AUDITING PRACTICES

CS Executive Programme

(New Syllabus)
Paper 5 – Company Accounts &
Auditing Practices
 Auditing Practices

Features of this book

1) This material has prepared mainly to score 25 + out of 30 marks
2) It has covered all scannered questions and Practice Manual of ICSI
3) It has given weightages of each chapter in the below table , to
know the importance of that chapter in the examination point of
view
4) Each and every question has been prepared
 In tabular form
 With side heading
 In simplified form
 Breakup of sentences meaningfully
 Quoted all applicable sections & standard numbers at the top
of each question
5) Company Audit is expected to come for nearly 15 marks in
examination, so it has covered more topics
6) All the list of questions are given at the beginning of each chapter ,
to understand the overview of that chapter
7) For each and every question quoted in which exam it has
appeared, to know the importance of that question
8) Questions in each chapter has covered concept wise

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 Auditing Practices

AVG.MARKS FOR
S.NO NAME OF THE CHAPTER
LAST 10 ATTEMTS
1 AUDITING CONCEPTS 7.5

2 TYPES OF COMPANY AUDIT 10.5

3 INTERNAL AUDIT 2.0

4 INTERNAL CONTROL 6.0

5 REVIEW OF INTERNAL CONTROL 3.0

AUDIT ENGAGEMENT AND
6 6.5
DOCUMETATION

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 Auditing Practices

S.NO NAME OF THE QUESTION

1 Auditing Definition
2 Features of Auditing
3 Objectives of an audit
4 Independence of an Auditor
What are the basic principles which govern the Auditor’s professional
5
responsibilities while doing Audit
6 Discuss the procedure of issuing auditing standards
7 Distinguish Between Auditing & Investigation
Explain the objectives of investigation and also
8 List out business situations where investigation may be considered
necessary
9 Concept of true and fair view
Factors governing modes of communication of auditor with those
10
charged with governance
“ Auditor assesses the reliability and sufficiency of information as well as
11
relevancy of financial information “ Explain
What does SA -230 (Revised) say about utility, ownership, custody and
12
retention of working papers?
What do you mean by ‘materiality ‘in auditing? As an auditor of a
13
company, how will you comply with materiality concept in auditing?
List out five factors that influence the reliability of audit evidence as per
14
SA – 500
15 Explain the scope of SA 210 agreeing the terms of audit engagement.
It includes establishing that certain pre-conditions for an audit, responsibility for
16
which rests with management and those charged with governance, are present
17 What are the examples of the audit documentation?
Explain briefly duties and responsibilities of an auditor in case of material
18
misstatement resulting from Management Fraud
19 Write short notes on ‘preliminary engagement activities’ under SA 300.
20 Can the statutory auditor rely upon the work of an internal auditor?
21 State in brief about SA- 620, using the work of an auditor’s expert.
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 Auditing Practices

Auditing Definition
 Audit is an independent examination of financial information of any entity ,
Lawrence  Whether profit oriented or not , and irrespective of its size and legal form ,
R. Dicksee  When such an examination is conducted with a view to express an opinion
thereon

Features of Auditing
Systematic &  Audit is a systematic and scientific examination of the books of accounts of a
Scientific
business.
Independent  Audit is undertaken by an independent person or body of persons who are
person
duly qualified for the job
 Audit is a verification of the results shown by

Verification  The profit & loss account &

 State of affairs as shown by balance sheet
Critical
 Audit is a critical review of the system of accounting and internal control
review
 Audit is done with the help of
 Vouchers
Done with the
help of  Documents
 Information and explanations received from the authorities

Objectives of an audit ( SA - 200 )

 As per SA – 200 , the primary objective of an audit is to enable an auditor to
express an opinion on financial statements
Primary Prepared in accordance with the applicable financials reporting framework
(FRF)
Main  The main objective of auditing is to report whether the financial statements are
objective showing true and fair view or not.
This is done by comparing the B/S and P & L with books of accounts
 Other objectives are
 Detection & Prevention of frauds and
Others
 Detection & Prevention of errors.

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 Auditing Practices

Independence of an Auditor ( SA : 200 )

Or
“Audit is advantageous even to those enterprise and org. where it is not compulsory “.
Discuss.
( May-2012 , Dec-2016 )
 The term independence means that the judgment of a person is not
subordinate to the wishes and directions of some other persons , who have
Meaning engaged him And
 Similarly he should not give importance to his personal interests.
 Produces reliable financial statements
 Protects the interest of persons who are not participating in the management
of the entity
 Acts as a moral check on the employees from committing frauds
 Audited financial statements are helpful in
 Settling tax liabilities
 Bargaining loans from banks
 For determining the purchase consideration of business
Advantages  Useful to settle trade disputes for higher wages or bonus
 Useful to settle the disputes among the partners
 Helps the client to decide whether necessary books and records have been
properly kept
 Helps the client to decide whether necessary books and records have been
properly kept
 Government may require audited financial statements before it gives
subsides

What are the basic principles which govern the Auditor’s professional responsibilities while
doing Audit
( Nov -2008 , Nov –2009 , May-2011 , May-2012 )
 The auditor should be straight forward, honest and sincere in his
Integrity,
approach to his professional work
Objectivity,
 He must be fair and must not allow prejudice or bias to override his
Independence
objectivity
 The auditor should maintain utmost secrecy
Confidentiality  He should not leak the information collected by him during the course of
his professional work to any person without the consent of client
 The audit should be performed and the report prepared with due
Skills professional care by persons who have adequate training
&
 This can be acquired through a combination of
competence
 General education
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 Auditing Practices

 Technical knowledge
 Formal course
 When the auditor delegates work to assistants or
Uses the work performed by other auditors or experts
Work he will continue to be responsible for forming and expressing his opinion
performed by on the financial information
others  At the same time he is entitled to rely on work performed by others
 The auditor should carefully direct , supervise & review work delegated
by assistants
 The auditor should document matters ,
Documentation Which are important in providing evidence that the audit was carried
out in accordance with the basic principles
 The auditor should plan his work to enable him to conduct an effective
Planning
audit in efficient and timely manner
 The auditor should obtain sufficient & appropriate audit evidence
Audit evidence
through the performance of compliance and substantive test procedures
 The auditor should study and evaluate the
Accounting
 The system of accounting &
system &
 Operation of t hose internal controls
Internal
On which he wishes to rely in determining the nature , timing and extent of
control
other audit procedures
 The auditor should review and assess the conclusions drawn from the
audit evidence obtained
Audit
 The audit report should contain a written expression of opinion of the
conclusions &
financial information
reporting
In case of a qualified opinion or adverse opinion or disclaimer of opinion
is given are reservation on any matter is to be made reasons thereof

Discuss the procedure of issuing auditing standards

( Dec-2014 , June- 2016 )
AASB  The Auditing and Assurance Standards Board identifies the areas
Identify  Where auditing standards need to be formulated &
areas  The priority in regard to their selection
Assisted by  In the preparation of the auditing standards ,
study The Board is normally , assisted by study groups comprising of a cross
groups section of members of the Institute
Draft  On the basis of the work of the study groups , The Draft auditing standards
auditing is prepared by the Board &
standards Issued to the members , for their comments
Draft is  After taking into the comments received,
finalized The final auditing standards is finalized by the Board &
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 Auditing Practices

Submitted to the council of the Institute

Modification  The Council considers the final draft auditing standards & if necessary ,
if any Modifies the same in consultation with the Board.
Issue of  The auditing standard is , then issued under the authority of the Council
standards

Distinguish Between Auditing & Investigation

( Nov- 2012 , Dec- 2013 , June- 2015 , June- 2017 )
Auditing Investigation
 It is the independent Investigation relates to
examination of financial  Systematic
information of any entity  Critical &
Meaning
 When such an examination  Special examination of the
is conducted with a view records of the business
to express an opinion For specific purpose
 Appointment of auditor is Management - In case of non – statutory
done by shareholders Investigation
Appointment
Central Government - In case of statutory
Investigation
 The object is to give an  The object is to find out in detail the
opinion facts in respect of a particular area
Object  Whether financial
statements are showing
true and fair view
 Determined by the act  Determined by the appointing
Scope
authority
 Fixed by the shareholders  Fixed by respective appointing
Remuneration
authority
Qualification  Should be a qualified C.A  No specific qualification is required
 It covers a period of 12  No time frame covered by the
Period
months investigation studies
 Shall be submitted to the  Report shall be submitted to the
Report
shareholders respective appointing authority
 Audit includes  Whereas investigation does not
investigation include audit
Inter -relation
 Because while auditing all  Because it is restricted to a specific
the area are covered area

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 Auditing Practices

 Explain the objectives of investigation and also

 List out business situations where investigation may be considered necessary
( June- 2016 )
 Investigation is an exercise which is carried out with a specific objective
 The investigation means In – depth analysis of
 Books of accounts
Meaning
 Transaction and event
 Investigation exercise is voluntary in nature and used extensively by internal
and management auditors
 The real objective of conducting an investigation by an auditor on behalf of his
client is
To provide him the desire information in the form of a report about the matter
Objective specified
 Normally the objective of investigation is to collect , analyze and evaluate facts
in respect of desire field of activity with a view on some special purpose as
determined by the person on whose behalf the investigation is undertaken
a) Proposed purchase of business
b) Proposed sale of business
c) Reasons for low profitability
d) Cause of high employee turnover
e) Reliability of business data
f) Proposed investment in particular securities
Business g) Suspected fraud
Situations h) Joining in existing partnership business
i) Borrowing funds
j) Lending funds
k) Proposed purchase of controlling shares in a company
l) Suspected misfeasance against directors
m) Detection of undisclosed income for tax purposes
n) Suspected misappropriation by trustees

Concept of true and fair view

( June- 2014 , June- 2015 , June- 2017 )
 The purpose of audit is to enable the auditor to express an opinion on
financial statements as regards their ‘ True and Fair view ‘
 The word ‘ True & Fair view ‘ has been negatively defined in the
companies Act
Meaning  As per sec 129 (3) states that the financial statements shall not be
deemed to be showing a true & fair view in case any matters which are
require to be disclosed under schedule III are not disclosed
 True & fair view refers to reasonable assurance i. e a high level assurance
but not absolute assurance

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 Auditing Practices

 Auditor has to consider the following to see , whether the financial

statements are showing true & fair view

a) That the assets are neither undervalued nor overvalued

b) No material asset is omitted
c) The charge on assets , if any are properly disclosed
d) That the liabilities are neither undervalued
e) No liabilities should not be omitted
f) Accounting policies have been followed consistently
Considerations
g) Proper distinction is made between capital and revenue items
by the auditor
h) The transactions are entered in the corresponding accounting
periods
i) There are no material frauds and errors
j) All unusual , exceptional and non – recurring items have been
disclosed separately
k) Accounts have been drawn as per requirements of schedule III to
the companies Act
l) The accounts have been prepared in accordance with generally
accepted accounting principles

Factors governing modes of communication of auditor with those charged with governance
SA – 260 (Nov- 10)
Factors governing modes of communication of auditor with those charges with governance
According to SA -260 , “ Communication with those charged with Governance “ :
The auditor may decide whether to communicate
 Orally or in writing
 The extent of detail or summarization in the communication &
 Whether to communicate in a structure or unstructured manner
May be affected by such factors as :
Factors affecting the modes of communication

 The size of operating structure , Control environment & Legal structure of

the entity
 Legal requirements , in some jurisdictions a written communication with
those charged with governance is required in prescribed form by local law
 In the case of an audit of special purpose financial statements ,
Whether the auditor also audits the entity’s general purpose financial
statements
 The amount of ongoing contact and dialogue the auditor has with those
charged with governance
 The expectations of those charged with governance , including arrangements
made for periodic meetings or communication with the auditor
 Whether there have been significant changes in the membership of a
governing body
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 Auditing Practices

“ Auditor assesses the reliability and sufficiency of information as well as relevancy of

financial information “ Explain
( Dec- 2013 )
The auditor assesses the reliability and sufficiency of the information contained in
underlying accounting records and other source data by :
Study  Making a study and evaluation of accounting systems and internal controls
& on which he wishes to rely and testing those internal controls
Evaluation to determine the Nature, Extent and Timing of other auditing procedures

 Carrying out such other tests , enquiries and other verification procedures
Other tests To accounting tractions and account balances
As he considers appropriate in particular circumstances
The auditor determines whether the relevant information is properly disclosed in financial
statements :
 Comparing the financial statements with
 the underlying records and
By
 other source data
comparing
to see whether they properly summarize the transactions and events recorded
therein
 considering the judgments that management has made in preparing the
financial statements accordingly
Considering
the auditor assesses the selection and consistent application of accounting
the Mng,
policies,
judgments
the manner in which the information has been classified and the adequacy
of disclosure

What does SA -230 (Revised) say about utility, ownership, custody and retention of working
papers?
( June – 2014 )
SA – 230 : Audit Documentation
This standard deals with the auditor’s responsibility to prepare
 Audit documentation for an audit of financial statements
Auditor’s
 Requirements of timely preparation of audit documentation
responsibility
 Documentation of the audit procedure performed and audit evidence
obtained &
 Assembly of the final audit file.
 It outlines about vesting of property of working papers with the Auditor.
 SQC – 1 read with SA – 230 spells out two essential principles viz. .
SQC – 1
 Period of maintain working papers &
 Assembly of audit files by the auditor.

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 Auditing Practices


According to SA – 230 , Audit Documentation refers to the record of :
Documentation  audit procedures performed
refers  Relevant audit evidence obtained &
 Conclusions the auditor reached.
 Preparing sufficient and appropriate audit documentation on a timely
basis helps to
 Enhance the quality of audit &
How it helps
 Facilitates effective review and evaluation of audit evidence
obtained and conclusions reached before finalizing auditor’s
report.
According to this standard ,
Period of
 The auditor shall retain working papers for at least 10 years from the
retention
date of audit report in good condition

What do you mean by ‘materiality ‘in auditing? As an auditor of a company, how will you
comply with materiality concept in auditing?
SA : 320 & 450 ( Dec – 2016 )
 Material items are those items , the omission or misstatements of which may
influence the decisions of users of the financial statements
 SA- 320 deals with audit materiality at the time of planning and performance ,
to design appropriate audit procedures
 The auditor must judge the materiality while planning on overall
basis ( financial statements level ) &
Meaning  Relate it to the individual class of transactions of balances while
performing audit
Which is called as performance materiality so as to reduce audit
risk to an acceptably low level
 SA – 450 deal with audit materiality while evaluating misstatements to provide
appropriate audit report
 What is material is a matter of professional judgment by the auditor.
 The auditor should consider the following while deciding upon the materiality
a) Materiality as contained in applicable financial reporting framework :
 When the financial reporting framework prescribes the materiality
levels, and in those cases the auditor should follow those materiality
How to levels
judge b) Where applicable financial reporting framework is silent with respect to
materiality materiality :
 the auditor should decide upon the materiality applying his
professional judgment based up on
 Size of the relative item.
 Impact of the relative item on financial statements.
 Nature of the relative item

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 Auditing Practices

 Materiality is a relative term

for example : Rs. 1000 may be a material for a small concern , but this may not
be material for a large company
 Several individual immaterial items together may become a material in total
 Even a small amount may become material , if its disclosure is required
statutorily
 Sometimes the percentage comparisons will be helpful to judge the materiality
Accepted of an item
criteria for For example , part II of schedule III of the companies Act requires that any item
judging exceeding
materiality  1 % of the total revenue of the company or
 Rs. 1,00,000
Whichever is higher ,
Shall not be shown under miscellaneous expenses
 A small mistake / fraud may be considered material if it converts a small profit
into loss or vice – versa
 Any item which is material in previous year may become immaterial item in
current year

List out five factors that influence the reliability of audit evidence as per SA – 500
(Dec – 2016 )
As per SA – 500 , The audit evidence
The following factors that influences reliability of audit evidence :
Based on  External evidence is more reliable than internal evidence
source ( for example third party confirmations )
Effectiveness  Internal evidence is more reliable when related internal control system is
of controls working satisfactorily
Direct Vs.  Evidence obtained by the auditor himself is more reliable than evidence
Indirect obtained from the entity
Based on  Documentary evidences i.e. evidences in the written form are more reliable
Nature than oral evidences
 If the evidence received from different sources is consistent , there is a high
Consistency
level of reliance
Original Vs.  Evidences in original form will be more reliable than evidences in digital
Duplicate form or duplicate form
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 Auditing Practices

Explain the scope of SA 210 agreeing the terms of audit engagement.

SA – 210 ( PM )
SA 210 deals with :
Auditor’s  The auditor’s responsibilities in agreeing the terms of the audit
Responsibility engagement with management and those charged with governance.

 It includes
Management  Establishing that certain pre-conditions for an audit,
Responsibility  Responsibility for which rests with management and those charged with
governance, are present.

It includes establishing that certain pre-conditions for an audit, responsibility for which rests with
management and those charged with governance, are present.
( PM )

The auditor shall prepare audit documentation that is sufficient to enable an

experienced auditor, having no previous connection with the audit, to
understand:

 The nature, timing, and extent of the audit procedures performed to comply
NTE with the Standards on Auditing (SA) &
applicable legal and regulatory requirements;
 The results of the audit procedures performed, and the audit evidence
Result
obtained;
Significant  Significant matters arising during the audit, the conclusions reached thereon,
matters and significant professional judgments made in reaching those conclusions.

What are the examples of the audit documentation?

( PM )
Examples of audit documentation include the following:
 Engagement letter
 Audit programmes defined, with details of work carried out and results
filled, including planning memorandum
 Analyses of various account balances through comparatives and
corroborative.
 Issues memorandum
 Summaries of significant matters
 Letters of confirmation and representation.
 Checklists
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 Auditing Practices

 Correspondence (including e-mail) concerning significant matters

 Abstracts or copies of the entity’s records (for example, significant and
specific contracts and agreements)
 Audit documentation, however, is not a substitute for the entity’s accounting
records.

Explain briefly duties and responsibilities of an auditor in case of material misstatement resulting
from Management Fraud.
SA – 240 ( PM )
 Misstatement in the financial statements can arise from fraud or
error
 The term fraud refers to an ‘Intentional Act’ done by
Meaning of  One or more individuals among management,
Fraud  Those charged with governance,
 Employees, or
 Third parties
Involving the use of deception to obtain an unjust or illegal advantage.
As per SA 240 “The Auditor’s Responsibilities Relating to Fraud in an Audit
of Financial Statements”
Primary
 The primary responsibility for the prevention and detection of fraud rests
responsibility
(Management) with both those charged with governance of the entity and management.
 The auditor is responsible for obtaining reasonable assurance that the
financial statements taken as a whole are free from material misstatement
Whether caused by fraud or error.
 Owing to the inherent limitations of an audit, there is an unavoidable risk
Auditor’s
Responsibility that some material misstatements of the financial statements may not be
detected,
even though the audit is properly planned and performed in accordance
with the SAs

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 Auditing Practices

Write short notes on ‘preliminary engagement activities’ under SA 300.

SA – 300 ( PM )
The auditor shall undertake the following activities at the beginning of the
current audit engagement
 performing procedures on Quality control for audit work (as per SA 220)
Performing
regarding the continuance of the client relationship and the specific audit
procedures
engagement

Evaluating  Evaluating compliance with ethical requirements, including independence

as per SA 220; &

 Establishing an understanding of the terms of the engagement, as required

Establishing
by SA 210;

Can the statutory auditor rely upon the work of an internal auditor?
SA – 610 ( PM )
SA 610 “Using the work of Internal auditors”
SA – 610 deals with ,
 External auditor’s responsibilities regarding the work of internal auditors
Meaning When the external auditor has determined, in accordance with SA 315 that the
internal audit function is likely to be relevant to the audit.
With respect to relationship between statutory auditor and internal auditor
SA 610 provides the following:
 The role and objectives of the internal audit function are determined by
 Management &
Role &  those charged with governance (where applicable)
responsibilities While the objectives of the internal audit function and the external
of internal
auditor are different
auditor
Some of the ways in which the internal audit function and the external
auditor achieve their respective objectives may be similar.

 Irrespective of the degree of autonomy and objectivity of the internal

When
expressing audit function
opinion Such function is not independent of the entity as is required of the
external auditor when expressing an opinion on financial statements.

 Therefore, the external auditor has sole responsibility for the audit
Sole opinion expressed
responsibility & That responsibility is not reduced by the external auditor’s use of the
Work of the Internal auditors.

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 Auditing Practices

State in brief about SA- 620, using the work of an auditor’s expert.
SA- 620 ( PM )
SA 620 “Using the work of an Auditor’s Expert”
SA 620, deals with
 The auditor’s responsibilities regarding the use of an individual or
organization’s work in a field of expertise other than
 Accounting or
Meaning  Auditing
when that work is used to assist the auditor in obtaining sufficient &
Appropriate audit evidence.
SA 620 provides the following
Shall not  The auditor shall not refer to the work of an auditor’s expert in an auditor’s
refer the
report
work of
expert Containing an unmodified opinion unless required by law or regulation to
do so.
 If such reference is required by law or regulation
If refer work the auditor shall indicate in the auditor’s report ,
of export That the reference does not reduce the auditor’s responsibility for the
audit opinion.

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 Auditing Practices

S.NO NAME OF THE QUESTION

1 Write the qualifications and disqualifications of statutory auditor

2 Services specified under Sec.144
3 Appointment of First auditors in case of Non Govt. Company
4 Appointment of First Auditor in case of Govt. Company
5 Appointment of subsequent Auditors in case of Non – Government
Companies
6 Appointment of subsequent Auditors in case of Government Companies
7 Filling of a Casual Vacancy
8 Re – appointment of Retiring Auditor
9 Rotation of Auditors
10 Audit committee
11 Manner of Selection & Appointment of Auditors
12 Auditor’s Remuneration
13 Removal of Auditor Before Expiry of Term
14 Ceiling on Number of Audits
15 Rights of Auditors
16 Explain the provision regarding the appointment of C&AG and its term of
office
17 Explain the role of CAG in the functioning of financial committees of
Parliament
18 Duty to report on Frauds
19 Joint Auditors
20 Distinction between Qualified opinion and Adverse opinion
21 Distinguish between statutory Audit and Internal Audit
22 Internal Auditor
23 Secretarial Audit
24 Cost Audit
25 Explain the penal provisions applicable to auditors
26 Enumerate the various types of audit prescribed under Companies Act,
2013?
27 The first auditor did not give notice to the ROC for accepting the audit
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 Auditing Practices

Write the qualifications and disqualifications of statutory auditor

Sec. 141 (1) , (2) & (3) (June- 2017, Dec – 2013 , Dec – 2014 )
Qualifications
As per Section 141 (1) & (2) of Companies Act , 2013 :
 Only a Chartered Accountant ( Individual ) or
Sec.141(1) A firm , where majority of partners practicing in India are Chartered
Accountant can be appointed as auditor

 Where a firm including a Limited Liability Partnership (LLP),

Sec.141(2) Is appointed as an auditor of a company,
Only the partners who are Chartered Accountants shall be authorized to
act and sign on behalf of the firm
Sec.141.(3 Disqualifications of Auditor
As per sec.141(3) of Companies Act , 2013 read with Rule 10 Prescribed the
following persons shall not be eligible for appointment as auditor of Company :
Body cor.  A body Corporate , except LLP
Officer/ ee  An officer or employee of the company
Partner/ee  Any partner or employee of officer or employee of company
 A person who himself or his relative/partner
Holding
Holding any security or interest in the company or any company which is
security
its holding , subsidiary , associate
 A person whose relative is holding security or interest
Not exceeding ₹ 1, 00,000 value in companies as mentioned above.
Provided that this condition be also applicable in the case of a company
> 1 Lakh
securities not having share capital or other securities, wherever relevant
Provided further that in the event of acquiring any security or interest by
a relative, above the threshold i.e. ₹ 1,00,000
The corrective action to maintain the limits shall be taken by the auditor
within 60 days of such acquisition or interest;
 A person who or whose relative or partner is indebted to the company or
Indebted > 5
Lakh its subsidiary or its holding or associate company or a subsidiary of such
holding company, in excess of ₹ 5,00,000 shall not ve eligible for
appointment
 A person who or whose relative or partner has given guarantee or
Guarantee >1
Lakh provided any security in connection with the indebtedness of any third
person to the company, or its subsidiary , or its holding or associate

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 Auditing Practices

company or a subsidiary of such holding company , in excess of ₹

1,00,000 shall not be eligible for appointment

Business  A person or a firm who, whether directly or indirectly , has “ business

relationship
relationship” with the company or its subsidiary , or its holding or
associate company
Relative is a  A person whose relative is Director or is in the employment of the
Director
company as a director or key Managerial Personnel
 A person who is in full time employment elsewhere or
A person or a partner of a firm holding appointment as its auditor of

Full time more than 20

employment/ Companies other than

20 companies  One person companies ( OPC )

 Dormant companies
 Small companies &
 Private companies having paid –up share capital < ₹ 100 Crore
 A person who has been convicted by a court of an offence with
Convicted by
court imprisonment , involving fraud &
A period of 10 years has not elapsed from the date of such conviction
Providing ser.  Any person is engaged as on the date of appointment,
as mentioned
in consulting and specialized services as provided in section 144
in sec.144

Services specified under Sec.144

Sec.144 (Dec – 2014 , Dec – 2016 )
An auditor appointed under this Act shall not provide any of the following services
Namely
I. Accounting and book keeping services
II. Internal audit functions
III. Design and implementation of any financial information system
IV. Actuarial services
V. Investment advisory services
VI. Investment banking services

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 Auditing Practices

VII. Rendering of outsourced financial services

VIII. Management services &
IX. Any other kind of services as may be prescribed

Must  An auditor or audit firm who or which has been performing any non-audit
comply services on or before the commencement of this Act
with the  Shall comply with the provisions of this section before the closure of the 1st
provisions financial year after the date of such commencement.

Appointment of First auditors in case of Non Govt. Company

Sec.139 (6) hint: 30 : 90
As per section 139(6) ,
BOD  The first auditor of a company , other than a Government company
with in Shall be appointed by the Board of Directors within 30 days from the date of
30days
registration of the company

If BOD  In the case of failure of the Board to appoint the auditor

failed It shall inform the members of the company

Within
 The members of the company shall within 90 days (from the date of registration)
90 days
by mem. At an extraordinary general meeting appoint the auditor

Till 1st
 Appointed auditor shall hold office till the conclusion of the first annual general meeting
AGM

Definition of Government company Sec.2 (45)

Government
Company

Gov.com means , in which not less the

51% of capital is held by

Or Or Or Or
Central Any State State Partly by C.G Subsidiary
Government Government Governments & Company, if
Partly by S.G any

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 Auditing Practices

Appointment of First Auditor in case of Govt. Company

Sec.139 (7) hint : 60 : 30 : 60
 See above diagram
Meaning of
Govt.Com
As per section 139 (7) ,
C & AG
shall  The first auditor shall be appointed by the Comptroller and Auditor – General
appoint , of India ( C & AG )
60 days Within 60 days from the date of registration of the company

If he fails,
 In case the C & AG do not appoint such auditor within the above said period
the BOD in
30 days The BOD of the company shall appoint such auditor within next 30 days

If they also  Further , in the case of failure of the Board to appoint such auditor within next
fails Mem. 30 days
In next 60 It shall inform the members of the Company , who shall appoint such auditor
days within next 60 days at EGM

Hold the  Auditor shall hold office till the conclusion of the first AGM
office

Appointment of subsequent Auditors in case of Non – Government Companies

Sec.139 ( 1 ) ( June – 2016 )
As per section 139 (1) of the Companies Act 2013 ,
At 1st AGM  Every company shall , at the first annual general meeting appoint an
shall individual or a firm as an auditor
appoint Who shall hold office from the conclusion of that meeting till the conclusion
auditor of its sixth AGM &
Thereafter till the conclusion of every sixth AGM

Ratification  The auditor so appointed shall be ratified by the members at every AGM

Place the  The company shall place the matter relating to such appointment of
matter at ratification by member at AGM
AGM
Obtain  Before such appointment is made, the written consent and certificate shall be
consent obtained from the auditor

Satisfy  The certificate shall also indicate whether the auditor satisfies the criteria
Sec.141 provided in Sec.141

File with  The company shall inform the auditor concerned of his or its appointment ,
ROC and also file a notice of such appointment
With the ROC within 15 days of the meeting in which the auditor is appointed

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 Auditing Practices

Appointment of subsequent Auditors in case of Government Companies

Sec. 139 (5)
Meaning of
Govt.  See above diagram
company
As per section 139 (5) of the companies Act 2013 ,
C & AG
appoint  The Comptroller and Auditor – General of India shall appoint an auditor
auditor within duly qualified to be appointed as an auditor of companies under this Act
180 days Within a period of 180 days from the commencement of the financial year

In respect of  The appointment is in respect of financial year

F.Y

 The auditor so appointed shall hold office till the conclusion of the next
Hold the office
AGM

Filling of a Casual Vacancy

Sec.139 (8) (PM)
In case of a Non – Government company
Filled by BOD  Any casual vacancy by Non Resignation in the office of an auditor
shall be filled by the BOD within 30 days
Approved by  If such casual vacancy is as a result of the resignation of an auditor
the company Such appointment shall also be approved by the company at General
at GM meeting convened within 3 months of the recommendation of the Board
 The auditor so appointed shall hold the office till conclusion of the next
Hold the office AGM

In case of Government company

Filled by
 Any casual vacancy in the office of an auditor shall be filled by the C & AG
C & AG
within 30 days
In case of  It may be noted that in case the C & AG does not fill the vacancy within the
failure by said period
C & AG , filled
The BOD shall fill the vacancy within next 30 days
by BOD

Hold the office  The auditor so appointed shall hold the office till the conclusion of next
AGM
Statement to be filed in case of Resignation
 As per Sec.140 (2) ,
Statement to  the auditor who has resigned from the company
be filed with shall file within a period of 30 days from the date of resignation
company and
statement in the prescribed form ADT – 3 , with the company and
ROC
ROC
 indicating the reasons and other facts as may be relevant with

22
 Auditing Practices

regard to his resignation

In case of Govt.  In case of a Government company , the auditor shall also file such
com. Also file
with C & AG statement with the C & AG

In case of  In case of failure , the auditor shall be punishable with a fine

failure by  Minimum – 50,000
auditor
 Maximum – 1,00,000

Re – appointment of Retiring Auditor

Sec. 139 ( 9 ) & (10 )
 A Retiring auditor may be re – appointed at an AGM , if

 He is not disqualified for re – appointment ,

 He has not given the company a notice in writing of his unwillingness
to be re – appointed ; &
 A special resolution has not been passed at the meeting
 Appointing some other auditor or
 Providing expressly that he shall not be re – appointed
 Where at any Annual General Meeting ,
No auditor is appointed or re – appointed , the existing auditor shall continue
to be the auditor of the company

NOTE :
As per the clarifications given by MCA ,
Where no auditor appointed or re – appointed then is shall be deemed to be
casual vacancy caused by Non - resignation

Rotation of Auditors
Sec. 139 ( 2) ( Dec – 2014 )
The concept of rotation of auditors is applicable to the following classes
of companies

Listed  All listed companies

companies
 All unlisted public companies satisfying both / any one of the
following conditions

Unlisted ≥10 Crore  Having paid up share capital of ₹ 10 Crore or more

public
companies ≥50 Crore  Having public borrowings from financial institutions
,banks or public deposits of ₹ 50 Crore or more

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 Auditing Practices

 All private limited companies satisfying both / any one of the

following conditions
Private
≥20 Crore  Having paid up share capital of ₹ 20 Crore or more
companies
≥50 Crore  Having public borrowings from financial institutions
,banks or public deposits of ₹ 50 Crore or more

Manner of Rotation
As per Sec. 139 ( 2) ,
 Listed company or
 A company belonging to such class or classes of companies as mentioned
above
Shall appoint or re – appoint
a. Individual as auditor for more than one term of 5 consecutive years &
b. Audit firm as auditor for more than two term of 5 consecutive years

Provided that :
 an individual auditor who has completed his term under clause ( a )
shall not be eligible for re – appointment as auditor in the same company for 5
years from the completion of his term

 an audit firm which has completed its term under clause ( b )

shall not be eligible for re – appointment as auditor in the same company for 5
years from the completion of such term

Audit committee
Sec.177
All the  where a company is required to constitute an Audit Committee U/S 177
appointments all appointments , including the filling of casual vacancy of an auditor
are made with shall be made after taking into account the recommendations of such
recom ‘s of AC committee

Set up of A.C  All the companies listed on stock exchange in India have to set – up Audit
committee in compliance with clause 49 of the Listing Agreement

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 Auditing Practices

 As per Sec. 177 ,

Applicability Every listed company & following classes of companies shall constitute an Audit
committee
a. All public companies with a paid up capital of ₹ ≥ 10 Crore
≥ 10 Crore
b. All public companies having turnover of ₹ ≥ 100 Crore
≥ 100 Crore

≥ 50 Crore c. All public companies having outstanding loans or

borrowings of debentures or deposits ≥ 50 Crore

Note :
 Paid up share capital or
 Turnover or
 Outstanding loans or
 Borrowings or
 Debentures or
 Deposits
As the case may be , as existing on the date of last audited Financial
Statements shall be taken into account for the purposes of this rule

Manner of Selection & Appointment of Auditors

Rule – 3 of CAAR 2014
Rule – 3 of CAAR 2014 , prescribes the following manner and procedure for
selection and appointment of auditors
 Audit Committee – where the Audit Committee is constituted or
Qualification  Board of Directors - where the Audit Committee is required to be
& constituted
Experience Shall take into consideration the qualifications and experience of the proposed
auditor

consider the
 While considering the appointment , A.C or Board as a case may be
pending
proceeding Shall have regard to any order or pending proceeding relating to
relating to professional matters of conduct ,
professional Against the proposed auditor before ICAI or any competent authority or
matter any court

A.C  Audit Committee shall recommend the name of an individual or a firm as

recommend
auditor to the board for consideration
the name of
proposed The Board shall consider and recommend an individual or a firm as auditor
auditor to the members in the AGM for appointment

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 Auditing Practices

If Board
agrees –  If the Board agrees with the recommendation of the Audit Committee
recommend It shall further recommend the appointment of an Auditor to the members
to the
in the AGM
members

If disagrees  If the Board disagrees with the recommendation of the Audit Committee ,
– it shall It shall refer back the recommendation to the committee for
refer back reconsideration quoting reasons for such disagreement

Board shall  If the Audit Committee , after considering the reasons given by the board ,
record
Decides not to reconsider its original recommendation ,
reasons for
its The board shall record reasons for its disagreement with the committee and
disagreement Send its own recommendation for consideration of the members in the AGM

Hold the  The auditor so appointed in the AGM shall hold office from the conclusion of
office that meeting till the conclusion of the sixth AGM

Ratification  It may be noted that such appointment shall be subject to ratification in

every AGM till the 6th such meeting

Auditor’s Remuneration
Sec.142 (PM)
Fixed in G.M  The remuneration of the auditor of a company shall be fixed
or such  In its General Meeting or
other  In such manner as may be determined therein
manner
In case of 1st  Board may fix remuneration of the 1st auditor appointed by it
auditor
 The remuneration includes
It includes  Fee payable to an auditor
 Expenses , if any , incurred by auditor in connection with the audit ;
 Any facility extended to him.
It does not  Remuneration does not include any amount paid to him for any other
include services rendered by him at the request of the company

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 Auditing Practices

Removal of Auditor Before Expiry of Term

Sec.140 ( 1)
 The auditor appointed under Sec.139 , may be removed from his office
S. R before the expiry of his term only
+  By passing Special Resolution of the company
C.G Permission  After obtaining the prior approval of the Central Govt
In that behalf as per Rule 7 of CAAR , 2014
Application  The application to the Central Government for removal of auditor shall be
ADT- 2 made in Form ADT – 2
Within 30  The application shall be made to the Central Government within 30 days of
days the resolution passed by the Board
GM in 60  The company shall hold the General meeting within 60 days of receipt of
days approval of the Central Government for passing the Special resolution
Opportunity  Before taking any action for removal before expiry of terms ,
of being The auditor concerned shall be given a reasonalble opportunity of being
heard heard

Ceiling on Number of Audits

Sec.141 ( 3 ) ( g )
As Section 141 ( 3 ) ( g ) of the companies Act 2013 , prescribes that
 A person who is in full time employment elsewhere or
 A person or a partner of a firm holding appointment as auditor for > 20
Companies other than
Meaning  One person companies
 Dormant companies
 Small companies &
 Private companies having paid – up share capital of < 100 Cr.
Shall not be eligible for appointment as an auditor of a Company

Per person  This limit of 20 Company audits is per person.

 In the case of a firm of auditors , it has been further provided that ,

In case of
firm of Specified no. of Companies , shall be construed as the no. of Companies
auditors specified for every partner of the firm
Who is not in full time employment elsewhere

27
 Auditing Practices

If he is a  Sometimes, a chartered accountant is a partner in a number of auditing

partner in > firms.
1 firm In such a case , all the firms in which he is partner will be together entitles
to 20 Company audits on his accounts

Allocation is  Subject to the overall ceiling of company audits,

their affair How they allocate the 20 audits between themselves is their affairs

 In computing the specified number of audit assignments.

Computation  The no. of partners of a firm on the date of acceptance of
of 20 audits audit assignment shall be taken into account
 A Chartered accountant in full time employment elsewhere
shall not be taken into account

Rights of Auditors
 The auditor of company , at all times , shall have a right of access to the
books of account and vouchers of company
 Whether kept at the registered office of the company or at any other place
Right of  All the times means during working days and working hours
access to
 This right can be exercised even without giving any notice
books , etc.
 The right of access is not restricted to books of accounts alone and
it is for the auditor to determine what record or document is necessary for
the purpose of the audit

 The right of the auditor to obtain from the officers of the company
Such information and explanations as he may thick necessary for the
purpose of audit

Right to  It is for the auditor to decide the matters in respect of which information and
receive
explanations are required by him
information

 When the auditor is not provided the information required by him or denied
access to books , etc.,
His only remedy would be to report to the members

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 Auditing Practices

 The auditors of a company are entitled to attend any General meeting of the
company and also
To receive all the notices and other communications relating to the General
meetings &
Right to
receive To be heard at any General meeting in any part of the business of the meeting
notices and which concerns them as auditors
to attend
general  The right is not restricted to those at which the accounts audited by them are
meeting to be discussed

 This right extends only to meeting of the members and not to the meeting of
directors

Right to  The auditor shall make a report to the members of the company
Report to
on the accounts examined by him and every financial statements
the
Members of which are required by or under this Act to laid before the company in
the
General meeting
Company

 An auditor can exercise lien on books and documents placed at his

possession by the client for non – payment of fees, for work done on the
books and documents
Right to
Lien  Documents retained must belong to the client who owes the money

 Documents must have come into possession of the auditor on the authority
of the client

Explain the provision regarding the appointment of C & AG and its term of office
Article 148 & 151 of the constitution (June – 2014 ) ( P M )
Article 148 of the constitution provides that
Appointment  the C&AG shall be appointed by the President &
&  can be removed from the office only in a like manner and on the like
Removal grounds as a judge of the Supreme Court

29
 Auditing Practices

Article 151 of the constitution provides that

 audit reports of the C&AG relating to the accounts of the Central/State Govt.
Submission
of Report should be submitted to the President/Governor of the State
Who shall cause them to be laid before Parliament/State legislative

 The Comptroller and audit Generals Act 1971, prescribes that ,the C&AG
shall hold office
Term of
Office  For a term of 6 years or
 Upto the age of 65 years
Whichever is earlier
 He can resign at any time through a resignation letter addressed to the
Resignation
President.

Explain the role of C & AG in the functioning of financial committees of Parliament.

( PM ) , ( Dec – 2014 )
 The Comptroller & Auditor General of India plays a key role in the
Key role functioning of the financial committees of Parliament and the State
Legislatures
He
recognized  He has been recognized as a ‘friend, philosopher and guide’ of the
as Committee.

 His Reports generally form the basis of the Committees’ working,

His repots Although they are not precluded from examining issues not brought out in
his Reports.

Scrutinizes  He scrutinizes the notes which the Ministries submit to the Committees &
the notes helps the Committees to check the correctness of facts and figures in their
Draft reports.
DOG are
required to  The various Ministries / Department of the Government are required to
inform the inform the Committees of the action taken by them on the
actions recommendations of the Committees and
taken The Committees present Action Taken Reports to Parliament / Legislature.
 In respect of those cases in Audit Reports, which could not be discussed in
In respect of detail by the Committees,
those cases Written answers are obtained from the Department / Ministry concerned
not
and are sometimes incorporated in the Reports presented to the Parliament
discussed
/ State Legislature.

Not  This ensures that the Audit Reports are not taken lightly by the Govt. ,
deliberated
even if the entire report is not deliberated upon by the Committee.
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 Auditing Practices

Duty to report on Frauds

Sec. 143 ( 12 ) ( June – 2015 )
Reporting to the Central Government
Reason to As per Sec. 143 ( 12 ) ,
believe  If the auditor of a company in the course of performance of his duties as an
auditor
Fraud Has a reason to believe that an offence or fraud involving such amount of
involving ₹. ₹. 1 Crore or more
1 Crore or
Is being or has been committed in the company by its
more
 Officers or
Done by  Employees
officers or Shall report the matters to the Central Govt. within such time & such a
ee’s manner as may be prescribed
Report The manner of Reporting to the Central Government
immediately  The auditor shall report the matter to the Board or Audit Committee
, not later
 Immediately but not later than 2 days of his knowledge &
than 2 days
and seeking  Seeking their reply or observations within 45 days
reply within
45 day

On receipt of  On receipt of such reply or observations ,

reply , The auditor shall forward his report & reply or observations of the Board or
forward to Audit Committee along with his comments
C.G within
To the Central Govt. within 15 days from the date of Receipt of such reply or
15 days
observations

In case of  In case the auditor fails to get reply or observations from the Board or Audit
failure of get Committee within 45 days
reply , He shall forward his report to the Central Govt. , along with the notes
He has to
containing the details of his report
forward his
report with That was earlier forwarded to the Board or Audit Committee , for which he
his notes has not received reply or observations

 The report shall be send to

Manner of  The secretary &
sending  MCA
In a sealed cover by a registered post with acknowledgement due or speed post
Followed by an e – mail in confirmation of the same

 The report shall be on the letter – head of the auditor containing

The report  Postal address
shall  E – mail address
enclosed

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 Auditing Practices

 Contact number
 Signed by the auditor with seal
 Membership number

 The report shall be in the form ADT -4

Reporting to Board or Audit Committee

As per Sec. 143 ( 12 ) ,
If fraud
 Further prescribes that the fraud involving the amount < 1 Crore
involving < 1
Crore The auditor shall report the matter to the Board or Audit Committee
Immediately but not later than 2 days of his knowledge of fraud , in such a
Report to manner as may prescribed &
A.C or Board Specify the following
 Nature of the frauds & Description
Immediately  Approximate amount involved
but not later
 Parties involved
than 2 days
Disclose in the Board’s report
As per Sec.143 ( 12 ) ,
Report is  Furthermore prescribes that, the auditor who has reported the Frauds to
made to the Audit Committee or Board but not to the Central Govt.
other than  Shall disclose the details of such frauds in the Board report , the following
to C.G
matters
Disclosers to  Nature of the Fraud with description
be made  Approximate amount involved
 Parties involved
 Remedial actions taken

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 Auditing Practices

Joint Auditors
SA – 299 (June – 2016, Nov – 2008 , May – 2009)
 When two or more practicing units are appointed to conduct audit of an
Meaning entity
It is called as joint audit
 It is based on understanding among the joint Auditors ,
 Normally any one of the following
Division of  On basis of period or
work  Functional areas or
 Components of Financial Statements or
Geographical location etc.
 For the following matters , the responsibilities of auditors are separate
 Work allocated to him
Separate
 Drafting his own audit program
responsibilities
 Keeping appropriate documentation
Components allocated to him
Joint and Several responsibilities
 For the following matters all the joint auditors are jointly and severally
responsible
 Audit work not divided
Responsibility
 Collective decision w.r.t Nature , Timing , Extent of audit
of joint
procedures
Auditors
 Matters brought to knowledge of all by any one of them and on
which they all agree
 Disclosure requirements in financial statement
Compliance of Audit Report with statutory requirement
 Sharing of expertise
 Lower workload
 Better quality of performance
 Improved service to the client
Advantages  A sense of healthy competition towards a better performance
 In respect of multi – national companies ,
 The work can be spread using the expertise of the local firms , which are
in a better position to deal with detailed work and the local laws and
regulations
 The fees being shared
 Psychological problem
Where firms of different standing are associated in the joint audit
Disadvantages  General superiority complexes of some auditors
 Problems of co – ordination of the work
 Areas of work of common concern being neglected
Uncertainty about the liability for the work done

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 Auditing Practices

Distinction between Qualified opinion and Adverse opinion

SA – 705 ( May – 2010 )
Qualified opinion Adverse opinion
 A qualified opinion should be  an adverse opinion should be
expressed expressed

 When the auditor concludes that  When the effect of a disagreement

an unqualified opinion cannot be is so material and pervasive to the
expressed financial statements &
Effect on  But that the effect of any  When having obtained sufficient &
Materiality disagreement with management appropriate audit evidence ,
is not so material and pervasive concludes that misstatements ,
as to require an adverse opinion individually or in the aggregate,
or are both material and pervasive to
 limitation on scope is not so the financial statements
material and pervasive as to
require a disclaimer of opinion
In qualified report , In an adverse report,
 The auditor’s reservation is  The auditor states that “ the
True & generally written as financial statements do not
Fair View “subject to or except for , we present a true and fair view of the
report that the Balance Sheet state of affairs and working results
shows a true and fair view “ “
In the qualified report , In the adverse report ,
 The auditor gives an opinion  The auditor concludes that on the
Opinion subject to certain reservations basis of his examination he is not
satisfied with the affirmation
made in the financial statements

Distinguish between statutory Audit and Internal Audit

( Dec – 2013 , June – 2016 )
Statutory Audit Internal Audit
 Statutory auditor is appointed by  Internal Auditor is appointed
owners i.e. shareholders by the management of the
Appointment first statutory auditors of organization
company are appointed by the
BOD
 Qualification is must be qualified  There is no fixed qualification
Qualification
Chartered Accountant for the Internal Auditor
 The main Object is to form  The main object of the Internal
opinion on the Financial Audit is detect & prevent the
Objects
Statements errors and frauds
 Auditor has to state that whether

34
 Auditing Practices

the financial statements are

showing the true and fair view or
not
 The scope is fixed by the  The scope of the internal audit
Companies Act 2013, is fixed by the mutual consent
Scope  It cannot be changed by mutual of the auditor and
consent between the auditor and management
management
 Report shall be submitted to the  Report shall be submitted to
Report shareholders in its General the management
meeting
 Only the company in the General  The management can remove
Meeting can remove the Auditor the internal auditor
Removal  It also has to take prior  No permission of Central
permission of the Central Government is require
Government
Independence  It is Independent  It not Independent

 The contents of the auditor’s  There is no statutory

Contents of report shall be as per Sec.143 requirement regarding the
report contents of internal audit
report
 The approach is from the angle of  The approach of the auditor is
Approach compliance of the statute from the management’s point
of view

Internal Auditor
Sec. 138 & Companies ( Accounts ) Rules , 2014 (Dec – 2016, June – 2015 )
Section 138 under Chapter IX of the companies Act , 2013 contains
provisions regarding internal audit
 The internal auditor shall either be
 Chartered Accountant , whether engaged in practice or not or
Qualification  Cost Accountant or
 Such other professional as may be decide by the Board
To conduct internal audit functions and activates of the company
Requirement of  The following class of companies shall be required to appoint an
Internal internal auditor
Auditor
(A) Every listed company
Listed company
(B) Every Unlisted public company having ,
Capital - ₹ 50 Cr  Paid up share capital of ₹ 50 Crore or more during the preceding
financial year or
Turnover-200 Cr  Turnover of ₹ 200 Crore or more during the preceding financial
year or
Loans – 100 Cr
 Outstanding loans or borrowing from banks or public financial
35
 Auditing Practices

institutions exceeding ₹ 100 Crore or more at any point of time

during the preceding financial year or
 Outstanding deposits of ₹ 25 Crores or more at any point of time
during the preceding financial year

(C) Every private company having

Turnover – 200 Cr  Turnover of ₹ 200 Crore or more during the preceding financial
year or
 Outstanding loans or borrowings from banks or public financial
Loans – 100 Cr
institutions exceeding ₹ 100 Crore or more at nay point of time
during the preceding financial year

Secretarial Audit
Sec.204 & companies ( Appointment and Remuneration of Managerial Personnel ) Rules
( June- 2015 )
 The companies Act 2013 , has introduced a new requirement of
Provision Secretarial Audit for bigger Companies
 Which has been prescribed under Section.204 of the Act
Requirement of As per Sec. 204 & Companies rules 2014 are as fallows
Secretarial audit
Listed company (A) Every listed Company & Or

Capital -50 Cr (B) Every public company having a paid – up share capital of ₹ 50 Crore or
more Or
Turnover – 200 Cr
(C) Every public company having a turnover of ₹ 200 Crore or more
 A secretarial Audit has to be conducted by a practicing Company
Qualification Secretary
In respect of the secretarial & other records of the company
 A secretarial audit report shall be annexed with the Board’s report of
the company
 The BOD’s , in their report made in terms of Sec 134 (3) , shall explain
Report
in full any qualification or observation or other remarks made by the
Company Secretarial Audit report
 The format of the Secretarial Audit Report shall be in Form No. MR.3

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 Auditing Practices

Cost Audit
Sec.148 ( June – 2014 )
 It is an audit process for verifying the cost of production of any article ,
On the basis of accounts as regards utilization of
Meaning  Material or
 Labor or
 Other items of costs maintained by the company
As per Section 148 ,
 The Central Government may by order specify audit of items of cost in
respect of certain companies
Need for Cost
 As per Rule 5 of the companies ( Cost records and audit ) Rules , 2014
Audit
Every company shall in respect of each of its financial year commencing on
or after the 1st day of April 2014 is required to maintain cost records in
Form CRA – 1
As per rule – 6
Appointment  The companies prescribed under the said rules to appoint an auditor
within 180 days of the commencement of every financial year
 The cost auditor shall submit the cost audit report along with his
Submission qualifications or observations or if any , in Form CRA – 3
of report  He shall be forward his report to the BOD of the company within a period
of 180 days from the closure of the financial year
Duty to  The provisions of Section 143 ( 12 ) of the companies Act 2013 ,
report on Duty to report on fraud shall apply mutatis mutandis , to a cost auditor
Frauds during performance of his functions
 Whose revenue from exports, in foreign exchange, exceeds 75 % of its total
Exemption revenue
 Which operating from a Special Economic Zone ( SEZ )
 The audit shall be conducted by a Cost Accountant in practice
Qualification  No person appointed U/S 139 , as auditor of the company shall be
appointed for conducting the audit of cost records
 A company shall within 30 days from the date of receipt of a copy of the
Duty of the
cost audit report
company to
 Furnish the central govt. with such report along with full information and
central govt.
explanation in every reservation or qualification in Form CRA – 4

37
 Auditing Practices

Explain the penal provisions applicable to auditors

( June – 2015 )
The penal provisions applicable to auditors under the companies Act 2013 ,
are as under
 If an auditor of a company contravenes any of the provisions of section 139
, section 143 , section 144 or section 145
The auditor shall be punishable with a fine
 Minimum – 25,000
 Maximum – 5,00,000
 If an auditor has contravened such provisions knowingly or willfully with
the intention to deceive
 Company or
Contravenes  Its shareholders or
the  Creditors or
provision of  Tax authorities
Act He shall be punishable with
a) Imprisonment for a term , which may extend to 1 year Or

b) With a fine
 Minimum – 1,00,000
 Maximum – 25,00,000
 Where an auditor has been convicted he shall be liable to
 Refund the remuneration received by him to the company &
 Pay for damages to all parties

Enumerate the various types of audit prescribed under Companies Act, 2013?
(PM)
 The Companies Act, 2013 is focused on transparency and disclosure
 In the new Act, attempt has been made to cover each aspect of corporate
functioning under audit by prescribing various types of audits like
 internal audit &
 secretarial audit
 The various types of audits prescribed under the Companies Act, 2013 are:
 Statutory Audit
 Internal Audit
 Secretarial Audit
 Cost Audit

38
 Auditing Practices

The first auditor did not give notice to the ROC for accepting the audit
(PM)
Only for  The requirement of giving notice to the ROC has been prescribed only in
the auditor respect of appointment in an AGM under section 139 (1) read along with rule
appointed 4 of Companies (Audit and Auditors) Rules, 2014
U/S. 139
& therefore
Not for the
auditor  It is not applicable to appointment of first auditor being appointed by the
appointed Board of director’s or shareholders in the general meeting.
1st Auditor

39
 Auditing Practices

S.NO NAME OF THE QUESTION

1 Define Internal Audit

How Internal Audit become an important Management tool
2 Or
Objectives of Internal Audit
3 Limitation of Internal Audit
Role of internal audit in corporate governance and internal
4
control
5 Pre – Audit
6 Propriety Audit
7 Limitations of proprietary Audit
8 Objectives of the Efficiency Audit
9 Efficiency Audit
As an internal auditor how you will verity the amount due to
10
subsidiary companies?
11 What do you understand by Compliance Audit?
12 What process should be followed for doing compliance audit?
13 Benefits of Compliance Audit

40
 Auditing Practices

Define Internal Audit

(PM)
As per the institute of internal auditors (IIA)
 “Internal auditing is ,
 an independent,
As per IIA  objective assurance &
 consulting activity
Designed to add value and improve an organization’s operations.

 It helps an organization to accomplish its objectives by bringing

How it  A systematic,
helps  Disciplined approach to evaluate
 Improve the effectiveness of risk management, &
 Control and governance processes.”

 Internal audit is performed by professionals with an in depth understanding

Performed of
by
 The business culture,
 systems and processes,

 The internal audit activity provides assurance that , internal controls in place
Provide are
assurance  Adequate to mitigate the risk,
 The governance processes are effective and efficient &
 Organizational goals and objectives are met

How Internal Audit become an important Management tool

Or
Objectives of Internal Audit
( June – 2009 )
Integral part  It is an integral part of management by system

 Internal auditing is a specialized service to look into the standards of

Specialized efficiency of business operation
service It ensures that standard accounting practices and policies are followed in
the organization
Special  It provides special investigations for management
investigation
Detects  It detects and prevents
&  Frauds ,
Prevents  Misappropriation of money &

41
 Auditing Practices

 Other Assets
 It ensures the
It ensures  Adequacy ,
 Reliability and accuracy
Of financial and operational data
 It establishes that there is a proper authority for assets in respect of :
It
 Acquisition,
establishes a
proper  Protection ,
authority  Utilization ,
 Maintenance ,
 Retirement & disposal
Promptness
& Reliability  It ensures the promptness and reliability of the MIS
Review the  It reviews the operation of the overall internal control system &
operational brings material departures and non – compliance to the notice of the
activities appropriate level of management
Helps to  It helps an organization accomplish its objectives by bringing
accomplish  A systematic , disciplined approach to evaluate &
org’s  Improve the effectiveness of risk management, control and
objectives governance process

Limitation of Internal Audit

( June – 2016 )
 The installation and operation of internal audit involve extra expenditure
Extra which cannot be met by many small concerns
expenditure As a matter of fact, internal audit is confined to larger business

 The limitation of internal audit starts when there is time lag between
recording and checking entries.
Time lag
The accounting and internal audit must go side by side with minimum
time gap

 Internal audit becomes as better as it is used by managers.

There are occasions when managers cannot accept the finding of internal
audit and take consequent actions
This defect arises mainly from
Not so useful  The deficiencies of the internal auditing staff,
 Because of their advisory staff position ,
 Unfamiliarity with operating aspects of work and accounting bias
 Internal auditors fail to be of any real help to the manager in many

42
 Auditing Practices

cases
Not likely to
 Internal audits are employed by the organization and this can be impair
be
Independent  Their independence and objectivity &
&  Ability to report fraud / error to senior management
Objectivity Best practice indicates that the internal audit should report both to
management and those charged with governance ( audit committee )
Not
professionally  Internal auditors are not required to be professionally qualified and
qualified There may be limitations in their knowledge and technical expertise

Role of internal audit in corporate governance and internal control

( June – 2014 )
Role of Internal Audit in Corporate Governance
 Internal auditing activity as it relates to corporate governance is generally
It relates to informal ,
Accomplished primarily through participation in meetings and discussions
with members of the BOD
 Corporate governance is a combination of
 Processes and organizational structures implemented by the Board
It is a
of Directors
combination
of  To inform , direct , manage , and monitor the organizations
resources , strategies and policies
towards the achievement of the organizations objectives
Internal  The internal auditor is often considered one of the “four pillars” of
auditor is corporate governance ,
considered
The other pillars being the BOD , management and external auditor
as pillars
 A primary focus area of internal auditing as it relates to corporate
governance is helping the Audit Committee of the BOD perform its
responsibilities effectively
This may include
Primary  Reporting critical internal control problems ,
focus area  Informing the committee privately on the capabilities of key
managers ,
 Suggesting questions or topics for the Audit Committee’s agendas &
 Coordinating carefully with the external auditor and management to
ensure the committee receives effective information
Role of internal audit in internal control
Examine  The internal auditor should examine and contribute to the ongoing
& effectiveness of the internal control system
Contribute Through evaluation and recommendations

43
 Auditing Practices

Its functions  Internal audit functions add value to an organization’s internal control
add value to system by bringing
an  A systematic , disciplined approach to the evaluation of risk &
origination  By making recommendations to strengthen the effectiveness of risk
management efforts
 The internal auditor should focus towards
It focus
 Improving the internal control structure &
towards
 Promoting better corporate governance
 The role of the internal auditor encompasses :
 Evaluation the efficiency and effectiveness of internal check and
Role of control
internal  Recommending new controls where needed or discounting
auditor unnecessary controls
 Using control frameworks
 Developing control self – assessment.

Pre – Audit
( Dec – 2007 )
 Pre – Audit is prior scrutiny of bills before releasing payment against the
same
Meaning The bills submitted for payments are properly scrutinized prior to passing
them for payment

 Pre – Audit is usual for making payments against

Useful  Salaries
 Medical bills
 Travelling allowance bills etc.

Done by  Pre – Audit may be done by any person authorized by the management and
specific appointment is not made for this task

qualification  No specific qualification is required for conducting pre – Audit

Propriety Audit
( Dec – 2007 )
 Propriety audit stands for ,
Stands for  Verification of transaction in the best interest of the public
 Commonly accepted customs and standards of conduct
 The term propriety has been defined by Kholer ,
 “ that which meets the tests of public interest,
Definition  Commonly accepted customs and standards of conduct &
particularly as applied to professional performance

44
 Auditing Practices

 Requirements of Government regulations and professional codes “.

 Propriety audit means , that the decisions have been taken and the
transactions have been done in conformity with
 Established rules
It means
 Principles
 Standards &
 Statutory regulations
To meet the test of public interest
 In simple words the propriety audit ensures that ,
In simple
The disbursing officer applies the same prudence as he applies towards his
words
own money , while using the government money
 The system of propriety audit applies to Government companies and
To whom it departments
applies
Because public money and public interest are involved therein

Limitations of proprietary Audit

 All decisions are subjected to proprietary audit ,
In decision The auditor examines and scrutinizes every decision of the executive
making This may cause the executive to make decision after a lot of thought
process It may adversely affect the dynamism and risk taking attitude of the
executive
Work -
within  The executive works well within the framework of rules and regulations
rules and This hampers the progress and achievement of estimated targets
regulations
Report –
 The report is more like a post mortem. It is not of much use.
not much
use

Objectives of the Efficiency Audit

The objectives of efficiency audit can include assessing one or more of the
following
Level of  The level of efficiency achieved by an organization or operation in relation to
efficiency reasonable standards
Adequacy
&  The adequacy and reliability of systems or procedures used to measure and
Reliability report efficiency
To
improve  An organization’s efforts to explore and exploit opportunities to improve
efficiency efficiency

45
 Auditing Practices

Efficiency Audit
( Dec – 2015 )

Efficiency indicates how well an organization uses its resources to
produce goods and services
It focuses on
Meaning  Resources ( Inputs ) ,
 Goods & Services ( Outputs ) ,
 The rate ( Productivity ) at which inputs are used to produce or
deliver the outputs
 To understand the meaning of “ Efficiency “ , it is necessary to understand
the following terms :
Terms
involved  Inputs ,
 Outputs ( including quantity and quality ) ,
 Productivity and level of service
 Efficiency audit refers to comparing the actual results with the desired /
projected results
Comparing
It is directed towards the measurement of whether plans have been
effectively executed
 It is concerned with ,
Most  The utilization of resources in economic &
Economical  Most remunerative manner to achieve the objectives of the
concern
Advantages of Efficiency Audit
 It help managers and staff to be more sensitive to their obligation of due
More sensitive
regard to efficiency
Measuring  Underline the importance of measuring efficiency and of using that
efficiency information for managing operations and providing accountability
Improving  It identify means for improving efficiency , even in operations where
efficiency efficiency is difficult to measure
 It demonstrate the scope for lowering the cost of delivering programs
Low cost of without reducing the quantity or
programs Improve the quality of outputs and level of service without increasing
spending &
 It identify needed improvements in ,
 Existing controls
Identify
improvements  Operational systems &
 Work processes
For better use of resources

46
 Auditing Practices

As an internal auditor how you will verity the amount due to subsidiary companies?
( Dec – 2011 )
Authorized by  To examine whether the subsidiary company is authorized by its
its memorandum of association ( MOA )
Memorandum To advance the loan to the holding company

Interest rate ,  To verify the interest rate at which the loan has been obtained &
Amount of  Particulars of the securities that furnished for confirming the
interest ,
amount of interest
Charge
 Disclosure of the charge in the Balance sheet

 To inspect the documents executed by the holding company

To inspect the  Which constitute the basis of the loan &
documents  The provision in the memorandum under which the loan has been
raised

What do you understand by Compliance Audit?

(PM)
Compliance audit is a comprehensive review of an organization’s adherence to
regulatory guidelines.

 It is common to us that the business undertakings require some certified

statement on various matters &
Meaning
The auditors certify such statements after carrying out audit, which might
be necessary under the particular cases.
All such audits are called Compliance Audit.

Example  Suppose when a company applies to a bank for some loan,

a certified statement showing the turnover of the company for the past two
or three years along with the current year might be necessary, &
for this purpose the certified statements are to be attached with the
application,
Otherwise the application will be rejected.
So these certified statements showing the turnover of the company fall
under the category of compliance audit

Internal  Internal audit for compliance could be the broader base to include
audit for
 Compliance with documented procedures/policies,
compliance
audit  Compliance with statutory requirements in the relevant areas

47
 Auditing Practices

What process should be followed for doing compliance audit?

(PM)
Doing a Compliance Audit, a stepwise approach is required:
Need to have  First the compliance auditor needs to have a clear knowledge of audit’s
clear objective and scope.
knowledge Accordingly he decides the time to be devoted in the compliance audit.

 Before beginning a particular compliance audit,

Thorough The auditor must gain thorough understanding of
understanding  Applicable rules,
 Guidelines &
 Procedures to be evaluated.
 He should decide
Manner of  How to recognize when a deviation has occurred, &
audit  How to evaluate evidence obtained through audit tests.
 The auditor must figure out, For each event to be tested,
Detailed
 Just what evidence signifies compliance, &
manner
 What evidence signifies non-compliance.
not  If the auditor is not sufficiently experienced in very specialized
sufficiently compliance topics
experienced Then the opinions of an expert should be sought.
 Compliance audit reports must be made in the format
Audit report That is relevant to the Auditee or sponsoring entity i.e. government.

 When a statistical sample of events has been tested and required

In case of assumptions are appropriate,
sample Results from the sample may be used to predict the level of compliance

Benefits of Compliance Audit

 Adherence to the established standards.
 Improvement of internal processes and technologies.
 Maintenance of Certifications
 Adherence to government regulations
 Cost recovery
 Elevate fraud awareness and determine fraudulent activity.
 Manage contract areas of risk

48
 Auditing Practices

S.NO NAME OF THE QUESTION

1 What is Internal Controls & its Objectives

2 Advantages & Limitations of Internal Controls & Limitations of
Internal control
3 Essential feature & weakness in internal Control System
4 Techniques of internal control system
5 Preventive controls techniques
6 Detective controls techniques
7 Explain briefly the technique of “internal Control Questionnaire “ to
facilitate the accumulation of information necessary
8 What are the general considerations in framing a system of internal
check
9 Auditing through the computer
10 Distinguish between Internal control & Internal audit
11 What is Internal Check? Distinguish between Internal check &
Internal audit
12 Write short note on Examination in depth
13 Internal control in Small Business
14 Statistical sampling in Auditing
15 Simple Random Sampling
16 Explain the different approaches used in statistical sampling during
and audit
17 Draft an internal control questionnaire for review of goods
receiving procedures and controls
18 What is the difference between ‘ inter – firm comparison ‘ and
‘intra– comparison ‘

49
 Auditing Practices

What is Internal Controls & its Objectives

( Nov – 2011 )
 Internal controls refers to
 The policies and procedures or
 The rules and regulation
Meaning Made by the management of an entity to assist in achieving the
management’s objectives.
 In other words , it’s an action plan for the purpose of
preventing and detecting errors and frauds
Following are the objectives of internal control system
Orderly & Efficient  The orderly and efficient conduct of business
Prevention &Detection  The prevention and detection of fraud and errors
Safeguarding  The safeguarding of assets
Adherence  Adherence to management policies
Segregation  Segregation of accounting and custodial functions
Securing  Securing proper documentation at each stage
Specifying authority  Specifying authority to enter into the various transactions
Accurate and complete  Accurate and complete accounting records
Timely preparation  The timely preparation of financial information

Advantages & Limitations of Internal Controls

( Nov – 2007 )
Advantages of Internal Control
 Increase in operational efficiency
 Accurate Recording
 Compliance
 Protection of Employees
 Benefits of Internal Control to the Auditor
Limitations of Internal control
Unusual transitions  The transaction of unusual nature do not tend to be directed
Mang. consideration  Management’s consideration that a control be cost effective
 There may be possibility that a person responsible for exercising
Abuse the authority

50
 Auditing Practices

control could abuse the authority

 While preparing the financial statements ,
Manipulation of The management may manipulate the transactions , estimates and
transaction
judgments of required
 The possibility of circumvention of controls through collusion with
Collusion
parties outside the entity or with employees of entity

Essential feature & weakness in internal Control System

( June – 2014 )
Following are the two essential features of internal control
 Breaking the chain of the work in a manner
Breakdown So that no single person can handle a transaction from the beginning to the
of chain
end &

Segregation  Segregation of accounting and custodial functions

Receiving Weakness in internal control system
cash & also  The accountant is receiving cash and also passing the entries in the books
passing The accountant should not have been allowed to effect recoveries
entries
Issuing
receipts for  It also appears that system for issuing receipts for amount received
amounts Whether cash or cheque is also lacking
received
 In a small and to some extent medium size organization ,
Offsets the The supervision of the owner offsets the deficiencies in internal control
deficiencies system
in internal But in this case , it appears that supervision and personal control is also
control
lacking

Thus in the given case ,

 The main weakness of the system is that it is ignoring the basic
requirements of good internal control system

51
 Auditing Practices

Techniques of internal control system

( June – 2017 , Dec – 2013 , June -2015 )
There are 2 types of Preventive controls techniques ( examples )
techniques used in internal  Segregation of Duties
control system  Approvals , Authorizations , Verifications
 Security of Assets ( Preventive & Detective )
They are
Detective Controls ( examples )
1) Preventive internal
control technique  Reviews of Performance
 Reconciliations
2) Detective internal  Physical Inventories
control technique  Internal Audits

Preventive controls techniques

( Dec – 2013 )
Discourage errors  These are designed to discourage errors or irregularities from
before they occur occurring
 They are proactive in nature , that helps to ensure departmental
Proactive in nature
objectives are being met
 Duties are segregated among different people to reduce
 Risk of error or
 Inappropriate action
Segregation of
 Normally , a transaction is divided following way ,
Duties
 Responsibilities for authorizing transactions ( approval )
 Recording transactions ( accounting ) &
 Handling the related asset ( custody )
 Management authorizes employees to perform certain activates
and to execute certain transactions within limited parameters
 In addition , management specifies those activities or transactions
Approvals , that need supervisory approval before they are performed or
Authorizations &
executed by employees
Verifications
 A supervisor’s approval impels that he has verified and validated
that the activity or transaction conforms to established policies and
procedures
 Access to equipment , inventories , securities , cash and other
Security of Assets assets is restricted
( Preventive &
 Assets are periodically counted and compared to amounts shown
Detective )
on control records

52
 Auditing Practices

Detective controls techniques

Find errors after  Techniques are designed to find errors or irregularities after they
they occur have occurred
 Management compares information about current performance to
 Budgets
 Forecasts
Reviews of  Prior periods or
performance  Other benchmarks
To measure the extent to which goals and objectives are being
achieved & identify unexpected results or unusual conditions that
require follow
 An employee relates different sets of data to one another, identifies
Reconciliations and investigates differences, and takes corrective action. when
necessary
Physical  Conducting the physical verification of inventories periodically by
inventories independent person
 Conducting the Internal Audit as per the requirement of companies
Internal Audits
Act

Explain briefly the technique of “internal Control Questionnaire “ to facilitate the

accumulation of information necessary
( Nov – 2010 )
 It is a comprehensive series of questions designed
To provide a thorough view of internal control system prevailing in an
organization
Meaning
 The questionnaire is usually issued to the client ,
The client is requested to get it filled up by the concerned executives and
employees
In the questionnaire , the questions are generally prepare in sections of distinct
control areas such as
 Sales & Purchases
 Debtors & Creditors
 Stocks
Content of  Fixed Assets
ICQ  Cash & Bank receipts and payments
These questions are so framed that ,
 ‘ yes ‘ answer denotes satisfactory position &
 ‘ No ‘ answer suggest weakness
 If the questions are not relevant to the business ‘ Not Applicable ‘ reply is
given
53
 Auditing Practices

Advantages
Less  In this method , there is less chance of oversight or omission of significant
chances of internal control review procedures
omission

Complete  It enable to complete all internal control evaluation at one time

evaluation Weakness in the internal control system can easily be identified by
at one time examining answers to the question in the ICQ

 ICQ also helps in testing whether the controls or procedures stated to be

Helps in operating are actually in operation
testing On the basis of ICQ analysis the auditor can decide the extent and depth of
checking required in accounting areas
Helps in
detailed  ICQ analysis helps the auditor to adopt more detailed checking in weak
checking control areas

What are the general considerations in framing a system of internal check

( May – 2012 )
 No single person should have an independent control over any important
Different aspect of the business
hands All dealing and acts of every employee should come under the review of
another

 The duties of staff member should be changed from time to time without
Job Rotation any previous notice
The same officer or subordinate should not perform the same function for
considerable period of time

Leave  Every member of the staff should be encouraged to go on leave at least

once in a year

Assets – Book  Persons having physical custody of assets hould not bepermitted to have
Differentiation access to the books of accounts

 There should be an accounting control in respect of each important class

Assets of assets
Verification They should be periodically inspected so as to establish their physical
existence

Mechanical  Mechanical devices such as automatic cash register may be employed to

Devices prevent loss or misappropriation cash

54
 Auditing Practices

 During yearend stock – Taking trading activities should preferably , be

Stock –
Tacking suspended
stock – taking and evaluation should not be done exclusively by stores
staff

Delegation of  The financial & administrative powers , should be distributed very

Powers judiciously among different officers and the manner in which these are
actually exercised should be reviewed periodically

Review of  Procedures should be laid down for periodical verification and testing of
accounts different sections of accounting records to ensure that they are accurate

Auditing through the computer

( Nov – 2010 )
 The auditor takes the computer as a target of audit
Introduction It is treated as a live and dynamic device , which has added value to the
process of auditing
The auditor can use the computer to test :
 The program logics and program controls existing within the
How can use
system &
 The records produced by them
There 3 methods of auditing through the computer

 This is a special set of input data , prepared specifically

a)Test data
to test a programme or set programs of the entity under
audit
b)Controlled
processing  This means that a processing run is undertaken using
Methods an already tested programme under the control of the
auditor

 The auditor uses computer programmes for

c) Computer  Testing & evaluating the system of internal
audit control and
Programme  Validity of transactions processed by an
electronic data processing system
It is used if :
Situations  The computer processes a large volume of input and
where it must Large
resultantly produces a large volume of output
be used volume

55
 Auditing Practices

Significant  The significant parts of the internal control system are

parts embodied in the computer system itself
embodied
Complex
 The logic of the system is complex
logics
Substantial  Because of cost – benefit considerations , there are
gap substantial gaps in the visible audit trail
Increased  Auditor has increased power to effectively test a
power computer system
Increases the  The range & capability of tests to be performed
Advantages capability increases
Greater  He acquires greater confidence that the data
confidence processing is correct
 Highly expensive
Expensive
Disadvantages
More  Need for extensive technical expertise when the logics
technical within the system are complex

Distinguish between Internal control & Internal audit

( Dec – 2015 , Dec – 2013)
Internal Audit Internal control
 Internal Auditing is  Internal control is the system
 Independent of control established by the
 Objective assurance & management in order to carry
 Consulting activity on business
Designed to add value and improve an  In an orderly and
organization’s operations. efficient manner
 It helps the organization to accomplish  Ensure adherence to
Meaning
its objectives by bringing a management policies
 Systematic  Safeguard assets and
 Disciplined approach to completeness of
evaluate & records
 Improve the effectiveness of
risk management
 Control & governance process
Narrow  Internal audit system is comparatively  Internal control system is
/Broad a narrow concept broad concept
concept
 Internal audit system is to be  Internal control system is
Suitability implemented as the suitability of the necessary for every
organization organization
56
 Auditing Practices

 Internal Audit is primarily a backward  The primary objective of

looking activity internal control system is to
Nature
prevent the occurrence of
fraud

What is Internal Check? Distinguish between Internal check & Internal audit
( Dec – 2014 , Dec - 2016)
 Internal check is best regarded as indicating checks on the day – to – day
transactions
 Which operate continuously as a part of the routine systems , where by work
of one person is proved independently to the work of another
Meaning
 The main objective of internal check is prevention of errors and frauds
and/or detection of errors and frauds at the earliest
 Internal check is a continuous process and is part of the day – to – day
routine
Internal check Internal audit
Way of  In internal check system work  In internal audit system work is
checking is automatically checked checked specially
Cost  In internal check system  Mistake can be checked at an early
involvement checking is done when the stage in internal check system
work is being done
Thrust of  Thrust of internal check  The thrust of internal audit system is
system system is to prevent the to detect the errors and frauds
errors
 In internal check system  In internal audit system work is
Time of checking is done when the checked after it is done
checking work is being done  Mistakes can be checked at an early
stage in internal check system

Write short note on Examination in depth

( Nov – 2007 , Nov – 2012 , Dec – 2015 )
Beginning  It means an examination of few selected transactions from the beginning to
to end the end through the entire flow of transaction

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 Auditing Practices

 This examination includes

It includes  Studying ,
 The recording of transactions at each stage and judging
 Whether the person who has exercised the authority in relation to the
transaction is fit to do so
Sample size  A sample size may be small but it should be true representative of the
must be universe of transaction
 A purchase of goods may commence when the company reaches its re –
order level
 The probable step of purchase are as follows :
 Material Requisition Note ( MRN )
 Purchase Requisition
 Invitation for quotations / Tenders
Example
 Quotations received and analysis of the same
 Purchase order
 Receipt of goods , together with delivery challans
 Receipt of supplier’s Invoice and entries in purchase day book
 Payment of cheque in settlement of invoice & entry for payment in
Cash / Bank book

Internal control in Small Business

( May – 2011 )
Same degree of  The auditor needs the same degree of assurance to give an unqualified
assurance opinion on the financial statements of both small and large entities
Different controls for  Many controls which would be relevant to large entities may not be
different business practical for small business
 In small business,
In case small  Accounting work may be performed by only a few persons
business having both operating and custodial responsibilities &
 Segregation of functions may be missing or several limited
However , this may be offset by personal supervision of manager
which may be possible due to low volume of transactions
 So, if the auditor finds that
 segregation of duties is limited or
Extensive  Evidence of supervisory controls is lacking
procedures He would have to perform extensive substantive procedures to obtain
evidence to express his opinion on the financial statements
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 Auditing Practices

Statistical sampling in Auditing

( May – 2008 , Nov – 2007 )
 Statistical sampling involves use of mathematical and statistical
techniques to determine the appropriate sample size
 Under this the samples are determined by
 Theory of probability &
Meaning  Theory of random numbers
 These sampling have a wide usage in the case of homogenous
population
 Selection of sample involves quantifiable relationship between sample
size and degree of risk
Advantages
 It is more scientific as the judgment is replace by mathematical and
More scientific
statistical techniques
More objective  The selection of samples is more objective

To measure the  It enables the auditor to measure the risk he takes for expressing a
risk particular opinion
 It involves high degree of refinement due to the use of statistical
High degree of
refinement procedure , rules ,formulas and tables

Disadvantages
Complex  It becomes quite complex , which it comes to the operational part
More time  Due to large sample it involves considerable time

Simple Random Sampling

( May – 2012 )
 As per this method each unit of the whole population has an equal
Equal chance
chance of being selected
 The items may be selected by
 Choosing numbers from table of random numbers by
Selection
computers or
 Picking up numbers randomly from a drum
Simple and easy  It is considered that
&
 Random number tables are simple and easy to use & also
Provide
assurance

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 Auditing Practices

 Provide assurance that it does not affect the selection

 This method is considered appropriate ,
When it is
appropriate Provided the population to be sampled consists of reasonably similar
units and fall within a reasonable range

Explain the different approaches used in statistical sampling during and audit
( June – 2014 )
 In statistical sampling ,
Samples during the audit are normally selected through one of the
Approaches probability sampling methods
to  Random sampling ,
Statistical  Systematic sampling or
Sampling  Stratified sampling
 Probability sampling provides an objective method of determining sample
size and selecting the items to be examined
 This method used sampling without replacement
i.e. once and item has been selected for testing it is removed from the
Simple
population and is not subjected to re – selection
Random
 An auditor can implement simple random sampling in one of two ways
Sampling
 Computer programs or
 Random number tables
 This method provides for the selection of sample items in such a way that
Systematic
there is a uniform interval between each sample item
( Interval )
 Under this method of sampling , every “ N “ item is selected with a random
Sampling
start
 This method provides for the selection of sample items by breaking the
population down into strata’s or clusters
 Each strata is then treated separately
Stratified
 For this plan to be effective , dispersion within clusters should be greater
( Cluster )
than dispersion among clusters
Sampling
 An example of cluster sampling is the inclusion in the sample of all
remittances or cash disbursements for a particular month
 If blocks of homogeneous samples are selected , the sample will be biased

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 Auditing Practices

Draft an internal control questionnaire for review of goods receiving procedures and
controls
( Dec – 2015 )
Receiving procedures and controls
 Is the receipt of all goods documented with at least a signature and date?
 Are claims filed against carriers or vendors for all shortages or damaged
materials?
 Are goods received accurately counted and examined to verify they meet
quality standard?
 Are copies of receiving reports sent directly to accounting purchasing and
inventory record keeping?

What is the difference between ‘ inter – firm comparison ‘ and ‘intra – comparison ‘
( Dec – 2016 )
Inter – firm Comparison Intra - comparison
 It is technique of evaluating the  Intra – firm comparison means
performance , efficiency , costs comparison among different units /
and profits of firm in an industry products / strategic business unit
 It consist of voluntary exchange ( SBU ) of the same firm
of information concerning costs ,
prices ,profits , productivity and
Meaning
overall efficiency among firms
engaged in similar type of
operations for the purpose of
bringing improvement in
efficiency and indicting the
weaknesses
 It will be possible where  It is possible only when uniform
When uniform costing is in operation costing is being adopted by all units of
possible among the different firm of the the firm or different branches of the
industry same company
 It gives an overall view of the  It gives an overall view of the firm as a
industry as whole to its whole to the owner or stakeholders
members the present position f and gives a comparative view of
View
the industry , progress made different product / different business
during the past and the future of of the firm
the industry
 In this , top management feels  There is no such fear in intra – firm
that secrecy will be lost as comparison as all units belong to
Secrecy
information is being shared with same firm and are under the same
other firms in the industry management

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 Auditing Practices

 It helps to Government in  It helps the management in

To effecting price regulation and identifying the units which have not
whom it taxation policies been performing as per the internal
benefits benchmark or standards achieved by
other units

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 Auditing Practices

S.NO NAME OF THE QUESTION

1 What is Internal Control Review (ICR) and how different it is to Internal Audit?
2 What are the objectives of review of management information system
What are the important points to be considered while reviewing the process of
3
taking
With respect to up keep and custody of inventory after its purchase, certain
4
controls are required for its security. comment
5 Explain the term ‘segregation of duties’ in context of purchase control review

What is Internal Control Review (ICR) and how different it is to Internal Audit?
(PM)
Internal Control Review (ICR)
 Internal Control Review is
 An overall assessment of the internal control system &
Meaning  Its adequacy of each business area in an organization to address
the relevant risks.
 Through internal control review, an organization's resources are directed,
Used for
monitored, and measured in an effective manner.
Plays  It plays an important role in protecting the organization's tangible and
important intangible resources
role
Internal Audit
 Internal audit as defined by the Institute of Internal Auditors is "an
activity that provides
Meaning  Independent, objective assurance
 consulting activity
Designed to add value and improve an organization’s operations.
 It helps an organization accomplish its objectives by bringing a systematic,

How it helps disciplined approach to evaluate and improve the effectiveness of risk
management, control, and governance processes".

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 Auditing Practices

What are the objectives of review of management information system

( Dec – 2014 , June – 2016 )
To achieve  To determine whether review procedures are necessary to achieve
stated
stated objectives
objectives
Adequate MIS  To determine whether MIS policies or practices , processes , objectives ,
policies and internal controls are adequate

How MIS appl.  To evaluate whether MIS applications provide users with timely
Provide users accurate ,consistent , complete and relevant information
Type & level of  To assess the types and level of risk associated with MIS and the quality
risk of controls over those risks
Adequately
 To determine whether MIS applications and enhancements to existing
support
corporate goals systems adequately support corporate goals

Compliance  To determine whether MIS is being developed in compliance with an

with approved corporate MIS policy or practice statement
 To determine whether management is committed to providing the
Committed
resources needed to develop the required MIS
 To determine if officers are operating according to established
Operation
guidelines
Scope  To evaluate the scope and adequacy of audit activities

Corrective  To initiate corrective action when policies or practices , processes ,

action objectives or internal controls are deficient
 To determine if any additional work is needed to fulfill the examination
Any additional
work strategy of the institution

What are the important points to be considered while reviewing the process of taking
insurance during transit
( Dec – 2015 , June – 2016)
 Check whether the process of taking insurance for transit vehicle exits
Existences
or not
 Check the coverage of insurance policy i.e. it covers full inventory value
Coverage policy
or just material price
Who takes  Check who takes the insurance transporter or the client
insurance
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 Auditing Practices

Proper  Check whether proper insurance value is declared for insurance

insurance value coverage
Available to all
concerned  Check whether the insurance policy is made available to all concerned
 Check whether any cost benefit analysis has been done for the insurance
Cost benefit
analysis premium paid and claim launched

With respect to up keep and custody of inventory after its purchase, certain controls are
required for its security. comment
( June – 2017 )
 Once the purchase are done , it is necessary to secure the materials in a
safe location
Physical control  To ensure that the resources are accounted for , it is necessary to
over assets
periodically verify the inventory and compare the results with the
books
 Secure goods received in a restricted area
 Restrict inventory access to appropriate staff
 Lock goods and materials , and provide key or combination to as few
people as possible
To ensure
security of  Keep inventory records and periodically calculate beginning and ending
assets , it is inventory amounts
advisable to
If physical control over assets does not exist , it may result into
 Theft of goods ,
 Inventory shortages,
 Additional costs incurred for replacement of goods

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 Auditing Practices

Explain the term ‘segregation of duties’ in context of purchase control review

(PM)
Proper separation  To ensure proper separation of duties, assign related buying functions
of duties to different people
Proper  Ensure proper segregation, no single person has complete control
segregation
over all buying activities
 It is always preferable to have different people who
 Approve purchases
 Receive ordered materials
Different people
 Approve invoices for payment
 Review and reconcile financial records
 Perform inventory counts
 If segregation of duties does not exist in purchases operations, this
may result into
If segregation of  Unauthorized or unnecessary purchases,
duties not exists  Improper charges to department budgets,
 Purchase of goods at excessive costs, use of goods for personal
purposes.

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 Auditing Practices

S.NO NAME OF THE QUESTION

1 Audit program
2 Audit Documentation / Audit working papers
3 State the general guidelines for preparing audit working papers
What are the points for consideration in audit planning in relation
4
to the audit engagement
5 Test checking
6 Vouching and Objectives
As an auditor of a company , how you instruct and guide your
7 assistants about special considerations to be borne in the course of
vouching
8 Verification & its Objects
What points be considered by the auditor while verifying the fixed
9
assets of a company
10 Distinguish Between ‘Vouching’ and ‘ Verification
11 What is tolerable terror

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 Auditing Practices

Audit program
( S A – 300 ) ( May – 2012 , Dec – 2014 ,June – 2017 )
 It refers to a document prepared by the auditor before commencement
of audit
Meaning
 It consisting of the plan of audit containing various procedures and
techniques to be applied in an audit of financial statements
 Nature and size of the client’s business
 Timelines for completion of audit
 Scope of audit

Points are to be  Nature of procedures and techniques to be applied

considered in  Extent of check
framing an audit
program  Timing of check
 Availability of staff and experience levels
 Allocation of work amongst the team members
 Special instructions based on past experience of the auditee
Advantages of Audit Program
Division of work  The division of work among the staff can be made easily
 By carefully dividing the work , the auditor is in a position to decide
Selection of staff
about the selection of different levels of staff

Sufficient  Provides sufficient guidance to audit staff on various areas to be

guidance covered, extent of checking etc.
Chances of  Chances of duplication of work can be eliminated
duplication
 Since the assistants are signing the program , it is easy to fix the
Fix responsibility
responsibility on audit staff
 There may be occasions when the auditor has to shift some staff from

Continuation of one particular client to another

Audit In such case , by referring to audit program the auditor will be in a
position to ensure continuation of audit

Evidence in the  Useful as evidence in the court of law , in case the client files a suit
court against the auditor

Help in  The audit program of one year helps in preparing the audit program of
subsequent year subsequent year
Limitations
 It may become mechanical for an audit assistants and they may lose
Become interest
mechanical
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 Auditing Practices

Incomplete Audit  In case the audit program is not complete , some items may not get
Program checked
 If the client’s system of business has changed , but the audit program
Not amendment
has not been changed accordingly ,
in Audit program
It may fail to serve the intended purpose

Standard audit  Standard audit program may consist of procedures which may not be
program suitable for a particular client
 It provides an easy way out for inefficient staff on the ground that no
Easy way out
instruction is contained therein
Precautions to overcome limitations
 Audit assistants should be consulted while preparing the audit
Consult audit program and their inputs , if any , should be considered to gain their
staff before A.P to
be designed support
 Auditor should review client’s internal control system first to see the
Review of client’s areas of weaknesses and design his audit program accordingly
ICS
So that these areas may be covered thoroughly
 Program should be flexible enough and should be changed from time
Flexible to make
changes to time according to the changes in size or Nature of client’s business
 There should be frequent audit assistant’s meeting , so that all staff can
Audit staff
meeting exchange their experiences with others

Audit Documentation / Audit working papers

( S. A – 230 ) (Dec -2014 , Dec – 2015 , June – 2017 , Dec - 2016 )
 “Documentation “ refers to the working papers prepared or

Meaning obtained by the auditor and retained by him, in connection with

the performance of the audit
 The permanent working files contain working papers ,
Permanent which are useful for the auditor not only for the current
audit files
Types of working year but also for the future reference
papers
 The current Audit file contain the information
Current
audit file related to single audit period
Importance of working papers
Review of work  Helps the auditor in reviewing the work performed by staff
 Demonstrate the audit work performed
Demonstration

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 Auditing Practices

 Provide adequate guidance to the engagement team in various

Adequate guidance
matters concerning audit
Fix responsibility  Ease in fixation of responsibility on staff
 Act as evidence in a court of law when a chance of negligence is
Act as a evidence
brought against the auditor
Draw conclusion  Draw conclusion from the evidence obtained
Support opinion  Support the auditor’s opinion arrived
Contents of permanent Audit file
MOA & AOA  Copies of Memorandum and articles of association

Important  Copies of important agreements like agreement with suppliers,

agreements customers, lessors etc.
Audited financial
 Copies of audited financial statements of previous years
statements
Management letter  Copies of management letter , issued by auditor , if any
Ratios & trends  Analysis of significant ratios and trends
Audit observations  Significant audit observations of earlier years
List of officers  List of officers , their financial powers and authorities
List of offices  List of offices, factories, warehouse etc.
Accounting policies  Notes regarding significant account polices
Comm. With retiring
 Record of communication with the retiring auditor, if any
auditor
Annual re- Contents of current audit file
appointment  Communication to acceptance of annual re – appointment
 Financial statements and the related schedules obtained from
Financial statements
client

Extracts from  Extracts of important matters in the minutes of board and general
meetings meetings
Audit program  Audit program
Analysis of transactions  Analysis of transactions and balances made by the auditor

A record of NTE of  A record of Nature , Timing and Extent of auditing procedures

audit procedures performed , and result of the same

Evidence of work  Evidence that the work performed by assistants was supervised
performed and reviewed

Communications with  Copies of communication with other auditors, experts and third
others parties
Letter of  Letters of representation received from the client
representation

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 Auditing Practices

Communication with  Copies of audit matters communicated to the client , including the
client material weaknesses in internal controls
Reports of branch  Reports of branch auditors , internal auditors and stock auditors
auditor
 Conclusions reached by the auditor
Conclusions reached

State the general guidelines for preparing audit working papers

( Dec – 2013 )
 Working papers should be clear and understandable without
supplementary oral explanations
 With the information the working papers reveal ,
Clarity
& A reviewer should be able to
Understanding  Readily determine their purpose
 The nature and scope of the work done
 The preparer’s conclusions
 Working papers should be complete , accurate and support observations ,
Completeness testing , conclusions , and recommendations
and Accuracy
 They should also show the nature and scope of the work performed
 Limit the information in working papers to matters that are important

Pertinence and necessary , to support the objectives and scope established for the
assignment

Logical  File the working papers in a logical order

Arrangement
 Working papers should be legible and as neat as practical
Legibility  Sloppy work papers may lose their worth as evidence
&
 Crowding and writing between lines should be avoided by anticipating
Neatness
space needs and arranging the work papers before writing

Safety  Keep your papers safe and retrievable

Initial and  Put your initials and date on every working paper
Date
 Summarize the results of work performed and identify the overall
Summary of
conclusions significance of any weakness or exceptions found

71
 Auditing Practices

What are the points for consideration in audit planning in relation to the audit engagement
( June – 2015 )
 This will include such matters as stocktaking , cash count ,
debtor’s circularization and review of previous year’s working
Preliminary work to papers
be done in addition to
 This will remind the auditor of those matters brought forward
the real audit work
from the previous year and any other points to ve resolved in the
current year or problems anticipated
 The auditor should acquaint himself with all the changes that

Changes in legislation took place during the year in applicable legislation , accounting
, accounting or any standard
auditing standards or
guidelines  This will help and auditor in carrying out the auditing assignment
in a way that meets the legislative requirement
 This will assist in establishing valuable ratios and indicators that
Analytical review of
available management will guide the auditor
accounts & other  For instance , the computation of the gross profit % compared
management
information that with that of the previous year will provide a good indicator to the
relate to the accounts auditor of the accuracy and reliability of sales and cost of sales
 The appointment of a new finance controller and the
establishment of a new business line or the creation of a new
branch are significant changes in the circumstances of the
Changes in the
business or company which will necessitate changes in the existing audit
management plans
 There may be similarly changes for which change may be
required in audit plan
 The introduction of computers such that when a company
Changes in the introduces significant changes in its operating procedures will
accounting system
require a review and evaluation of the system of internal control
 Where a client has set deadlines for its statutory activities such as
Deadlines established
for the submission of the annual general meeting, it is an important for the auditor to
audit report work in line with such programs

Use of rotational  In practice, the auditor may not carry out a hundred percent
testing testing or verification of the client’s transactions or segments of
&
Verification the business

72
 Auditing Practices

Test checking
( June – 2015 )
 It is a method of auditing where instead of a complete examination
Meaning of all the transactions only some of the transactions are selected
and verified
Precautions to be taken in Test Checking
 Entries selected for test checking must be representative of all
Representative of all
transactions transactions
Random  The selection of the items should be at random
Not for cash book  It cannot be adopted in case of vouching the cash book
 Client’s staff should not come to know of the entries selected for
Confidential
test checking
 Period selected for test checking should differ from book and year
Different periods
to year

Law requires  He should not adopt test checking where the law requires
thorough audit thorough audit
 A number of entries of the first and last month of the year must be
First & last month
checked thoroughly
 Test should be so devised that a sizeable portion of the work done
Sizeable portion
by each employee is checked
Control accounts or  Control accounts or impersonal ledger should not be subject to
impersonal ledger test checking
 Auditor should select the test independently without regard to the
Independently
suggestions of the member of the client’s staff
 Bank statement and entries for cash withdrawal and cash deposits
Bank statement
should be checked in full

Vouching and Objectives

 Vouching is a process of comparing the entries in the books with the

particulars in the voucher with regard to date, amount, name of the
party etc.
vouching
 Vouching is a substantive auditing procedure ( tests of details of
transactions )
Performed to obtain evidence as to the ( AVC )

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 Auditing Practices

 Accuracy
 Validity
 Completeness
Of data produced by the accounting system

Objectives of Vouching
Properly  All the transactions are properly accounted for in books of accounts
accounted
 Transactions represented by the entries have
Actually occurred  Actually occurred during the period &
& pertain to entity
 Pertain to the entity

Relate to business  Transaction which does not relate to business is entered in the books
 There are no fraudulent transactions recorded in the books of
No fraudulent
accounts

Proper evidence  All the entries and transactions are supported by proper evidences

Authorization  Entries and transactions are properly authorized

Not ultra vires  Transactions represented by the entries are not ultra vires the entity

Correct amounts  Transactions have been recorded at the correct amounts

Properly allotted  Transactions have allotted properly between capital and revenue

As an auditor of a company , how you instruct and guide your assistants about special
considerations to be borne in the course of vouching
( Dec – 2016 )
Within accounting period  The date of the voucher falls within the accounting period
Name should be same  The name as recorded and as contained in voucher is same
 Voucher / transactions therein are duly and properly authorized
Properly authorized
by the relevant signatory

Relates to business  The transaction for which payment have been made or amount
have been received relates to business

During relevant period  The transactions being examined belongs to the entity and took
place during the relevant period

Any alteration  Whether any alteration has been done in the voucher , if so
whether it has been duly recorded and authorized
 Whether any control number maintained on voucher or not.
Serially numbered
Whether there is any missing number or voucher

Proper amount  The transaction is recorded in the proper account and revenue

74
 Auditing Practices

or expenses is properly allocated to the accounting period

 All transactions which have actually occurred have been
Actually occurred recorded
 The posting from the voucher of the amount needs to be
Posting from vendors correctly taken in the final accounts, disclosed in accordance
with recognized accounting policies and procedures

Verification & its Objects

( June – 2017 )
 The term valuation refers to the ‘Process of ascertaining the values of various
categories of disclosed in the financial statements
 Both verification and valuation are considered as inseparable twins
Because the auditor has to satisfy himself both with regard to existence of the

Meaning assets physically and proper valuation them

Valuation of assets is a part of verification
 The auditor is not a technically qualified and competent value ,
 However, he is closely connected with values because the financial statements
which are certified by him are consisting of values only
Objectives
 Different categories of assets are valued according to the generally accepted
accounting principles consistently
 There is no over or under valuation of assets
 The values are properly disclosed in the financial statements

75
 Auditing Practices

What points be considered by the auditor while verifying the fixed assets of a company
( Dec – 2014 )
Existence  Verify existence of fixed asset by physically inspecting it
ownership  Verify ownership of fixed asset by inspecting the purchase invoices
 Register :
 In case of fixed assets owned is large, a Register is generally
Register maintained by the entity.
 The auditor should also examine it to ascertain existence &
ownership

Purchase  Verify the purchase of fixed asset by checking Board resolution &
supporting evidences like invoices
 In case of sales :
 Check the authority for sale with the board resolution
 Supporting evidences such as cash receipt
Sale  Check whether related accumulated depreciation have been
cancelled
 Check whither the profit on sale has been properly treated in
the accounts
Depreciation  See whether proper depreciation is provided in the accounts
Expenses on  Ensure that the expenses incurred for installation of the asset have
installation been capitalized
Self – generated  In case the fixed asset is self – generated see that no profits have
fixed asset been booked and only the cost incurred have been capitalized

Repairs  Review the repairs account to confirm that distinction is made

between capital & revenue
Insurance
 The auditor should also look into insurance policies taken or not

Charge  Ascertain the charges, if any , see whether Sec.77 of the company’s
Act have been complied with
CARO  See the compliance with CARO 2016 , Clause I

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 Auditing Practices

Distinguish Between ‘Vouching’ and ‘ Verification

( Dec – 2013 )
Verification Vouching
 Verification is the act of  Vouching is the act of checking the

Meaning checking title, possession and records with the help of evidential
valuation of assets documents
 Verification is specially related  Vouching is related to all the
Nature
to the assets and liabilities accounting documents
 Auditor himself perform the  Assistant staff or auditor performs
Person
work of verification the work of vouching
 Verification is made at the end  Vouching is made at the Beginning

Time of auditing or at the time of of auditing

checking Balance Sheet

What is tolerable terror

(PM)
 Tolerable error is
 the maximum error in the population that the auditor would be
Meaning willing to accept &
 still concludes that the result from the sample has achieved the
audit objective
 Tolerable error is considered
When it is
 during the planning stage &
considered
 for substantive procedures
Relationship  The smaller the tolerable error, the greater the sample size will need to be.
 In tests of control, the tolerable error is the maximum rate of deviation
In test control from a prescribed control procedure that the auditor would be willing to
accept, based on the preliminary assessment of control risk
 In substantive procedures, the tolerable error is the maximum monetary
In substantive
error in an account balance or class of transactions that the auditor would
procedures

77
 Auditing Practices

be willing to accept
 So that when the results of all audit procedures are considered, the
Reasonable
assurance auditor is able to conclude, with reasonable assurance, that the financial
statements are not materially misstated.

78