Kunal Mandhania

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 CA Inter – audit Marathon by Kunal Mandhania

Date Time Chapter Name

11 Nov. 07:00 pm – 11:00 pm CARO. Chapter – 10 and 11

12 Nov. 08:00 am – 11:00 am Chp. 5, 6, 7, 8
12 Nov. 11:30 am – 12:45 pm Chp. 1
12 Nov. 01:00 pm – 02:30 pm Chp. 4
12 Nov. 03:00 pm – 06:00 pm Chp. 13
12 Nov. 06:15 pm – 07:30 pm Chp. 2
12 Nov. 07:30 pm – 10:30 pm Chp. 3
12 Nov. 10:45 pm Part 8
13 Nov. 07:00 am Chp. 12
13 Nov. 08:30 am – 11:00 am Special Class – MCQ & and T/ F Practice

Unacademy CA Intermediate Group - 2

Marathon Nov 2022

Chapter 11
Auditing &
Assurance

SA-700
 Types of opinion

Unmodified
Modified

Clean Report

Qualified Negative Disclaimer of

SA - 700 report report opinion

SA - 705
 SA – 700 – Forming opinion on F.S

Scope 🡪 Deals with

a) Auditors resp. to form a opinion
b) Form & content of auditor’s report
General Purpose Framework
FRF designed to meet information needs of wide range of
users
Specific Evaluations for forming opinion
Two Types
To express his opinion whether F.S in
Fair Presentation Compliance Framework
Framework accordance with applicable FRF i.e.
↓ ↓
↓
Has strictly follow i. Disclosures 🡪 Appropriately
Follow disclosed
requirements the framework
ii. A/c Polices 🡪 as per AFRF
from established ↓ iii. A/c Estimates 🡪 by Mgt. 🡪
framework Cannot deviate Reasonable
But iv. Information in 🡪 Relevant, reliable,
↓ comparable, understandable.
Can deviate Even for better v. Terminology 🡪 Appropriate
↓ presentation If all complied, issue unmodified opinion.
For fair presentation E.G 🡪 F.S of Banking
E.g🡪 F.S of Co.
Companies
 SA – 700 – Forming opinion on F.S

Contents / Elements of Audit Report

1. Title – Independent Auditor’s Report
2. Addresse – To, members of Co.
3. Opinion Paragraph.
Includes
a) Name of entity
b) Period of Audit
c) Name of F.S. audited
d) Opinion
4. Basis for opinion para
a) Followed S.A.
b) Sec. 143(2)🡪 Ref. to Responsibility
c) Independence statement
d) States whether the auditor believes that the audit evidence the auditor has obtained
is sufficient and appropriate to provide a basis for the auditor's opinion.
 SA – 700 – Forming opinion on F.S

Contents / Elements of Audit Report

5. Going Concern Para –As per SA 570
6. Key audit matters (As per SA- 701)
7. Auditors Resp. for Audit of F.S
Mention
a) We can take only reasonable assurance
b) Report whether F.S is free from material misstatement
8. Mgt.’s Resp.
9. Report on other legal and Regulatory requirements [Sec. 143]
 SA – 700 – Forming opinion on F.S

Contents / Elements of Audit Report

10. Date – Can be any date but after date of approval of F.s by mgt
11. Place – City where Audit report is signed
12. Signature
a) Prop firm – Signed in his own name
b) Part Firm/LLp- Sign on behalf of firm
c) Also mention membership no and Firm’s registration no
 The auditor’s report shall include a section with a heading “Responsibilities of
Management for the Financial Statements.” SA 200 explains the premise, relating to the
responsibilities of management and, where appropriate, those charged with govenance,
on which an audit in accordance with SAs in conducted. Explain
[RTP-Nov. 18, MTP-April 19, may 20, April 21]

● This section of the auditor's report shall describe management's responsibility for:
● Preparing the F.S. in accordance with the applicable FRF, and for such internal control as management determines is necessary to enable the
preparation of F.S. that are free from material misstatement, whether due to fraud or error; and

● Assessing the entity's ability to continue as a going concern and whether the use of the going concern basis of accounting is appropriate as
well as disclosing, if applicable, matters relating to going concern. The explanation of management's responsibility for this assessment shall
include a description of when the use of the going concern basis of accounting is appropriate.
 The requirements of SA 700 are aimed at addressing an
appropriate balance between the need for consistency and
comparability in auditor reporting globally. Explain.
[RTP - May 21]
● Need for consistency and comparability in auditor reporting globally:
1. The requirements of SA 700 are aimed at addressing an appropriate balance between the need for consistency and comparability in
auditor reporting globally and the need to increase the value of auditor reporting by making the information provided in the auditor's report
more relevant to users.

2. This SA promotes consistency in the auditor's report but recognizes the need for flexibility to accommodate particular circumstances of
individual jurisdictions. Consistency in the auditor's report, when the audit has been conducted in accordance with SAs, promotes
credibility in the global marketplace by making more readily identifiable those audits that have been conducted in accordance with globally
recognized standards.

3. It also helps to promote the user's understanding and to identify unusual circumstances when they occur.
 SA 705 MODIFIED OPINION

Meaning Which opinion to give Changes in Audit Report

Reasons Material but Material as well
Any opinion not as pervasive 1. Opinion in opinion
other than pervasive para
clean report is (Spread out)
2. Name of opinion
Material Qualified Adverse /
modified Misstatement Negative para will be
report in FS qualified /
Eg negative /
Unable to Qualified Disclaimer of
1. Qualified obtain Audit opinion Disclaimer of
report evidence opinion
2. Negative 3. Name of basis of
report
opinion para will
3. Disclaimer of be basis for Q / N /
Opinion DOO and give
reasons and effect
of Modification
 Opinion Section

Wordings of Opinion:

● Qualified
Except for the effects of matters prescribed in ‘Basis of Qualified Opinion’ section, the F.S. have been prescribed fairly in all material respects in
accordance with [applicable FRF].

● Adverse
In auditor’s opinion because of significance of the matters described in ‘Basis of Adverse Opinion’ section, the F.S. does not give a true and fair view
of ______ in accordance with [applicable FRF].

● Disclaimer
because of significate of matters described in the ‘Basis for Disclaimer of Opinion’ section, the auditor has not been able to obtain sufficient
appropriate audit evidence to provide a basis for audit opinion on F.S.
 SA 706 Emphasis of Matter Para & Other Matter Para
EMPHASIS OF MATTER PARA (EOM)
Meaning Examples where used Other Important Points
Used where 1. Early application of AS 🡪 disclosed by 1. Placed in Audit report
although Management 🡪 before or after
auditor doesn’t 2. Doubt about Going Concern 🡪 disclosed by ‘KAM’ Para
modify report assumption Management
on such matter 2. Use EOM para where
3. Material Change in 🡪 Disclosed by on such matter
↓ Accounting policy Management
Uncertainty over pending 🡪 Disclosed by - He neither modifies
But highlight it 4.
in this para to Litigation Management report
bring attention 5. Major amalgamation during the year - Nor use KAM Para
of user of FS on 6. Many prior period items
such matter
7. Subsequent event
↓
↓
For their better
Occurring between Balance Sheet date & date of
understanding Audit Report
 State clearly the objective of the Auditor as per SA 706. Also
define emphasis of and other matter paragraph. matter
paragraph [MTP-Oct. 20]
●The objective of the auditor, having formed an opinion on the financial statements, is to draw users' attention, when in the auditor's judgment it is necessary
to do so, by way of clear additional communication in the auditor's report, to:
(a) A matter, although appropriately presented or disclosed in the financial statements, that is of such importance that it is fundamental to users'
understanding of the financial statements; or
(b) As appropriate, any other matter that is relevant to users' understanding of the audit, the auditor's responsibilities or the auditor's report.
 SA 706 Emphasis of Matter Para & Other Matter Para
OTHER MATTER PARA (OM)
Meaning Examples where used Placed where
Matter other After EOM Para (if EOM
1. Audit not conducted in present or after KAM para
than those in FS previous year (SA 510)
↓
2. Someone else did audit
Relevant to during previous year
-User’s (SA 510)
understanding
3. Audit of branch done by
-Auditors
responsibility
someone else (SA 600)
4. Reporting on distribution
or use of audit report
 SA-701🡪 Key audit matters (KAM)

Meaning Where How to determine Other IMP Pts.

required KAM (nov 20 )
Matters 1) Higher 1) Communicate in
1) Listed Co. RMM
🡪 1) Should be auditors report
2) If required from 2) Significant under KAM para
In auditors by law matters risk with
judgement 3) Optional communicat identified a) Separate heading

🡪 ion to TCWG 3) Area b) Reason of

a) If entity consideration
is of + requiring
Were of significant c) How matter was
most significa 2) Require addressed.
nt public significant mgt.
significanc judgemen 2) Where KAM not
e in audit interest. auditor
E.g. attention t. required
🡪 Banks, a) Matter on which
+ 4) Recent report modified
F.I. significant
Of F.S. of 3) Most b) If disclaimer- then
current b) Public event omit KAM para
sector significant occurred (SA 705)
period entites during
period
Other important points
1. If matter highlighted in KAM no need to include it in EOM / OM para

2. Purpose [RTP-Nov. 18]

i) Enhance communication value of report for intended users

ii) Greater transparency
iii) Assist them in understanding significant areas , and matters requiring significant judgement

1. Difference between KAM & EOM para

i) Significant – EOM para
Most significant – KAM Para
ii) KAM Para mandatory even if there is no KAM but EOM Para is included in Auditor’s Report only when there is any matter to emphasize
4. Communicating KAM is not a Substitute to

i. Disclosure in FS

ii. Modified Opinion

iii. Material uncertainty about Going Concern Reporting

iv. Separate opinion individually

 SA 710 – Comparative Information
corresponding figures & Comparative F.S
Auditors 2 Approaches (depends upon law /terms of eng )
Meaning
Procedure
🡪 🡪
1) Included as
Amounts & AFRF Corresponding Comparative F.S
Disclosures 2) CI agrees Figure approach approach
with amt and
🡪 disclosures
1. Meaning Where amt. & disclosures of prior Where amt. & disclosures of prior
as per prior period are period
period
Included in a) Included as a integral part of 🡪
current F.S 3) A/c policies C.Y. F.S Included as comparison with C.Y. F.S
consistently b) As read only
applied and if
🡪 not then n
2. Used where Last year inf just for reference Last year infn more detailed
disclosed
Related to 4) In case of As per its relevance to the current Is comparable with F.S of C.Y.
suspicion 3. Level of
Previous about M.M Information period figures
year in ,perform
additional
accordance procedure 4. Auditor’s Only on current period except On both C.Y & P.Y
with AFRF 5) Obtain W.R opinion Prior period items
where a) Contains Modification
required b) M.M exist
c) Not audited
 Decisions

Corresponding Figure approach Comparative F.S approach

Prior period M.M still exists Prior period 1. Previous opinion differs
AR was where F.S not audited from current opinion
modified previously 🡪
unmodified 🡪
🡪 Disclose reason in ‘OM’ para
opinion was Mention O.M
Matter of 2. Prior period F.S audited by
modification issued para
unresolved Predecessor auditor
+
🡪
Follow
Modifed report procedures of State in OM para
+ SA 510
Give ref to both
periods
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 CA Inter – audit Marathon by Kunal Mandhania

Date Time Chapter Name

11 Nov. 07:00 pm – 11:00 pm CARO. Chapter – 10 and 11

12 Nov. 08:00 am – 11:00 am Chp. 5, 6, 7, 8
12 Nov. 11:30 am – 12:45 pm Chp. 1
12 Nov. 01:00 pm – 02:30 pm Chp. 4
12 Nov. 03:00 pm – 06:00 pm Chp. 13
12 Nov. 06:15 pm – 07:30 pm Chp. 2
12 Nov. 07:30 pm – 10:30 pm Chp. 3
12 Nov. 10:45 pm Part 8
13 Nov. 07:00 am Chp. 12
13 Nov. 08:30 am – 11:00 am Special Class – MCQ & and T/ F Practice

Unacademy CA Intermediate Group - 2

CA Inter
Audit
CARO - 2020
Join KUNAL Sir’s Telegram Channel
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 CARO 2020 Sec. 143(11)
Para
(1) (2) (3) (4)
Commencement Companies 21 Clauses Such matters
& applicability affect F.S.
To which
CARO Applies Comment
(+)
Report on Reason
matters stated
in Para (3)
Applicability of CARO
CARO is applicable to all the companies including foreign company excluding the following :-

1) OPC
2) Small company
i. paid up capital doesn’t exceed 2 cr
ii. Average annual Turnover doesn’t exceed 20 crores
3) Section 8 company
4) Banking company u/s 5(c) of Banking Regulation Act, 1949 (not
apply to cooperative banks as they are govered under
Cooperative Societies Act, 1912)
5) Insurance company under Insuarance Act, 1938
6) Private Limited company which satisfies all the following
conditions .
 Does not 10 crore [As on B/s date ]
T 1. Total Revenues
Exceed [ as per FS]
2. O/s loans from Does not 1 crore [Anytime
banks and
O financial Exceed during the year]
institutions

3. Paid up (+) Does not

P Reserve &
Exceed
1 crore [as on B/s date]
Surplus
4. Public company is neither holding co. nor
subsidiary co. of such private co.
 Calculation of Revenue (Note-1)
1) From Operations (including discontinuing operation )
✓
2) Other Income such as Interest, Dividend, Non-operating
✓
3) GST/Sales tax / Excise (Included in turnover ) ✓
4) GST/Sales tax / Excise (Excluded in turnover)
🡪
5) Sales Return whether deducted of previous years
✓
6) Trade discount should be deducted from revenue (-)
Calculation of paid up Capital (Note-2)

🡪 Equity
✓
🡪 Preference ✓
🡪 Share application money 🡪
🡪 Bonus share ✓
🡪 Consideration otherwise than cash
✓
🡪 Unpaid calls
🡪
🡪 Forfeited shares
Note: if share capital is credited then it is included
✓
 Calculation of Reserves (Note -3)
1) Capital Reserves
✓
2) Revenue Reserve
✓
3) Asset Revaluation Reserve ✓
4) Capital Redumption Reserve ✓
5) Debenture Redumption Reserve ✓
6) Security Premium Reserve ✓
Added
7) Credit Balance of P & L
8) Debit Balance of P &L Subtracted
Calculation of Loan (Note -4)

1) Limits of Loan taken separately or in aggregate

Aggregated

✓
2) C.C /O.D

✓
3) Short Term

4) Long Term loan

5) Bills Discounted
✓
✓
Calculation of Loan (Note -4)

6) Non-fund based credit facility

✓
(to the extent it is
made fund based )
7) Interest accrued but not due

8) Interest accrued and due

🡪
9) OD against F.D
✓
✓
( Amount not net of F.D)
Calculation of Loan (Note -4)

10) Export Credits

✓
11) O/s dues w.r.t. credit cards
✓
12) Secured borrowings
✓
13) Unsecured borrowings
✓
5. Government Company
● Rule of normal company also
apply to Government company
6. Stand Alone Financial Statement

● It applicable to standalone FS
but not applicable to
consolidated FS
 7. Branch Audit Report
CARO is applicable, if applicable to
head / main company then branch
auditor also has to report on CARO
with respect to branch as per ICAI
Guidelines
 8. Insurance company
[General Insurance as well as
life Insurance ]
● CARO is not applicable
Note 9.
Conditions only for Private
limited Company , if unlimited
company CARO is applicable
Note 10.
Every year we have to check CARO is
applicable or not because “Once applicable
always applicable” rule doesn’t apply to
CARO
 Para 3 - Matters to be included in AR
• Read as Para 3 clause (i)…… sub-clause (a) 🡪 if any
• Total 21 clauses
o These 16 clauses are in the form of questionnaire.
The answer is to be given by auditor and not
management
o The auditor will give answer to all the 16 clauses in
his AR as annexure; whether all clauses applicable to
the company or not
 (i) Fixed Assets

a) Proper Records A] Qtywise and Situationwise

Maintained B] Full Particulars of intangible assets

b) Physical • In it’s own name (except lease agreement)

Verification • If not provide details
c) Title deeds of • At reasonable internal
immovable • Material discrepancy notice and property dealt in BOA
property
d) Revaluation • As per regd. Valuer
• Specify amt of change if change atleast 10% (upward or
downward)
e) Benami • If held whether disclosed
Property
 (ii) Inventory

(a)
(b)
Physical Verification
Working Capital Loan

• Reasonable interval • Loan in excess of 5 cr or more

• Appropriate coverage and on security (any point of year )
procedure • Quarterly returns filled with
• Whether discrepancy of 10% bank in conformity with BOA
or more (each class) noticed.
If yes properly dealt
 (iii) Loans / Guarantee/ Security / Investment (LGSI)

a) If Provided mention amt A] to group Co. [S | A | J.V]

B] others
b) T & C • If not prejudicial to interest of Co.
c) Repayment • Schedule stipulated
• Whether receipts regular
d) Over due recovery If receipts irregular whether Co.
🡪
More than 90 days
🡪
Steps taken to recover it

e) Renewal / Extension / • If yes,

Fresh loan (for loan fallen due (a) Amt.
during year) (b) % to total loans granted during year
(f) Demand loans to • If yes,
promoters / related parties/ (a) Amt.
others (b) % to total loans
3(iv) - Loans, Investment, Guarantee &
Securities
Whether provision of section 185 & 186
↓
complied or not
↓
if not provide details thereof
 3(iv) - Loans, Investment, Guarantee &
Securities
Explanation:
Sec 185 🡪 MBP-1 Sec 186 🡪 MBP-2
Company 🡪 X loan 🡪 Company 🡪 ✔ loan 🡪 any person
Directors except director
🡪 X guarantee 🡪 ✔ guarantee
& & Relative
🡪 X Security for loan 🡪 ✔ Security
Relatives
Company 🡪 ✔ loan 🡪 Business OR
🡪 ✔ guarantee enterprises Company 🡪 invest in securities of 🡪 any
🡪 ✔ Security for loan of directors body corporate
2 conditions to be satisfied: Conditions to be satisfied:
i) Pass SR Limits w.e.h.🡪 60% of (PUSC + FR + SP)
ii) loan to be utilized only for principal 🡪 100% of (FR + SP)
business activities RULE 🡪 Upto limit – BM – UBR
🡪 Beyond limit–BM–UBR – GM – SR
 3(v) – Public Deposits
Section 73 to 76 &
Directives issued by RBI
other provision (Rules, 2014)

Complied or not
↓
If not, state nature of contravention
↓
If order passed by NCLT / RBI / Court / Other Tribunals
↓
Order complied or not
 3(vi) - Cost Records
If required to maintain records u/s 148(1)
↓
Whether maintained or not

Comment :
CARO does not require detailed examination
of such record
 Including PF, ESIC, income Tax, sales tax,
3(vii) - Statutory Dues service tax,VAT, etc – this is not
exhaustive definition, it is inclusive

(a) Undisputes (b) Disputes

Whether company is regular Report:
↓ 1) Forum where dispute is
If not, report, if taxes are pending
unpaid for more than 6 months2) Amount involved
as on b/s date from the due (mere representation to
date concerned department shall
not constitute a dispute)
Comment:
Since, emphasis of this clause is on regularity, the scope of auditor’s inquiry is
restricted only to those dues which company is required to deposit regularly to an
authority
 (viii) Previously unrecoreded income

Whether surrendered / Disclosed as per I.T Act

Whether properly recorded in BOA

 (ix) Defaulter Co.

a) Default in paying (P, I ) from If yes

borrowings (a) Period (b) Amt.
b) Wilful Defaulter • Whether declared
c) Purpose • Whether term loan used for purpose for which it was obtained
• If not report
• Amt & purpose for which diverted
d) Whether Short- term funds If yes, report
used for long term purpose, (a) Period (b) Amt.

e) Loan for Group Co. • If yes,

(a) Nature
(b) Amt.
(f) Loan taken by pledging • If yes,
Sec. of Group Co. (a) Details
 (x) Issue of Securities

Public Offer
Private Placement /
Preferential allotment

(IPO+FPO)
(Including debt Sec. )
• Whether Sec. 42 & Sec.
🡪 62 complied
Applied for purpose for which it was raise
🡪 • Utilised for purpose for
If not which it was raised
🡪
Report • Report 🡪
(a) Details non-compliance
(b) Delays
(c) Default
(d) Subsequent rectification
 (xi) Fraud

(a) By / On Co. Noticed 🡪 If Yes

(b) Reported u/s 143(12) to C.G in ADT-4
(c) Auditor Considered whistle blower
complaint during year, recd. by Co.
 (xii) Nidhi Co.

(a) Maintained Net owned Fund : Deposit Ratio

1 : 20
(b) Maintaining 10% unencumbered term
deposits to meet liability
(c) Default in payment (P or I )
If yes (a) Period (b) Details
 (xiii) Related Party Transaction

●Whether Sec. 177 & 188 Complied

●Details disclosed in F.S as per A.S

Note:-
Sec. 177 🡪 Audit Committee (A.C) Approval
Sec. 188 🡪 B.R in B.M
Sec. 188 🡪 if Transaction value greater than limit,
then O.R passed
A.S -18 | Ind –A.S 🡪 24 Complied
 (xiv) Internal Audit System

●Commensurate with size and nature

of business
●Whether report considered by
statutory auditor
 (xv) Non – Cash Transaction

Whether Sec. 192 Complied or not

Note : Conditions
(i) Pass O.R
(ii) Asset valued by Regd. Valuer
 (xvi) NBFC

a) Whether req. to register u/s 45 IA, If so, whetehr regd. or not

b) NBFC/HFC 🡪 Conducted Activities without registration certificate

from RBI.

c) Whether Co. is CIC (Core Investment Co.) as per RBI or exempted

CIC. Whether it continues to fulfill such criteria
Note:
i. Invt > 90% of it’s total Assets
ii. Invt in Sec. > 60% of it’s total Assets
iii. Whether group has more than 1 CIC, if yes number
 (xvii) Cash Losses

●Whether incurred in C.Y and

Previous F.Y
●If Yes, tell, amount
 (xviii) Resignation of Previous Auditor

●During the year

●If Yes, whether his issues ,
objections, concerns, considered.
 (xix) Material Uncertainty on Going Concern (GC)

•Financial a) Whether
ratios MURGA
On (Material
basis •Aging uncertainty
analysis related to
of G.C )
•Other
reports b) Co. can meet
it’s liability
with 1 year
 (xx) Unspent CSR

Whether Sec. 135(5) for unspent

CSR for ongoing project or
otherwise complied
 (xxi) Auditor of Holding Co.

If If yes
adverse In a) Details
remark / Of Co. of Co.
Qualifica CARO in C.F.S
tions reports b) Para
No. of
CARO
 CA Inter – audit Marathon by Kunal Mandhania

Date Time Chapter Name

11 Nov. 07:00 pm – 11:00 pm CARO. Chapter – 10 and 11

12 Nov. 08:00 am – 11:00 am Chp. 5, 6, 7, 8
12 Nov. 11:30 am – 12:45 pm Chp. 1
12 Nov. 01:00 pm – 02:30 pm Chp. 4
12 Nov. 03:00 pm – 06:00 pm Chp. 13
12 Nov. 06:15 pm – 07:30 pm Chp. 2
12 Nov. 07:30 pm – 10:30 pm Chp. 3
12 Nov. 10:45 pm Part 8
13 Nov. 07:00 am Chp. 12
13 Nov. 08:30 am – 11:00 am Special Class – MCQ & and T/ F Practice

Unacademy CA Intermediate Group - 2

Marathon Nov 2022

Chapter 10
 COMPANY
AUDIT

Kunal Mandhania
Join KUNAL Sir’s Telegram Channel
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 Basics

●Company Audit means statutory

Audit of the Company.
●Compulsory for all companies
irrespective of size or legal form.
 Who can Audit

Sec. 141

(1)(2) (3)

Qualifications Disqualifications
 Qualifications of Auditor
● CA under CA Act, 1949.
● Nationality is not imp.
● Holds COP
Can Accept Audit

By Partnership
By Proprietor firm By L.L.P
Firm

Foreign L.L. P
In his own name In firm’s name
disqualified
 Disqualifications of Auditor [Sec. 141 (3)]
(CA + COP) Still cannot do audit

To Be checked

On appointment After Appointment

If disq. cannot be If disq. Attracts will leave office of

appointed as auditor[sec auditor i.e casual vancancy[sec
141(3) 141(4)
Shortcut 🡪 BIG FIBRE ROPE
B- Body corporate
●Except L.L.P
 Indebtedness to Company

Subsidiary
Person Holding
or
More than
Partner Company Associate
Rs. 5 lac in
or
Relative Subsidiary
G 🡪 Guarantee

Subsidiary
Person Holding
or
More than
Partner Company Associate
Rs. 1 lac in
or
Relative Subsidiary
 F 🡪 Full time Employment

Employment That Co. Other Co.

Part- Time 🗴 ✓
Full-Time 🗴 🗴
Interest in securities of Company

Subsidiary
Person Holding
Holds sec.
or
Of any amt
Partner Company Associate

or l a c
an 1
Relative re t h
Mo Subsidiary
Business relationship

Subsidiary
Holding
Person
B.R
or Company Associate
With client
Firm
Subsidiary
 Exception

HATO Services specified by

H- Hotel / Hospital CA Act other than
Sec. 144
A- Airlines
T- Tele communication
O- Other similar services

Arm’s length
transaction
 Business relationship

Doing business Providing goods or Procuring goods or

together service to client service from client

Can provide Ordinary course

which are not of business
prohibited by +
H- Hospital / Hotel
prohibited companies & CA (HATO) A- Airlines
act + T- Telecommunication
Arm’s length
O- Other similar services
transaction
 Relative in company
●a person whose relative is
● a Director or is in the employment
of the Company as a director or
key Managerial Personnel
Employee
●an officer or employee of the
company
●a person who is a partner, or who
is in the employment, of an officer
or employee of the company
 Restricted services(section 144).
Shortcut - ACADEMICS
1) accounting and book keeping services;
2) Carry out outsourced financial services;
3) actuarial services;
4) design and implementation of any financial information system;
5) Engaged in investment advisory or investment banking services;
6) management services
7) internal audit
8) Carry out any other kind of services as may be prescribed
 Overall Limit
●1 person = 20 company audit
Excludes
1. One person company
2. Dormant company
3. Small company
4. Private company having paid up capital
less than 100 cr
● "ABC & Co.' is an Audit Firm having partners "Mr. A", "Mr. B" and
"Mr. C", Chartered Accountants. "Mr. A", "Mr. B" and "Mr, C" are
holding appointment as an Auditor 414, 6 and 10 Companies
respectively.
1. Provide the, maximum number of Audits remaining in the name of
"ABC & Co."
2. Provide the maximum number of Audits remaining in the name of
individual partner i.e. Mr. A, Mr. B and Mr. C.
3. Can ABC & Co. accept the appointment as an auditor in 60 private
companies having paid-up share capital less than 100 Cr., which
has not committed default in filing its financial statements u/s 137
or annual return u/s 92 of Companies Act with the Registrar, 2 small
companies and 1 dormant company?
4. Would your answer be different, if out of those 60 private
companies, 45 companies are having paid-up share capital of 110
crore each?
● [MTP-Oct. 20]
● In exercise of the powers conferred by the Chartered Accountants Act, 1949, the Council of the Institute of Chartered
Accountants of India specifies that a member of the Institute in practice shall be deemed to be guilty of professional
misconduct, if he holds at any time appointment of more than the "specified number of audit assignments of the
companies u/s 141(3)(g) of the Companies Act, 2013".

● Explain the provisions prescribed under Companies Act, 2013 in respect of ceiling on number of audits in a company to
be accepted by an auditor.

● [RTP - May 21]

Person who is Convict
●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
●“CA. NM who is rendering management
consultancy service to LA Ltd. wants to
accept offer letter for appointment as an
auditor of the LA Ltd. for the next
financial year." Discuss with reference to
the provision of the Companies Act, 2013.
●[Nov. 18 (5 Marks), MTP-April 21]
●Mis. ABC & Co. is an audit firm, having patterns CA.
A, CA. B and CA. C. The firm has been offered the
appointment as an auditor of XYZ Ltd. for the
financial year 2020-21.
●Mr. D, the relative of CA. A, is holding 25,000 shares
(face value of 10 each) in XYZ Ltd. having market
value of Rs. 90,000. Are M/s. ABC & Co. qualified to
be appointed as auditors of XYZ Ltd.
●[May 18 (4 Marks), MTP-May 20, RTP-Nov. 20]
 Appointment of First Auditor [Tenure till 1st AGM]

Other Company Govt. Company

[Sec. 139(6)] [Sec. 139(7)]

By BOD If BOD fails

By CAG If CAG fails If BOD fails
▪ Within 30 days Intimate to
from shareholders ▪ Within Intimate to
By BOD
incorporation 60 days shareholders
▪ Naming in By shareholders from
AOA not incorp. Within By
sufficient 30 days shareholders
Within 90 days
from intimation Within 60 days
Take valid B.M in EGM from intimation
& Pass B.R in EGM
 Appointment of subsequent Auditor

Other Company [139(1)] Govt. Company [139(5)]

▪ In AGM
▪ By shareholders
▪ By CAG
▪ By passing O.R. ▪ Within 180 days from
▪ Tenure commencement of
🡪 F.Y.
1 term = 5 years ▪ Tenure
🡪
i.e. from 1st AGM to 6th AGM 🡪
▪ After appointment AGM to AGM
🡪
Co. intimates to ROC within 15 days
🡪
(ADT-1)
● Discuss the Provisions regarding appointment of
Auditors -
● First auditor of a Government company and a
Non-Government company.
● Subsequent auditor of a Government company and
a Non-Government company.
● [RTP - May 21]
 Appointment in case of Casual vacancy
Sec. 139(8)
Other Company (i) (ii) Govt. Company

Other reasons By resignation Any reason

By BOD By BOD + Ratified By CAG If CAG fails

by Shareholders
in EGM Within 30 days By BOD
Within 30 days
Within 3 months
Within 30 days
Note :- In case of resignation, Auditor within 30 days intimate to
🡪 (1) Company, (2) ROC, (3) CAG(Govt. Co.) in form No. – ADT-3
● At the AGM of HDB Pvt. Ltd., Mn R was appointed as the
statutory auditor He, however, resigned after 3 months
since he wanted to purse his career in banking sector.
The board of director has appointed Mn L as the statutory
auditor in board meeting within 30 days. Comment on the
matter.With reference to the provisions of companies Act,
2013. [May 18 (5 Marks), RTP-Nov. 20]
 Reappointment of Auditor [ 139(9)]
Not eligible for reappointment if rotation applicable &
term expired (individual – 5yrs / firm – 2 terms i.e. 10 yrs)
Same auditor appointed earlier can be reappointed
except
1) Disqualified [U/s 141(3) + 139(2)(3)(4)]
2) Unwilling to continue
3) Company has appointed somebody else instead of him
 Automatic Reappointment [ 139(10)]
If no new auditor is appointed
+
Auditor can be reappointed
[not disqualified u/s 139(9)]
↓
Existing auditor will be automatically reappointed for next
tenure
Note: if no new auditor appointed + retiring auditor cannot
be reappointed 🡪 Casual vacancy 🡪 filled by BOD within 30
days
 Rotation Applicability

Public Private

Or Paid up
Listed Unlisted Capital is 50
Public
cr or more
borrowing from
Always Paid up • F.I
Applicable share Capital • Bank
of 10 cr or
more • Public
Deposit

50 cr or more
 Rotation – [Sec. 139(2)]

● CA Proprietory firm 🡪 Max 1 term

● CA Partnership firm / LLP 🡪 Max 2 term
● Cooling period for both 🡪 5 years
● In cooling period cannot appoint
a) Same firm
b) Other firm with any common partner
c) Firm with same network i.e same brand name , trade name or
common control [Sec. 139(4)]
Sec 139(3) 🡪 In same auditing firm 🡪 members can decide to
rotate partners & term
● Clue Ltd. Is a Public unlisted company having paid-up
share capital of 9 crores and public borrowings from the
financial institutions of 51 crores. They appointed M/s
Pray and Co., a Chartered Accountant firm as the
statutory auditor in its annual general meeting for 11
years.
● Is the manner of rotation of auditor applicable in case
of Clue Ltd.?
● Whether the appointment of M/s Pray and Co. is valid?
● [Nov. 20 (4 Marks)]
 SELECTION OF AUDITOR
RECOMMENDATION PROCESS
If Section 177 regarding Audit Committee is applicable.

Recommend If BOD agree

Name of Auditor Recommend Name
of Auditor
Committee Board of Shareholders
Director @ AGM
If BOD disagree
Refer Back + Reasons

If AC doesn’t reconsider, If AC reconsider, then they

then BOD will shall send its will recommend new name
own recommendation and process will continue
 Consent & Certificate

Committee Board of Director

Consent Certificate
I/We agree to become auditor I certify that following is True & Correct.
of the company
✔ I am qualified u/s 141
He should take NOC from ✔ I am not disqualified u/s 141.
previous auditor before
sending Consent as per CA ✔ Appointment is correct as per other
Act, 1949 sections of companies Act, & CA Act,
1949.
✔ I have limit to accept audit CA CA Firm
✔ List of orders & proceedings provided to
company is True & Correct.
 Removal, Resignation & Special Notice (Sec. 140)
Sec. 140(1) Sec. 140(2) & (3) Sec 140(4) Sec. 140(5)
Before completion of Resignation by auditor Special Notice for not By Tribunal
tenure Sec. 140(2): file ADT-3 reappointing retiring auditor [Sec. 140(5)]
(next AGM) indicating reasons & facts Shareholders 🡪
On application of
🡪 file with Special Notice (aleast 14 clear C.G / any person
Pass B.R a) Company days) to appoint new auditor
🡪
🡪 Company If tribunal satisfied
b) Registrar
Within 30 days take Send Copy auditor acted
c) CAG – if govt co. fraudulently
approval from C.G Within 30 days from Retiring Auditor 🡪
(ADT-2) and remaining Within 15 days can
date of resignation shareholders
🡪 Sec. 140(3): Fine
order auditor to
Retiring Co. will circulate it to all vacate his office
Within 60 days of Min: 50000 or auditor can shareholders (atleast 7 days
receipt of approval
remuneration of
give before GM) or he can +
take EGM & pass SR representation represent in GM Cannot be auditor
auditor, w.e.l. in any co. for 5
In AGM
Continuing failure 🡪 Shareholders pass SR to years
Follow procedure for
app of new auditor further penalty of
500 per day subj After
appoint new Auditor
Retiring auditor will give
+
Appointment written consent to new auditor Sec. 447
to max 500000 Intimate to ROC (ADT-1) in 15 days
● CA Raj, an auditor was removed by
PQR Ltd. before the expiry of his term.
Discuss the, procedure to be taken by
PQR Ltd to appoint an auditor other
than retiring auditor under Sec.140(4).
of-the Companies Act. 2013.
● [Jan. 21 (4 Marks)]
 Sec. 143(1)🡪 Duty to enquire

● Enquire means to inquire & report only in case of discrepancy

Properly secured
Loan & Made by
S Security
Advance co. Terms –prejudicial
Mere book Prejudicial to interest of Co.
B entries
Whether
I Investment in securities selling price < Purchase Price

D Deposits Loan & Advance Shown as deposits

P Personal expense Charged to revenue a/c’s

S Shares Paid up Actually cash received or not

● The auditor has to make inquires
on certain matters under section
143(1) of Companies Act, 2013.
Discuss those matters.
● [MTP-Oct. 20]
 Sec. 143(3)– Principal Assertions

Information & Needed to Has been

I Explanation be obtained obtained

A A.S Complied or not

B Books of accounts Properly maintained

B B/s & P&L In agreement with BOA

Branch Audit
B Report
Timely submitted to H.A

C Control system Adequate

D Directors Disqualified u/s 164(2)

 Sec. 143(3)– Principal Assertions

Matters having adverse effect on functioning of

E Effect
company

F Further Points

Pending litigations Provision made Delay Specified bank notes

Whether properly
For material disclose
Company has In transfer of
foreseeable
disclosed amount to
losses Holding & dealing with it
impact IEPF
+
between 16th Nov. 2016 to
30th Dec. 2016
 Amendment
After clause (d), the following clauses shall be inserted –
(a)
(i) Whether the management has represented that, to the best of its knowledge
and belief, other than as disclosed in the notes to the accounts,
no funds have been advanced or loaned or invested (either from borrowed
funds or share premium or any other sources or kind of funds) by the
company
to or in any other person(s) or entity(ies), including foreign entities
(“Intermediaries”),
with the understanding, whether recorded in writing or otherwise, that
the intermediary shall, whether, directly or indirectly lend or invest in other
persons or entities identified in any manner whatsoever by or on behalf of
the company (“Ultimate Beneficiaries”) or provide any guarantee, security or
the like on behalf of the Ultimate Beneficiaries;
(ii)Whether the management has represented, that, to the best of its
knowledge and belief, other than as disclosed in the notes to the
accounts, 🡪 no funds have been received by the company
from any person(s) or entity(ies), including foreign entities
(“Funding Parties”),
with the understanding, whether recorded in writing or otherwise,
that
the company shall, whether, directly or indirectly, lend or invest in
other persons or entities identified in any manner whatsoever by
or on behalf of the Funding Party (“Ultimate Beneficiaries”) or
provide any guarantee, security or the like on behalf of the
Ultimate Beneficiaries; and
(iii) Based on such audit procedures that the auditor
has considered reasonable and appropriate in the
circumstances, nothing has come to their notice that
has caused them to believe that the representations
under sub-clause (i) and (ii) contain any material
mis-statement.
(b)Whether the dividend declared or paid during the year by the
company is in compliance with section 123 of the Companies Act,
2013.
(c)Whether the company, in respect of financial years commencing
on or after the 1st April, 2022 has used such accounting software
for maintaining its books of account which has a feature of
recording audit trail (edit log) facility and
the same has been operated throughout the year for all
transactions recorded in the software and
the audit trail feature has not been tampered with and the audit
trail has been preserved by the company as per the statutory
requirements for record retention
Sec. 143 (12) 🡪 Fraud Reporting
If any Fraud
found by auditor Check amount of Fraud

less 1 cr 1cr or more

Report to audit committee / BOD Report to Within 2 days
AC / BOD

Note: 1) This section mutatis

mutandis applies to CMA Seek reply Within 45
+CS from them days
2) Company should also
include this in board report With reply Within 15
Report to days
CG ADT-4
 Note

1. Report sent to Secretary, MCA, in Sealed cover by

registered post with acknowledgement due or by speed
post followed by email
2. Report to be send on letter head of auditor with address,
email, contact number, signed by auditor with seal &
membership no
3. Report in Form ADT-4
Remuneration to auditor Sec. 142

Jo appoint karega wohi remuneration bhi fix karega

Other Company 🡪 BOD - ✔

Shareholders - ✔

Except Government Company

🡪 appointed by CAG
🡪 Remuneration fixed by shareholders
 Basis Cost Audit Branch Audit
U/s 148 Sec. 143(8)

(i) Applicable As per Sec. 148 Compulsory

(ii) Appointed by Board / A.C within 180 days Shareholers in

from Commencement of F.Y consultation with Head
(Intimate to ROC – CRA-2) Auditor
(iii) Tenure 1 year 1 year
(iv) Qualification Prac. CMA 1. Company Auditor
2. Person qualified u/s
141(1)(2)
3. Foreign Branch – as
per rules of that
country
 Basis Cost Audit Branch Audit
U/s 148 Sec. 143(8)
(v)Disq. Same Like 143 (3) Same like 143(3)

(vi) Reporting i. Prepare report and • Prepare same like H.A

submit to BOD within 180 using SA 700, 701,
days of closure of year in 705, 706 & Sec. 143
CRA-3 (Incl. CARO)
ii. Within 30 days Board • Submit to P.A.
report to CG in CRA-4
(along with explanation)
(vii) Powers & Same like stat auditor Same like stat Auditor
Duties including 143 (12) including 143(12)
 Cost Record applicability

Cost Records

Applicable Not Applicable

(1) Having product (1) Foreign co.

of Regulated / having liaison
unregulated
sector office in India
(2) Micro & small
+ enterprises
(2) Overall ≥ 35 Cr
T/O of C.Y
 Note

(1) Regulated products S – Sugar

(6 product)
E – Electricity
T – Telecommunication
P – Petroleum
D – Drugs / Pharma
F – Fertilizer
(2) Unregulated 33 products
Product
(3) Definition of Small & Micro Enterprise
Category of enterprise
Enterprise Enterprise
in Goods in Service

Investment Investment
in plant & in
machinery Equipment

Micro ≤ 25 lakh ≤ 10 lakh

Small > 25 lakh. ≤ 5 cr > 10 lakh ≤ 2 Cr

 Question of cost record applicability

Company A B C
Product
dealt
Regulated
(1) Sugar 2 -- --
(2) Telecommunication 5 -- --
Unregulated
X -- 40 --
Y -- 15 --
Others 30 5 80

Total 37 cr 60 cr 80 cr
Conclusion ✓ ✓ 🡪
(Since no regulated or unregulated product )
 Cost Audit

Applicable Not Applicable

(1) Maintaining (1) Revenue from

cost records export
+
(2) Regulated Un-regulated
≥ 75% of Total
(a) Overall 50 Cr or 100 Cr revenue
T/O more or more
+ (2) Operating in SEZ
(Don’t count T/O
(b) Individual 25 Cr or 35 Cr or limit)
T/O more more
 Question on applicability of cost audit

Company A B C
Product
dealt

Regulated
P 5 -- 15
Q 10 -- 10
Unregulated
R -- 20 --
S -- 30 --
Others 60 60 20
75 110 45
Audit Committee (Sec 177)

Applicability Functions Powers

🡪 Listed Company 1. Recommend appointment, 1. Call for comments of auditor
🡪 All Unlisted Public Company remuneration & terms of on
satisfying any of the following appointment of auditor a) internal control system
Condition 2. Review & monitor auditors b) scope of audit
1. PUC > 10 Crore independence & performance c) observations made
2. T/o > 100 Crore 3. Examination of FS & AR 2. Review FS before submission to
3. O/s Loan / borrowing / 4. Approval of subsequent BOD
Debentures / Deposits in modification of transaction of 3. Discuss issue w.r.t. FS with
aggregate > 50 Crore company with related party Auditor & mgt
🡪 AC should have min 3 5. Scrutiny of inter-corporate 4. Authority to investigate into
Directors 🡪 independent loans & investments matters relating to any of the
Director majority 6. Valuation of undertaking of above
🡪 AC before commencement of company 5. Power to obtain professional
Act 🡪 Reconstitute within 1 7. Evaluation of internal financial advice from external sources
Year controls & risk management & access to records of
🡪 Auditors & KMP 🡪 right to be system company
heard in meeting of AC but 8. Monitoring end use of funds
not right to vote through public offers
● Where a company is required to constitute an Audit
Committee, all appointments of an auditor under
this section shall be made after taking into account
the recommendations of such committee. Explain
stating also the class of companies required to
constitute Audit Committee.
● [MTP-March 19, May 20]
● During the audit of PQR Ltd. you as an
auditor requested officers of the
company to have access to secretarial
records and correspondence which
they refused to provide. Comment.
● [RTP - May 21]
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Marathon Nov 2022

Chapter 1
Primary Objective of Auditor
Secondary Objective of Auditor

Prevention and
detection Of Fraud
and Error
 SA 200

Responsibilities / Pre-requisites /
Objectives of Audit
requirements of Auditor.

To obtain sufficient and 1. Ethical Requirements

appropriate Audit 2. Professional skepticism
Evidence to satisfy 3. Professional Judgment
himself and thereby 4. Sufficient and Appropriate
express his opinion Audit evidence
whether BOA shows 5. Use of S.A
true of fair view or not
 
Explain the fundamental principles of professional ethics
relevant to the auditor when conducting an audit of financial
statements in accordance with Code of Ethics issued by ICAI.
[Jan. 21 (4 Marks)]
• As per SA 200 "Overall Objectives of the IndependentAuditor and
Conduct of Audit in accordance with SAs" the auditor shall comply
with relevant ethical requirements, including independence.
• Relevant ethical requirements ordinarily comprise the Code of
Ethics issued by the ICAI. The fundamental principles are:
• Integrity;
• Objectivity;
• Professional competence and due care;
• Confidentiality; and
• Professional behaviour.
• Independence
 Professional skepticism includes being alert to,
1. Audit evidence that contradicts other audit evidence obtained.
2. Information that brings into question the reliability of documents and
responses to inquiries to be used as audit evidence.
3. Conditions that may indicate possible fraud.
4. Circumstances that suggest the need for additional audit procedures
in addition to those required by the SAs.
5. to reduce the risks of:
a) Overlooking unusual circumstances.
b) Over generalising when drawing conclusions from audit observations.
c) Using inappropriate assumptions
Inherent Limitation of Audit (A+ || TQ)
1. Nature of Financial Reporting
J – Judgement preparing FS checking judgement /
by requires interpretation covers high
Management judgement by mgt uncertainty (SA-540)
2. Nature of Audit Procedures
I – Information Auditor may ask for They may conceal fact or give
various information wrong information
&
from client (mgt) or (intentionally or
explanation their employees unintentionally)
F – Fraud Since fraud If FS contains fraud, auditor is not
involves expected to unearth every
sophisticated and misstatement (SA 240)
organized scheme
 L– Legal Audit involves So we are devoid of
Powers checking & not various legal powers like
investigation search, seizure, etc..
C – Cost Due to difficulty Time, effort & cost may not
in performing
some audit justify conclusion to be drawn
procedures
3. Other matters affecting limitation
M – fraud involving senior management
R – related party transaction
N – non compliance of laws & regulation
G - future events that may impact going concern

Shortcut – J – jumping from CLIF in MRNG

Other imp points of Sa - 200

•Auditors opinion do not Comment on

1. Efficiency and effectiveness of
management
2. Future viability of Enterprise
 Types of Audit
Statutory Audit / Non-Statutory Audit /
Audit Required Under Law Voluntary Audit
Shortcut – ABC4DE It done not because the law require it
A – Audit required under GST Law but the owner desire the books to be
B – Banking Company governed by audited
Banking Regulation Act, 1949
Eg. Propriety audit
C – Companies Governed under
Companies Act, 2013 Partnership firm Audit
C – Co-operative societies under
cooperative Societies Act, 1912
C – Charitable trust registered under
various trust Act
C – Corporations set up under act of
Parliament
D – Direct Tax Audit
E – Electricity Supply Companies under
Electricity supply Act, 1948
 2 2
Advantages of Audit - AB CD E- I
a) Advantage of suggestions by Auditor - with regard to the system
of accounts, internal controls and checks over employees etc,
b) Books are upto date
c) Easy to take loans and financial assistance from banks.
d) acts as a moral check on the employees.
e) Helps in decision making
f) Helps in solving disputes in case of arbitration
g) The audit helps in detecting frauds and errors.
h) Insurance companies also rely on audited accounts, in case of any
insurance claims.
 Basic /Principal Aspects to be covered in Audit
1. An examination of the system of accounting and internal control to ascertain whether it is appropriate
Preliminary for the business and helps in properly recording all transactions.
2. Reviewing the system and procedures to find out whether they are adequate and
comprehensive and incidentally whether material inadequacies and weaknesses exist to
allow frauds and errors going unnoticed.
Vouching 3. Checking of the arithmetical accuracy of the books of account by the verification of postings,
balances, etc.
4. Verification of the authenticity and validity of transactions entered into by making an
examination of the entries in the books of accounts with the relevant supporting
documents.
5. Ascertaining that a proper distinction has been made between items of capital and of
revenue nature and that the amounts of various items of income and expenditure
adjusted in the accounts corresponding to the accounting period.
Verification 6. Verification of the title, existence and value of the assets appearing in the balance sheet.
7. Verification of the liabilities stated in the balance sheet
General Points 8. Comparison of the balance sheet and profit and loss account or other statements with the
to be checked underlying record in order to see that they are in accordance therewith.
9. Checking the result shown by the profit and loss and to see whether the results shown
are true and fair.
Checking laws10. Where audit is of a corporate body, confirming that the statutory requirements have been
complied with.
 Independent Audit
Steps to Safeguard Why
Meaning Independence Independence Advantages Threats
When judgement 1. Rotation of 1. For 2 Gharwale 4 Baharwale Shortcut –
of auditor Auditor / Audit creditability 1. Management 1. Creditors Threat
Firm of audit / Owner - Exact bhagane K liye
Is not 2. Appointed by opinion - know exact judgement of SSAFI pilao
subordinate to Shareholder (OR) 2. Opinion will profitability / credit
performance / worthiness S-
Will/wishes of 3. Disqualification be accepted &
financial - recoverability Self-interes
another person U/s 141(3) & CA respected by position of dues t threat
(who has engaged Act all - better decision 2. Government
S - Self-Review
him) 4. Ceiling Limit on making - Exact tax
- reliability of FS calculation threat
Or to his own self No. of Audit
2. Employees A - Advocacy
5. Power to qualify
interest - exact bonus 3. Investors threat
o It should be from Report calculation
- better decision
making
both - moral check F - Familiarity
- attract
- Mind on employees investor threat
- Personal 4. Arbitrator I - Intimidation
Character - solve disputes threat
 Threats Occurs When Example
1. Self Interest Threat a) Auditing Firm Could Benefit 1. Direct / indirect financial interest in client
2. Loan / guarantee to / from client
b) Its Partners from financial 3. Undue dependence on clients fees
c) Associates interest in 4. Close business relationship
5. Potential employment
Client
2. Self Review Threat During review of any judgement or
Earlier auditor provided
a) Management services
conclusion reached in a previous b) Was director employee of company
audit or non audit engagement c) Was internal auditor / investment advisor
d) Was engaged in setting up IT system

3. Advocacy Threat Auditor promotes or is perceived to 1. Auditors deals with shares or securities of
promote, clients opinion to a point client
where people may believe that 2. Represents client in litigation / 3rd party
objectivity is getting compromised dispute

4. Familiarity Threat Auditor from relationships with the

1. Relative work in component
2. Former partner now being director or senior
client that end up being too sympatric employee of co
to the clients interest 3. Long association with client
4. Accepting significant gifts from client

5. Intimidation Threat Auditor are deterred from acting 1. Threat of replacement over disagreement
with acceptable FRF
objectively with an adequate degree 2. Pressure to disproportionately reduce work
of professional skepticism in response to reduced audit fees
Describe the guiding principles which the auditor should take into
account which serves as the safeguards to eliminate the threats to
independence.
[Nov. 20 (4 Marks)]
• Auditors should always be and appears to be independent of the
entities that they are auditing.
• Auditor should abide himself with the key fundamental principles
are integrity, objectivity and professional scepticism.
• Auditor should consider threats to independence before accepting
any audit assignment.
• In case of existence of any threats to independence, auditor
should not accept the engagement or put in place safeguards that
eliminate them.
• If necessary safeguards cannot be put in place due to
circumstances, auditor should withdraw.
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SA 210 – Agreeing the terms of Audit Engagement
Objective Pre-conditions T/Q Audit Engagement letter
Is to accept or a) Determine whether managements Mandatory content of eng.
continue audit FRF s Acceptable to us, &
engagement onlyb) Obtain agreement of management
letter (A)
when; that it acknowledges its a) Scope & object of audit of FS
a) Establish responsibility i.e. b) Auditors Responsibility
whether i. Preparation of FS in Accordance c) Managements Responsibility
pre-conditions with AFRF d) Identification of AFRF for
are present ii. Designing Internal Control as preparation of FS
b) Confirm there management considers e) Reference to the expected
is common necessary form & content of any report
understanding iii. Provide auditor with to be issued by auditor
between • all information relevant for f) Statement that report may
auditor & audit differ from its expected form
Management • Addn information asked by & content (if required)
/TCWG auditor
• Unrestricted access to person
within or outside the entity
 SA 210 – DECISIONS
If mgt/ TCWG impose Acceptance of change in audit Recurring audit
limitation on scope of A request from client to auditor to change •SA prescribes that auditor may
audit prior to audit engagement may result from decide not to send new eng
engagement
letter for each period
acceptance
Change in Misunderstanding Restriction on •EXCEPTIONS; i.e. cases where
Such that auditor circumstances as to nature of audit scope of eng auditor may think it apt to
believes limitation will send new eng letter
result in auditor Auditor would consider carefully the reasons 1. If entity misunderstands
disclaiming opinion on given for such request scope & objective of audit
FS 2. Change in
↓ Finds reasonable No reasonable a) senior mgt
Auditor should not justification justification b) significant ownership
accept audit unless ↓ c) nature & size of entity
Change & issue If mgt support Mgt doesn’t support d) legal or regulatory
required by law or No new eng letter a) Withdraw if possible
regulation to so new eng letter requirement
Continues with b) Obligation to
original
e) FRF adopted
communicate to
f) other reporting requirement
TVWG / owner /
regulators 3. Any revised or special terms
of audit eng
 SA 220 – Quality Control for Audit of FS
Basics Imp Definitions Responsibility Factors / Decision
Information which
SQC Assist Auditor to
Engagement Partner:
a) Engagement Quality Control decide client / If
(Standards of partner or other person in firm partner Reviewer Continuance
quality (CA full time in practice) Relationship (A) difference
responsible for engagement & 1) Primary 1. Discuss significant
control) wants of opinion
report thereon responsibility to matters with eng team [Shortcut – Break
every firm to b)
Engagement Quality Control maintain Quality of 2. Review the ice (multiple
between
make rules & Review: audit of F.S a) FS & proposed AR eng.
2) To appoint eng. ICE)🡪 ICES]
regulation to object evaluation of judgements b) Selected audit
& conclusion of engagement Team 1. I- Integrity of Partner &
maintain 3) To check their documentation
quality in
team before issue of report
qualification c) Conclusion drawn mgt. & TCWG Reviewer
Engagement Quality Control 4) To
c) direct and from AR
Audit Reviewer: 2. C – Whether Follow
consult if difficulty Reviewers responsibility
partner / other person in firm /5) To ensure team is engagement
SA-220 external person or team to independent
in case of listed co.
team competent firms
a) Eng teams evaluation
demands conduct review 6) To ensure team
for firms independence3. E – whether
policy of
auditor to - other person should be conducts audit as
member of ICAI per SA/ COC b) Whether consultation team can tackling
implements comply ethical
- if review done by team; team 7) Regarding taken on matters it
those reviewer 🡪 to involving difference of requirement
should be headed by member of
check
standards in ICAI opinion & conclusion
1) Appointed 4. S- Significant
individual d) Engagement Team: 2) Review as per drawn
matter has
all person performing firms policy c) Whether
engagement
engagement including an expert 3) Not to sign audit
arised during
documentation selected
level report till current or
supports the conclusion
review done previous audit
 SA 220 – Quality Control for Audit of FS
Elements of System of Monitoring Human Resources
Quality Control
1. Process of ongoing evaluation of firms establish policies &
(a) Leadership system of QC, including periodic selection of procedures to obtain
completed eng to obtain reasonable reasonable assurance
responsibilities for quality
assurance regarding
within the firm. 2. Purpose is evaluate: a) Recruitment
(b) Ethical requirements. a) Adherence to professional standards & law b) Performance
(c) Acceptance and b) Whether QC system appropriately evaluation
continuance of client designed & effectively implemented c) Capabilities
relationships and specific c) Whether firms QC policy applied d) Competence
engagements. appropriately so that AR issued is
e) Career development
(d) Human resources. appropriate
f) Promotion
3. Required under SQC 1
(e) Engagement g) Compensation
4. Eng partner consider results of firm
performance. monitoring process as per firm’s latest info &
h) Estimation of personal
(f) Monitoring. other network firms that info may affect the
needs
audit eng
 Other important points
1. Review compulsory for listed co. for others it is optional as per
auditors judgement
2. Deficiency in firms QC system does not necessarily indicate that
particular audit engagement was not performed in accordance with
professional standards & legal requirements or that AR was not
appropriate
3. The performance of an engagement QC review does not reduce the
responsibility of engagement partner for audit engagement
4. Timely review of significant risk by eng partner at appropriate stage
during engagement 🡪 allow such matter to resolve on timely basis 🡪
to engagement partners satisfaction 🡪 on / before date of AR
 Engagement Standards
Standards on Standards on review Standards on assurance Standard on related
auditing(SA’s) engagement (SRE’s) engagement (SAE’s) services (SRS’s)

• Applied in audit • Review whether • Other than historical •Either verify

of historical Financial Statements financial statement agreed upon
financial are prepared in procedures e.g
• Generally verifying
information accordance with FRF debtors
prospective financial
• Objective- • Not detailed information or verification
enable auditor assessment like audit Review of forecasts •Compilations-
to express an • Level of assurance • 3000-3699 member of ICAI
opinion on less than normal engaged to collect,
Financial audit report classified and
Statements • 2000-2699 summarize
• No. from 100- financial
899 information
•4000 to 4699
Documents issued by ICAI
❑Statement
the ‘Statements’ have been issued with a view to securing
compliance by members on matters which, in the opinion of the
Council, are critical for the proper discharge of their functions.
‘Statements’ therefore are mandatory.
❑Guidance notes (May 14)
‘Guidance Notes’ are designed to provide guidance to members on
matters(difficulty) which may arise in the course of their
professional work and on which they may rely in the course of their
professional work and on which they may desire assistance in
resolving issue which may pose difficulty. Guidance Note are
recommendatory in nature.
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P r
SA-300 Planning an Audit of Financial Statement
Involvement of
Key Engagement
Engagement Partner & other Key members of

n i
engagement team should be involved in planning thereby a
Team Member
h a
enhancing efficiency & effectiveness of planning process

Preliminary
a n d
a) Perform procedures required by SA 220, for continuance of client relationship
& specific audit engagement
Engagement
Activities (PEA)
l M
b) Check compliance of ethical requirements including independence as per
SA-220

a
n
c) Understand terms of engagement as per SA-210 & check pre-Conditions of

u
Audit

f
Benefits Of
o K • P-potential problems - identify and resolve on a timely basis.
• S-selection of Right engagement team members

r
Planning

P
(P-SCAMS)
• C-coordination of work done by auditors of components and experts
• A-attention to important areas of the audit.
• M-manage the audit engagement so that it is performed in an effective and
efficient manner.
• S- supervision of engagement team members and the review of their work.
 Overall audit strategy
Meaning - Overall audit strategy sets the scope, timing and direction of
the audit, and guides the development of the more detailed audit plan.
n i a
h a
a n d
M
•R-Ascertain reporting objective of engagement to plan NTE of communication

al
•E-Identify characteristics of engagement that define its scope

n
u
•S-Consider factors that are significant to direct team’s effort

K
rof Factors
•P-Consider results of PEA to be Considered to
establish Strategy

P
•N-Ascertain NTE of resources necessary to perform engagement
(RESPoNce)
RELATIONSHIP BETWEEN OVERALL
AUDIT STRATEGY AND AUDIT PLAN
n i a
h a
d
• The establishment of the overall audit strategy and the detailed

n
audit plan are not necessarily discrete or sequential processes, but
a
are closely inter-related since changes in one may result in

l M
consequential changes to the other.
a
n
• Audit Plan is More detailed
u
of K
• Strategy gives Framework whereas

P r
SA-300 Planning an Audit of Financial Statement
Factors To be
Considered
T – Terms of auditors engagement
n i a
To develop a
R – Result of RAP

h a
A –Applicable laws & Statutory requirements
AuditPlan
(Shortcut- n d
I – identification of significant audit areas
a
Training days )
a M
N – NTE of report
l
I – involvement of other auditor

un N – NTE of audit evidence obtained

of K G – Get knowledge of client business

P r D – Degree of reliance to be placed on a/c system & ICS

A – Allocation of work
Y – Yardsticks or conditions requiring special attention
S – Setting & staffing requirement
 Knowledge Of Clients Business
Factors
State of Economy
n i a
Nature of Industry
ha
Regulatory Requirement
Ownership & Structure a n d
al M
Financing & Structure

un types of Investments

of K Nature of operations
Financial Reporting

P r Framework
Selection & Application
of Accounting Policies

Financial Performance
Objectives.

Shortcut :- From Macro to Micro

 Plan NTE of direction of supervision of engagement team & review their work, factors
Direction / on which it depends: ( Size of C3AR)
supervision 1. Size & complexity of entity
review 2.
3.
Area of audit
Assessed RMM

n i a
4. Capabilities & competence of team members

h a
Additional
consideration in
initial audit eng d
a) Check client continuance relationship (SA 220)

n
b) Communicate with predecessor auditor, when there is change of auditor

a
Changes to planning
decision during
al M
Auditor shall update & change the overall audit strategy / audit plan as
required. Changes may be required due to:
course of audit

un a) Unexpected events b) changes in condition c) evidence obtained

audit plan
of K
Documentation of Document - overall audit strategy (record of key decisions)
- audit plan (record of NTE of RAP & FAP)

r
- any significant changes (record of response to changes)

P
Other points Planning is a continuous process:
• It is not a discrete phase
• NTE of planning vary with size & complexity
SA-300 Planning an Audit of Financial Statement
Audit
Programme
Definition Audit program is a predetermined audit plan of

n i a
a
Work to be Procedure to be Allocation of Time frame to be followed

h
Performed followed audit staff in conduct of audit

Advantages 1.Provides total

perspective of
work to be
a n
4.Serves as a ready
check list d
5.set of instruction
for staff
6.supervision for
8.Helps in
completion
timely

performed

l M
2.Serves as Evidence

a
3.Basis for Reporting
assistants
7.helps in fixing
responsibility

un
K
Disadvantages

f
1.Work becomes Mechanical rigid & 3..Insufficient assistance

o A inflexible B

r
4.No independent judgment and initiative
2.Audit becomes monotonous
from staff

P Measures to remove
There should be flexibility & it should
reviewed on timely basis
Encourage staff to draw attention of auditor
towards defects & discuss modifications
A B
Consider nature of business, scale of Encourage staff to work on unusual
operation, etc in Audit Programme transaction during audit.
SA-300 Planning an Audit of Financial Statement
Audit Other points

n i a
Programme 1) Evolving one AP: business vary in nature, Size & Composition 🡪 evolving one AP is
not practicable for all circumstances

h a
2)

3) n
requisite knowledge & evidence about Transaction

a d
Periodic Review: to assess whether it continue to be adequate for obtaining

Drafting of AP: - stay within scope & limitation of assignment

the best

al M
- determine evidence reasonably available &

- apply only useful steps for verification purpose

identify

un - consider all possibilities of error

- co-ordinate the procedures

of
4)
K Designed to provide AE: audit programme prescribes procedures & techniques 🡪
give evidence for formulating opinion

P r Developing of audit programme

Written audit Audit obj & Reliance on Timing of

Programme instructions Audit
ICS performance of AP Planning
 SA 320 – Materiality in Planning & Performing Audit
Scope Materiality
i
Benchmarking

n a
a
Deals with 1. Misstatement including omissions A percentage applied to a chosen benchmark for determining

h
Auditor’s 🡪 are material if they materiality for FS as a whole

d
responsibility 🡪 individually / in aggregate Benchmark X Percentage = Materiality
to apply 🡪 influence the economic decision Steps:
concept of
materiality in
of users
2. Judgements about materiality
a n
1. Decide Benchmark (Base): factors affecting identification of
appropriate base:

M
planning & made on two basis a) Elements of FS (eg. Asset, liability, equity, etc.)

l
performing 🡪 Circumstances – affected by size b) attention of users on particular items(eg.Profit, revenue, etc)

a
audit. This or nature of misstatement or both c) industry & economic environment of entity and stage of life

n
concept also 🡪 users of FS – matters that are cycle of entity (Intro, growth, maturity, decline)
applied to

u
material to users as a group d) ownership structure (financed by debt, equity or both)
evaluate 3. It is a matter of professional e) relative volatility of benchmark
effect of
identified
misstatement
f K
judgement
4. Judgement made by auditor about

o
size of misstatement that is
2. Normalization (Adjusting base): w.r.t. chosen benchmark,
relevant financial data includes
a) prior period financial position
on audit and
of
uncorrected
misstatement,
if any
P rmaterial will help to determine
a) NTE of RAP
b) Identify RMM
c) NTE of FAP
b) current financial position
c) budgets for current period
d) significant changes in entity
3. Determine percentage: - matter of judgment
- % applied to PBT from continuing operations will normally be
higher than % applied to total revenue
- generally, as benchmark quantum increases, lower percentage
are used
 SA 320 – Materiality in Planning & Performing Audit
Performance Materiality Relationship between

n i a Revision of
materiality & Audit Risk
a materiality
1. Amount set by auditor at lower
level to reduce the probability that
uncorrected or undetected
d h
1. Inverse relationship; if
materiality is more we do
1. If auditor gets additional

n
misstatement exceeds the information

a
materiality level for FS as a whole more procedures which 🡪 revise materiality
reduces audit risk

M
2. Helps to assess RMM determine
2. Materiality & audit risk are Example:

l
NTE of FAP
considered particularly while: 1) Change in base – earlier
3. Auditor should leave some margin

n
for undetected misstatements
a
a) Identifying and assessing anticipated profit was

u
hence set performance materiality RMM taken as benchmark 🡪

K
less than materiality (50% to 90%) b) Determining NTE of FAP but actual profits were

f
c) Evaluating effect of significantly higher, so

o
uncorrected misstatement, base was revised

P r if any 2) New disclosure

requirement of law / FRF
3) New aspects of business
(acquisition or disposal)
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Audit Risk

Auditor may give When Financial Statement

inappropriate opinion is materially misstated
 Components of Audit Risk - (CID)
I- Inherent Risk C- Control Risk D-Detection Risk
Meaning Meaning Meaning
Susceptibility of Risk that I.C.S will Risk that an auditor’s
mis-statements in not be able to procedures will not detect
accounts and an error or fraud or
prevent, detect, misstatement that exists
balances assuming correct in account balance or
there is no I.C.S mis-statements in class of transaction.
Reasons F.S.
Reasons Reasons
• Nature of business
• Mgt. expertise Inherent limitation of Inherent limitation of
• Pressure on mgt. I.C.S Audit
• Integrity of mgt.
• Factors affecting industry
• Unusual transition at year end
• Complicated transactions
• Quality of Accounting System
• Accounts or assets prone to misappropriation
• Audit Risk = Risk of Material Misstatement x Detection Risk
• Risk of Material Misstatement= Inherent Risk x Control Risk
• Audit Risk = Inherent Risk x Control Risk x Detection Risk
• The assessment of risks is a matter of professional judgment,
rather than a matter capable of precise measurement.
• Risks of Material Misstatement at Two levels
I. The overall financial statement level
II. The assertion level for classes of transactions, account balances,
and disclosures
 Risk Assessment Procedures
• The audit procedures performed to obtain an understanding of the entity
and its environment, including the entity’s internal control, to identify
and assess the risks of material misstatement, whether due to fraud or
error, at the financial statement and assertion levels.
• Risk assessment procedures by themselves, however, do not provide
sufficient appropriate audit evidence
• The assessment of risks is a matter of professional judgment, rather than
a matter capable of precise measurement.
 Risk Assessment procedures
O Observation 🡪 how mgt. performs procedure
I Inspection 🡪 System and Mgt.
C
A Analytical Procedure🡪 identify the existence of unusual
transactions or events, and amount.
Management
TCWG
I Inquiry Employees
Internal Auditor
Branch Auditor

R Fraud risk factors

 Understanding entity & its environment
Factors
State of Economy
Nature of Industry
Regulatory Requirement
Ownership & Structure
Financing & Structure
types of Investments
Nature of operations
Financial Reporting
Framework
Selection & Application
of Accounting Policies

Financial Performance
Objectives.

Shortcut :- From Macro to Micro

The Auditor may exercise his judgement to identify which risk
are significant risk. Explain the above in context of SA 315. May
15 – 6 Marks

• In exercising judgment as to which risks are significant risks, the auditor shall
consider at least the following-
• (i) Whether the risk is a risk of fraud;
• (ii) Whether the risk is related to recent significant economic, accounting or other
developments like changes in regulatory environment etc. and therefore requires
specific attention;
• (iii) The complexity of transactions;
• (iv) Whether the risk involves significant transactions with related parties;
• (v) The degree of subjectivity in the measurement of financial information related to
the risk, especially those measurements involving a wide range of measurement
uncertainty; and
• (vi) Whether the risk involves significant transactions that are outside the normal
course of business for the entity or that otherwise appear to be unusual.
Internal Control System
🡪 3P Plans Adopted by For orderly & efficient
Policies Management conduct of business
Procedure
🡪 Whole system of control - financial or otherwise (administrative)
policy making
Auditor is mainly concerned with ICS related to financial or
accounting control
If ICS is Auditor can put good reliance Perform less audit
Good on financial data generated procedure including
sampling
If ICS is not Auditor has to follow
satisfactory detailed checking
Objective / Functions of ICS (Related to financial aspect)
Fraud & error * Prevention * Detection * Correction
Transaction Proper execution of transaction (proper authorization)

Proper recording of transaction - with correct amount

- in proper accounts
-in proper period

Assets Safe guarding of assets (from unauthorized use, access,

disposition)

Comparison of actual assets with recorded assets & take

action in case of discrepancies

Liabilities 🡪 Timely paying off liability

Benefits of Understanding of Internal
Control
• (i) identifying types of potential misstatements
• (ii) identifying factors that affect the risks of material
misstatement, and
• (iii) designing the nature, timing, and extent of further audit
procedures.
Inherent Limitations of ICS
Entity do not apply best control or even where good controls are established, error
may exist because of following inherent limitations
Cost Effectiveness Many time cost are much higher than benefits

Small Entities Have no proper internal check system nor internal audit
system resulting into higher RMM
Human error Human being working can form error in judgement or
do basic errors
Collusion among emp. Perfect check system is when there is division of work,
but if employees collude error & frud increases
Abuse of authority Authorities abusing authority leads to higher RMM

Manipulation by mgt If mgt manipulates/forms wrong judgement system

fails
Unusual transaction Controls not properly structured🡪 so RMM increase

reasonable assurance: Internal control, no matter how effective, can provide

an entity with only reasonable assurance
Components of ICS – shortcut: CRIME
Risk assessment
Information related Control
Control Activity procedure within Monitoring
system Environment
entity
• Policy & procedure to Whether entity has Obtain understanding of • Process to • 3A
ensure mgt’s process for IDEA information system access ICS Attitude, Action,
directives are followed relevant of financial performance Awareness of mgt
• Auditor requires
I – Identifying reporting by checking • Helps in taking / TCWG regarding
understanding of only
control activity related D – Deciding action 1. class of transaction timely remedial ICS & its
to E – Estimating significant to FS action Importance
- Class of transaction significance 2. Process of initiation, • Done through
- A/c balances A – assessing recording, i. ongoing
- Disclosure in FS processing & activities
likelihood
- Having significant posting of
risk ↓ ii. Separate
transaction
Of risk evaluation
3. Related records
iii. Both
helpful for above
4. Events & conditions • Include
significant to FS assessing
5. Financial reporting internal audit
process function
 CONTROL ENVIRONMENT
Meaning Elements
Menmonic : HOPE- TCA (Tikihai)
🡪
1) H – H.R Policies 🡪 For recruitment, training
3a counselling, promotion, compensation, etc.
🡪 2) O – Organisation structure – Fremework to
• Attitute plan, control, execute, review activities
• Action 3) P – Mgt Philosophy & operating style
• Awareness 4) E – Ethical value & Integrity 🡪 Enforcement &
🡪 communication
Of Mgt. 5) T – TCWG 🡪 Experience, involvement,
🡪 independence
Towards T.C.S & 6) C – Commitment to competence
it’s importance 7) A – Assignment of Authority
Controls relevant to audit
Factors relevant to auditors judgement
Whether a control individually or in combination
Is relevant to audit
As follows 🡪 shortcut : Size & Nature of CARE matters
Size 🡪 Size of entity
Nature 🡪 nature of entity’s business including organization & ownership
C 🡪 Complexity of operations
A 🡪 Applicable legal & regulatory requirement
R 🡪 related RMM
E 🡪 established component of ICS
Matters 🡪 materiality
Tools to evaluate ICS
Tool Meaning Advantages Disadvantages
Complete & exhaustive a) When property framed a) Detailed observation is needed
(time consuming)
Narrative detail of system as found in formal I.C system is not found,
b) It doesn’t readily identify weakness
operation by the auditor complete description is in system.
record needed. c) Constant updating is needed if
b) Suitable for small business. circumstances changes.

It contains series of a) On the job requirement, thus a) Require intelligence to prepare

motivating. proper checklist.
questions, to be answered b) Completed checklist is studied by
Checklist by the audit staff. the senior audit staff, thus weaknesses
b) Client can manipulate when
can’t be over looked.
responding to questions raised by
c) Easy location of weakness. audit staff.

Comprehensive series of Same like check list Same like check list
I.C. questions, on each aspect
Questionnaire of I.C. Prepared by auditor
& answered by client staff.
Graphic presentation, of a) Concise presentation. a) Time consuming to prepare such
a flowchart which is concise yet
each part of entity’s ICS b) Easily understandable showing every important aspect of
Flowchart c) Gives “birds eye view” of I.C.
complete system. b) Weakness can’t be readily located.
 Benefits of Evaluation of Internal Controls to Auditor
Shortcut :- RELIANCE
R :- Reliability 🡪 ensure reliability of reports, records and certificate
E :- Errors & Frauds 🡪 Locate
L :- Location of weakness in I.C.S and Suggestions for it
I :- Internal Audit function effective or not
A :- Adequacy of I.C.S
N :- NTE 🡪 deciding NTE of audit procedure and techniques
C :- Circumstance 🡪 Identifying circumstances and situations requiring more
attention
E :- To Ensure Mgt has discharged it’s duties for
a) Proper execution of transaction
b) Safeguarding of assets
c) Paying of liabilities
 Internal audit
• Internal Audit means
• “An independent management function,
• which involves a continuous and critical appraisal of the functioning of an
entity
• with a view to suggest improvements thereto and add value to and
strengthen the
• (a)overall governance mechanism of the entity,
• (b )entity’s strategic risk management and
• (c)internal control system”.
 Internal audit [Section 138]
APPLICABILITY
QUALIFICATION
Following Class of companies are required to appoint an
internal auditor (individual or firm or body corp.) • Any person certified as :
▪ Listed company 1. Chartered accountant
▪ Unlisted company having 2. Cost accountant
1. Paid up Capital not less than 50 crore, or 3. Such other professional as
2. Turnover not less than 200 crore, or may be decided by board.
3. Borrowing from banks or PFI not less than 100 crore, or • May or may not be an
4. Deposits not less than 25 crore employee of the company.
▪ Private company having • CA or cost accountant
1. Turnover of not less than 200 crore or whether in practice or not.
2. Borrowings from banks or PFI not less than 100 crore.
(All above limits during preceding FY)
Internal audit function

•A function of an entity that performs

assurance and consulting activities
•designed to evaluate and improve the
effectiveness of the entity’s governance, risk
management and internal control processes
 The objectives and scope of internal audit
functions
1. Governance
2. Risk Management
3. Activities Relating to Internal Control
•Evaluation of internal control
•Examination of financial and operating information
•Review of operating activities
•Review of compliance with laws and regulations
 SA-230 AUDIT DOCUMENTATION
Meaning Nature Basic Points Audit File Examples/
❑ Record of a) Evidence for SQC 1 Provides One or more folders in content
↓ auditor a) It is property of • Physical form
1. Audit
o Planning b) Basis for auditor • Electronic form
programme
o Procedures conclusion drawn b) Auditor should • Other media
2. Analysis
performed c) Evidence that preserve it for 3. Audit
o Evidences audit was atleast 7 years Assembling of audit file
memorandum
collected planned & from date of is admistrative process
4. Summaries
o Opinion formed performed in audit report that does not include
5. Letter of
accordance with c) Timely • Performance of new
confirmation
❑ It is link SA’s & Applicable completion of AP
6. Checklist
between clients financial assembling of • Drawing new
7. Query sheet
record & audit Reporting audit files of conclusion
8. Copy of
report Framework date of within important
d) It acts as 60 days from Changes can be made
contract /
evidence against Audit report during final assembling
challan / etc
charge of process
negligence
 SA-230 AUDIT DOCUMENTATION
It can be shown to Factors that Functions / Documentation of
Clien 3rd Branch determine size, Importance / significant matters
t part Auditor form & content of Advantages / Utility & professional
y Sizedocumentation 2nd Base : judgement
Auditor ↓ At his & Nature of CARE2 of Working Papers • Matters that give rise to
at his Cannot discretion Size – Size of Entity Audit Staff significant risk
discretion show (SA 600) • Planning • Supervise & • Results of audit
Nature – Nature of • NTE of review audit
↓ ↓ procedures indicating
procedures Audit work
Because it Same as a) Financial statements
performed Procedures • Delegation of
will in case of could be misstated
• Evidence work to
violate holding & C – Complexity of Transaction b) Need to revise auditors
against control quality
principle subsidiar A – Audit Tools & previous assessment of
Methodologies Used charge of of work
of y RMM & auditors
negligence performed
confidenti R – Risk of Material response to those risk
• Conclusion • Fix
ality Mis-statement • Findings that could result
from Audit responsibility
E – Type of Evidences obtained Evidence to staff in modification too audit
E – Nature & extent of obtained members opinion
Exceptions identified • Guidance to
audit staff
•Audit documentation serves a
number of purposes. List such
purposes.
•[MTP-March 21] [RTP-May 21]
 SA-230 AUDIT DOCUMENTATION
Completion Memorandum
Types
Audit Working Files Audit Notebook • Part of audit documentation
Permanent Audit File Current Audit File o Audit notebook is a bound • Summary describing
book in which auditor - Significant matters identified
1. MOA & AOA 1. Audit program records important audit during audit
2. Copies of Important 2. Audit Engagement observation - How they were addressed
contracts & agreements letter o Part of current audit • Helps as cross reference to
3. Previous years FS & AR observation other relevant corroborative
3. Current years FS & AR
4. Audit Engagement letter o Content:
4. Management audit documentation providing
5. Written consent of - Audit program
representation letter such information
- Query sheet
previous auditor • Functions:
5. External confirmation - Important audit
6. Analysis of ratios & observation 1) Good for efficient & effective
6. Branch Auditors report,
trends - Important matters for review & Inspection
internal Auditors
7. Record of future reference 2) May assist auditors
report, stock Auditors
communication with o Necessary to maintain fresh consideration of significant
retiring auditor report audit notebook every year matters
8. List of officers, their 7. Evidence of planning o Workflow of audit in detail 3) Helps auditor to consider audit
financial powers & process o Important defence against procedures performed from
Authorities 8. Analysis of transaction charge of negligence
perspective of achieving overall
& balances o Help to follow up of work
9. List of offices godowns & objective
done & formulate audit
An important factor in determining the form, content and extent of audit
documentation of signifiant matters is the extent of professional judgment exercised
in performing the work and evaluating the results. Explain stating clearly the
examples of significant matters. [RTP-Nov. 20]
• Documentation of Significant Matters and Related Significant
Professional Judgments:
1. Judging the significance of a matter requires an objective analysis of the
facts and circumstances. Examples of significant matters include:
2. Matters that give rise to significant risks (as defined in SA 315].
3. Results of audit procedures indicating (a) that the financial statements
could be materially misstated, or (b) a need to revise the auditor's
previous assessment of the risks of material misstatement and the
auditor's responses to those risks.
4. Circumstances that cause the auditor significant difficulty in applying
necessary audit procedures.
5. Findings that could result in a modification to the audit opinion or the
inclusion of an Emphasis of Matter paragraph in the auditor's report.
 SA 501- Audit Evidence –
Special Consideration for selected Items

Scope Objectives Specific/ selected

items
Deals with specific To obtain SAAE regarding 1. Inventory
consideration by auditor :
2. Litigations & Claims
to obtain SAAE w.r.t.
a) Existence and
inventory, litigation & 3. Segment information
condition of inventory
claims and segment
information b) Completeness of
litigation and claims
involving the entity
c) Presentation and
disclosure of segment
information as per
AFRF
 Inventory
Auditors Procedure Decision 1 Decision 2 Decision 3
When inventory is material If auditor could not It is not practical for If verification is held by
He shall obtain sufficient attend physical auditor at all to attend stockiest (3rd party)
verification on B/s verification
appropriate evidence
Date 1. Perform alternate 1. Confirmation from
W.r.t. existence and condition of 1. Attend some rd
other day procedures; eg. 3 party
inventory by Inspect documents of 2. Perform inspection
(Count Date) subsequent sale of 3. Other audit
2. Check inventory inventory prior to procedure:
Attendance at & Examining as on count date counting a) Attending or
physical 3. Check 2. If unable to obtain arranging for
Entity’s SAAE; then modify another auditor
inventory count
final intermediary the report (SA-705) b) Another auditors
transactions 3. Matter of general report or a service
inventory st
•Evaluate management records & (from 1 April inconvenience to auditors report (SA
instructions for to count date) auditor; is not 402)
comparing sufficient to support c) Inspecting
controlling inventory them with 4. If unable to that attendance is documentation
•Observe mgt. count obtain AE, then impracticable d) Confirmation from
actual modify the 4. Matter of difficulty, other parties when
procedure count result report cost, time not valid inventory has been
•Inspect inventory basis to omit audit pledged as
•Perform test count procedures collateral.
 Question

4. (a) While conducting audit of Vee Ltd, CA

Aman, auditor of the company, found that some
goods are lying with third party for a long
period. Advise Aman how will he verify them.
(4 Marks)
• Explain the procedures to be performed by auditor to obtain sufficient and
appropriate audit evidence regarding the existence and condition of inventory.
• Or
• How would an auditor proceed to obtain sufficient appropriate audit evidence
regarding the existence and condition of inventory? Also, state reporting
requirements in this respect.
• Or
• ABC Ltd is engaged in manufacturing of different type of yarns. On-going
through its financial statements for the past years, it is observed that inventory
is material to the financial statements.
• You as an auditor of the company wanted to obtain sufficient appropriate audit
evidence regarding the existence and condition of the inventory as appearing in
the financial statements. Discuss, how would you proceed as an auditor.
• [MTP-March 18, Aug. 18, Oct.18, March 19, May 20]
Question

•Explain clearly the examples of

matters relevant in planning
attendance at physical inventory
counting.
RTP MAY 20
 Answer
Matters relevant in planning attendance at physical inventory counting include,
for example:

CRICKET
i. C 🡪 Completion Stage of WIP
ii. R 🡪 RMM
iii. I 🡪 I.C.S related to it
iv. C 🡪 Counting procedure
v. K 🡪 Knowledge about nature of inventory
vi. E 🡪 Ensure location of inventory
vii. T 🡪 Timing of verification
 Completeness of Litigation & claims
Auditors Procedure Additional Procedure Written Representation

Inquiry of management Risk assessment procedure as per SA 315 From Management / TCWG
Review minutes of ↓ ↓
meetings If risk of material misstatement identified All information disclosed to
Review legal expenses A/c ↓ auditor and discussed in FS as
1. Direct communication with entity’s per AFRF
legal counsel
2. Send letter of inquiry prepared by
management
3. Obtain evidence regarding valuation
& measurement
4. Accounting estimate as per SA 540
5. Management / Law prohibits
communication with legal
Counsel/external legal council
a) Alternate procedure
b) Unable to obtain SAAE – modify
report - SA 705
 True & False

(vi) If the auditor assesses a risk of

material misstatement regarding
litigation or claims that have been
identified, the auditor need not seek
direct communication with the
entity’s external legal counsel.
 Answer

(vi) Incorrect: If the auditor assesses a risk of material

misstatement regarding litigation or claims that have
been identified, or when audit procedures performed
indicate that other material litigation or claims may exist,
the auditor shall, in addition to the procedures required
by other SAs, seek direct communication with the
entity’s external legal counsel.
 SA 505 External Confirmation
Meaning Process to obtain Examples Types of Confirmation letter
Audit Shortcut – DS DS Shortcut –
Evidence 1. Decide - Matters on which ABCD of SIP
obtained by confirmation required (Systematic Positive Negative
auditor Factor to be considered while Investment plan)
↓ deciding items: A– Account Balance 🡪 🡪
From 3rd a. Materiality of a/c balance & transaction
b. Assessment of inherent & Control Situation Situation where
party details where auditor
↓
risk
B- Bank Balances & auditor require
c. Particular FS assertion require answer
As a DIRECT transaction in all
ans. Only in
2. Select - Party from which
WRITTEN confirmation required Details agreements & case of
RESPONSE 3. Design – Confirmation Letter C– Creditor Balance disagreements disagreement
↓ Factor to be considered while confirmation
In paper designing confirmation letter D – Debtor Balance 🡪 🡪
form / Assertions being addressed Confirmation Less persuasive
More
electronic / Layout & presentation of confirmation S- Stock held by
request persuasive
other 3rd party 🡪
Management’s Authorization to 🡪
medium confirming parties to respond
I – Investments ICS is - Weak Strong
Ability of confirming party to provide details
request information P- Related Party RMM is- High Low
Method of Communication transaction
Identified RMM, including Fraud risk confirmation Materiality is – more Less
Prior experience on audit or similar
engagement Expected error – more Less
4. Send – To the appropriate party
 SA 505 External Confirmation
Decisions
1. In case of Non-response
🡪 perform alternate procedure
🡪 still AE not obtained 🡪 modify AR
2. Unreliable Response
🡪 perform additional procedures
🡪 if not satisfied, alternate procedure
🡪 AE not obtained 🡪 Modify AR
3. Managements Refusal
Check whether it is justified

Yes No
↓ ↓
Perform alternate procedure Communicate with TCWG (SA 260)
↓ ↓
Still AE not obtained – modify modify AR (SA 705)
 Question

(iii) Audit evidence obtained from

external confirmation is always reliable.
 Answer

(iii) Incorrect: The reliability of information to be used as

audit evidence, and therefore of the audit evidence itself,
is influenced by its source and its nature, and the
circumstances under which it is obtained, including the
controls over its preparation and maintenance where
relevant. Even when information to be used as audit
evidence is obtained from sources external to the entity,
circumstances may exist that could affect its reliability.
 SA 510 ‘Initial Audit Engagement – Opening Balance’
Meaning Consistency of Predecessor’s Audit
Engagement Procedure for Opening Balances Accounting Policy Report
in which a) Read prior year’s Financial Obtain SAAE If modification in
Statements & Audit Reports. whether: predecessor’s AR,
either FS for b) Whether correctly brought a) Accounting
the prior forward. Policies applied then evaluate the
period c) Any adjustment disclosed as Prior appropriately effect of
a) Not audited Period Adjustment. and consistently modification in
OR d) Co-relate opening balance with b) If any change; assessing RMM in
procedures performed in current properly Current period
b) Audited by year. disclosed by
Predecesso e) Obtain additional evidence for management in F.S.
r auditor opening balances. If doubt as to notes to account 🡪
Decision
misstatement in opening balance, as per AFRF If balance of current FY
then communicate with 🡪 still contain effect of that
management and TCWG. misstatement
🡪 Decision modify AR (SA 705 &
Whether disclosed: 710)
Decision
Yes – Clean Report
a) Unable to obtain AE: modify AR (SA 705) Note:
(EOM para) Use OM para to mention
b) If misstatement in Opening Balance ask
mgt to rectify 🡪 Yes – EOM para No – modify the AR that last year we have not
🡪 No – Modify AR (SA 705) audited the FS
 SA 560 Subsequent Events
Scope Objective Definitions Types of Subsequent Event
Deals with ▪To obtain 1. Subsequent Events: As per AS 4
Auditor’s SAAE events between date of 1. Adjusting Event (TYPE - I)
responsibility ▪To respond FS & date of AR; fact provide additional evidence w.r.t.
relating to Appropriately becomes known to condition existed on B/s date.
Subsequent auditor after date of AR Adjustment to be done in FS
Events in 2. Date of FS: last date of eg. Settlement of dispute before date of
audit of FS period covered by FS AR; which arose before B/s date
3. Date of Approval of FS: 2. Non Adjusting Event (TYPE - II)
date on which recognized conditions that did not exist on B/s
authority takes date but arose subsequent to it. No
responsibility of FS adjustment required in FS.
4. Date of AR: as dated by Eg. Purchase of business, sale of shares.
auditor in his report
5. Date the FS are issued:
date on which audited FS
& AR are made available
to 3rd parties
 SA 560 Subsequent Events
B/s AR
Events occurring after B/s Date Facts that become known to auditor
but before date of AR
❑ Perform SAAE whether Such event can
& after the date of AR

Before FS issued After FS issued

be
a) Adjusting event 🡪 FS Since auditor has signed AR, so he has no obligation. However, if the
OR facts are so material, had it been known earlier to auditor, he would
b) Disclosing Event 🡪 Board Report have modified report

❑ Perform procedure to cover period from Discuss with Management / TCWG & Discuss with Management /
as date of FS to date of AR ask him to amend FS TCWG & ask them to issue New FS
❑ Since, yet we have not signed AR in case Management Management
of any modification 🡪 we can modify AR
Amends FS Does not Amend FS Does not
❑ Auditor shall Prform RAP which includes Issue new FS
•Obtain understanding of Procedure Issue new Check whether AR already Issue new FS
established by mgt. AR issued to mgt:
Issue new AR Take step to
•Reading minutes 1. Dual a) No – modify as per SA 705
1. Dual prevent
•Inquiry mgt or TCWG where Dating b) Yes – ask them not to give it
rd Dating reliance on
appropriate 2. Altogethe to 3 party – if gave then
2. Altogether wrong FS
•Reading latest subsequent interim FS r new AR take step to prevent
new AR +
if any + EOM / reliance on wrong FS
EOM / OM
OM para
para
• The auditor should consider the effect of subsequent events
on the financial statements and auditor's report according to
SA 560". Comment. [MTP-Oct-19]
• Or
• The auditor shall perform audit procedures designed to
obtain sufficient appropriate audit evidence that all events
occurring between the date of the financial statements and
the date of the auditor's report that require adjustment of, or
disclosure in, the financial statements have been identified.
Explain.
• [RIP-May 19]
Question
•Enquiry from Management is helpful for Auditor to
evaluate subsequent events. Discuss specific
enquiries in reference of SA 560, which might have
effect on the financial statements.
Nov 14 – 5 Marks
•Inquiry from Management is helpful for Auditor to
evaluate subsequent events. Discuss specific
enquiries in reference of SA 560, which might have
effect on the financial statements.
RTP NOV 18
 Answer
Inquiring from Management to Evaluate Subsequent Event: As per SA 560 “Subsequent Events”, in inquiring
of management and, where appropriate, those charged with governance, as to whether any subsequent
events have occurred that might affect the financial statements, the auditor may inquire as to the current
status of items that were accounted for on the basis of preliminary or inconclusive data and may make
specific inquiries about the following matters-
(i) Whether new commitments, borrowings or guarantees have been entered into.
(ii) Whether sales or acquisitions of assets have occurred or are planned.
(iii) Whether there have been increases in capital or issuance of debt instruments, such as the issue of new
shares or debentures, or an agreement to merge or liquidate has been made or is planned.
(iv) Whether any assets have been appropriated by government or destroyed, for example, by fire or flood.
(v) Whether there have been any developments regarding contingencies.
(vi) Whether any unusual accounting adjustments have been made or are contemplated.
(vii) Whether any events have occurred or are likely to occur which will bring into question the
appropriateness of accounting policies used in the financial statements as would be the case, for example, if
such events call into question the validity of the going concern assumption.
(viii) Whether any events have occurred that are relevant to the measurement of estimates or provisions
made in the financial statements.
(ix) Whether any events have occurred that are relevant to the recoverability of assets.
Question
The auditor has no obligation to perform any audit
procedures regarding the financial statements after
the date of the auditor’s report. However, when,
after the date of the auditor’s report but before the
date the financial statements are issued, a fact
becomes known to the auditor that, had it been
known to the auditor at the date of the auditor’s
report, may have caused the auditor to amend the
auditor’s report. Explain the auditor’s obligation in
the above situation.
RTP MAY 20
SA – 570 -Question
Under the going concern basis of accounting,
the financial statements are prepared on the
assumption that the entity is a going concern
and will continue its operations for the
foreseeable future. Explain. Also discuss the
objectives of an auditor regarding Going
concern as per relevant standard on auditing.
RTP MAY 21
 Answer
The objectives of the auditor regarding Going Concern are:
(1) To obtain sufficient appropriate audit evidence regarding, and conclude on, the
appropriateness of management’s use of the going concern basis of accounting in the
preparation of the financial statements;
(2) To conclude, based on the audit evidence obtained, whether a material uncertainty exists
related to events or conditions that may cast significant doubt on the entity’s ability to
continue as a going concern; and
(3) To report in accordance with this SA.
 SA 570 (Revised) Going Concern (w.e.f. 1st April, 2009)
Indicators

Financial indicators Operating indicators

1. A- Arrears / discontinuance of Dividends

2. A- Adverse Financial ratio 1. L – Loss of key management and no
replacement available.
3. Negative - Negative Net worth/ working capital
2. L – Loss of major market or supplier
4. Negative- Negative cash flow from operations
3. L – Labour unrest, strikes etc.
5. No- No payment to creditors on due date.
4. L – Loss or major licence, franchise,
6. No- Non compliance with terms in loan agreement etc.
7. RC – Rearrangement with Creditors for reduction in 5. Emergence of a highly successful
liability competitor.
8. B- Borrowings approaching maturity without any 6. Management intentions to liquidate the
chance of renewal/ repayment. entity or to cease operations.
7. Shortages of important supplies.
Other Indicators
1. Uninsured or underinsured catastrophes when they occur. (Law
related matters)
2. Non-compliance with capital or other statutory requirements.
(CAR in Banks)
3. Changes in law or regulation or government policy expected to
adversely affect the entity.
4. Pending legal or regulatory proceedings against the entity that
may, if successful, result in claims that the entity is unlikely to be
able to satisfy.
 If auditor has doubt regarding Going Concern Assumption

He should obtain Audit Evidence

Evaluate those Evidences & Conclude whether

Going concerns is Going concerns is Going concerns

appropriate inappropriate question not
resolved
 Going concerns is appropriate
Due to Mitigatory Factors Otherwise

Auditor considers whether it

needs to be disclosed in
financial statements by the Clean report
management

Yes No
Ask management to disclose Clean report
the same

If management doe not disclose If management disclose

Qualified/ adverse report EOM

 Going concerns is inappropriate

The Effect is material and pervasive

Adverse report
Going concerns question not resolved

Whether financial statements disclose such fact

Yes No
EOM Modified report
(qualified/ disclaimer)
Question
Management's assessment of the
entity's ability to continue as a going
concern involves making a judgement
about inherently uncertain future
outcomes of events or conditions. What
are relevant factors to that judgement?
SUGG JAN 21
Answer
Management’s assessment of the entity’s ability to continue as a going
concern involves making a judgment, at a particular point in time, about
inherently uncertain future outcomes of events or conditions. The
following factors are relevant to that judgment:
❖ The degree of uncertainty associated with the outcome of an event or
condition increases significantly the further into the future an event or
condition or the outcome occurs. For that reason, most financial
reporting frameworks that require an explicit management assessment
specify the period for which management is required to take into
account all available information.
❖ The size and complexity of the entity, the nature and condition of its
business and the degree to which it is affected by external factors affect
the judgment regarding the outcome of events or conditions.
❖ Any judgment about the future is based on information available at the
time at which the judgment is made. Subsequent events may result in
outcomes that are inconsistent with judgments that were reasonable at
Question
As described in SA 200, the potential effects of
inherent limitations on the auditor’s ability to
detect material misstatements are greater for
future events or conditions that may cause an
entity to cease to continue as a going concern.
Explain stating the auditor’s responsibilities
with regard to going concern.
RTP MAY 21
 SA 580 Written Representation
Scope Meaning Features of WR Types of WR
Deals with Written 1. Not a WR about Mgt’s Other WR
auditors statement by substitute to responsibility
responsibility Management audit
to obtain WR ↓ procedures • Compulsory Any other
from Provided to 2. Corroborative • Managements matter
Management / auditor audit evidence Responsibility: auditor
TCWG ↓ 3. Evaluate a) Preparation & wants to
To confirm reasonableness presentation of FS confirm
Objective(TQ) certain matters & consistency of b) Designing &
1. To obtain WR or support WR implementation
from audit evidence 4. Person of ICS
Management ↓ representing c) Management has
that it has Not a sufficient on behalf of provided all
fulfilled its & Appropriate management is information
responsibility A.E by itself. well informed relevant for audit
2. To support 5. Sometimes WR to auditor
other may be the
evidence only evidence
3. To respond with auditor
appropriately
 SA 580 Written Representation
Management from Date of WR & Decision
whom WR requested Period Covered Decision-1
Requested from those responsible for As near as W.R not Provided
preparation & presentation of FS practicable but not 🡪
↓ after the date of AR a) Discuss with Mgt.
Such individual may vary as per on FS for period b) Re-evaluate reliability & integrity of
governance structure of entity referred to in AR mgt.
(generally – management) c) Modify report – if unable to obtain A.E.

Hence WR requested from entity’s Decision-2

CEO/ CFO/ other equivalent persons / Doubt about reliability of W.R.
TCWG Perform additional procedure to resolve
However management may inquire matter
others who have expertise relating to If W.R not reliable
matters on which WR required. Such 🡪
individuals include: Reconsider reliability on other W.R.
a) Actuary +
b) Staff Engineers Modify report where unable to obtain A.E.
c) Legal Counsels
 Questions
1. Written representation in itself is a sufficient and appropriate audit evidence about
any of the matters with which they deal. T/F MTP MAR 21
2. What do you mean by "Written Representations"? As an auditor, how you will deal if
management does not provide requested written representations? RTP NOV 18
3. The Partner of Vansh and Vaibhav, Chartered Accountants, asked the management to
provide statements from the creditors as part of audit evidence and also required
written representation from the management but the management did not provide the
requested written representations. Discuss how the auditor would proceed. MTP OCT
18
4. Explain clearly objective of the auditor regarding written representation. RTP Nov
19
5. Explain the objectives of the auditor regarding written representations JAN 21
6. Audit evidence is all the information used by the auditor in arriving at the conclusions
on which the audit opinion is based. Written representations are necessary
information that the auditor requires in connection with the audit of the entity’s
financial statements. Accordingly, similar to responses to inquiries, written
representations are audit evidence. Explain stating clearly objectives of the auditor
regarding written representation. RTP MAY 20
Audit Risk

Auditor may give When Financial Statement

inappropriate opinion is materially misstated
 Components of Audit Risk - (CID)
I- Inherent Risk C- Control Risk D-Detection Risk
Meaning Meaning Meaning
Susceptibility of Risk that I.C.S will Risk that an auditor’s
mis-statements in not be able to procedures will not detect
accounts and an error or fraud or
prevent, detect, misstatement that exists
balances assuming correct in account balance or
there is no I.C.S mis-statements in class of transaction.
Reasons F.S.
Reasons Reasons
• Nature of business
• Mgt. expertise Inherent limitation of Inherent limitation of
• Pressure on mgt. I.C.S Audit
• Integrity of mgt.
• Factors affecting industry
• Unusual transition at year end
• Complicated transactions
• Quality of Accounting System
• Accounts or assets prone to misappropriation
• Audit Risk = Risk of Material Misstatement x Detection Risk
• Risk of Material Misstatement= Inherent Risk x Control Risk
• Audit Risk = Inherent Risk x Control Risk x Detection Risk
• The assessment of risks is a matter of professional judgment,
rather than a matter capable of precise measurement.
• Risks of Material Misstatement at Two levels
I. The overall financial statement level
II. The assertion level for classes of transactions, account balances,
and disclosures
 Risk Assessment Procedures
• The audit procedures performed to obtain an understanding of the entity
and its environment, including the entity’s internal control, to identify
and assess the risks of material misstatement, whether due to fraud or
error, at the financial statement and assertion levels.
• Risk assessment procedures by themselves, however, do not provide
sufficient appropriate audit evidence
• The assessment of risks is a matter of professional judgment, rather than
a matter capable of precise measurement.
 Risk Assessment procedures
O Observation 🡪 how mgt. performs procedure
I Inspection 🡪 System and Mgt.
C
A Analytical Procedure🡪 identify the existence of unusual
transactions or events, and amount.
Management
TCWG
I Inquiry Employees
Internal Auditor
Branch Auditor

R Fraud risk factors

 Understanding entity & its environment
Factors
State of Economy
Nature of Industry
Regulatory Requirement
Ownership & Structure
Financing & Structure
types of Investments
Nature of operations
Financial Reporting
Framework
Selection & Application
of Accounting Policies

Financial Performance
Objectives.

Shortcut :- From Macro to Micro

The Auditor may exercise his judgement to identify which risk
are significant risk. Explain the above in context of SA 315. May
15 – 6 Marks

• In exercising judgment as to which risks are significant risks, the auditor shall
consider at least the following-
• (i) Whether the risk is a risk of fraud;
• (ii) Whether the risk is related to recent significant economic, accounting or other
developments like changes in regulatory environment etc. and therefore requires
specific attention;
• (iii) The complexity of transactions;
• (iv) Whether the risk involves significant transactions with related parties;
• (v) The degree of subjectivity in the measurement of financial information related to
the risk, especially those measurements involving a wide range of measurement
uncertainty; and
• (vi) Whether the risk involves significant transactions that are outside the normal
course of business for the entity or that otherwise appear to be unusual.
Internal Control System
🡪 3P Plans Adopted by For orderly & efficient
Policies Management conduct of business
Procedure
🡪 Whole system of control - financial or otherwise (administrative)
policy making
Auditor is mainly concerned with ICS related to financial or
accounting control
If ICS is Auditor can put good reliance Perform less audit
Good on financial data generated procedure including
sampling
If ICS is not Auditor has to follow
satisfactory detailed checking
Objective / Functions of ICS (Related to financial aspect)
Fraud & error * Prevention * Detection * Correction
Transaction Proper execution of transaction (proper authorization)

Proper recording of transaction - with correct amount

- in proper accounts
-in proper period

Assets Safe guarding of assets (from unauthorized use, access,

disposition)

Comparison of actual assets with recorded assets & take

action in case of discrepancies

Liabilities 🡪 Timely paying off liability

Benefits of Understanding of Internal
Control
• (i) identifying types of potential misstatements
• (ii) identifying factors that affect the risks of material
misstatement, and
• (iii) designing the nature, timing, and extent of further audit
procedures.
Inherent Limitations of ICS
Entity do not apply best control or even where good controls are established, error
may exist because of following inherent limitations
Cost Effectiveness Many time cost are much higher than benefits

Small Entities Have no proper internal check system nor internal audit
system resulting into higher RMM
Human error Human being working can form error in judgement or
do basic errors
Collusion among emp. Perfect check system is when there is division of work,
but if employees collude error & frud increases
Abuse of authority Authorities abusing authority leads to higher RMM

Manipulation by mgt If mgt manipulates/forms wrong judgement system

fails
Unusual transaction Controls not properly structured🡪 so RMM increase

reasonable assurance: Internal control, no matter how effective, can provide

an entity with only reasonable assurance
Components of ICS – shortcut: CRIME
Risk assessment
Information related Control
Control Activity procedure within Monitoring
system Environment
entity
• Policy & procedure to Whether entity has Obtain understanding of • Process to • 3A
ensure mgt’s process for IDEA information system access ICS Attitude, Action,
directives are followed relevant of financial performance Awareness of mgt
• Auditor requires
I – Identifying reporting by checking • Helps in taking / TCWG regarding
understanding of only
control activity related D – Deciding action 1. class of transaction timely remedial ICS & its
to E – Estimating significant to FS action Importance
- Class of transaction significance 2. Process of initiation, • Done through
- A/c balances A – assessing recording, i. ongoing
- Disclosure in FS processing & activities
likelihood
- Having significant posting of
risk ↓ ii. Separate
transaction
Of risk evaluation
3. Related records
iii. Both
helpful for above
4. Events & conditions • Include
significant to FS assessing
5. Financial reporting internal audit
process function
 CONTROL ENVIRONMENT
Meaning Elements
Menmonic : HOPE- TCA (Tikihai)
🡪
1) H – H.R Policies 🡪 For recruitment, training
3a counselling, promotion, compensation, etc.
🡪 2) O – Organisation structure – Fremework to
• Attitute plan, control, execute, review activities
• Action 3) P – Mgt Philosophy & operating style
• Awareness 4) E – Ethical value & Integrity 🡪 Enforcement &
🡪 communication
Of Mgt. 5) T – TCWG 🡪 Experience, involvement,
🡪 independence
Towards T.C.S & 6) C – Commitment to competence
it’s importance 7) A – Assignment of Authority
Controls relevant to audit
Factors relevant to auditors judgement
Whether a control individually or in combination
Is relevant to audit
As follows 🡪 shortcut : Size & Nature of CARE matters
Size 🡪 Size of entity
Nature 🡪 nature of entity’s business including organization & ownership
C 🡪 Complexity of operations
A 🡪 Applicable legal & regulatory requirement
R 🡪 related RMM
E 🡪 established component of ICS
Matters 🡪 materiality
Tools to evaluate ICS
Tool Meaning Advantages Disadvantages
Complete & exhaustive a) When property framed a) Detailed observation is needed
(time consuming)
Narrative detail of system as found in formal I.C system is not found,
b) It doesn’t readily identify weakness
operation by the auditor complete description is in system.
record needed. c) Constant updating is needed if
b) Suitable for small business. circumstances changes.

It contains series of a) On the job requirement, thus a) Require intelligence to prepare

motivating. proper checklist.
questions, to be answered b) Completed checklist is studied by
Checklist by the audit staff. the senior audit staff, thus weaknesses
b) Client can manipulate when
can’t be over looked.
responding to questions raised by
c) Easy location of weakness. audit staff.

Comprehensive series of Same like check list Same like check list
I.C. questions, on each aspect
Questionnaire of I.C. Prepared by auditor
& answered by client staff.
Graphic presentation, of a) Concise presentation. a) Time consuming to prepare such
a flowchart which is concise yet
each part of entity’s ICS b) Easily understandable showing every important aspect of
Flowchart c) Gives “birds eye view” of I.C.
complete system. b) Weakness can’t be readily located.
 Benefits of Evaluation of Internal Controls to Auditor
Shortcut :- RELIANCE
R :- Reliability 🡪 ensure reliability of reports, records and certificate
E :- Errors & Frauds 🡪 Locate
L :- Location of weakness in I.C.S and Suggestions for it
I :- Internal Audit function effective or not
A :- Adequacy of I.C.S
N :- NTE 🡪 deciding NTE of audit procedure and techniques
C :- Circumstance 🡪 Identifying circumstances and situations requiring more
attention
E :- To Ensure Mgt has discharged it’s duties for
a) Proper execution of transaction
b) Safeguarding of assets
c) Paying of liabilities
 Internal audit
• Internal Audit means
• “An independent management function,
• which involves a continuous and critical appraisal of the functioning of an
entity
• with a view to suggest improvements thereto and add value to and
strengthen the
• (a)overall governance mechanism of the entity,
• (b )entity’s strategic risk management and
• (c)internal control system”.
 Internal audit [Section 138]
APPLICABILITY
QUALIFICATION
Following Class of companies are required to appoint an
internal auditor (individual or firm or body corp.) • Any person certified as :
▪ Listed company 1. Chartered accountant
▪ Unlisted company having 2. Cost accountant
1. Paid up Capital not less than 50 crore, or 3. Such other professional as
2. Turnover not less than 200 crore, or may be decided by board.
3. Borrowing from banks or PFI not less than 100 crore, or • May or may not be an
4. Deposits not less than 25 crore employee of the company.
▪ Private company having • CA or cost accountant
1. Turnover of not less than 200 crore or whether in practice or not.
2. Borrowings from banks or PFI not less than 100 crore.
(All above limits during preceding FY)
Internal audit function

•A function of an entity that performs

assurance and consulting activities
•designed to evaluate and improve the
effectiveness of the entity’s governance, risk
management and internal control processes
 The objectives and scope of internal audit
functions
1. Governance
2. Risk Management
3. Activities Relating to Internal Control
•Evaluation of internal control
•Examination of financial and operating information
•Review of operating activities
•Review of compliance with laws and regulations
OTM Audit Nov 2022

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 ARP 🡪 SA - 520

Meaning Benefits Techniques /types Factors to asses

reliability
🡪 🡪 🡪
PROF 🡪
Evaluation of SINC
financial
🡪 i. Trend
Information i. P🡪 Planning (Help analysis 🡪
in )
i. Source of data
🡪 ii. R🡪 Risk
Assesement
ii. Ratio
Through (Help) analysis ii. Information 🡪
analysis of iii. R🡪 Comparable
relationship Reasonableness iii. Reasonablen iii. Nature of
(judge)
iv. O🡪 Overall review
ess test Information
🡪 to draw
Among financial conclusion iv. structure iv. Controls over
& non –financial v. Fraud 🡪 Existence (stastical)mo preparation of
data
(to confirm)
del information
 ARP can be applied Decision in case of
inconsistency in
data
(1)Planning (2)Substantive (3)Overall
procedure Review 🡪
🡪 1. Inquire with
Factors/pts to be Steps
considered Mgt.
Benefits 🡪
Pls to see
considered 2. If still
🡪 (SAP, AND, I)
🡪
🡪 i. Determine inconsistent,
i. Understand
entity’s S 🡪 Source Suitability perform
business A 🡪 Available Inf n’
ii. Evaluate additional
P🡪 Predictibility
ii. Risk A🡪 A/c Types reliability procedure to
assessment N 🡪 Nature of Assertion iii. Develop confirm
iii. Designing D🡪 Disaggregation expectation
NTE of I🡪 Inherent Risk
further audit iv. Compare &
procedure conclude
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 SA 530 – Audit Sampling
Scope Definitions Population Other Imp points
1.Applies 1. Sampling: Sample selected must be
when Checking less than representative of the 1. Sample must be true representative
auditor 100% data in population of data
decides to entire population
use Characteristics: 2. Sampling perform on Test of
sampling in 2. Population: 1. Appropriateness: Controls (to identify deviations in
performing entire set of data
from which Population from which
audit
sample is selected sample taken expected controls ) and test of
appropriate or not. The details (to identify mis-statements )
3. Sampling Risk: individual items that
Risk that auditors make up the population 3. While designing sample – auditor
conclusion on are known as sampling
sample may be units includes specific purpose to be
different if entire
2. Completeness: achieved and procedures which
population was
checked (dealt in population needs to give best results .
include all relevant
detail further)
items throughout the 4. Size of entity has no effect on
4. Non-sampling entire period sample size
risk:
Risk that auditor 3. Reliable: 5. Anamoly is mis-statement and
reaches erroneous ensure that information
conclusion for upon which sampling is deviation not representing
reason other than performed is complete mis-statement in population
sampling risk & accurate
 SA 530 – Audit Sampling
Techniques / types Method to pick Sample
Judgmental / Traditional Statistical
/ non-statistical 1. Random Sampling: equal chance of selection & may involve use of
Auditor use random
Auditor use experience / selection of samples random number tables
judgement and use probability Simple random – data homogenous
theory / Statistics
Advantages Stratified sampling – data heterogenous
-Easy to operate Advantages:
-TIME SAVING -More scientific 2. Systematic / Interval Sampling: items chosen in such
-No personal a way that there is constant interval between
biasness selections. 1st interval has random start
-Results can be
a) Block: block of consecutive items. It may be biased
projected in more
reliable way at times
b) cluster: population divided into clusters. No. of
clusters are selected on random basis
3. Monetary unit sampling/ Value weighted selection :
Disadvantages Disadvantages
-Complex to operate Conclusions are drawn in monetary amount
-Less scientific
-Personal biasness -Time consuming 4. Haphazard Sampling: combination of other methods
-LESS RELIABLE exercise
5. Block Sampling – of Contiguous items
 SA 530 – Audit Sampling
Sampling Risk Factors affecting Sample Size
Test of Control Test of Detail 1. Lower the acceptable risk , higher
sample size
1.Over reliance 1.Incorrect 2. Greater reliance placed on controls ,
↓ Acceptance more test of controls , more sample
erroneous/insuffici ↓ size
ent AR erroneous / 3. More tolerable error , less sample size
insufficient AR 4. Higher expected rate of deviation ,
2.Under Reliance higher sample size
↓ 2.Incorrect Rejection 5. Desired level of assurance high , more
no error in AR ↓ sample size required
additional work no error in AR 6. More auditor rely on other substantive
additional work procedure , less reliance on sampling ,
so size of sample will decrease
7. Higher romm , high S.S
Explain the following terms with reference to Audit Sampling:
Stratification
Tolerable misstatement
Tolerable rate of deviation
[RTP - May 21]
• Stratification - The process of dividing a population into sub-populations,
each of which is a group of sampling units which have similar
characteristics (often monetary value).
• Tolerable misstatement - A monetary amount set by the auditor in respect
of which the auditor seeks to obtain an appropriate level of assurance that
the monetary amount set by the auditor is not exceeded by the actual
misstatement in the population.
• Tolerable rate of deviation - A rate of deviation from prescribed internal
control procedures set by the auditor in respect of which the auditor seeks
to obtain an appropriate level of assurance that the rate of deviation set by
the auditor is not exceeded by the actual rate of deviation in the population.
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AUDITING IN
AUTOMATED
ENVIRNMENT

Prof. Kunal Mandhania

 Auditing in Automated Environment
Introduction:-
Meaning: Business operation where
🡪
Process, operation, Accounting
🡪
Carried out by using Computer system
Where system is more automated, it is more difficult to audit.
Auditor should have knowledge of IT systems.
 Factors /Points auditor should consider to obtain
understanding of company’s automated environment
A Architecture (Desktop based,C/S , web or cloud based )
I Information system used
P Purpose (financial / Non-financial)
L Location (Local v/s Global)
P Person handling it (CIO,CISI,Admin )
A Activities outsourced
I Interface
Shortcut :-
D Developer (In-house/ packaged)
A IPL PAID VERSION
Version
 Key Features / Characteristics / Advantages of Automated
Environment
F Faster Business Operations
A Accurate data processing and computation
F Faster data processing
P Process large volume of data
L Latest information - provided
E Errors 🡪 less human error
S Security 🡪 better
Shortcut :-
I Integration between business
FAF- DU-PLESIS operation
S System connectivity and
network capability
 Risk in Automated industry/IT related Risks
F Failure to update
A Authority – Unauthorised access of data or change
I Inaccurate data processing
L Lack of segregation of duties
L Loss of data
E Excessive access / Privileged access(Super users )

D Direct data change (backend changes)

Shortcut :-
2
FAIL ED
 Impact of IT related risk on

Substantive On controls /compliance On reporting

procedure procedure

Data not completely • Cannot rely on Inaccurate

reliable
automated report can lead
🡪
control system to wrong data
More evidences & calculations
required 🡪
🡪 • No audit trail
Modified report
Data, system & report • Should be
has to be thoroughly
tested and corroborated thoroughly
for tested for
• Completeness ✔ Completeness
• Accuracy ✔ Accuracy
Types of Controls in Automated Environment

General IT Application control IT Dependent Control

Control
• Applications that • Include automated and Manual controls
support effective manual control
functioning of Make use of
• Controls over Input, data,
application controls output , processing
• Helps in ensuring information and
• Also known as
indirect or pervasive completeness, accuracy report produced
control and integrity of data. from IT systems
• E.g.:
• E.g.: Control over • Edit check
• Network operations • User limit check
• Access security • Check data fields
• Program change • Validation of input check
 Testing Methods / Ways of Testing
Shortcut :- O I C A I - R High Low
1) Observation :- How user process transaction under
different scenario Inquiry

Effectiveness
Observation

Efficiency
2) Inspection :- Configuration defined in application
Inspection
3) Inquiry :- • Most efficient
• Get least audit evidence
Reperformance
• So should be used in combination with
other methods. Low High
4) Re-performance :- • Most effective
• Give best evidence
• Time consuming
• Least efficient

Note : Appling inquiry in combination with inspection gives most

effective and efficient audit evidence
Explain some of the commonly used methods for testing in
an automated environment
[RTP-May 20]
• Commonly used methods for testing in an automated environment:
• Obtain an understanding of how an automated transaction is processed by
doing a walk through of one end-to-end transaction using a combination of
inquiry, observation and inspection.
• Observe how a user processes transaction under different scenarios.
• Inspect the configuration defined in an application.
• Inspect the system logs to determine any changes made since last audit
testing.
Inspect technical manual/user manual of systems and applications.
• Carry out a test check and observe the error message displayed by the
application.
• Conduct reperformance using raw source data and independently applying
formulae, business rules or validations on the source data using CAATs.
Data Analytics
1. Combination of Process , tools and techniques over electronic data to
obtain meaningful results
2. The data so extracted is useful for preparation of management
information system (MIS) reports and electronic dashboards that give
a high-level snapshot of business performance.
3. The data analytics methods used in an audit are known as Computer
Assisted Auditing Techniques or CAATs.
4. Data analytics can be used in testing of electronic records and data
residing in IT systems using spreadsheets and specialised audit tools
viz., IDEA and ACL.
5. Benefits- Increased profitability,better customer service , getting
competitive advantage
DEfinitions[Nov. 18 (5 Marks), MTP-May 20]

• CAATs: ComputerAssisted Audittechniques - Collection of computer-based

tools and techniques that are used in an audit for analysing data in electronic
form to obtain audit evidence.
• Data Analytics: Data analytics is an analytical process by which meaning
information is generated and prepared from raw system data using processes,
tools, and techniques.
• Database: A logical sub-system within a larger information system where
electronic data is stored in a predefined form and retrieved for use.
• Information Systems: Collection of electronic hardware, software, networks
and processes that are used in a business to carry out operations and
transactions.
• Privileged access: A type of super user access to information systems that
enforces less or no limits on using that system.
Definitions
[MTP - March 21]

• Data Processing: Refers to the systematic recording, storage, retrieval,

modification and transformation of electronic data using information systems.
• ERP (Enterprise Resource Planning): A type of business application
software that provides an integrated platform to automate multiple
interrelated business processes and operations.
• General IT Control: Are a type of internal controls that help in mitigating
risks that arise due to use of information technology and information systems
in a business.
• Automated: A task or activity that is routinely performed by a computer
system and does not require manual effort.
• Direct Data Change: A backend modification that is made directly to data that
is stored in a database bypassing business rules built-in to a business
application software.
Definitions (RTP-may -21)
• Applications:
• These are computer software programs that provide a medium for recording, storage and retrieval of
business operations or transactions in electronic format.
• Control Deficiency:
• It Exists when an internal control is either missing or not operating effectively to prevent or detect a
misstatement in a timely manner by management.
• Data Processing:
• It Refers to the systematic recording, storage, retrieval, modification and transformation of electronic data
using information systems.
• Enterprise Resource Planning:
• A type of business application software that provides an integrated platform to automate multiple
interrelated business processes and operations.
• Software:
• A computer program or a collection of computer programs that provides an interface to a user for
performing a specific activity, task, operation or transaction in electronic form through a computer or
information system.
 Steps to be followed to audit (CAAT)
Understand business Define the objectives and Identify source and
environment including Criteria format of data
IT

Extract data Verify the completeness Apply Criteria on data

and accuracy of obtained
extracted data

Validate and confirm Report and Document

results results and conclusions
OTM Audit Nov 22
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OTM Audit Nov 2022

Bank Audit Complete

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 Types of Banks
1) Commercial Banks ▪Most wide spread
▪Provide many product and services
▪Two main functions
a) Accepting deposits b) Granting Advances
2) Regional Rural ▪ IN Rural Areas
Banks ▪ To cater basic banking and financial needs of rural communitis
Eg.: Pubjab Gramin Bank
3) Co-Operative Banks ▪ Set-Up under co-operative principles
▪ Regd. under co-operative Act or MSCS Act.
Eg. : Gujrat State Co-operative Bank Ltd.
4) Payment Banks Can Cannot
Eg.: PayTm , Bharat ▪ Open A/cs ▪ Loan facility
Pe, Airtel Bank ▪ ATM Services ▪ Credit card facility
▪ Internet and Mobile banking
▪ Accept deposits
5) Development Banks ▪ Funds for infra facility
▪ Imp for economic growth of country
▪ Eg.: IFCI, IDBI, SIDBI etc.
6) Small Finance ▪ Basic financial and banking facility
Banks ▪ For unorganised sectors like formers, small and micro business
 RBI
Basics Responsibilities Functions
🡪 🡪 🡪
DDR Licence from R2B2I2
▪ Regulatory i. Licence 🡪 Issuing
body of all 🡪 licence to commence
(Develop, Determine, banking business
banks
Regulate) ii. R 🡪 Regulate 🡪
▪ Central Bank i. Develop Currency notes
iii. R 🡪 Regulate 🡪 Banks
of India Indian financial system
iv. B🡪 Banker to C.G |
ii. Determine S.G
Monetory and credit v. B🡪 Banker to other
policies of India banks
iii. Regulate vi. I 🡪 Inspect 🡪 Banks
Activities of all banks vii. I 🡪 Issue currency
 Peculiarities involved in banking system

Mnemonic 🡪 STATES
i. S 🡪 Strict Vigilance by RBI
ii. T 🡪 Too many transactions
iii. A 🡪 Area 🡪 Huge Area covered under banking
network
iv. T🡪 Transactions 🡪 Complex
v. E 🡪 Extensive use of technology
vi. S 🡪 Services 🡪 many services and product offered
 Types of Reports in Banks
Mnemonic 🡪 LIST by CA2S
*Reports on :-
i. L 🡪 Long form Audit Report (LFAR)
ii. I 🡪 Income Recognition
iii. S 🡪 SLR requirement compliance
iv. T🡪 Treasury operations
v. C 🡪 Compliance of conducted as per RBI guidelines
vi. Ghosh Comittee 🡪 Fraud / Malpractices
Jilani Committee 🡪 Internal Controls and credit system
vii. A 🡪 Adverse credit : deposit ratio in rural areas
viii. A 🡪 Adqueacy of internal financial controls
ix. S 🡪 Serious irregularity notice in working of bank
 Different Enactments (Act). Applicable to Bank.

2 3 2 2
P RES C RIB E
P Prevention of money laundering Act, 2002.
P Payment and settlement systems Act, 2007
RE REgional Rural Bank Act, 1976
S SARFAESI, 2002 Securitisation and Reconstruction of Financial Assets and
Enforcement of Securities Interest Act, 2002

S SBI Act, 1955

S SBI (Subsidiary banks) Act, 1959
C Companies Act, 2013
C Credit information companies regulation act,
2005
R RBI Act, 1934
I I. T Act, 2000

B Banking Regulation Act, 1949

B Banking Companies (Acquisition and

transfer of undertaking ) Act, 1970 & 1980
(this governs nationalise banks)
E END
 Overall Audit Approach / Steps to conduct Bank Audit
1. Banking Nationalise Subsidiaries of Reg Rural
SBI
Appointment Co. Banks SBI bank
of Auditor ↓ ↓ ↓ ↓ ↓
Note: Qualifications / Shareholders in By BOD (Bank By CAG in By SBI By BOD (Bank Itself)
Disqualifications consultation with
AGM Itself) prior Approval of
same as Sec. 141 of CG
CG
Co. Act, 2013 Prior approval of RBI

Declaration of indebtedness to bank (RBI)- Money owed to bank

i.
2. Agree upon terms of audit engagement (SA-210)
ii.
Declaration as to non-continuance of other internal assignments with banks (eg concurrent audit)
iii.
Initial iv.Check client continuance relationship (SA-220)
Consideration / v.Initial Engagements (SA-510)
Preliminary vi.Communication with previous auditor (as per CA Act, 1949 CA cannot accept audit without
communication with previous auditor in writing
Work vii. Assessment of engagement risk
viii. Establish engagement team
 3. 4. 5.
Identifying & Understand the bank and its Understand the Banks
assessing the RMM environment including ICS accounting process
(SA-315)

At FS level & assertion level i. To identify & assess risk Produces financial & operational
ii. To develop an audit plan information 🡪 helps to identify &
assess RMM

6. Requirement of adequate Risk Mgt Process ( C R I M E)

C 🡪 Control activities – to manage risk including SOD, contingency planning, approval of transaction,
Understanding setting limits, etc.
risk R 🡪 Reliable information system – TCWG / Mgt needs risk management information that is easily
understood & assess dynamic nature of risk
management I 🡪 Identification, measurement & monitoring of Risk – risk that could impact banks goals must be
process identified
M 🡪 Monitoring activities – risk management models, methodologies, assumptions must be
assessed & updated regularly
E 🡪 Ensure proper risk assessment policies / strategies made by TCWG – whether TCWG approves
written risk management policies that are consistent with banks objective
 7.
Engagement Hold discussions for better understanding of bank & its environments,
team Discussion internal controls to assess RMM

8.
Follow SA-300 (PROCESS)
Establish i. Establish prior to commencement of audit
overall audit
strategy ii. Involve key engagement team members

9.
Follow SA-300, 210, 220
Develop audit
Refer TRAINING DAYS 🡪 Factors for audit plan
plan

10.
Audit planning Develop Memorandum to describe scope and objective , Highlight all
memorandum significant issue & risk indentified and provides evidence
 Question
The discussion between the members of the engagement team and the audit
engagement partner are being done on the susceptibility of the bank's financial
statements to material misstatements. These discussions are ordinarily done at the
planning stage of an audit.Analyse and Advise the matters to be discussed in the
engagement team discussion.[MTP-March 18, March 19]
Or
You are appointed as an auditor of Banking Co., and hold discussions with
engagement team. List out matters which you would discuss at planning stage of an
audit to gain better understanding of the bank and its environment. [May 19 (4
Marks)]
Or
The discussion between members of the engagement team members and the audit
engagement partner should be done on the susceptibility of the bank's financial
statements to material mis¬statements. Briefly discuss the points ordinarily included
in discussion of the engagement team[Nov. 19 (3 Marks)]
Solution
● Engagernentteam should hold discussions to gain better understanding of banks and its
environment, including internal control, and also to assess the potential for material
misstatements of the financial statements. All these discussions should be appropriately
documented for future reference. The discussion should be done on the susceptibility of
the bank's financial statements to material misstatements. These discussions are
ordinarily done at the planning stage of an audit.
● Benefits of discussion:
● to share their insights based on their knowledge of the bank and its environment.
● to exchange information about the bank's business risks.
● To make an understanding amongst the team members about effect of the results of the
risk assessment procedures on other aspects of the audit, including decisions about the
NTE of further audit procedures.
● Matters to be discussed:
● Errors that may be more likely to occur;
● Errors which have been identified in prior years;
● Method by which fraud might be perpetrated by bank personnel or others within
particular account balances and/or disclosures;
● Audit responses to Engagement Risk, Pervasive Risks, and Specific Risks;
● Need to maintain professional skepticism throughout the audit engagement;
● Need to alert for information or other conditions that indicates that a material
misstatement may have occurred.
 11. 12.
Determine Audit Materiality Consider going concern

Consider relationship between materiality Whether events & conditions cast significant doubt on
& audit risk (SA-320) bank’s ability to continue as a going concern

13. 14. 15.

Assess fraud risk including money Assess specific risk Risks associated with
laundering outsourced activity
SA-240 i. Obtain SAAE on fraud risks Identify & assess RMM at Outsourced for reducing costs &
ii. Maintain prof. skepticism FS level 🡪 relating obtaining expert advice; hence
pervasively these risk need to be managed
iii. Follow KYC norms given by RBI
 16.
Responses to assessed risk (SA-330)
Implement overall responses to such risk & perform FAP whose NTE is Based on responses

17. 18.
Stress Testing BASEL III Framing

i. To check whether bank can survive in any i. Basel Committee on Banking Supervision
economic crises prevailing in industry (BCSC) & Financial Stability Board (FSB) 🡪 has
ii. Also check existence of any window – dressing done review of regulatory framework
ii. Can be done by bank or external agency (RBI) ii. BCBS released BASEL III in Dec 2010 along with
new criteria for regulatory capital

19. i. Previous AR
ii. RBI’s latest inspection report
Reliance / Review of other reports
iii. Internal Audit Report, etc.
 Other Important Basic Point
1. Remuneration of auditor
Banking Company Nationalised Company SBI
As per Sec. 142 of Companies Act, 2013 By RBI in consultation with CG
i.e. by Company in GM or manner
determined in GM
2. Powers of Auditor – same as Company Auditor
3. Form & Content of FS of Bank (any bank) – as prescribed u/s 29(1) & (2) of Banking Regulation Act
1949
Compliance for Banking Companies:
i. B/s as per From A of Sch III of this Act
ii. P&L as per Form B of Sch III of this Act
iii. Disclosure as per AS u/s 133 read with Rule 7 (Companies Act, 2013 & Company Rules 2014)
4. Sec. 30(1) of this Act requires accounts to be audited by any qualified person u/s 141 of Companies
Act, 2013
5. Classification of Banks on the level of computerization
i. Non-Computerised Banks Note: In Computerised environment, auditor should not go by
ii. Partially Computerized Banks assumptions that system generated information is correct and
iii. Fully Computerised Banks can be relied upon without evidence
 Basic Points Regarding Advances
4. Classification of Advances 5. Nature of 6. Modes of Creating Security
1. By Type: Security 1. Mortgage- Registered: affected by mortgage deed signed
a) bills purchased /Discounted 1. Primary by mortgager
b) CC/OD/loan repayable on Security: - equitable: affected by mere delivery of title
demand Security offered deeds or other documents of title with
c) term loans by borrower for intention to create Security
2. By security bank finance 2. Pledge- bailment or delivery of goods by borrower to lending
a) Secured by tangible assets 2. Collateral bank. Ownership remains with pledger. Pledge of goods is a
b) Secured by bank / Security: fixed charge
Government guarantee Additional 3. Hypothecation- created for moveable security. Borrower
c) unsecured Security, it can holds physical possession of goods
3. By Security be in any form 4. Assignment- transfer of existing / future debts, right or
i. Advances in India tangible / property in favour of another person
a) Priority sectors intangible or 5. Set-off- statutory right of creditor to adjust, wholly or partly,
b) Public Sectors movable / the debit balance of debtors account against any credit
c) Banks immovable balance lying in another account of debtor
d) others assets For purpose of set off, all branches of bank are treated as one
ii. Advances outside India single entity can be exercised for time barred debt also
a) Due from Banks 6. Lien- creation of legal charge with consent of owner, which
b) due from other gives lender a right to seize and dispose / liquidate the asset
under lien
 Classification of Advances as per RBI Prudential Norms

Standard Loans NPA Loans

SMA Special Mention A/cs 1. Sub-standard Assets
NPA for period < 12 months
SMA-0 Secured Unsecured
(A/c showing stress signals but Provision 15% 25%
not overdue for more than 30 Infrastructure 🡪 20%
days) 2. Doubtful Assets
SMA-1 Sub-standard for 12 months
(overdue between 31 to 60 days) Doubtful upto Secured Unsecured
SMA-2 <1 yr – D1 25% + 100%
(overdue between 61 to 90 days) 1-3 yr – D2 40% + 100%
> 3 yr – D3 100% + 100%
3. Loss Assets
loss identified by Bank / Auditor / RBI Provision 🡪
100%
 Non-performing Assets (NPA)
a) Term Loan / Bills Discounted
Overdue > 90 days 🡪 NPA
b) Credit Cards – atleast Min amt overdue for more than 90 days

c) Cash Credit / OD
NPA if Out of Order > 90 Days

Out of Order
i. Amount withdrawn is more than drawing power or sanctioned limit
ii. when Crs < Drs or no Credit
 Agricultural Advances

d) Agricultural Advances

Short Duration Crops Long Duration Crops

Crop Season < 1 yr Crop Season > 1yr Crop Season = time from
NPA – NPA - sowing to harvesting
if overdue > 2 CS if overdue > 1CS

Note:
Agriculture advance affected by natural calamities 🡪 NPA as per new T&C
 Non-performing Assets (NPA)
e) Government Guaranteed Advances

CG SG
↓ ↓
Loan Guaranteed by Overdue > 90 Days
CG ↓
↓ But if NPA
Overdue > 90 Days guarantee
↓ REVOKED by
Not treated as NPA CG
↓
NPA
(immediately )
 Non-performing Assets (NPA)
f) NPA classification is borrower wise & not facility wise

BUSINESS LOAN NPA

CC/OD Then all other loans
LOAN FOR TRANPORT VEHICLE will also be NPA

COMMENT
AB took loan 🡪 HDFC Bank - Car Loan 🡪 NPA
- Home loan
- Education Loan 🡪 other loans also NPA

🡪 ICICI Bank - Personal Loan 🡪 loans from other banks

- Credit Card not NPA
 Non-performing Assets (NPA)
g) Advances under consortium
Loan - SBI 🡪 Lead Bank
- HDFC
- ICICI
- Axis 🡪 Member banks
- PNB

Borrower repaid the loan 🡪 Lead Bank

Lead bank 🡪 Failed to Distribute 🡪 member bank
overdue > 90 days 🡪 NPA
NPA treatment is based on record
of recovery in bank books
 Non-performing Assets (NPA)
h) Regularization near B/s Date

Home loan 🡪 due on 30th April (overdue > 90 days ) 🡪 NPA

Kunal
Even though the loan a/c
Mandhania
is regularized it is deemed
as NPA
VIP Called Grant Utilized this amount
customer of manager OD / CC to pay home loan
bank
 2. Non-performing Assets (NPA)
i) On take out finance
Take out
During the transfer of
AB
loan to HDFC it
ROI = 12% Scheme ‘Restructure your
became overdue for >
loan with us’
90 days
ROI = 10.5%
🡪 NPA
HDFC will classify it as NPA

k) Advances against KVP/IVP/NSC/LIP/FD/etc –

Surrender value will be considered
 Non-performing Assets (NPA)

j) Erosion in value of security

Falls Below 50% Falls Below 10%

↓ ↓
Treatment 🡪 doubtful Treatment 🡪 loss Asset
asset (written off or fully provided by
bank)
 CC/OD granted based on stock
CC/OD granted based on stock
↓
thus latest stock statement is required
↓
But it is impossible to provide stock statement as on date
↓
Hence stock statement for period of 3 months is acceptable
but not older than that
↓
If such statement older than
3 months 🡪 the account becomes irregular 🡪 if irregular >
90 days 🡪 NPA
Note Where CC/OD limit is 5cr or more bank should
conduct stock audit instead of stock statement
 Income Recognition Rules
i. Standard Assets : accrual basis
ii. NPA - Cash Basis
 8. Computation of Drawing Power
a) DP for OD facility means how much a customer should be allowed
to overdraft in his sanctioned limit
b) DP is always less than sanctioned limit
c) Is equal to Primary security – margin
d) Normally it is based on current assets of a client
i. STOCK 🡪 Stock at NRV
(-) Unpaid Stock
(-) Margin
ii. Debtors 🡪 Total Debtors
(-) Ineligible debtors
(-) Margin
 6. Audit of Advances
Audit is concerned with obtaining evidence about the following:
(Shortcut – A to S )
A – Adequate Margin kept – to secure – future risk
B – Borrowing / Drawing power – properly calculated
C – Calculations – Correct
D – Disclosure requirements in B/s – Complied
E – Physical Enquiry – Timely basis
F– Figures – Accurate
 6. Audit of Advances
G – Guarantee / security – Properly documented
H–X
I – Interest on N.P.A taken only when received
J– X
K–X
L– Laws (Acts) – Complied

M– Mortgage deeds & other docs properly maintained

 6. Audit of Advances

N – N.P.A properly classified

O – Overall systems is adequate
P – Provisions properly made
Q–X
R – Recording of Advances - Correct
S – Sanctioning Rules - Followed
 6. Audit of Advances
Note:
•In carrying substantive procedures, auditor should examine all
large advances while other advances may be examined on
sampling basis
•As a general rule, an advance may be considered to be a large
advance if,
Year end Balance > 2 Cr
or
5% of aggregate year end advance of branch, w.e.l
•Advances which are adversely commented by RBI inspection team,
concurrent auditors, etc. should be included in auditors review
 7. Evaluation of Internal Controls over Advances
Internal Controls should include:( ADvance Given to CREDITOR)
A – adequate margin kept against securities, check its availability at regular intervals
D – Documents to be executed by parties before giving loans
G – goods in possession of bank, the content of it must be checked at time of receipt
C – credit worthiness of borrower to be satisfied before sanctioning any advance by proper
authority
R – registration of securities in name of bank or equivalent document sufficient to give title
to bank if security on basis of security
E – end use of funds & compliance of T&C be ensured
D – drawing power register should be updated every month
I – irregular a/c to be brought to notice of controlling authority regularly
O – ownership of securities in nature of shares / debentures must be transferred to bank &
shall be documented
R – review operation of each advance atleast once in a year & more frequent intervals in
large advances
 Part 3 – Reporting Requirements & other points
Bank Auditors Report
Format of Audit Report Additional Matters to be reported to CG in
Format – Comply SA 700, 701, 705, 706, 710 Case of Nationalized Banks & SBI
True & Fair View – state whether B/s, P&L, Cash Flow Sec. 30(3) of Banking Regulation Act, requires to state
St. show true & Fair View or not the following:
Unaudited Branches – Provide information about a. Information & explanation – satisfactory or not
unaudited branches along with qualification of advances, b. Transaction – within power of banking company
deposits, interest, income & expense with unaudited
c. Return from branch office – adequate
Branches
LFAR – Long Form Audit Report is a banking industry d. P&L shows true P&L balance for period
specific questionnaire – submitted before 30th June e. Any other matter – considered by auditor
every year – matter of LFAR specified by RBI & Note:
submitted to RBI only 1. In banking company, AR should also cover matters u/s
Reporting to RBI – RBI issued circular on 143 of Companies Act, 2013. Also mention that
implementation of recommendations of Committee on CARO is NA u/s 143(11)
legal aspect of bank frauds – applicable to all scheduled 2. In addition to reports, auditors have to furnish
commercial banks (excluding RRB’s) ‘Certificates’ as required by RBI & other regulations
SA-250 – Report under SA 250
3. LFAR to be submitted by Public / Private Sector Bank
Sec. 143(12) & SA 240 – Comply with its requirements
as required & Foreign Banks & their Branches
 Audit of Revenue Items
Audit of Income Audit of Expense Disclosure of
Items INTEREST EXPENSE
1. Items included – interest on
OPERATING
EXPENSE
PROVISIONS &
CONTINGENCIES Prior Period
1. Items of Income: all sources of
interest & commission earnings & deposited / RBI borrowing, 1. Items included – rent, 1. Items included – Items
other income like locker rent, etc. etc. tax, light, stationary, provision for NPA, Tax,
2. Audit Approach/ Procedure 2. Audit Approach/ printing, advertise, Contingencies, etc Form B of Schedule
a. Income recorded in proper Procedure legal charges, 2. Audit Approach/ III of Banking
amount & proper period a. Obtain reasonableness of allowances, repairs, etc Procedure Regulation Act, does
b. If any income > 1% of Total amount of interest expense 2. Audit Approach/ a. Check compliance as not specifically
Income / > 1% of PBT; should b. Obtain from bank analysis Procedure to requirement of
of types of deposits o/s at a. Evaluate ICS of provisioning provide for
be recorded on accrual as per
AS-9 (RBI) quarter end expenses b. Obtain understanding disclosure of impact
c. Immaterial income may be c. Compare figure with b. Authorisation of as to how bank of prior period items
recorded on cash basis previous years figure expenses provides for standard on CY’s P&L, such
d. Income on NPA – cash basis d. Test check; calculation of c. Examine any & NPA loans disclosure, wherever
e. Income from TD/ NSC/ KVP on interest divergent trends w.r.t. c. Verify loan
i. interest provided upto b/s major items of classification on warranted, may be
accrual basis if sufficient
margin kept date expenses sample basis disclosed
f. Test check fees & commission ii. ROI as per regulation d. Perform overall d. Obtain detailed
earned on collection, LOC, iii. In FD compare ROI analytical review on breakup of standard &
guarantee recorded with that monthly basis NPA loans
g. Fees/ commission earned after mentioned in FD receipt e. Verify expense with e. Perform
rescheduling of O/s debts iv. Check interest on documents recomputation if
recognized on accrual basis saving a/c f. Check calculations required
h. If bill purchased o/s at year end, v. interest on inter- branch where required f. Obtain tax provision
discount received on it to be balance as per HO g. Check reasonableness computation from
apportioned between 2 years vi. Interest on matured TD of expense banks management
i. If bill collected, examine to be estimated h. Compare with PY g. Obtain WR from
procedure for crediting party on e. Obtain ROI card & expense management regarding
whose behalf bill collected examine completeness adequacy of prov.
Assertions by Mgt (A) (May 2008)
• M - Measurement • Transaction is property recorded in proper period
and proper Time.
• P - Presentation & disclosure • All items are property classified and
disclosed.
• C - Completeness • All transactions have been completely recorded in all
material Respects
• O - Occurrence • Transactions actually took place during the year.
• V - Valuation • All assets and liabilities have been property valued.
• E - Evidence • Assets and liabilities exists at given date.
• R - Right and Obligation • Asset is our right we will preserve it, liability is
our obligation we will pay it.
 Financial Statements divided into 2 parts

Balance Sheet Items Profit & loss Items

Assets & Liabilities Income & Expense
↓ ↓
We need to address following assertions We need to address following assertions by
↓ management
MP COVER ↓
MP COVER
 Assertions
What we will do??
Addressed
1. Presentation & Disclosure Check such item is properly presented and disclosed
as per Schedule III (you can also mention more
specifically)
2. Completeness Check record / register / books made for it
3. Valuation Check whether it is properly valued (mention
valuation)
4. Existence By physical verification check whether it exist on
Balance Sheet Date
5. Right & Obligation Check documents than mention right of ownership
or obligation such as . . . .
 Share Capital
1. Existence - Tally opening balance through previous years balance sheet
- For transactions during year:
o Check whether PUC within limits of Authorised capital
o Check copy of resolution / minutes to confirm
o Obtain copy of SH-7, PAS-3 with MCA

2. Records / - Check Share Capital Register

Register - Check Bank Book / Cash Book

3. Valuation Check whether properly valued with share capital only entered as Face Value & amount of
premium / Discount properly adjusted in respective accounts

4. Rights /
Tally shares issued / allotted with register of members
Obligations
 Share Capital
5. Presentation & - Check whether properly presented & disclosed as per Schedule III (Part 1)
Disclosure - Properly classified in
(can also mention a) Balance at beginning of period
b) Changes during the year
where it is recorded c) Balance at end of period
in Balance Sheet) - Disclose shareholders holding atleast 5% shares

6. Other
Important
i. Law: Check all provisions of Companies Act has been complied
Points
ii. Cut-off Procedure: check whether cut-off procedure is followed & transaction of
(Law / Cut-off
one period is not recorded in other year & vice versa
Procedure / AS /
other points)
 Reserves & Surplus
1. Existence - Tally opening balance through previous years balance sheet
- Current year transactions:
o Trace movement of profit / loss as per P&L
o Check resolutions for any adjustments & minutes of meeting.

2. Records /
Check from any registers maintained for it for completeness
Register
3. Valuation Check whether it is properly valued

4. Rights /
Obligations
 Reserves & Surplus
5. Presentation & - As per Schedule III (Part 1)
Disclosure - Proper sub-classification made into different types of reserves
(can also mention - Check disclosures
i. Balance in beginning of period
where it is recorded ii. Changes during the year
in Balance Sheet) iii. Total P&L
iv. Dividend
v. Transfer to retained earnings
vi. Balance in end of period

6. Other Important
Points i. Law: Check whether respective laws specifically for reserve in Companies Act
(Law / Cut-off has been complied.
Procedure / AS / other ii. Cut-off Procedure: check whether cut-off procedure is followed & transaction
points) of one period is not recorded in other year & vice versa
iii. AS: Check whether AS 4 complied
 Borrowings (Loans/ Trade Payables/ other Current
Liability)
1. Existence - Tally opening balance through previous years balance sheet
- For current year Borrowing check :
o Resolution / minutes copy
o Obtain External confirmation
o Check NOC for released debt
- Tally closing balance properly calculated

2. Records /
Loan Register / Lender’s register / Borrowings register
Register
3. Valuation - Ensure no unrecorded borrowings
- Recorded in correct accounts
- Recording method – consistently applied
- Check due dates for proper classification into short term / long term

4. Rights / - Check lending agreement / hire purchase agreement

Obligations - Check details of loan
 Borrowings (Loans/ Trade Payables/ other Current
Liability)
5. Presentation & - Check whether properly classified as per Schedule III as
Disclosure (a) Bond / Debenture (b) term loan (bank / RP) (c) Deferred payment liability
(can also mention (d) deposits (e) from RP (f) other loans & advances
where it is recorded - Installments due in next 12 months properly disclosed
in Balance Sheet) - Contingent liability properly disclosed
- Check long term liability properly disclosed as
(a) Secured / Unsecured (b) nature if security (c) guarantee by Director
(d) terms of repayment
- Disclose:- (a) period (b) amount in case of default

6. Other i. Law: a) ensure sec. 73 to 76 of deposits complied

Important b) ensure Sec. 179 / 180 / 185 / 186 complied
Points ii. AS-11: Complied if foreign currency loan (closing currency rate used)
(Law / Cut-off iii. Cut-off Procedure
Procedure / AS / iv. Report if loans & advances shown as deposits U/s 143(1)
other points) v. Report in CARO
 Trade Receivables / Debtors
1. Existence - Obtain external confirmation
- Obtain period end aging report
- Check proper appropriation of money

2. Records /
Check debtor register / cash book / bank book / sales register
Register
3. Valuation - Check properly valued
- All money received properly adjusted
- Sales return considered
- Discount / incentives properly adjusted
- Bad debts properly accounted & authorised

4. Rights /
Sales invoice / copy of agreement / transport shipping documents
Obligations
 Trade Receivables / Debtors
5. Presentation &
Disclosure - Ensure split: more than 6 months, less than 6 months from due date and not
(can also mention invoice
where it is recorded - Properly disclosed as secured / unsecured / doubtful
in Balance Sheet)

6. Other Important i. Law: ensure section 189 complied, if RTP.

Points ii. Cut-off Procedure: ensure goods dispatched & not lying with company as on
(Law / Cut-off Balance Sheet Date if accounted this year & vice versa
Procedure / AS / iii. AS: AS-11 complied if foreign currency trade
other points) iv. ARP : Check bad debts – sales ratio to ensure reasonableness
 Cash & Cash Equivalent
(Cash in hand, Balance in current A/c, CC A/c, FD, Cheques in
hand)
1. Existence - Surprise check in presence of cashier
- Check posting from rough cash book to fair cash book
- Check BRS
- External confirmation from bank for balance

2. Records /
Cash book / bank book / FA register
Register
3. Valuation Check properly recorded

4. Rights / Check cash payment slip / cash repayment slip / daily cash book / bank statement / bank
Obligations slips
 Cash & Cash Equivalent
(Cash in hand, Balance in current A/c, CC A/c, FD, Cheques in
hand)
5. Presentation & - As per Schedule III (part I)
Disclosure - It should be properly classified into
(can also mention a) Balance with bank
b) Cheque in hand
where it is recorded
c) Cash in hand
in Balance Sheet) d) Others
- Earmarked balance with bank (eg. Unpaid dividend) separately stated
- Bank deposits with more than 12 months maturity separately stated

6. Other i. AS-11: foreign currency restated at closing currency rate

Important ii. Cut-off Procedure followed
Points iii. ARP: perform cash sensitive analysis for summary of receipt / payment each
(Law / Cut-off month and analyse trends and ask management on variations
Procedure / AS / iv. Report if cash received from directors against shares, if actually not received u/s
other points) 143(1)
 Inventory
1. Existence - Conduct physical verification to confirm physical inventory matches with records
- Check variation of physical & actual sheet and ask stockiest to sign
- Ensure inventory lying with 3rd party and confirm it using SA 501
- Check inventory ageing report

2. Records /
Stock / cash / bank register
Register
3. Valuation Check
- 3rd party stock / damaged / absolute stock 🡪excluded
- Stock held by 3rd party (stockiest) 🡪 included
- Valuation as per FIFO / Weighted average
- Cost of carriage inward, etc 🡪 included
- Ensure WIP / FG properly calculated

4. Rights / - Sale purchase bill

Obligations - Shipping documents, PO, GRN, declaration letter for stock help by 3rd party (stockiest)
 Inventory
5. Presentation & - Schedule III (part I)
Disclosure - Properly classified into
(can also mention (a) RM (b) WIP (c) FG (d) Stock in Trade (e) stores & spares (f)
where it is recorded loose tools, others
in Balance Sheet) - Goods in transit – separately disclosed

6. Other Important i. Cut-off Procedure: followed

Points ii. AS: AS-2 inventory valued at lower of cost or NRV
(Law / Cut-off iii. ARP : COGS to inventory ratio, vertical analysis for reasonableness
Procedure / AS / iv. CARO reporting
other points) v. Follow SA 501
 Note
1. Tangible asset
2. Intangible asset
3. Trade payables
4. Contingent liability
5. Current assets
6. Shares at premium
7. Sweat equity shares
↓
Study with same pattern
 Income / Expense
1. Measurement - Check whether transaction date pertains to current year or not

2. Presented &
Check such transaction is properly presented & disclosed in P&L as per Sch. III (Part 2)
Disclosed
3. Completeness Check whether transaction is properly recorded by:
- Debiting 🡪
- Crediting 🡪

4. Occurrence - Check whether transaction has actually occurred during the year by checking
supportive documents such as ______________

5. Additional
i. Law:
Consideration ii. Cut off procedures
(Other important iii. ARP
points)
 Sales
1. Check ICS Regarding execution of transaction & recording of sale

2. Ensure Date Pertains to current year or not

3. Authorisation Check whether transaction is properly authorised by Sales Manager

4. Recording • Check whether transaction is properly recorded

• Check whether sales return is properly adjusted
• Check all discounts & incentives have been properly deducted
• Ensure no fictitious sale is recorded
5. Supportive Ensure occurrence & correctness of transaction from supportive documents such as sales invoice,
Documents credit note, shipping documents, GST returns.

6. Books / Confirm transaction is complete & properly posted by tracing it in Sales Register, Stock Register,
Registers Cash Book, Bank Book, Debtor Register, Security Gate Outward Register.

7. Presentation & Check whether revenue from operation is properly disclosed as

Disclosure i. Sale of products ii. Sales of service iii. Other operating revenue
i. Cut off procedure
8. Other ii. AS – Ensure AS 18 is complied if sales made to related party
Important Points iii. ARP – compare sales return : Sales ratio of previous year to ensure genuineness &
reasonableness of transaction
 Purchase
1. Check ICS Ordering, procurement & recording of purchase

2. Ensure Date Pertains to current year or not

3. Authorisation Check whether transaction is properly authorised by Purchase Manager

4. Recording • Check whether transaction is properly entered

• Proper bifurcation of revenue & capital purchase
• Ensure no fictitious purchase is recorded
5. Supportive Ensure occurrence & correctness of transaction from supportive documents such as GRN,
Documents Purchase invoice (Original) (in name of entity), GST invoice

6. Books / Confirm transaction is complete & properly posted by tracing it in Purchase Register, Stock
Registers Register, Cash Book, Bank Book, Creditor Register, Security Gate Inward Register.

7. Presentation & Sch III

Disclosure Stock in trade properly disclosed

8. Other i. AS – Ensure AS 18 is complied if related party transaction

Important Points ii. Cut off procedure
iii. ARP – Creditor turnover ratio, stock turnover ratio
 Interest / Dividend Income
1. Check ICS Recognizing, receiving & accounting

2. Ensure Date Pertains to current year or not

3. Authorisation Check whether transaction is properly authorised by Recovery Manager, Accounts Manager, CFO

4. Recording • Check whether transaction is properly recorded

• Check whether interest on FD – recognized on time proportion basis
• Dividend – recorded only when right to receive established
5. Supportive Ensure occurrence & correctness of transaction from supportive documents such as TDS
Documents certificate (26 AS), Investment Certificate, bank statement

6. Books / Registers Confirm transaction is complete & properly posted by tracing it in Investment register, bank book.

7. Presentation & Schedule III (Part 1)

Check whether ‘other income’ is classified as – Interest income, dividend income, other
Disclosure non-operating income

8. Other i. Cut off procedure

ii. AS – Ensure AS 19 (revenue recognition) is complied
Important Points iii. ARP – interest /dividend : Investment Ratio
iv. SA 505 🡪 External Confirmation from banks & investment company officials
 Employee Benefit Expense (salary, bonus, gratuity,
1. Check ICS
etc.)
Ascertainment, calculation, payment & accounting

2. Ensure Date Pertains to current year or not

3. Authorisation Check whether transaction is properly authorised by HR Manager

4. Recording • Check whether transaction is properly entered

• Check whether the expense recorded actually occurred during the year
• Check calculations
5. Supportive
TDS certificate, Salary slips, attendance record, HR policy manual, calculation sheet,etc.
Documents
6. Books / Confirm transaction is complete & properly posted by tracing it in payroll register, cash book,
Registers bank book.

8. Other i. AS – Ensure AS 15 is complied

Important Points ii. Law – provisions of Bonus Act, Gratuity Act, EPF Act, Minimum Wages Act, ESIC Act, etc
Complied
iii. ARP – compare expense incurred during year with previous years
 SA-500 Audit Evidence
Meanings Why AE is Sources of AE Types of AE
❑ Any information required • By performing
Obtained by • Auditing is logical audit procedures On the basis On the basis On the basis
process of NATURE of SOURCE of IMPACT
Auditor
• Auditor assesses + • Through analysis
To express his opinion on & review 1. WRITTEN 1.INTERNAL 1. PERSUASIVE
review FS & give
FS Documentary which originates 2. CONCLUSIVE
expert opinion on • Reperformance of
❑ AE includes evidences within the entity
them
i. Financial
procedures 2. ORAL being audited
• Objective
information information & eg. Sales,
examination & • Corroborating /
* initial accounting explanation Invoice, Challan,
scrutiny of supporting
entries obtained by GRN, etc.
accounting information from
* supporting statement of client / 2.EXTERNAL
an independent
records undertaking with employees evidence that
EFT, invoices, source originates
view of assessing 3. VISUAL
contracts, ledgers. how far the outside the
observing
ii. Other information statement present clients entity
somebody else
* minutes actual state of affairs eg. Purchase
performing
* written • Hence, he needs Invoice,
procedures
confirmations evidence to arrive at Quotations, etc.
(physical
* manuals of ICS his judgement verification )
 SA-500 Audit Evidence
Relevance & reliability Sufficiency & appropriateness

RELEVANCE RELIABILITY Sufficiency of AE Factors determining SAAE

Deals with 1. Written AE more Measure of quantity MNEMONIC – PRITAM
reliable
❑ Logical connection Bearing Documentary Oral AE Quantity is affected by auditors P – Previous experience of
than
upon the purpose of audit form is assessment
auditor
more - higher the risk, more AE
procedures 2. External AE Internal AE
reliable - Higher the quality, less AE R – Risk of Mis-statement
❑ And assertions under than
Depends upon I – if any fraud detected by
consideration
3. If ICS is more Materiality, ROMM ,Size Of auditor
satisfactory reliable Population (less for homogenous
than External AE
T – trends shown by accounting
Internal AE and more for heterogenous )
NOTE: ratio
more Appropriateness of AE
If original documents are 4. Original AE Duplicate / A – available information
reliable
seized by the certified than
Xerox
Measure of Quality M – Materiality of items
authorities such as income tax Copies
i.e. its relevance &
department & they have
5. Evidence more Obtained reliability
provided the copy of it on
obtained reliable indirectly
demand, then such copy shall Reliability is influenced by
directly by than
be relatable source & nature
auditor
 SA-500 Audit Evidence
Steps to obtain Audit Evidence

Audit Procedure Methods

To perform procedure, we need methods 🡪 applied with help of techniques
1. INSPECTION
Involves examining records, documents, books, assets.
2. OBSERVATION
looking at a process or procedure being performed by others
3. COMPUTAION
checking arithmetical accuracy of records & performing
independent calculation
4. ANALYTICAL PROCEDURE
study of significant ratio & trends & investigate unusual
fluctuation
(covered in SA 520)
5. INQUIRY
seeking information from knowledgeable person
6. External CONFIRMATION
Audit evidence from 3rd Party
7. REPERFORMANCE
auditors independent execution of procedures or controls
that were originally performed as part of entity’s internal
SA-250 Consideration of Laws & Regulation
Scope Objective Non-compliance

Deals with a) Obtain SAAE for

• Act of omission or
auditors compliance of laws commission by
responsibility to directly affecting FS entity
b) Perform specified intentionally
consider laws &
audit procedures to /unintentionally
regulation while identify any • Which are
performing audit non-compliance contrary to
of FS. c) Appropriate prevailing laws
response to and
non-compliance regulations
SA-250 Consideration of Laws & Regulation
Responsibilities
Management Auditors
•Primary responsibility for 1. Take general understanding of
prevention & detection of a) legal & regulatory framework (Banking,
non-compliance medicine, Coaching)
b) how do they comply with such framework
•Responsible for: 2. Professional skepticism
a) Monitoring changes in law 3. Check non-compliance
b) Making changes accordingly 4. If non-compliance found, assess its impact on FS
i. Forms a) Direct impact (e.g impacts F.S) – Detail chech req
ii. Developing code of conduct b) Indirect impact
5. Obtain SAAE regarding compliance of law having
iii. Ensure employees are trained direct impact
c) Engaging legal advisor for 6. Specified audit procedure
assistance a) Inquire mgt/TCWG
d) Maintaining register of significant b) inspecting correspondence with regulatory auth.
laws which entity has to comply 7. Obtain WR that all laws complied
 Indicators of non compliance of laws

Shortcut : UMBRELLA
U – unusual payment towards legal fees
M – matters related to transactions in tax heaven
B – being payments made for penalties/ fines
R – many related parties transactions
E – enquiry with mgt & TCWG
L – licensing authority investigation
L – many litigation & claims
A – adverse media comments
SA-250 Consideration of Laws & Regulation
Reporting of suspected or identified non-compliance
Non-compliance Found Unable to obtain A.E or Doubt
limitations imposed by Mgt
(1) If it impacts F.S Ask mgt to disclose
Q/DOO
Q/N
Material &
+ Intentional Disclosed Not
(2) Report Report
Clean disclosed
to TCWG Immediately Qualified
report +
EOM para report
If TCWG Report to higher authority
+ involved (Shareholders )
No auth.-obtain legal advise

(3) Report to enforcement

Authority if asked by law.
(Normally no rules for this exist)
SA-250 other important points
1. All non compliance (material + immaterial)
shall be informed to mgt.
2. All non compliance (material) shall be
communicated to both mgt and TCWG
 Salient Feature of LLP Audit
Basics of LLP Some Statutory Compliance Maintain BOA Public Inspection
• Min 2 Annual Statement of Fees 1. Document open for
partners in Return Account & M A S C – Others inspection by any
LLP person:
Solvency
• Atleast two M – Money received & a) Annual Return
In Form 11 In Form 8 File document expended b) Statement of
designated
partners (1 ↓ ↓ after due date account &
should be File with ROC File with ROC ↓ A – Assets & Liabilities Solvency
resident in ↓ every year Additional fees c) Name of Partners
S – Sales & Purchase d) Incorporation
India) Within 60 days ↓ upto 300 days documents
• LLP has of closure of FY Within 30 days ↓ C – Cost Record 2. Fees:
obligation to a) For inspection of
↓ ↓ If > 300 days
maintain O – others prescribed by LLP
annual Open for public From end of 6 ↓
partners = Rs. 50
account inspection on months of FY Pay normal b) For certificate
• LLP is under payment of (biannually) fees copy or extract
no obligation fees (+) u/s 36
for Additional fees = Rs. 5/page
compulsory
(+)
insurance, it
increases Liable for
cost of prosecution
operation
 LLP Audit
Powers of Audit of LLP Appointment of Advantage / Purpose Auditors Duty regarding
Registrar a) As per Rule 24 Auditors / Need of Audit Audit of LLP
1. Obtain (LLP Rules 1. Appointed by 🡪 1. Helps in detecting 1. Get instruction in writing 🡪
information 2009) Designated Partners errors, frauds & work to be performed
from: b) LLP Audit ↓ verification of FS 2. Mention whether:
a) Designated Compulsory if: a) any time but 2. Improves a) any restriction imposed
partner i) T/o > 40 management of LLP b) able to obtain information &
before end of 1st FY
b) Partner Lakhs in any 3. Settling accounts explanation
b) atleast 30 Days
c) Employee FY between partners at c) firms record reliable
prior to end of each
2. Summon: OR time of death, 3. Read LLPA and note:
FY (other than 1st admission, retirement a) Nature of business
a) Designated ii) Contribution
FY) 4. Reasonableness of b) Duration of partnership
partner > 25 Lakhs
b) Partner c) However, can 2. If designated salary & bonus c) Drawing / rights / duties of
c) Employee be audited at partners fails 🡪 by calculation partners
↓ discretion of Partners 5. Banks & FI lend money d) Loans to partners
If not satisfied partners 3. Casual vacancy on basis of audited e) Capital by partners
with information filled by designated accounts f) Interest / salary / commission
furnished to him partners 6. Disputes if any to partner
between any partners g) Methods of settlement of
4. Tenure: as decided
account between partners
4. Read minutes books, if any.