down the Auditor’s duty as a member of Audit Committee.
Comment. [June 2013 (2 marks)]
This statement is false. Auditor is not a member of Audit Committee. He has no right to vote. However
he shall attend and participate at the meetings of the Audit Committee.
Q.12 What are the disqualifications for appointment of Statutory Auditor of a Company? [Dec 2013, June
2015, June 2017 (4 marks)]
Q.13 Discuss the scope of audit committee in public limited company. [June 2016 (8 marks)]
Q.14 What are the services that an Auditor cannot render under section 144 of the Companies Act, 2013.
[June 2017 (5 marks)]
Q.15 Discuss the provisions under Section 139(7) relating to the appointment of the first auditor in a
Government Company. How can an auditor, duly appointed by a company, be removed before
expiry of his term? [Dec 2017 (7 marks)]
Or
How can an auditor, who is appointed under section 139 of the Companies Act, 2013, be removed
from his office before the expiry of his term. [June 2019 (4 marks)]
Q.16 Discuss the duty of an auditor to report certain matters in the audit report u/s 143(3). [Dec 2017 (5
marks)]
Duty Regarding Inclusion of Certain Matters in the Audit Report: As per Section 143(3), the company
auditor, in his audit report, shall clearly state –
Whether he has sought and obtained all the information and explanations which to the best of his
knowledge and belief were necessary for the purpose of his audit and if not, the details thereof and the
effect of such information on the financial statements.
Whether, in his opinion, proper books of account as required by law have been kept by the company
and proper returns adequate for the purposes of his audit have been received from branches not visited
by him.
Whether the report on the accounts of any branch office of the company audited by a person other
than the company's auditor has been sent to him and the manner in which he has dealt with it in
preparing his report.
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.
Whether, in his opinion, the financial statements comply with the accounting standards.
The observations or comments of the auditors on financial transactions or matters which have any
adverse effect on the functioning of the company.
Whether any director is disqualified from being appointed as a director under sub-section (2) of section
164.
Any qualification, reservation or adverse remark relating to the maintenance of accounts and other
matters connected therewith.
Whether the company has adequate internal financial controls system in place and the operating
effectiveness of such controls.
Q.17 Discuss the provisions of Companies Act, 2013 as regards reporting of frauds by Company Auditor.
[June 2018 (6 marks)]
The provisions of Companies Act 2013 regarding reporting of frauds by a company auditor are as
follows: For the purpose of sub-section (12) of section 143, in case the auditor has sufficient reason
to believe that an offence involving fraud, is being or has been committed against the company by
officers or employees of the company, he shall report the matter to the Central Government
immediately but not later than sixty days of his knowledge and after following the procedure indicated
herein below.
1. auditor shall forward his report to the Board or the Audit Committee, as the case may be,
immediately after he comes to knowledge of the fraud, seeking their reply or observations within
forty-five days;
2. on receipt of such reply or observations the auditor shall forward his report and the reply or
observations of the Board or the Audit Committee along with his comments (on such reply or
observations of the Board or the Audit Committee) to the Central Government within fifteen
days of receipt of such reply or observations;
3. in case the auditor fails to get any reply or observations from the Board or the Audit Committee
within the stipulated period of forty-five days, he shall forward his report to the Central
Government along with a note containing the details of his report that was earlier forwarded to
the Board or the Audit Committee for which he failed to receive any reply or observations within
the stipulated time.
The report shall be sent to the Secretary, Ministry of Corporate Affairs fin 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 number and be signed by the auditor with his seal and shall indicate his Membership Number.
The report shall be in the form of a statement as specified in Form ADT-4.
The provision of this rule shall also, mutatis mutandis, to a cost auditor and a secretarial auditor during
the performance of his duties under section 148 and section 204 respectively.
Q.18 Discuss about the manner in which rotation of Auditors may be done by the company on expiry of
their term. [June 2018 (6 marks)]
Q.19 Discuss the rights of an auditor according to the Companies Act, 2013 [June 2019 (8 marks)]
Q.20 Discuss the functions and power of the Audit Committee. [Dec 2018 (6 marks)]
Q.21 Discuss the procedure for appointment for first Auditor of the Company and his tenure [Dec 2018
(6 marks)]
Removal / Removal - The auditor may be removed before the end of his term, by:
resignation of passing a special resolution and
auditor obtaining the previous approval of Central government
Removal – The auditor may be removed (or not re-appointed) after the end of
his term, by:
Special notice issued by the shareholders intending to appoint an auditor
other than the retiring auditor
Retiring Auditor to make a representation in writing
Special resolution be passed
Not applicable to Section 139(2) – rotation cases
Resignation - When the auditor resigns from the company, he should, within
30 days from the resignation, file a statement with the company and the
Registrar, indicating the reasons of resignation
auditor (Section In case of a firm, only the partners who are Chartered Accountants shall be
141) authorized to act and sign on behalf of the firm
Powers /rights of Right to access books of accounts and the supporting documents of the
an auditor company as well as its subsidiaries
(Section 143) Ask such information and explanation, from the officers of the company, as is
required for audit
Inquire into the critical matters like:
Whether the loans and advances made by the company are fully secured and
they are not prejudicial to the interest of the company
Whether personnel expenses have been charged to P&L Account
Whether the position stated in the financial statements is correct and not
misleading
Whether any assets of the company are sold below the purchase price
To give qualification on the matters he deems fit, in the auditor’s report
In case of Government companies, the CAG has the power to conduct a test
audit / supplementary audit, in addition to the regular statutory audit
To attend the AGM and address the members, either himself or through an
authorized representative
Duties of an To make report to the members of the company on the basis of the accounts
auditor (Section examined by him
143) In case of Government company, to furnish the report to the CAG
To comply with the auditing standards
To give a true and fair view of the company’s affairs
To give the reasons for every qualification given in the auditor’s report
To inform the board of directors or the audit committee, and subsequently to
the central government, in case of a fraud, within the prescribed timelines
Punishment for For the contravention of any of the above provisions, following punishments should
contravention follow:
(Section 147) For the default of the Company – Fine of INR 25,000 – INR 500,000
For the default of the Auditor:
For unknowing defaults - fine of INR 25,000 to INR 500,000;
For knowing / willful defaults - fine of INR 100,000 to INR 2,500,000, and
imprisonment for 0-1 year.– Imprisonment of upto one year
Where the auditor is convicted, he/she shall also be required to - a) refund the
remuneration received by him to the company and b) pay damages, if any.
Audit Committee Constitution of Audit committee is mandatory for:
(Section 177) (i) Every listed Company; and
(ii) All public companies having:-
a paid up share capital Rs 10 Crore or more;
turnover of Rs 100 Crore or more;
outstanding Loans, or borrowings and debentures or deposits aggregating to
Rs 50 Crore or more.
Powers of audit to call for comments of the Auditor about Internal Control Systems and its
committee other observations.
to review the Financial Statement and Audit report, before submission to the
Board
to discuss any issues with the Statutory & Internal Auditor and the Board of
the Company
Note: The tenure of the first auditor is till the conclusion of the first Annual General Meeting (‘AGM’) only.
Appointed by the CAG within 180 Days Appointed at the AGM and holds the
of commencement of the financial office of the auditor till the conclusion
year ('FY') of the 6th AGM (Rotation of Auditors)
*The network firms of the same auditor also cannot be re-appointed. Network firms means - CA Firms under
same brand / common control.
Reappointment of the existing auditors: The existing auditors may be re-appointed if following conditions
are satisfied:
1) The existing auditor is not disqualified from being re-appointed
2) The existing auditor is not unwilling to be re-appointed
3) Any other auditor has not been already appointed
Note 1: In case the appointment of a new auditor or re-appointment of the existing auditor does not take place,
the existing auditor is automatically re-appointed and continues the office of the auditor.
Note 2: Audit committee should be consulted before re-appointing the existing auditor.
Other Company
In any case, the auditor should report the fraud to the Central Government within maximum 60 days, on his
letterhead, in the prescribed Form ADT – 4.
Punishment of contravention of provisions related to audit (Section 147 of the Companies Act, 2013)
Cost Audit (1) Notwithstanding anything contained in this Chapter, the Central Government may, by
[Section 148] order, in respect of such class of companies engaged in the production of such goods
or providing such services as may be prescribed, direct that particulars relating to the
utilisation of material or 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, before issuing 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.
(2) If the Central Government is of the opinion, that it is necessary to do so, it may, by
order, direct that the audit of cost records of class of companies, 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.
Cost Appointe
Accountan d by the Cost
t in Board of Auditor
Practice Directors
Provided that no person appointed under section 139 as an auditor of the company shall
be appointed for conducting the audit of cost records:
Provided further that the auditor conducting the cost audit shall comply with the cost
auditing standards.
Applicability of Companies engaged in the production of specified goods or services (Category A and B),
maintenance of having an overall turnover from all its products and services of Rs. 35 crore or more
cost records during the immediately preceding financial year are required to maintain the cost records
(Rule 3) Exclusion 1- Micro enterprise or a Small enterprise as per the turnover criteria provided
under Micro, Small and Medium Enterprises Development Act, 2006
Exclusion 2 - Foreign companies having only liaison offices in respect to medical devices,
like Cardiac stents; Drug eluting stents, heart valves etc.
Manner of - Cost records should be maintained in Form CRA-1
maintenance of - They should be prepared in accordance with the Cost Accounting Standards as
Cost records may be prescribed
(Rule 5) - Cost records should facilitate calculation of – a) per unit cost of production or b)
cost of operations, c) cost of sales and d) margin for each of its products and
activities, in a true and fair manner.
- No format has been specified for preparation of the cost records
- May be prepared on monthly or quarterly or half-yearly or annual basis.
Applicability of For regulated goods (Category A – contains 6 products1)
Cost Audit - annual turnover of the company (from all its products and services) during the
(Rule 4) immediately preceding financial year is Rs. 50 crore or more; and
- aggregate turnover of the individual product(s) or service(s) for which cost records
are required to be maintained under rule 3 is Rs. 25 crore or more.
1
Telecommunication services, Generation transmission distribution and supply of electricity, Petroleum products,
Drugs and pharmaceuticals, Fertilisers, Sugar and industrial alcohol
2
a) Machinery and mechanical appliances used in defence, space and atomic energy sectors excluding any ancillary
item or items, b) Turbo jets and turbo propellers; c) Arms, ammunitions and explosives; d) Propellant powders; e)
Radar apparatus, radio navigational aid apparatus and radio remote control apparatus; f) Tanks and other armoured
fighting vehicles; g) Port services of stevedoring, pilotage, hauling, etc rendered by a Port in relation to a vessel or
goods; h) Aeronautical services; i) Iron and Steel; j) Roads and other infrastructure projects; k) Rubber and allied
products; l) Coffee and tea; m) Railway or tramway locomotives, mechanical traffic signaling equipment of all kind; n)
Cement; o) Ores and Mineral products; p) Mineral fuels (other than Petroleum), mineral oils etc. q) Base metals; r)
Inorganic chemicals, precious metals, rare-earth metals of radioactive elements or isotopes; s) Jute and Jute Products; t)
Edible Oil; u) Construction Industry; v) Health services, namely functioning as or running hospitals, diagnostic centres,
clinical centres or test laboratories; w) Education services, like imparting training or education by means of any mode; x)
Milk powder; y) Insecticides; z) Plastics and polymers; aa) Tyres and tubes; bb) Paper; cc) Textiles; dd) Glass; ee) Other
machinery; ff) Electricals or electronic machinery; gg) Production, import and supply or trading of medical devices, like
Cardiac stents; Drug eluting stents, heart valves etc.
Usefulness to Shareholders: Cost Audit ensures that proper records are kept as to
purchases and utilisation of material and expenses incurred on wages, etc. It also makes
sure that the valuation of closing stock and work-in-progress is on a fair basis. Thus, the
shareholders are assured of a fair return on their investment.
a period of 180 days of the commencement of the financial year, whichever is earlier,
in Form CRA-2
Any casual vacancy in the office of a cost auditor, whether due to resignation, death
or removal, shall be filled by the Board of Directors (BOD) within thirty days of
occurrence of such vacancy and the company shall inform the Central Government in
Form CRA-2 within thirty days of such appointment of cost auditor.
Class Notes
Rotation of Cost Section 139(3) of the Act, applicable to appointment of auditors (financial), deals with the
Auditor provision of rotation of auditors and these provisions are applicable only to appointment
of auditors (financial). The Act does not provide for rotation in case of appointment of
cost auditors and the same is not applicable to a cost auditor. It may, however, be noted
that though there is no statutory provision for rotation of cost auditors, individual
companies may do so as a part of their policy, as is the practice with Public Sector
Undertakings.
Remuneration In the case of companies which are required to constitute an audit committee
of the Cost (i) The Audit committee, shall recommend the remuneration for the cost auditor;
Auditor (ii) the remuneration recommended by the Audit Committee under (i) shall be
considered and approved by the Board of Directors and ratified subsequently by
the shareholders;
In the case of other companies which are not required to constitute an audit
committee - the Board shall fix the remuneration which shall be ratified by shareholders
subsequently.
Obligation to As per sub-section (12) of section 143 of the Companies Act 2013, it is obligatory on
report offence of the part of cost auditor to report offence of fraud which is being or has been committed
fraud in the company by its officers or employees, to the Central Government as per the
prescribed procedure under the Rules.
As per the proviso to above sub-section, it has been stated that in case of a fraud
involving lesser than the specified amount, the auditor shall report the matter to the
audit committee constituted under section 177 or to the Board in other cases within
such time and in such manner as may be prescribed.
Cost audit report The cost auditor shall submit the cost audit report in Form CRA-3 to the Board of
Directors of the company within a period of 180 days from the closure of the financial
year
The company shall within 30 days from the date of receipt of a copy of the cost audit
report, furnish it to the Central Government in Form CRA-4. Such report shall be
accompanied with full information and explanation on every reservation or
qualification contained therein
In case the Central Government requires any further information / explanation, the
company should provide the same within the time stipulated by the Central
Government.
Secretarial 1) Every listed company and a company belonging to other prescribed class of
Audit (Section companies shall annex with its Board’s report, a secretarial audit report, given by a
204) company secretary in practice, in such form as may be prescribed.
2) It shall be the duty of the company to give all assistance and facilities to the company
secretary in practice, for auditing the secretarial and related records of the company.
3) The Board of Directors, shall explain in full any qualification or observation or other
remarks made by the company secretary in practice in his report under sub-section
(1).
4) If a company or any officer of the company or the company secretary in practice,
contravenes the provisions of this section, the company, every officer of the company
or the company secretary in practice, who is in default, shall be punishable with fine
which shall not be less than one lakh rupees but which may extend to five lakh rupees.
Applicability of Following companies are required to obtain Secretarial Audit Report:
Secretarial (i) Every listed company;
Audit (ii) Every public company having a paid-up share capital of fifty crore rupees or more;
or
(iii) Every public company having a turnover of two hundred fifty crore rupees or
more.
However the “Turnover” means the aggregate value of the realisation of amount made
from the Sale, Supply or Distribution of goods or on account of services rendered, or both,
by the company during a financial year [Section 2(91)].
Secretarial The Secretarial Audit Report is required to be provided in the format prescribed in Form
Audit Report MR-3 (Rule 9 of the Companies (Appointment and Remuneration of Managerial
Personnel) Rules, 2014).
Procedures of As per Rule 8 of the Companies (Meetings of Board and its powers) Rules, 2014,
appointment of Secretarial Auditor is required to be appointed by means of resolution passed at a duly
Secretarial convened Board meeting. It is advisable for the Secretarial Auditor to get a letter of
Auditor engagement from the company. Secretarial Auditor should accept the letter of
engagement. However, it is advisable that any changes in the Secretarial Auditor during
the financial year are to be reported to the members in the Board’s Report.
State the advantages of Cost Audit to management and shareholders. [Dec 2013 (4 marks)]
Q.5 What is meant by cost audit? State the duties of a cost auditor. [June 2014 (4 marks)]
Cost audit is an audit process for verifying the cost of manufacture or production of any article, on the
basis of accounts as regards utilisation of material or labour or other items of costs, maintained by the
company. In simple words the term cost audit means a systematic and accurate verification of the cost
accounts and records and checking of adherence to the objectives of the cost accounting.
The Central Government may, if it feels necessary, direct by an order that an audit of the cost records kept
by a Company u/s 148(1) shall be conducted by a Cost Accountant within the meaning of the Cost and
Works Accountants Act, 1959 in such a manner as may be specified.
In cost audit, auditor has to perform the following duties:
- Examine the correctness of the cost records maintained by the concern and
- To report as to whether the cost accounting plans have been adhered to or not
Q.6 Discuss the relevant provisions of Companies (Cost Records and Audit) Rules 2014 on
applicability of Cost Audit to different sectors. [Dec 2018 (6 marks)]
Q.7 With reference to the Companies (Cost Records and Audit) Rules, 2014, as amended, discuss the
following:
i) Submission of cost audit report to the Board of Directors by the Cost auditor
ii) Applicability of rotation to Cost Auditors
iii) Remuneration of a Cost Auditor
[June 2019 (2+2+3 marks)]
Applicability for Companies whose annual turnover, of the preceding year, is INR 35 crores or
preparation of more, are required to prepare the cost records
cost records Exemption – a) Foreign companies having only liaison office in India and b)
micro and small enterprise are exempt from preparation of cost records, even if
the turnover is more than the prescribed limit
Any casual vacancy (due to death, resignation or removal) of the cost auditor
should be filled by the Board of Directors within 30 days of its occurrence
The cost auditor should prepare the cost audit report in Form CRA 3 and submit
it to the Board of Directors within 180 days of the end of the FY
The Company should file such audit report with the CG in Form CRA 4, in
XBRL format), alongwith their comments on the qualifications / reservations
given in the report
Authority for Remuneration of the cost auditor should be recommended by the Audit
fixing committee and / or the Board.
remuneration Such remuneration should be subsequently ratified by the shareholders
Obligation to The cost auditor should report any incident of fraud to the Board / Audit
report fraud committee promptly
In case the amount involved in the fraud is above the prescribed threshold, it
should be reported to the Central Government
Secretarial Audit Every company is required to prepare its secretarial books. The prescribed companies
(Section 204) are required to get these books audited by a practicing company secretary. Form MR-3
prescribes the format of the secretarial audit report
Applicability of The following companies are required to get the Secretarial Audit done:
secretarial audit (i) Every listed company;
(ii) Every public company having a paid-up share capital of fifty crore rupees or more;
or-
(iii) Every public company having a turnover of two hundred fifty crore rupees or more.
Appointment of Appointed by the Board of Directors in the Board meeting
secretarial Company issues the letter of appointment to the auditor, which is accepted by
auditor the auditor
Any change in the Secretarial auditor should be intimated to the members in the
Board’s report
The companies must (through Board of Directors / Audit committee) appoint a cost
auditor within 180 days of commencement of the financial year
The cost auditor must submit the following certificates to the Company that :-
- It is not disqualified for appointment under the Companies Act, 2013 (“the Act”).
- It satisfies the criteria provided in section 141 of the Act.
The Company must inform the cost auditor about his appointment and file a notice of such
appointment with the CG (in form CRA-2, XBRL format) within 30 days of the Board meeting
(in which appointment has been done) or 180 days of the commencement of financial year,
whichever is earlier
Any casual vacancy3 in the office of the cost auditor, shall be filled by the Board of Directors
within 30 days of occurrence of such vacancy and the company shall inform the CG in Form
CRA-2 (to be submitted alongwith the board resolution) within 30 days of such appointment of
the cost auditor.
Cost auditor should forward his signed auditors report (in Form CRA-3) to the Board of
Directors within 180 days of the closure of the relevant financial year.
The Company, within 30 days from receipt of the auditor’s report, shall file a report to the CG
(in form CRA-4) containing full information and explanation on every reservation or
qualification of in the cost audit report
After considering the cost audit report, the Central Government may call for such further
information and explanation from the company, within such time as may be specified. The
company must furnish such information within the specified time.
3
Casual vacancy may occur due to the resignation or death or removal of the cost auditor before its stipulated term.
Chapter at a Glance
6
Branch Audit Duties of statutory auditor with respect to branch office
5
CARO Applicability, constituents,
4
Revised Auditor’s duties, steps to be taken
accounts 3
Audit Report Audit Report is called as the ultimate and final product of every audit. A Report is a
statement of collected & considered facts which gives clear and concise information to
persons who are not already in possession of the full facts of the subject matter of the report.
Elements of a) Title: The Auditor’s Report should have an appropriate title i.e. “Auditor’s Report”. It
the Auditors’ should be distinguished from other Reports, e.g. reports of officers of the entity, Board
Report of Directors.
b) Addressee: The Auditor’s Report is usually addressed to the authority appointing the
Auditor.
- that the audit was planned and performed to obtain reasonable assurance whether
the Financial Statements are free of material misstatement.
- The Auditor’s Report should describe the Audit as including examining, on a test
basis, evidence to support the amounts and disclosures in Financial Statements.
- a statement by the Auditor that the audit provides a reasonable basis for his opinion.
e) Opinion Paragraph: The Opinion paragraph of the Report should state the Auditor’s
opinion as to whether the Financial Statements give a true and fair view in accordance
with the financial reporting framework and comply with the statutory requirements.
f) Date of the Report: The date of an Auditor’s Report is the date on which the Auditor
signs the Report expressing an opinion on the Financial Statements. Following things
should be noted about the date of audit report:-
- The date of audit report should be the date on which audit has been completed
- The date of the audit Report should not be earlier than the date on which the
Financial Statements are signed or approved by Management. It can be on the same
date though.
- Any event occurring after the date of the Audit Report is not the responsibility of
the Auditor
g) Place of Signature: The Report should name the specific location, which is ordinarily
the city where the Audit Report is signed.
h) Auditor’s Signature: The Report should be signed by the Auditor in his personal name.
Where a Firm is appointed as the Auditor, the Report should be signed in the personal
name of the Auditor and in the name of the Audit Firm. The Partner / Proprietor signing
the Report should mention his ICAI Membership Number.
Specimen of Auditor’s Report
Significance It identifies the Financial Statements of the entity that have been audited,
of Opening including the date of and period covered by the Financial Statements.
Paragraph: It clarifies that preparation of the accounts is the responsibility of the Management
of the enterprise, whereas the responsibility of the Auditor is to express an opinion
on the said accounts based on the audit carried out by him.
It communicates that the preparation of Financial Statements requires Management
to make significant accounting estimates and judgements, as well as to determine
the appropriate accounting principles and methods used in preparation of the said
Financial Statements.
Significance It inform the Users about the practices and procedures followed in the conduct of
of Scope audit by the Auditor.
Paragraph It states that the audit was planned and performed in accordance with Auditing
Standards generally accepted in India
It highlights the test check approach of audit adopted by the Auditor in performing
his audit work as also the significant aspect of evaluation of accounting principles
and accounting estimates is also clarified.
It conveys that the Auditor provides only “reasonable assurance”. Thus, this
paragraph signifies the inherent limitations of audit.
Importance of i. An Audit report is the end product of the auditing and concluding part of the
Audit Report audit process.
ii. Audit report gives the auditor’s opinion on the accounts & record of the
company, as examined by him.
iii. Audit Report reflects the work done by the auditor.
iv. Audit report is the instrument which, measures the auditors responsibility in
regard to the true & fair view on the financial statement of the company.
v. Audit Report indicates the real position of the financial status of the company.
It is used by different people as a reliable document.
Types of Broadly there are two types of audit reports:
Audit report - Unqualified / Clean Report
- Modified Report
Unqualified An opinion is said to be unqualified, when the Auditor concludes that the Financial
Report / Statements give a true and fair view in accordance with the financial reporting framework
Clean report used for the preparation and presentation of the Financial Statements.
For issuing an Unqualified Audit Report, the Auditor has to satisfy himself that
i. Evidence: Reasonable evidence is obtained in support of transactions recorded
in the books of account.
ii. Standards: Accounting entries passed in the books of account are in conformity
with the generally applicable accounting principles and Indian Accounting
Standards followed consistently.
iii. True and Fair: The Financial Statements prepared represent a true and fair
summary of the transactions that took place during the year.
iv. Classification: The process of classification and aggregation followed in the
preparation of the Financial Statements is fair and it does not hide a material fact
nor does it highlight something, which may distort the real state of affairs.
v. Format: The form of Financial Statements is in accordance with the form
prescribed by law, if any.
vi. Free of Misstatements: There are no material misstatements in the Financial
Statements. No material transaction recorded in the books of account is illegal
or beyond the legal competence of the Company.
vii. Disclosure: All the disclosures statutorily required or otherwise relevant have
been made appropriately.
Modified When the Auditor issues any Report other than unqualified, his Report is said to be modified.
Report (SA It includes –
750) i. Matters That Do Not Affect the Auditor’s Opinion - with Emphasis of Matter
Paragraph.
ii. Matters That Do Affect the Auditor’s Opinion viz:
(a) Qualified Opinion,
(b) Disclaimer of Opinion, and,
(c) Adverse Opinion.
Emphasis of The emphasis of matter paragraph does not affect the Auditor’s opinion. This paragraph
matter – that would typically be inserted in the following situations:
do not affect i. Going Concern Not Resolved: The Auditor should modify the Auditor’s Report
auditor’s where the going concern question is not resolved and adequate disclosures have been
unqualified made in the Financial Statements.
opinion ii. Significant Uncertainty: The Auditor should consider modifying his Report by
adding a paragraph if there is a significant uncertainty (other than going concern
problem), the resolution of which is dependent upon future events and which may
affect the Financial Statements. Eg. A pending legal suit against the company
iii. Multiple Uncertainties: In case there are multiple future events which may affect the
financial statements, an emphasis of matter may be used. However, in extreme cases,
e.g. multiple uncertainties that are significant to the Financial Statements, the Auditor
may consider it appropriate to express a Disclaimer of Opinion instead of adding an
emphasis of matter paragraph.
Qualified A Qualified Audit Report is one where an Auditor gives an opinion on the truth and
opinion fairness of Financial Statements, subject to certain reservations.
The impact of all reservations or qualification is not material enough / pervasive to
vitiate the overall true and fair view of Financial Statements, but it is important that such
a matter(s) should be brought to the attention of the shareholders. Eg. Limitation on
scope of audit, disagreement with the management on some issue etc.
The Report should also give detailed reasons along with quantitative impact on the
qualifications on Financial Statements
Features of i. Clarity: The Auditor must express the nature of qualification, in a clear and
Qualified unambiguous manner. The qualification should not be vague. like, The debtors
Opinion balances are subject to confirmation’, No provision for taxation has been made in view
of the loss during the year’, etc. should be avoided.
ii. Explanation: Where the Auditor gives a qualification, his Report shall state the
reasons for such qualification.
iii. Quantification: The Auditors should quantify, wherever possible, the effect of these
qualifications on the Financial Statements if the same is material. Where the effect of
qualification cannot be accurately quantified, the Auditor may reflect the effect on the
basis of Management estimates, after carrying out necessary audit tests on such
estimates.
iv. Placement: All qualifications should be contained in the Auditor’s Report. When
there are Notes, which are subject matter of a qualification, the same should preferably
he annexed to the Auditors’ Report.
v. Subject to: The words “subject to” are essential to state any qualification. The
qualification should be preceded by words such as “Subject to” or “Except that” to
make it clear that he is making an exception.
vi. Violation of Law: Any breach of law, should be brought to the notice of the
shareholders by properly qualifying the report.
vii. Notes-Report Relationship: Where notes of a qualificatory nature appear in the
accounts, the Auditors should state all qualifications independently in their report so
that the user can assess the significance of these qualifications.
viii. Draft Report: The Auditor may discuss matters of qualification with the Management
of the Company to acquire their views and accordingly draft the qualifications in his
Final Report
Adverse Or i. An Adverse or Negative Report is given when the Auditor does not agree with the
Negative affirmations / assertions made in the Financial Statements / Financial Report.
Report ii. The Auditor states that the Financial Statements do not present a true and fair view of
the state of affairs and the working results of the organisation.
iii. The Auditor should state the reasons for issuing such a report.
iv. An Adverse Opinion should be expressed when the effect of the misstatement /
disagreement is material and pervasive to the Financial Statements.
Disclaimer of A Disclaimer of Opinion Report is given when the Auditor is unable to form an overall
opinion opinion about the matters contained in the Financial Statements.
The Auditor will state in his Report that he is unable to form an opinion on the Financial
Statements. Such Report is called as “Disclaimer of Opinion Report”.
Piecemeal The Auditor, may in some cases, find that the Financial Statements he has examined present
Opinion only a partial true and fair view. In such cases, he may report that he is unable to express an
opinion, limited to certain items in the statement, with which he is satisfied. Such a situation
would warrant a Piecemeal Opinion.
In such a case, the Auditor gives a divided opinion on matters with which he is satisfied and
with which he is not. The Auditor should state the reasons for having given a Piecemeal
Opinion.
Class Notes
according to 1) Narrow Interpretation: Auditors will not be held responsible if they acted on
the information and explanations supplied by the management, which they believe to be
explanations true. To that extent this phrase restricts the scope of enquiry to be made by an Auditor.
given to us’ 2) Broad Interpretation: the Auditor should obtain all information and explanations,
which he deems necessary, for the expression of an opinion. If he does not obtain all
such information, he is entitled to issue a Disclaimer of Opinion Report. The Auditors
should apply professional judgment to obtain all that information and explanations,
which are necessary for the performance of conducting the audit.
Conclusion: Hence, the given phrase is a double-edged sword, which may be interpreted
either to restrict the scope of enquiry or to stretch responsibilities beyond a limit.
Enquiry u/s Auditor has the right to obtain all information and explanations necessary to conduct the
143(1) and audit. Where the Auditor has not been able to obtain all information and explanations as
explanation required he should issue a Modified Audit Report (i.e. other than an Unqualified Report)
from the
management The auditor should usually enquire about the following aspects:
a) whether loans and advances have been made on the basis of adequate security and
whether the terms on which they have been made are prejudicial to the interests of
the company or its members;
b) whether transactions of the company which are represented merely by book entries
are prejudicial to the interests of the company;
c) Whether the assets / investments of the company as consist of shares, debentures
and other securities have been sold at a price less than that at which they were
purchased by the company;
d) whether loans and advances made by the company have been shown as deposits;
e) whether personal expenses have been charged to revenue account;
Duties of Where the audit of the branch of the Company is carried out by a person other than the
statutory Statutory Auditor, the Branch Auditor shall prepare a report on the accounts of the branch
auditor with office examined by him and forward the same to the Company’s Auditor [Section 143]
respect to the
Branch audit If the Branch Auditor’s Report contains any qualification, the Statutory Auditors should
report include it in their own report unless they are satisfied that either
a) Objections raised by the Branch Auditor have been met while preparing the main
Company’s accounts, or
b) The matter on which the qualification is made is not material in the context of the
Company’s Accounts as a whole, or
c) The statutory auditor have received sufficient and appropriate information and
explanations, which were not available to the Branch Auditor, and that the statutory
auditor is satisfied that the qualification is not called for.
Class Notes
Companies The CARO, 2016 is an order issued by the Central Government as per the power granted
(Auditor's under section 143(11) of the Companies Act, 2013. CARO states some additional reporting
Report) requirements. It contains 16 matters on which the auditor has to provide its comments.
Order, 2016 The Order is applicable to every company except for:
[CARO, a) a banking company [section 5(c) of the Banking Regulation Act, 1949];
2016] b) an insurance co mpany [Insurance Act,1938];
c) a company licensed to operate under section 8 of the Companies Act;
d) a One Person Company [section 2(62) of the Companies Act];
e) a small company [section 2(85) of the Companies Act]; and
f) a private limited company, having a paid up capital and reserves and surplus of Rs. 1
crore or less as on the balance sheet date and which has total borrowings less than Rs. 1
crore from any bank or financial institution at any point of time during the financial year
and which does has a total revenue as (including revenue from discontinuing operations)
Rs. 10 crore or less during the financial year.
Note 1: The Order will be applicable to a private company which is a subsidiary or holding
company of a public company, irrespective of the above monetary thresholds
Note 2: Order shall not be applicable to the auditor's report on consolidated financial
statements.
Test Your Case Study: Ashu Pvt. Ltd. has fully paid capital and reserves of Rs. 50 lakh. During the
Knowledge year, the company had borrowed Rs. 70 lakh each from a bank and a financial institution
independently. It has the turnover of Rs. 900 lakh.
Analysis: In the given case of Ashu Pvt. Ltd., it has paid capital and reserves of Rs. 50 lakh
i.e. less than crore, turnover of Rs. 9 crore i.e. less than Rs. 10 crore. However, it has
maximum outstanding borrowings of Rs. 1.40 crore (Rs. 70 lakh + Rs. 70 lakh) collectively
from bank and financial institution. Therefore, it fails to fulfill the condition relating to
borrowings.
Conclusion: Thus, CARO, 2016 shall be applicable to Ashu Pvt. Ltd. accordingly.
Matters to be 1) Fixed Assets
included in - Whether the company has made proper records including – a) Quantitative details
the Auditor's and b) situation of fixed assets
Report as per - Whether the assets have been physically verified by management at reasonable
CARO intervals
(prescribed in - Whether the title deeds of immovable properties are held in the name of the
para 3 of the company.
CARO) 2) Inventory - Whether the inventories have been physically verified by management at
reasonable intervals
3) Loans and advances granted to entities covered in the register maintained under
section 189 of the Companies Act, 2013 (ie. entities in which the directors are interested)
- Whether the terms and conditions of the grant of such loans are not prejudicial to
the company's interest;
- Whether the schedule of repayment of principal and payment of interest has been
stipulated and whether the repayments or receipts are regular;
- if the amount is overdue, state the total amount overdue for more than ninety
days, and whether reasonable steps have been taken by the company for recovery of
the principal and interest
4) Loans, investment, guarantees and security given by the Company - in respect of
loans, investments, guarantees, and security whether provisions of section 185 and 186
of the Companies Act, 2013 have been complied with.
5) In case the company has accepted deposits, whether the directives issued by the
Reserve Bank of India and the applicable provisions of sections of the Companies Act,
have been complied with?
6) Where maintenance of Cost records has been specified by the Central Government
under sub-section (1) of section 148 of the Companies Act, 2013 and whether such
accounts and records have been so made and maintained.
7) Statutory dues
- whether the company is regular in depositing undisputed statutory dues (including
provident fund, employees' state insurance, income-tax, sales-tax, service tax, duty
of customs, duty of excise, value added tax, cess etc) and if not, the extent of the
arrears of outstanding statutory dues as at the last day of the financial year concerned
for a period of more than six months from the date they became payable, shall be
indicated;
- where dues of income tax or sales tax or service tax or duty of customs or duty of
excise or value added tax have not been deposited on account of any dispute, then
the amounts involved and the forum where dispute is pending shall be mentioned.
(A mere representation to the concerned Department shall not constitute a dispute).
8) Loans or borrowings
- Whether the company has defaulted in repayment of loans or borrowing from a
financial institution, bank, Government or dues to debenture holders
- If yes, lender-wise details of the period and the amount of default is to be reported
9) Initial Public Offer (IPO) or further public offer or term loan
- Whether the amounts raised by way of IPO or further public offer or term loan were
applied for the purposes for which those are raised
- If not, the details together with delays or default and subsequent rectification, if any,
as may be applicable, be reported
10) Fraud
- whether any fraud by the company or any fraud on the Company by its officers or
employees has been noticed or reported during the year;
- If yes, the nature and the amount involved is to be indicated
11) Managerial Remuneration
- Whether managerial remuneration has been paid or provided in accordance with the
requisite approvals mandated by the provisions of section 197 read with Schedule V
to the Companies Act, 2013?
- If not, state the amount involved and steps taken by the company for securing refund
of the same
12) Nidhi Company
- Whether the Nidhi Company has complied with the Net Owned Funds to Deposits
in the ratio of 1:20 to meet out the liability and whether the Nidhi Company is
maintaining ten per cent unencumbered term deposits as specified in the Nidhi
Rules, 2014 to meet out the liability
13) Transactions with related parties
- Whether all transactions with the related parties are in compliance with sections 177
and 188 of Companies Act, 2013 where applicable and the details have been
disclosed in the Financial Statements etc., as required by the applicable accounting
standards
14) Preferential allotment or private placement of shares
- whether the company has made any preferential allotment or private placement of
shares or fully or partly convertible debentures during the year under review and if
so, as to whether the requirement of section 42 of the Companies Act, 2013 have
been complied with and the amount raised have been used for the purposes for which
the funds were raised.
- If not, provide the details in respect of the amount involved and nature of non-
compliance;
15) Non-cash transactions
- whether the company has entered into any non-cash transactions with directors or
persons connected with him and if so, whether the provisions of section 192 of
Companies Act, 2013 have been complied with
16) Registration with RBI
Whether the company is required to be registered under section 45-IA of the Reserve Bank
of India Act, 1934 and if so, whether the registration has been obtained.
Some If any material discrepancy is noted in respect to above aspects, it is to be reported by
miscellaneous the auditor in the respective clauses of CARO
points on The auditor shall also state the basis for such unfavourable or qualified answer, as the
CARO case may be.
where the auditor is unable to express any opinion on any specified matter, his report
shall indicate such fact together with the reasons why it is not possible for him to give
his opinion on the same
Test your Case Study: Rolls Royce Ltd. has dispensed with the practice of taking inventory of their
knowledge inventories at the year-end as in their opinion the exercise is redundant, time consuming and
intrusion to normal functioning of the operations. Explain reporting requirement under
CARO, 2016.
Analysis: Clause (ii) of Para 3 of CARO, 2016, requires the auditor to report whether
physical verification of inventory has been conducted at reasonable intervals by the
management and whether any material discrepancies were noticed and if so, whether they
have been properly dealt with in the books of account. The physical verification of inventory
is the responsibility of the management of the company which should verify all material
items at least once in a year and more often in appropriate cases.
Conclusion: In the given case, the above requirement of physical verification of inventory
by the management has not been taken place and therefore the auditor should point out the
same under CARO, 2016. He may consider the impact on financial statement and report
accordingly.
Auditor’s There may be instances, where the Management of a Company amends its audited accounts,
report on and re-approves it and then requests the Statutory Auditors to make a Report once again on
revised the amended accounts.
accounts of The Auditors’ duties in this regard are enumerated below;
companies i. Return: Ensure that all copies of the Original Accounts and Report are returned to
before the Auditor.
circulation to ii. Disclosure: Ensure that the fact of Revision of accounts already approved by the
shareholders Board and reported upon by the Statutory Auditors, appears as a specific Note on the
amended accounts.
iii. Reporting: Reporting requirements are as under
- Adequate Disclosure: If the Statutory Auditor is satisfied that the disclosure
made by the Company in the Notes on Accounts is adequate, there is no further
need for the Auditor to refer to the revision of the Balance Sheet and/ or the
Profit and Loss Account in his report.
- Inadequate Disclosure: If the Notes on Accounts do not contain any note on
the revision or if such Note is not considered as adequately comprehensive by
the Auditor, the Auditor should refer to the fact of revision of the accounts in
his report. The above principles are also applicable to the audit of Government
Companies.
Class Notes
Revision/ As per the opinion of the Institute of Chartered Accountants of India, Audit Report may
rectification only be revised till the accounts are adopted at the AGM. For entities where such
of financial adoption is not required, the Auditor may consider revising the Audit Report within a
statements reasonable time, but in any case not later than the issuance of the Audit Report for the
after they immediately succeeding accounting period.
have been Still, where past accounts have been re-opened and revised on technical grounds, and
adopted in the the Company has asked the Auditor to give his report u/s 143 on the revised accounts,
AGM he should issue a Qualified Report only. The Report should indicate that the Company
has re-opened the accounts.
the Auditor should - (i) issue a Revised Report in which he should refer to the earlier
report, and (ii) state the reasons for revising the report.
Preventing Reliance on Earlier Report: If the management neither agrees to revise the
Financial Statements nor agrees to circulate the proposed Revised Audit Report to the
recipients of the earlier report, the Auditor should notify the persons ultimately
responsible for the overall direction of the entity that action will be taken by him to
prevent reliance on the Audit Report.
The Auditor may take the following steps in this regard
- Notify the client that the Audit Report must no longer be associated with the
Financial Statements.
- Notify the regulatory agencies (ROC / Income Tax Department / SEBI / RBI / IRDA
etc.) having jurisdiction over the client that the Audit Report should be no longer be
relied upon.
- Make an appropriate statement at the AGM, if requested by the Chairman.
- In extreme situations, the Auditor may conclude that withdrawal from the further
engagement with the entity is necessary.
Where a Firm is the Auditor, the Partner who signed the Original Audit Report, should
also sign the Revised Report or the letter indicating preventing reliance on the Audit
Report, as the case may be. In case of signing by any other Partner, the reasons thereof
should be stated.
Class Notes
Audit of Abridged Financial Statements are Condensed Financial Statements that cover a full
abridged accounting period but omit detailed financial information. The auditor should ensure the
financial following:
statement the requirements relating to Abridged Balance Sheet and Abridged Profit & Loss
Account as laid down in Section 136 (Right of members to copies of financial
statements) of the Companies Act, 2013 have been duly complied with.
If the Audit Report on Abridged Financial Statements is issued on a date subsequent to
the issuance of the Audit Report on Annual Accounts as per Schedule III, the Auditor
should check the events occurring after the Balance Sheet date.
The Auditor should express a Qualified Opinion or an Adverse Opinion, as appropriate,
if he has certain reservations about the Abridged Financial Statements, e.g. if a material
piece of information has not been disclosed in the Abridged Financial Statements or has
been disclosed in an inappropriate manner.
Class Notes
Provision for When a Company does not provide for an amount for Proposed Dividend, the attention
proposed of Shareholders should he drawn to the fact that no appropriation has been made.
dividend The fact that provision for Proposed Dividend has not been made should be disclosed
by means of a Note in the Accounts.
The Auditor should refer to the Note in his Report and make his Report subject thereto.
Accounts of As per the provisions of Section 348 of the Companies Act, 2013, if the winding up of a
liquidators / company is not concluded within one year after its commencement, the Company
Report u/s Liquidator shall, file a statement containing such particulars as may be prescribed, duly
348 of audited, by a person qualified to act as auditor of the company, with respect to the
Companies proceedings in, and position of, the liquidation, with the Tribunal.
Act, 2013
The Auditor’s Report should consider the following:
Whether he has obtained all the information and explanations, which to the best of
his knowledge and belief, were necessary for the purposes of his audit,
Whether in his opinion, proper books of account as required by the Companies Act,
2013 and Companies (Court) Rules, 1959 have been kept by the Liquidator, so far as
appears from his examination of these books,
Whether the Liquidator’s Account relating to realisations and disbursements is in
agreement with the books and records produced before him,
Whether in his opinion, the Liquidator’s Account including Annexures give the
information required by the Companies Act, 2013, and the Companies (Court) Rules,
1959 in the manner so required and give a true and correct view of the realisations and
disbursements of the Liquidator.
Disclosure: Every Company should disclose in its P&L Account, the amount contributed by
it during the financial year to any political party or for any political purpose, giving the
particulars of the name of the recipient party or person.
Auditor’s Duties:
The Auditor should verify that the political contribution has not been made in excess of
the limit prescribed.
He should also check whether adequate disclosures have been made in the FS
regarding this.
If the Auditor is in doubt about applicability of Section 182, he should disclose this
fact in his report.
The Auditor should obtain a certificate from the Board stating – a) That all amounts
of contributions to Political Parties have been properly recorded; b) No amounts of such
nature other than those so included in the books have been paid / given directly or
indirectly.
Auditor should report any instances of mis-compliance with these provisions, if any
in the audit report.
Audit of Consolidated financial statements are prepared for a group of enterprises which are under
consolidated the sole control of a parent enterprise.
financial
statements Company’s responsibility on CFS:
(CFS) a. Identifying the components like subsidiaries, joint ventures and associates to be
included in the Consolidated Financial Statements
b. Identifying reportable segments for segmental reporting,
c. Identifying related parties and related party transactions for reporting,
d. Obtaining accurate and complete financial information from components, and
e. Making appropriate consolidation adjustments.
Auditor’s Duties:
To ensure that all relevant Subsidiaries, Associates and Joint Ventures (JVs) have
been included. This may be evident from the working papers for the prior years for
known Subsidiaries, Associates and JVs,
To verify the investments made, to determine the shareholding in other entities, Joint
Ventures and other relevant agreements entered into by the Parent,
To verify the Statutory records maintained by the Parent, e.g. Registers u/s 190 / 186.
The control of the composition of the Board of Directors/ Governing Body of an
enterprise also results in a Parent-Subsidiary Relationship, the Auditor should examine
the minutes of Board Meetings, Shareholder Agreements with entities to which
technology or know-how might have been provided, etc.
Where a Subsidiary’/ Associate /Jointly Controlled Entity is excluded from the CFS, the
Auditor should examine the reasons for the exclusion.
The Auditor should review whether the procedures and disclosure requirements laid
down by the relevant AS / IndAS have been followed, in preparing the CFS.
Verify that the gross amounts of Goodwill and Capital Reserve have also been disclosed,
if such Goodwill arising in respect of one Subsidiary is set-off against Capital Reserve
arising in respect of another.
The auditor should also verify the following intra-group adjustments:
- Intra-group interest paid and received, or management fees, etc.
- intra-group profits on assets acquired from other Subsidiaries.
- Intra-group indebtedness.
- Adjustments related to harmonising the different accounting policies being
followed by the Parent enterprise and its Subsidiaries.
- Adjustments made for the effects of significant transactions or other events that
occur between the date of the Financial Statements of the Parent and one or
Responsibility Audit Report does not hold While Audit Certificate makes an
auditor responsible for auditor responsible if anything
anything wrong in the mentioned in the certificate found
accounts, as wrong later on.
Suggestion Audit Report may provide While Audit certificate does not
certain suggestions for provide any such suggestion
improvement
Nature Audit Report is based on the while Audit Certificate is based
vouching & verification of on checking arithmetical accuracy
books of accounts, voucher, of the facts.
assets & liabilities,
Scope Audit Report covers all while the Audit Certificate is very
transactions done during the specific.
year,
Q.1 Distinguish between Qualified Report and Adverse Report of the auditor. [Dec 2013, June 2017 – 4
marks]
Q.2 Distinguish between Audit report and audit certificate. [Dec 2014, Dec 2015, Dec 2016, June 2018 –
7 marks]
Q.3 Tabulate the differences between Clean Audit Report and Qualified Audit Report. [Jun 2015, June
2016 – 7 marks]
Q.4 Enumerate the contents / elements of the good audit report. [Dec 2008, Dec 2017 – 8 marks]
Q.5 In course of audit, the auditor advised to amend the Profit and loss account which was faulty but
the directors did not follow his advice. As an auditor what should you do? [Dec 2009 – 2 marks]
As an auditor, I would qualify my report and state that financial statements do not represent true and fair
view of the state of affair of the company. I would also mention what is wrong in the profit and loss account
and what it should actually be. I will also quantify the incorrectness and justify my stand on the issue.
Q.6 Under what circumstances, Auditor has to qualify his report. [June 2010, June 2011 – 4 marks]
Or
What is a qualified Audit Report? Discuss the circumstances when an Auditor shall qualify
his report. [Dec 2018 (2+4=6)]
iii. Where the Balance Sheet and P&L Account are not in agreement with the hooks of account and
returns.
iv. When the information required by law is not furnished.
v. When the accounts do not disclose a true and fair view like
(a) Where the accounting practices followed by the Company are not considered appropriate to the
circumstances and nature of the business e.g. treatment of HP Sales as outright sales,
(b) Where there has been a change in accounting principles or procedures in relation to material
items, such, valuation of stock, depreciation, treatment of by-product cost, etc. without adequate
explanation and disclosure of effect of the change,
(c) Where difference of opinion with management has arisen regarding valuation or realisability of
assets, such as Stock-in-Trade, Debtors, Loans & Advances or the extent of liabilities, contingent
or otherwise,
(d) Where income or expenditure is not properly reflected so as to show a fair figure of profit for the
year,
(e) Where information is not required by law to be disclosed but the disclosure of which is considered
essential by the Auditors in order to show a true and fair view,
(f) Where there is a contravention of the provisions of the Companies Act having a bearing upon the
accounts and transactions of the Company e.g. donations to political parties or for political
purposes in contravention of Section 182, or contributions to charitable or other funds in excess
of the limitation specified in Section 181;
(g) Where the Company has contravened the provisions of its Memorandum and Articles of
Association.
Q.7 State the parameters to be satisfied for issuing unqualified audit report. [Dec 2013 – 4 marks]
An unqualified audit report could be issued when the following parameters are met:
(a) Evidence: Reasonable evidence is obtained in support of transactions recorded in the books of
account.
(b) Standards: Accounting entries passed in the books of account are in conformity with the
generally applicable accounting principles and Accounting standards followed consistently.
(c) True and Fair: The financial statements prepared represent a true and fair summary of the
transactions that took place during the year.
(d) Classification: The process of classification and aggregation followed in the preparation of the
financial statements is fair and it does not hide a material fact nor does it highlight something,
which may distort the real state of affairs.
(e) Format: The form of financial statement is in accordance with the form prescribed by law, if
any.
(f) Free of misstatements: There are no material misstatements in the financial statements. No
material transaction recorded in the books of account is illegal or beyond the legal competence
of the company.
Q.8 Proposed dividend was not adjusted in the financial statements. Comment [June 2012 – 2 marks]
Proposed dividend by Directors should be disclosed in the financial statements as per the requirement of
Schedule III of the Companies Act, 2013. Though proposed dividend is subject to the approval of the
shareholder, it should be disclosed in the Profit and Loss appropriation account. When a Company does not
provide for an amount for Proposed Dividend, auditor should take the following steps:
The fact that provision for Proposed Dividend has not been made should be disclosed by means of a
Note in the Accounts.
The Auditor should refer to the Note in his Report and make his Report subject thereto.
Q.9 Disclaimer of Opinion and Adverse Report do not serve the same purpose. Comment [June 2019 – 5
marks]
Audit report A statement of observation where the auditor expresses his opinion on the financial
statements
Types of Clean / Unqualified Report – Financial statements gives a true and fair view
auditor’s report Emphasis of matter – Financial statement gives a true and fair view but some issues
related to future have been highlighted by the auditors
Qualified report – Financial statement gives a true and fair view but some issues
related to current financial year have been highlighted by the auditors
Adverse report – Financial statement do not give a true and fair view, owing to certain
material misstatements
Disclaimer of opinion - No opinion is expressed by the auditor on all the items of
Financial Statements
Piecemeal Opinion - No opinion is expressed by the auditor on some items of
Financial Statements
Date of The date of auditors report should be the date of completion of audit
Auditors report Events occurring after the date of auditors report is not the responsibility of the auditor
The date of auditors report should be equal to or a later date than the date of signing
of financial statements by the company’s signatories.
Companies According to this order, the auditor is required to report / comment on the 16 specified
(Auditor’s matters in the auditors report, after his examination of the accounts
Report) Order,
2016 (CARO)
Applicability of CARO is applicable to all the companies except for the following companies:
CARO Banking company
Insurance company
Companies with charitable / philanthropic objectives like NGOs (registered under
section 8 of the Companies Act)
One person company
small company
private company having:
a paid up capital and reserves of not more than INR 1 crore; and
total borrowings of not more than INR 1 crore; and
total revenue of not more than INR 10 crore
Revision of In case there is a revision in the accounts, after the audit has been completed, but
accounts before before the audited financials have been circulated to the shareholders, the auditor may
adoption in the re-audit the revised financials subject to the following conditions:
AGM
Recover the signed copies of the original accounts and auditors report back from
the company
Ensure that adequate disclose, in regard to amendment, is there in the revised
financials
Issue a fresh report on the revised financial statements in which auditor should
refer to the earlier financials and the report
The Partner who signed the Original Audit Report, should also sign the Revised
Report. In case of signing by any other Partner, the reasons thereof should be
stated.
Audit of Abridged financial statements are the shortened version of the detailed financial
abridged statements.
financial These are prepared in addition detailed Annual accounts for ease of understandability
statement
and reference of the shareholders.
(Section 136)
If they are prepared after the date of signing of the Annual accounts, the events
occurring between the date of sign of annual accounts and abridged accounts is not
the auditors responsibility
Audit of To ensure that all the subsidiaries, joint ventures and associates have been included in
consolidated the CFS.
financial To ensure that the accounts of such entities whose composition of Board of Directors
statements
is controlled by the Company is also included in the CFS
(CFS)
Where a Subsidiary / Associate /Jointly Controlled Entity is excluded from the CFS,
the Auditor should examine the reasons for the exclusion
To ensure that the adjustments of goodwill / capital reserve have been suitably carried
out
Audit certificate Unlike the auditor’s report, an audit certificate gives a confirmation on the accuracy
of certain information. Following is the comparison between the two:
S.No. Type of report True & fair Issues are there Issues are there in future
view in current period* but they do not
financials impact the current
financials
1 Unqualified Report Yes No No
2 Emphasis of matter Yes No Yes
3 Qualified Report Yes Yes, not Yes / No
pervasive
4 Adverse Report No Yes, pervasive Yes / No
*Examples of future issues are – going concern, significant uncertainty due to probable future events
Audit Report specified in Sl. No. 2 to 6 are known as Modified Opinion / Modified Report.
Chapter at a Glance
Branch Audit “Branch office”, in relation to a company, means any establishment described as such by the
company - section 2(14) of the Act.
1) Where a company has a branch office, the accounts of that office shall be audited either
by the company’s auditor or by any other person qualified for appointment as an
auditor of the company under section 139 of the 2013 Act.
2) Foreign branch offices - Where the branch office is situated outside India, the accounts
of the branch office shall be audited either by the company’s auditor or by an
accountant or by any other person duly qualified to act as an auditor of the accounts
of the branch office in accordance with the laws of that country. The duties and
powers of the company’s auditor with reference to the audit of the branch and the branch
auditor, if any, shall be as may be prescribed.
3) The branch auditor shall prepare a report on the accounts of the branch examined by him
and send it to the company’s auditor. The company’s auditor shall deal with the report
of branch auditor in his report in such manner as he considers necessary.
4) Duties and powers of company’s auditor (main auditor) with reference audit of branch
and branch auditor shall be as contained in section 143(1) to 143(4) of the 2013 Act.
Thus, the company’s auditor is responsible even if branch auditor is appointed.
5) Branch auditor’s responsibility to report fraud - Responsibility to report fraud, as
applicable to company’s auditor applies to branch auditor.
Joint Audit The practice of appointing more than one persons or firm of Chartered Accountants for
conducting the audit of an entity (especially big organisations) is known as joint audit.
Individual responsibility - In respect of audit work divided among the joint auditors, each
joint auditor is responsible only for the work allocated to him.
Joint responsibility - All the joint auditors are jointly and severally responsible in respect of
a) the audit work which is not divided among the joint auditors and is carried out by
all of them;
b) decisions taken by all the joint auditors concerning the nature, timing or extent of
the audit procedures to be performed by any of the joint auditors.
c) matters which are brought to the notice of the joint auditors by any one of them
and on which there is an agreement among the joint auditors;
d) the disclosure requirements of the relevant statute; and
e) the other requirements of the relevant statute.
Disagreement between the joint auditors - Where the joint auditors are in disagreement
with regard to any matters to be covered by the report, each one of them should express his
own opinion through a separate report.
Audit of shares and debentures
Audit of The allotment of shares is the issuing of new shares to the existing shareholders or to third
allotment of parties. Following steps are to be taken to check the allotment of Securities of a Company:
securities i. To verify - a) the number; b) the value; and c) the nature of shares to be issued.
(Shares) by This is written in the contract pursuant to which the issue is made.
company ii. Examination of the prospectus to see the substance of the contract and the relevant
[Section 39] terms of the issue including – a) the mode of payment; b) payability of commission to
the underwriters; or c) payability of the preliminary expenses.
iii. Check whether minimum amount has been subscribed or not as stated in the
prospectus.
iv. Check whether the sums payable on application for the amount so stated have been
paid to and received by the company by cheque or other instrument.
v. Check whether the amount payable on application on every security shall not be less
than 5% of the nominal amount of the security or as may be prescribed
vi. Examine the Board minutes and resolutions passed for the purpose for which
securities is issued and utilized for the same.
vii. In case the minimum amount has not been subscribed, check whether the amount is
refunded to the applicant/s within prescribed time period.
viii. Check whether the company has filed with the Registrar a return of allotment or not,
where the Company having a share capital makes any allotment of securities.
ix. In case the company is found in default under above provision then the same should
be reported by the auditor in his report.
Audit of Alteration refers to the increase or decrease in (or rearrangement) in the number of the
Alteration of authorized share capital of a company, as permitted in its articles of association. The number
Share Capital of shares which the company actually issues is different from the authorised share capital.
[Section 61] Following steps should be undertake the audit:
1
Source - Google
Audit of Bonus shares are shares distributed by a company to its current shareholders as fully paid
issue of shares free of charge. Following steps may be undertaken by the auditor to audit the issue of
bonus shares bonus shares:
i. Confirm that issue of Bonus Share was authorized by articles.
ii. Verify the minutes of the Board meeting and ordinary resolution passed in the
general meeting in which the approval of members is obtained.
iii. Check that the company has issued fully paid-up bonus shares to its members only.
iv. Confirm that the issue of bonus shares shall not be made by capitalising reserves
created by the revaluation of assets.
v. Check whether the company has made any default in payment of interest or
principal in respect of fixed deposits or debt securities issued by it.
vi. Check whether the company has made any default in payment of statutory dues of
the employees, such as, contribution to provident fund, gratuity and bonus.
vii. Whether the partly paid-up shares are made fully paid-up.
viii. Check whether the bonus shares shall not be issued in lieu of dividend.
Audit of buy- Buy-Back is a corporate action in which a company purchases its shares from the existing
back of shareholders usually at a price higher than market price. Following steps are undertaken to
shares audit the buy-back of shares:
(Section 68)
i. Confirm that Buy-Back was authorized by articles.
ii. Verify the minutes of the Board meeting and special resolution passed in the
general meeting in which the approval of members is obtained.
iii. Check that the buy-back shall not be more than twenty-five per cent. of the
aggregate of paid-up capital and free reserves of the company.
iv. Check that the no buy-back shall be made out of the proceeds of an earlier
issue of the same kind of shares or same kind of other specified securities.
v. In case the buy-back is authorized by only a board resolution and not by a
resolution in the general meeting, the buy-back should not more than ten per
cent. of the total paid-up equity capital and free reserves of the company.
vi. Check that the debt – equity ratio (ie. secured and unsecured debts / paid-up
capital and its free reserves) is not more than 2:1 after the buy-back.
vii. Check that all the shares or other specified securities for buy-back should be fully
paid-up.
viii. Check whether the buy-back is made as per SEBI regulations in case of buy-
back of the shares or securities listed on any recognized stock exchange.
ix. Check that no offer of buy-back shall be made within a period of one year
from the date of the closure of the preceding offer of buy-back.
x. Ensure that buy-back shall be completed within a period of one year from the
date of passing of the special resolution or the Board resolution, as the case may
be.
xi. Ensure that the buy-back has been done only out of the company’s free reserves
or its securities premium account or out of the proceeds of any shares other than
out of the proceeds of an earlier issue of the same kind of shares.
xii. Ascertain that declaration of solvency was filed with the SEBI and/or the
Registrar of Companies before making buy-back but subsequent the passing of
the special resolution.
xiii. Ensure that company shall extinguish and physically destroy the shares or
securities so bought back within seven days of the last date of completion of buy-
back.
xiv. Ensure that the company shall not make a further issue of the same kind of
shares within a period of six months, except by way of a bonus issue.
xv. Whether the company has maintained any register of the shares or securities so
bought
xvi. Check whether after the completion of the buy-back, the company file with the
Registrar and the Securities and Exchange Board a return containing such
particulars relating to the buyback within thirty days of such completion.
Audit of A stock split is the process by which a company increases the number of shares that are
Splitting of outstanding by issuing more shares to current shareholders.
shares
For example, in a 2-for-1 stock split, an additional share is given for each share held by a
shareholder. So, if a company had 10 million shares outstanding before the split, it will have
20 million shares outstanding after a 2-for-1 split. Following steps may be undertaken to audit
the share split:
ii. Verify the minutes of the Board meeting and ordinary resolution passed in the
general meeting in which the approval of members is obtained.
iii. Verify that alteration had been effected in copies of Memorandum, Articles, etc.
iv. Verify that proper accounting entries have been passed. Register of members may
also be checked to see that the necessary alteration have been effected therein.
Audit of The following aspects are required to be examined by the auditor in conducting the audit of
Share the share transfer:
Transfer i. Inspection of the Articles of Association regarding the prescribed form of transfer
and the time limits laid down therein.
ii. Where calls are due or not paid on the shares being transferred, whether transfer can
be refused under the articles and whether any transfer was so refused.
iii. Examining whether, a notice was sent to the transferee and registration was effected
only on receipt of ‘no-objection’ certificate from him or on elapse of period
prescribed.
iv. Scrutiny of transfer forms, noting specially:
the prescribed form was used and the prescribed authority had stamped the date
on which it was presented to it; also that it was delivered to the company within
60 days.
transfer form is properly executed and bears the proper stamp duty.
Email ID – [email protected]; Mob.: +91 96439 29913
YouTube Channel – CA CS CMA Nikkhil Gupta; - [email protected]
7.6
Secured debentures may be issued by a company subject to such terms and conditions
as may be prescribed
Where debentures are issued by a company under this section, the company shall create
a debenture redemption reserve account out of the profits of the company available for
payment of dividend and the amount credited to such account shall not be utilised by
the company except for the redemption of debentures.
A company may issue convertible debentures (ie. debentures with an option to convert
into shares) only after taking an approval by a special resolution passed at a general
meeting.
Appointment of debenture trustee is mandatory for the following – i. The offer of issue
of debenture is made to public ii. The company makes the offer to members exceeding
five hundred in number. The purpose of appointment of debenture trustee is for the
protection of interest & handle grievances of debenture holders.
Auditor’s Duty:
i. The auditor should verify that the prospectus had been duly filed with the registrar
before the date of allotment of debentures.
ii. He should check the amount collected in the cash book with the counterfoils of
receipts issued to the applicants and also cross check the amount into the application
and allotment book.
iii. He should examine the debenture trust deed and note the conditions contained
therein as to issue and repayment.
iv. If the debentures are covered by a mortgage of a charge, it should be verified that
the charge has been correctly recorded in the register of mortgage and charges and
it has also been registered with the registrar of the companies.
v. Compliance with SEBI guidelines should also be ensured.
vi. Where debentures have been issued as fully paid up to vendors as a part of the
purchase consideration, the contract in this regard should be checked.
Audit of A predetermined fixed rate of interest is payable on debentures irrespective of whether the
interest on company has earned the profit or not. Debenture holders are creditors of the company, they
Debentures are not the owners. They have no voting powers and cannot influence the management but
their claim of interest rank ahead of the claims of the shareholders.
Auditor’s Duty:
i. The payment of interest should be vouched with the acknowledgement of the
debentureholders.
ii. reconcile the total amount paid with the total amount due and payable with the
amount of interest outstanding for payment.
iii. ensure that the interest paid on debenture must be disclosed as a separate item in the
profit & loss account.
Audit of Redeemable debentures can be redeemed in any of the following way:
Redemption (i) By way of periodical drawing i.e. by creating Debenture Redemption Reserve
of Account.
Debentures (ii) By way of payment on fixed date.
(iii) By payment whenever the company desires to do so.
Auditor’s Duty:
i. inspect the debentures or trust deed for the terms and conditions regarding
redemption of debentures.
ii. see the Director’s minute book authorizing the redemption of debentures.
iii. vouch the redemption with the help of debenture bonds cancelled and the cash
book.
iv. examine the accounting treatment thoroughly.
Debenture If the debentures are issued as collateral security to the banks or creditors then auditor needs
issued as to ensure that such issue is approved by Board of Directors and is made as per the term of the
Collateral loan agreement
Security
Important Questions – Branch Audit, Joint audit, audit of shares and debentures
Q.1 State the advantages of Joint Audit. [June 2015, 2017 – 4 marks]
Q.2 Write short note on - a) Audit of Bonus shares issued by a company and b) Branch Auditor [Dec
2017 – 3 marks each]
Q.3 Write short notes on – a) Responsibility of a Joint Auditor and b) Auditor’s duty regarding issue of
debentures [June 2018 – 3 marks each]
Q.4 As a Branch Auditor, how you will conduct Branch Audit? [Dec 2009 – 3 marks]
Q.5 When a company appoints Joint Auditor, auditor’s liability and responsibility are increased because
an auditor is made responsible for the audit work of another auditor. Comment [Dec 2011 – 2
marks]
The statement is incorrect. According to the statement issued by the ICAI, it would not be correct to hold
an Auditor responsible for the work of another and each joint auditor will be responsible only for the work
allotted to him.
Q.6 Accounts of Mumbai Branch was audited by a firm of Chartered Accountants of Mumbai. Even
then the Company Auditor demanded to visit Mumbai Branch, Director (Finance) could not agree.
Comment [June 2012 – 2 marks]
The Company Auditor is entitled to visit the Branch Office and has right to access all the books an accounts
records etc of the branch. The Director (Finance) cannot restrict the company auditor from visiting the
Branches.
Q.7 Company Auditor received the Branch Audit Report which contains qualifications on matters
specially required to he disclosed pursuant to schedule VI requirement. How this type of situation
shall be dealt with by the Auditor? [Dec 2017 – 2 marks]
It is obvious that the Company Auditor has no other choice but to incorporate such qualifications in his
own report after confirming the accuracy of the Branch Audit Report if the Company Auditor so feels.
The Company’s auditor has a certain measure or responsibility in respect of the accounts and papers of
the branch. This is shown by the fact that he has a right to visit the branch and has access to the papers
and documents on basis of which he has to make disclosure of anything in regard to the branch which he
thinks is not in order and which has come to his notice.
Q.8 State the duties of Auditor in respect of issue of Debentures as co-lateral security. [June 2014 – 2
marks]
Q.9 The responsibilities of joint auditors are joint and several. Comment [Dec 2014 - 4 marks]
Q.10 State the auditor’s duties in respect of issue of redeemable debentures. [Dec 2015 – 2 marks]
Q.11 As an auditor of a company, how will you audit of re-issue of forfeited shares? [Dec 2015 – 4 marks]
Q.12 What aspects are required to be examined by the auditor in conducting audit of Buyback of shares
by the company? [Dec 2016 – 7 marks]
Q.13 XYZ India Ltd. has a Branch Office in England. M/s RB Dutta & Co. Chartered Accountants were
appointed as Auditor in England was appointed as Auditor of that Branch. Indian Auditor opined
that this was not legally valid. [Dec 2010 – 2 marks] (Hint – Appointment of the Branch Auditor is
valid)
Q.14 ABC Ltd. Has two branch offices in Chennai and Hyderabad for which the Branch Auditors were
engaged. M/s APS & Co. Chartered Accountants being statutory auditors of ABC Ltd. Is
responsible in respect of work entrusted to Branch Auditors also. Do you agree? [June 2013 – 2
marks] (Hint – APS will be responsible for the work of the branch auditor)
Q.15 Write short note on Audit of alteration of share capital. [June 2019 – 4 marks]
Dividend may be paid in cash, cheque or by warrant or the electronic credit to the
account of shareholder within 30 days of declaration.
Interim Dividend: Interim dividend is declared by the Company in mid of the financial
year, much before the closure the financial statements. Some salient features of the
interim dividend are:
The Board of Directors of a company may declare interim dividend out of the
profits of the current financial year or any previous financial years
In case the company has incurred loss during the current financial year (in the first
half), such interim dividend shall not be declared at a rate higher than the average
dividends declared by the company during the immediately preceding three
financial years.
Interim dividend shall be deposited in a scheduled bank in a separate account within
five days from the date of declaration of such dividend.
Dividend shall be paid to the registered shareholder of such share or to his order or
to his banker only
Dividend shall only be payable in cash, cheque or warrant or in any electronic mode
to the shareholder entitled to the payment of the dividend.
Profits or reserves may be capitalised for issuing fully paid-up bonus shares or
paying up unpaid amount on shares held by the members of the company.
If a company which fails to comply with the above-mentioned provisions shall not
declare any dividend on its equity shares, so long as such failure continues.
Auditor should ensure that the provisions related to declaration and payment of dividend
are duly followed by the Company.
Unpaid Stage 1: Unpaid dividend account
Dividend Where a dividend has been declared by a company but has not been paid or claimed
Account within thirty days from the date of the declaration, the company shall, within seven
[Section 124] days after a period of thirty days, transfer the unpaid dividend to a Unpaid Dividend
Account to be opened in any scheduled bank.
The company shall, within a period of ninety days of making any transfer of an
amount to the Unpaid Dividend Account, prepare a statement containing the names,
addresses and the unpaid dividend to be paid to each person on the website of the
company and also on any other website approved by the Central Government.
If the unpaid dividend is not transferred to the Unpaid Dividend Account of the
company, the Company shall pay, interest on the unpaid amount at the rate of twelve
per cent. per annum.
- The Central Government may provide the required resources like offices, officers,
employees and other resources in accordance with the rules.
- The authority shall maintain separate accounts and other relevant records in
relation to the Fund in such form as may be prescribed after consultation with the
Comptroller and Auditor-General of India.
- The money shall be spent out of the Fund for carrying out the specified objects in
accordance with the law.
- The accounts of the Fund shall be audited by the Comptroller and Auditor-
General of India and such audited accounts together with the audit report shall be
forwarded annually by the authority to the Central Government.
- The authority shall prepare its annual report giving a full account of its activities
during the financial year and forward a copy thereof to the Central Government
- Central Government shall place the annual report and the audit report before
each House of Parliament.
Q.16 ABC Ltd. has made a provision for payment of dividend out of capital redemption reserve fund.
Comment. [Dec 2009 – 2 marks]
Or
Dividend has been declared out of profit on re-issue of forfeited shares. Comment [June 2012 – 2
marks]
Capital redemption reserve / profit on re-issue of forfeited shares cannot be used for distribution of
dividend. Dividends can be declared only out of current year / past year profits. The underlying principle
is that the dividend is “return on capital” and not “return of capital”. Hence the following cannot be used
for distributing dividends:
- Capital redemption reserve
- Fixed assets revaluation reserve
- Excess amount of forfeiture / reissue of shares
- Any specific reserve created out of specific provisions
Q.18 Board of directors of Evershine Ltd. In its meeting held on 11.08.2011 declared and paid final
dividend of 30% for 2010-11. As an auditor how will you react? [Dec 2011 (2 marks)]
As per the provisions of Companies Act, 2013, the shareholders may declare the final divided in AGM.
Board has power to declare the interim and the final dividend. The auditor should check the following:
- if the approval of the shareholder has been subsequently taken
- whether the has been deposited in a separate account within 5 days of declaration.
- Whether Dividend has been paid in within 30 days of declaration.
In case any of the above steps have not been followed, the auditor should qualify his report
Q.19 Write short notes on declaration of dividend by a company u/s 123 [Dec 2017 (3 marks)]
Q.20 Write short note on Duty of the auditor regarding interim dividend. [June 2019 (4 marks)]
Q.21 Write short note on Auditor’s duty regarding unclaimed dividend [Dec 2018 (4 marks)]
Audit of fixed The term Property, plant and equipment refers to such tangible items that:
assets / property, a. are held for use in the production or supply of goods or services, for rental to
plant and others, or for administrative purposes; and
equipment b. are expected to be used during more than one period.
Audit of Education The special steps involved in the audit of an educational institution are the following:
institution
Constitution and internal control
Examine the Trust Deed or Regulations governing the educational institution
and note all the provisions affecting accounts.
Read through the minutes of the meetings of the Managing Committee or
Governing Body, noting resolutions affecting accounts.
Ensure that the internal controls system is working efficiently
Student’s Fees
Check names entered in the Students’ Fee Register for each month or term,
with the amount of fees charged
Check fees by comparing counterfoils of receipts / fees register with entries in
the cash book and to confirm that the revenue has been duly accounted for in
the books of accounts.
Ascertain that – a) fees paid in advance have been carried forward; and b) the
arrears that are irrecoverable have been written off after obtaining the sanction
of an appropriate authority. Auditor should report old heavy arrears on account
of fees, dormitory rents, etc, to the Managing Committee.
Check admission fees with admission slips signed by the head of the institution
and confirm that the amount had been credited to a Capital Fund.
See that free studentship / scholarship and concessions have been granted by a
person authorised to do so, having regard to the prescribed Rules.
Other receipts
Confirm that fines for late payment or absence, etc., have either been collected
or remitted under proper authority.
Confirm that hostel dues were recovered before students’ accounts were closed
and their deposits of caution money refunded.
Verify rental income from landed property with the rent rolls, etc.
Vouch income from endowments and legacies, as well as interest and
dividends from investment; also inspect the securities in respect of investments
held.
Verify any Government or local authority grant with the relevant papers of grant.
Confirm that caution money and other deposits paid by students on admission
have been shown as liability in the balance sheet and not transferred to revenue.
Vouch donations, if any, with the list published with the annual report. Ensure
that donation received for any specific purpose was utilised for the purpose.
Audit of hospital The following points are to be considered necessary for conducting an audit of
Hospital.
Study the Charter or Trust Deed under which the hospital has been set up and
take a special note of the provisions affecting the accounts.
Examine, evaluate and verify the system of internal check, internal control and
determine the nature, timing and the extent of the audit procedures.
Patient’s fees
Vouch the entries in the Patient’s Bill Register with a copies of bill issued.
Vouch the collection from patients with copies of bills and entries in Bills
Register and ensure that proper booking is made in the books of accounts.
Arrears of dues should be properly carried forward and where these are
deemed to be irrecoverable, they should be written off under due
authorizations.
Other Income
Interest and/ or dividend income should be vouched with reference to the
Investment Register and Interest and Dividend warrants.
To ensure that the legacies and donations which are received for specific
purposes, are utilized for that purpose.
Where receipts of subscription show a significant deviations from budgeted
figures, it should be thoroughly inquired into and the matter be brought to the
notice of the trustees or the Managing Committee.
Government grants or grants from local bodies should be verifies with the
reference to the correspondence with the concerned authorities.
Expenditure
Clear distinction should be made between the items of capital and revenue
nature.
The capital expenditure should be incurred under proper authorization by a
valid resolution of the trustees or the Managing Committee.
Verify the system of internal check as regards purchases and issue of stores,
medicines etc.
Examine that the appointment of the staff, payment of salaries etc. are duly
authorized.
Assets
Physically verify the investments, fixed assets and inventories.
Check that adequate depreciation has been provided on all the depreciable
assets.
Class Notes
Audit of co- A Co-operative society may broadly be defined as an association of persons who
operative societies have voluntarily joined together to achieve a common economic objective.
Elimination of middlemen and sharing of gains of economic activities seems to be
the hallmark of a co-operative society. There may be different types of co-operative
societies like – a) consumers’ cooperative societies, b) housing co-operative societies,
c) industrial co-operative societies, d) urban and rural cooperative banks, etc.
Income / receipts
Vouch the receipt of cash.
Cash received against sales should be vouched with the cash memos and
invoices issued to customers as also Sales Account.
Other Receipts
Cash receipts on account of share capital should be vouched with the Register
of Members.
Receipt of cash in respect of payment of interest and repayment of loans
advanced by the society should be vouched with the loan agreements.
Cash received from members towards construction of houses or their
maintenance, should be vouched with the Register of Members, demands made
by the society from time to time, and money receipts.
Expenditure
Vouch all expenditure with reference to authorisation from the Managing
Committee, particularly in the case of large capital expenditure, as also the bills
received from individual parties.
Vouch the payment of loans from the loan agreements entered into with
borrower-members.
Vouch establishment expenses with reference to the resolutions of the Managing
Committee, agreements with the persons concerned, and money receipts
obtained from them.
Cash in hand
Ensure that the Internal control is in place.
Visit the bank branch and inspects physical cash and ensure that it will tallies
with the banks cash book balance.
To verity the amount of foreign currency held by bank and its translation at
market rate on the date at which financial statement is prepared.
Balance with RBI: Inspect the ledger balance in each account with (a)
confirmation certificates from Reserve Bank of India and (b) Reconciliation
Statement.
Balance with other bank: Inspection of reconciliation statement to ensure that
no debit or credit for interest have been taken to Revenue account to the year.
Borrowings
To ensure that amount have been property disclosed for a) Borrowing in India
from RBI; and b) Borrowing outside India.
Ensure the rate of interest paid payable with duration of borrowing is correctly
reflected in the books of accounts.
Deposits
To ensure that the interest accrued but not due on deposits is not classified under
other liabilities and provision
See Whether there is any instances of window dressing reporting in Long Form
Audit Report (LFAR)
Share Capital
Bills Payable
Drafts, mail transfers, traveller’s cheques, etc., should be made out in standard
printed forms.
Unused forms relating to drafts, traveller’s cheques, etc., should be kept under
the custody of a responsible officer.
The bank should have a reliable private code known only to the responsible
officers of its branches.
The signatures on a demand draft should be checked by an officer with the
specimen signature book.
the telegraphic transfers and demand drafts issued by a branch should be
immediately confirmed by advices to the branches concerned.
If the paying branch does not receive proper confirmation of any telegraphic
transfers or demand draft from the issuing branch, it should take immediate steps
to ascertain the reasons.
In case an instrument prepared on a security paper, e.g., draft, has to be cancelled
(say, due to error in preparation), it should be examined whether the manner of
cancellation is such that the instrument cannot be misused.
Cases of frequent cancellation and reissuance of drafts, pay orders, etc., should
be carefully looked into by a responsible official.
The auditor should examine other provisions and other items of liabilities in the
same manner as in the case of other entities. Eg. the auditor should verify the
payment of liability for TDS and report if it finds any irregularity therein.
Contingent liabilities
Ascertain whether there are adequate internal controls to ensure that contingent
liabilities are properly identified and recorded.
The auditor should also examine whether payment to the overseas suppliers is
made on the basis of shipping documents and after ensuring that the said
documents are in strict conformity with the terms of LCs.
Ascertain whether the accounting system of the bank provides for maintenance
of adequate records in respect of such obligations
Review the reasonableness of the year-end amount of contingent liabilities in
the light of previous experience and knowledge of the current year’s activities.
In regard to bills for collection, the auditor should also examine the procedure
for crediting the party on whose behalf the bill has been collected. The procedure
is usually such that the customer’s account is credited only after the bill has
actually been collected from the drawee either by the bank itself or through its
agents, etc.
Audit of trusts When conducting the audit of a charitable institution, the auditor should consider the
following matters:
The auditor should study the constitution of the charitable institution, for
example, whether it is set up under the Societies Registration Act or as per
section 8 of the Companies Act or as a trust.
Obtain a list of members of the governing body. This will help the auditor in
identifying whether any of the members of the governing body has any interest
in the charitable institution.
The auditor should obtain a copy of the budget sanctioned or the financial
statement. This would enable him to acquaint himself with the different heads
of income and expenditures of incomes and expenditures of the institution.
Examination of the system of internal check, especially as regards the
accounting of the amounts collected.
Income
Check that the amounts received towards income have been duly collected,
received and deposited into the bank regularly and promptly.
Subscriptions and donations: These institutions receive subscriptions and
donations which form the major part of their collections. Therefore the auditor
should check the following:
- The amount or the rate of the annual subscription.
- Any instructions given by the donors as to the specific utilization of donation.
- Adequacy of internal controls existing as regards unused receipt books,
counter foils, etc.
- Where subscriptions are received in advance these should be properly dealt
with in the accounts.
Legacies received: Verify the amounts of legacies received by reference to
correspondence with any figures and other available information’s.
Income from Investment: Where the institution has made any investments or
given loans, the amount of dividend and interest should be properly vouched
with reference to the counterfoils or dividend warrants received. It should be
ensured that such loans or grants are given under proper authorizations.
Rent: If some property is given or taken on rent, then the auditor should check
the tenancy agreement, the rent slips and the authorized person for the collection
or payment, as the case may be, of the rent.
Income/Expenditure relating to concert: Most of the organisations organize
special functions such as concert etc. The auditor should – a) properly vouch all
the gross receipts and outgoings; b) ensure that proper internal check was
maintained as regards the receipts and outgoings. For example, the person
responsible for collection and disbursements should be separate persons.
Expenditure
the auditor should verify that the expenditure is made only for the charitable
purpose.
If the expenditure is not for the charitable purpose, then the auditor should
examine the implications of applicable law and document for the same.
Assets
The auditor should physically verify the cash in hand, inventories and fixed
assets.
The auditor should ensure that all the assets have been duly disclosed in the
balance sheet at the correct values
Audit of The major objective of audit of Municipalities and Panchayats are enumerated below;
municipalities and To ensure on the fairness and correctness of contents in the Financial Statement
panchayats (local To report on adequacy of Internal control
bodies) To ensure value of money is fully received on amount spent.
To detect the frauds and errors.
Email ID – [email protected]; Mob.: +91 96439 29913
YouTube Channel – CA CS CMA Nikkhil Gupta; - [email protected]
7.22
Auditor’s duty for carrying on audit of Municipalities and panchayats (Local Bodies);
To ensure that the expenditures incurred conform to the relevant provision of
the law and is in accordance with the financial Rules and regulation formed by
the compliant authority.
To ensure that sanction is accorded by the competent authority either special or
general.
To ensure that there is provision of funds for expenditure and is authorized by
competent Authority.
To ensure that where huge financial expenditure is made is run economically
and is expected to contribute growth.
Joint Audit In a big organisation, audit cannot be accomplished with single individual, so for
overcoming such situation joint auditor is appointed
Advantages
Lowers workload on a single auditor
Timely completion of audit
Improved quality of audit due to sharing of experiences
Healthy competition
Disadvantages
Ego clashes between the two auditors
Costly
Lack of coordination between the auditors can be detrimental
Dispute in distribution of work
Shrugging of responsibility
Responsibilities The joint auditors are responsible for the respective work allocated to them
of joint auditors However, the joint auditors are jointly responsible for:-
(SA 299) work which is not divided among the joint auditors and is carried out by all of
them
decisions taken by all the joint auditors
in respect of matters which are brought to the notice of the joint auditors by any
one of them and on which there is an agreement among the joint auditors;
the disclosure requirements in the financial statements;
for ensuring that the audit report complies with the requirements of the relevant
statute.
Joint auditors should be able to arrive at an agreed report
Where the joint auditors are in disagreement on any matter, each one should express
his opinion through a separate report
Miscellaneous Audits
Audit of Allotment of shares (Section 39)
Securities / Verify the contract to ascertain the number of shares to be issued
shares Examination of prospectus to understand the terms of allotment and to verify if the
terms / conditions have been fulfilled
Check if the minimum shares (as stated in the prospectus) have been subscribed or
not
Ensure timely receipt of application money by the Company
Ensure timely refund of the application money, in case the minimum subscription has
not been received within 30 days of issue of prospectus
Ensure that the return of allotment has been filed with the Registrar on time
Splitting of shares
Confirm that the splitting up is authorized by AoA
Check Board / General meeting resolution in which the splitting up is approved
Verify that the alteration has been carried out in MoA and AoA
Verify that proper accounting entries have been passed
Audit of divisible Verify the minutes of Board and shareholders in which dividend is approved
profits and Dividend should be declared out of:
dividends Profits of the current year
(section 123)
Free reserves
The declared dividend must be deposited in a scheduled bank within 5 days of
declaration of (interim and final) dividends
Unpaid should be transferred to Investor Education and protection fund (IEPF)
established by the central government
Funds lying in IEPF must be utilized for Education, awareness and protection of
investors
interim dividend shall not be declared at a rate higher than the average dividends
declared by the company during the immediately preceding three financial years
Audit of fixed Auditor should review internal controls over acquisition like authorisation, capital
assets budgeting etc.
Physical verification of Fixed Assets
Check whether proper records are maintained
Check whether proper depreciation of Fixed Assets is done
Audit of Examine the Trust Deed, or Regulations in the case of school or college to know the
educational bye-laws and policies
institution Read through the minutes of the meetings of the Managing Committee or Governing
Body, noting resolutions affecting accounts and operation of bank accounts and
sanctioning of expenditure
Check names entered in the Students’ Fee Register
Check whether the fees received has been duly accounted for, by comparing
counterfoils of receipts granted with entries in the cash book.
Verify that free studentship and concessions have been granted by a person authorised
to do so, having regard to the prescribed Rules.
Confirm that fines for late payment or absence, etc., have either been collected or
remitted under proper authority.
Vouch donations, if any, with the list published with the annual report. If some
donations were meant for any specific purpose, see that the money was utilised for
the purpose.
Audit of hospital Study the Charter or Trust Deed under which the hospital has been set up especially
the provisions affecting the accounts.
Vouch the entries in the Patient’s Bill Register with a copies of bill issued.
Vouch the collection from patients with copies of bills and entries in Bills Register.
In case of legacies and donations which are received for specific purposes, it should
be ensured that any income therefrom is not utilized for any other purposes.
Where receipts of subscription show a significant deviations from budgeted figures,
it should be thoroughly inquired into and the matter be brought to the notice of the
trustees or the Managing Committee.
Government grants or grants from local bodies should be verified with the reference
to the correspondence with the concerned authorities.
The capital expenditure should be incurred under proper authorization by a valid
resolution of the trustees or the Managing Committee.
Verify the system of internal check as regards purchases and issue of stores,
medicines etc.
Examine that the appointment of the staff, payment of salaries etc. are duly
authorized.
Physically verify the investments, fixed assets and inventories like medicines, other
medical equipment
Ensure that a society accepts loans from its members or non-members as per the bye-
laws
Ensure that the accounting entries are properly recorded in the books of accounts
Ensure that the society has invested its funds strictly as per the regulatory provisions
Bank Audit Ensure that internal control with respect to cash, deposits, advances are in place
Inspect the cash in the bank physically and ensure that it tallies with the cash book
balance
Reconciliation of balance with RBI as stated in the books of accounts vis-à-vis as
appearing in the certificate received from RBI
Ensure that accounting for fixed assets has been adequately done
Ensure that the title deed / ownership documents and calculation of depreciation is
appropriate
Information relating to number of unaudited Branches should be given
Audit report is to be submitted in Long Form Audit Report (LFAR) as specified by
RBI
Audit of Trusts To ensure that the trust has been established as per the provisions of Societies
Registration Act or Companies Act.
To ensure that the expenditures have done according to the budgets and approvals
have been taken for the expenditure
The auditor should physically verify the cash in hand, inventories and fixed assets.
Audit of To ensure that the expenditures incurred is as per the provision of the law and is in
municipalities / accordance with the financial Rules and regulation formed by the compliant
panchayats authority.
(local bodies)
To ensure that sanction / authorisation is granted by the competent authority for every
expenditure.
To ensure that where huge financial expenditure is made is run economically and is
expected to contribute growth.
List of Standards of Auditing (as prescribed by the Institute of Chartered Accountants of India
2 SA 200 Overall Objectives of the Independent Auditor and the Conduct 01.04.2010
(Revised) of an Audit in Accordance with Standards on Auditing
12 SA 315 Identifying and Assessing the Risk of material Misstatements through 01.04.2008
understating the Entity and Its Environment
Audit Evidence
34 SA 706 Emphasis of Matter Paragraphs and Other Matter Paragraphs in the 01.04.2018
(Revised) Independent Auditor’s Report
Specialised Areas
Note: Only the titles of the SAs are to be remembered, especially the highlighted ones.
2. When the auditor is an employee of the organization being audited (auditee), the audit is classified
as
A. Internal
B. External
C. Compliance
D. Both A & B
3. The most comprehensive type of audit is the ......... system audit, which examines suitability and
effectiveness of the system as a whole.
A. Quantity
B. Quality
C. Preliminary
D. Sequential
4. Each of the three parties involved in an audit ......................... plays a role that contributes to its
success.
A. the client, the auditor, and the auditeer
B. the client, the auditor, and the audite
C. the client, the moderator, and the auditee
D. the client, the auditor, and the auditee
7. The ......... is also expected to provide the resources needed and select staff members to accompany
the auditors.
A. Auditor
B. Client
C. Internal auditor
D. Auditee
[Answer: 1.E, 2.A, 3.B, 4.D, 5.A, 6.A, 7.D,]
[Answer: 1.Auditor, 2.Check list, 3.Internal or External, 4.Final, 5.Financial Status, 6.Planning,
7.Evidential]
A. Internal Audit
B. Internal Control
C. Internal Check
D. None of the above
6. Review of internal control system is very important for the auditor as the effectives of internal
control system will determine the extent of checking to be done by the;
A. Management
B. Auditor
C. Accountant
D. None of the above
3. The first auditor appointed shall hold office till the conclusion of first AGM. True
4. Government Company means a company where 21% of shares are hold by the Central government
or State Government or partly by Central Government or State Government. False
5. A Body Corporate can become Auditor of the company. False
6. The auditor shall have access at all times to the books of account and voucher of the company. True
7. An auditor of a company can render Investment Banking Service. False
8. The auditor report shall be signed only by the person appointed as an auditor of the company. True
9. All notices of the general meeting shall be forwarded to the auditor of the company. True
10. An audit committee shall have minimum 5 directors. False
[Answer: 1.3, 2.10 Crore or more, 3.Central Government, 4.30 days, 5.30 days, 6.Cost
Accountants, 7. 1crore, 8.Heard, 9.25000, 10.Comptroller and Auditor General of India. ]
[Answer: 1.Listed, 2.Cost Accountant, 3.Company Secretary, 4.CRA-1, 5.MR-3, 6.50 crore, 7.200
crore, 8.204 9.148, 10.Board of Directors]
C. Secretarial Auditor
D. None of the above
4. Secretarial Audit is applicable to the public sector company having the paid up share capital of-
A. 50 crore
B. 75 crore
C. 100 crore
D. 200 crore
5. Secretarial Audit is applicable to the public sector company having the turnover of-
A. 100 crore
B. 200 crore
C. 250 crore
D. 300 crore
[Answer: 1.1 Lakh Rupees, 2.Collected and Considered, 3.Expression of opinion, 4.Shareholders,
5.Auditor, 6.Auditor]
C. Section 72
D. Section 73
(ii) When the auditor is an employee of the organization being audited (auditee), the audit is classified
as
(a) Internal
(b) External
(c) Compliance
(iii) The most comprehensive type of audit is the ......... system audit, which examines suitability and
effectiveness of the system as a whole.
(a) Quantity
(b) Quality
(c) Preliminary
(d) Sequential
(iv) Each of the three parties involved in an audit ......................... plays a role that contributes to its
success.
(a) the client, the auditor, and the auditeer
(b) the client, the auditor, and the audite
(c) the client, the moderator, and the auditee
(d) the client, the auditor, and the auditee
(v) ------------------is a method of misappropriation of cash by which the past defalcations are covered
up by the current receipts.
(a) Fraud
(b) Error
(c) Lapping
(d) Forensic Audit
(vi) An audit which is conducted considering the particular area of accounting which the owner thinks
essential is known as -------.
(a) Complete Audit
(b) Partial Audit
(c) Balance Sheet Audit
(d) Cost Audit
(vii) The Companies Act 1913 used the term “True and -----------”.
(a) Fair
(b) True
(c) False
(d) Correct
(viii) -----------is conducted with a particular object in view, viz to know financial position, earning
capacity, prove fraud, invest capital, etc.
(a) Auditing
(b) Accounting
(c) Investigation
(d) Sampling
Answer:
(i) e
(ii) a
(iii) b
(iv) d
(v) c
(vi) b
(vii) d
(viii) c
(ix) a
(x) c
Answer:
(i) Audire
(ii) Books of Account
(iii) Standards on Auditing
(iv) Investigation
(v) Operational Audit
(vi) Internal Audit
(vii) Annual Audit
(viii) Interim Audit
(ix) Partial Audit
(x) Fraud
(xi) Conclusive
(xii) Professional
(e) Auditor has right to disclose the client information to a third party.
Answer:
a. true
b. false
c. false
d. false
e. false
f. false
g. false
h. true
i. false
j. true
k. true
l. false
m. true
Answer:
(a) auditor
(b) check list
(c) internal or external
(d) final
(e) financial status
(f) planning
(g) evidential
(h) evidence
(i) documentation
(j) external
Answer:
i.d
ii.d
iii.b
iv.c
v.d
vi.a
vii.d
viii.d
ix.b
Answer:
(i) True (ii)True
(iii) True
(iv) True
(v) False
(vi) False
(vii) False
(viii) True
(ix)False (x) True
Answer:
Column A Column B
1 SA 210 A Agreeing the terms of Audit
engagements.
2 SA 230 D Audit Documentation
3 SA 300 B (a) Audit Planning
4 SA 530 C Audit Sampling
Answer:
(i) True
(ii) False
(iii) True
(iv) True
(v) True
(vi) False
(vii) True
(viii) False
Answer:
(a) internal
(b) appraisal
(c) management
(d) financial
(e) 138
(f) auditor
(g) essence
(h) Verification
(i) Confirmation (j) iii
b. Employees
c. Accountant
d. External auditor
(vi) Review of internal control system is very important for the auditor as the effectives of internal
control system will determine the extent of checking to be done by the
a. Management
b. Auditor
c. Accountant
d. None of the above
(viii) Internal Control Questionnaire contains the questions need to be followed by the
a. Employer of the organisation
b. Employee of the organsation
c. Auditor of the entity
d. Banker to the organsation
(x) –––––––––––– allocation of duties among the staff in such a way that it eliminates the chances of
any duplicity of work
a. Internal check
b. Internal control
c. Internal audit
d. Operational control
Answer:
i.a
ii.a
iii.b
iv.a
v.a
vi.b
vii.c
viii.b
ix.d
x.a
A. Board of Directors
B. Managing Director
C. Comptroller and Auditor General (CAG)
D. Shareholders
(vi) Unpaid dividend standing at the credit of Unpaid Dividend A/C should be transferred to Investor
Education and Protection Fund after ______________years of its remaining unpaid.
A. Six
B. Eight
C. Seven
D. Five
(vii) Which of the following services cannot be rendered by an auditor as per Companies Act 2013?
A. Vouching
B. Verification of assets and liabilities
C. Issuing certificates on relevant matters
D. Providing investment advisory services
Answer:
(i) False
(ii)False
(iii) True
(iv) False
Answer:
Column ‘A’ Column ‘B’
1. Audit of branch accounts C. Section 143(8)
2. Unable to form an overall D. Disclaimer of Opinion
conclusion on Financial
Statements
3. Audit Report with reservations A. Qualified Audit Report
4. Filling up of casual vacancy B. Section 139(8)
(vii) The audit report should be signed in the personal name of the __________
(A) Accountant
(B) Auditor
(C) Directors
(D) None of the above.
(ix) Remuneration of auditors is covered under Section ____________ of Companies Act, 2013.
(A)Section 142
(B) Section 148
(C) Section 139
(d)None of the above
Answer:
Sl/No Answer
.
1. D
2. A
3. B
4. C
5. E
Answer:
(i) False
(ii) True
(iii) False
(iv) True
(v) False
(vi) False
(B) MR-3
(C) MR-4
(D) MR-5
(iv) The meetings of Audit committee should be ______________ in a year.
(A) 4
(B) 5
(C) 3
(D) 2
(i) Cost Accounting Standards is mandatory as per section 143 of the companies Act 2013.
(ii) Audit report reflects the work done by the employees.
(iii) The concept of true or fair is a fundamental concept in auditing.
(iv) Statutory Auditor is appointed by the shareholder in the general meeting.
Answer:
(i) True;
(ii) False;
(iii) False:
(iv) True.
(i) The most comprehensive type of audit is the _________system audit, which examines suitability and
effectiveness of the system as a whole.
(a) Quantity
(b) Quality
(c) Preliminary
(d) Sequential
(ii) Each of the three parties involved in an audit _____________ plays a role that contributes to its success.
(b) External
(v) Remuneration of auditors is covered under Section ____________ of Companies Act, 2013.
Answer:
(i) — (b)
(ii) — (d)
(iii) — (c)
(iv) — (a)
(v) — (a)
(vi) — (d)
Answer:
Column ‗A‘ Column ‗B‘
1. Government Company C. A company which is a subsidiary of
Government Company
2. Detailed of audit work to be B. Audit Programme
performed
3. Maximum term of Individual D. 1 term of 5 years
Auditor
4. True and Fair Audit Report A. Unqualified Opinion
True or False:
(i) An audit report should have a proper title.
(ii) Auditor has right to disclose the client information to a third party.
(iii) An in depth examination to detect a suspected fraud is termed as Investigation.
(iv) Debenture includes debenture stock, bonds or any other instrument of a company evidencing a debt,
whether constituting a charge on the assets of the company or not.
Answer:
(i) True;
(ii) False;
(iii) True;
(iv) True
(ii) Each of the three parties involved in an audit _____________ plays a role that contributes to its success.
(a) the client, the auditor, and the auditeer
(v) Secretarial Audit is covered under Section ____________ of Companies Act, 2013.
Answer:
Column ‗A‘ Column ‗B‘
1. Independent Directors C Audit Committee
2. Maximum term of Firm as Auditor B 2 Consecutive terms of 5 years
3. Maximum term of Individual D 1 term of 5 years
Auditor
4. True and Fair Audit Report A Unqualified Opinion
(i) "Branch office", in relation to a company, means any establishment described as such by the company.
(ii) Internal Auditor can be removed by the Board.
(iii) Final dividend is declared in the general meeting.
(iv) Debenture includes debenture stock, bonds or any other instrument of a company evidencing a debt,
whether constituting a charge on the assets of the company or not.
Answer:
(i) True;
(ii) True;
(iii) True;
(iv) True.
(A) Payment
(B) Expenses
(C) Assets
(D) Liabilities
(A) CRA-1
(B) CRA-2
(C) CRA-3
(D) CRA-4
(A) 4
(B) 5
(C) 3
(D) 2
(A) Main
(B) Final
(C) Semi final
(D) None of the above
Answer:
Column ‘A’ Column ‘B’
1. Statutory Audit C Tax Audit
2. Annual Audit A Final Audit
3. Functional Classification of Audit D External and Internal Audit
4. The authority for Govt. Audit B Comptroller and Auditor General of
India
State whether the following statements are True (or) False.
(i) Should reporting in Audit report comply with the requirements as made by statues?
Answer:
(i) True;
(ii) False;
(iii) False:
(iv) True.
(iii) The first Auditor of a Company shall be appointed by the Board of Directors within
(A) Assets
(B) Audit staff
(C) Accountant
(D) Management
(A) Payment
(B) Expenses
(C) Assets
(D) Liabilities
(A) CRA-1
(B) CRA-2
(C) CRA-3
(D) CRA-4
Answer:
(i) — C
(ii) — A
(iii) — B
(iv) — A
(v) — B
(vi) — A
Answer:
1 – C; 2 – A; 3 – D; 4 - B
(i) Audit report should comply with the requirements made by statues.
(ii) An audit work reflects the work done by the management.
(iii) The first auditor of a company is appointed by the shareholders of the company at the general meeting.
(A) Quantity
(B) Quality
(C) Preliminary
(D) Sequential
(ii) Each of the three parties involved in an audit _____________ plays a role that contributes to its success.
(A) Internal
(B) External
(v) Remuneration of auditors is covered under Section ____________ of Companies Act, 2013.
Answer:
(i) — (B)
(ii) — (D)
(iii) — (C)
(iv) — (A)
(v) — (A)
(vi) — (D)
(ii) Auditor has right to disclose the client information to a third party.
Answer:
(i) True;
(ii) False;
(iii) True;
(ii) In case of a company other than a Government Company, any casual vacancy in the post of auditor is to
be filled by the
(A) Board of Directors
(B) Managing Director
(C) Comptroller and Auditor General (CAG)
(D) Shareholders
(v) Unpaid dividend standing at the credit of Unpaid Dividend A/C should be transferred to Investor
Education and Protection Fund after years of its remaining unpaid.
(A) six
(B) eight
(C) seven
(D) five
(vi) Which of the following services cannot be rendered by an auditor as per Companies Act 2013?
(A) Vouching
(B) Verification of assets and liabilities
(C) Issuing certificates on relevant matters
(D) Providing investment advisory services
(b) Match the following items in Column 'A' with items shown in Column 'B':
Column 'A' Column 'B'
1. Appointment of Company A. Current Audit File
Auditor
2. Remuneration of a B. Section 139 of Companies
Company Auditor Act 2013
3. Different accounting C. Permanent Audit File
schedules such as schedule
of debtors and creditors
4. Analysis of significant D. Section 142 of Companies
ratios and trends Act 2013
(i) As per Section 138 of Companies Act 2013, no private company or unlisted
company is required to appoint an internal auditor.
(ii) Audit Memorandum is a detailed plan of audit work clearly specifying the responsibilities of the audit
staff and time allotted to perform the same.
(iii) Substantive procedure is also known as test of control.
(iv) Cut-off procedures are adopted to allocate revenues and costs to the proper accounting period.
Answer:
(a) (i) C
(ii) A
(iii) B
(iv) B
(v) C
(vi) D
(b) (1) B
(2) D
(3) A
(4) C
(vi) The first Auditor of a Company shall be appointed by the Board of Directors within
(A) 30 days from the date of registration.
(B) 90 days from the date of registration.
(C) 30 days from the date of first AGM.
(D) 1 year from the date of registration.
(b) Match the following items in Column 'A' with item s shown in Column 'B':
Column 'A' Column 'B'
1. Responsibility of Joint Auditor A. Qualified Audit Report
2. Unable to form an overall conclusion on B. SA 230
Financial Statement
3. Audit Report with reservations C. SA 299
4. Audit Documentation D. Disclaimer of Opinion
(ii) Internal audit is conducted by the staff of the entity or by an independent professional appointed for that
purpose.
(iii) The first auditor of a company is appointed by the shareholders of the company at the general meeting.
(iv) A company auditor can render actuarial services to his client.
Answers;
a) i.d
ii.c
iii.c
iv.c
v.a
vi.a
b) i.c
ii.d
iii.a
iv.b
c) i.true
ii.true
iii.false
iv.false
(A) Shareholders
(B) Board of Directors
(C) Debenture Trustee
(D) Audit Committee
(ii) As per SQC 1, Audit working papers should be retained for a period of
(A) 2 years
(B) 5 years
(C) 7 years
(D) 10 years
(A) CRA-1
(B) CRA-2
(C) CRA-3
Email ID – [email protected]; Mob.: +91 96439 29913
YouTube Channel – CA CS CMA Nikkhil Gupta; - [email protected]
9.44
(D) CRA-4
(b) Match the following items in Column 'A' with items shown in Column 'B':
Column 'A' Column 'B'
1. Independent appraisal activity A Secretarial Audit Report
2. SA700 B Section 123
3. Form MR3 C Internal Audit
4. Declaration of dividend D Forming an opinion and reporting on financial
statements
Answer:
(a) (i) B
(ii) C
(iii) D
(iv) A
(v) C
(vi) A
(b) (1) C
(2) D
(3) A
(4) B
(iv) _____________ Audit is conducted at the end of the accounting year, after the books of accounts have
been closed.
(A) Interim
(B) Annual
(C) Investigation
(D) None of the above
(vi) Each of the three parties involved in an audit _____________ plays a role that contributes to its success.
(A) the client, the auditor, and the auditeer
(B) the client, the auditor, and the audite
(C) the client, the moderator, and the auditee
(D) the client, the auditor, and the auditee
Answer:
Column ‘A’ Column ‘B’
1. Functional Classification of Audit C External and Internal Audit
(c) State whether the following statements are True (or) False.
(i) Internal audit, in its initial stages, was developed as a branch of Operational auditing. False
(ii) An auditor is not insurer. True
(iii) The first auditor of a company is appointed by the shareholders of the company at the general meeting.
False
(iv) Balance sheet audit is generally synonymous with statutory audit. True
(a) Choose the correct answer from the given four alternatives:
(ii) In case there is an Audit Committee the Cost Auditor is appointed by the
(A) Audit Committee
(B) BOD
(C) BOD on recommendation of Audit Committee
(D) None of the above
(v) The most comprehensive type of audit is the _________system audit, which examines suitability and
effectiveness of the system as a whole.
(A) Quantity
(B) Quality
(C) Preliminary
(D) Sequential
(c) State whether the following statements are True (or) False.
(i) An audit report should have a proper title.
(ii) Auditor has right to disclose the client information to a third party.
(iii) An in depth examination to detect a suspected fraud is termed as Investigation.
(iv) Before submission of the report to the Board the Audit Committee has the power to review the Financial
Statement.
Answer:
(i) True;
(ii) False;
(iii) True;
(iv) True.