Initial Pages
Initial Pages
Initial Pages
PAPER 3
MODULE – 1
BOARD OF STUDIES
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA
This study material has been prepared by the faculty of the Board of Studies. The objective of the
study material is to provide teaching material to the students to enable them to obtain knowledge
in the subject. In case students need any clarifications or have any suggestions for further
improvement of the material contained herein, they may write to the Director of Studies.
All care has been taken to provide interpretations and discussions in a manner useful for the
students. However, the study material has not been specifically discussed by the Council of the
Institute or any of its Committees and the views expressed herein may not be taken to necessarily
represent the views of the Council or any of its Committees.
Permission of the Institute is essential for reproduction of any portion of this material.
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BEFORE WE BEGIN …
The Study Material of Advanced Auditing and Professional Ethics subject has been designed
having regard to the needs of home study and distance learning students. The study material
deals with the conceptual theoretical framework in detail. In each chapter, the topic has been
covered in a step by step approach. The text has been explained, where appropriate, through
illustrations, diagrams, tables, flowcharts, screenshots etc. You should go through the chapter
carefully ensuring that you understand the topic and then test your knowledge by attempting
question.
The Study Material has been divided into eighteen chapters in line with the syllabus and further
bifurcated into three modules for the easy handling and convenience of students. For bare text of
Guidance Notes and Auditing Standards, the students are advised to refer the “Auditing
Pronouncements” which has been separately published by the Board of Studies. For
understanding the coverage of the syllabus, it is important to read the study material along with the
Study Guidelines.
Framework of Chapters – Uniform Structure Comprising of Specific Components
Efforts have been made to present each topic of the syllabus in a lucid manner. Care has been
taken to present the chapters in a logical sequence to facilitate easy understanding by the
students.
Structure of the Study Material
The content for each chapter/unit at the Final level has been structured in the following manner –
S. Components of Each About the Component
No. Chapter
1. Learning Outcomes Learning outcomes which you need to demonstrate after
learning each topic have been detailed in the first page of each
chapter/unit. Demonstration of these learning outcomes would
help you to achieve the desired level of technical competence.
2. Chapter Overview As the name suggests, this chart/table would give a broad
outline of the contents covered in the chapter.
3. Introduction A brief introduction is given at the beginning of each
chapter/unit which would help you get a feel of the topic.
4. Content The concepts and provisions of law/standard are explained in
student-friendly manner with the aid of
Examples/illustrations/diagrams/flow charts. These value
additions would help you develop conceptual clarity and get a
good grasp of the topic. Diagrams and Flow charts would help
you understand the concept/provision in a better manner.
Illustrations would help you understand the application of
concepts/provisions.
5. Exercise Questions Exercising questions and answers alongwith MCQs would help
with Answers and you to apply what you have learnt in problem solving. In effect,
MCQs / Test Your it would sharpen your application skills and test your
Knowledge understanding as well as your application of
concepts/provisions.
Attention is invited to the Significant Additions/Modifications made in this edition of the Study
Material which are given on the next page.
We hope that these student-friendly features in the Study Material makes your learning process
more enjoyable, enriches your knowledge and sharpens your application skills.
Students are advised to refer Multiple Choice Questions (MCQs) inserted at the end of each of the
Chapters after Theoretical Questions under heading Test Your Knowledge.
SYLLABUS
PAPER – 3 : ADVANCED AUDITING AND PROFESSIONAL ETHICS
(One paper – Three hours – 100 marks)
Objective:
(a) To acquire the ability to analyse current auditing practices and procedures and apply them
in auditing engagements;
(b) To acquire the ability to solve cases relating to audit engagements.
Contents:
1. Auditing Standards, Statements and Guidance Notes: Engagement & Quality Control
Standards, Statements and Guidance Notes on Auditing issued by the ICAI; Elements of System of
Quality Control, Leadership Responsibilities for Quality within the Firm, Acceptance and
Continuance of Clients Relationships and Specific Engagements, Engagement Performances, etc.
(SQC 1 Quality Control for Firms that Perform Audits and Reviews of Historical Financial
Information and Other Assurance and Related Services Engagements).
2. Audit Planning, Strategy and Execution: Planning the Flow of Audit Work; Audit Strategy,
Audit Plan, Audit Programme and Importance of Supervision; Principal’s Ultimate Responsibility;
Extent of Delegation; Control over Quality of Audit Work; Analytical Procedures Prior to Audit as
well as towards finalization; Concept of Principal Auditor and Other Auditor, Acceptance as
Principal Auditor, Procedures to be Performed by Principal Auditor, Co-ordination between the
Principal Auditor and Other Auditor (SA 600 Using the Work of Another Auditor); Concept of
Internal Audit Functions and its evaluation, Using the work of the internal audit function, Using
Internal Auditors to Provide Direct Assistance (SA 610 Using the Work of Internal Auditors);
Auditor's Expert – Meaning, Need for an Auditor’s Expert, Understanding the Auditor’s Expert,
Agreement with the Auditor’s Expert, Adequacy of the Auditor’s Expert’s Work (SA 620 Using the
Work of an Auditor’s Expert).
3. Risk Assessment and Internal Control: Evaluation of Internal Control Procedures;
Components of Internal Controls; Internal Control and Risk Assessment; Risk-Based Audit- Audit
Risk Analysis, General Steps; Internal Audit; Reporting on Internal Control Weaknesses (SA 265
Communicating Deficiencies in Internal Control to Those Charged With Governance and
Management); Framework on Reporting of Internal Controls.
4. Special aspects of Auditing in an Automated Environment: Key Features of Automated
Environment, Related Risks and Controls, Standards, Guidelines and Procedures, Using Relevant
Frameworks and Best Practices, Understanding and Documenting Automated Environment,
Enterprise Risk Management Overview, Assessing IT-Related Risks and Controls, Evaluating
Risks and Controls at Entity Level and Process Level, Considerations of Automated Environment
at each Phase of Audit Cycle, Using Relevant Analytical Procedures and Tests Using Data
Analytics, Key Concepts of Auditing in Real-Time Automated Environments such as E-Commerce,
ERP, Core Banking, etc..
5. Audit of Limited Companies: Application of Relevant Provisions under the Companies
Act, 2013 relating to Audit and Auditors and Rules made thereunder; Powers/rights, Duties of
Auditors; Branch Audit; Significance of True and Fair View; Dividends and Divisible Profits-
Financial, Legal, and Policy Considerations; Depreciation; Special Features of Audit of Limited
Liability Partnerships (LLPs)- Eligibility for Audit, Appointment of Auditor, Remuneration, etc. Audit
Report under the Companies Act, 2013; Reporting under CARO.
6. Audit Reports: Basic Elements of Auditor’s Report; Types of Opinion; Notes on Accounts;
Distinction between Notes and Qualifications; Distinction between Audit Reports and Certificates;
Communication to Management and those Charged with Governance; Self Review Threats;
Drafting of Different Types of Audit Reports.
7. Audit Committee and Corporate Governance: Audit committee; Role of Auditor in Audit
Committee and Certification of Compliance of Corporate Governance; Compliances with Laws and
Regulations (SA 250 Consideration of Laws and Regulations in an Audit of Financial Statements);
Disclosure requirements including those of SEBI; Regulatory requirements of Corporate
Governance, Report on Corporate Governance.
8. Audit of Consolidated Financial Statements: Provisions under the Companies Act, 2013
in respect of Accounts of Companies and Rules made thereunder; Audit of Consolidated Financial
Statements - Responsibility of Parent Company, Auditor of the Consolidated Financial Statements;
Audit Considerations - Permanent Consolidation, Current Period Consolidation; Reporting.
9. Special Features of Audit of Banks, Insurance & Non Banking Financial Companies
10. Audit under Fiscal Laws: Audit under Fiscal Laws, viz, Direct and Indirect Tax Laws
including Documentation for Form 3CD etc.
11. Audit of Public Sector Undertakings: Special features, Directions of Comptroller and
Auditor General of India; Concept of Propriety Audit; Performance Audit; Comprehensive Audit.
12. Liabilities of Auditors: Professional Negligence; Civil Liabilities; Criminal Liabilities;
Liabilities under Different Statutes - for example Income Tax Act, Companies Act.
13. Internal Audit, Management and Operational Audit: Provisions of Internal Audit as per
Companies Act, 2013; Scope of Internal Auditing; Relationship between Internal and External
Auditor; Basics of Internal Audit Standards issued by the ICAI; Drafting of Internal Audit Report;
Management Audit and Operational Audit.
14. Due Diligence, Investigation and Forensic Audit: Due Diligence Review; Audit versus
Investigation; Steps for Investigation; Types of Investigation; Procedure, Powers, etc. of
Investigator; Types of Fraud, Indicators of Fraud, Follow-up thereof; Forensic Audit- meaning,
difference between Statutory Audit and Forensic Audit, Forensic Audit Techniques, Forensic Audit
Report etc.
15. Peer Review and Quality Review
16. Professional Ethics: Code of Ethics with special reference to the relevant provisions of the
Chartered Accountants Act, 1949 and the Regulations thereunder.
Note:
(i) The specific inclusions/exclusions, in any topic covered in the syllabus, will be effected
every year by way of Study Guidelines.
(ii) The provisions of the Companies Act, 1956 which are still in force would form part of the
syllabus till the time their corresponding or new provisions of the Companies Act, 2013 are
enforced.
(iii) If new legislations/ Engagement and Quality Control Standards /Guidance
Notes/Statements are enacted in place of the existing legislations, the syllabus would
include the corresponding provisions of such new legislations with effect from a date
notified by the Institute. The changes in this regard would also form part of Study
Guidelines.
CONTENTS
MODULE – 1
Chapter 1: Auditing Standards, Statements and Guidance Notes – An Overview
Chapter 2: Audit Planning, Strategy and Execution
Chapter 3: Risk Assessment and Internal Control
Chapter 4: Special Aspects of Auditing in an Automated Environment
Chapter 5: Audit of Limited Companies
Chapter 6: Audit Reports
MODULE – 2
Chapter 7: Audit Committee and Corporate Governance
Chapter 8: Audit of Consolidated Financial Statements
Chapter 9: Audit of Banks
Chapter 10: Audit of Insurance Companies
Chapter 11: Audit of Non Banking Financial Companies
Chapter 12: Audit under Fiscal Laws
MODULE – 3
Chapter 13: Audit of Public Sector Undertakings
Chapter 14: Liabilities of Auditors
Chapter 15: Internal Audit, Management and Operational Audit
Chapter 16: Due Diligence, Investigation and Forensic Audit
Chapter 17: Peer Review and Quality Review
Chapter 18: Professional Ethics
Contents:
1. Introduction ................................................................................................................. 1.2
2. Historical Retrospect .................................................................................................... 1.2
3. Auditing and Assurance Standards Board-Scope and Functions ................................... 1.3
3.1 Setting up of AASB ......................................................................................... 1.3
3.2 Scope and Functions of AASB ........................................................................ 1.4
3.3 Scope of SAs .................................................................................................. 1.4
3.4 Procedure for Issuing SAs............................................................................... 1.5
3.5 Compliance with the SAs ................................................................................ 1.5
3.6 Linkage between SAs and Disciplinary Proceedings ........................................ 1.5
4. Framework of Standards and Guidance Notes on Related Services .............................. 1.6
5. Quality Control and Engagement Standards ................................................................. 1.8
5.1 Structure of SAs ........................................................................................... 1.11
6. Guidance Notes ......................................................................................................... 1.11
6.1 Guidance Note on Tax Audit under Section 44AB of the Income-Tax Act........ 1.11
6.2 Guidance Note on Audit of Internal Financial Controls over
Financial Reporting ....................................................................................... 1.12
7. Guidance Note(s) on Related Services ....................................................................... 1.12
8. Authority Attached to the Documents issued by the Institute/MCA ............................... 1.12
8.1 Statements ................................................................................................... 1.13
8.2 Guidance Notes ............................................................................................ 1.13
Contents:
1. Commencing an Audit .................................................................................................. 2.2
1.1 Benefits/Advantages of Planning in an Audit of Financial Statements ............... 2.2
Contents:
1. Introduction ................................................................................................................. 3.2
2. Internal Control System - Nature, Scope, Objectives and Structure ............................... 3.5
2.1 Nature of Internal Control ................................................................................ 3.5
2.2 Scope of Internal Controls ............................................................................... 3.6
2.3 Objectives of Internal Control System .............................................................. 3.6
2.4 Structure of Internal Control ............................................................................ 3.8
3. Components of Internal Controls ................................................................................ 3.10
3.1 Control Environment ..................................................................................... 3.10
3.2 Entity’s Risk Assessment Process ................................................................. 3.11
3.3 Control Activities ........................................................................................... 3.13
3.4 Information System, including the Related Business Processes,
Relevant to Financial Reporting, and Communication ................................... 3.14
3.5 Monitoring of Controls ................................................................................... 3.14
4. Review of the system of Internal Controls ................................................................... 3.17
5. Methods of Recording ................................................................................................ 3.19
5.1 Questionnaire ............................................................................................... 3.19
5.2 Check List .................................................................................................... 3.21
5.3 Flow Chart .................................................................................................... 3.22
6. Internal Control and Risk Assessment ........................................................................ 3.29
6.1 Preliminary Assessment of Control Risk ........................................................ 3.31
6.2 Relationship between the Assessments of Inherent and Control Risk: ............ 3.35
6.3 Detection Risk .............................................................................................. 3.35
7. Internal Control Assessment & Evaluation .................................................................. 3.38
8. Reporting to clients on Internal Control Weaknesses .................................................. 3.39
9. Risk Based Audit ....................................................................................................... 3.41
9.1 Audit Risk Analysis ....................................................................................... 3.42
9.2 General Steps in the Conduct of RBA ............................................................ 3.43
10. Frameworks of Internal Control .................................................................................. 3.44
10.1 International Internal Control Frameworks: .................................................... 3.45
TEST YOUR KNOWLEDGE .................................................................................................... 3.49
Contents:
1. Introduction ................................................................................................................. 6.2
2. The Auditor’s Report on Financial Statements .............................................................. 6.2
3. SA-700, “Forming an Opinion and Reporting on the Financial Statements” .................... 6.3
3.1 Purpose .......................................................................................................... 6.4
3.2 Basic Elements of the Auditor’s Report ............................................................ 6.4