INTER CA NOV’20

AUDIT

PROF. RAHUL MEHTA

 Preface

Dear Students,

Auditing is the subject which is given a step motherly

treatment by most of the students simply because it is a
theoretical subject. The hard reality is that ultimately it
claims many casualties.

As we proceed with our course, you will be amazed when

you realise that Auditing is actually the most practical
oriented subject in C.A. curriculum. You as students are going
to have the rare opportunity to discuss the theoretical
concepts in relation to the practical situations. It is this rare
opportunity which will give you the chance of changing your
entire attitude towards auditing.

In order to know the exact scope of the subject, the syllabus is

divided into many topics. Each topic has been created to
comprehensively cover not only the concepts but also carefully
selected examination questions which are a reflection of the
past and a peep into the future.

The coaching is well- planned, systematic, time bound and

totally examination oriented. The coaching coupled with this
study material is indeed your vehicle to success.

I wish you a very happy study time.

BEST OF LUCK

- J. K. SHAH CLASSES.
 ABOUT THE PROFESSOR :

Prof. Rahul Mehta,

CA, MCom.

Prof. Rahul possesses practical as well as theoretical

knowledge in the subject of Auditing. He has a way to
simplify theoretical subjects to understand them with
conceptual clarity and putting them on paper in exam.

Having a teaching experience of over 9 years, he has taught

more than 35000 students in 10 cities covering the huge
expanse of the country.

 Ahmedabad
 Bengaluru
 Chennai
 Coimbatore
 Hyderabad
 Indore
 Jaipur
 Kolkata
 Mumbai
 Rajkot

This book covers every aspect of the subject of auditing as

required in CA - Inter, and contains material that is enough
to ensure that you clear the subject with flying colours.
 INTER C.A. - AUDIT

INDEX AS GIVEN BY THE ICAI

Chapter Page
Chapter Name
No No.

PART A - CONTENT

1. Nature Scope and Objectives of Audit 1 – 13

2. Audit Strategy, Planning and Programming 14 – 22

3. Audit Evidence and Documentations 23 – 43

4. Risk Assessment and Internal Control 44 – 56

5. Auditor’s responsibility in relation to Fraud 57 – 65

6. Audit in an Automated Environment 66 – 71

7. Audit Sampling 72 – 80

8. Analytical Procedures 81 – 85

9. Audit of Items of Financial Statements 86 – 112

10. Company Audit 113 - 151

11. Audit Report 152 – 161

12 Audit of Banks 162 – 180

13 Audit of Different Types of Entities 181 – 204

PART B – Brief Answers- Practice Questions 205 – 244

PART C – MCQ’S 245 – 410

PART D – Correct Or Incorrect Questions 411 – 443

PART E – Past Question Papers 444 – 478

ANNEXURE: Bare SAs From Auditing Pronouncements 479 – 587

  STUDY PLAN FOR AUDIT FAST TRACK 

Dear students, I have prepared a complete study plan for Audit preparation,
guiding you with the sequence in which each chapter should be studied as well
as the ideal time in which you can complete the entire subject. You can
complete studying the entire subject in less than two weeks if you just follow
this plan and dedicate the required hours daily for Audit.

Day Chapter No Chapter Name

1 - Introduction to subject of Auditing
1 Nature, Scope & objective of Audit (1)

1 Nature, Scope & objective of Audit (2)

2 3 Audit Documentation & Audit evidence

2 Audit strategy, audit Planning & Audit Programming

3 5 Auditor’s Responsibility in Relation to Fraud

9 Audit of items of Financial Statements

4 4 Risk Assessment & Internal control (1)

4 Risk Assessment & Internal Control (2)

5 10 Company Audit (1)

10 Company Audit (2)

6 10 Company Audit (3)

10 Company Audit (4)

7 10 Company Audit (5)

11 Auditor’s Report

8 8 Analytical Procedures
7 Audit Sampling
 9 13 Audit of different types of entities (1)
13 Audit of different types of entities (2)

10 12 Audit of Banks (1)

12 Audit of Banks (2)
6 Audit in an automated environment

11 Standards on Auditing introduction

SA 200
SA 210
SA 220
SA 500
SA 501

12 SA 505
SA 580
SA 510
SA 560
SA 570
SA 320

13 SA 550
SA 315
SA 610
SA 710
SA 250
SA 299
SA Conclusion

13 - Miscellaneous
Subject Conclusion

Good luck and happy studying!

Prof. Rahul Mehta
PART – A
CONTENT
INTER C.A. - AUDIT

1 NATURE, SCOPE
AND OBJECTIVE
OF AUDIT

PART A : CONTENT

JKSC Textbook
Sr.No ICAI module reference
Reference

1 Meaning and Definition of Audit Topic 1

2 Objectives of Auditing Topic 2

3 Scope of Audit and Aspects to be covered Topic 3

4 Types of Audit Topic 4

5 Advantages of Audit Topic 6

6 Inherent Limitations of Audit Topic 5

7 Relationship of Auditing with other disciplines Topic 7

8 Standard Setting Process SA annexure

9 Qualities of an Auditor Topic 8 & 13

10 Elements of a System of Quality Control Topic 9 & 10

11 Preconditions for an Audit Topic 11

12 Agreement on Audit Engagement Terms Topic 11

13 Recurring Audits Topic 11

14 Limitation on Scope Prior to Audit Engagement Topic 11
Acceptance
15 Acceptance of a Change in Engagement Topic 11

Extra Basic Principles Governing an Audit Topic 12

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Sr.No Particulars

1 Audit- Definition and meaning

1.1 Definition
As per the ICAI, “An audit is independent examination of financial
information of any entity, whether profit oriented or not, and
irrespective of its size or legal form, when such an examination is
conducted with a view to expressing an opinion thereon.”
1.2 Elaboration:
The person conducting this task should take care to ensure that financial
statements would not mislead anybody. This he can do honestly by satisfying
himself that:
1.2.1 the accounts have been drawn up with reference to entries in the books of
account
1.2.2 the entries in the books of account are adequately supported by sufficient
and appropriate evidence
1.2.3 none of the entries in the books of account has been omitted in the process of
compilation and nothing which is not in the books of account has found
place in the statements
1.2.4 the information conveyed by the statements is clear and unambiguous
1.2.5 the financial statement amounts are properly classified, described and
disclosed in conformity with accounting standards
1.2.6 the statement of accounts present a true and fair picture of the operational
results and of the assets and liabilities
2 Objectives of Audit:
Objective means the purpose for which audit is conducted. The objectives
of auditor are based on the following principles:
2.1 Preparation and presentation of financial statements is the responsibility of
management.
2.2 Prevention and detection of fraud and errors is the responsibility of
management.
2.3 Auditor’s duty is to express an opinion on financial statements
2.4 Auditor cannot be held responsible for the fraud done by management if
auditor was not negligent in performing his duties. However, if it is proved
that auditor was negligent then he can be held responsible for fraud.
2.5 Auditor is a watchdog and not a bloodhound i.e. auditor performs audit
procedures with a questioning mind and not a suspicious mind. He will accept
the records and documents as genuine unless he finds evidence which creates
a doubt over reliability and correctness of such records and documents

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2.6 Based on the above auditor’s objectives can be classified as follows:

PRIMARY OBJECTIVE: The primary objective of auditor is to form and
express an opinion via audit report whether financial statements show a true
and fair view of state of affairs and profit & loss account and cash flows for the
year ended.
SECONDARY OBJECTIVE/DERIVED OBJECTIVE/INCIDENTAL OBJECTIVE :
The secondary objective of auditor is prevention and detection of fraud and
errors during the course of audit.
2.7 SUPPORTING CASE LAW:
If there remains a deep laid fraud in the accounts, which in the normal course
of examination of accounts may not come to light, it will not be construed as
failure of audit, provided the auditor was not negligent in the carrying out his
normal work. This principle was established as early as in 1896 in the leading
case in Re-Kingston Cotton Mills Co.
3 Scope of Audit
Scope means Coverage i.e. areas and extent to be covered by an auditor while
conducting audit of financial statements. Scope of audit is governed
by following factors:
3.1 Applicable law and regulation E.g. Sec 139-148 of Companies Act, 2013
3.2 The ICAI Pronouncements E.g. Standards on Auditing issued by Auditing and
Assurance Standard Board
3.3 The Terms of Engagement i.e. terms of contract between auditor and the
management
3.4 The terms of engagement cannot, however, restrict the scope of an audit in
relation to matters which are prescribed by legislation or by the
pronouncements of the Institute.
The auditor is not expected to perform duties which fall outside the
scope of audit.
3.5 The principal aspect to be covered in an audit concerning final
statements of account are the following:
3.5.1 An examination of the system of accounting and internal control to ascertain
whether it is appropriate for the business and helps in properly recording all
transactions.
3.5.2 Reviewing the system and procedures to find out whether they are adequate
3.5.3 Checking of the arithmetical accuracy of the books of account by the
verification of postings, balances, etc.
3.5.4 Verification of the authenticity and validity of transaction entered into by
making an examination of the entries in the books of accounts with the
relevant supporting documents.
3.5.5 Comparison of the balance sheet and profit and loss account or other
statements with the underlying record in order to see that they are in
accordance therewith.
3.5.6 Verification of the title, existence and value of the assets appearing in the
balance sheet.

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3.5.7 Verification of the liabilities stated in the balance sheet.

3.5.8 Checking the result shown by the profit and loss and to see whether the
results shown are true and fair.
3.5.9 Confirming that the statutory requirements have been complied with.
3.5.10 Reporting to the appropriate person/body whether the statements of account
examined do reveal a true and fair view of the state of affairs and
of the profit and loss of the organisation
4 Types of Audit
4.1 Statutory Audit- Audit required under law: The organisations which require
audit under law are the following:
(a) Companies governed by the Companies Act, 2013;
(b) Banking companies governed by the Banking Regulation Act, 1949;
(c) Electricity supply companies governed by the Electricity Supply Act,
1948;
(d) Co-operative societies registered under the Co-operative Societies Act,
1912;
(e) Public and charitable trusts registered under various Religious and
Endowment Acts;
(f) Corporations set up under an Act of Parliament or State Legislature
such as the Life Insurance Corporation of India.
(g) Specified entities under various sections of the Income-tax Act, 1961
4.2 Voluntary Audit- In the voluntary category are the audits of the accounts of
proprietary entities, partnership firms, Hindu undivided families, etc. In
respect of such accounts, there is no basic legal requirement of audit.
5 Inherent Limitations of Auditing:
The process of auditing is such that it suffers from certain limitations,
i.e. The limitation which auditor cannot overcome irrespective of the
nature and extent of audit procedures. The limitations arise from:
5.1 Nature of financial reporting: Many financial statement items involve
subjective decisions or assessments or a degree of uncertainty, and there may
be a range of acceptable interpretations or judgments that may be made.
Auditor cannot obtain conclusive evidence for such items and hence there is a
possibility that management may intentionally or unintentionally under
recognise or over recognise certain financial items.
5.2 Nature of audit procedures: There is the possibility that management or
others may not provide, intentionally or unintentionally, the complete
information that is relevant to the preparation and presentation of the
financial statements or that has been requested by the auditor. Auditor has
limited legal powers and hence it is possible that he may not be able to detect
certain errors
5.3 Cost-Benefit analysis: There is a balance to be struck between the reliability
of information and its cost. Auditor needs to evaluate the cost to be incurred
and the value of the information obtained i.e. whether it is worth to incur the
cost or not. Due to the cost constraints, he may be unable to perform in-depth
examination

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5.4 Timelines of financial reporting:

There is an expectation by users of financial statements that the auditor will
form an opinion on the financial statements within a reasonable period of
time and hence it is impracticable to address all information. Auditor
performs audit procedures on sampling basis to form and express an opinion
and it is possible that he may not be able to detect certain material errors due
to sampling technique
Due to the above inherent limitations, the auditor is not expected to, and
cannot, reduce audit risk to zero and cannot therefore obtain absolute
assurance that the financial statements are free from material misstatement
due to fraud or error.

6 Advantages of Audit
6.1 It safeguards the financial interest of persons who are not associated with the
management of the entity, whether they are partners or shareholders.
6.2 It acts as a moral check on the employees from committing defalcations or
embezzlement.
6.3 Audited statements of account are helpful in settling liability for taxes,
negotiating loans and for determining the purchase consideration for a
business.
6.4 These are also useful for settling trade disputes for higher wages or bonus as
well as claims in respect of damage suffered by property, by fire or some other
calamity.
6.5 An audit can also help in the detection of wastages and losses to show the
different ways by which these might be checked, especially those that occur
due to the absence or inadequacy of internal checks or internal control
measures.
6.6 Audit ascertains whether the necessary books of account and allied records
have been properly kept and helps the client in making good deficiencies or
inadequacies in this respect.
6.7 As an appraisal function, audit reviews the existence and operations of
various controls in the organisations and reports weaknesses, inadequacies,
etc., in them.
6.8 Audited accounts are of great help in the settlement of accounts at the time of
admission or death of partner.
6.9 Government may require audited and certified statement before it gives
assistance or issues a license for a particular trade
7 Relationship of Auditing with other discipline
7.1 Auditing and Accounting: It has been pointed out earlier that both accounting
and auditing are closely related with each other as auditing reviews the
financial statements which are nothing but a result of the overall accounting
process

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7.2 Auditing and Law: The relationship between auditing and law is very close
one.
Auditing involves examination of various transactions from the view point of
whether or not
these have been properly entered into
7.3 Auditing and Economics: As, it is well known, accounting is concerned with
the accumulation and presentation of data relating to economic activity. From
the auditing view point, the auditors are more concerned with Micro
economics rather than with the Macro economics
7.4 Auditing and Behavioural Science: The discipline of behavioural science is
closely linked with the subject of auditing. While it may be said that an
auditor, particularly the financial auditor, deals basically with the figures
contained in the financial statements but he shall be required to interact with
a lot of people in the organisation. The knowledge of human behaviour is
indeed very essential for an auditor so as to effectively discharge his duties
7.5 Auditing and Statistics & Mathematics: With the passage of time, test check
procedures in auditing have become part of generally accepted auditing
procedures. With the emergence of test check procedure, discipline of
statistics has come quite close to auditing as the auditor is also expected to
have the knowledge of statistical sampling so as to arrive at meaningful
conclusions. The knowledge of mathematics is also required on the part of
auditor particularly at the time of verification of inventories.
7.6 Auditing and Data Processing: Today, organisations are witnessing revolution
in the field of data processing of accounts. Many organisations are carrying
out their financial accounting activities with the help of computers. With such
a phenomenal growth in the field of computer sciences, the auditor should
have good knowledge of the components, general capability of the system and
the related terms
7.7 Auditing and Financial Management: Auditing is also closely related with
other functional fields of business such as finance, production, marketing,
personnel and other general areas of business management. With the
overgrowing field of auditing, the financial services sector occupies a
dominant place in our system.
7.8 Auditing and Production: Regarding production function, it may be stated that
a good auditor is one who understands the client and his business. While
carrying out the audit activity, the auditor is required to evaluate transactions
from the accounting aspect in relation to the process through which it has
passed through as accounting for by-products; joint-products may also
require to be done.
8 Independence of Auditor
8.1 Independence cannot be defined as it is a state of mind.

8.2 Independence means that auditor’s judgment should not be influenced in

any situation.

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8.3 The ICAI has issued a guidance note on Independence of auditors. According
to the guidance note independence implies that judgment of a person is not
subordinate to wishes or directions of another person who might have
engaged him or to his own self-interest.

8.4 It is not only important to be independent but it is also important to appear as

independent i.e. independence of mind and independence of appearance
should co-exist. Independence of auditor must not only exist in fact, but
should also appear to exist to all reasonable persons
8.5 Threats to Independence:
⇨ There are various threats to independence such as financial interest
threat, familiarity threat and self review threat where auditor’s judgment
may come under influence.
⇨ In order to secure independence of auditor there are safeguards in the
form of statutory provisions mentioned in Companies Act, 2013 and
Chartered Accountants Act, 1949
⇨ The Code of ethics for professional Accountants prepared by the
International federation of Accountants (IFAC) identifies five types of
threats. These are:
8.5.1 Self-interest threats, which occur when an auditing firm, its partner or
associate could benefit from a financial interest in an audit client. Examples
include (i) direct financial interest or materially significant indirect financial
interest in a client, (ii) loan or guarantee to or from the concerned client etc.
8.5.2 Self-review threats, which occur when during a review of any judgement or
conclusion reached in a previous audit or non-audit engagement (Non audit
services include any professional services provided to an entity by an
auditor, other than audit or review of the financial statements etc.
8.5.3 Advocacy threats, which occur when the auditor promotes, or is perceived to
promote, a client’s opinion to a point where people may believe that
objectivity is getting compromised, e.g. when an auditor deals with shares or
securities of the audited company, or becomes the client’s advocate in
litigation and third party disputes etc
8.5.4 Familiarity threats are self-evident, and occur when auditors form
relationships with the client where they end up being too sympathetic to the
client’s interests.
This can occur in many ways:
(i) Close relative of the audit team working in a senior position in the
client company,
(ii) Former partner of the audit firm being a director or senior employee of
the client etc.

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8.5.5 Intimidation threats, which occur when auditors are deterred from acting
objectively with an adequate degree of professional skepticism. Basically,
these could happen because of threat of replacement over disagreements with
the application of accounting principles, or pressure to disproportionately
reduce work in response to reduced audit fees etc.
9 SA 220- Elements of Firm’s system of Quality Control (Memory Code:
LEHEM)
The firm’s system of quality control should include policies and
procedures addressing each of the following elements:
9.1 Leadership responsibilities for quality within the firm:
⇨ As per SA 220 “Quality Control for an Audit of Financial Statements”, the
engagement partner shall take responsibility for the overall quality on
each audit engagement to which that partner is assigned.
⇨ The actions of the engagement partner and appropriate messages to the
other members of the engagement team, in taking responsibility for the
overall quality on each audit engagement, emphasise:
(a) The importance to audit quality of:
(i) Performing work that complies with professional standards and
regulatory and legal requirements;
(ii) Complying with the firm’s quality control policies and
procedures as applicable;
(b) The fact that quality is essential in performing audit engagements

9.2 Ethical requirements:

⇨ The auditor shall comply with relevant ethical requirements, including
those pertaining to independence, relating to financial statement audit
engagements.
⇨ Relevant ethical requirements ordinarily comprise the Code of Ethics for
Professional Accountants (IESBA Code) related to an audit of financial
statements.
⇨ The Code establishes the following as the fundamental principles of
professional ethics relevant to the auditor when conducting an audit of
financial statements :
(a) Integrity;
(b) Objectivity;
(c) Professional competence and due care;
(d) Confidentiality; and
(e) Professional behavior.

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9.3 Human resources

⇨ The firm should establish policies and procedures designed to provide it
with reasonable assurance that it has sufficient personnel with the
capabilities, competence, and commitment to ethical principles.
⇨ Such policies and procedures shall address the following issues:
(a) Recruitment;
(b) Performance evaluation;
(c) Capabilities;
(d) Competence
(e) Career Development
9.4 Engagement performance.
Matters to be addressed for improving engagement performance include the
following:
9.4.1 How engagement teams are briefed on the engagement to obtain an
understanding of the objectives of their work
9.4.2 Processes for complying with applicable engagement standards
9.4.3 Processes of engagement supervision, staff training and coaching

9.4.4 Methods of reviewing the work performed, the signifi cant judgments made
and the form of report being issued.
9.4.5 Appropriate documentation of the work performed and of the timing and
extent of the review.
9.4.6 Processes to keep all policies and procedures updated

9.5 Monitoring
Such policies and procedures should include an ongoing consideration and
evaluation of the firm’s system of quality control, including a periodic
inspection of a selection of completed engagements
10 Acceptance and Continuance of Client Relationship
⇨ The engagement partner shall be satisfied that appropriate procedures
regarding the acceptance and continuance of client relationships and
audit engagements have been followed.
⇨ SQC 1 requires the firm to obtain information before accepting an
engagement. Information such as the following assists the engagement
partner in determining whether the decisions regarding the acceptance
and continuance of audit engagements are appropriate:
10.1 The integrity of the principal owners, key management and those charged
with governance of the entity
10.2 Whether the engagement team is competent to perform the audit engagement
and has the necessary capabilities, including time and resources
10.3 Whether the firm and the engagement team can comply with relevant ethical
requirements

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10.4 Significant matters that have arisen during the current or previous audit
engagement, and their implications for continuing the relationship
If the engagement partner obtains information that would have caused the firm to
decline the audit engagement had that information been available earlier, the
engagement partner shall communicate that information promptly to the firm, so that
the firm and the engagement partner can take the necessary action
11 SA 210- Agreeing to the terms of Audit Engagement
11.1 Pre-conditions
11.1.1 Determine whether the financial reporting framework to be applied in the
preparation of the financial statements is acceptable; and
11.1.2 Obtain the agreement of management that it acknowledges and understands
its responsibility:
(i) For the preparation of the financial statements in accordance with the
applicable financial reporting framework, including where relevant
their fair presentation
(ii) For such internal control as management determines is necessary to
enable the preparation of financial statements that are free from
material misstatement, whether due to fraud or error
(iii) To provide the auditor with:
(a) Access to all information of which management is aware that is
relevant to the preparation of the financial statements such as
records, documentation and other matters;
(b) Additional information that the auditor may request from
management for the purpose of the audit; and
(c) Unrestricted access to persons within the entity from whom the
auditor determines it necessary to obtain audit evidence
11.1.3 If the preconditions for an audit are not present, the auditor shall discuss the
matter with management. Unless required by law or regulation to do so, the
auditor shall not accept the proposed audit engagement.
11.2 Terms of Engagement
the agreed terms of the audit engagement shall be recorded in an audit
engagement letter or other suitable form of written agreement and shall
include:
11.2.1 The objective and scope of the audit of the financial statements;

11.2.2 The responsibilities of the auditor;

11.2.3 The responsibilities of management;
11.2.4 Identification of the applicable financial reporting framework for the
preparation of the financial statements; and
11.2.5 Reference to the expected form and content of any reports to be issued by the
auditor and a statement that there may be circumstances in which a report
may differ from its expected form and content
11.2.6 Audit Remuneration and other matters as agreed between auditor and the
management.

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11.3 Recurring Audit.

On recurring audits, the auditor shall assess whether circumstances
require the terms of the audit engagement to be revised and whether
there is a need to remind the entity of the existing terms of the audit
engagement
11.3.1 Any indication that the entity misunderstands the objective and scope of the
audit
11.3.2 Any revised or special terms of the audit engagement.
11.3.3 A recent change of senior management.
11.3.4 A significant change in ownership

11.3.5 A significant change in nature or size of the entity‟s business

11.3.6 A change in legal or regulatory requirements
11.3.7 A change in the financial reporting framework adopted in the preparation of
the financial statements
11.3.8 A change in other reporting requirements

11.4 Limitation on Scope prior to Audit Engagement

11.4.1 If management or those charged with governance impose a limitation on the
scope of the auditor’s work in the terms of a proposed audit engagement then
auditor shall evaluate the possible effect of such changes.
11.4.2 If the auditor believes the limitation will result in the auditor disclaiming an
opinion on the financial statements, the auditor shall not accept such a limited
engagement as an audit engagement, unless required by law or regulation to
do so.
11.5 Acceptance of a change in the terms of engagement
11.5.1 The auditor shall not agree to a change in the terms of the audit engagement
where there is no reasonable justification for doing so.
11.5.2 If, prior to completing the audit engagement, the auditor is requested to
change the audit engagement to an engagement that conveys a lower level of
assurance, the auditor shall determine whether there is reasonable
justification for doing so.
11.5.3 If the terms of the audit engagement are changed, the auditor and
management shall agree on and record the new terms of the engagement in an
engagement letter or other suitable form of written agreement.

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11.5.4 If the auditor is unable to agree to a change of the terms of the audit
engagement and is not permitted by management to continue the original
audit engagement, the auditor shall:
(i) Withdraw from the audit engagement where possible under applicable
law or regulation; and
(ii) Determine whether there is any obligation, either contractual or
otherwise, to report the circumstances to other parties, such as those
charged with governance, owners or regulators
12 Basic Principles Governing an Audit of Financial Statements.
The basic principles which govern the auditor’s professional responsibilities
and which should be complied with wherever an audit is carried are described
below:
12.1 Planning: The auditor should plan his work to enable him to conduct an
effective audit in an efficient and timely manner. Plans should be based on
knowledge of the client’s business.
12.2 Confidentiality: The auditor should respect the confidentiality of information
acquired in the course of his work and should not disclose any such
information to a third party without specific authority or unless there is a legal
or professional duty to disclose.
12.3 Work performed by others: When the auditor delegates work to assistants
or uses work performed by other auditors and experts, he continues to be
responsible for forming and expressing his opinion on the financial
information. However, he will be entitled to rely on work performed by others,
provided he exercises adequate skill and care and is not aware of any reason
to believe that he should not have so relied.
12.4 Accounting system and Internal Control: The auditor should gain an
understanding of the accounting system and related controls and should study
and evaluate the operation of those internal controls upon which he wishes to
rely in determining the nature, timing and extent of other audit procedures.
12.5 Audit evidence: The auditor should obtain sufficient appropriate audit
evidence through the performance of audit procedures to enable him to draw
reasonable conclusions there from on which to base his opinion on the
financial information.
12.6 Audit Conclusions and Reporting: The auditor should review and assess the
conclusions drawn from the audit evidence obtained and from his knowledge
of business of the entity as the basis for the expression of his opinion on the
financial information.
12.7 Documentation: The auditor should document matters which are important
in providing evidence that the audit was carried out in accordance with the
basic principles.

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12.8 Integrity, objectivity and independence: The auditor should be straight

forward, honest and sincere in his approach to his professional work. He
should maintain an impartial attitude and both be and appear to be free of
any interest which might be regarded, whatever is actual effect, as being
incompatible with integrity and objectivity.
12.9 Skills and Competence: The audit should be performed and the report
prepared with due professional care by persons who have adequate training,
experience and competence in auditing. The auditor requires specialised skills
and competence along with a continuing awareness of developments on
accounting and auditing matters, and relevant regulations and statutory
requirements.
13 Qualities of Auditor:
13.1 Personal Qualities:
tact, caution, firmness, good temper, integrity, discretion, industry,
judgement, patience, clear headedness and reliability

13.2 Knowledge of:

(a) General principles of law
(b) Companies Act and law relating to contracts
(c) Special statute governing the undertakings
(d) Taxation
(e) Financial and management accounting
13.3 Both practical training and theoretical education are equally necessary for
the development of professional competence of an auditor for undertaking any
kind of audit assignment

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2 AUDIT STRATEGY
PLANNING AND
PROGRAMMING

Sr.No ICAI Module reference JKSC Topic Reference

1 Audit Planning Topic 1 & 2

2 Audit Strategy Topic 3

3 Relationship between audit strategy and audit plan Topic 4

4 Development of Audit Plan Topic 1.2

5 Audit Planning- A Continuous Process Topic 1.3

6 Overall audit strategy and the audit plan- the auditor’s Topic 3
responsibility
7 Changes to the planning decisions during the course of Topic 6
audit
8 Direction Supervision and Review Topic 7

9 Documentation of Audit Plan End of Topic 8

10 Audit Programme Topic 8

11 Quality Control for Audit Work- Delegation and SA 220- Chapter

Supervision of Audit Work 1
12 Audit Planning and Materiality Topic 9

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Sr. No Particulars
1 Audit planning- Basics
1.1 The auditor should plan his work to enable him to conduct an effective
audit in an efficient and timely manner.
1.2 Plans should be based on knowledge of the client’s business”. Plans should
be made to cover, among other things:
1.2.1 acquiring knowledge of the client’s accounting systems, policies and internal
control procedures;
1.2.2 establishing the expected degree of reliance to be placed on internal control;
1.2.3 determining and programming the nature, timing, and extent of the audit
procedures to be performed; and
1.2.4 coordinating the work to be performed.
1.3 SA-300, “Planning an Audit of Financial Statements” further expounds this
principle.
According to it, planning is not a discrete phase of an audit, but rather a
continual and iterative process that often begins shortly after (or in
connection with) the completion of the previous audit and continues until
the completion of the current audit engagement.
For example, planning includes the need to consider:
The analytical procedures to be applied as risk assessment procedures.
2. Obtaining a general understanding of the legal and regulatory framework
applicable to the entity and how the entity is complying with that framework.
The determination of materiality.
The involvement of experts.
The performance of other risk assessment procedures
2 Audit Planning- Benefits
Adequate planning benefits the audit of financial statements in several
ways, including the following:
2.1 Helping the auditor to devote appropriate attention to important areas of the
audit.
2.2 Helping the auditor identify and resolve potential problems on a timely basis.
2.3 Helping the auditor properly organize and manage the audit engagement so that
it is performed in an effective and efficient manner.

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2.4 Assisting in the selection of engagement team members with appropriate levels
of capabilities and competence to respond to anticipated risks, and the proper
assignment of work to them.
2.5 Facilitating the direction and supervision of engagement team members and the
review of their work
3 Audit Strategy
3.1  The auditor shall establish an overall audit strategy that sets the scope,
timing and direction of the audit, and that guides the development of the
audit plan.
 The process of establishing the overall audit strategy assists the auditor to
determine such matters as:
3.1.1 The resources to deploy for specific audit areas- such as the use of
appropriately experienced team members for high risk areas or the
involvement of experts on complex matters
3.1.2 The amount of resources to allocate to specific audit areas- such as the number
of team members assigned to observe the inventory count at material
locations, the extent of review of other auditors’ work in the case of group
audits, or the audit budget in hours to allocate to high risk areas
3.1.3 When these resources are to be deployed- such as whether at an interim audit
stage or at key cut-off dates
3.1.4 How such resources are managed- such as when team meetings are expected to
be held, how engagement partner and manager reviews are expected to take
place (for example, on-site or off -site), and whether to complete engagement
quality control reviews.
3.2 Factors to be considered while developing overall audit strategy: In
establishing the overall audit strategy, the auditor shall:
3.2.1 Identify the characteristics of the engagement that define its scope; example:
The expected audit coverage
3.2.2 Ascertain the reporting objectives of the engagement to plan the timing of the
audit and the nature of the communications required; example: The entity’s
timetable for reporting
3.2.3 Consider the factors that
3.2.4 Consider the results of preliminary engagement activities and
3.2.5 Ascertain the nature

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4 Relationship between plan and strategy

4.1 Overall Audit plan includes:
4.1.1 The nature, timing and extent of planned risk assessment procedures, as
determined under SA 315 “Identifying and Assessing the Risks of Material
Misstatement through Understanding the Entity and Its Environment”.
4.1.2 The nature, timing and extent of planned further audit procedures at the
assertion level, as determined under SA 330 “The Auditor’s Responses to
Assessed Risks”.
4.1.3 Other planned audit procedures that are required to be carried out so that the
engagement complies with SAs
4.2 Once the overall audit strategy has been established, an audit plan can be
developed to address the various matters identified in the overall audit strategy,
taking into account the need to achieve the audit objectives through the efficient
use of the auditor’s resources.
4.3 The establishment of the overall audit strategy and the detailed audit plan are
not necessarily discrete or sequential processes, but are closely inter-related
since changes in one may result in consequential changes to the other.
5 Knowledge of Client’s business- SA 315
Without adequate knowledge of client’s business, a proper audit is not
possible. As per SA-315, “Identifying and Assessing the Risk of Material
Misstatement through Understanding the Entity and Its Environment”, the
auditor shall obtain an understanding of the following:
5.1 Relevant industry, regulatory and other external factors including the
applicable financial reporting framework
5.2 The nature of the entity, including:
(i) its operations;
(ii) its ownership and governance structures;
(iii) the types of investments that the entity is making and plans to make,
including investments in special-purpose entities; and
(iv) the way that the entity is structured and how it is financed;
to enable the auditor to understand the classes of transactions, account
balances, and disclosures to be expected in the financial statements.
5.3 The entity’s selection and application of accounting policies, including the
reasons for changes thereto. The auditor shall evaluate whether the entity’s
accounting policies are appropriate for its business and consistent with the
applicable financial reporting framework and accounting policies used in the
relevant industry.

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5.4 The entity’s objectives and strategies, and those related business risks that may
result in risks of material misstatement
5.5 The measurement and review of the entity’s financial performance.
The understanding establishes a frame of reference within which the auditor plans
the audit and exercises professional judgment throughout the audit, for example,
when:
(a) Assessing risks of material misstatement of the financial statements
(b) Determining materiality in accordance with SA 320
(c) Considering the appropriateness of the selection and application of accounting
policies
(d) Identifying areas where special audit consideration may be necessary, for example,
related party transactions, the appropriateness of management’s use of the going
concern assumption, or considering the business purpose of transactions
(e) Evaluating the sufficiency and appropriateness of audit evidence obtained, such as
the appropriateness of assumptions and of management’s oral and written
representations
6 Revision of plan and strategy
6.1 The auditor shall update and change the overall audit strategy and the audit
plan as necessary during the course of the audit
6.2 As a result of unexpected events, changes in conditions, or the audit evidence
obtained from the results of audit procedures, the auditor may need to modify
the overall audit strategy and audit plan and thereby the resulting planned
nature, timing and extent of further audit procedures, based on the revised
consideration of assessed risks.
6.3 This may be the case when information comes to the auditor’s attention that
differs significantly from the information available when the auditor planned
the audit procedures.
For example, audit evidence obtained through the performance of substantive
procedures may contradict the audit evidence obtained through tests of controls
7 The nature, timing and extent of the direction and supervision of
engagement team members and review of their work vary depending on
many factors, including:
7.1 The size and complexity of the entity.

7.2 The area of the audit.

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7.3 The assessed risks of material misstatement

7.4 The capabilities and competence of the individual team members performing
the audit work.
8 Audit Programme
8.1 An audit programme consists of a series of verification procedures to be applied
to the financial statements and accounts of a given company for the purpose of
obtaining sufficient evidence to enable the auditor to express an informed
opinion on such statements.
8.2 In other words, an audit programme is a detailed plan of applying the audit
procedures in the given circumstances with instructions for the appropriate
techniques to be adopted for accomplishing the audit objectives.
8.3 Points to be considered while constructing programme
8.3.1 Stay within the scope and limitation of the assignment.

8.3.2 Determine the evidence reasonably available and identify the best evidence for
deriving the necessary satisfaction.
8.3.3 Apply only those steps and procedures which are useful in accomplishing the
verification purpose in the specific situation.
8.3.4 Consider all possibilities of error.

8.3.5 Co-ordinate the procedures to be applied to related items

8.4 Advantages
8.4.1 It provides the assistant carrying out the audit with total and clear set of
instructions of the work generally to be done.
8.4.2 It is essential, particularly for major audits, to provide a total perspective of the
work to be performed.
8.4.3 Selection of assistants for the jobs on the basis of capability becomes easier
when the work is rationally planned, defined and segregated.
8.4.4 The assistants, by putting their signature on programme, accept the
responsibility for the work carried out by them individually and, if necessary,
the work done may be traced back to the assistant
8.5 Disadvantages
8.5.1 The work may become mechanical and particular parts of the programme may
be carried out without any understanding of the object of such parts in the
whole audit scheme.

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8.5.2 The programme often tends to become rigid and inflexible following set
grooves; the business may change in its operation of conduct, but the old
programme may still be carried on. Changes in staff or internal control may
render precaution necessary at points different from those originally decided
upon.
8.5.3 Inefficient assistants may take shelter behind the programme i.e. defend
deficiencies in their work on the ground that no instruction in the matter is
contained therein.
8.5.4 A hard and fast audit programme may kill the initiative of efficient and
enterprising assistants.
 Documentation of plan and strategy
DOCUMENTATION SHALL INCLUDE:
 the overall audit strategy;
 audit plan
 any significant changes made during the audit engagement to the
overall audit strategy or the audit plan, and the reasons for such
changes
 A summary of discussions with the entity’s key decision makers
 Documentation of audit committee pre-approval of services, where
required.
 Audit documentation access letters
 Other communications or agreements with management or those
charged with governance regarding the scope, or changes in scope, of
our services
 Previous Auditor’s report on the entity’s financial statements

9 Materiality

9.1 Materiality is an important consideration for an auditor to evaluate whether the

financial statements reflect a true or fair view or not

9.2 When planning the audit, the auditor considers what would make the financial
information materially misstated.

9.3 This enables the auditor to select audit procedures that, in combination, can be
expected to support the audit opinion at an acceptably low degree of audit risk.

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9.4 Performance Materiality:

When establishing the overall audit strategy, the auditor shall determine
materiality for the financial statements as a whole. If, in the specific
circumstances of the entity, there is one or more particular classes of
transactions, account balances or disclosures for which misstatements of
lesser amounts than the materiality for the financial statements as a
whole could reasonably be expected to influence the economic decisions
of users taken on the basis of the financial statements, the auditor shall also
determine the materiality level or levels to be applied to those particular
classes of transactions, account balances or disclosures.
Performance materiality means the amount or amounts set by the auditor
at less than materiality for the financial statements as a whole

9.5 Benchmark Selection:

 Determining materiality involves the exercise of professional judgment.
A percentage is often applied to a chosen benchmark as a starting point
in determining materiality for the financial statements as a whole.
 Factors that may affect the identification of an appropriate benchmark
include the following:

9.5.1 The elements of the financial statements. Example: Assets, liabilities, equity,
revenue, expenses

9.5.2 Whether there are items on which the attention of the users of the particular
entity’s financial statements tends to be focused.

9.5.3 The nature of the entity, where the entity is at in its life cycle, and the industry
and economic environment in which the entity operates;
9.5.4 The entity’s ownership structure and the way it is financed.
9.5.5 The relative volatility of the benchmark
9.6 Revision in Materiality
9.6.1 Materiality for the financial statements as a whole may need to be revised as a
result of a change in circumstances that occurred during the audit (for example,
a decision to dispose of a major part of the entity’s business), new information,
or a change in the auditor’s understanding of the entity and its operations as a
result of performing further audit procedures

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9.6.2 If the auditor concludes that a lower materiality for the financial statements as a
whole than that initially determined is appropriate, the auditor shall determine
whether it is necessary to revise performance materiality, and whether the
nature, timing and extent of the further audit procedures remain appropriate.
Documenting Materiality:
9.7 The audit documentation shall include the following amounts and the
factors considered in their determination:
9.7.1 Materiality for the financial statements as a whole
9.7.2 If applicable, the materiality level or levels for particular classes of
transactions, account balances or disclosures
9.7.3 Performance materiality
9.7.4 Any revision of the above as the audit progressed
10 Mention the factors to be considered in development of an overall plan:
10.1 The terms of his engagement and statutory responsibilities
10.2 Nature and timing of reports
10.3 Applicable legal or statutory requirements
10.4 Accounting policies adopted by the client
10.5 Effect of new accounting or auditing pronouncements on the audit
10.6 Identification of significant audit areas
10.7 Setting of materiality levels for audit purposes
10.8 The degree of reliance on accounting system and internal control
10.9 Possible rotation of emphasis on specific audit areas
10.10 The nature and extent of audit evidence to be obtained
10.11 The work of internal auditors and the extent of their involvement
10.12 The involvement of other auditors
10.13 The involvement of experts.
10.14 The allocation of work between joint auditors
10.15 Establishing and coordinating sta□ng requirements

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3 AUDIT
DOCUMENTATION
AND EVIDENCE

Sr.No List of topics as per module JKSC Topic reference

1 Audit Documentation Topic 1

2 SA 500 Audit Evidence Topic 2

3 SA 580 Written Representation Topic 5

4 SA 501 Audit Evidence- Specific consideration for Topic 6

selected items
5 SA 505 External Confirmation Topic 4

6 SA 510 Initial Audit Engagement Topic 7

7 SA 550 Related Party Topic 8

8 Concept of true and fair view Topic 11

9 SA 560 Subsequent Events Topic 9

10 SA 570 Going Concern Topic 10

Sr. No Particulars
1 SA 230- Audit Documentation
1.1 Meaning:
 Audit documentation refers to the record of audit procedures performed,
relevant audit evidence obtained, and conclusions the auditor reached.
 Audit documentation provides:
(a) evidence of the auditor’s basis for a conclusion about the
achievement of the overall objectives of the auditor; and

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(b) evidence that the audit was planned and performed in accordance
with SAs and applicable legal and regulatory requirements.
1.2 Purpose of Documentation
1.2.1 Assisting the engagement team to plan and perform the audit.

1.2.2 Assisting members of the engagement team to direct and supervise the audit
work, and to discharge their review responsibilities.
1.2.3 Enabling the engagement team to be accountable for its work.

1.2.4 Retaining a record of matters of continuing significance to future audits.

1.2.5 Enabling the conduct of quality control reviews and inspections.
1.2.6 Enabling the conduct of external inspections in accordance with applicable legal,
regulatory or other requirements

1.3 Form, Content and Extent of Documentation

1.3.1 The nature, timing, and extent of the audit procedures performed to comply with
the SAs and applicable legal and regulatory requirements. In Documenting this,
the auditor shall record:
(i) identifying characteristics of the specific items or matters tested
(ii) Who performed the audit work and the date such work was completed
(iii) Who reviewed the audit work performed and the date and extent of such
review
1.3.2 The results of the audit procedures performed, and the audit evidence obtained

1.3.3 Significant matters arising during the audit, the conclusions reached thereon, and
significant professional judgments made in reaching those conclusions

1.3.4 document discussions of significant matters with management, those charged

with governance, and others, including the nature of the significant matters
discussed and when and with whom the discussions took place
1.3.5 document how the auditor addressed the inconsistency to resolve the doubts as
identified during the course of audit.
1.4 Factors affecting Form, Content and Extent of Documentation
1.4.1 The size and complexity of the entity
1.4.2 The nature of the audit procedures to be performed

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1.4.3 The identified risks of material misstatement

1.4.4 The significance of the audit evidence obtained
1.4.5 The nature and extent of exceptions identified
1.4.6 The need to document a conclusion or the basis for a conclusion not readily
determinable from the documentation of the work performed or audit evidence
obtained
1.4.7 The audit methodology and tools used
1.5 Audit File
1.5.1 Audit file may be defined as one or more folders or other storage media, in
physical or electronic form, containing the records that comprise the audit
documentation for a specific engagement
1.5.2 The auditor shall assemble the audit documentation in an audit file and complete
the administrative process of assembling the final audit fi le on a timely basis
after the date of the auditor’s report.
1.5.3 SQC 1 “Quality Control” requires firms to establish policies and procedures for the
timely completion of the assembly of audit files. An appropriate time limit within
which to complete the assembly of the final audit file is ordinarily not more than
60 days after the date of the auditor’s report.
1.6 Completion Memorandum
1.6.1 The auditor may consider it helpful to prepare and retain as part of the audit
documentation a summary (sometimes known as a completion memorandum)
that describes-
 the significant matters identified during the audit and
 how they were addressed.
1.6.2 Such a summary may facilitate effective and efficient review and inspection of the
audit documentation, particularly for large and complex audits. Further, the
preparation of such a summary may assist auditor’s consideration of the
significant matters
1.7 Ownership of Working Papers
1.7.1 Standard on Quality Control (SQC) 1 issued by the Institute, provides that, unless
otherwise specified by law or regulation, audit documentation is the property of
the auditor

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1.7.2 He may at his discretion, make portions of, or extracts from, audit documentation
available to clients, provided such disclosure does not undermine the validity of
the work performed, or, in the case of assurance engagements, the independence
of the auditor or of his personnel
1.8 Retention of Working Papers

1.8.1 After the assembly of the final audit file has been completed, the auditor shall not
delete or discard audit documentation of any nature before the end of its
retention period.

1.8.2 SQC 1 requires firms to establish policies and procedures for the retention of
engagement documentation. The retention period for audit engagements
ordinarily is no shorter than seven years from the date of the auditor’s report, or,
if later, the date of the group auditor’s report

2 SA 500- Audit Evidence

2.1 Meaning
 Audit evidence may be defined as the information used by the auditor in
arriving at the conclusions on which the auditor’s opinion is based.
 Audit evidence includes both information contained in the accounting
records underlying the financial statements and other information.
Explaining this further, audit evidence includes:-
(1) Information contained in the accounting records: Accounting records
include the records of initial accounting entries and supporting records,
such as checks and records of electronic fund transfers; invoices;
contracts; the general and subsidiary ledgers, journal entries.
(2) Other information that authenticates the accounting records and also
supports the auditor’s rationale behind the true and fair
presentation of the financial statements: Other information which the
auditor may use as audit evidence includes, for example minutes of the
meetings, written confirmations from trade receivables and trade payables
etc.
2.2 Sufficiency and Appropriateness

2.2.1 Sufficiency of Audit Evidence: Sufficiency is the measure of the quantity of audit
evidence. The quantity of audit evidence needed is affected by the auditor’s
assessment of the risks of misstatement (the higher the assessed risks, the more
audit evidence is likely to be required).

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2.2.2 Auditor’s judgment as to sufficiency may be affected by the factors such as:
(i) Materiality
May be defined as the significance of classes of transactions, account
balances and presentation and disclosures to the users of the financial
statements. Less evidence would be required in case assertions are less
material to users of the financial statements. But on the other hand if
assertions are more material to the users of the financial statements, more
evidence would be required
(ii) Risk of material misstatement

May be defined as the risk that the financial statements are materially
misstated prior to audit. This consists of two components described as
follows at the assertion level
(a) Inherent risk
(b) Control risk
(iii) Size and characteristics of the population.’
Refers to the number of items included in the population. Less evidence
would be required in case of smaller, more homogeneous population but
on the other hand in case of larger, more heterogeneous populations, more
evidence would be required.
2.2.3 Appropriateness of Audit Evidence: Appropriateness is the measure of the
quality of audit evidence; that is, its relevance and its reliability in providing
support for the conclusions on which the auditor’s opinion is based. In order to
obtain reliable audit evidence, information produced by the entity that is used for
performing audit procedures needs to be sufficiently complete and accurate.
2.2.4 Sufficiency and appropriateness are inter-related and both of them should co-
exist.
2.3 Type of Audit Evidence
2.3.1 Based upon Source of Information
 Internal evidence and external evidence: Evidence which originates within
the organisation being audited is internal evidence. E.g. Sales invoice,
Copies of sales challan and forwarding notes, goods received note,
inspection report, copies of cash memo, debit and credit notes, etc.
 External evidence on the other hand is the evidence that originates outside
the client’s organization. Eg. Purchase invoice, supplier’s challan and
forwarding note, debit notes and credit notes coming from parties,
quotations, confirmations, etc.

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2.3.2 Based upon Nature of Information

 Visual Evidence
 Oral Evidence
 Documentary Evidence
2.4 Reliability of Evidence
The reliability of information to be used as audit evidence, and therefore of
the audit evidence itself, is influenced by its source and its nature, and the
circumstances under which it is obtained, including the controls over its
preparation and maintenance where relevant.
2.4.1 The reliability of audit evidence is increased when it is obtained from
independent sources outside the entity
2.4.2 The reliability of audit evidence that is generated internally is increased when the
related controls, including those over its preparation and maintenance, imposed
by the entity are effective.
2.4.3 Audit evidence obtained directly by the auditor (for example, observation of
the application of a control) is more reliable than audit evidence obtained
indirectly or by inference (for example, inquiry about the application of a
control).
2.4.4 Audit evidence in documentary form, whether paper, electronic, or other
medium, is more reliable than evidence obtained orally (for example, a
contemporaneously written record of a meeting is more reliable than a
subsequent oral representation
of the matters discussed).
2.4.5 Audit evidence provided by original documents is more reliable than audit
evidence provided by photocopies or facsimiles, or documents that have been
filmed, digitised or otherwise transformed into electronic form, the reliability of
which may depend on the controls over their preparation and maintenance.
2.5 Audit Techniques- Methods to obtain audit evidence includes:
2.5.1 Inspection: Inspection involves examining records or documents, whether
internal or external, in paper form, electronic form, or other media, or a
physical examination of an asset.
2.5.2 Observation: Observation consists of looking at a process or procedure being
performed by others. Example: The auditor’s observation of inventory counting
by the entity’s personnel, or of the performance of control activities.

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2.5.3 External Confirmation: An external confirmation represents audit evidence

obtained by the auditor as a direct written response to the auditor from a third
party (the confirming party), in paper form, or by electronic or other medium.
External confirmation procedures frequently are relevant when addressing
assertions associated with certain account balances and their elements. However,
external confirmations need not be restricted to account balances
only.
2.5.4 Recalculation: Recalculation consists of checking the mathematical accuracy of
documents or records. Recalculation may be performed manually or
electronically.
2.5.5 Re-performance: Re-performance involves the auditor’s independent execution
of procedures or controls that were originally performed as part of the entity’s
internal control.
2.5.6 Analytical Procedures: Analytical procedures consist of evaluations of financial
information made by a study of plausible relationships among both
financial and nonfinancial data.
2.5.7 Inquiry: Inquiry consists of seeking information of knowledgeable persons, both
financial and non-financial, within the entity or outside the entity. Inquiry is used
extensively throughout the audit in addition to other audit procedures. Inquiries
may range from formal written inquiries to informal oral inquiries.
Evaluating responses to inquiries is an integral part of the inquiry process.
3 Audit Procedures- SA 315 and SA 330
3.1 Risk Assessment Procedure- SA 315:
Risk assessment procedures refer to the audit procedures performed to obtain
an understanding of the entity and its environment, including the entity’s
internal control, to identify and assess the risks of material misstatement,
whether due to fraud or error
3.2 Further Audit Procedure- SA 330
3.2.1 Compliance Procedure i.e. Test of Controls:
When required by the SAs or when the auditor has chosen to do so, In designing
and performing tests of controls, the auditor shall verify:
(a) How the controls were applied at relevant times during the period under
audit.
(b) The consistency with which they were applied.
(c) By whom or by what means they were applied

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3.2.2 Substantive Procedures:

Substantive procedures, including
(a) Tests of details i.e. vouching & verification of amount, classification,
presentation & disclosure and
(b) Substantive analytical procedures as discussed in SA 520/Chapter 8.
4 External Confirmation- SA 505
4.1 Meaning
External confirmation may be defined as an audit evidence obtained as a direct
written response to the auditor from a third party (the confirming party), in
paper form, or by electronic or other medium.
4.2 Types of Confirmation Request
4.2.1 Positive confirmation request – A request that the confirming party respond
directly to the auditor indicating whether the confirming party agrees or
disagrees with the information in the request, or providing the requested
information
4.2.2 Negative confirmation request – A request that the confirming party respond
directly to the auditor only if the confi rming party disagrees with the information
provided in the request
4.2.3 Factors to be considered before sending negative confirmation request:
(i) The risk of material misstatement is low i.e. internal records are more
reliable
(ii) Too many similar items are required to be confirmed which are very small.
(iii) There is a low chance that such requests will be ignored.
(iv) Exception rate expected is low i.e. there are low chances of disagreement.

4.3 External Confirmation Procedure

4.3.1 Determining the information to be confirmed or requested
4.3.2 Selecting the appropriate confirming party
4.3.3 Designing the confirmation requests after considering following factors:`
(a) Risk of Material Misstatement involved in matters
(b) Method of communication
(c) Prior experience in the audit engagement

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4.3.4 Sending the requests, including follow-up requests when applicable, to the
confirming party.
4.4 Factors to be considered while designing a confirmation request
The design of a confirmation request may directly affect the confirmation
response
rate, and the reliability and the nature of the audit evidence obtained from
responses.
4.4.1 Specific identified risks of material misstatement, including fraud risks.
4.4.2 The layout and presentation of the confirmation request.
4.4.3 Prior experience on the audit or similar engagements.
4.4.4 The assertions being addressed.
4.4.5 The method of communication [for example, in paper form, or by electronic
4.4.6 mode (like e-mail) or other medium].
4.4.7 Management’s authorisation or encouragement to the confirming parties to
respond to the auditor. Confirming parties may only be willing to respond to a
confirmation request containing management’s authorisation.
4.5 Management’s refusal to allow auditor to send a confirmation request
4.5.1 Inquire as to management’s reasons for the refusal, and seek audit evidence
as to their validity and reasonableness;

4.5.2 Evaluate the implications of management’s refusal on the auditor’s assessment of

the relevant risks of material misstatement, including the risk of
fraud, and on the nature, timing and extent of other audit procedures; and

4.5.3 Perform alternative audit procedures designed to obtain relevant and reliable
audit evidence.

4.5.4 If the auditor concludes that management’s refusal to allow the auditor to send a
confirmation request is unreasonable, or the auditor is unable to obtain relevant
and reliable audit evidence from alternative audit procedures, the auditor shall
communicate with those charged with governance in accordance
with SA 260

4.5.5 The auditor also shall determine the implications for the audit and the auditor’s
opinion in accordance with SA 705

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4.6 Factors creating doubt over reliability of external confirmation responses

4.6.1 Unauthorised Confirmation

4.6.2 Management’s intervention in the confirmation sent by third party

4.6.3 Doubt over integrity and reliability of third party

4.6.4 Incomplete information given by third party

4.6.5 Delayed response from third party

5 Written Representation- SA 580

5.1 Meaning
 Written representations may be defined as a written statement by
management provided to the auditor to confirm certain matters or to
support other audit evidence.
 Written representations in this context do not include financial
statements, the assertions therein, or supporting books and records.

5.2 Form and Content

5.2.1 It should be in paper form as a representation letter addressed to the auditor
5.2. It should be taken at the end of the audit but before signing auditor’s report
5.2.3 Content of Written Representation:
(a) Management has fulfilled its responsibility for the preparation of the
financial statements
(b) Management has provided the auditor with all relevant information and
access as agreed in the terms of the audit engagement
(c) All transactions have been recorded and are reflected in the financial
statements
(d) As required by other SAs and as requested by the auditor
5.2.4 The written representations shall be for all financial statements and period(s)
referred to in the auditor’s report
5.3 Reliability of Written Representation
5.3.1 Although written representations provide necessary audit evidence, they do not
provide sufficient appropriate audit evidence on their own about any of the
matters with which they deal.

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5.3.2 It cannot substitute verification

5.3.3 Furthermore, the fact that management has provided reliable written
representations does not affect the nature or extent of other audit evidence that
the auditor obtains about the fulfilment of management’s responsibilities,
or about specific assertions
5.4 Management’s refusal to provide written representation
5.4.1 Discuss the matter with those charged with governance as per SA 260
5.4.2 Re-evaluate the integrity of management and evaluate the effect that this may
have on the reliability of representations (oral or written) and audit evidence in
general
5.4.3 Take appropriate actions, including determining the possible effect on the
opinion in the auditor’s report in accordance with SA 705
5.4.4 The auditor shall disclaim an opinion on the financial statements in
accordance with SA 705
5.5 Doubt over reliability of written representation
5.5.1 If the auditor has concerns about the competence, integrity, ethical values or
diligence of management the auditor shall determine the effect that such
concerns may have on the reliability of representations
5.5.2 In particular, if written representations are inconsistent with other audit
evidence, the auditor shall perform audit procedures to attempt to resolve the
matter
5.5.3 If the auditor concludes that the written representations are not reliable, the
auditor shall take appropriate actions, including determining the possible effect
on the opinion in the auditor’s report in accordance with SA 705
5.5.4 The auditor shall disclaim an opinion on the financial statements in
accordance with SA 705
6 Audit Evidence- Specific Considerations for selected items- SA 501
6.1 Objective of SA 501
To obtain sufficient and appropriate audit evidence regarding
6.1.1 Existence and condition of inventory.
6.1.2 Completeness of litigation and claims involving the entity.
6.1.3 Presentation and disclosure of segment information in accordance with the
applicable financial reporting framework.

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6.2 Audit procedures- Inventory

When inventory is material to the financial statements, the auditor shall
obtain sufficient appropriate audit evidence regarding the existence and
condition of inventory by:
6.2.1 Evaluate management’s instructions and procedures for recording and
controlling the results of the entity’s physical inventory counting
6.2.2 Observe the performance of management’s count procedures
6.2.3 Inspect the inventory
6.2.4 Perform test counts
6.2.5 Performing audit procedures over the entity’s final inventory records to
determine whether they accurately reflect actual inventory count results.
6.2.6 When inventory under the custody and control of a third party is material to
the financial statements, the auditor shall obtain sufficient appropriate audit
evidence regarding the existence and condition of that inventory by performing
one or both of the following:
 Request confirmation from the third party as to the quantities and
condition
of inventory held on behalf of the entity
 Perform inspection or other audit procedures appropriate in the
circumstances
6.2.7 Factors to be considered while planning attendance at Physical Inventory
Counting:
(a) Nature of inventory.
(b) Stages of completion of work in progress.
(c) The risks of material misstatement related to inventory.
(d) The nature of the internal control related to inventory.
(e) Whether adequate procedures are expected to be established and proper
instructions issued for physical inventory counting.
(f) The timing of physical inventory counting.
(g) Whether the entity maintains a perpetual inventory system.
(h) The locations at which inventory is held, including the materiality of the
inventory and the risks of material misstatement at different locations, in
deciding at which locations attendance is appropriate
(i) Whether the assistance of an auditor’s expert is needed

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6.3 Auditor is unable to attend inventory count

6.3.1 If the auditor is unable to attend physical inventory counting due to
unforeseen circumstances, the auditor shall make or observe some physical
counts on an alternative date, and perform audit procedures on intervening
transactions
6.4 Inventory count is performed as on alternate date
6.4.1 If physical inventory counting is conducted at a date other than the date of
the financial statements, the auditor shall, in addition to the procedures
required above, perform audit procedures to obtain audit evidence about
whether changes in inventory between the count date and the date of the
financial statements are properly recorded
6.5 Physical verification is impracticable
6.5.1 If attendance at physical inventory counting is impracticable, the auditor
shall perform alternative audit procedures to obtain sufficient appropriate audit
evidence regarding the existence and condition of inventory. If it is not possible
to do so, the auditor shall modify the opinion in the auditor’s report in
accordance with SA 705.
6.6 Verification of completeness of litigation and claims
The auditor shall design and perform audit procedures in order to identify
litigation and claims involving the entity which may give rise to a risk of
material misstatement, including:
6.6.1 Inquiry of management and, where applicable, others within the entity,
including in-house legal counsel
6.6.2 Reviewing minutes of meetings of those charged with governance and
correspondence between the entity and its external legal counsel
6.6.3 Reviewing legal expense accounts
6.6.4 Seek direct communication with the entity’s external legal counsel (if risk of
material misstatement is high) as per SA 505.
 The auditor shall do so through a letter of inquiry, prepared by
management and sent by the auditor, requesting the entity’s external
legal counsel to communicate directly with the auditor
 If law, regulation or the respective legal professional body prohibits the
entity’s external legal counsel from communicating directly with the
auditor, the auditor shall perform alternative audit procedures

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6.6.5 The auditor shall request management and, where appropriate, those charged
with governance to provide written representations that all known actual or
possible litigation and claims whose effects should be considered when
preparing the financial statements have been disclosed to the auditor and
appropriately accounted for and disclosed in accordance with the applicable
financial reporting framework
6.7 Verification of presentation and disclosure of segment reporting
6.7.1 The auditor shall obtain sufficient appropriate audit evidence regarding the
presentation and disclosure of segment information in accordance with the
applicable financial reporting framework by:
(a) Obtaining an understanding of the methods used by management in
determining segment information, and
(i) Evaluating whether such methods are likely to result in disclosure
in accordance with the applicable financial reporting framework;
and
(ii) Where appropriate, testing the application of such methods
(b) Performing analytical procedures or other audit procedures appropriate
in the circumstances
7 Initial Audit Engagement- Verification of opening balances- SA 510
7.1 Initial Audit Engagement- Meaning
An engagement in which either:
(i) The financial statements for the prior period were not audited; or
(ii) The financial statements for the prior period were audited by a
predecessor auditor.
7.2 Verification of opening balances- procedures
7.2.1 The auditor shall read the most recent financial statements, if any, and the
predecessor auditor’s report thereon, if any, for information relevant to opening
balances, including disclosures
7.2.2 Determining whether the prior period’s closing balances have been correctly
brought forward to the current period or, when appropriate, any adjustments
have been disclosed as prior period items in the current year’s Statement of
Profit and Loss

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7.2.3 Determining whether the opening balances reflect the application of appropriate
accounting policies.
The auditor shall obtain sufficient appropriate audit evidence about
whether the accounting policies reflected in the opening balances have
been consistently applied in the current period’s financial statements, and
whether changes in the accounting policies have been properly accounted for
and adequately presented and disclosed in accordance with the applicable
financial reporting framework
7.2.4 Evaluating whether audit procedures performed in the current period provide
evidence relevant to the opening balances

7.2.5 If the auditor obtains audit evidence that the opening balances contain
misstatements that could materially affect the current period’s financial
statements, the auditor shall perform such additional audit procedures as
are appropriate in the circumstances to determine the effect on the current
period’s financial statements.

7.3 Audit Conclusions

7.3.1 If the auditor is unable to obtain sufficient appropriate audit evidence
regarding the opening balances, the auditor shall express a qualified opinion
or a disclaimer of opinion, as appropriate, in accordance with SA 705
7.3.2 If the auditor concludes that the opening balances contain a misstatement
that materially affects the current period’s financial statements, and the
effect of the misstatement is not properly accounted for or not adequately
presented or disclosed, the auditor shall express a qualified opinion or an
adverse opinion, as appropriate, in accordance with SA 705
7.3.3 If the auditor concludes that:
(a) the current period’s accounting policies are not consistently applied
in relation to opening balances in accordance with the applicable financial
reporting framework; or
(b) a change in accounting policies is not properly accounted for or not
adequately presented or disclosed in accordance with the applicable
financial reporting framework, the auditor shall express a qualified
opinion or an adverse opinion as appropriate in accordance with SA 705

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7.3.4 If the predecessor auditor’s opinion regarding the prior period’s financial
statements included a modification to the auditor’s opinion that remains
relevant and material to the current period’s financial statements, the auditor
shall modify the auditor’s opinion on the current period’s financial statements in
accordance with SA 705(Revised) and SA 710

8 Related Party- SA 550

8.1 Meaning

8.1.1 A related party as defined in the applicable financial reporting framework; or

8.1.2 (ii) Where the applicable financial reporting framework establishes minimal
or no related party requirements:
(a) A person or other entity that has control or significant influence
directly or indirectly through one or more intermediaries, over the
reporting entity
(b) Another entity over which the reporting entity has control or
significant influence, directly or indirectly through one or more
intermediaries
(c) Another entity that is under common control with the reporting
entity through having:
(i) Common controlling ownership;
(ii) Owners who are close family members; or
(iii) Common key management
Note: However, entities that are under common control by a state (i.e., a
national, regional or local government) are not considered related unless
they engage in significant transactions or share resources to a
significant extent with one another
8.2 Risks associated with related party relationships and transactions
The nature of related party relationships and transactions may, in some
circumstances, give rise to higher risks of material misstatement of the
financial statements than transactions with unrelated parties. For example:
8.2.1 Related parties may operate through an extensive and complex range of
relationships and structures, with a corresponding increase in the complexity of
related party transactions

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8.2.2 Information systems may be ineffective at identifying or summarising

transactions and outstanding balances between an entity and its related
parties
8.2.3 Related party transactions may not be conducted under normal market terms
and conditions; for example, some related party transactions may be
conducted with no exchange of consideration
8.3 Auditor’s responsibilities for verifying related party transactions
8.3.1 to identify, assess and respond to the risks of material misstatement arising
from the entity’s failure to appropriately account for related party relationships,
transactions or balances
8.3.2 to identify, assess and respond to the risks of material misstatement arising from
the entity’s failure to appropriately account for related party relationships,
transactions or balances achieve a true and fair presentation
8.3.3 to identify whether fraud risk factors are present as required by SA 240. This
is because fraud may be more easily committed through related parties.
8.3.4 Owing to the inherent limitations of an audit, there is an unavoidable risk 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. In the context of related parties, the potential effects of inherent
limitations on the auditor’s ability to detect material misstatements are greater
9 Subsequent Events- SA 560
9.1 Meaning
Subsequent events are such events which occur after date of financial
statements and before date of auditor’s report and facts that come to the
knowledge of auditor after issue of auditor’s report
9.2 Objective of auditor regarding subsequent events
9.2.1 To Obtain sufficient appropriate audit evidence about whether events occurring
between the date of the financial statements and the date of the auditor’s report
that require adjustment of, or disclosure in, the financial statements are
appropriately reflected in those financial statements
9.2.2 To Respond appropriately to facts that become known to the auditor after the
date of the auditor’s report, that, had they been known to the auditor at that
date, may have caused the auditor to amend the auditor’s report.

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9.3 Audit Procedures- Events occurring after date of financial statements but
before the date of auditor’s report
9.3.1 Obtaining an understanding of any procedures management has established
to ensure that subsequent events are identified
9.3.2 Inquiring of management and, where appropriate, those charged with
governance as to whether any subsequent events have occurred which might
affect the financial statements

9.3.3 Reading minutes, if any, of the meetings, of the entity’s owners, management and
those charged with governance, that have been held after the date of the financial
statements
9.3.4 Reading the entity’s latest subsequent interim financial statements, if any.
9.3.5 Obtain written representations as per SA 580, that all events occurring subsequent
to the date of the financial statements and for which the applicable financial
reporting framework requires adjustment or disclosure have been adjusted or
disclosed
9.4 Audit Procedures- Facts which become known to the auditor after date of
auditor’s report but before the date the financial statements are issued
9.4.1 Discuss the matter with management and, where appropriate, those charged with
governance
9.4.2 Determine whether the financial statements need amendment and, if so,
9.4.3 Inquire how management intends to address the matter in the financial
statements
9.4.4 If management amends the financial statements, the auditor shall:
(a) Carry out the audit procedures necessary in the circumstances on the
amendment.
(b) Unless prohibited by law:
(i) Extend the audit procedures referred to such events up to the date of
the new auditor’s report and
(ii) Provide a new auditor’s report on the amended financial statements.
The new auditor’s report shall not be dated earlier than the date of
approval of the amended financial statements

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9.5 Audit Procedures- Facts Which Become Known to the Auditor After the
Financial Statements have been Issued
9.5.1 (a) If the auditor’s report has not yet been provided to the entity, the
auditor shall modify the opinion as required by SA 705 and then provide
the auditor’s report; or
(b) If the auditor’s report has already been provided to the entity, the
auditor shall notify management and those charged with governance are
involved in managing the entity, not to issue the financial statements to
third parties before the necessary amendments have been made.
9.5.2  If management does not take the necessary steps to ensure that anyone
in receipt of the previously issued financial statements is informed of the
situation, the auditor shall notify management and those charged with
governance.
 If, despite such notification, management or those charged with governance
do not take these necessary steps, the auditor shall take appropriate
action to seek to prevent reliance on the auditor’s report
10 Going Concern- SA 570
10.1 Meaning
Under the going concern basis of accounting, the financial statements are
prepared on the assumption that the entity is a going concern and will continue its
operations for the foreseeable future i.e. atleast one more accounting period
10.2 Auditor’s responsibilities
10.2.1 The auditor’s responsibilities are to obtain su□cient appropriate audit evidence
regarding, and conclude on, the appropriateness of management’s use of the going
concern basis of accounting in the preparation of the financial
statements
10.2.2 To conclude, based on the audit evidence obtained, whether a material
uncertainty exists about the entity’s ability to continue as a going concern.
10.3 Indicators of Material Uncertainty
10.3.1 Financial
 Net liability or net current liability position.
 Fixed-term borrowings approaching maturity without realistic prospects
of renewal or repayment; or excessive reliance on short-term borrowings
to finance long-term assets.

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 Indications of withdrawal of financial support by creditors.

 Negative operating cash flows indicated by historical or prospective
financial statements.
 Adverse key financial ratios.
 Substantial operating losses or significant deterioration in the value of
assets used to generate cash flows
10.3.2 Operating
 Management intentions to liquidate the entity or to cease operations.
 Loss of key management without replacement.
 Loss of a major market, key customer(s), franchise, license, or principal
supplier(s).
 Labor difficulties.
 Shortages of important
10.3.3 Other
 Non-compliance with capital or other statutory or regulatory
requirements, such as solvency or liquidity requirements for financial
institutions.
 Pending legal or regulatory proceedings against the entity that may, if
successful, result in claims that the entity is unlikely to be able to satisfy.
 Changes in law or regulation or government policy expected to adversely
affect the entity.
 Uninsured or underinsured catastrophes when they occur
10.4 Audit procedures to evaluate feasibility of Management’s assessment
10.4.1  In evaluating management’s assessment of the entity’s ability to continue as
a going concern, the auditor shall cover the same period as that used by
management to make its assessment as required by the applicable financial
reporting framework, or by law or regulation if it specifies a longer period.
 If management’s assessment of the entity’s ability to continue as a going
concern covers less than twelve months from the date of the financial
statements ,the auditor shall request management to extend its assessment
period to at least twelve months from that date
10.4.2 The auditor shall consider whether management’s assessment includes all
relevant information of which the auditor is aware as a result of the audit

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10.4.3 The auditor shall inquire of management as to its knowledge of events or

conditions beyond the period of management’s assessment that may cast
significant doubt on the entity’s ability to continue as a going concern
10.4.4 Evaluating management’s plans for future actions in relation to its going concern
assessment, whether the outcome of these plans is likely to improve the situation
and whether management’s plans are feasible in the
circumstances
10.4.5 Considering whether any additional facts or information have become available
since the date on which management made its assessment
10.4.6 Where the entity has prepared a cash flow forecast, and analysis of the forecast is a
significant factor in considering the future outcome of events or conditions in the
evaluation of management’s plans for future actions:
(i) Evaluating the reliability of the underlying data generated to prepare the
forecast; and
(ii) Determining whether there is adequate support for the assumptions
underlying the forecast.
11 Points to be considered while examining true and fair view of the
financial statements
11.1 The phrase “true and fair view” is used in many statutes but it is not defined in any
act.
11.2 In order to form and express an opinion on true and fair view, auditor needs to
examine that all assets, liabilities, income and expenses are recorded at such
amounts and in such accounts which are in accordance with accounting
policies and principles and no material transaction has been omitted
11.3 General considerations for verifying true and fair view:
(a) No asset or liability should be undervalued or over valued
(b) No material asset should be omitted
(c) No material liability should be omitted
(d) Charge on asset, if any should be separately disclosed
(e) Format of financial statements should be as per applicable financial
reporting framework
(f) Selection and application of accounting policies should be as per accounting
standards
(g) Any extraordinary or non-recurring item should be separately disclosed



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4 RISK ASSESSMENT
AND INTERNAL
CONTROL

JKSC Topic
Sr.No List of topics as per module
reference

1 Audit Risk Topic 2

Identifying and assessing the Risks of Material Topic 1, 3 & 4

2
Misstatement

3 Internal Control Topic 5

4 Evaluation of Control by the auditor Topic 11 & 12

5 Testing of Internal control Topic 13

6 Internal Control and IT environment Topic 14 and 15

7 Materiality and Audit Risk Topic 16

8 Documenting the Risk Topic 17

9 Internal Audit Topic 10

10 Standards of Internal Audit Topic 10

Basics of Internal Financial Controls and reporting Topic 18

11 & 12
Requirements

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Sr.No Particulars
1 Risk Assessment Procedure

1.1 Meaning:
To identify and assess the risks of material misstatement, whether due to fraud
or error, at the financial statement and assertion levels, through understanding
the entity and its environment, including the entity’s internal control, thereby
providing a basis for designing and implementing responses to the assessed risks
of material misstatement

1.2 Components of Risks of Material Misstatement

Risk of material misstatement may be defined as the risk that the financial
statements are materially misstated prior to audit.
This consists of two components, described as follows:

1.2.1 Inherent Risk: The susceptibility of an assertion about a class of transaction,

account balance or disclosure to a misstatement that could be material, either
individually or when aggregated with other misstatements, before consideration
of any related controls

1.2.2 Control Risk: The risk that a misstatement that could occur in an assertion about
a class of transaction, account balance or disclosure and that could be material,
either individually or when aggregated with other misstatements, will not be
prevented, or detected and corrected, on a timely basis by the
entity’s internal control.
1.3 Risks of Material Misstatement at two levels

1.3.1 The overall financial statement level- Risks of material misstatement at the
overall financial statement level refer to risks of material misstatement that
relate pervasively to the financial statements as a whole and potentially aect any
assertions

1.3.2 The assertion level for classes of transactions, account balances, and disclosures-
Risks of material misstatement at the assertion level are assessed in order to
determine the nature, timing, and extent of further audit procedures necessary to
obtain scient appropriate audit evidence. This evidence enables the auditor to
express an opinion on the financial statements at an acceptably low level of audit
risk.

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2 Audit Risk
The risk that the auditor expresses an inappropriate audit opinion when the
financial statements are materially misstated. Audit risk is a function of the risks
of material misstatement and detection risk
2.1 Components of Audit risk
⇨ Risks of Material Misstatement as discussed above
⇨ Detection Risk: The risk that the procedures performed by the auditor to
reduce audit risk to an acceptably low level will not detect a misstatement
that exists and that could be material, either individually or when
aggregated with other misstatements
2.2 Inter-Relationship amongst the components
If Risks of Material Misstatement is high then it increases doubt over internal
records and hence auditor shall perform extensive procedures to reduce
Detection risk and thereby it helps to reduce audit risk to an acceptably low level.
2.3 Audit Risk excludes:
(i) Audit risk does not include the risk that the auditor might express an
opinion that the financial statements are materially misstated when they
are not. This risk is ordinarily insignificant.
(ii) Further, audit risk is a technical term related to the process of auditing; it
does not refer to the auditor’s business risks such as loss from litigation,
adverse publicity, or other events arising in connection with the audit of
financial statements.
3 Considerations for identification and assessment of risks of material
misstatement
3.1 Identify risks throughout the process of obtaining an understanding of the entity
and its environment, including relevant controls that relate to the risks, and by
considering the classes of transactions, account balances, and disclosures in the
financial statements
3.2 Assess the identified risks, and evaluate whether they relate more pervasively to
the financial statements as a whole and potentially aect many assertions
3.3 Relate the identified risks to what can go wrong at the assertion level, taking
account of relevant controls that the auditor intends to test
3.4 Consider the likelihood of misstatement, including the possibility of multiple
misstatements, and whether the potential misstatement is of a magnitude that
could result in a material misstatement

4 Techniques used for performing risk assessment procedure

4.1 ⇨ Inquiries of management and of others within the entity who in the
auditor’s judgment may have information that is likely to assist in
identifying risks of material misstatement due to fraud or error.

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⇨ Examples of such INQUIRIES:

(a) Inquiries directed towards those charged with governance may help
the auditor understand the environment in which the financial
statements are prepared
(b) Inquiries of employees involved in initiating, processing or
recording complex or unusual transactions may help the auditor to
evaluate the appropriateness of the selection and application of
certain accounting policies
(c) Inquiries directed toward in-house legal counsel may provide
information about such matters as litigation, compliance with laws
and regulations, knowledge of fraud or suspected fraud affecting the
entity, warranties, post- sales obligations, arrangements (such as
joint ventures) with business partners and the meaning of contract
terms.
4.2 Analytical procedures
Analytical procedures may help identify the existence of unusual transactions or
events, and amounts, ratios, and trends that might indicate matters that have
audit implications. Unusual or unexpected relationships that are identified may
assist the auditor in identifying risks of material misstatement, especially risks of
material misstatement due to fraud
4.3 Observation and inspection for e.g observing entity’s operations
5 Internal Control
5.1 Meaning
As per SA-315, “Identifying and Assessing the Risk of Material Misstatement
Through Understanding the Entity and its Environment”, the internal control
may be defined as “the process designed, implemented and maintained by
those charged with governance, management and other personnel to
provide reasonable assurance about the achievement of an entity’s
objectives with regard to reliability of financial reporting, effectiveness and
efficiency of operations, safeguarding of assets, and compliance with
applicable laws and regulations.”
5.2 Objectives
5.2.1 Transactions are executed in accordance with managements general or specific
authorization;
5.2.2 All transactions are promptly recorded in the correct amount in the appropriate
accounts and in the accounting period in which executed so as to permit
preparation of financial information within a framework of recognized
accounting policies and practices and relevant statutory requirements, if any, and
to maintain accountability for assets;
5.2.3 Assets are safeguarded from unauthorised access, use or disposition; and
5.2.4 The recorded assets are compared with the existing assets at reasonable
intervals and appropriate action is taken with regard to any differences

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6 Limitations of Internal Control

6.1 (i) Internal control can provide only reasonable assurance:

Internal control, no matter how effective, can provide an entity with only
reasonable assurance about achieving the entity’s financial reporting
objectives. The likelihood of their achievement is affected by inherent
limitations of internal control
6.2 Human judgment in decision-making:
Realities that human judgment in decision-making can be faulty and that
breakdowns in internal control can occur because of human error
6.3 Judgements by Management:
Further, in designing and implementing controls, management may make
judgments on the nature and extent of the controls it chooses to implement, and
the nature and extent of the risks it chooses to assume. Management may end up
with faulty design of internal control system.
6.4 Lack of understanding the purpose:
Equally, the operation of a control may not be effective, such as where
information produced for the purposes of internal control (for example, an
exception report) is not effectively used because the individual responsible for
reviewing the information does not understand its purpose or fails to take
appropriate action
6.5 Collusion among People:
Additionally, controls can be circumvented by the collusion of two or more
people or inappropriate management override of internal control. For example,
management may enter into side agreements with customers that alter the terms
and conditions of the entity’s standard sales contracts, which may result in
improper revenue recognition. Also, edit checks in a software program that are
designed to identify and report transactions that exceed specified credit limits
may be overridden or disabled
6.6 Limitations in case of Small Entities:
⇨ Smaller entities often have fewer employees due to which segregation of
duties is not practicable.
⇨ However, in a small owner-managed entity, the owner-manager may be
able to exercise more effective oversight than in a larger entity. This
oversight may compensate for the generally more limited opportunities
for segregation of duties.
⇨ On the other hand, the owner-manager may be more able to override
controls because the system of internal control is less structured. This is
taken into account by the auditor when identifying the risks of material
misstatement due to fraud

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7 Mention the controls relevant to audit and factors to decide which controls
are relevant:
The entity’s objectives, and therefore controls, relate to financial reporting,
operations and compliance; however, not all of these objectives and controls are
relevant to the auditor’s risk assessment
7.1 Materiality.

7.2 The significance of the related risk.

7.3 The size of the entity.

7.4 The nature of the entity’s business, including its organisation and ownership
characteristics.

7.5 The diversity and complexity of the entity’s operations.

7.6 Applicable legal and regulatory requirements.

7.7 The circumstances and the applicable component of internal control.

7.8 The nature and complexity of the systems that are part of the entity’s internal
Control
7.9 Whether, and how, a specific control, individually or in combination with others,
prevents, or detects and corrects, material misstatement.
8 Components of Internal Control
The division of internal control into the following five components provides a
useful framework for auditors to consider how different aspects of an entity’s
internal control may affect the audit:
8.1 Control Environment:
The auditor shall obtain an understanding of the control environment. As part of
obtaining this understanding, the auditor shall evaluate whether:
(i) Management has created and maintained a culture of honesty and ethical
behavior; and
(ii) The strengths in the control environment elements collectively provide an
appropriate foundation for the other components of internal control.
Elements of control environment include:
8.1.1 Communication and enforcement of integrity and ethical values–
These are essential elements that influence the effectiveness of the design,
administration and monitoring of controls
8.1.2 Commitment to competence – Matters such as management’s consideration
of the competence levels for particular jobs and how those levels translate into
requisite skills and knowledge

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8.1.3 Management’s philosophy and operating style– Characteristics such as

management’s:
⇨ Approach to taking and managing business risks.
⇨ Attitudes and actions toward financial reporting.
⇨ Attitudes toward information processing and accounting functions and
personnel
8.1.4 Organisational structure– The framework within which an entity’s activities for
achieving its objectives are planned, executed, controlled, and reviewed.
8.2 The Entity’s Risk Assessment Process:
The auditor shall obtain an understanding of whether the entity has a process for:
8.2.1 Identifying business risks relevant to financial reporting objectives;
8.2.2 Estimating the significance of the risks;
8.2.3 Assessing the likelihood of their occurrence; and
8.2.4 Deciding about actions to address those risks
8.3 The information system, including the related business processes, relevant
to financial reporting and communication
8.3.1 The classes of transactions in the entity’s operations that are significant to
the financial statements;
8.3.2 The procedures by which those transactions are initiated, recorded, processed,
corrected as necessary, transferred to the general ledger and reported in the
financial statements;
8.3.3 The related accounting records, supporting information and specific accounts in
the financial statements that are used to initiate, record, process and report
transactions;
8.3.4 How the information system captures events and conditions that are significant
to the financial statements
8.4 Control Activities
8.4.1 The auditor shall obtain an understanding of control activities relevant to the
audit, which the auditor considers necessary to assess the risks of material
misstatement
8.4.2 An audit requires an understanding of only those control activities related to
significant class of transactions, account balance, and disclosure in the
financial statements and the assertions which the auditor finds relevant in his
risk assessment process.
8.4.3 Examples of control activities are authorization, approval, segregation of duties
etc
8.5 Monitoring of Controls
8.5.1 It is done to test the operating effectiveness of the internal controls.

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8.5.2 Management accomplishes monitoring through

⇨ On-going monitoring activities are often built into the normal recurring
activities of an entity and include regular management and supervisory
activities
⇨ Separate evaluations e.g. Internal Audit
9 Risks that require Special Audit Considerations
9.1 Whether the risk is a risk of fraud;
9.2 Whether the risk is related to recent significant economic, accounting, or
other developments like changes in regulatory environment, etc., and, therefore,
requires specific attention
9.3 The complexity of transactions
9.4 Whether the risk involves significant transactions with related parties
9.5 The degree of subjectivity in the measurement of financial information related to
the risk, especially those measurements involving a wide range of measurement
uncertainty
9.6 Whether the risk involves significant transactions that are outside the normal
course of business for the entity, or that otherwise appear to be unusual
10 Internal Audit
10.1 Meaning
Audit of Internal Control system designed, implemented and maintained by
management and those charged with governance of the entity.
10.2 ⇨ Applicability
(a) Every listed company;
(b) Every unlisted public company having-
(i) paid up share capital of fifty crore rupees or more during the
preceding financial year; or
(ii) turnover of two hundred crore rupees or more during the preceding
financial year; or
(iii) outstanding loans or borrowings from banks or public financial
institutions exceeding one hundred crore rupees or more at any
point of time during the preceding financial year; or
(iv) outstanding deposits of twenty five crore rupees or more at any
point of time during the preceding financial year; and
(c) Every private company having-
(i) turnover of two hundred crore rupees or more during the preceding
financial year; or
(ii) outstanding loans or borrowings from banks or public financial
institutions exceeding one hundred crore rupees or more at any
point of time during the preceding financial year

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⇨ Eligibility
As per section 138, the internal auditor shall either be a chartered
accountant or a cost accountant (whether engaged in practice or not), or
such other professional as may be decided by the Board to conduct
internal audit of the functions and activities of the companies.
The internal auditor may or may not be an employee of the company
10.3 Scope
It is majorly governed by the terms of engagement between management and
internal auditor. The main functions are as follows:
⇨ Activities Relating to Governance: The internal audit function may
assess the governance process in its accomplishment of objectives on
ethics and values, performance management and accountability
⇨ Activities Relating to Risk Management: The internal audit function
may assist the entity by identifying and evaluating significant exposures to
risk and contributing to the improvement of risk management. The
internal audit function may perform procedures to assist the entity in the
detection of fraud
⇨ Activities Relating to Internal Control:
(i) Evaluation of internal control: The internal audit function may be
assigned specific responsibility for reviewing controls, evaluating
their operation and recommending improvements thereto
(ii) Examination of financial and operating information: The
internal audit function may be assigned to review the means used
to identify, recognize, measure, classify and report financial and
operating information, and to make specific inquiry into individual
items, including detailed testing of transactions, balances and
procedures
(iii) Review of operating activities: The internal audit function may be
assigned to review the economy, efficiency and effectiveness of
operating activities, including nonfinancial activities of an entity
(iv) Review of compliance with laws and regulations: The internal
audit function may be assigned to review compliance with laws,
regulations and other external requirements
10.4 Independence
Internal Auditor is relatively less independent than external auditor
10.5 Using the work of Internal Audit Function- SA 610
10.5.1 This Standard on Auditing (SA) deals with the external auditor’s responsibilities
if using the work of internal auditors. This includes
(a) Using the work of the internal audit function in obtaining audit evidence
and

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(b) Using internal auditors to provide direct assistance under the direction,
supervision and review of the external auditor
10.5.2 ⇨ The external auditor has sole responsibility for the audit opinion
expressed, and that responsibility is not reduced by the external auditor’s
use of the work of the internal audit function or internal auditors to
provide direct assistance on the engagement.
⇨ Although they may perform audit procedures similar to those performed
by the external auditor, neither the internal audit function nor the internal
auditors are independent of the entity as is required of the external
auditor in an audit of financial statements in accordance with SA 200.
10.5.3 Evaluating Internal Audit Function
The external auditor shall determine whether the work of the internal audit
function can be used for purposes of the audit by evaluating the following:
⇨ The extent to which the internal audit function’s organizational status and
relevant policies and procedures support the objectivity of the internal
auditors
⇨ The level of competence of the internal audit function
⇨ Whether the internal audit function applies a systematic and disciplined
approach, including quality control
10.5.4 Using the work of Internal Auditor without Direct Assistance
⇨ The external auditor shall consider the nature and scope of the work that
has been performed, or is planned to be performed, by the internal audit
function and its relevance to the external auditor’s overall audit strategy
and audit plan
⇨ The external auditor shall make all significant judgments in the audit
engagement and, to prevent undue use of the work of the internal audit
function, shall plan to use less of the work of the function and perform
more of the work directly
10.5.5 Using Direct Assistance from Internal Auditor
⇨ Direct assistance – The use of internal auditors to perform audit
procedures under the direction, supervision and review of the external
auditor
⇨ Prior to using internal auditors to provide direct assistance for purposes
of the audit, the external auditor shall:
(a) Obtain written agreement from an authorized representative of the
entity that the internal auditors will be allowed to follow the external
auditor’s instructions, and that the entity will not intervene in the
work the internal auditor performs for the external auditor; and
(b) Obtain written agreement from the internal auditors that they will
keep confidential specific matters as instructed by the external
auditor and inform the external auditor of any threat to their
objectivity
⇨ The external auditor shall direct, supervise and review the work performed
by internal auditors on the engagement in accordance with SA 220.

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10.6 Standards on Internal Audit (SIA):

There are 18 SIAs issued by Internal Audit Standard Board which are
recommendatory in nature.
11 Benefits of Evaluation of Internal Control
11.1 Whether errors and frauds are likely to be located in the ordinary course of
operations of the business;
11.2 Whether an adequate internal control system is in use and operating as planned
by the management;
11.3 Whether the controls adequately safeguard the assets;
11.4 How far and how adequately the management is discharging its function in so far
as correct recording of transactions is concerned;
11.5 How reliable the reports, records and the certificates to the management can be;
11.6 The extent and the depth of the examination that he needs to carry out in the
different areas of accounting;
11.7 What would be appropriate audit technique and the audit procedure in the given
circumstances;
11.8 What are the areas where control is weak and where it is excessive; and
11.9 Whether some worthwhile suggestions can be given to improve the control
system.
12 Methods to Evaluate Internal Control
12.1 The Narrative Record
This is a complete and exhaustive description of the system as found in operation
by the auditor. Actual testing and observation are necessary before such a record
can be developed. It may be recommended in cases where no formal control
system is in operation and would be more suited to small business
12.2 A Check List
This is a series of instructions which a member of the auditing staff must follow.
When he completes instruction, he initials the space against the instruction.
Answers to the check list instructions are given by adopting distinctive “ticks
12.3 Internal Control Questionnaire
In the questionnaire, generally questions are so framed that a ‘Yes’ answer
denotes satisfactory position and a ‘No’ answer suggests weakness. Provision is
made for an explanation or further details of ‘No’ answers. In respect of questions
not relevant to the business, ‘Not Applicable’ reply is given.
12.4 A Flow Chart
It is a graphic presentation of each part of the company’s system of internal
control. A flow chart is considered to be the most concise way of recording the
auditor’s review of the system. It minimises the amount of narrative explanation
and thereby achieves a consideration or presentation not possible in any other
form.

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It is also necessary for the auditor to study the significant features of the business
carried on by the concern; the nature of its activities and various channels of
goods and materials
13 Test of Controls
13.1 Test of controls are performed to obtain audit evidence about the activeness of
the:
(a) Design of the accounting and internal control systems
(b) Operation of internal controls throughout the period
13.2 the auditor considers
⇨ How they were applied,
⇨ The consistency with which they were applied during the period and
⇨ By whom they were applied
13.3 It has been suggested that actual operation of the internal control should be
tested by the application of procedural tests and examination in depth
⇨ Procedural Test: Procedural tests simply mean testing of the compliance
with the procedures laid down by the management in respect of initiation,
authorisation, recording and documentation of transaction at each stage
through which it flows.
⇨ Examination in depth: It means in-depth verification of selected
transactions to examine the process from beginning to end. Auditor not
only verifies compliance with the procedures laid down by the
management but also suggests additions or deletions in the processes.
13.4 The concept of ejective operation recognises that some deviations may have
occurred. Deviations from prescribed controls may be caused by such factors as
changes in key personnel, significant seasonal fluctuations in volume of
transactions and human error. When deviations are detected the auditor makes
specific inquiries regarding these matters, particularly, the
timing of stay changes in key internal control functions
14 Benefits of Information technology to an entity’s control
14.1 Consistently apply predefined business rules and perform complex calculations
in processing large volumes of transactions or data;
14.2 Enhance the timeliness, availability, and accuracy of information;
14.3 Facilitate the additional analysis of information;
14.4 Enhance the ability to monitor the performance of the entity’s activities and
its policies and procedures;
15 Examples of Risks to an entity’s internal control due to information
technology
15.1 Reliance on systems or programs that are inaccurately processing data,
processing inaccurate data, or both.

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15.2 Unauthorised access to data that may result in destruction of data or improper
changes to data
15.3 The possibility of IT personnel gaining access privileges beyond those necessary
to perform their assigned duties there by breaking down segregation of duties
15.4 Unauthorised changes to data in master files
15.5 Unauthorised changes to systems or programs
15.6 Potential loss of data or inability to access data as required
16 Materiality and Audit Risk
16.1 The concept of materiality is applied by the auditor both in planning and
performing the audit, and in evaluating the effect of identified misstatements on
the audit and of uncorrected misstatements, if any, on the financial statements
and in forming the opinion in the auditor’s report
16.2 Audit risk is the risk that the auditor expresses an inappropriate audit opinion
when the financial statements are materially misstated
16.3 Materiality and audit risk are considered throughout the audit, in particular,
when:
(a) Identifying and assessing the risks of material misstatement;
(b) Determining the nature, timing and extent of further audit procedures
(c) Evaluating the effect of uncorrected misstatements, if any, on the financial
statements and in forming the opinion in the auditor’s report
17 Documentation in relation to risk of material misstatement
17.1 The discussion among the engagement team and the significant decisions
reached;
17.2 Key elements of the understanding obtained regarding each of the aspects of the
entity and its environment and of each of the internal control components, the
sources of information from which the understanding was obtained; and the risk
assessment procedures performed;
17.3 The identified and assessed risks of material misstatement at the financial
statement level and at the assertion level ; and
17.4 The risks identified, and related controls about which the auditor has obtained an
understanding
18 Auditor’s duty to report upon Internal financial controls with reference to
financial statements- REFER SEC 143(3)(i) of Companies Act, 2013
(COMPANY AUDIT TOPIC)



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5 AUDITOR’S
RESPONSIBILITIES
IN RELATION TO
FRAUD

Sr. No List of Topics as per Module JKSC Topic reference

1 Meaning of fraud Topic 1.1 & 1.2

2 Characteristics of fraud Topic 1.3 & 1.4

3 Detection of fraud and error- Duty of auditor Topic 2

4 Fraud Risk factors and possibility of fraud Topic 6 and Topic 7

5 Fraud Reporting Topic 8

6 Auditor unable to continue the engagement Topic 9

Sr. No Particulars
1 Meaning and characteristics of fraud
Meaning
1.1 The Standard on Auditing (SA) 240 “The Auditor’s Responsibilities Relating to
Fraud in an Audit of Financial Statements” defines the term ‘fraud’ as-
“an intentional act by one or more individuals among management, those
charged with governance, employees, or third parties, involving the use of
deception to obtain an unjust or illegal advantage”.
1.2 The auditor is concerned with fraud that causes a material misstatement
in the financial statements.
Two types of intentional misstatements are relevant to the auditor–
 misstatements resulting from fraudulent financial reporting and
 misstatements resulting from misappropriation of assets.

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Characteristics
1.3 Fraudulent Financial Reporting:
It means manipulating the operating results and the financial statements. It is
often perpetrated by management.
It is achieved by:
 Manipulation/Falsification/alteration
 Misrepresentation/Intentional Omission
 Intentional Misapplication of accounting principles
1.4 Misappropriation of assets:
It involves the theft of an entity’s assets and is often perpetrated by employees
in relatively small and immaterial amounts.
Misappropriation of assets can be accomplished in a variety of ways including:
 Embezzling receipts
 Stealing physical assets or intellectual property
 Causing an entity to pay for goods and services not received
 Using an entity’s assets for personal use
2 Auditor’s Responsibilities
2.1 As per SA 240, the primary responsibility for the prevention and detection of
fraud rests with both those charged with governance of the entity and
management
2.2 An auditor conducting an audit in accordance with SAs is responsible for
obtaining reasonable assurance that the financial statements taken as a
whole are free from material misstatement, whether caused by fraud or error.
2.3 Owing to the inherent limitations of an audit, there is an unavoidable risk that
some material misstatements of the financial statements will not be detected,
even though the audit is properly planned and performed in accordance with
the SAs.
2.4 The risk of not detecting a material misstatement resulting from fraud is
higher than the risk of not detecting one resulting from error.
2.5 The question of whether the auditor has adhered to the basic principles
governing an audit is determined by the adequacy of the procedures
undertaken in the circumstances and the suitability of the auditor’s report
based on the results of these procedures.
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2.6  The liability of the auditor for failure to detect fraud exists only when such
failure is clearly due to not exercising reasonable care and skill.
 If the auditor can prove with the help of his papers (documentation) that he
has followed adequate procedures necessary for the proper conduct of an
audit, he cannot be held responsible for the same. If however, the same
cannot be proved, he would be held responsible
2.7 If the auditor can prove with the help of his papers (documentation) that he has
followed adequate procedures necessary for the proper conduct of an audit, he
cannot be held responsible for the same. If however, the same cannot be proved,
he would be held responsible.
2.8 Although the auditor may suspect or, in rare cases, identify the occurrence of
fraud, the auditor does not make legal determinations of
whether fraud has actually occurred
3 Manipulation of accounts
3.1 Why it is done?
3.1.1 to avoid incidence of income-tax or other taxes
3.1.2 for declaring a dividend when there are insu□cient profits
3.1.3 to withhold declaration of dividend even when there is adequate profit (this is
often done to manipulate the value of shares in stock market to make it
possible for selected persons to acquire shares at a lower cost.
3.1.4 for receiving higher remuneration where managerial remuneration is payable
by reference to profits
3.2 How it is done?
3.2.1 inflating or suppressing purchases and expenses
3.2.2 inflating or suppressing sales and other items of income
3.2.3 inflating or deflating the value of closing inventory
3.2.4 failing to adjust outstanding liabilities or prepaid expenses
3.2.5 charging items of capital expenditure to revenue or by capitalising revenue
expenses
4 Management Override of Controls
It means management manipulating or not following procedures to commit fraud.
It usually involves the following:

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4.1 Recording fictitious journal entries, particularly close to the end of an

accounting period, to manipulate operating results or achieve other objectives
4.2 Inappropriately adjusting assumptions and changing judgments used to estimate
account balances.

4.3 Omitting, advancing or delaying recognition in the financial statements of events

and transactions that have occurred during the reporting period.

4.4 Concealing, or not disclosing, facts that could affect the amounts recorded in
the financial statements
4.5 Engaging in complex transactions that are structured to misrepresent the financial
position or financial performance of the entity

4.6 Altering records and terms related to significant and unusual transactions
5 Misappropriation of assets
5.1 Misappropriation of Goods
Fraud in the form of misappropriation of goods is more difficult to detect; for this
management has to rely on various measures. Apart from the various
requirements of record keeping about the physical quantities and their periodic
checks, there must be rules and procedures for allowing persons inside the area
where goods are kept. In addition there should be external security arrangements
to see that no goods are taken out without proper
authority.
5.2 Defalcation of Cash
It usually involves:
5.2.1 By inflating cash payments:
Examples of inflation of payments:
(1) Making payments against fictitious vouchers.
(2) Making payments against vouchers, the amounts whereof have been
inflated.
(3) Manipulating totals of wage rolls either by including therein names of
dummy workers or by inflating them in any other manner.
(4) Casting a larger totals for petty cash expenditure and adjusting the excess in
the totals of the detailed columns so that cross totals show agreement

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5.2.2 By suppressing cash receipts:

(1) Teeming and Lading: Amount received from a customer being
misappropriated; also to prevent its detection the money received from
another customer subsequently being credited to the account of the
customer who has paid earlier. Similarly, moneys received from the
customer who has paid thereafter being credited to the account of the
second customer and such a practice is continued so that no one account is
outstanding for payment for any length of time, which may lead the
management to either send out a statement of account to him or
communicate with him
(2) Adjusting unauthorised or fictitious rebates, allowances, discounts, etc. to
customer’ accounts and misappropriating amount paid by them.
(3) Writing off as debts in respect of such balances against which cash has
already been received but has been misappropriated.
6 Fraud Risk Factors
 Fraud Risk Factors may be defined as events or conditions that indicate an
incentive or pressure to commit fraud or provide an opportunity to commit
fraud.
 For each of these types of fraud, the risk factors are further classified based
on the three conditions generally present when material misstatements
due to fraud occur:
6.1 Incentive/Pressure
 High degree of competition or market saturation, accompanied by
declining margins
 High vulnerability to rapid changes, such as changes in technology,
product obsolescence, or interest rates
 Managerial Remuneration linked with profit of the entity
 Personal financial obligations may create pressure on employees with
access to cash
6.2 Opportunity
 A strong financial presence or ability to dominate a certain industry sector
that allows the entity to dictate terms or conditions to suppliers or
customers that may result in inappropriate or non-arm’s-length
transactions

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 Large amounts of cash in hand

 Weak internal controls
6.3 Attitude/Rationalization
 Known history of violations of securities laws or other laws and regulations
 Management Communicating unethical values to employees.
 Behaviour indicating displeasure or dissatisfaction with the entity or its
treatment of the employee
7 Circumstances relating to possibility of fraud
7.1 Discrepancies in the accounting records, including:
7.1.1 Transactions that are not recorded in a complete or timely manner or are
improperly recorded as to amount, accounting period, classification, or entity
policy.
7.1.2 Unsupported or unauthorized balances or transactions
7.1.3 Last-minute adjustments that significantly a□ect financial results
7.1.4 Evidence of employees’ access to systems and records inconsistent with that
necessary to perform their authorized duties.
7.1.5 Tips or complaints to the auditor about alleged fraud
7.2 Conflicting or missing evidence, including:
7.2.1 Missing documents
7.2.2 Documents that appear to have been altered
7.2.3 Significant unexplained items on reconciliations
7.2.4 Unusual discrepancies between the entity’s records and confirmation replies
7.2.5 Missing or non-existent cancelled cheques in circumstances where cancelled
cheques are ordinarily returned to the entity with the bank statement
7.3 Problematic or unusual relationships between the auditor and management,
including:
7.3.1 Denial of access to records, facilities, certain employees, customers, vendors, or
others from whom audit evidence might be sought
7.3.2 Undue time pressures imposed by management to resolve complex or contentious
issues
7.3.3 Unusual delays by the entity in providing requested information

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7.3.4 Unwillingness to facilitate auditor access to key electronic fi les for testing through
the use of computer-assisted audit techniques
7.3.5 Denial of access to key IT operations start and facilities, including security,
operations, and systems development personnel.
7.3.6 An unwillingness to address identified deficiencies in internal control on a timely
basis.
7.4 Other
7.4.1 Unwillingness by management to permit the auditor to meet privately with
those charged with governance.
7.4.2 Accounting policies that appear to be at variance with industry norms
7.4.3 Frequent changes in accounting estimates that do not appear to result from
changed circumstances
7.4.4 Tolerance of violations of the entity’s Code of Conduct
8 Fraud Reporting
8.1 Section 143(12) of Companies Act, 2013 read with Rule 13 of CAAR, 2014
8.1.1 If an auditor of a company in the course of the performance of his duties as
auditor, has reason to believe that an an offence of fraud, which involves or is
expected to involve individually an amount of Rs. 1 crore or above, is being or
has been committed against the company by its overs or employees, the
auditor shall report the matter to the Central Government

8.1.2 the auditor shall report the matter to the Board or the Audit Committee, as the case
may be, immediately but not later than 2 days of his knowledge of the
fraud, seeking their reply or observations within 45 days
8.1.3 on receipt of such reply or observations, the auditor shall forward his report and
the reply or observations of the Board or the Audit Committee along with his
comments (on such reply or observations of the Board or the Audit Committee) to
the Central Government within 15 days from the date of receipt of such reply or
observations
8.1.4 in case the auditor fails to get any reply or observations from the Board or the
Audit Committee within the stipulated period of 45 days, he shall forward his
report to the Central Government along with a note containing the details of his
report that was earlier forwarded to the Board or the Audit Committee for which
he has not received any reply or observations
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8.1.5 the report shall be sent to the Secretary, Ministry of Corporate A□ airs in a sealed
cover by Registered Post with Acknowledgement Due or by Speed Post followed by
an e-mail in confirmation of the same
8.1.6 the report shall be on the letter-head of the auditor containing postal address,
e-mail address and contact telephone number or mobile number and be signed by
the auditor with his seal and shall indicate his Membership Number.
The report shall be in the form of a statement as specified in Form ADT-4.
8.1.7  In case of a fraud involving lesser than the amount specified [i.e. less
than 1 crore], the auditor shall report the matter to Audit Committee
constituted under section 177 or to the Board immediately but not later
than 2 days of his knowledge of the fraud and he shall report the matter
specifying the following:
(a) Nature of Fraud with description;
(b) Approximate amount involved; and
(c) Parties involved.
 Company shall disclose the details about such frauds in the Board’s report
8.1.8 This Duty is also applicable to Cost auditor and Secretarial auditor of the
company
If a suspected once of fraud has already been reported under section 143(12) by such
other person, and the auditor becomes aware of such suspected once involving fraud,
he need not report the same since he has not per se identified the suspected once of
fraud.

8.2 Clause X of CARO 2016

8.2.1 Whether any fraud by the company or any fraud on the Company by its
officers or employees has been noticed or reported during the year. If yes, the
nature and the amount involved is to be indicated

8.2.2 Auditor should report frauds “noticed or reported during the year”, even
though fraud has been noticed or reported by other parties.

8.2.3 Audit procedure to report under CARO 2016:

(1) While planning the audit, the auditor should make inquiries of management
to determine whether management is aware of any known fraud or
suspected fraud that the company is investigating.

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(2) The auditor should examine the reports of the internal auditor with a view
to ascertain whether any fraud has been reported or noticed by the
management.
(3) The auditor should examine the minutes of the audit committee, if
available, to ascertain whether any instance of fraud pertaining to the
company has been reported and actions taken thereon.
(4) The auditor should obtain written representations from management that:
(i) it acknowledges its responsibility for the implementation and
operation of accounting and internal control systems that are
designed to prevent and detect fraud and error;
(ii) it has:
(a) disclosed to the auditor all significant facts relating to any
frauds or suspected frauds known to management that may
have affected the entity; and
(b) it has disclosed to the auditor the results of its assessment of the
risk that the financial statements may be materially misstated as
a result of fraud.
9 Auditor unable to continue the engagement
If, as a result of a misstatement resulting from fraud or suspected fraud, the auditor
encounters exceptional circumstances that bring into question the auditor’s ability
to continue performing the audit, the auditor shall:
9.1 Discuss with the appropriate level of management and those charged with
governance the auditor’s withdrawal from the engagement and the reasons for the
withdrawal
9.2 Consider whether it is appropriate to withdraw from the engagement, where
withdrawal is possible under applicable law or regulation
9.3 Determine whether there is a professional or legal requirement to report to
the person or persons who made the audit appointment or, in some cases, to
regulatory authorities, the auditor’s withdrawal from the engagement and the
reasons for the withdrawal.

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6 AUDIT IN AN
AUTOMATED
ENVIRONMENT

JKSC Textbook
Sr.No List of Topics as per Module
Reference

1 What is an Automated environment Topic 1

2 Relevance of IT in audit Topic 2

3 Risks and controls in an automated environment Topic 4

4 Testing Methods Topic 7

5 Internal financial controls as per regulatory requirements Company audit

6 Data analytics for Audit Topic 8

7 Assess and Report Audit findings Topic 9

Sr.No Particulars

1 Features of an automated environment

An automated environment basically refers to a business environment
where the processes, operations, accounting and even decisions are carried
out by using computer systems – also known as Information Systems (IS) or
Information Technology (IT) systems.
Features are as follows:

1.1 Enables faster business operations

1.2 Accuracy in data processing and computation

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1.3 Ability to process large volumes of data

1.4 Integration between business operations

1.5 Better security and controls

1.6 Connectivity and networking capability

2 Relevance of IT in audit

2.1 Computation and Calculations are automatically carried out (for example,
bank interest computation and inventory valuation).

2.2 Accounting entries are posted automatically (for example, sub-ledger to GL

postings are automatic).

2.3 Business policies and procedures, including internal controls, are applied
automatically (for example, delegation of authority for journal approvals,
customer credit limit checks are performed automatically).

2.4 Reports used in business are produced from systems.

2.5 Management and other stakeholders rely on these reports and information
produced (for example, debtors ageing report).

2.6 User access and security are controlled by assigning system roles to users
(for example, segregation of duties can be enforced effectively).

3 Understanding of the company’s automated environment

3.1 Information systems being used (one or more application systems and what
they are).

3.2 Their purpose (financial and non-financial).

3.3 Location of IT systems - local vs global.

3.4 Architecture (desktop based, client-server, web application, cloud based).

3.5 Version (functions and risks could vary in diffrent versions of same
application).

3.6 Interfaces within systems (in case multiple systems exist).

3.7 In-house vs Packaged.

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3.8 Outsourced activities (IT maintenance and support).

3.9 Key persons (CIO, CISO, Administrators).

4 Risks that arise from the use of IT systems.

4.1 Inaccurate processing of data, processing inaccurate data, or both.

4.2 Unauthorized access to data.

4.3 Direct data changes (backend changes).

4.4 Excessive access / Privileged access (super users).

4.5 Lack of adequate segregation of duties.

4.6 Unauthorized changes to systems or programs.

4.7 Failure to make necessary changes to systems or programs.

4.8 Loss of data

5 Impact of IT related risks
5.1 Impact on Substantive Audit
⇨ Cannot rely on the data obtained from systems
⇨ More audit evidence is needed
⇨ System data and report should be tested substantively for completeness
and accuracy
5.2 Impact on Controls
⇨ Cannot rely on IT dependent Manual controls
⇨ Cannot rely on automated controls, system calculations and accounting
procedures built into applications
5.3 Impact on Reporting
⇨ Due to the regulatory requirement of auditors to report on internal
financial controls of a company, the audit report also may have to be
modified in some instances.
6 Types of Controls in Automated Environment
6.1 General IT controls
⇨ “General IT controls are policies and procedures that relate to many
applications and support the effective functioning of application controls.
They apply to mainframe, miniframe, and end-user environments.

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⇨ General IT-controls that maintain the integrity of information and security

of data commonly include controls over the following:” (SA 315)
Data center and network operations Program change
Access security
Application system acquisition, development, and maintenance (Business
Applications)
6.2 Application Controls
⇨ Application controls include both automated and manual controls that
operate at a business process level. Automated Application controls are
embedded into IT applications viz., ERPs and help in ensuring the
completeness, accuracy and integrity of data in those systems.
⇨ Examples of automated applications include edit checks and validation of
input data, sequence number checks, user limit checks, reasonableness
checks, mandatory data fields.

6.3 IT-dependent Controls

⇨ IT dependent controls are basically manual controls that make use of
some form of data or information or report produced from IT systems and
applications.
⇨ In this case, even though the control is performed manually, the design
and electiveness of such controls depends on the reliability of source data.

7 Testing Methods

7.1 Obtain an understanding of how an automated transaction is processed by doing

a walkthrough of one end-to-end transaction using a combination of inquiry,
observation and inspection.

7.2 Observe how a user processes transactions under different scenarios

7.3 Inspect the configuration defined in an application.

7.4 Inspect the system logs to determine any changes made since last audit testing.

7.5 Carry out a test check (negative testing) and observe the error message

displayed by the application

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7.6 Common methods:

⇨ Inquiry
⇨ Observation
⇨ Inspection
⇨ Re-performance
A combination of inquiry and inspection is generally the most effective and
efficient testing method. However, determining the most effective and efficient
testing method is a matter of professional judgement and depends on the several
factors including risk assessment, control environment, desired level of evidence
required, history of errors/misstatements, complexity of business, assertions
being addressed

8 Data analytics
⇨ The tools and techniques that auditors use in applying the principles
of data analytics are known as Computer Assisted Auditing
Techniques or CAATs in short.
⇨ Data analytics can be used in testing of electronic records and data
residing in IT systems using spreadsheets and specialised audit tools
viz., IDEA and ACL to perform the following:

8.1 Check completeness of data and population that is used in either test of
controls or substantive audit tests.

8.2 Selection of audit samples – random sampling, systematic sampling.

8.3 Re-computation of balances – reconstruction of trial balance from transaction

data.

8.4 Reperformance of mathematical calculations – depreciation, bank interest

calculation.

8.5 Analysis of journal entries as required by SA 240.

8.6 Fraud investigation.

8.7 Evaluating impact of control deficiencies.

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9 Assess and Report Audit Findings

9.1 Are there any weaknesses in IT controls?

9.2 What is the impact of these weaknesses on overall audit?

9.3 Report deficiencies to management – Internal Controls Memo or Management

Letter.

9.4 Communicate in writing any significant deficiencies to Those Charged With

Governance.

The auditor needs to assess each finding or exception to determine impact on

the audit and evaluate if the exception results in a deficiency in internal control.

10 Situations where Information Technology is needed in audit

Given below are some situations where IT will be needed in audit:

10.1 Increased use of Systems and Application software in Business (for example,
use of ERPs)

10.2 Complexity of transactions has increased (multiple systems, network of

systems)

10.3 Hi-tech nature of business (Telecom, e-Commerce).

10.4 Volume of transactions are high (Insurance, Banking, Railways ticketing).

10.5 Company Policy (Compliance).

10.6 Regulatory requirements - Companies Act 2013 IFC, IT Act 2008. Required
by Indian and

10.7 International Standards - ISO, PCI-DSS, SA 315, SOC, ISAE.

10.8 Increases eScience and electiveness of audit.

NOTE: STUDENTS SHOULD READ GLOSSARY AND ABBREVIATIONS GIVEN AT THE

END OF CHAPTER 6 FROM THE ICAI MODULE

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7 AUDIT
SAMPLING

JKSC Textbook
Sr.No List of Topics as per Module
Reference

1 Sampling: An Audit Procedure Refer note

2 Meaning of audit sampling Topic 1

3 Approaches to Sampling Topic 6

4 Sample design and selection of items for testing Topic 4, 5, 7, 8 & 9

5 Performing Audit Procedures Chapter 3

6 Nature and cause of deviations and misstatements Topic 10

7 Projecting Misstatements Topic 10

8 Evaluating Results of Audit Sampling Topic 10

Note: Is auditor justified in sampling technique? What is the need of sampling

procedure in auditing financial statements?
⇨ The extent of the checking to be undertaken is primarily a matter of judgment of the
auditor, there is nothing statutorily stated anywhere which specifies what work is to
be done, how it is to be done and to what extent.
⇨ It is also not obligatory that the auditor must adopt the sampling technique. What he
is to do is to express his opinion and become bound by that.
⇨ With the shift in favour of formal internal controls in the management of affairs of
organisations, the possibilities of routine errors and frauds have greatly diminished
and auditors often find extensive routine checking as nothing more than a ritual
because it seldom reveals anything material.

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⇨ To ensure good and reasonable standard of work, he should adopt standards and
techniques that can lead him to an informed professional opinion.
⇨ On a consideration of this fact, it can be said that it is in the interest of the auditor that
if he decides to form his opinion on the basis of a part checking, he should adopt
standards and techniques which are widely followed and which have a recognised
basis.
⇨ Since statistical theory of sampling is based on a scientific law, it can be relied upon to
a greater extent than any arbitrary technique which lacks in basis and acceptability

Sr.No Particulars

1 Meaning
According to SA 530 “Audit sampling”, ‘audit sampling’ refers to the
application of audit procedures to less than 100% of items within a
population of audit relevance such that all sampling units have a chance of
selection in order to provide the auditor with a reasonable basis on which
to draw conclusions about the entire population.

2 Population and its characteristics

⇨ Population: Population refers to the entire set of data from which a
sample is selected and about which the auditor wishes to draw
conclusions. The auditor should select sample items in such a way that the
sample can be expected to be representative of the population.
⇨ Characteristics of the population are as follows:

2.1 Appropriateness : The auditor will need to determine that the population from
which the sample is drawn is appropriate for the specific audit objective

2.2 Completeness : The population also needs to be complete, the population needs
to include all relevant items from throughout the entire period.

2.3 Reliable : When performing the audit sampling, the auditor performs audit
procedures to ensure that the information upon which the audit sampling is
performed is sufficiently complete and accurate.

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3 Sampling Risk

3.1 The risk that the auditor’s conclusion based on a sample may be different from
the conclusion if the entire population were subjected to the same audit
procedure. Sampling risk can lead to two types of erroneous conclusions as
explained below

3.1.1 In the case of a test of controls, that controls are more effective than they actually
are, or in the case of a test of details, that a material misstatement does not exist
when in fact it does. The auditor is primarily concerned with this type of
erroneous conclusion because it affects audit effectiveness and is more likely to
lead to an inappropriate audit opinion

3.1.2 In the case of a test of controls, that controls are less effective than they actually
are, or in the case of a test of details, that a material misstatement exists when in
fact it does not. This type of erroneous conclusion affects audit effciency as it
would usually lead to additional work to establish that initial conclusions were
incorrect.

3.2 In order to reduce sampling risk, auditor should select an appropriate and
adequate sample which represents the population

4 Non Sampling Risk

4.1 The risk that the auditor reaches an erroneous conclusion for any reason not
related to sampling risk.

4.2 Examples of non-sampling risk include use of inappropriate audit procedures, or

misinterpretation of audit evidence and failure to recognize a misstatement or
deviation.

4.3 Non sampling risk can never be mathematically measured

5 Sample Selection Techniques

5.1 Random Sampling:

Random Sampling: Random selection ensures that all items in the population or
within each stratum have a known chance of selection. It may involve use of
random number tables. Random sampling includes two very popular methods
which are discussed below:
(i) Simple Random Sampling: Under this method each unit of the whole
population e.g. purchase or sales invoice has an equal chance of being

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selected. The mechanics of selection of items may be by choosing numbers

from table of random numbers by computers or picking up numbers
randomly from a drum. It is considered that random number tables are
simple and easy to use and also provide assurance that the bias does not
affect the selection. This method is considered appropriate provided the
population to be sampled consists of reasonably similar units and fall
within a reasonable range.
(ii) Stratified Sampling: This method involves dividing the whole population
to be tested in a few separate groups called strata and taking a sample
from each of them. Each stratum is treated as if it was a separate
population and if proportionate of items area selected from each of these
stratum. The number of groups into which the whole population has to be
divided is determined on the basis of auditor judgment.
5.2 Systematic or Interval Sampling:
Systematic selection is a selection method in which the number of sampling units
in the population is divided by the sample size to give a sampling interval, for
example 50, and having determined a starting point within the first 50, each 50th
sampling unit thereafter is selected. When using systematic selection, the auditor
would need to determine that sampling units within the population are not
structured in such a way that the sampling interval
corresponds with a particular pattern in the population.
5.3 Monetary Unit Sampling:
It is a type of value-weighted selection in which sample size, selection and
evaluation results in a conclusion in monetary amounts.
5.4 Block Sampling:
This method involves selection of a block(s) of contiguous items from within the
population. Block selection cannot ordinarily be used in audit sampling because
most populations are structured such that items in a sequence can be expected to
have similar characteristics to each other, but different
characteristics from items elsewhere in the population.
5.5 Haphazard Sampling:
Haphazard selection, in which the auditor selects the sample without following a
structured technique. Although no structured technique is used, the auditor
would nonetheless avoid any conscious bias or predictability (for example,
always choosing or avoiding the first or last entries on a page) and thus attempt
to ensure that all items in the population have a chance of selection.
Haphazard selection is not appropriate when using statistical sampling.

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5.6 Stratification:
⇨ Audit effciency may be improved if the auditor stratifies a population by
dividing it into discrete sub-populations which have an identifying
characteristic. The objective of stratification is to reduce the variability of
items within each stratum and therefore allow sample size to be reduced
without increasing sampling risk.
⇨ When performing tests of details, the population is often stratified by
monetary value. This allows greater audit effort to be directed to the
larger value items, as these items may contain the greatest potential
misstatement in terms of overstatement.
⇨ Similarly, a population may be stratified according to a particular
characteristic that indicates a higher risk of misstatement, for example,
when testing the allowance for doubtful accounts in the valuation of
accounts receivable, balances may be stratified by age.
⇨ The results of audit procedures applied to a sample of items within a
stratum can only be projected to the items that make up that stratum. To
draw a conclusion on the entire population, the auditor will need to
consider the risk of material misstatement in relation to whatever other
strata make up the entire population.
Value-Weighted Selection:
⇨ When performing tests of details it may be effcient to identify the
sampling unit as the individual monetary units that make up the
population.
⇨ Having selected specific monetary units from within the population, for
example, the accounts receivable balance, the auditor may then examine
the particular items, for example, individual balances, that contain those
monetary units
⇨ One benefit of this approach to defining the sampling unit is that audit
effort is directed to the larger value items because they have a greater
chance of selection, and can result in smaller sample sizes.
⇨ This approach may be used in conjunction with the systematic method of
sample selection and is most efficient when selecting items using random
selection.
6 Approaches to Sampling
6.1 Statistical Approach

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6.1.1 Statistical sampling is an approach to sampling that has the random selection of
the sample items; and the use of probability theory to evaluate sample results,
including measurement of sampling risk characteristics

6.1.2 Audit testing done through statistical approach is more scientific than testing
based entirely on the auditor’s own judgment because it involves use of
mathematical laws of probability in determining the appropriate sample size in
varying circumstances

6.1.3 The advantages of statistical sampling may be summarized as follows -

⇨ The amount of testing (sample size) does not increase in proportion to the
increase in the size of the area (universe) tested.
⇨ The sample selection is more objective and thereby more defensible.
⇨ The method provides a means of estimating the minimum sample size
associated with a specified risk and precision.
⇨ It provides a means for deriving a “calculated risk” and corresponding
precision (sampling error) i.e. the probable difference in result due to the
use of a sample in lieu of examining all the records in the group
(universe), using the same audit procedures.
⇨ It may provide a better description of a large mass of data than a complete
examination of all the data, since non-sampling errors such as processing
and clerical mistakes are not as large.

6.2 Non Statistical approach

6.2.1 A sampling approach that does not have above characteristics is considered
non-statistical sampling

6.2.2 The non-statistical sampling is criticized on the grounds that it is neither

objective nor scientific

6.2.3 The expected degree of objectivity cannot be assured in non-statistical sampling

because the risk of personal bias in selection of sample items cannot be
eliminated

6.2.4 Under some audit circumstances, statistical sampling methods may not be
appropriate. The auditor should not attempt to use statistical sampling when
another approach is either necessary or will provide satisfactory information in
less time or with less effort, for instance when exact accuracy is required or in
case of legal requirements etc.

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⇨ The decision whether to use a statistical or non-statistical sampling approach is a matter

for the auditor’s judgment; however, sample size is not a valid criterion to distinguish
between statistical and non-statistical approaches.

⇨ Whatever may be the approach non-statistical or statistical sampling, the sample

must be representative. This means that it must be closely similar to the whole
population although not necessarily exactly the same. The sample must be large enough
to provide statistically meaningful results.

7 Tolerance Level
Level upto which auditor can accept misstatements/deviations while
performing test of details/controls.

7.1 Tolerable misstatement – A monetary amount set by the auditor in respect of

which the auditor seeks to obtain an appropriate level of assurance that the
monetary amount set by the auditor is not exceeded by the actual misstatement
in the population.

7.2 Tolerable rate of deviation – A rate of deviation from prescribed internal control
procedures set by the auditor in respect of which the auditor seeks to obtain an
appropriate level of assurance that the rate of deviation set by the auditor is not
exceeded by the actual rate of deviation in the population

7.3 Relationship with Sample Size:

If tolerance level is high then auditor shall reduce the sample size and vice-
versa

8 Sample Design, size and selection

8.1 Sample design - When designing an audit sample, the auditor shall consider the
purpose of the audit procedure and the characteristics of the population from
which the sample will be drawn.

8.2 Sample Size - The auditor shall determine a sample size sufficient to reduce
sampling risk to an acceptably low level.

8.3 Selection of Items for Testing- The auditor shall select items for the sample in
such a way that each sampling unit in the population has a chance of selection

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8.4 The factors that should be considered for deciding upon the extent of checking
on a sampling plan are following:
(i) Size of the organisation under audit.
(ii) State of the internal control.
(iii) Adequacy and reliability of books and records.
(iv) Tolerable error range.
(v) Degree of the desired confidence.

9 Examples of Factors influencing Sample size

9.1 The higher the auditor’s assessment of the risk of material misstatement, the
larger the sample size needs to be. The auditor’s assessment of the risk of
material misstatement is affected by inherent risk and control risk.

9.2 The more the auditor is relying on other substantive procedures (tests of details
or substantive analytical procedures) to reduce to an acceptable level the
detection risk regarding a particular population, the less assurance the auditor
will require from sampling and, therefore, the smaller the sample size can be.
Hence, if there is an increase in the use of other substantive procedures directed
at the same assertion, the size of sample will decrease.

9.3 Greater the level of assurance that the auditor requires that the results of the
sample are in fact indicative of the actual amount of misstatement in the
population, the larger the sample size needs to be

9.4 An increase in tolerable misstatement will decrease the sample size as lower the
tolerable misstatement, the larger the sample size needs to be.

9.5 When a population can be appropriately stratified, the aggregate of the sample
sizes from the strata generally will be less than the sample size that would have
been required from the whole population

10 Evaluating Results of Audit Sampling

10.1 The auditor shall perform audit procedures, appropriate to the purpose, on each
item selected.

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10.2 The auditor shall evaluate-

(a) The results of the sample; and
(b) Whether the use of audit sampling has provided a reasonable basis for
conclusions about the population that has been tested

10.3 ⇨ In analyzing the deviations and misstatements identified, the auditor may
observe that many have a common feature, for example, type of
transaction, location, product line or period of time.
⇨ In such circumstances, the auditor may decide to identify all items in the
population that possess the common feature, and extend audit procedures
to those items
⇨ The auditor shall investigate the nature and cause of any deviations or
misstatements identified, and evaluate their possible effect on the
purpose of the audit procedure and on other areas of the audit.
10.4 ⇨ In the extremely rare circumstances when the auditor considers a
misstatement or deviation discovered in a sample to be an anomaly, the
auditor shall obtain a high degree of certainty that such misstatement or
deviation is not representative of the population.
⇨ The auditor shall obtain this degree of certainty by performing additional
audit procedures to obtain sufficient appropriate audit evidence that the
misstatement or deviation does not affect the remainder of the population
10.5 ⇨ For tests of details, the auditor shall project misstatements found in the
sample to the population.
⇨ Total Misstatements = Projection of Non-Anomalous misstatement +
Anomaly
10.6 In case the auditor concludes that audit sampling has not provided a reasonable
basis for conclusions about the population that has been tested, the auditor
should tailor the nature, timing and extent of those further audit procedures to
best achieve the required assurance. For example, in the case of tests of controls,
the auditor might extend the sample size, test an alternative control or modify
related substantive procedures.

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8 ANALYTICAL
PROCEDURE

Sr. No List of Topics as per Module JKSC topic reference

1 Meaning of Analytical Procedures Topic 1
2 Purpose and timing of analytical procedures Topic 2
3 Substantive Analytical Procedures Topic 4 & 6
4 Suitability of Particular Analytical Procedures for Topic 4, 5, 7, 8 & 9
given assertions
5 Extent of Reliance on Analytical Procedures Topic 7
6 Risk of Material Misstatements Topic 4
7 Investigating Results of Analytical Procedures Topic 8
8 Analytical Procedures that assist when forming Topic 10
an overall conclusion
9 Considerations specific to Public sector entities Topic 9

Sr. No Particulars
1 Meaning
 Since routine checks cannot be depended upon to disclose all the mistakes
or manipulation that may exist in accounts, certain other procedures also
have to be applied like trend and ratio analysis in addition to reasonable
tests.
 As per SA 520, the term “analytical procedures” means evaluations of
financial information through analysis of plausible relationships among
both financial and non-financial data.
 Thus, analytical procedures include the consideration of comparisons of
the entity’s financial information with as well as consideration of
relationships.

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 Analytical procedures are performed:

(a) To obtain relevant and reliable audit evidence when using
substantive analytical procedures.
(b) To design and perform analytical procedures near the end of the
audit that assist the auditor when forming an overall conclusion as
to whether the financial statements are consistent with the auditor
understands of the entity.
 SA 520 discusses use of analytical procedures as substantive procedures
 The use of analytical procedures as risk assessment procedures is
discussed in SA 315 i.e. Chapter 4
2 Examples of Analytical procedures
2.1 Examples of Analytical Procedures having consideration of comparisons of
the entity’s financial information with are:
 Comparable information for prior periods.
 Anticipated results of the entity, such as budgets or forecasts, or
expectations of the auditor, such as an estimation of depreciation.
2.2 Examples of Analytical procedures having consideration of relationships
are:
 Among elements of financial information that would be expected to
conform to a predictable pattern based on the entity’s experience, such as
gross margin percentages.
 Between financial information and relevant non-financial information, such
as payroll costs to number of employees.
3 Timing of Analytical procedures
3.1 Analytical procedures can be applied at planning, testing and completion phase.
3.2 (a) Planning phase: Trend analysis of past profits
(b) Testing phase: Comparing salary with total number of employees
(c) Completion phase: Overall ratio analysis of current year financial
performance
4 Factors to be considered for substantive audit procedures
4.1 Availability of Data – The availability of reliable and relevant data will facilitate
effective procedures
4.2 Disaggregation – The degree of disaggregation in available data can directly affect
the degree of its usefulness in detecting misstatements

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4.3 Predictability – Substantive analytical procedures are more appropriate when an

account balance or relationships between items of data are predictable (e.g.,
between sales and cost of sales or between trade receivables and cash receipts). A
predictable relationship is one that may reasonably be expected to exist and
continue over time
4.4 Nature of Assertion – Substantive analytical procedures may be more effective in
providing evidence for some assertions (e.g., completeness or valuation) than for
others (e.g., rights and obligations). Predictive analytical procedures using data
analytics can be used to address completeness, valuation/measurement and
occurrence
4.5 Inherent Risk or “What Can Go Wrong” – When we are designing audit
procedures to address an inherent risk or “what can go wrong”, we consider the
nature of the risk of material misstatement in order to determine if a substantive
analytical procedure can be used to obtain audit evidence.
5 Techniques available as substantive analytical procedures
5.1 Trend analysis – A commonly used technique is the comparison of current data
with the prior period balance or with a trend in two or more prior period
balances. We evaluate whether the current balance of an account moves in line
with the trend established with previous balances for that account, or based on an
understanding of factors that may cause the account to change.
5.2 Ratio analysis – Ratio analysis is useful for analysing asset and liability accounts
as well as revenue and expense accounts. An individual balance sheet account is
difficult to predict on its own, but its relationship to another account is often more
predictable (e.g., the trade receivables balance related to sales). Ratios can also be
compared over time or to the ratios of separate entities within the group, or with
the ratios of other companies in the same industry.

5.3 Reasonableness tests – Unlike trend analysis, this analytical procedure does not
rely on events of prior periods, but upon non-financial data for the audit period
under consideration (e.g., occupancy rates to estimate rental income or interest
rates to estimate interest income or expense). These tests are generally more
applicable to income statement accounts and certain accrual or prepayment
accounts.
5.4 Structural modelling – A modelling tool constructs a statistical model from
financial and/or non-financial data of prior accounting periods to predict current
account balances (e.g., linear regression).

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6 Precautions to be taken before performing analytical procedures

6.1 Determine the suitability of particular substantive analytical procedures for
given assertions, taking account of the assessed risks of material misstatement
and tests of details, if any, for these assertions
6.2 Evaluate the reliability of data from which the auditor’s expectation of recorded
amounts or ratios is developed, taking account of source, comparability, and
nature and relevance of information available, and controls over preparation
6.3 Develop an expectation of recorded amounts or ratios and evaluate whether the
expectation is sufficiently precise to identify a misstatement that, individually or
when aggregated with other misstatements, may cause the financial statements to
be materially misstated.
Matters relevant to the auditor’s evaluation of whether the expectation can be
developed sufficiently precisely to identify a misstatement that, when aggregated
with other misstatements, may cause the financial statements to be materially
misstated, include:
6.3.1 The accuracy with which the expected results of substantive analytical procedures
can be predicted
6.3.2 The degree to which information can be disaggregated
6.3.3 The availability of information, both financial and non-financial
6.4 Determine the amount of any difference of recorded amounts from
expected values that is acceptable without further investigation
The suitability of a particular analytical procedure will depend upon the auditor’s
assessment of how effective it will be in detecting a misstatement.
7 Extent of Reliance on Analytical procedures
The reliability of data is influenced by its source and nature and is dependent on
the circumstances under which it is obtained. Accordingly, the following are
relevant when determining whether data is reliable for purposes of designing
substantive analytical procedures:
7.1 Source of the information available. For example, information may be more
reliable when it is obtained from independent sources outside the entity;
7.2 Comparability of the information available
7.3 Nature and relevance of the information available. For example, whether budgets
have been established as results to be expected rather than as goals to be achieved

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7.4 Controls over the preparation of the information that are designed to ensure its
completeness, accuracy and validity. For example, controls over the preparation,
review and maintenance of budgets.
8 Results of Analytical Procedure
If analytical procedures performed in accordance with SA 520 identify fluctuations
or relationships that are inconsistent with other relevant information or that differ
from expected values by a significant amount, the auditor shall investigate such
differences by:
8.1 (i) Inquiring of management and obtaining appropriate audit evidence
relevant to management’s responses:
Audit evidence relevant to management’s responses may be obtained by
evaluating those responses taking into account the auditor’s understanding
of the entity and its environment, and with other audit evidence obtained
during the course of the audit.
8.2 (ii) Performing other audit procedures as necessary in the circumstances:
The need to perform other audit procedures may arise when, for example,
management is unable to provide an explanation, or the explanation,
together with the audit evidence obtained relevant to management’s
response, is not considered adequate.
9 Considerations specific to public sector entities
9.1 The relationships between individual financial statements items traditionally
considered in the audit of business entities may not always be relevant in the audit
of governments or other non-business public sector entities
9.2 For example, in many public sector entities there may be little direct relationship
between revenue and expenditure.
9.3 In addition, because expenditure on the acquisition of assets may not be
capitalized, there may be no relationship between expenditures on, for example,
inventories and fixed assets and the amount of those assets
reported in the financial statements
9.4 Also, industry data or statistics for comparative purposes may not be available in
the public sector.
9.5 However, other relationships may be relevant, for example, variations in the cost
per kilometer of road construction or the number of vehicles acquired compared
with vehicles retired.

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10 Analytical procedures may help identify the existence of unusual

transactions or events, and amounts, ratios, and trends that might indicate
matters that have audit implications. Explain and Give 4
Examples of such unusual or unexpected relationships/ transactions
 Various methods may be used to perform analytical procedures. These methods
range from performing simple comparisons to performing complex analyses using
advanced statistical techniques.
 Analytical procedures may be applied to consolidated financial statements,
components and individual elements of information
Examples are as follows:
10.1 In XYZ Ltd., after applying analytical procedures as comparison of the gross profit
ratio with that of the previous year, it is discovered that there has been fall in the
ratio. Therefore, it became necessary for the auditor to make further enquiries as
it may be due to pilferage of inventories/ misappropriation of a part of the sale
proceeds/ a change in the cost of sales without a
corresponding increase in the sales price.
10.2 By setting up certain expenses ratios on the basis of balances included in the
Statement of Profit and Loss, for the year under audit, comparing them with the
same ratios for the previous year, it is possible to ascertain the extent of increase
or decrease in various items of expenditure in relation to sales and that of trading
profit in relation to sales. If di□erences are found to be material, the auditor would
ascertain the reasons thereof and assess whether the
accounts have been manipulated to inflate or suppress profits
10.3 an abnormal fall in the cost of manufacture or that in the administrative cost apart
from economy in expenses, there could be no provision or less provision for
expenses incurred in the year
10.4 By reconciling the amounts of interest and dividends collected with the amounts
which had accrued due and that which are outstanding for payment, the mistake,
if any, in the adjustment of such an income would be detected



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9 AUDIT OF ITEMS
OF FINANCIAL
STATEMENTS

Introduction
(1) This chapter deals with different aspects to be verified while auditing financial
items.
(2) Auditor needs to obtain sufficient and appropriate audit evidence to verify
management’s assertions i.e. representations made by management regarding
financial items- transactions, balances and disclosures.
(3) While verifying transactions auditor needs to consider following assertions:
(MOC)
 Measurement: Transactions have been recorded accurately at their
appropriate amounts and further, transactions have been classified and
presented fairly in the financial statements.
 Occurrence: Transactions recognized in the financial statements have occurred
and relate to the entity
 Completeness: All transactions that were supposed to be recorded have been
recognized in the financial statements and further, transactions have been
recognized in the correct accounting periods
(4) While verifying balances auditor needs to consider following assertions: (EVOC)
 Existence: Assets, liabilities and equity balances exist as at the period end.
 Valuation: Assets, liabilities and equity balances have been valued
appropriately.
 Rights & Obligations: Entity has the right to ownership or use of the
recognized assets, and the liabilities recognized in the financial statements
represent the obligations of the entity
 Completeness: All assets, liabilities and equity balances that were supposed
to be recorded have been recognized in the financial statements

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(5) While verifying presentation and disclosure auditor needs to consider the
following assertions (Complete MOVE)
 Occurrence (O) and Existence (E): Transactions and events disclosed in the
financial statements have occurred and relate to the entity and further, the
closing balance does exist as at the period- end
 Completeness: All transactions, balances, events and other matters that
should have been disclosed have been disclosed in the financial statements.
 Measurement (M) and Valuation (V): Transactions, events, balances and
other financial matters have been measured and disclosed correctly at their
appropriate values and in a manner that promotes the understandability of
information contained in the financial statements.

Sr. No Particulars
1 Share Capital
1.1 Existence
 It is the sum stated in the memorandum as the capital of the company with
which it is to be registered being the maximum amount which it is
authorised to raise by issuing shares, and upon which it pays the stamp
duty
1.2 Valuation
 Tally the period- end share capital balance- authorised, issued and paid
up, to the previous year audited financial statements
 In case there in no change during the year, obtain a written confirmation/
representation from the Company Secretary that there were no changes
to entity’s capital structure during the year.
 In case there is any change, obtain the certified copies of relevant
resolutions passed at the meetings of board of directors, shareholders
authorising the increase/ decrease in authorised and paid up share capital
 Verify whether the paid up capital as at the period- end is within the
limits of authorised capital
1.3 Completeness
 “Issued capital” means that part of authorised capital which is ordered by
the company for subscription and includes the shares allotted for
consideration other than cash.

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1.4 Presentation and Disclosure

 It should be as per AS/IND AS as applicable to the entity and in accordance
with Schedule III of Companies Act, 2013
2 Reserves and Surplus
2.1 Existence/Valuation/Completeness
 Tally the opening balance of reserves and surplus to the previous year
audited financial statements.
 For addition/ utilisation in current year, in case of:
(a) Profit and Loss balance- trace the movement as disclosed in
Statement of changes in Equity to Surplus/ Deficit as per Income
Statement for the year under audit
(b) For adjustment related to dividend payment and the tax related
thereto i.e. dividend distribution tax, verify the resolution passed by
the board of directors regarding declaration of dividend
(c) Students should note that as per Ind AS 10 and AS-4 (revised), if
dividends to holders of equity instruments are proposed or
declared after the balance sheet date, an entity should not recognize
those dividends as a liability as at the balance sheet date. It should,
however, disclose the amount of dividends that were proposed or
declared after the balance sheet date, but before the financial
statements were approved for issue.
(d) Utilisation of share premium as discussed under topic 1
2.2 Presentation and Disclosure
 It should be as per AS/IND AS as applicable to the entity and in
accordance with Schedule III of Companies Act, 2013
3 Borrowings
3.1 Existence
 Review board minutes for approval of new lending agreements. During
review, make sure that any new loan agreements or bond issuances are
authorized. Ensure that significant debt commitments should be approved
by the board of directors.
 Agree details of loans recorded (interest rate, nature and repayment
terms) to the loan agreement. Verify that borrowing limits imposed by
agreements are not exceeded
 Agree overdrafts and loans recorded to bank confirmation / confirmation
to lenders
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 Agree details of leases and hire purchase creditors recorded to

underlying agreement
 Examine trust deed for terms and dates of redemption, borrowing
restrictions and compliance with covenants
3.2 Valuation
 Determine that the accounting policies and methods of recording debt are
appropriate and applied consistently.
 Recalculate the interest accrual, and discount or premium on redemption
 For foreign current loans, agree the closing exchange rate(s) used and test
the translation calculations
 Check computation of the amortization of premium or discount.
3.3 Completeness
 Obtain a schedule of short term and long term borrowing (including debt
outstanding at the end of the prior year, as well as any new debt or
renewal of debt) showing beginning and ending balances and borrowings
and repayments during the year, and perform the following:
(a) Consider any evidence of additional debt obtained through
examination of minutes of the board, significant contracts,
confirmations of bank accounts, support for subsequent cash
disbursements (when testing payables), and other documents.
(b) Test the summarization and trace the ending balances to the
general ledger
 For each lender (or, in some circumstances, selected lenders) with which
the client had debt outstanding at the prior year end or during the current
year, prepare, or have the client prepare, a confirmation request for the
amount(s) owed to the lender
3.4 Presentation and Disclosure
 It should be as per AS/IND AS as applicable to the entity and in accordance
with Schedule III of Companies Act, 2013
 Examine the due dates on loans for proper classification between long-
term and current. Analyse relevant details of interest rates, amounts due
(e.g. between current and non-current payables), dates and terms of
redemption or conversion
 Verify whether liabilities to bank towards bills discounted, bills
negotiated, cheques discounted, etc. are correctly reflected and disclosed
in the accounts
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3.5 Other Aspects:

 Verify that the company has not contravened the restrictions laid down by
Section 180 of the Companies Act, on the borrowings of the company. Also,
check compliance of section 185 and 186 of Companies Act, 2013.
 Check compliance of Section 2(22)(e) of Income Tax Act,1961 and ensure
that payment by way of advance or loan to a shareholder holding not less
than 10% of voting power or any concern in which such shareholder is a
member or a partner and in which he has substantial interest, shall be
treated as dividend
 Where the entity has accepted deposits, examine whether the directives
issued by the Reserve Bank of India or other appropriate authority have
been complied with.
4 Trade Receivables
4.1 Existence
 To ensure that trace receivables ledger reconciles to general ledger. Ask
for a period-end accounts receivable aging report and trace the grand
total to the amount in the accounts receivable account in the general
ledger
 Calculate the receivable report total. Add up the invoices on the accounts
receivable aging report to verify that the total traced to the general ledger
is correct.
 Investigate reconciling items. If there are journal entries in the accounts
receivable account in the general ledger, review the justification for larger
amounts. This implies that these journal entries should be fully
documented.
 See whether realization is recorded invoice wise or not. If not, check that
money received from debtors is adjusted chronologically invoice wise
and on FIFO basis i.e. previous bill is adjusted first. If realization is made
on account, verify if the Company has obtained confirmations from
debtors.
 A significant and important audit activity is to contact customers directly
and ask them to confirm the amounts of unpaid accounts receivable as of
the end of the reporting period under audit. This should necessarily be
done for all significant account balances as at the period- end while
certain random customers having smaller outstanding invoices should
also be selected.

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 The trade receivables may be requested to confirm the balances either

(a) as at the date of the balance sheet, or
(b) as at any other selected date which is reasonably close to the date of
the balance sheet. The date should be decided by the auditor in
consultation with the Company.
 If there are any related party receivables, review them for collectability,
as well as whether they were properly authorized and the value of such
transactions were reasonable and at arm’s length.

4.2 Valuation
 Assess the allowance for doubtful accounts. Review the process followed
by the Company to derive an allowance for doubtful accounts. This will
include a consistency comparison with the method used in the last year,
and a determination of whether the method is appropriate for the
underlying business environment.
 Obtain the ageing report of accounts receivable (both Dr/Cr balance),
split between not currently due, 30 days old, 30-60 days old, 60- 180 days
old, 180- 365 days old and more than 365 days old (refer screenshot
below). Also, obtain the list of debtors under litigation and compare with
previous year.
 Assess bad debt write-offs. Prepare schedule of movements on Bad Debts
– Provision Accounts and Debts written off and compare the proportion
of bad debt expense to sales for the current year in comparison to prior
years, to see if the current expense appears reasonable.
 Check that write-offs or other reductions in the receivable balances
have been approved by an appropriate and authorised member of senior
management, for example the fi nancial controller or finance director.
4.3 Completeness
 The auditor needs to satisfy himself of correct and proper cut-offs.
Without a correct cut-off, sales could be understated or overstated, hence,
the need to perform the following cut-off tests:
(a) For the invoices issued during the last few days (say 5 days) closer
to the reporting date/ cut-off date and which have been included in
the debtors; the goods should have been dispatched and not lying
with the Company and included in closing stock;
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(b) All good dispatched prior to the period/ year-end have been
invoiced and included in debtors;
(c) No goods dispatched after the year- end have been invoiced and
included in debtors for the period under audit
 Study the system of giving discounts and check the following:
(a) Whether the same is being given as per the Company policy/
general industry trends;
(b) Whether cash discount is given on the basis of date of realization of
cheque or on the basis of date of receipt of cheque. If the same is on
the basis of date of receipt of cheques, verify that the cheque
has been realized within a reasonable time.
4.4 Presentation and Disclosure
 It should be as per AS/IND AS as applicable to the entity and in accordance
with Schedule III of Companies Act, 2013.
 Verify that the split between more than 6 months and less than 6 months
has been done from the due date instead of sales invoice date
5 Cash and Cash equivalents

5.1 Existence/Completeness/Valuation:
 Special care is necessary in regard to verification of cash balances for
unless they are checked by surprise, there can be no certainty that the
cash produced for inspection was in fact held by the custodian.
 For this reason, the cash should be checked not only on the last day of the
year, but also checked again sometime after the close of the year without
giving notice of the auditor’s visit either to the client or to his staff
 If there are more than one cash balances, e.g., when there is a cashier, a
petty cashier, a branch cashier and, in addition, there are imprest
balances with employees, all of them should be checked simultaneously,
as far as practicable so that the shortage in one balance is not made good
by transfer of amount from the other.
 It is desirable for the cashier to be present while cash is being counted
and he should be made to sign the statement prepared containing details
of the cash balance counted.

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 If the auditor is unable to check the cash balance on the date of the
Balance Sheet, he should arrange with his client for all the cash balance to
be banked and where this cannot conveniently be done on the evening of
the close of the financial year, it should be deposited the following
morning.
 If there is any rough Cash Book or details of daily balance are separately
kept, the auditor should test entries from the rough Cash Book with those
in the Cash Book to prove that entries in the Cash Book are correct.
 The auditor should also perform a cash sensitivity analysis by compiling a
summary of total cash receipts and payments each month and analyse the
trends to see if there have been variations in any specific month and
request explanations from the management
 In addition to the procedures performed above, the auditor should ensure
that all bank account holding foreign currency have been restated at the
closing exchange rates.
5.2 Presentation and Disclosure
 It should be as per AS/IND AS as applicable to the entity and in
accordance with Schedule III of Companies Act, 2013.
6 Inventories
6.1 Existence
 Review client’s plan for performing inventory count. Plan should include
procedures relating to shipments and receipts during count and should
also allocate staff responsible for each class of inventory.
 Ensure that consigned goods have been segregated
 Evidence of appropriate supervision for those performing count should
be examined.
 Observe inventory being counted and personally perform test counts to
verify counts. Test counts by auditor should include:
{FURTHER CONSIDER SA 501}

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6.2 Valuation
 Depending on how the business operates, the management may value
inventory using “first-in firstout,” “last-in first-out,” or a weighted average
system. First-in first-out, called FIFO, values inventory at close to its
current replacement cost. Last-in first-out, called LIFO, values inventory
at close to its original purchase cost. A weighted average system values
inventory according to an average cost of all inventory items bought
during the period.
 Ascertain what elements of cost are included e.g. carriage in, duties etc
 If standard costs are used, enquire into basis of standards, how these are
compared with actual costs and how variances are analyzed and
accounted for/ treated in accounting records.
 Follow up valuation of all damaged or obsolete inventories noted during
observance of physical counting with a view to establishing a realistic net
realizable value.
 Ascertain how the various stages of production/ value add are measured
and in case estimates are made, understand the basis for such estimates.
 Ascertain what elements of cost are included. If overheads are included,
ascertain the basis on which they are included and compare such basis
with the available costing and financial data/ information maintained by
the entity.
 Ensure that material costs exclude any abnormal wastage factors
 Enquire into what costs are included, how these have been established
and ensure that the overheads included have been determined based on
normal costs and appear reasonable in relation to the information
disclosed in the draft financial statements
 Follow up for items that are obsolete, damaged, slow moving and ascertain
the possible realizable value of such items. For the purpose, request the
client to provide inventory ageing split between less than 30 days, 30-60
days old, 60- 90 days old, 90- 180 days old, 180- 385 days old and more
than 365 days old.

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6.3 Rights and Obligation

 Evaluate the consigned goods. Examine client correspondence, sales and
receivables records, purchase documents.
 Determine existence of collateral agreements
 For instances of inventory held by third party, the auditor should insist on
obtaining declaration from the third party on its business letterhead and
signed by an authorized personnel of that third party confirming that the
items of inventory belong to the entity and are being held by such third
party on behalf of and for the benefit of the entity under audit
6.4 Completeness
 Perform purchase and sales cut-o□ tests. Trace shipping documents (bills
of lading and receiving reports, warehouse records, and inventory
records) to accounting records immediately before and after year-end.
 Reconcile physical inventory amounts with perpetual records.
6.5 Presentation and Disclosure
 It should be as per AS/IND AS as applicable to the entity and in
accordance with Schedule III of Companies Act, 2013.
7 Fixed Assets (Property, Plant and Equipment)
7.1 Existence
 Review client’s plan for performing physical verification of PPE i.e.
whether performed by own staff or by a third party and the policy
regarding periodicity i.e. whether physical verification shall be done on
annual basis or once in two years/ three years.
 Evidence of appropriate supervision of those performing physical
verification of PPE should be examined.
 Assess if all items of PPE are properly tagged and carry identification
marks/ numbers and physical verification work papers do capture the
asset identification numbers for assets physically verified
 Verify the discrepancies noted, based on physical verification undertaken
and the manner in which such discrepancies have been dealt with in the
entity’s books and financial statements, for example any identified
shortages/ assets not in working condition and/ or active use should be
accounted for as deletions in the books of account post approvals by the
entity’s management

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7.2 Valuation
 It is a common understanding that the value of fixed assets/ PPE
depreciates due to efflux of time, use and obsolescence. The diminution of
the value represents an item of cost to the entity for earning revenue
during a given period. Unless this cost in the form of depreciation is
charged to the accounts, the profit or loss would not be correctly
ascertained and the values of PPE would be shown at higher amounts.
 Verify that the entity has charged depreciation on all items of PPE unless
any item of PPE is non- depreciating like freehold land
 Verify that the depreciation method used reflects the pattern in which the
asset’s future economic benefits are expected to be consumed by the
entity
 The auditor should also verify if the management has undertaken an
impairment assessment to determine whether an item of property, plant
and equipment is impaired.
7.3 Rights and Obligation
 In addition to the procedures undertaken for verifying completeness of
additions to PPE during the period under audit, the auditor while
performing testing of additions should also verify that all PPE purchase
invoices are in the name of the entity that entitles legal title of ownership
to the respective entity.
 For all additions to land, building in particular, the auditor should obtain
copies of conveyance deed/ sale deed to establish whether the entity is
mentioned to be the legal and valid owner.
 The auditor should insist and verify the original title deeds for all
immoveable properties held as at the balance sheet date
 In addition, the auditor should also verify the register of charges, available
with the entity to assess the PPE that has been given as security to any
third parties
7.4 Completeness
 Verify the movement in the PPE schedule (asset class wise like building,
P&M etc.) compiled by the management i.e. Opening + Additions –
Deletions = Closing and tally the closing balance to the entity’s books of
account.
 Check the arithmetical accuracy of the movement in PPE schedule, tally
the opening balances to the previous year audited financial statements.

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7.5 Presentation and Disclosure

It should be as per AS/IND AS as applicable to the entity and in accordance with
Schedule III of Companies Act, 2013.
8 Intangible Asset
8.1 Existence
 Since an Intangible Asset is an identifiable non-monetary asset, without
physical substance, for establishing the existence of such assets, the
auditor should verify whether such intangible asset is in active use in the
production or supply of goods or services, for rental to others, or for
administrative purposes.
 In case any intangible asset is not in active use, deletion should have been
recorded in the books of account post approvals by the entity’s
management and amortization charge should have ceased to be charged
beyond the date of deletion.
8.2 Valuation
 Verify the movement in the Intangible assets schedule (asset class wise
like software, designs/ drawings, goodwill etc.) compiled by the
management i.e. Opening + Additions - Deletions= Closing and tally the
closing balance to the entity’s books of account.
 Check the arithmetical accuracy of the movement in intangible asset
schedule, tally the opening balances to the previous year audited financial
statements.
 For all material additions, verify if such expenditure meets the criterion
for recognition of an intangible asset.
 The value of intangible assets may diminish due to efflux of time, use and/
or obsolescence. The diminution of the value represents an item of cost to
the entity for earning revenue during a given period.
 Unless this cost in the form of amortization is charged to the accounts, the
profit or loss would not be correctly ascertained and the values of
intangible asset would be shown at higher amounts.
 Verify that the amortization method used reflects the pattern in which the
asset’s future economic benefits are expected to be consumed by the entity
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8.3 Rights and Obligation

an intangible asset shall be recognised if, and only if:
(a) The said asset is identifiable;
(b) The entity controls the asset i.e. the entity has the power to obtain the
future economic benefits fl owing from the underlying resource and to
restrict the access of others to those benefits;
(c) It is probable that future economic benefits associated with the asset will
flow to the entity;
(d) The cost of the item can be measured reliably.
To assess whether an internally generated intangible asset meets the criteria for
recognition, an entity classifies the generation of the asset into:
(a) Research phase; and
(b) A development phase
8.4 Presentation and Disclosure
It should be as per AS/IND AS as applicable to the entity and in accordance with
Schedule III of Companies Act, 2013.
9 Trade Payables and Current Liabilities
9.1 Existence
 Check whether there are controls in place to ensure that the same
purchase/ expense invoice cannot be recorded more than once and payable
balances are automatically recorded in the general ledger at the time of
recording of expense
 To ensure that trade payable ledger reconciles to general ledger, ask for a
period-end accounts payable aging report and trace the grand total to the
amount in the accounts payable account in the general ledger.
 Calculate the accounts payable report total. Add up the expense/ liability
items on the accounts payable aging report to verify that the total traced to
the general ledger is correct.
 Investigate reconciling items. If there are journal entries in the accounts
payable account in the general ledger, review the justification for larger
amounts. This implies that these journal entries should be fully
documented.
 An important audit activity is to contact vendors directly and ask them to
confirm the amounts of accounts payable as of the end of the reporting
period under audit. This should necessarily be done for all significant
account payable balances as at the period- end and for parties from whom
material purchases have been made during the period under audit even if
period- end balance of such parties is not significant.

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 The trade creditors may be requested to confirm the balances either

(a) as at the date of the balance sheet, or
(b) as at any other selected date which is reasonably close to the date of
the balance sheet. The date should be decided by the auditor in
consultation with the Company.
9.2 Valuation
 Obtain the ageing of payable balances, split between current, less than 30
days old, 30-60 days old, 60-180 days old, 180- 365 days old and more
than 365 days old (refer screenshot below). Also, obtain the list of vendors
with whom the Company has disputes and any claims from customers,
under litigation and compare with previous year.
 Check that write backs in the liability balances assessed as no longer
payable have been approved by an appropriate and authorised member of
senior management, for example the financial controller or finance
director.
 Check that the restatement of foreign currency trade payables has been
done properly
9.3 Completeness
 For the invoices received/ recorded during the last few days (say 5 days)
closer to the reporting date/ cut off date and which have been included in
the trade payables; the goods should have been received/ risk and
rewards of ownership in goods should have been transferred in favour of
the entity
 All good received prior to the period/ yearend should have been booked in
the form of purchases and included in trade creditors
 No goods received/ risk and rewards of ownership in goods transferred in
favour of the entity after the year- end should have been recorded as
purchases and included in trade creditors for the period under audit.
9.4 Presentation and Disclosure
It should be as per AS/IND AS as applicable to the entity and in accordance with
Schedule III of Companies Act, 2013.
10 Loans and Advances
10.1 Existence
 For establishing existence of loans and advances, direct confirmation
procedures, similar to those performed for ‘’Accounts receivable’’ balances
are undertaken with the only difference that while undertaking
circularisation of direct confirmations, in addition to the principal amount,
interest received/ receivable, if any, as per the agreed terms between
the parties, may also be included as part of the balance to be confirmed.

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10.2 Valuation
 Assess the allowance for doubtful accounts. Review the process followed
by the Company to derive an allowance for doubtful accounts. This will
include a consistency comparison with the method used in the last year,
and a determination of whether the method is appropriate for the
underlying business environment
 Obtain the ageing report of loans and advances, split between not
currently due, 30 days old, 30-60 days old, 60- 180 days old, 180- 365
days old and more than 365 days old. Also, obtain the list of loans and
advances under litigation and compare with previous year.
 Assess bad loans/ advances write-off s. Prepare schedule of movements
on Bad loans/ advances – Provision Accounts and loans/ advances written
off .
 Check that the restatement of foreign currency loans and advances/ other
current assets has been done properly.
10.3 Completeness
 Obtain a list of all advances and other current assets and compare them
with balances in the ledger
 Inspect loan agreements and acknowledgements of parties in respect of
outstanding loans
 Inspect the minutes of meeting of board of directors to confirm if all
material loans and advances were approved by the board of directors
 Further, the auditor should obtain copies of statutory returns fi led with
the authorities like excise returns/ VAT returns etc. and verify whether
the amount recorded as per books of account tallies with the claim made
with the authorities
10.4 Presentation and Disclosure
It should be as per AS/IND AS as applicable to the entity and in accordance with
Schedule III of Companies Act, 2013.
11 Provisions and Contingent Liability
11.1 Existence/Completeness/Valuation
 Obtain a list of all provisions and compare them with balances in the ledger
 Inspect the underlying arrangements like appointment agreement with
employees to understand the entity’s commitment towards defined
benefits, agreement with customers to assess warranty commitments, any
legal and other claims on the entity i.e. litigations
 Obtain the underlying working and the basis for each of the provisions
made, from the management and verify whether the same is complete and
accurate.

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 Wherever required, obtain experts report, calculation and underlying

working for the provision amount, example for employee defined benefit
provision, the auditor may request the management to share the actuarial
valuation report and in case of any matter under legal dispute.
11.2 Presentation and Disclosure
It should be as per AS/IND AS as applicable to the entity and in accordance with
Schedule III of Companies Act, 2013.
12 Sale of Products and Services
12.1 Occurrence:
 Check whether a single sales invoice is recorded twice or a cancelled sales
invoice could also be recorded
 Whether any shipments were done without the consent and agreement of
the customer.
 Vouch from the sales journal to the supporting documents
 Check the sales return with sales invoice, challan, credit note, stock
register, reversal of excise duty and sales tax etc.
12.2 Measurement:
 If there are any export sales, consider calculating/reviewing “Exchange
gain/ loss” arising from the sales
 Recalculate prices and extensions on sales invoice
 Trace a few transactions from inception to completion
 Auditor must understand client’s operations and related GAAP issues e.g.
point of sale revenue recognition vs. percentage of completion
 Compare the rate of sales affected with related parties and review them
for collectability, as well as whether they were properly authorized
and the value of such transactions were reasonable and at arm’s length
12.3 Completeness
 Perform cut-off test to ensure that revenues are recognised in the current
accounting period and sales were not tampered towards the period end
 Auditors will also have to see “Credit notes” issued after the accounting
period. Sometimes sales team or sales personnel can make fictitious/
ghost sales before the year-end to meet performance target and cancel
out the sale with a post year end credit note.
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12.4 Presentation and Disclosure

 It should be as per AS/IND AS as applicable to the entity and in accordance
with Schedule III of Companies Act, 2013.
13 Other Income Comprising interest Income, Dividend Income, Gain/ Loss
on Sale of Investments etc
13.1 Occurrence/Completeness/Measurement
 For verifying interest income on Fixed deposit:
(a) Obtain a listing of fixed deposits opened during the period under
audit along with the applicable interest rate and the number of days
for which the deposit was outstanding during the period. Verify the
arithmetical accuracy of the interest calculation made by the entity
by multiplying the deposit amount with the applicable rate and
number of days during the period under audit.
(b) For deposits still outstanding as at the period- end, trace the same
to the direct confirmation obtained from the respective bank/
financial institution
(c) Obtain a confirmation of interest income from the bank and verify
that the interest income as per bank reconciles to the calculation
shared by the entity
(d) Also, obtain a copy of Form 26AS (TDS withholding by the bank/
financial institution) and reconcile the interest reflected therein to
the calculation shared by client
 For Dividends, verify that the same are recognised in the statement of
profit and loss only when the entity’s right to receive payment of the
dividend is established, provided it is probable that the economic benefits
associated with the dividend will flow to the entity and the amount of the
dividend can be measured reliably.
 Verify that Gain/(loss) on sale of investment in mutual funds is
recorded as other income only on transfer of title from the entity and is
determined as the difference between the redemption price and carrying
value of the investments. For the purpose, obtain the mutual fund
statement and trace the gain / loss as recorded in the books of account to
the gain/ loss as reflected in the statement.
13.2 Presentation and Disclosure
 It should be as per AS/IND AS as applicable to the entity and in accordance
with Schedule III of Companies Act, 2013

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14 Purchases
14.1 Occurrence:
 Whether any fictitious vendor and purchase has been recorded by
reviewing the vendor selection process followed by the entity and also
doing a search on web for ascertaining the existence of the vendor.
 Whether the goods were received at the factory gate and whether there
exists an entry in the security gate inward register
 Whether quality inspection of goods was done
 Whether a goods receipt note was prepared and signed by an appropriate
client personnel
 Whether stock record has been updated by the stores personnel
14.2 Measurement/Completeness:
 Perform cut-off test to ensure that purchases are recognised in the correct
accounting period. For the purpose, the auditor should examine material
inward records for few days say last 5 days prior to closing date to check
that all corresponding invoices have been duly entered in the Purchases
book and none have been omitted.
 Ensure correct accounting treatment of goods – in – transit as per the
agreed terms with the vendor regarding transfer of risk and reward of
ownership in goods.
 Perform analytical procedures to obtain audit evidence as to overall
reasonableness of purchase quantity and price which may include:
(a) Consumption Analysis: Auditor should scrutinize raw material
consumed as per manufacturing account and compare the same
with previous years with closing stock and ask for the reasons from
Management If any significant variations found.
(b) Stock Composition Analysis: Auditor to collect the reports from
management for composition of stock i.e. raw materials as a
percentage of total stock and compare the same with previous year
and ask for reasons from management in case of significant
variations.
(c) Ratios: Auditor should compare the creditors turnover ratios and
stock turnover ratios of the current year with previous years.
(d) Auditor should review quantitative reconciliation of closing stocks
with opening stock, purchases and consumption
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14.3 Presentation and Disclosure

 It should be as per AS/IND AS as applicable to the entity and in accordance
with Schedule III of Companies Act, 2013
15 Employee Benefit Expense
15.1 Occurrence/Completeness/Measurement:
 Understanding of entity’s process of capturing employee attendance.
 There is always a risk that an entity could record expense for fictitious
employees.
 To address this risk, the auditor may choose to be physically present at the
entry gate at any given date and himself count the employees entering the
premises and also, understand the manner of recording/ capturing their
time
 Obtain a list of employees as at the period- end along with a monthly
movement split between new hires, leavers and continuing employees
 For a sample (selected randomly) of resigned employees, obtain their full
and final computation and verify whether all their dues including post-
retirement benefits like gratuity, leave encashment have been paid and
whether the respective employee’s acknowledgement on final
computation has been obtained.
 Obtain the monthly salary registers for all 12 months. Compile a monthly
payroll reasonability by calculating the average salary per employee per
month and compare with the previous year and preceding month and
analyse the reasons for variance which could be attributable to annual
increments, an employee at senior level joining/ leaving the entity, bonus
pay-out etc
 In case provident fund (PF), employee state insurance (ESI) are applicable
to the entity, compile a reasonability by applying the rate to the basic
wages and comparing to the amount recorded in books and analyse
reasons for variance, if any. Also, obtain monthly deposit challans to verify
if the month on month liability was subsequently deposited with the
authorities and within the defined timelines.
15.2 Presentation and Disclosure
 It should be as per AS/IND AS as applicable to the entity and in accordance
with Schedule III of Companies Act, 2013

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16 Depreciation and Amortisation

16.1 Occurrence/Completeness/Measurement
 Obtain an understanding of entity’s process of charging depreciation and
amortization.
 Obtain the fixed asset register maintained by the entity.
 There is always a risk that an entity could capitalize expense of revenue
nature to increase its profit or charge capital expenditure directly in
income and expense statement to reduce its profit.
 Obtain a list of all additions/ deletions along with their proper approval
from the authorised person for the same.
 Select the sample of assets from the Fixed Assets Register, on materiality
considerations and verify the rates of depreciation, depreciation
calculation.
 Obtain the list of all the components identified by the management
 Ensure Intangible assets like patents, goodwill, copy rights have been
properly amortized over the period
 Ensure depreciation is charged on the assets from the date when it is ready
to use
 Ensure depreciation on revalued amount has been properly accounted
from revaluation reserve
 Depreciation computation as per Income tax Act, 1961- Ensure that
additions are tallying with the additions as per Companies Act and the
opening WDV to the Tax audit schedule for the assessment year preceding
the previous year under audit.
16.2 Presentation and Disclosure
 It should be as per AS/IND AS as applicable to the entity and in accordance
with Schedule III of Companies Act, 2013
17 Other Expenses like Power and Fuel, Rent, Repair to Building, Plant and
Machinery, Insurance, Travelling, Legal and Professional, Miscellaneous
Expenses
17.1 Occurrence/Completeness/Measurement
 Rent expense- Obtain a month wise expense schedule along with the rent
agreements. Verify if expense has been recorded for all 12 months and
whether the rent amount is as per the underlying agreement. Specific

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consideration should be given to escalation clause in the agreement to verify if

the rent was to be increased/ adjusted during the period under audit. Also,
verify if the agreement is in the name of the entity and whether the expense
pertains to premises used for running business operations of the entity
 Power and fuel expense- Obtain a month wise expense schedule along with
the power bills. Verify if expense has been recorded for all 12 months. Also,
compile a month wise summary of power units consumed and the applicable
rate and check the arithmetical accuracy of the bill raised on monthly basis. In
relation to the units consumed, analyse the monthly power units consumed by
linking it to units of finished goods produced and investigate reasons for
variance in monthly trends
 Insurance expense- Obtain a summary of insurance policies taken along with
their validity period. Verify if the expense has been correctly classified
between prepaid and expense for the period based on number of days.
 Legal and professional expenses- Obtain a month wise and consultant wise
summary. In case of monthly retainer ship agreements, verify if the
expenditure for all 12 months has been recorded correctly. For non- recurring
expenses, select a sample and vouch for the attributes discussed above. The
auditor should be cautious while vouching for legal expenses as the same may
highlight a dispute for which the entity may not have made any provision and
the matter may also not have been discussed/ highlighted to the auditor for
his specific consideration.
 Travel, repair and maintenance, printing and stationery, miscellaneous
expenses- The auditor should select a sample and vouch for the attributes
discussed above. Wherever possible, the auditor and try and prepare a
summary of expenditure on monthly basis and then analytically compare the
trends
 Perform analytical procedures to obtain audit evidence as to overall
reasonableness of other expense which may include expenditure per unit
produced analysis. Auditor should analyse expense per unit produced and
compare the same with previous years and prevent industry trends and ask
for the reasons from Management If any significant variations are found.

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17.2 Presentation and Disclosure

 Ensure other expenses have been classified as follows in accordance
with AS/IND AS as applicable to the entity and Schedule III of Companies
Act, 2013:
(a) Rent.
(b) Insurance.
(c) Power and fuel.
(d) Repairs and maintenance- Building, Plant and machinery, others.
(e) Legal and professional.
(f) Printing and stationary.
(g) Travel expenses.
(h) Miscellaneous expenses

Other Accounting and Company Law Concepts which can be questioned in exam
(1) Share issued at premium:
 In case a company has issued shares at a premium, that is, at amount in
excess of the nominal value of the shares, whether for cash or otherwise,
section 52 of the Companies Act, 2013 provides that a Company shall
transfer the amount received by it as securities premium to securities
premium account and state the means in which the amount in the account
can be applied
 The securities premium account may be applied by the Company:
(a) Towards the issue of unissued shares of the company to the members
of the company as fully paid bonus shares;
(b) In writing off the preliminary expenses of the Company;
(c) In writing off the expenses of, or the commission paid or discount
allowed on, any issue of shares or debentures of the company;
(d) In providing for the premium payable on the redemption of any
redeemable preference shares or of any debentures of the company; or
(e) For the purchase of its own shares or other securities under section 68.
The auditor needs to verify whether the premium received on shares, if
any, has been transferred to a “securities premium account” and
whether the application of any amount out of the said “securities
premium account” is only for the purposes mentioned above.

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(2) Shares Issued at discount:

 According to section 53 of the Companies Act, 2013, a company shall not
issue shares at a discount, except in the case of an issue of sweat equity
shares given under section 54 of the Companies Act, 2013.
 Any share issued by a company at a discounted price shall be void
 The auditor needs to verify that the Company has not issued any of its shares
at a discount by reading the minutes of meeting of its directors and
shareholders authorizing issue of share capital and the issue price.

(3) Issue of Sweat Equity Shares:

 According to section 54 of the Companies Act, 2013, the employees may be
compensated in the form of ‘Sweat Equity Shares”.
 “Sweat Equity Shares” means equity shares issued by the company to
employees or directors at a discount or for consideration other than cash for
providing know-how or making available right in the nature of intellectual
property rights or value additions, by whatever name called
 The auditor needs to verify that the Sweat Equity Shares issued by the
company are of a class of shares already issued and following conditions
have been complied with:
(a) The issue is authorised by a special resolution passed by the company;
(b) The resolution specifies the number of shares, the current market
price, consideration, if any, and the class or classes of directors or
employees to whom such equity shares are to be issued;
(c) Not less than one year has, at the date of such issue, elapsed since the
date on which the company had commenced business; and
(d) Where the equity shares of the company are listed on a recognised
stock exchange, the sweat equity shares are issued in accordance with
the regulations made by the Securities and Exchange Board in this
behalf and if they are not so listed, the sweat equity shares are issued
in accordance with such rules as may be prescribed.

(4) Reduction of Capital

For verifying reduction of capital, the auditor needs to undertake the
following procedures:
(i) Verify that the meeting of the shareholder held to pass the special resolution
was properly convened and that the proposal was circularised in advance
among all the shareholders;

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(ii) Verify that the Articles of Association authorises reduction of capital;

(iii) Examine the order of the Tribunal confirming the reduction and verify that a
copy of the order and the minutes have been registered and filed with the
Registrar of Companies;
(iv) Inspect the Registrar’s Certificate as regards to reduction of capital;
(v) Vouch the accounting entries recorded to reduce the capital and to write
down the assets by reference to the resolution of shareholders and other
documentary evidence; also check whether the requirements of Schedule III,
Part I, have been complied with;
(vi) Confirm whether the revaluation of assets has been properly disclosed in the
Balance Sheet;
(vii) Verify the adjustment made in the members’ accounts in the Register of
Members and confirm that either the paid up amount shown on the old share
certificates have been altered or new certificates have been issued in lieu of
the old, and the old ones have been cancelled;
(viii) Confirm that the words “and reduced”, if required by the order of the
Tribunal, have been added to the name of the company in the Balance Sheet.
(ix) Verify that the Memorandum of Association of the company has been
suitably amended.

(5) Distinguish between reserves and provisions

 Reserves are amounts appropriated out of profits that are not intended to
meet any liability, contingency, commitment or diminution in the value of
assets known to exist as at the date of the Balance Sheet
 On the contrary, provisions are amounts charged against revenue to provide for:
(i) Renewal or diminution in the value of assets; or
(ii) a known liability, the amount whereof could only be estimated and
cannot be determined with accuracy; or
(iii) a claim which is disputed.
 Provisions are normally charged to the Statement of Profit and Loss before
arriving at the amount of profit. Reserves are appropriations out of profits.

(6) Revenue and Capital Reserve

 Revenue reserves represent profits that are available for distribution to
shareholders held for the time being or any one or more purpose.

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 Capital Reserve, on the other hand represents a reserve which does not
include any amount regarded as free for distribution through the Statement
of Profit and Loss.

(7) Difference between Revenue and Capital Expenditure

 Revenue Expenditure
An expenditure, the benefits of which shall get expended or exhausted in the
process of earning revenue within a short span of time, maximum period
being one year, for example on purchase of goods for sale, on their
movement from one place to another, on maintenance of assets, etc
 Capital Expenditure
An expenditure incurred for the below mentioned purposes:
(i) Acquiring fixed assets, i.e., assets of a permanent or a semi-permanent
nature, which are held not for resale but for use within the business
with a view to earning profits and the benefit whereof is expected to
last for more than one year;
(ii) Making additions/ enhancements to the existing fixed assets with the
intent to increasing earning capacity of the business;
(iii) Minimising the cost of production;
(iv) Acquiring a benefit of enduring nature in the form of a valuable right
like patent, trademarks etc.

(8) Expenses which are essentially of a revenue nature, if incurred for creating an
asset or adding to its value for achieving higher productivity, are also regarded
as expenditure of a capital nature. Examples.
Examples of such capital expenditure are:
(i) Material and wages- capital expenditure when expended on the construction
of a building or erection of machinery;
(ii) Legal expenses- capital expenditure when incurred in connection with the
purchase of land or building;
(iii) Freight- capital expenditure when incurred in respect of purchase of plant
and machinery;
(iv) Repair- Major repairs of a fixed asset that increases its productivity;
(v) Wages- Wages paid on installation costs incurred in Plant & machinery;
vi) Interest- Interest incurred during the eligible period as defi ned under AS 16
i.e. during the period of construction of the asset.

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(9) Note on other income

(a) Dividend Income:
Dividends are recognised in the statement of profit and loss only when:
(i) the entity’s right to receive payment of the dividend is established;
(ii) it is probable that the economic benefits associated with the dividend
will flow to the entity; and
(iii) the amount of the dividend can be measured reliably.
(b) Gain/(loss) on sale of investment in mutual funds is recorded as other
income on transfer of title from the entity and is determined as the
difference between the redemption price and carrying value of the
investments.

(10) Auditor needs to consider some attributes while verifying for depreciation and
amortisation expenses. List them.
 Obtain the understanding of entity’s accounting policy related to depreciation
and amortisation.
 Ensure the Company policy for charging depreciation and amortisation is as
per the relevant provisions of Companies Act, applicable accounting
standards.
 Whether the depreciation has been calculated after making adjustment of
residual value from the cost of the assets.
 Whether depreciation and amortisation charges are valid.
 Whether depreciation and amortisation charges are accurately calculated and
recorded.
 Whether all depreciation and amortisation charges are recorded in the
appropriate period.
 Ensure the parts (components) of each item of property, plant and equipment
that are to be depreciated separately has been properly identified.
 Whether the most appropriate depreciation method for each separately
depreciable component has been used.

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(11) While the auditor may choose to analyse the monthly trends for expenses like
rent, power and fuel, an auditor generally prefers to vouch for other expenses to
verify certain attributes. List them.
 Whether the expenditure pertained to current period under audit
 Whether the expenditure qualified as a revenue and not capital expenditure
 Whether the expenditure had a valid supporting like travel tickets, insurance
policy, third party invoice etc
 Whether the expenditure has been classified under the correct expense head
 Whether the expenditure was authorised as per the delegation of authority
matrix
 Whether the expenditure was in relation to the entity’s business and not a
personal expenditure



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10
COMPANY
AUDIT

Coverage of the topic based upon Chapter X of Companies Act, 2013 read with Company
(Audit and Auditors) Rules, 2014
List of Sections :

Sec. No Particulars

139 Appointment of Auditor etc

140 Removal and Resignation etc

141 Eligibility, Qualification and Disqualification

142 Remuneration

143 Rights and Duties of Auditor

144 Auditor not to render certain services

145 Duty to Sign Audit report

146 Right and Duty to attend General Meeting

147 Punishments

148 Cost Audit

Our Order of Discussion :

S. No Particulars

1 Eligibility and Qualification

2 Disqualification

3 Appointment of Auditor

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3.1 Government Company

3.2 Non Government Company

3.3 Casual Vacancy

4 Remuneration of Auditor

5 Removal of Auditor

5.1 Before Expiry of the term

5.2 Appointment of an auditor other than retiring auditor

5.3 By NCLT

6 Rights and Duties

6.1 Rights of auditor

6.2 Duties of Auditor

7 Penalties of Auditor

8 Branch Audit

9 CARO 2016

10 Cost Audit

Content Discussion:
1. Eligibility and Qualification- Sec 141 (1) and (2)

Section Particulars
Reference

Sec 141(1) A person shall be eligible for appointment as an auditor of a company only if
he is a chartered accountant:
Provided that a firm whereof majority of partners practising in India are
qualified for appointment as aforesaid may be appointed by its firm name to
be auditor of a company

Sec 141(2) Where a firm including a limited liability partnership is appointed as an

auditor of a company, only the partners who are chartered accountants shall
be authorised to act and sign on behalf of the firm

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Company Auditor

Proprietor Partnership Firm

(including LLP)

CA in practice as Majority (>1/2) of

per CA Act, 1949 partners
CA in practice as per
+ CA Act, 1949
Practising In India +
Practising in India

Only Qualified
Partners are
authorised to act and
sign on behalf of firm

2. Disqualification- Section 141(3)

The following persons shall not be eligible for appointment as an auditor of a
company, namely:

Section Particulars
Reference

Sec 141(3) (a) A body corporate other than a limited liability partnership
registered under the Limited Liability Partnership Act, 2008

Discussion

1 Body Corporate as defined in Companies Act, 2013 body corporate” or

“corporation” includes a company incorporated outside India, but does
not include —
(i) A co-operative society registered under any law relating to co
operative societies; and
(ii) Any other body corporate (not being a company as defined in this
Act), which the Central Government may, by notification, specify in
this behalf;

2 Although LLP is a separate legal entity but as discussed in Sec 141(1) and
(2), it will be considered as a company

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Sec 141(3)(b) An officer or employee of the company

Discussion

1 Officer” includes any director, manager or key managerial personnel or

any person in accordance with whose directions or instructions the Board
of Directors or
Any one or more of the directors is or are accustomed to act

2 If an individual is disqualified then his partners are also disqualified from

auditing such a company

3 IF a CA in Practice is a senior employee in a company then can he be

appointed as an auditor of the holding company?’
There are various situations which are not covered in the
disqualifications prescribed above. However requirement of
independence is pre-requisite in audit and hence even though a person
may not be disqualified under companies act, 2013 however he needs to
evaluate his independence before accepting the assignment because it is
not only important to be independent but it is also important to appear as
independent as per the guidance note given by The ICAI on
Independence.

Sec 141(3)(c) A person who is a partner, or who is in the employment, of an officer

or employee of the company

Discussion

1 This sub-section disqualifies the below mentioned persons from being

appointed as auditor of a company :

(i) Partner of an officer of the company;

(ii) Employee of an officer of the company;

(iii) Partner of an employee of the company;

(iv) Employee of an employee of the company

Sec A person who, or his relative or partner:

141(3)(d)
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Sec 141(3) Is holding any security of or interest in the company or its

(d)(i) subsidiary, or of its holding or associate company or a subsidiary of
such holding company: Provided that the relative may hold security
or interest in the company of face value not exceeding one thousand
rupees or such sum as may be prescribed;

Discussion
1 The value of shares of ` 1,00,000 that can be hold by relative is the face
value
not the market value
2 The limit of ` 1,00,000 would be applicable where the securities are held
by the relative of an auditor and not where the securities are held by an
auditor himself or his partner. In case of an auditor or his partner,
securities of even small value shall be a disqualification
3 Grace period of 60 days for corrective action shall apply only in respect of
securities held by relatives. This would not apply to auditor or his partner
Limit of `1,00,000 and grace period of 60 days would be applicable where
securities are held in the company only.
4 It may also be noted that the condition of rupees one lakh shall, wherever
relevant, be also applicable in the case of a company not having share
capital or other securities
Sec A person who, or his relative or partner:
141(3)(d)
Sec 141(3) Is indebted to the company, or its subsidiary, or its holding or
(d)(ii) associate company or a subsidiary of such holding company, in
excess of such amount as may be prescribed
Discussion
1 The value of shares of ` 1,00,000 that can be hold by relative is the face
value not the market value
2 The limit of ` 1,00,000 would be applicable where the securities are held
by the relative of an auditor and not where the securities are held by an
auditor himself or his partner. In case of an auditor or his partner,
securities of even small value shall be a disqualification

3 Grace period of 60 days for corrective action shall apply only in respect of
securities held by relatives. This would not apply to auditor or his partner
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4 Limit of ` 1,00,000 and grace period of 60 days would be applicable

where securities are held in the company only.

5 It may also be noted that the condition of rupees one lakh shall, wherever
relevant, be also applicable in the case of a company not having share
capital or other securities

Sec 141(3) Is indebted to the company, or its subsidiary, or its holding or

(d)(ii) associate company or a subsidiary of such holding company, in
excess of such amount as may be prescribed

Discussion

1 As per the Guidance note issued by The ICAI, audit fees received on
progressive basis i.e. after beginning the engagement is not treated as an
advance of the fees and hence there is no indebtedness involved. {DIRECT
INDEBTEDNESS}

Sec 141(3) Has given a guarantee or provided any security in connection with
(d)(iii) the indebtedness of any third person to the company, or its
subsidiary, or its holding or associate company or a subsidiary of
such holding company, for such amount as may be prescribed;

Discussion

1 This provision is also called as INDIRECT INDEBTEDNESS.

Sec 141(3)(e) A person or a firm who, whether directly or indirectly, has business
relationship with the company, or its subsidiary, or its holding or
associate company or subsidiary of such holding company or
associate company of such nature as may be prescribed
Discussion

1 Business Relationship means any relationship apart from statutory audit

entered for commercial purpose EXCEPT FOR-
⇨ Commercial transactions which are in the nature of professional
services permitted to be rendered by an auditor or audit firm
under the Act and the Chartered Accountants Act, 1949 (unless
such services are prohibited u/s 144 of the act).

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⇨ Commercial transactions which are in the ordinary course of

business of the company at arm’s length price - like sale of
products or services to the auditor, as customer, in the ordinary
course of business, by companies engaged in the business of
telecommunications, airlines, hospitals, hotels and such other
similar businesses.

Sec A person whose relative is a director or is in the employment of the

company as a director or key managerial personnel.
141(3)(f)

Sec 141(3)(g) A person who is in full time employment elsewhere or a person or a

partner of a firm holding appointment as its auditor, if such persons
or partner is at the date of such appointment or reappointment
holding appointment as auditor of more than twenty companies

Discussion

1 It should not exceed 20 companies per individual at any point of time.

2 Following Companies are included in this limit:

• Public Companies
• Private Limited Companies having Paid up capital of Rs.100 crore
or more as on the date of appointment

3 Person or Partner who is in whole time employment elsewhere cannot

conduct audit of companies.

4 This Means that the Limit does not include following companies:
• One Person Company
• Small Company
• Dormant Company
• Private Limited companies having Paid up Capital of Less than
Rs.100 crore as on the date of appointment

5 The above exemption is not available if the company has not filed its
annual statements as required by Section 137 and Section 92 of
Companies Act, 2013.
Sec 141(3)(h) a person who has been convicted by a court of an offence involving fraud
and a period of ten years has not elapsed from the date of such conviction

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Discussion

1 If person or partner is convicted by court for offence involving fraud then

we need to check the eligibility of the membership under CA Act, 1949

Sec 141(3)(i) A person who, directly or indirectly, renders any service referred to
in section 144 to the company or its holding company or its
subsidiary company. Explanation. — For the purposes of this clause,
the term "directly or indirectly" shall have the meaning assigned to
it in the Explanation to section 144.’.

Discussion

Sec 144- auditor not to render these services to the company, its holding and
subsidiary company.

1 List of Services which are not to be rendered

(i) Accounting and book keeping services;

(ii) Internal audit;

(iii) Design and implementation of any financial information system;

(iv) Actuarial services;

(v) Investment advisory services;

(vi) Investment banking services;

(vii) Rendering of outsourced financial services;

(viii) Management services; and

(ix) Any other kind of services as may be prescribed.

2 Relative of person or partner is also not allowed to render the above

services

3 Person or Partner shall not provide such services through any other
entity, whatsoever, in which such person or partner has significant
influence or control- e.g. Firms working under common brand name,
firms having common partners etc

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Note:
Sec 141(4) Where a person appointed as an auditor of a company incurs any of the
disqualifications mentioned in sub-section (3) after his appointment, he
shall vacate his office as such auditor and such vacation shall be deemed
to be a casual vacancy in the office of the auditor
Section 2(77) Defines the term “relative” to mean anyone who is related to
another as:
(i) Members of a Hindu Undivided Family;
(ii) Husband and wife; or
(iii) One person is related to the other in such manner as may be
prescribed Rule 4 of the Companies (Specification of
Definitions Details) Rules, 2014 prescribes the list of relatives
as per Section 2(77).;
⇨ Father (including step- father)
⇨ Mother (including step-mother)
⇨ Son (including step- son)
⇨ Son’s wife
⇨ Daughter
⇨ Daughter’s husband
⇨ Brother (including step- brother),
⇨ Sister (including step- sister).

3. Appointment of Auditor- Sec 139

Sec Content Given in

139(1) Discussion 3.2

139(2) Discussion 3.2
139 (3) Discussion 3.2
139(4) Discussion 3.2
139(5) Discussion 3.1
139(6) Discussion 3.2
139(7) Discussion 3.1
139(8) Discussion 3.3

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139(9) Discussion 3.2

139(10) Discussion 3.2
139(11) Discussion 3.2

3. Appointment

Government Other than

Company (3.1)
Government Company (3.2)

First Auditor Subsequent

Auditor First Auditor Subsequent
Auditor

Common Questions for appointment

1) Who will appoint?
2) How and when the auditors will be appointed?
3) What is the term of auditors?
4) Whether same auditors can be reappointed after expiry of their term?
5) Appointment in case of auditor’s death, resignation, disqualification, unsound mind etc.
i.e Casual Vacancy (3.3).

3.1 Appointment of Auditor- Government Companies

Sec Particulars

139(5) Notwithstanding anything contained in sub-section (1), in the case of a

Government company or any other company owned or controlled,
directly or indirectly, by the Central Government, or by any State
Government or Governments, or partly by the Central Government and
partly by one or more State Governments, the Comptroller and Auditor-
General of India shall, in respect of a financial year, appoint an auditor
duly qualified to be appointed as an auditor of companies under this Act,
within a period of one hundred and eighty days from the commencement
of the financial year, who shall hold office till the conclusion of the annual
general meeting.
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139(7) Notwithstanding anything contained in sub-section (1) or sub-section (5),

in the case of a Government company or any other company owned or
controlled, directly or indirectly, by the Central Government, or by any
State Government, or Governments, or partly by the Central Government
and partly by one or more State Governments, the first auditor shall be
appointed by the Comptroller and Auditor-General of India within sixty
days from the date of registration of the company and in case the
Comptroller and Auditor-General of India does not appoint such auditor
within the said period, the Board of Directors of the company shall
appoint such auditor within the next thirty days; and in the case of failure
of the Board to appoint such auditor within the next thirty days, it shall
inform the members of the company who shall appoint such auditor
within the sixty days at an extraordinary general meeting, who shall hold
office till the conclusion of the first annual general meeting

Appointment of Auditor-
Government Companies {Sec
139 (5) & (7)}

First Auditor Sec Subsequent Auditor

139(7) Sec 139(5)

CAG will appoint (60 days) CAG will appoint within 180
days of commencement of
IF CAG Fails, BOD will financial year
appoint (30 days)
Term= Conclusion of
IF BOD FAILS subsequent AGM
BOD will inform to members
Members will appoint within
60 days in EGM
Term= Conclusion of 1st AGM

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3.2 Appointment of Auditor- Other than Government Companies

Sec 139- Appointment of Auditor

(1) Notwithstanding anything contained in sub-section (1), in the case of a

Government company or any other company owned or controlled,
directly or indirectly, by the Central Government, or by any State
Government or Governments, or partly by the Central Government and
partly by one or more State Governments, the Comptroller and Auditor-
General of India shall, in respect of a financial year, appoint an auditor
duly qualified to be appointed as an auditor of companies under this Act,
within a period of one hundred and eighty days from the commencement
of the financial year, who shall hold office till the conclusion of the annual
general meeting. Subject to the provisions of this Chapter, every company
shall, at the first annual general meeting, appoint an individual or a firm
as an auditor who shall hold office from the conclusion of that meeting till
the conclusion of its sixth annual general meeting and thereafter till the
conclusion of every sixth meeting and the manner and procedure of
selection of auditors by the members of the company at such meeting
shall be such as may be prescribed:
Provided that the company shall place the matter relating to such
appointment for ratification by members at every annual general
meeting:
Provided further that before such appointment is made, the written
consent of the auditor to such appointment, and a certificate from him or
it that the appointment, if made, shall be in accordance with the
conditions as may be prescribed, shall be obtained from the auditor:
Provided also that the certificate shall also indicate whether the auditor
satisfies the criteria provided in section 141:
Provided also that the company shall inform the auditor concerned of his
or its appointment, and also file a notice of such appointment with the
Registrar within fifteen days of the meeting in which the auditor is
appointed.
Explanation.—For the purposes of this Chapter, “appointment” includes
reappointment.
(2) No listed company or a company belonging to such class or classes of
companies as may be prescribed, shall appoint or re-appoint—
(a) An individual as auditor for more than one term of five
consecutive years; and

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(b) An audit firm as auditor for more than two terms of five
consecutive years: Provided that—
(i) An individual auditor who has completed his term under
clause (a) shall not be eligible for re-appointment as
auditor in the same company for five years from the
completion of his term;
(ii) An audit firm which has completed its term under clause
(b), shall not be eligible for re-appointment as auditor in
the same company for five years from the completion of
such term:
Provided further that as on the date of appointment no audit firm having
a common partner or partners to the other audit firm, whose tenure has
expired in a company immediately preceding the financial year, shall be
appointed as auditor of the same company for a period of five years:
Provided also that every company, existing on or before the
commencement of this Act which is required to comply with provisions of
this sub-section, shall comply with the requirements of this sub-section
within three years from the date of commencement of this Act:
Provided also that, nothing contained in this sub-section shall prejudice
the right of the company to remove an auditor or the right of the auditor
to resign from such office of the company.
(3) Subject to the provisions of this Act, members of a company may resolve
to provide that:
(a) In the audit firm appointed by it, the auditing partner and his team
shall be rotated at such intervals as may be resolved by members; or
(b) The audit shall be conducted by more than one auditor.
(4) The Central Government may, by rules, prescribe the manner in which
the companies shall rotate their auditors in pursuance of sub-section (2).
Explanation.—For the purposes of this Chapter, the word “firm” shall
include a limited liability partnership incorporated under the Limited
Liability Partnership Act, 2008.
(6) Notwithstanding anything contained in sub-section (1), the first auditor
of a company, other than a Government company, shall be appointed by
the Board of Directors within thirty days from the date of registration of
the company and in the case of failure of the Board to appoint such

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auditor, it shall inform the members of the company, who shall within
ninety days at an extraordinary general meeting appoint such auditor and
such auditor shall hold office till the conclusion of the first annual general
meeting.
(9) Subject to the provisions of sub-section (1) and the rules made
thereunder, a retiring auditor may be re-appointed at an annual general
meeting, if—
(a) He is not disqualified for re-appointment;
(b) He has not given the company a notice in writing of his
unwillingness to be re-appointed; and
(c) A special resolution has not been passed at that meeting appointing
some other auditor or providing expressly that he shall not be re-
appointed.
(10) Where at any annual general meeting, no auditor is appointed or re-
appointed, the existing auditor shall continue to be the auditor of the
company.
(11) Where a company is required to constitute an Audit Committee under
section 177, all appointments, including the filling of a casual vacancy of
an auditor under this section shall be made after taking into account the
recommendations
of such committee.

Appointment of Auditors-
Other than Govt Co

First Auditor Sec Subsequent Auditor

139(6) Sec 139(1)

a) BOD Appoints within 30 a) BOD Recommends name

days of DOI IF BOD Fails of auditor to Members
b) BOD will inform to b) Members shall appoint
members auditor in AGM via
c) Members will appoint in ordinary resolution
EGM within 90 days of c) Term= 5 years (5
receiving information concluded AGMs)
d) Term= Conclusion of 1st
AGM

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(i) Recommendation process

Manner of Selection of Auditor Sec
139 (11) read with CAAR, 2014

Section 177 is Section 177 is not

applicable to company applicable to company

Audit Committee Recommends BOD Recommends name of

name of auditor to BOD auditor to members

BOD AGREES BOD DISAGREES

BOD Recommends BOD communicates reasons

name of auditor to for disagreement
members +
it's own recommendation to
Audit Committee

Audit Committee Audit Committee

agrees agrees

BOD Recommends BOD Recommends name of

name of auditor to auditor to members
members +
BOD submits a statement in
writing to members for
reasons of disagreement with
Audit Committee
(ii) Possible Scenarios
Sr. No Situation Solution

1 Members appoint the proposed Company Needs to file FORM ADT-1 within
auditor 15 days of appointment.

2 Members don’t appoint IF not auditor is appointed at the AGM then

the proposed auditor retiring auditor is deemed as reappointed
3 Proposed auditor withdraws his u/s 139(10) of Companies Act, 2013.
consent or death before IF retiring auditor is not appointed due to
appointment and similar any reason as described in Sec 139(9) then
contingencies occur it leads to casual vacancy u/s 139(8) of
Companies Act, 2013.
4 Members don’t want proposed They need to exercise their rights
auditor to be appointed and prescribed under section 140(4) i.e.
existing auditor to be provisions for appointment of an auditor
reappointed other than retiring auditor.
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(iii) Rotation of auditor :

Whether the Same

auditors can be
reappointed after expiry of
their term allowed

Check whether
Rotation of auditors is applicable
as per Section 139 (2), (3), (4)
along with Company Rules?

Applicable Not Applicable

Auditor (including Auditor can be

network firms) cannot be reappointed until rotation
reappointed for 5 years after becomes applicable
expiry of the term allowed

What is the term allowed to

auditors?

Proprietor- 1 term of 5 Partnership Firm- 2

consecutive years terms of 5 consecutive years each

(1) Applicability (it excludes one person company and small company as defined under
companies act, 2013):
(a) Listed Companies- Mandatory
(b) Unlisted Public Companies-
(i) Paid up share capital of Rs 10 Crore or More as per latest audited financial
statements
(ii) Aggregate Public Borrrowings (Loans from Banks/Financial Institution +
Public Deposits) of Rs. 50 Crore or More as per latest audited financial
statements
(c) Private Limited Companies
(i) Paid up share capital of Rs 50 Crore or More as per latest audited financial
statements

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(ii) Aggregate Public Borrrowings (Loans from Banks/Financial Institution) of

Rs. 50 Crore or More as per latest audited financial statements

(2) For auditors appointed before commencement of Companies Act, 2013, a transitional
period of 3 years shall be given i.e. FY 14-15, 15-16 and 16-17.

Auditor is Period Served Transitional Total Period Additional

before Period at the end of Period after

Companies Act, transitional transitional

2013 period period is over

Partnership 2 years 3 years 5 years 5 years

35 years 3 years 38 years 0 years

Proprietor 1 year 3 years 4 years 1 year

12 years 3 year 15 years 0 year

(3) If auditor vacates the office as an auditor of the company due to any reason then such
vacation will be deemed as expiry of term allowed and auditor cannot be reappointed
for another 5 years.
(4) Incoming Auditor should not be associated with the outgoing auditor in any manner
whatsoever. E.g Common Partners, network firms etc.
(5) During the term allowed, members can pass a resolution for rotation of partners along
with audit team in order to secure independence of auditors.
(6) As per SQC-1(in case of listed entities) rotation should be done after 7 years. SQC- 1
became applicable from April 1, 2009 (FY 09-10). So rotation should be done after FY
15-16. As per the Co Act, 2013, transitional period of 3 years is given which ends on FY
16-17.
Hence, no rotation required as per SQC-1 because Law will supersede Standard i.e.
Rotation will be done from FY 17-18.

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3.3 Casual Vacancy

Sec 139 (8)

Any casual vacancy in the office of an auditor shall—

(i) In the case of a company other than a company whose accounts are subject to audit
by an auditor appointed by the Comptroller and Auditor-General of India, be filled by
the Board of Directors within thirty days, but if such casual vacancy is as a result of
the resignation of an auditor, such appointment shall also be approved by the
company at a general meeting convened within three months of the
recommendation of the Board and he shall hold the office till the conclusion of the
next annual general meeting;

(ii) In the case of a company whose accounts are subject to audit by an auditor
appointed by the Comptroller and Auditor-General of India, be filled by the
Comptroller and Auditor-General of India within thirty days.

Provided that in case the Comptroller and Auditor-General of India does not fill the
vacancy within the said period, the Board of Directors shall fill the vacancy within
next thirty days.

As per section 140(2) the auditor who has resigned from the company shall file within a
period of 30 days from the date of resignation, a statement in the prescribed Form ADT–3
(as per Rule 8 of CAAR) with the company and the Registrar, and in case of the companies
referred to in section 139(5) i.e. Government company, the auditor shall also file such
statement with the Comptroller and Auditor-General of India, indicating the reasons and
other facts as may be relevant with regard to his resignation. In case of failure the auditor
shall be punishable with fine which shall not be less than fifty thousand rupees or the
remuneration of the auditor, whichever is less, but which may extend to five lakhs
rupees as per section 140(3).

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Auditor appointed under Casual Vacancy shall continue up to conclusion of Next AGM.

4. Remuneration of Auditor
Section Particulars
Sec The remuneration of the auditor of a company shall be fixed in its general
141(1) meeting or in such manner as may be determined therein:
Provided that the Board may fix remuneration of the first auditor
appointed by it.
Sec 141(2) The remuneration under sub-section (1) shall, in addition to the fee payable
to an auditor, include the expenses, if any, incurred by the auditor in
connection with the audit of the company and any facility extended to him
but does not include any remuneration paid to him for any other service
rendered by him at the request of the company

Note: Manner of Remuneration should not violate Clause 10 Part I of First Schedule to
CA Act, 1949

5. Removal of Auditor
Section Particulars
Sec 140(1) Removal of auditor before expiry of his term
The auditor appointed under section 139 may be removed from his office
before the expiry of his term only by a special resolution of the company,
after obtaining the previous approval of the Central Government in that
behalf in the prescribed manner:
Provided that before taking any action under this sub-section, the auditor
concerned shall be given a reasonable opportunity of being heard.
Sec 140(4) Appointment of an auditor other than retiring auditor
(i) Special notice shall be required for a resolution at an annual general
meeting appointing as auditor a person other than a retiring
auditor, or providing expressly that a retiring auditor shall not be
re-appointed, except where the retiring auditor has completed a
consecutive tenure of five years or, as the case may be, ten years, as
provided under sub-section (2) of section 139.
(ii) On receipt of notice of such a resolution, the company shall
forthwith send a copy thereof to the retiring auditor.
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(iii) Where notice is given of such a resolution and the retiring auditor
makes with respect thereto representation in writing to the
company (not exceeding a reasonable length) and requests its
notification to members of the company, the company shall, unless
the representation is received by it too late for it to do so,—
(a) in any notice of the resolution given to members of the
company, state the fact of the representation having been
made; and
(b) send a copy of the representation to every member of the
company to whom notice of the meeting is sent, whether
before or after the receipt of the representation by the
company, and if a copy of the representation is not sent as
aforesaid because it was received too late or because of the
company’s default, the auditor may (without prejudice to
his right to be heard orally) require that the
representation shall be read out at the meeting.
Provided that if a copy of representation is not sent as aforesaid, a copy
thereof shall be filed with the Registrar:
Provided further that if the Tribunal is satisfied on an application either
of the company or of any other aggrieved person that the rights conferred
by this sub-section are being abused by the auditor, then, the copy of the
representation may not be sent and the representation need not be read
out at the meeting.
Special notice u/s 115 of Companies Act, 2013 can be given by-
It can be sent by Member or Members holding at least 1% of voting power
or Shares with paid up value of at least Rs. 5 Lacs. It must be sent at least
14 days before the date of meeting.
Sec 140(5) Removal of auditor by National Company Law Tribunal
Without prejudice to any action under the provisions of this Act or any
other law for the time being in force, the Tribunal either suo moto or on an
application made to it by the Central Government or by any person
concerned, if it is satisfied that the auditor of a company has, whether
directly or indirectly, acted in a fraudulent manner or abetted or colluded
in any fraud by, or in relation to, the company or its directors or officers, it
may, by order, direct the company to change its auditors:

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Provided that if the application is made by the Central Government and

the Tribunal is satisfied that any change of the auditor is required, it shall
within fifteen days of receipt of such application, make an order that he
shall not function as an auditor and the Central Government may appoint
another auditor in his place:
Provided further that an auditor, whether individual or firm, against
whom final order has been passed by the Tribunal under this section shall
not be eligible to be appointed as an auditor of any company for a period of
five years from the date of passing of the order and the auditor shall also
be liable for action under section 447.
Explanation I.—It is hereby clarified that the case of a firm, the liability
shall be of the firm and that of every partner or partners who acted in a
fraudulent manner or abetted or colluded in any fraud by, or in relation to,
the company or its director or officers.
Explanation II.—For the purposes of this Chapter the word “auditor”
includes a firm of auditors.

(i) Removal of Auditor before expiry of his term

If Special Resolution is

BOD Resolution passed then Auditor shalll be

removed with immediate effect

Reasonable opportunity
Application to CG via
of being heard to Auditor
FORM ADT-2 (30 days)

CG Approval is required GM to be held (60 days)

after receiving approval

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(ii) Appointment of an Auditor other than retiring auditor- Sec 140(4)

Member(s) with Ordinary

1 Voting power AGM is held Resolution is
or holding shares passed
with paid up
value of Rs. 5 Company sends representation
Lakh and copy of notice to members
Auditor is
(at least 7 days before AGM)
removed

Give Special
notice to Auditor makes Written
company representations and submits to
the company
(it should not solicit shareholders
Company gives as per Clause 6 Part I of First
copy to Auditor Schedule to CA Act, 1949

6.1 Rights of Auditor

Section Particulars
Sec 143(1) Right to Access Books of Accounts, etc
Section 143(1) of the Act provides that the auditor of a company, at all
times, shall have a right of access to the books of account and vouchers of
the company, whether kept at the registered office of the company or at
any other place and he is entitled to require from the officers of the
company such information and explanation as he may consider necessary
for the performance of his duties as auditor.
The right of access is not limited to those books and records maintained at
the registered or head office so that in the case of a company with branches,
the right also extends to the branch records, if the auditor considers it
necessary to have access thereto as per section143(8).
Further, the auditor of a company which is a holding company shall also have
the right of access to the records of all its subsidiaries and associates in so far
as it relates to the consolidation of its financial
statements with that of its subsidiaries and associates

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Sec 143(2) Right to Report to the members of the company

The auditor shall make a report to the members of the company on the
accounts examined by him and on every financial statements which are
required by or under this Act to be laid before the company in general
meeting and the report shall after taking into account the provisions of
this Act, the accounting and auditing standards and matters which are
required to be included in the audit report under the provisions of this Act
or any rules made there under or under any order made under this section
and to the best of his information and knowledge, the said accounts,
financial statements give a true and fair view of the state of the company’s
affairs as at the end of its financial year and profit or loss and
cash flow for the year and such other matters as may be prescribed.
Sec 146 Right to attend General Meetings
The auditors of a company are entitled to attend any general meeting of the
company (the right is not restricted to those at which the accounts audited
by them are to be discussed); also to receive all the notices and other
communications relating to the general meetings, which members are
entitled to receive and to be heard at any general meeting in any part of the
business of the meeting which concerns them as auditors.
According to the section 146:“all notices of, and other communications
relating to, any general meeting shall be forwarded to the auditor of the
company, and the auditor shall, unless otherwise exempted by the
company, attend either by himself or through his authorised
representative, who shall also be qualified to be an auditor, any general
meeting and shall have right to be heard at such meeting on any part of
the business which concerns him as the auditor.”
Thus, it is right of the auditor to receive notices and other
communications relating to any general meeting and to be heard at
such meeting, relating to the matter of his concern, however, it is duty
of the auditor to attend the same or through his authorized
representative unless otherwise exempted

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Indian Right to Lien i.e. Right to retain Books of Accounts and other documents In
Contract terms of the general principles of law, any person having the lawful
Act possession of somebody else’s property, on which he has worked, may
retain the property for non-payment of his dues on account of the work
done on the property. On this premise, 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.
HOWEVER RIGHT TO RETAIN BOOKS OF ACCOUNTS HAS BEEN RESTRICTED
BY ETHICAL STANDARD BOARD.

6.1 Duties of Auditor

Section Particulars
Sec Duty to inquire upon Certain Matters:
143(1) It is the duty of auditor to inquire into the following matters:
Clause a whether loans and advances made by the company on the basis of security
have been properly secured and whether the terms on which they have been
made are prejudicial to the interests of the company or its members

Clause b whether transactions of the company which are represented merely by book
entries are prejudicial to the interests of the company
Clause c where the company not being an investment company or a banking
company, whether so much of the assets of the company as consist of shares,
debentures and other securities have been sold at a price less than that at
which they were purchased by the company
Clause d whether loans and advances made by the company have been shown as
deposits
Clause e whether personal expenses have been charged to revenue account
Clause f where it is stated in the books and documents of the company that any
shares have been allotted for cash, whether cash has actually been received
in respect of such allotment, and if no cash has actually been so received,
whether the position as stated in the account books and the balance sheet is
correct, regular and not misleading.

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“The auditor is not required to report on the matters specified in sub-section (1) unless he
has any special comments to make on any of the items referred to therein. If he is satisfied
as a result of the inquiries, he has no further duty to report that he is so satisfied. In such a
case, the content of the Auditor’s Report will remain exactly the same as the auditor has to
inquire and apply his mind to the information elicited by the enquiry, in deciding whether
or not any reference needs to be made in his report. In our opinion, it is in this light that the
auditor has to consider his duties under section 143(1).”
Therefore, it could be said that the auditor should make a report to the members in
case he finds answer to any of these matters in adverse.
Sec Duty to report upon certain matters.
143(3) As per sub-section (3) of section 143, the auditor’s report shall also state:
Clause a whether he has sought and obtained all the information and explanations which
to the best of his knowledge and belief were necessary for the purpose of his
audit and if not, the details thereof and the effect of such
information on the financial statements
Clause b whether, in his opinion, proper books of account as required by law have been
kept by the company so far as appears from his examination of those books and
proper returns adequate for the purposes of his audit
have been received from branches not visited by him
Clause c whether the report on the accounts of any branch office of the company audited
under subsection (8) by a person other than the company’s auditors has been
sent to him under the proviso to that sub-section and the manner in which he
has dealt with it in preparing his report
Clause d whether the company’s balance sheet and profit and loss account dealt with in
the report are in agreement with the books of account and returns
Clause e whether, in his opinion, the financial statements comply with the accounting
standards
Clause f the observations or comments of the auditors on financial transactions or
matters which have any adverse effect on the functioning of the company
Clause g whether any director is disqualified from being appointed as a director
under sub-section (2) of the section 164
Clause h Any qualification, reservation or adverse remark relating to the maintenance of
accounts and other matters connected therewith

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Clause i whether the company has adequate internal financial controls with reference to
financial statements" in place and the operating effectiveness of such controls
(Note: Clause
(i) of Sub-Section (3) of Section143 shall not apply to a private company:-
(i) which is a one person company or a small company; or
(ii) which has turnover less than rupees fifty crores as per latest audited
financial statement and which has aggregate borrowings from banks or
financial institutions or anybody corporate at any point of time during
the financial year less than rupees twenty five crore)
Clause j such other matters as may be prescribed. Rule 11 of the Companies (Audit and
Auditors) Rules, 2014 prescribes the other matters to be included in auditor’s
report. The auditor’s report shall also include their views and comments on
the following matters, namely:-
(i) whether the company has disclosed the impact, if any, of pending litigations on its
financial position in its financial statement
(ii) whether the company has made provision, as required under any law or
accounting standards, for material foreseeable losses, if any, on long term
contracts including derivative contracts
(iii) whether there has been any delay in transferring amounts, required to be
transferred, to the Investor Education and Protection Fund by the company
Sec Duty to state reasons for negative remarks in audit report
143(4) As per sub-section (4) of section 143, where any of the matters required to be
included in the audit report is answered in the negative or with a qualification,
the report shall state the reasons there for
Sec Duty to Comply with Auditing Standards
143(9) Every auditor shall comply with the auditing standards
Sec The Central Government may prescribe the standards of auditing or any
143(10) addendum thereto, as recommended by the Institute of Chartered Accountants
of India, constituted under section 3 of the Chartered Accountants Act, 1949, in
consultation with and after examination of the recommendations made by the
National Financial Reporting Authority. Students may note that until any
auditing standards are notified, any standard, or standards of auditing specified
by the Institute of Chartered
Accountants of India shall be deemed to be the auditing standards.
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Sec Duty to report upon any other matter prescribed by Central Government:
143(11) The Central Government may, in consultation with the National Financial
Reporting Authority (NFRA), by general or special order, direct, in respect of
such class or description of companies, as may be specified in the order, that the
auditor's report shall also include a statement on such matters as may be
specified therein.
Sec Duty to report fraud to Central Government:
143(12) if an auditor of a company in the course of the performance of his duties as
auditor, has reason to believe that an offence of fraud involving such amount or
amounts as may be prescribed, is being or has been committed in the company
by its officers or employees, the auditor shall report the matter to the Central
Government within such time and in such manner as may be prescribed
Rule 13 of CAAR, 2014
(1) if an auditor of a company, in the course of the performance of his duties as
statutory auditor, has reason to believe that an offence of fraud, which involves
or is expected to involve individually an amount of ` 1 crore or above, is being or
has been committed against the company by its officers or employees, the
auditor shall report the matter to the Central Government.
(2) The manner of reporting the matter to the Central Government is as
follows:
(a) the auditor shall report the matter to the Board or the Audit Committee,
as the case may be, immediately but not later than 2 days of his
knowledge of the fraud, seeking their reply or observations within 45
days;
(b) on receipt of such reply or observations, the auditor shall forward his
report and the reply or observations of the Board or the Audit Committee
along with his comments (on such reply or observations of the Board or
the Audit Committee) to the Central Government within 15 days from
the date of receipt of such reply or observations;
(c) in case the auditor fails to get any reply or observations from the Board
or the Audit Committee within the stipulated period of 45 days, he shall
forward his report to the Central Government along with a note
containing the details of his report that was earlier forwarded to the
Board or the Audit Committee for which he has not received any reply or
observations
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(d) the report shall be sent to the Secretary, Ministry of Corporate Affairs in a
sealed cover by Registered Post with Acknowledgement Due or by Speed
Post followed by an e-mail in confirmation of the same
(e) the report shall be on the letter-head of the auditor containing postal
address, e-mail address and contact telephone number or mobile number
and be signed by the auditor with his seal and shall indicate his
Membership Number; and
(f) the report shall be in the form of a statement as specified in Form ADT-4
(3)  in case of a fraud involving lesser than the amount specified in sub-
rule (1) [i.e. less than ` 1 crore], the auditor shall report the matter to
Audit Committee constituted under section 177 or to the Board
immediately but not later than 2 days of his knowledge of the fraud and he
shall report the matter specifying the following:
(a) Nature of Fraud with description.
(b) Approximate amount involved.
(c) Parties involved.
 The company is required to disclose in the Board’s Report the following
details of each of the fraud reported to the Audit Committee or the Board
under sub-rule (3) during the year:
(a) Nature of Fraud with description
(b) Approximate amount involved
(c) Parties involved, if remedial action not taken
(d) Remedial actions taken
Sec 145 Duty to Sign Audit Report
the person appointed as an auditor of the company shall sign the auditor's
report or sign or certify any other document of the company, in accordance with
the provisions of sub-section (2) of section 141 and the qualifications,
observations or comments on financial transactions or matters, which have any
adverse effect on the functioning of the company mentioned in the auditors’
report shall be read before the company in general meeting and shall be open
to inspection by any member of the company.

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7. Penalties u/s 147 of Companies Act, 2013

Section Particulars
Sec If any of the provisions of sections 139 to 146 (both inclusive) is contravened,
147(1) the company shall be punishable with fine which shall not be less than
twenty-five thousand rupees but which may extend to five lakh rupees and
every officer of the company who is in default shall be punishable with
imprisonment for a term which may extend to one year or with fine which
shall not be less than ten thousand rupees but which may extend to one lakh
rupees, or with both.
Sec If an auditor of a company contravenes any of the provisions of section 139
147(2) section 143, section 144 or section 145, the auditor shall be punishable with
fine which shall not be less than twentyfive thousand rupees but which may
extend to five lakh rupees or four times the remuneration of the auditor,
which ever is less.
It may be noted that if an auditor has contravened such provisions knowingly
or willfully with the intention to deceive the company or its shareholders or
creditors or tax authorities,
he shall be punishable with imprisonment for a term which may extend to
one year and with fine which shall not be less than fifty thousand rupees but
which may extend to twenty-five lakh rupees or eight times the
remuneration of the auditor, which every is less.
Sec Where an auditor has been convicted under sub-section (2), he shall be liable
147(3) to:-
(i) refund the remuneration received by him to the company;
(ii) and pay for damages to the company statutory bodies or authorities or
to members or the creditors of the Company for loss arising out of
incorrect or misleading statements of particulars made in his audit
report.
Sec The Central Government shall, by notification, specify any statutory body or
147(4) authority of an officer for ensuring prompt payment of damages to the
company or the persons under clause (ii) of sub-section (3) and such body,
authority or officer shall after payment of damages the such company or
persons file a report with the Central Government in respect of making such
damages in such manner as may be specified in the said notification.

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Sec Where, in case of audit of a company being conducted by an audit firm, it is

147(5) proved that the partner or partners of the audit firm has or have acted in a
fraudulent manner or abetted or colluded in an fraud by, or in relation to or
by, the company or its directors or officers, the liability, whether civil criminal
as provided in this Act or in any other law for the time being in force, for such
act shall be the partner or partners concerned of the audit firm and of the firm
jointly and severally.
Provided that in case of criminal liability of an audit firm, in respect of
liability other than fine, the concerned partner or partners, who acted in a
fraudulent manner or abetted or, as the case may be, colluded in any fraud
shall only be liable.

8. Branch Audit- Section 143(8)

Section Particulars
Sec It prescribes the duties and powers of the company’s auditor with reference to
143(8) the audit of the branch and the branch auditor.
Where a company has a branch office, the accounts of that office shall be
audited either by
 the auditor appointed for the company (herein referred to as the
company's auditor) under this Act or
 by any other person qualified for appointment as an auditor of the
company under this Act and appointed as such under section 139, or
 where the branch office is situated in a country outside India, the
accounts of the branch office shall be audited either by the company's
auditor or
 by any other person duly qualified to act as an auditor of the accounts of
the branch office in accordance with the laws of that country
The duties and powers of the company' s auditor with reference to the audit
of the branch and the branch auditor, if any, shall be such as may be
prescribed.
It may be noted that the branch auditor shall prepare a report on the
accounts of the branch examined by him and send it to the auditor of the
company who shall deal with it in his report in such manner as he considers
necessary
Rule 12 of the branch auditor shall submit his report to the company’s auditor and
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CAAR, reporting of fraud by the auditor shall also extend to such branch auditor to the
2014 extent it relates to the concerned branch
SA 600 It makes clear that in certain situations, the statute governing the entity may
confer a right on the principal auditor to visit a component and examine the
books of account and other records of the said component, if he thinks it
necessary to do so. Where another auditor has been appointed for the
component, the principal auditor would normally be entitled to rely upon the
work of such auditor unless there are special circumstances to make it essential
for him to visit the component and/or to examine the books of account and
other records of the said component

9. CARO 2016
1. What is  Additional Reporting Requirement prescribed by Ministry of
CARO 2016 Corporate affairs
 Prescribed Under Section 143(11)
 Total Number of Clauses- 16
 Auditor Must comment upon all clauses in cases where CARO 2016
is applicable
 It is issued as an annexure to the Independent Auditor’s Report
2. It is applicable to all companies including foreign companies except
Applicability for companies given below

A. CARO is NOT APPLICABLE TO:

Companies (a) banking company as defined under Banking Regulation Act, 1949
Excluded (b) an insurance company as defined under the Insurance Act, 1938
(c) a company licensed to operate under section 8 of the Companies
Act, 2013
(d) a One person Company as defined under section 2(62) of the
Companies Act, 2013
(e) a Small Company as defined under 2(85) of the Companies Act
2013
(f) a private limited company, not being a subsidiary or holding
company of a public company, having:
(i) a paidup capital and reserves and surplus not more than
rupees one crore as on the balance sheet date and

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(ii) which does not have total borrowings exceeding rupees

one crore from any bank or financial institution at any
point of time during the financial year and
(iii) which does not have a total revenue exceeding rupees ten
crores during the financial year as per the financial
statements.
Consolidated The Order specifically provides that it shall not apply to the auditor’s
Financial report on consolidated financial statements.
Statement
Branch Audit The Order is also applicable to the audits of branch(es) of a company since
sub-section 8 of section 143 of the Act read with Rule 12 of the Companies
(Audit and Auditors) Rules, 2014 clearly specifies that a branch auditor
has the same duties in respect of audit as the company’s auditor. It is,
therefore, necessary that the report submitted by the branch auditor
contains a statement on all the matters specified in the Order, as
applicable to the company.
Status of the The applicability of the Order would be based on the status of the company
Company as at the balance sheet date for the financial year under
audit.
3. Clause Reporting
Clause Fixed Assets
(i) (a) whether the company is maintaining proper records showing full
particulars, including quantitative details and situation of fixed assets;
(b) whether these fixed assets have been physically verified by the
management at reasonable intervals; whether any material
discrepancies were noticed on such verification and if so, whether the
same have been properly dealt with in the books of account;
(c) whether the title deeds of immovable properties are held in the name of
the company. If not, provide the details thereof
Clause Inventory
(ii) whether physical verification of inventory has been conducted at reasonable
intervals by the management and whether any material discrepancies were
noticed and if so, whether they have been properly dealt with in the books of
account

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Clause Loans given by the company (Secured and Unsecured)

(iii) Whether the company has granted any loans, secured or unsecured to
companies, firms,Limited Liability Partnerships or other parties covered in the
register maintained under section 189 of the Companies Act, 2013. If so,
(a) whether the terms and conditions of the grant of such loans are not
prejudicial to the company’s interest;
(b) whether the schedule of repayment of principal and payment of interest
has been stipulated and whether the repayments or receipts are regular;
(c) if the amount is overdue, state the total amount overdue for more than
ninety days, and whether reasonable steps have been taken by the
company for recovery of the principal and interest;
Clause Compliance of Sec 185 and Sec 186 of Companies Act 2013
(iv) In respect of loans, investments, guarantees, and security whether provisions of
section 185 and 186 of the Companies Act, 2013 have been complied with. If
not, provide the details thereof
Clause Acceptance of Deposits
(v) (a) In case, the company has accepted deposits, whether the directives
issued by the Reserve Bank of India and the provisions of sections 73 to
76 or any other relevant provisions of the Companies Act, 2013 and the
rules framed thereunder, where applicable, have been complied with? If
not, the nature of such contraventions be stated.
(b) If an order has been passed by Company Law Board or National
Company Law Tribunal or Reserve Bank of India or any court or any
other tribunal, whether the same has been complied with or not?
Clause Cost Records
(vi) Whether maintenance of cost records has been specified by the Central
Government under sub-section (1) of section 148 of the Companies Act, 2013
and whether such accounts and records have been so made and maintained.
Clause Statutory Dues
(vii) a) Undisputed Statutory Dues : whether the company is regular in depositing
undisputed statutory dues including provident fund, employees' state
insurance, income-tax, sales-tax, service tax, duty of customs, duty of excise,
value added tax, cess and any other statutory dues to the appropriate
authorities and if not, the extent of the arrears of outstanding statutory dues as
on the last day of the financial year concerned for a period of more than six
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months from the date they became payable, shall be indicated;

b) Disputed Statutory Dues : where dues of income tax or sales tax or service tax
or duty of customs or duty of excise or value added tax have not been deposited
on account of any dispute, then the amounts involved and the forum where
dispute is pending shall be mentioned.
(A mere representation to the concerned Department shall not be treated as a
dispute).
Clause Default in repayment of Loans or Borrowings
(viii) Whether the company has defaulted in repayment of loans or borrowing to a
financial institution, bank, Government or dues to debenture holders?
If yes, the period and the amount of default to be reported
Clause Public Offer and money raised by debt and Term Loans
(ix) Whether moneys raised by way of initial public offer or further public offer
(including debt instruments) and term loans were applied for the purposes for
which those are raised.
If not, the details together with delays or default and subsequent rectification, if
any, as may be applicable, be reported
Clause Fraud
(x) Whether any fraud by the company or any fraud on the Company by its officers
or employees has been noticed or reported during the year.
If yes, the nature and the amount involved is to be indicated
Clause Managerial Remuneration
(xi) Whether managerial remuneration has been paid or provided in accordance
with the requisite approvals mandated by the provisions of section 197 read
with Schedule V to the Companies Act?
If not, state the amount involved and steps taken by the company for securing
refund of the same.
Clause Nidhi Company
(xii) (a) Whether the Nidhi Company has complied with the Net Owned Funds to
Deposits in the ratio of 1: 20 to meet out the liability and
(b) Whether the Nidhi Company is maintaining ten per cent unencumbered
term deposit as specified in the Nidhi Rules, 2014 to meet out the
liability.

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Clause Related Parties

(xiii) Whether all transactions with the related parties are
(a) in compliance with sections 177 and 188 of Companies Act, 2013 where
applicable and
(b) the details have been disclosed in the Financial Statements etc., as
required by the applicable accounting standards(AS-18).
Clause Allotment
(xiv) If the company has made any
 preferential allotment or
 private placement of shares or
 fully or partly convertible debentures during the year under review then
whether the requirement of section 42 of the Companies Act, 2013 have
been complied with and
The amount raised have been used for the purposes for which the funds were
raised. (b) If not, provide the details in respect of the amount involved and
nature of non compliance;
Clause Non Cash Transaction
(xv) Whether the company has entered into any non-cash transactions with
directors or persons connected with him and if so, whether the provisions of
section 192 of Companies Act, 2013 have been complied with.
Clause Registration under Reserve Bank of India Act ,1934
(xvi) Whether the company is required to be registered under section 45-IA of the
Reserve Bank of India Act,1934 and if so, whether the registration has been
obtained.
4. Explanations for Negative remarks or data not available:
(1) Where, in the auditor's report, the answer to any of the questions referred to in
paragraph 3 is unfavourable or qualified, the auditor's report shall also state the
basis for such unfavourable or qualified answer, as the case may be.
(2) Were the auditor is unable to express any opinion on any specified matter, his report
shall indicate such fact together with the reasons as to why it is not possible for him
to give his opinion on the same.

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7. Cost Audit- Sec 148

Section Deals with Particulars
148(1) Cost Records Notwithstanding anything contained in this Chapter, the
Central Government may, by order, in respect of such class
of companies engaged in the production of such goods or
providing such services as may be prescribed, direct that
particulars relating to the utilisation of material or labour
or to other items of cost as may be prescribed shall also be
included in the books of account kept by that class of
companies.
Provided that the Central Government shall, before
issuing such order in respect of any class of companies
regulated under a special Act, consult the regulatory body
constituted or established under such special Act.
Sec Cost Audit If the Central Government is of the opinion, that it is
148(2) necessary to do so, it may, by order, direct that the audit of
cost records of class of companies, which are covered
under sub-section (1) and which have a net worth of such
amount as may be prescribed or a turnover of such
amount as may be prescribed, shall be conducted in the
manner specified in the order.
Sec 148(3) Appointment The audit under sub-section (2) shall be conducted by a
of Cost Cost Accountant in practice who shall be appointed by the
Auditor Board on such remuneration as may be determined by the
members in such manner as may be prescribed:
Provided that no person appointed under section 139 as
an auditor of the company shall be appointed for
conducting the audit of cost records: Provided further that
the auditor conducting the cost audit shall comply with the
cost
auditing standards.
Explanation.—For the purposes of this sub-section, the
expression “cost auditing
standards” mean such standards as are issued by the
Institute of Cost and Works Accountants of India,
constituted under the Cost and Works Accountants Act,
1959, with the approval of the Central Government.
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Sec 148(4) Cost audit An audit conducted under this section shall be in addition
clarification to the audit conducted under section 143.
Sec 148(5) Qualifications The qualifications, disqualifications, rights, duties and
and obligations applicable to auditors under this Chapter shall,
disqualificatio so far as may be applicable, apply to a cost auditor
ns of cost appointed under this section and it shall be the duty of the
auditor company to give all assistance and facilities to the cost
auditor appointed under this section for auditing the cost
records of the company:
Provided that the report on the audit of cost records shall
be submitted by the cost accountant in practice to the
Board of Directors of the company.
Sec 148(6) Cost audit A company shall within thirty days from the date of receipt
report of a copy of the cost audit report prepared in pursuance of
a direction under sub-section (2) furnish the Central
Government with such report along with full information
and explanation on every reservation or qualification
contained therein.
Sec 148(7) Right of If, after considering the cost audit report referred to under
Central this section and the information and explanation
Government furnished by the company under sub-section (6), the
Central Government is of the opinion that any further
information or explanation is necessary, it may call for
such further information and explanation and the
company shall furnish the same within such time as may
be specified by that Government.
Sec 148(8) Punishment If any default is made in complying with the provisions of
this section,—
(a) the company and every officer of the company who
is in default shall be punishable in the manner as
provided in sub-section (1) of section 147;
(b) the cost auditor of the company who is in default
shall be punishable in the manner as provided in
sub-sections (2) to (4) of section 147.

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List of Regulated/Non- Regulated Sectors subject to Cost Records and Audit Regulated
and Non- Regulated Sectors

 List of Regulated Sectors

(1) Telecommunication Services
(2) Generation, transmission distribution and supply of Electricity
(3) Petroleum products
(4) Drugs and pharmaceuticals
(5) Fertilizers
(6) Sugar and industrial alcohol

 List of Non Regulated Sectors

(1) Machinery used for defence space atomic research
(2) Turbo jets and Turbo propellers
(3) Arms and ammunition
(4) Aeronautical Services
(5) Steel and Cement
(6) Rubber and allied products
(7) Roads and other infrastructure project
(8) Ores and mineral products
(9) Edible oil
(10) Jute and Jute products

 Appointment
Rule 6 of the Companies (Cost Records and Audit) Rules, 2014 requires the companies
prescribed under the said Rules to appoint an auditor within one hundred and eighty
days of the commencement of every financial year. It will be done by Board of
Directors in consultation with Audit Committee.

 Removal
The cost auditor may be removed from his office before the expiry of his term, through
a board resolution after giving a reasonable opportunity of being heard to the cost
auditor and recording the reasons for such removal in writing.
It may be noted that the Form CRA-2 to be filed with the Central Government for
intimating appointment of another cost auditor shall enclose the relevant Board
Resolution to the effect.

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 Reporting
(1) The cost auditor shall submit the cost audit report along with his or its
reservations or qualifications or observations or suggestions, if any, in Form
CRA-3. He shall forward his duly signed report to the Board of Directors of the
company within a period of one hundred and eighty days from the closure of
the financial year to which the report relates
(2) A company shall within thirty days from the date of receipt of a copy of the cost
audit report prepared (in pursuance of a direction issued by Central
Government) furnish the Central Government with such report along with full
information and explanation on every reservation or qualification contained
therein, in Form CRA-4.

Applicability of Cost Audit

Cost Audit (Sec 148 r.w

Companies (Cost Records and
Audit) Rules, 2014

Regulated Non Regulated

Sectors Sectors

Overall turnover Overall turnover

of Rs 50 crore or of Rs 100 crore or
more (only products more (only products
with turnover of Rs with turnover of Rs
25 cr or more shall 35 cr or more shall
be audited) be audited)

The requirement for cost audit under these rules shall not be applicable to a company
(i) Whose revenue from exports, in foreign exchange, exceeds 75% of its total revenue; or
(ii) Which is operating from a special economic zone.
(iii) Which is engaged in generation of electricity for captive consumption through Captive
Generating Plant.


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11
AUDIT
REPORT

Sr. No List of Topics as per Module JKSC Topic

Reference
1 Elements of Audit Report- SA 700 Topic 1

2 Modified opinion- SA 705 Topic 2

3 Emphasis of Matter and Other Matter Paragraph- SA 706 Topic 3

4 Key Matter Paragraph- SA 701 Topic 4

5 SA 710 Topic 5

Sr. No Particulars
1 SA 700- Forming an opinion
1.1 Objectives
(a) To form an opinion on the financial statements based on an evaluation of
the conclusions drawn from the audit evidence obtained; and
(b) To express clearly that opinion through a written report. The auditor shall
form an opinion on whether the financial statements are prepared, in all
material respects, in accordance with the applicable financial reporting
framework.
1.2 Specific Evaluations to be done by auditor
(a) The financial statements adequately disclose the significant accounting
policies selected and applied;
(b) The accounting policies selected and applied are consistent with the
applicable financial reporting framework and are appropriate;

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(c) The accounting estimates made by management are reasonable;

(d) The information presented in the financial statements is relevant, reliable,
comparable, and understandable;
(e) The financial statements provide adequate disclosures to enable the
intended users to understand the e□ect of material transactions and
events on the information conveyed in the financial statements; and
(f) The terminology used in the financial statements, including the title of
each financial statement, is appropriate.
1.3 Elements of Audit report
1.3.1 Title: The auditor’s report shall have a title that clearly indicates that it is the
report of an independent auditor. For example, “Independent Auditor’s Report,”
distinguishes the independent auditor’s report from reports issued by
others.
1.3.2 Addressee: The auditor’s report shall be addressed, as appropriate, based on the
circumstances of the engagement. Law, regulation or the terms of the
engagement may specify to whom the auditor’s report is to be addressed. The
auditor’s report is normally addressed to those for whom the report is prepared,
often either to the shareholders or to those charged with
governance of the entity whose financial statements are being audited.
1.3.3 Auditor’s Opinion: The first section of the auditor’s report shall include the
auditor’s opinion, and shall have the heading “Opinion.” The Opinion section of
the auditor’s report shall also:
(a) Identify the entity whose financial statements have been audited;
(b) State that the financial statements have been audited;
(c) Identify the title of each statement comprising the financial statements;
(d) Refer to the notes, including the summary of significant accounting
policies; and
(e) Specify the date of, or period covered by, each financial statement
comprising the financial statements
1.3.4 Basis for Opinion:
The auditor’s report shall include a section, directly following the Opinion section,
with
the heading “Basis for Opinion”, that:
(a) States that the audit was conducted in accordance with Standards on
Auditing;

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(b) Refers to the section of the auditor’s report that describes the auditor’s
responsibilities under the SAs;
(c) Includes a statement that the auditor is independent of the entity in
accordance with the relevant ethical requirements relating to the audit
and has fulfilled the auditor’s other ethical responsibilities in accordance
with these requirements.
(d) States whether the auditor believes that the audit evidence the auditor has
obtained is sufficient and appropriate to provide a basis for the auditor’s
opinion
1.3.5 Going Concern: Where applicable, the auditor shall report in accordance with SA
570 (Revised).
1.3.6 Key Audit Matters: For audits of complete sets of general purpose financial
statements of listed entities, the auditor shall communicate key audit matters in
the auditor’s report in accordance with SA 701.
When the auditor is otherwise required by law or regulation or decides to
communicate key audit matters in the auditor’s report, the auditor shall do so in
accordance with SA 701.
Law or regulation may require communication of key audit matters for audits of
entities other than listed entities.
The auditor may also decide to communicate key audit matters for other entities,
including those that may be of significant public interest, for example because
they have a large number and wide range of stakeholders and considering the
nature and size of the business.
1.3.7 Responsibilities for the Financial Statements: The auditor’s report shall
include a section with a heading “Responsibilities of Management for the
Financial Statements.”
SA 200 explains the premise, relating to the responsibilities of management and,
where appropriate, those charged with governance, on which an audit in
accordance with SAs is conducted. Management and, where appropriate, those
charged with governance accept responsibility for the preparation of the
financial statements. Management also accepts responsibility for such internal
control as it determines is necessary to enable the preparation of financial
statements that are free from material misstatement, whether due to fraud or
error. The description of management’s responsibilities in the auditor’s report
includes reference to both responsibilities as it helps to explain to users the
premise on which an audit is conducted.

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1.3.8 Auditor’s Responsibilities for the Audit of the Financial Statements:

This section of the auditor’s report shall:
(a) State that the objectives of the auditor are to:
(i) Obtain reasonable assurance about whether the financial
statements as a whole are free from material misstatement, whether
due to fraud or error; and
(ii) Issue an auditor’s report that includes the auditor’s opinion.
(b) State that reasonable assurance is a high level of assurance, but is not a
guarantee that an audit conducted in accordance with SAs will always
detect a material misstatement when it exists; and
(c) State that misstatements can arise from fraud or error, and either:
(i) Describe that they are considered material if, individually or in the
aggregate, they could reasonably be expected to influence the
economic decisions of users taken on the basis of these financial
statements; or
(ii) Provide a definition or description of materiality in accordance with
the applicable financial reporting framework.
1.3.9 Other Reporting Responsibilities: If the auditor addresses other reporting
responsibilities in the auditor’s report on the financial statements that are in
addition to the auditor’s responsibilities under the SAs, these other reporting
responsibilities shall be addressed in a separate section in the auditor’s report
with a heading titled-
“Report on Other Legal and Regulatory Requirements” or otherwise as
appropriate to the content of the section, unless these other reporting
responsibilities address the same topics as those presented under the reporting
responsibilities required by the SAs in which case the other reporting
responsibilities may be presented in the same section as the related report
elements required by the SAs.
1.3.10  Signature of the Auditor: The auditor’s report shall be signed. The report
is signed by the auditor (i.e. the engagement partner) in his personal
name. Where the firm is appointed as the auditor, the report is signed in
the personal name of the auditor and in the name of the audit firm.
The partner/proprietor signing the audit report also needs to mention the
membership number assigned by the Institute of Chartered Accountants of
India. They also include the registration number of the firm, wherever
applicable, as allotted by ICAI, in the audit reports signed by them.

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 Auditor’s Address: The auditor’s report shall name specific location,

which is ordinarily the city where the audit report is signed.
 Date of the Auditor’s Report: The auditor’s report shall be dated no
earlier than the date on which the auditor has obtained sufficient
appropriate audit evidence on which to base the auditor’s opinion.
2 SA 705- Modification to the opinion
2.1 Qualified Opinion
The auditor shall express a qualified opinion when:
2.1.1 (a) The auditor, having obtained sufficient appropriate audit evidence,
concludes that misstatements, individually or in the aggregate, are
material, but not pervasive, to the financial statements or
2.1.2 (b) The auditor is unable to obtain sufficient appropriate audit evidence on
which to base the opinion, but the auditor concludes that the possible
effects on the financial statements of undetected misstatements, if any,
could be material but not pervasive.
2.2 Adverse Opinion
2.2.1 The auditor shall express an adverse opinion when the auditor, having obtained
sufficient appropriate audit evidence, concludes that misstatements,
individually or in the aggregate, are both material and pervasive to the financial
statements.
2.3 Disclaimer of an opinion
2.3.1 The auditor shall disclaim an opinion when the auditor is unable to obtain
sufficient appropriate audit evidence on which to base the opinion, and the
auditor concludes that the possible effects on the financial statements of
undetected misstatements, if any, could be both material and pervasive.
2.3.2 The auditor shall disclaim an opinion when, in extremely rare circumstances
involving multiple uncertainties.
2.4 Basis for opinion
When the auditor modifies the opinion on the financial statements, the auditor
shall,
in addition to the specific elements required by SA 700 (Revised):
(a) Amend the heading “Basis for Opinion” required by para of SA 700
(Revised) to “Basis for Qualified Opinion,” “Basis for Adverse Opinion,” or
“Basis for Disclaimer of Opinion,” as appropriate; and

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(b) Within this section, include a description of the matter giving rise to the
modification
3 SA 706- Emphasis of Matter and other matter
3.1 Emphasis of Matter Para
If the auditor considers it necessary to draw users’ attention to a matter
presented or disclosed in the financial statements that, in the auditor’s judgment,
is of such importance that it is fundamental to users’ understanding
of the financial statements, the auditor shall include an Emphasis of Matter
paragraph in the auditor’s report provided:
3.1.1 The auditor would not be required to modify the opinion in accordance with
SA 705 as a result of the matter and
3.1.2 When SA 701 applies, the matter has not been determined to be a key audit
matter to be communicated in the auditor’s report
3.1.3 Drafting EOM Para
When the auditor includes an Emphasis of Matter paragraph in the auditor’s
report, the auditor shall:
 Include the paragraph within a separate section of the auditor’s report
with an appropriate heading that includes the term “Emphasis of Matter
 Include in the paragraph a clear reference to the matter being emphasized
and to where relevant disclosures that fully describe the matter can be
found in the financial statements. The paragraph shall refer only to
information presented or disclosed in the financial statements
 Indicate that the auditor’s opinion is not modified in respect of the matter
emphasized
3.2 Other Matter
If the auditor considers it necessary to communicate a matter other than those
that are presented or disclosed in the financial statements that, in the
auditor’s judgment, is relevant to users’ understanding of the audit, the auditor’s
responsibilities or the auditor’s report, the auditor shall include an Other Matter
paragraph in the auditor’s report, provided:
3.2.1 This is not prohibited by law or regulation
3.2.2 When SA 701 applies, the matter has not been determined to be a key audit
matter to be communicated in the auditor’s report

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3.2.3 Drafting OM Para

When the auditor includes an Other Matter paragraph in the auditor’s report, the
auditor shall include the paragraph within a separate section with the heading
“Other Matter,” or other appropriate heading
3.3 Emphasis of Matter and Other Matter Paragraph can be substituted by Key
Audit Matters.
4 Key Audit Matters
4.1 Those matters that, in the auditor’s professional judgment, were of most
significance in the audit of the financial statements of the current period. Key
audit matters are selected from matters communicated with those charged with
governance.
4.2 The auditor shall describe each key audit matter, using an appropriate
subheading, in a separate section of the auditor’s report under the heading “Key
Audit Matters”.
The introductory language in this section of the auditor’s report shall state
that:
(a) Key audit matters are those matters that, in the auditor’s professional
judgment, were of most significance in the audit of the financial statements
[of the current period]; and
(b) These matters were addressed in the context of the audit of the financial
statements as a whole, and in forming the auditor’s opinion thereon, and
the auditor does not provide a separate opinion on these matters.
4.3 If the auditor determines, depending on the facts and circumstances of the entity
and the audit, that there are no key audit matters to communicate or that the key
audit matters have been addressed by other paragraphs, the
auditor shall include a statement to this effect in a separate section of the
auditor’s report under the heading “Key Audit Matters”.
4.4 Communicating key audit matters in the auditor’s report is in the context
of the auditor having formed an opinion on the financial
statements as a whole. Communicating key audit matters in the auditor’s
report is not:
4.4.1 A substitute for disclosures in the financial statements that the applicable
financial reporting framework requires management to make, or that are
otherwise necessary to achieve fair presentation

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4.4.2 A substitute for the auditor expressing a modified opinion when required by the
circumstances of a specific audit engagement in accordance with SA 705
(Revised)
4.4.3 A substitute for reporting in accordance with SA 570 (Revised) when a material
uncertainty exists relating to events or conditions that may cast significant doubt
on an entity’s ability to continue as a going concern
4.4.4 A separate opinion on individual matters
4.5 Factors to be considered for determining key audit matters:
4.5.1 Areas of higher assessed risk of material misstatement, or significant risks
identified in accordance with SA 315 (For examples Refer SA 315)
4.5.2 Significant auditor judgments relating to areas in the financial statements that
involved significant management judgment, including accounting estimates
that have been identified as having high estimation uncertainty.
4.5.3 The effect on the audit of significant events or transactions that occurred
during the period.
5 SA 710
5.1 Corresponding figures
Corresponding figures – Comparative information where amounts and other
disclosures for the prior period are included as an integral part of the current
period financial statements, and are intended to be read only in relation to the
amounts and other disclosures relating to the current period (referred to as
“current period figures”). The level of detail presented in the corresponding
amounts and disclosures is dictated primarily by its relevance to the current
period figures.
5.2 Audit Procedures
5.2.1 The auditor shall determine whether the financial statements include the
comparative information required by the applicable financial reporting
framework and whether such information is appropriately classified. For this
purpose, the auditor shall evaluate whether:
(a) The comparative information agrees with the amounts and other disclosures
presented in the prior period; and
(b) The accounting policies reflected in the comparative information are
consistent with those applied in the current period

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5.2.2 If the auditor becomes aware of a possible material misstatement in the

comparative information while performing the current period audit, the auditor
shall perform such additional audit procedures as are necessary in the
circumstances to obtain sufficient appropriate audit evidence to determine
whether a material misstatement exists
5.2.3 If the auditor had audited the prior period’s financial statements, the auditor
shall also follow the relevant requirements of SA 560
5.2.4 As required by SA 580, the auditor shall request written representations for all
periods referred to in the auditor’s opinion. The auditor shall also obtain a
specific written representation regarding any prior period item that is
separately disclosed in the current year’s statement of profit and loss.
5.3 Reporting Considerations
When corresponding figures are presented, the auditor’s opinion shall not
refer to the corresponding figures except in the circumstances described
below:
5.3.1 If the auditor’s report on the prior period, as previously issued, included a
qualified opinion, a disclaimer of opinion, or an adverse opinion and the matter
which gave rise to the modification is unresolved, the auditor shall modify the
auditor’s opinion on the current period’s financial statements. In the Basis for
Modification paragraph in the auditor’s report, the auditor shall either:
(a) Refer to both the current period’s figures and the corresponding figures
in the description of the matter giving rise to the modification when the
effects or possible effects of the matter on the current period’s figures are
material; or
(b) In other cases, explain that the audit opinion has been modified because
of the effects or possible effects of the unresolved matter on the
comparability of the current period’s figures and the corresponding
figures
5.3.2 If the auditor obtains audit evidence that a material misstatement exists in the
prior period financial statements on which an unmodified opinion has been
previously issued, the auditor shall verify whether the misstatement has been
dealt with as required under the applicable financial reporting framework and, if
that is not the case, the auditor shall express a qualified opinion or an adverse
opinion in the auditor’s report on the current period financial statements

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5.3.3 If the financial statements of the prior period were audited by a predecessor
auditor and the auditor is permitted by law or regulation to refer to the
predecessor auditor’s report on the corresponding figures and decides to do so,
the auditor shall state in an Other Matter paragraph in the auditor’s report:
(a) That the financial statements of the prior period were audited by the
predecessor auditor;
(b) The type of opinion expressed by the predecessor auditor and, if the
opinion was modified, the reasons therefore; and
(c) The date of that report.
5.3.4 If the prior period financial statements were not audited, the auditor shall state
in an Other Matter paragraph in the auditor’s report that the corresponding
figures are unaudited. Such a statement does not, however, relieve the auditor of
the requirement to obtain sufficient appropriate audit evidence that the opening
balances do not contain misstatements that materially affect the current
period’s financial statements.

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12
AUDIT OF
BANKS

Sr. No Particulars JKSC Topic Reference

1 Basics Introduction and Topic 1

2 Form and Content of Financial Statements Topic 4.4

3 Audit of accounts Topic 4

4 Auditor’s Report Topic 4.5.5

5 Advances and its Audit Topic 6

6 Audit of Income & Expenses Topic 8 & 9

7 Bank Audit Approach Topic 4


Introduction
Bank Audit- Why separate topic on bank audit?
1 Banks have certain characteristics distinguishing them from most other
commercial enterprises.

2 Auditor needs to give some special considerations to audit of banks because:

2.1 the particular nature of risks associated with the transactions undertaken

2.2 the scale of banking operations and the resultant significant exposures which can
arise within short period of time

2.3 the extensive dependence on IT to process transactions

2.4 the effect of the statutory and regulatory requirements

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2.5 the continuing development of new products and services and banking practices
which may not be matched by the concurrent development of accounting
principles and auditing practices

Sr. No Particulars
1 Types of Banks
1.1 Commercial Banks:
Commercial banks are the most wide spread banking institutions in India, that
provide a number of products and services to general public and other segments
of economy. Two of its main functions are (1) accepting deposits and (2) granting
advances.
1.2 Regional Rural Banks (RRBs):
Regional Rural Banks(RRBs) are Indian Scheduled Commercial Banks
(Government Banks) operating at regional level in different States of India. They
have been created with a view of serving primarily the rural areas of India with
basic banking and financial services.
E.g Andhra Pragathi Grameena Bank.
1.3 Co-operative Banks
Cooperative bank is an institution established on the cooperative basis and
dealing in ordinary banking business. Like other banks, the cooperative banks
are founded by collecting funds through shares, accept deposits and grant loans.
E.g The Gujarat State Co-operative Bank Ltd
1.4 Development Banks (Term Lending Institutions)
 These banks are specialised financial institutions which perform the twin
functions of providing medium and long-term finance to private
entrepreneurs and of performing various promotional roles conducive
to economic development.
 The development banks for the industry are the Industrial Development
Bank of India (IDBI), the Industrial Finance Corporation of India (IFCI), the
Industrial Credit and Investment Corporation of India (ICICI), and the
Industrial Reconstruction Corporation of India (IRCI) for large industries
and the National Small Industries Development Bank of India (SIDBI) for
small- scale industries.
 For agriculture, it is the National Bank for Agriculture and Rural
Development (NABARD).

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1.5 Payment Banks:

 Payments banks is a new model of banks conceptualised by the Reserve
Bank of India (RBI). These banks can accept a restricted deposit
 Bharti Airtel set up India's first live payments bank
 The main objective of a payments bank is to enhance financial inclusion.
This is expected to be done by providing small savings accounts, payments
and remittance services to migrant labour workforce, low income
households, small businesses, other unorganised sector entities and other
users.
1.6 Small finance banks
 Small finance banks are a type of niche banks in India.
 The aim behind these to provide financial inclusion to sections of the
economy not being served by other banks, such as small business units,
small and marginal farmers, micro and small industries and unorganised
sector entities.
 E.g UJJIVAN SMALL FINANCE BANK
2 Regulatory Framework
2.1 Banking Regulation Act, 1959
2.2 State Bank of India Act, 1955
2.3 Companies Act, 2013
2.4 State Bank of India (Subsidiary Banks) Act, 1959
2.5 Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970
2.6 Regional Rural Banks Act, 1976
2.7 Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980
2.8 Information Technology Act, 2000
2.9 Prevention of Money Laundering Act, 2002
2.10 Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act,2002
2.11 Credit Information Companies (Regulation) Act, 2005
2.12 Payment and Settlement Systems Act, 2007
2.13 Reserve Bank of India Act, 1934

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3 Accounting System of Banks

3.1 Banks may be divided into three board categorises based on the level of
computerisation:
 Non-computerised banks.
 Partially Computerised banks.
 Fully computerised banks.
3.2 In the Computerised environment, it is imperative that the auditor is familiar with,
and is satisfied that, all the norms/parameters as per the latest applicable RBI
guidelines are incorporated and built into the system that generates information
having a effect on the classification/ provisions and income recognition.
3.3 A bank should have appropriate controls to manage its risks, including effective
segregation of duties
3.4 The auditor should not go by the assumption that the system generated
information is correct and can be relied upon without evidence that demonstrates
that the system driven information is based on validation of the required
parameters for the time being in force and applicable
4 Bank Audit
4.1 A bank should have appropriate controls to manage its risks, including:
 Effective segregation of duties (particularly, between front and back
offices),
 Accurate measurement and reporting of positions, verification and
 Approval of transactions,
 Reconciliation of positions and results,
 Setting of limits,
 Reporting and approval of exceptions,
 Physical security and contingency planning.
4.2 Auditor should consider bank’s unique features and draw an audit plan
accordingly.
4.3 Engagement Team Discussions
 The engagement team should hold discussions to gain better
understanding of the bank and its environment, including internal control,
and also to assess the potential for material misstatements of the financial
statements.
 All these discussions should be appropriately documented for future
reference. The discussion provides an opportunity for more experienced
team members to share their insights based on their knowledge of the

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bank and its environment.

 The engagement team discussion ordinarily includes a discussion of the
following matters:
4.3.1 Errors that may be more likely to occur
4.3.2 Errors which have been identified in prior years
4.3.3 Method by which fraud might be perpetrated by bank personnel or others
within particular account balances and/or disclosures
4.3.4 Audit responses to Engagement Risk, Pervasive Risks, and Specific Risks
4.3.5 Need to maintain professional skepticism throughout the audit engagement
4.3.6 Need to alert for information or other conditions that indicates that a material
misstatement may have occurred (e.g., the bank’s application of accounting
policies in the given facts and circumstances)
4.4 Form and Content of Financial Statements
4.4.1 Sub-sections (1) and (2) of section 29 of the Act deal with the form and content
of financial statements of a banking company and their authentication.
4.4.2 These subsections are also applicable to nationalised banks, State Bank of
India, subsidiaries of the State Bank of India, and Regional Rural Banks.
4.4.3  Every banking company is required to prepare a Balance Sheet and a Profit
and Loss Account in the forms set out in the Third Schedule to the Act or as
near thereto as the circumstances admit
 Form A of the Third Schedule to the Banking Regulation Act, 1949,
contains the form of Balance Sheet and Form B contains the form of Profit
and Loss Account.
4.4.4 Every banking company needs to comply with the disclosure requirements under
the various Accounting Standards, as specified under section 133 of the
Companies Act, 2013, read with Rule 7 of the Companies (Accounts) Rules 2014,
in so far as they apply to banking companies or the Accounting Standards issued
by the ICAI
4.5 Bank Audit provisions
4.5.1 Eligibility and Qualification
Refer Section 141 of the Companies Act, 2013 discussed in the “Chapter-10 The
Company Audit”.

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4.5.2 Appointment
Auditor of Appointed By
Nationalised Bank Board of Directors (prior approval of RBI)

State Bank of India Comptroller and Auditor General of India (in

consultation with Central Government)
Subsidiaries of SBI Board of Directors of SBI
Regional Rural Bank Board of Directors (prior approval of
Central Government)
Any other Case Shareholders in General Meeting (prior approval of
RBI)
4.5.3 Remuneration
 Nationalised Bank and SBI- Remuneration is fixed by RBI in consultation
with Central Government
 Apart from the above specific provisions, in other cases Remuneration
is governed by Sec 142 of Companies Act, 2013.
4.5.4 Powers of Auditor
 As per Companies Act, 2013
4.5.5 Bank Audit Report
 In the case of a nationalised bank, the auditor is required to make a
report to the Central Government in which he has to state the following:
(a) whether, in his opinion, the balance sheet is a full and fair balance
sheet containing all the necessary particulars and is properly drawn
up so as to exhibit a true and fair view of the affairs of the bank, and
in case he had called for any explanation or information, whether it
has been given and whether it is satisfactory;
(b) whether or not the transactions of the bank, which have come to his
notice, have been within the powers of that bank;
(c) whether or not the returns received from the offices and branches
of the bank have been found adequate for the purpose of his audit;
(d) whether the profit and loss account shows a true balance of profit
or loss for the period covered by such account
(e) any other matter which he considers should be brought to the
notice of the Central Government.

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 The report of auditors of State Bank of India is also to be made to the

Central Government and is almost identical to the auditor’s report in the
case of a nationalised bank.
 Format of the report
(a) It should comply with Standards on Auditing as issued by THE ICAI.
(b) Information related to number of unaudited branches should be
given
(c) Quantification of advances, deposits, interest income and interest
expense for such unaudited branches has also been disclosed in the
audit report.
(d) Banking company is also required to state in his report in respect of
matters covered by Section 143 of the Companies Act, 2013.
(e) CARO 2016 is not applicable to Banks.
 Long Form Audit Report
(a) RBI requires require the auditors to also furnish a long form audit
report (LFAR).
(b) The matters which the banks require their auditors to deal with in
the long form audit report have been specified by the Reserve Bank
of India.
(c) The LFAR is to be submitted before 30th June every year.
 Reporting to RBI
(a) The RBI issued a Circular relating to implementation of
recommendations of Committee on Legal Aspects of Bank Frauds
applicable to all scheduled commercial banks (excluding Regional
Rural Banks).
(a) Regarding liability of accounting and auditing profession, the said
circular provided as under:
“If an accounting professional, whether in the course of internal or
external audit or in the process of institutional audit finds anything
susceptible to be fraud or fraudulent activity or act of excess power
or smell any foul play in any transaction, he should refer the matter
to the regulator. Any deliberate failure on the part of the auditor
should render himself liable for action”.
(b) As per the above requirement, the member shall be required to
report the kind of matters stated in the circular to RBI.

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4.6 Initial Considerations by statutory auditor

4.6.1 Declaration of Indebtedness: The RBI has advised that the banks, before
appointing their statutory central/circle/branch auditors, should obtain a
declaration of indebtedness
4.6.2 Internal Assignments in Banks by Statutory Auditors: The RBI decided that
the audit fi rms should not undertake statutory audit assignment while they
are associated with internal assignments in the bank during the same year.
4.6.3 Planning: Standard on Auditing (SA) 300, “Planning an Audit of Financial
Statements” requires that the auditor shall undertake the following activities
prior to starting an initial audit: (REFER SA 300- Preliminary Engagement
Activities)
4.6.4 Communication with Previous Auditor: As per Clause (8) of the Part I of the
First Schedule to the Chartered Accountants Act, 1949, a chartered accountant in
practice cannot accept position as auditor previously held by
another chartered accountant without fi rst communicating with him in writing.
4.6.5 Terms of Audit Engagements: SA 210, “Terms of Audit Engagements” requires
that for each period to be audited, the auditor should agree on the terms of the
audit engagement with the bank before beginning significant portions of
fieldwork. It is imperative that the terms of the engagement are documented, in
order to prevent any confusion as to the terms that have been agreed in relation to
the audit and the respective responsibilities of the management and the auditor,
at the beginning of an audit relationship.
4.6.6 Initial Engagements: The auditor needs to perform the audit procedures as
mentioned in SA 510 “Initial Audit Engagements-Opening Balances” and if after
performing that procedures, the auditor concludes that the opening balances
contain misstatements which materially affect the financial statements for the
current period and the effect of the same is not properly accounted for and
adequately disclosed, the auditor should express a qualified opinion or an adverse
opinion, as appropriate.
4.6.7 Assessment of Engagement Risk: The assessment of engagement risk is a
critical part of the audit process and should be done prior to the acceptance of an
audit engagement since it affects the decision of accepting the engagement and
also in planning decisions if the audit is accepted.

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4.6.8 Understanding the Bank and its Environment: SA 315 “Identifying and
Assessing the Risks of Material Misstatement Through Understanding the Entity
and Its Environment” lays down that the auditor should obtain an understanding
of the entity and its environment, including its internal control, sufficient to
identify and assess the risks of material misstatement of the financial statements
whether due to fraud or error, and sufficient to design and perform further audit
procedures.
4.7 Understanding the risk management process of the bank
Management develops controls and uses performance indicators to aid in
managing key business and financial risks. An effective risk management system
in a bank generally requires the following:
4.7.1 Oversight and involvement in the control process by those charged with
governance:
Those charged with governance (BOD/Chief Executive Officer) should approve
written risk management policies. The policies should be consistent with the
bank’s business objectives and strategies, capital strength, management expertise,
regulatory requirements and the types and amounts of risk it regards as
acceptable
4.7.2 Identification, measurement and monitoring of risks:
Risks that could significantly impact the achievement of bank’s goals should be
identified, measured and monitored against pre-approved limits and criteria
4.7.3 Control activities: A bank should have appropriate controls to manage its risks,
including effective segregation of duties (particularly, between front and back
offices), accurate measurement and reporting of positions, verification and
approval of transactions, reconciliation of positions and results, setting of limits,
reporting and approval of exceptions, physical security and contingency planning.
4.7.4 Monitoring activities: Risk management models, methodologies and
assumptions used to measure and manage risk should be regularly assessed and
updated. This function may be conducted by the independent risk management
unit.
4.7.5 Reliable information systems: Banks require reliable information systems that
provide adequate financial, operational and compliance information on a timely
and consistent basis. Those charged with governance and management require
risk management information that is easily understood and that enables them to
assess the changing nature of the bank’s risk profile.

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4.8 Review of other reports

The auditor should take into account the adverse comments, if any, on
advances appearing in the following:
4.8.1 Previous audit reports
4.8.2 Latest internal inspection reports of bank officials
4.8.3 Reserve Bank’s latest inspection report.
4.8.4 Concurrent / Internal audit report
4.8.5 Report on verification of security
4.8.6 Any other internal reports specially related to particular accounts
4.8.7 Manager’s charge-handing-over report when incumbent is changed.
4.8.8 Annual Financial Inspection report of RBI relating to the bank
4.9 Other aspects to be considered
4.9.1 Determine audit materiality as per SA 320
4.9.2 Responses to the assessed Risks as per SA 330
4.9.3 Consider Going Concern as per SA 570
4.9.4 Assess the risk of fraud including money laundering as per SA 240
5 Advances
5.1 Advances Comprises of
5.1.1 Term loans
5.1.2 Cash credits, Overdrafts, Demand Loans
5.1.3 Bills Discounted and Purchased
5.1.4 Adverse balances in Deposit Accounts
5.1.5 Participation on Risk Sharing basis
5.1.6 Interest bearing Staff Loans
5.2 Legal Requirements of disclosure of advances in bank’s balance sheet
5.2.1 (i) Bills purchased and discounted
(ii) Cash credits, Overdrafts and loans repayable on demand
(iii) Term Loans
5.2.2 (i) Secured by tangible assets
(ii) Covered by Bank/Government guarantees
(iii) Unsecured

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5.2.3 (I) Advances in India:

(i) Priority sectors
(ii) Public sector
(iii) Banks
(iv) Others
5.2.4 II. Advances outside India:
(i) Due from Banks
(ii) Due from Others:
(a) Bills Purchased and discounted
(b) Syndicated loans and
(c) Others
5.3 Classification of advances
5.3.1 Standard
Standard asset for a bank is an asset that is not classified as an NPA. The
asset exhibits no problem in the normal course other than the usual business risk
Standard asset for a bank is an asset that is not classified as an NPA. The asset
exhibits no problem in the normal course other than the usual business risk.

5.3.2 Non Performing Asset

REFER 5.8
5.4 Nature of Security against advances
5.4.1 Primary:
Primary security refers to the security offered by the borrower for bank fi nance
or the one against which credit has been extended by the bank. This security is
the principal security for an advance.
5.4.2 Collateral:
Collateral security is an additional security. Security can be in any form i.e. tangible
or intangible asset, movable or immovable asset.
5.4.3 Examples of most common types of securities accepted by banks are the
following.
 Personal Security of Guarantor
 Goods/Stocks/Debtors /Trade Receivables
 Gold Ornaments and Bullion
 Immovable Property

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5.5 Mode of Creation of Security

Depending on the nature of the item concerned, creation of security may take the
form of a mortgage, pledge, hypothecation, assignment, set-off, or lien.
5.5.1 Mortgage: Mortgage are of several kinds but the most important are the
Registered Mortgage and the Equitable Mortgage.
 A Registered Mortgage can be affected by a registered instrument called
the ‘Mortgage Deed’ signed by the mortgagor. It registers the property to
the mortgagee as a security.
 Equitable mortgage, on the other hand, is effected by a mere delivery of
title deeds or other documents of title with intent to create security
thereof.
5.5.2 Pledge: A pledge thus involves bailment or delivery of goods by the borrower to
the lending bank with the intention of creating a charge thereon as security for the
advance. The legal ownership of the goods remains with the pledger while the
lending banker gets certain defined interests in the goods. The pledge of goods
constitutes a specific (or fixed) charge.
5.5.3 Hypothecation:
 The hypothecation is the creation of an equitable charge (i.e., a charge
created not by an express enactment but by equity and reason), which is
created in favour of the lending bank by execution of hypothecation
agreement in respect of the moveable securities belonging to the borrower.
 Neither ownership nor possession is transferred to the bank. However, the
borrower holds the physical possession of the goods as an agent/trustee of
the bank.
5.5.4 Assignment:
 Assignment represents a transfer of an existing or future debt, right or
property belonging to a person in favour of another person. Book debts
and life insurance policies are accepted by banks as security by way of
assignment.
 An assignment gives the assignee absolute right over the moneys/debts
assigned to him.

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5.5.5 Set-off:
 Set-off is a statutory right of a creditor to adjust, wholly or partly, the debit
balance in the debtor’s account against any credit balance lying in another
account of the debtor.
 The right of set-off enables a bank to combine two accounts (a deposit
account and a loan account) of the same person provided both the
accounts are in the same name and in the same right.
5.5.6 Lien:
Lien is creation of a legal charge with consent of the owner, which gives lender a
legal right to seize and dispose / liquidate the asset under lien.
5.6 Criteria for classifying asset as Non-Performing Asset
5.6.1 Interest and/ or instalment of principal remain overdue for a period of more than
90 days in respect of a term loan
5.6.2 the account remains ‘out of order’ as given below, in respect of an Overdraft/Cash
Credit (OD/CC).
 An account should be treated as 'out of order' if the outstanding balance
remains continuously in excess of the sanctioned limit/drawing power for
90 days.
 In cases where the outstanding balance in the principal operating account
is less than the sanctioned limit/drawing power, but there are no credits
continuously for 90 days as on the date of Balance Sheet or credits are not
enough to cover the interest debited during the same period, these
accounts should be treated as 'out of order'.
5.6.3 Agricultural advances
 the instalment of principal or interest thereon remains overdue for two
crop seasons for short duration crops
 the instalment of principal or interest thereon remains overdue for one
crop season for long duration crops,

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5.6.4 Credit Card Accounts

(i) In credit card accounts, the amount spent is billed to the card users
through a monthly statement with a definite due date for repayment.
Banks give an option to the card users to pay either the full amount or a
fraction of it, i.e., minimum amount due, on the due date and roll-over the
balance amount to the subsequent months’ billing cycle.
(ii) A credit card account will be treated as non-performing asset if the
minimum amount due, as mentioned in the statement, is not paid fully
within 90 days from the next statement date. The gap between two
statements should not be more than a month.
5.6.5 Erosion in the value of security
Accounts where there is erosion in the value of security / frauds committed by
borrowers:
Not prudent to follow stages of asset classification. It should be straight-away
classified as doubtful or loss asset as appropriate.
 Erosion in the value of security can be reckoned as significant when the
realisable value of the security is less than 50 per cent of the value
assessed by the bank or accepted by RBI at the time of last inspection, as
the case may be. Such NPAs may be straight-away classified under doubtful
category and provisioning should be made as applicable to doubtful assets.
 If the realisable value of the security, as assessed by the bank/ approved
valuers/ RBI is less than 10 per cent of the outstanding in the borrowal
accounts, the existence of security should be ignored and the asset should
be straight-away classified as loss asset. It may be either written off or fully
provided for by the bank.
5.6.6 Advances against term deposits
Interest on advances against Term Deposits, National Savings Certificates (NSCs),
Indira Vikas Patras (IVPs), Kisan Vikas Patras (KVPs) and Life policies may be
taken to income account on the due date, provided adequate margin is available in
the accounts

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5.7 Central Government Guaranteed advances

 Loan is guaranteed by CENTRAL GOVERNMENT (here there is no need to
create NPA provision on the amount of asset however, income accrued but
not realised must be reversed).
 State Government guaranteed advances and investments in State
Government guaranteed securities would attract asset classification and
provisioning norms if interest and/or principal or any other amount due
to the bank remains overdue for more than 90 days

5.8 Provisioning

Asset Classification % Provision

a substandard asset would be one,  provision of 15 percent on total

which has remained NPA for a period outstanding
less than or equal to 12 months  ‘unsecured exposures’ which are
identified as ‘substandard’ would
attract additional provision of 10
per cent, i.e., a total of 25 per cent
on the outstanding balance

an asset would be classified as Doubtful upto one year = 25%

doubtful if it has remained in the Doubtful from One to three years=
substandard category for a period of 40%
12 months Doubtful more than 3 years= 100%

A loss asset is one where loss has 100 percent of the extent to which
been identified by the bank or the advance is not covered by the
internal or external auditors or the realisable value of the security to
RBI inspection but the amount has which the bank has a valid recourse
not been written off wholly. In other and the realisable value is estimated
words, such an asset is considered on a realistic basis.
uncollectible and of such little value
that its continuance as a bankable
asset is not warranted although there
may be some salvage or
recovery value.

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5.9 Reversal Of Income

5.9.1  If any advance, including bills purchased and discounted, becomes NPA,
the entire interest accrued and credited to income account in the past
periods, should be reversed if the same is not realised. This will apply
to Government guaranteed accounts also
5.9.2  In respect of NPAs, fees, commission and similar income that have accrued
should cease to accrue in the current period and should be reversed with
respect to past periods, if uncollected
5.10 Calculation of Drawing power
5.10.1 All accounts should be kept within both the drawing power and the sanctioned
limit at all times. The accounts which exceed the sanctioned limit or drawing
power or are against unapproved securities or are otherwise irregular should
be brought to the notice of the Management/Head Office regularly.
5.10.2 Banks should ensure that drawings in the working capital account are covered by
the adequacy of the current assets. Drawing power is required to be arrived at
based on current stock statement. However, considering the difficulties of large
borrowers, stock statements relied upon by the banks for determining drawing
power should not be older than three months. The outstanding in the account
based on drawing power calculated from stock statements older than three
months is deemed as irregular.
5.10.3 The stock statements, quarterly returns and other statements submitted by the
borrower to the bank should be scrutinised in detail.
5.10.4 The stock audit should be carried out by the bank for all accounts having funded
exposure of more than ` 5 crores. Auditors can also advise for stock audit in other
cases if the situation warrants the same.
6 Audit of Advances
6.1 Check classification of advances and its disclosure (The Third Schedule to the Act
requires classification of advances made by a bank from three different angles,
viz., nature of advance, nature and extent of security, and place of making
advance (i.e. whether in India or outside India).
6.2 Examine internal control- policy of the bank, sanctioning authority, system of
verifying credibility of the borrower, system of recording advances etc.
6.3 Examine loan documentation- purpose of the loan, sanction letter, security and
collaterals taken from the borrower

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6.4 Recoverability of advances and income recognition

6.5 Provisioning and NPA norms whether applied properly or not (as discussed
earlier).
6.6 Whether security is adequate and legally enforceable or not.
7 Evaluation of Internal Control over advances
The auditor should examine the efficacy of various internal controls over
advances to determine the nature, timing and extent of his substantive
procedures. In general, the internal controls over advances should include,
inter alia, the following:
7.1 The bank should make an advance only after satisfying itself as to the credit
worthiness of the borrower and after obtaining sanction from the appropriate
authorities of the bank.
7.2 All the necessary documents (e.g., agreements, demand promissory notes, letters
of hypothecation, etc.) should be executed by the parties before advances are
made.
7.3 The compliance with the terms of sanction and end use of funds should be
ensured.
7.4 Sufficient margin as specified in the sanction letter should be kept against
securities taken so as to cover for any decline in the value thereof. The availability
of sufficient margin needs to be ensured at regular intervals.
7.5 All securities requiring registration should be registered in the name of the bank
or otherwise accompanied by documents sufficient to give title to the bank.
7.6 All the accounts which exceed the sanctioned limit or drawing power or are
otherwise irregular should be brought to the notice of the controlling authority
regularly
8 Audit of Revenue items
8.1 RBI has advised that in respect of any income which exceeds one percent of the
total income of the bank if the income is reckoned on a gross basis or one
percent of the net profit before taxes if the income is reckoned net of costs,
should be considered on accrual as per AS-9.
8.2 If any item of income is not considered to be material as per the above norms, it
may be recognised when received and the auditors need not qualify the
statements in that situation.

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8.3 Banks recognise income (such as interest, fees and commission) on accrual basis,
i.e., as it is earned. It is an essential condition for accrual of income that it should
not be unreasonable to expect its ultimate collection. In modern day banking, the
entries for interest income on advances are automatically generated through a
batch process in the CBS system
8.4 In view of the significant uncertainty regarding ultimate collection of income
arising in respect of non-performing assets, the guidelines require that banks
should not recognize income on non-performing assets until it is actually
realised.
8.5 When a credit facility is classified as non-performing for the first time, interest
accrued and credited to the income account in the corresponding previous year
which has not been realized should be reversed or provided for. This will
apply to Government guaranteed accounts also.
8.6 Interest on advances against Term Deposits, National Savings Certificates (NSCs),
Indira Vikas Patras (IVPs), Kisan Vikas Patras (KVPs) and Life policies may be
taken to income account on the due date, provided adequate margin is available
in the accounts.
8.7 Fees and commissions earned by the banks as a result of re-negotiations or
rescheduling of outstanding debts should be recognised on an accrual basis over
the period of time covered by the re-negotiated or rescheduled extension of
credit. Test checks the Interest earned by the banks for sample items.
9 Audit of Expenses
Expenditure is to be shown under three broad heads
(1) Interest expended;
(2) Operating expenses; and
(3) Provisions and contingencies.
9.1 In carrying out an audit of Interest expended, the auditor is primarily concerned
with assessing the overall reasonableness of the amount of interest expense by
analysing ratios of interest paid on different types of deposits and borrowings
to the average quantum of the respective liabilities during the year
9.2 In modern day banking, the entries for interest expended are automatically
generated through a batch process in the CBS system.
9.3 The auditor should, on a test check basis, verify the calculation of interest and
satisfy himself that:

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9.3.1 Interest has been provided on all deposits upto the date of the balance sheet; and
verify whether there is any excess or short credit of material amount.
9.3.2 Interest rates are in accordance with the bank’s internal regulations, of the RBI
directives, and agreements with the respective depositors
9.3.3 In case of Fixed Deposits it should be examined whether the Interest Rate in the
accounting system are in accordance with the Interest Rate mentioned in the
Fixed Deposit Receipt/Certificate
9.3.4 Interest on Savings Account should be checked on a test check basis in
accordance with the rules framed by the bank in this behalf.
9.3.5 Interest on overdue/ matured term deposits should be estimated and provided
for



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13 Audit of
Different Types
of Entities

Sr. No ICAI MODULE REFERENCE JKSC TOPIC REFERENCE

1 Government Audit Topic 1
2 Local Bodies Topic 2
3 Audit of NGO Topic 8
4 Audit of Sole trader General audit checklist
5 Audit of Firm General audit checklist
6 Basics of LLP audit Topic 10
7 Audit of Charitable institution Audit of NGO
8 Audit of Educational Institution Topic 3
9 Audit of Hospital Topic 4
10 Audit of Club Topic 7
11 Audit of Cinema Topic 5
12 Audit of Hire Purchase and Leasing Companies Topic 11
13 Audit of Hotels Topic 6
14 Audit of Co-operative Society Topic 9

Sr. No Particulars
1 Government Audit
1.1 Framework:
 Government audit serves as a mechanism or process for public
accounting of government funds. It also provides public accounting of
the operational, management, programme and policy aspects of public
administration as well as accountability of the officials administering
them

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 Audit observations based on factual data collection also serve to

highlight the lapses of the lower hierarchy, thus helping supervisory
level officers to take corrective measures.
 It aims to ensure accountability of the executive in respect of public
revenue and expenditure. Primarily, the Parliament and in case of
States, the State legislatures control all government expenditure
through insistence upon demand for grants.
 In India, the function of Government Audit is discharged by the
independent statutory authority of the Comptroller and Auditor
General through the agency of the Indian Audit and Accounts
Department
 He Comptroller and Auditor General (C&AG), in the discharge of his
functions, watches that the various authorities act in regard to
financial matters in accordance with the Constitution and the laws
made by Parliament, and conform to the rules or orders made
thereunder.
1.2 Consitutional Safegaurds to CAG
 The Constitution of India contains specific provisions regarding the
appointment, salary and duties and powers of the C&AG.
 The constitution guarantees the independence of the C&AG of India by
prescribing that he shall be appointed by the President of India and
shall not be removed from office except on the ground of proven mis-
behaviour or incapacity
 He can be removed only when each House of Parliament decides to do
so by a majority of not less than 2/3rd of the members of the House
present and voting
 The Constitution further provides that the conditions of service of
person serving in the Indian Audit and Accounts Department and the
administrative powers of the C&AG shall be determined by the
President after consultation with him.
 The Comptroller & Auditor General’s (Duties, Powers and Conditions
of Service) Act, 1971 passed in pursuance of the provisions of the
Constitution lays down a fixed tenure of the office prescribing that he
shall be paid a salary which is equal to the salary of the Judge of the
Supreme Court thereby further strengthening his independence.

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1.3 Powers of CAG as per Companies Act, 2013

Sec 143 (5) In the case of a Government company, the Comptroller and
Auditor-General of India shall
 Appoint the auditor under section 139 and direct such auditor the
manner in which the accounts of the Government company are
required to be audited and thereupon the auditor so appointed shall
submit a copy of the audit report to the Comptroller and Auditor-
General of India which, among other things, include the directions, if
any, issued by the Comptroller and Auditor-General of India, the action
taken thereon and its impact on the accounts and financial statement
of the company.
Sec 143 (6) The Comptroller and Auditor-General of India shall within
sixty days from the date
of receipt of the audit report under sub-section (5) have a right to,—
(a) conduct a supplementary audit of the financial statement of the
company by such person or persons as he may authorise in this behalf;
and for the purposes of such audit, require information or additional
information to be furnished to any person or persons, so authorised,
on such matters, by such person or persons, and in such form, as the
Comptroller and Auditor-General of India may direct; and
(b) comment upon or supplement such audit report:
Provided that any comments given by the Comptroller and Auditor-
General of India upon, or supplement to, the audit report shall be sent
by the company to every person entitled to copies of audited financial
statements under sub section (1) of section 136 and also be placed
before the annual general meeting of the company at the same time
and in the same manner as the audit report.
Sec 143 (7) Without prejudice to the provisions of this Chapter, the
Comptroller and Auditor-
General of India may, in case of any company covered under section 139, if
he considers necessary, by an order, cause test audit to be conducted of the
accounts of such company and the provisions of section 19A of the
Comptroller and Auditor-General’s (Duties, Powers and Conditions of
Service) Act, 1971, shall apply to the report of such test audit.

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1.4 Propriety audit

 Propriety audit stands for verification of transactions on the tests of
public interest, commonly accepted customs and standards of conduct
 Principles governing propriety audit:
(a) that the expenditure is not prima facie more than the occasion
demands and that every official exercises the same degree of
vigilance in respect of expenditure as a person of ordinary
prudence would exercise in respect of his own money;
(b) that the authority exercises its power of sanctioning
expenditure to pass an order which will not directly or
indirectly accrue to its own advantage;
(c) that funds are not utilised for the benefit of a particular person
or group of persons and
(d) that, apart from the agreed remuneration or reward, no other
avenue is kept open to indirectly benefit the management
personnel, employees and others.
1.5 Performance Audit
 A performance audit is an objective and systematic examination of
evidence for the purpose of providing an independent assessment of
the performance of a government organization, program, activity, or
function
 Economy- It is minimising the cost of resources used for an activity,
 the auditor so appointed shall submit a copy of the audit report to the
Comptroller and Auditor-General of India which, among other things,
include the directions, if any, issued by the Comptroller and Auditor-
General of India, the action taken thereon and its impact on the
accounts and financial statement of the company.
Sec 143 (6) The Comptroller and Auditor-General of India shall within
sixty days from the date
of receipt of the audit report under sub-section (5) have a right to,—
(a) Conduct a supplementary audit of the financial statement of the
company by such person or persons as he may authorise in this
behalf; and for the purposes of such audit, require information or
additional information to be furnished to any person or persons, so
authorised, on such matters, by such person or persons, and in such
form, as the Comptroller and Auditor-General of India may direct; and
(b) Comment upon or supplement such audit report:
Provided that any comments given by the Comptroller and Auditor-

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General of India upon, or supplement to, the audit report shall be sent
by the company to every person entitled to copies of audited financial
statements under sub section (1) of section 136 and also be placed
before the annual general meeting of the company at the same time
and in the same manner as the audit report.

Sec 143 (7) Without prejudice to the provisions of this Chapter, the
Comptroller and Auditor-
General of India may, in case of any company covered under section 139, if
he considers necessary, by an order, cause test audit to be conducted of the
accounts of such company and the provisions of section 19A of the
Comptroller and Auditor-General’s (Duties, Powers and Conditions of
Service) Act, 1971, shall apply to the report of such test audit.

1.4 Propriety audit

 Propriety audit stands for verification of transactions on the tests of
public interest, commonly accepted customs and standards of conduct
 Principles governing propriety audit:
(a) That the expenditure is not prima facie more than the occasion
demands and that every official exercises the same degree of
vigilance in respect of expenditure as a person of ordinary
prudence would exercise in respect of his own money;
(b) That the authority exercises its power of sanctioning
expenditure to pass an order which will not directly or
indirectly accrue to its own advantage;
(c) That funds are not utilised for the benefit of a particular person
or group of persons and
(d) That, apart from the agreed remuneration or reward, no other
avenue is kept open to indirectly benefit the management
personnel, employees and others.
1.5 Performance Audit
 A performance audit is an objective and systematic examination of
evidence for the purpose of providing an independent assessment of
the performance of a government organization, program, activity, or
function

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Economy- It is minimising the cost of resources used for an activity,

having regard to appropriate quantity, quality and at the best price
 Efficiency- It is the input-output ratio. In the case of public spending,
efficiency is achieved when the output is maximised at the minimum
of inputs, or input is minimised for any given quantity and quality of
output.
 Effectiveness- It is the extent to which objectives are achieved and
the relationship between the intended impact and the actual impact of
an activity
1.6 Audit of Stores and Stocks
 Audit of the accounts of stores and inventories has been developed as
a part of expenditure audit with reference to the duties and
responsibilities entrusted to C&AG
 Audit is conducted to ascertain whether the Regulations governing
purchase, receipt and issue, custody, sale and inventory taking of
stores are well de vised and properly carried out.
 The aim is also to bring to the notice of the government any
deficiencies in quantities of stores held or any defects in the system of
control
 The auditor has to ensure that the prices paid are reasonable and are
in agreement with those shown in the contract for the supply of stores
 The certificates of quality and quantity are furnished by the inspecting
and receiving units
 Cases of uneconomical purchase of stores and losses attributable to
defective or inferior quality of stores are specifically brought by the
audit
2 Audit of local bodies
2.1  Property taxes and octroi are the major sources of revenue of the
municipal authorities;other municipal taxes are profession tax, non-
mechanised vehicles tax, taxes on advertisements, taxes on animals
and boats, tolls, show-tax, etc. Local bodies may receive diff erent
types of grants from the state administration as well. Broadly, the
revenue grants are of three categories:
2.1.1 (a) General purpose grants: These are primarily intended to
substantially bridge the gap between the needs and resources of the
local bodies

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2.1.2 (b) Specific purpose grants: These grants which are tied to the provision
of certain services or performance of certain tasks.
2.1.3 (c) Statutory and compensatory grants: These grants, under various
enactments, are given to local bodies as compensation on account of
loss of any revenue on taking over a tax by state government from
local government
2.2 Expenditure incurred by the municipalities and corporations can be broadly
classified under the following heads:
(a) general administration and revenue collection,
(b) public health,
(c) public safety,
(d) education,
(e) public works, and
(f) others such as interest payments, etc.
2.2.1 The auditor while auditing the local bodies should report on the fairness of
the contents and presentation of financial statements, the strengths and
weaknesses of system of financial control, the adherence to legal and/or
administrative requirements; whether value is being fully received on money
spent. His objective should be to detect errors and fraud and misuse of
resources

2.2.2 The auditor should ensure that the expenditure incurred conforms to the
relevant provisions of the law and is in accordance with the financial rules and
regulations framed by the competent authority

2.2.3 He should ensure that all types of sanctions, either special or general,
accorded by the competent authority

2.2.4 He should ensure that there is a provision of funds and the expenditure is
incurred from the provision and the same has been authorized by the
competent authority

2.2.5 The auditor should check that the different schemes, programmes and
projects, where large financial expenditure has been incurred, are running

economically and getting the expected results

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3 Audit of Educational Institution

3.1 Examine the Trust Deed or Regulations, in the case of school or college and
note all the provisions affecting accounts. In the case of a university, refer to
the Act of Legislature and the Regulation framed thereunder.
3.2 Read through the minutes of the meetings of the Managing Committee or
Governing Body, noting resolutions affecting accounts to see that these have
been duly complied with, specially the decisions as regards the operation of
bank accounts and sanctioning of expenditure.
3.3 Check names entered in the Students Fee Register for each month or term,
with the respective Class Registers, showing names of students on rolls and
test amount of fees charged; and verify that there operates a system of
internal check which ensures that demands against the students are properly
raised.
3.4 Check fees received by comparing counterfoils of receipts granted with
entries in the Cash Book and tracing the collections in the Fee Register to
confirm that the revenue from this source has been duly accounted for.
3.5 Total up the various columns of the Fees Register for each month or term to
ascertain that fees paid in advance have been carried forward and that the
arrears that are irrecoverable have been written off under the sanction of an
appropriate authority.
3.6 Check admission fees with admission slips signed by the head of the
institution and confirm that the amount has been credited to a Capital fund,
unless the Managing Committee has taken a decision to the contrary.
3.7 See that free studentship and concessions have been granted by a person
authorised to do so, having regard to the Rules prepared by the Managing
Committee.
3.8 Confirm that fines for late payment or absence, etc. have been either collected
or remitted under proper authority.
3.9 Confirm that hostel dues were recovered before student’s accounts were
closed and their deposits of caution money refunded.
3.10 Verify rental income from landed property with the rent rolls, etc.
3.11 Vouch income from endowments and legacies, as well as interest and
dividends from investment; also inspect the securities in respect of
investments held.

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3.12 Verify any Government or local authority grant with the memo of grant. If any
expense has been disallowed for purposes of grant, ascertain the reasons
thereof
3.13 Report any old heavy arrears on account of fees, dormitory rents, etc. to the
Managing Committee.
3.14 Confirm that caution money and other deposits paid by students on
admission, have been shown as liability in the balance sheet not transferred
to revenue, unless they are not refundable.
3.15 Vouch donations, if any with the list published with the annual report. If some
donations were meant for any specific purpose, see that the money was
utilised for the purpose.
3.16 Vouch, all capital expenditure in the usual way and verify the same with the
sanction for the Committee as contained in the minute book.
3.17 Verify the inventories of furniture, stationery, clothing, provision and all
equipment etc. These should be checked by reference to Inventory Register
or corresponding inventories of the previous year and values applied to
various items should be test checked.
4 Audit of Hospital
4.1 Register of Patients: Vouch the Register of patients with copies of bills issued
to them. Verify bills for a selected period with the patients’ attendance record
to see that the bills have been correctly prepared. Also see that bills have
been issued to all patients from whom an amount was recoverable according
to the rules of the hospital
4.2 Collection of Cash: Check cash collections as entered in the Cash Book with
the receipts, counterfoils and other evidence for example, copies of patients
bills, counterfoils of dividend and other interest warrants, copies of rent
bills, etc.
4.3 Income from Investments, Rent etc: See by reference to the property and
Investment Register that all income that should have been received by way of
rent on properties, dividends, and interest on securities have been collected.
4.4 Legacies and Donations: Ascertain that legacies and donations received for
a specific purpose have been applied in the manner agreed upon.
4.5 Reconciliation of Subscriptions: Trace all collections of subscription and
donations from the Cash Book to the respective Registers. Reconcile the total
subscriptions due (as shown by the Subscription Register and the amount
collected and that still outstanding).

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4.6 Authorisation and Sanctions: Vouch all purchases and expenses and verify
that the capital expenditure was incurred only with the prior sanction of the
Trustees or the Managing Committee and that appointments and increments
to staff have been duly authorised.
4.7 Grants and TDS: Verify that grants, if any, received from Government or
local authority has been duly accounted for. Also, that refund in respect of
taxes deducted at source has been claimed.
4.8 Budgets: Compare the totals of various items of expenditure and income
with the amount budgeted for them and report to the Trustees or the
Managing Committee, signifi cant variations which have taken place.
4.9 Internal Check: Examine the internal check as regards the receipt and issue
of stores; medicines, linen, apparatus, clothing, instruments, etc. so as to
insure that purchases have been properly recorded in the Inventory Register
and that issues have been made only against proper authorisation.
4.10 Depreciation: See that depreciation has been written off against all the
assets at the appropriate rates.
4.11 Registers: Inspect the bonds, share scrips, title deeds of propert ies and
compare their particulars with those entered in the property and Investment
Registers
4.12 Inventories: Obtain inventories, especially of stocks and stores as at the end
of the year and check a percentage of the items physic ally; also compare their
total values with respective ledger balances.
4.13 Management Representation and Certificate: Get proper Management
Representation and Certificate with respect to various aspects covered
during the course of audit
5 Audit of Cinema Hall
5.1 Verify the internal control mechanism
(a) that entrance to the cinema-hall during show is only through printed
tickets;
(b) that they are serially numbered and bound into books;
(c) that the number of tickets issued for each show and class, are different
though the numbers of the same class for the show on the same day,
each week, run serially;
(d) that for advance booking a separate series of tickets is issued; and
(e) that the inventory of tickets is kept in the custody of a responsible
official.

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5.2 Confirm that at the end of show, a statement of tickets sold is prepared and
cash collected is agreed with it.

5.3 Verify that a record is kept of the ‘free passes’ and that these are issued under
proper authority

5.4 Reconcile the amount of Entertainment Tax collected with the total number
of tickets issued for each class and vouch and verify the entertainment tax
returns fi led each month.

5.5 Vouch the entries in the Cash Book in respect of cash collected on sale of
tickets for different shows on a reference to Daily Statements which have
been test checked as aforementioned with record of tickets issued for the
different shows held.

5.6 Verify the charges collected for advertisement slides and shorts by reference
to the Register of Slides and Shorts Exhibited kept at the cinema as well with
the agreements, entered into with advertisers in this regard.

5.7 Vouch the expenditure incurred on advertisement, rep airs and maintenance.
No part of such expenditure should be capitalized.

5.8 Confirm that depreciation on machinery and furniture has been charged at an
appropriate rate.

5.9 Vouch payments on account of fi lm hire with bills of distributors and in the
process, the agreements concerned should be referred to.
5.10 Examine unadjusted balance out of advance paid to the distributors against fi
lm hire contracts to see that they are good and recoverable. If any fi lm in
respect of which an advance was paid has already run, it should be enquired
as to why the advance has not been adjusted. The management should be
asked to make a provision in respect of advances that are considered
irrecoverable.
5.11 The arrangement for collection of the share in the restaurant income should
be enquired into either a fixed sum or a fixed percentage of the taking may be
receivable annually. In case the restaurant is run by the Cinema, its accounts
should be checked. The audit should cover sale of various items of foods tuffs,
purchase of foodstuffs, cold drink, etc. as in the case of club

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6 Audit of Hotel
6.1 Internal Controls - Pilfering is one of the greatest problems in any hotel and
the importance of internal control cannot be undermined. It is the
responsibility of management to introduce controls which will minimise
the leakage as far as possible.
6.2 The auditor should obtain these regular trading accounts for the period
under review, examine them and obtain explanations for any apparent
deviations.
6.3 Room Sales - The charge for room sales is normally posted to guest bills by
the receptionist/ front office or in the case of large hotels by the night
auditor. The source of these entries is invariably the guest register and audit
tests should be carried out to ensure that the correct numbers of guests are
charged for the correct period. Any difference between the charged rates
used on the guests’ bills and the standard room rate should be investigated to
ensure that they have been properly authorised.
6.4 Inventories - The inventories in any hotel are both readily portable and
saleable particularly the food and beverage inventories. It is therefore
extremely important that all movements and transfers of such inventories
should be properly documented to enable control to be exercised over each
individual stores areas and sales point. The auditor should carry out tests to
ensure that all such documentation is accurately processed.
6.5 Fixed Assets - The accounting policies for fixed assets of individual hotels are
likely to diff er. However, many hotels account for certain quasi-fixed assets
such as silver and cutlery on inventory basis. This can lead to confusion
between each inventory items and similar assets which are accounted for on
a more normal fixed assets basis. In such cases, it is important that very
detailed definitions of inventory items exist and the auditor should carry out
tests to ensure that the definitions have been closely followed.

6.6 Casual Labour - The hotel trade operates to very large extent on casual
labour. The records maintained of such wage payments are frequently
inadequate. The auditor should ensure that defalcation on this account does
not take place by suggesting proper controls to the management.
6.7 For ledgers coming through travel agents or other booking agencies the bills
are usually made on the travel agents or booking agencies. The auditor should
ensure that money are recovered from the travel agents or booking agencies
as per the terms of credit allowed

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6.8 Commission, if any, paid to travel agents or booking agents should be

checked by reference to the agreement on that behalf.
6.9 The auditor should verify a few restaurant bills by reference to K.O.T.s
(Kitchen Order Tickets) or basic record. This would enable the auditor to
ensure that controls regarding revenue cycle are in order
6.10 The auditor should ensure that proper valuation of occupancy-in-progress at
the balance sheet date is made and included in the accounts
6.11 The auditor should satisfy himself that all taxes collected from occupants on
food and occupation have been paid over to the proper authorities.
6.12 The auditor should ensure that proper records re-maintained for booking of
halls and other premises for special parties and recovered on the basis of the
tariff
7 Audit of Club
7.1 Vouch the receipt on account of entrance fees with members’ applications,
counterfoils issued to them, as well as on a reference to minutes of the
Managing Committee.
7.2 Vouch members’ subscriptions with the counterfoils of receipt issued to
them, trace receipts for a selected period to the Register of Members; also
reconcile the amount of total subscriptions due with the amount collected
and that outstanding.
7.3 Ensure that arrears of subscriptions for the previous year have been correctly
brought over and arrears for the year under audit and subscriptions received
in advance have been correctly adjusted.
7.4 Check totals of various columns of the Register of members and tally them
across
7.5 See the Register of Members to ascertain the Member’s dues which are in
arrear and enquire whether necessary steps have been taken for their
recovery; the amount considered irrecoverable should be mentioned in the
Audit Report.
7.6 Verify the internal check as regards members being charged with the price of
foodstuff s and drinks provided to them and their guests, as well as, with the
fees chargeable for the special services rendered, such as billiards, tennis, etc.

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7.7 Trace debits for a selected period from subsidiary registers maintained in
respect of supplies and services to members to confirm that the account of
every member has been debited with amounts recoverable from him.
7.8 Vouch purchase of sports items, furniture, crockery, etc. and trace their
entries into the respective inventory registers.
7.9 Vouch purchases of foodstuffs, cigars, wines, etc., and test their sale price so
as to confi rm that the normal rates of gross profit have been earned on their
sales. The inventory of unsold provisions and stores, at the end of year,
should be verified physically and its valuation checked.
7.10 Check the inventory of furniture, sports material and other assets physically
with the respective inventory registers or inventories prepared at the end of
the year.
7.11 Inspect the share scrips and bonds in respect of investments, check their
current values for disclosure in final accounts; also ascertain that the
arrangements for their safe custody are satisfactory.
7.12 Examine the financial powers of the secretary and, if these have been
exceeded, report specific case for confirmation by the Managing Committee
8 Audit of NGO
8.1 Regulatory Framework:
 The auditors of an NGO registered under the Societies Registration
Act, 1860 (or under any law corresponding to this Act, in force in any
part of India) or the Indian Trusts Act 1882 are normally appointed by
the Management of the Society or Trust.
 The auditors of NGO registered under section 8 of the Companies Act,
2013 are appointed by the members of the company.
 Some of the statues such as the Companies Act, 2013, Foreign
Contribution (Regulation) Act 1976, Income Tax Act 1961 required
that the accounts of the NGO be audited and submitted to the
prescribed authorities and failure to do so could lead to forfeiture
of certain exemptions and benefits

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8.2 While planning the audit, the auditor may concentrate on the following:
(i) Knowledge of the NGO’s work, its mission and vision, areas of
operations and environment in which it operate.
(ii) Updating knowledge of relevant statutes especially with regard to
recent amendments, circulars, judicial decisions viz. Foreign
Contribution (Regulation) Act 1976, Societies Registration Act, 1860,
Income Tax Act 1961 etc. and the Rules related to the statutes.
(iii) Reviewing the legal form of the Organisation and its Memorandum of
Association, Articles of Association, Rules and Regulations.
(iv) Study the accounting system, procedures, internal controls and
internal checks existing for the NGO and verify their applicability
8.3 Corpus Fund: The contributions / grants received towards corpus be
vouched with special reference to the letters from the donor(s). The interest
income be checked with Investment Register and Physical Investments in
hand.
8.4 Reserves: Vouch transfers from projects / programmes with donors letters
and board resolutions of NGO. Also check transfer of gross value of asset sold
from capital reserve to general reserve and adjustments during the year.
8.5 Ear-marked Funds: Check requirements of donors institutions, board
resolution of NGO, rules and regulations of the schemes of the ear-marked
funds.
8.6 Project / Agency Balances: Vouch disbursements and expenditure as per
agreements with donors for each of the balances.
8.7 Programme and Project Expenses: Verify agreement with
donor/contributor(s) supporting the particular programme or project to
ascertain the conditions with respect to undertaking the programme/project
and accordingly, in the case of programmes/projects involving contracts,
ensure that income tax is deducted, deposited and returns fi led and verify
the terms of the contract
8.8 Membership Fees: Check fees received with Membership Register. Ensure
proper classification is made between entrance and annual fees and life
membership fees. Reconcile fees received with fees to be received during
the year

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8.9 Subscriptions: Check with subscription register and receipts issued.

Reconcile subscription received with printing and dispatch of corresponding
magazine / circulars / periodicals. Check the receipts with subscription rate
schedule.
8.10 Interest and Dividends: Check the interest and dividends received and
receivable with investments held during the year.
9 Audit of Co-operative Society
9.1 Who can be appointed?
Apart from a chartered accountant within the meaning of the Chartered
Accountants Act, 1949, some of the State Co-operative Acts have permitted
persons holding a government diploma in co-operative accounts or in co-
operation and accountancy and also a person who has served as an auditor
in the co-operative department of a government to act as an auditor
9.2 Who appoints auditor?
An auditor of a co-operative society is appointed by the Registrar of Co-
operative Societies and the auditor so appointed conducts the audit on behalf
of the Registrar and submits his report to him as also to the society. The audit
fees are paid by the society on the basis of statutory scale of fees
prescribed by the Registrar, according to the category of the society audited.
9.3 Books of accounts of co-operative society
Under section 43(h) of the Central Act, a state government can frame rules
prescribing the books and accounts to be kept by a co-operative society.

9.4 Restriction on share-holdings

According to section 5 of the Central Act, in the case of a society where the
liability of a member of the society is limited, no member of a society other
than a registered society can hold such portion of the share capital of the
society as would exceed a maximum of twenty percent of the total number of
shares or of the value of shareholding to ` 1,000/-. The auditor of a co-
operative society will be concerned with this provision so as to watch any
breach relating to holding of shares. One should also watch whether any
provision in the bye-laws of the society is not contrary to this statutory
position. The State Acts may provide limits as to the shareholding, other
than that provided in the Central Act.

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9.5 Restriction on loans

Section 29 of the Central Act puts restriction on loan. It states that a
registered society shall not make a loan to any person other than a member.
However, with the special sanction of the Registrar, a registered society may
make a loan to another registered society
9.6 Restriction on borrowings
Section 30 of the Central Act further puts restriction on borrowings.
According to this section, a registered society shall accept loans and deposits
from persons who are not members subject to the restrictions and limits of
the bye- laws of the society. The auditor will have to examine the bye-laws in
this respect.
9.7 Investment of funds
According to section 32 of the Central Act, a society may invest its funds in
any one or more of the following:
(a) In the Central or State Co-operative Bank
(b) In any of the securities specified in section 20 of the Indian Trusts
Act, 1882.
(c) In the shares, securities, bonds or debentures of any other society
with limited liability.
(d) In any co-operative bank, other than a Central or State co-operative
bank, as approved by the Registrar on specified terms and conditions.
(e) In any other moneys permitted by the Central or State Government.
9.8 Reserve fund
According to section 33 of the Central Act, a prescribed percentage of the
profits should be transferred to Reserve Fund, before distribution as
dividends or bonus to members.
9.9 Contribution to charitable purposes
According to section 34, a registered society may, with the sanction of the
Registrar, contribute an amount not exceeding 10% of the net profits
remaining after the compulsory transfer to the reserve fund for any
charitable purpose as defined in section 2 of the Charitable Endowments
Act, 1890.
9.10 Special features of Co-operative Society audit
(a) Examination of overdue debts - Overdue debts for a period from 6
months to 5 years and more than 5 years will have to be classified
and shall have to be reported by an auditor. The auditor will have to
ascertain whether proper provisions for doubtful debts are made and
whether the same is satisfactory.

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(b) Overdue Interest - Overdue interest should be excluded from

interest outstanding and accrued due while calculating profit.
Overdue interest is interest accrued or accruing in accounts, the
amount of which the principal is overdue. In practice an overdue
interest reserve is created and the credit of overdue interest credited
to interest account is reduced.
(c) Certification of Bad Debts - A peculiar feature regarding the writing
off of the bad debts as per Maharashtra State Co-operative Rules,
1961, is very interesting to note. As per the said rules, bad debts can
be written off only when they are certified as bad by the auditor
(d) Valuation of Assets and Liabilities - Regarding valuation of assets
there are no specific provisions or instructions under the Act and
Rules and as such due regard shall be had to the general principles of
accounting and auditing conventions and standards adopted.
(e) Adherence to Co-operative Principles - The auditor will have to
ascertain in general, how far the objects, for which the co-operative
organisation is set up, have been achieved in the course of its
working
(f) Observations of the Provisions of the Act and Rules - An auditor
of a co-operative society is required to point out the infringement
with the provisions of Co-operative Societies Act and Rules and bye-
laws.
(g) Verification of Members’ Register and examination of their pass
books
(h) Examination of entries in members pass books regarding the loan
given and its repayments, and confirmation of loan balances in
person is very much important in a co-operative organisation to
assure that the entries in the books of accounts are free from
manipulation
(i) Special report to the Registrar - During the course of audit, if the
auditor notices that there are some serious irregularities in the
working of the society he may report these special matters to the
Registrar.
In the following cases, for instance, a special report may become
necessary:

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(a) Personal profiteering by members of managing committee in

transactions of the society, which are ultimately detrimental
to the interest of the society.
(b) Detection of fraud relating to expenses, purchases, property
and stores of the society.
(c) Specific examples of mis-management. Decisions of
management against cooperative principles.
(j) Audit classification of society - After a judgement of an overall
performance of the society, the auditor has to award a class to the
society.
This judgement is to be based on the criteria specified by the
Registrar
(k) Discussion of draft audit report with managing committee - On
conclusion of the audit, the auditor should ask the Secretary of the
society to convene the managing committee meeting to discuss the
audit draft report.
9.11 Audit report
 The form of the audit report to be submitted by the auditor, as prescribed
in various states, contains a number of matters which the auditor has to
state or comment upon
 In addition to the above, the auditor will have to attach schedules to
the report regarding the following information:
(a) All transactions which appear to be contrary to the provisions
of the Act, the rules and bye-laws of the society
(b) All sums, which ought to have been, but have not been
brought into account by the society.
(c) Any material, or property belonging to society which appears
to the auditor to be bad or doubtful of recovery
(d) Any material irregularity or impropriety in expenditure or in
the realisation or monies due to society.
(e) Any other matters specified by the Registrar in this behalf.
9.12 Audit of Multi-State Co-operative Societies
The Multi-State Co-operative Societies Act, 2002, which came into force in
August, 2002 applies to co-operative societies whose objects are not
confined to one State. The Act contains detailed provisions regarding
registration, membership and management of such societies

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9.12.1 Qualification of auditor

Section 72 of the Multi-State Co-operative Societies Act, 2002 states that a
person who is a Chartered Accountant within the meaning of the Chartered
Accountants Act, 1949 can only be appointed as auditor of Multi-State co-
operative society.
9.12.2 Disqualification of auditor
However the following persons are not eligible for appointment as auditors
of a MultiState co-operative society
(a) A body corporate
(b) An officer or employee of the Multi-State co-operative society
(c) A person who is a member or who is in the employment, of an officer
or employee of the Multi-State co-operative society.
(d) A person who is indebted to the Multi-State co-operative society or
who has given any guarantee or provided any security in connection
with the indebtedness of any third person to the Multi-State co-
operative society for an amount exceeding one thousand rupees.
If an auditor becomes subject, after his appointment, to any, of the
disqualifications specified above, he shall be deemed to have vacated
his office as such.
9.12.3 Appointment
 Section 70 of the Multi-State Co-operative Societies Act, 2002
provides that the first auditor or auditors of a Multi-State co-
operative society shall be appointed by the board within one month
of the date of registration of such society and the auditor or auditors
so appointed shall hold office until the conclusion of the first annual
general meeting
 If the board fails to exercise its powers under this sub-section, the
Multi- State co-operative society in the general meeting may appoint
the first auditor or auditors.
 The subsequent auditor or auditors are appointed by Multi-State co-
operative society, at each annual general meeting.
 The auditor or auditors so appointed shall hold office from the
conclusion of that meeting until the conclusion of the next annual
general meeting.

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9.12.4 Rights and Duties

 Section 73 of the Multi-State Co-operative Societies Act, 2002
discusses the powers and duties of auditors. According to this, every
auditor of a Multi-State co-operative society shall have a right of
access at all times to the books accounts and vouchers of the Multi-
State co-operative society
 As per section 73(2), the auditor shall make following inquiries:
(a) Whether loans and advances made by the Multi-State co-
operative society on the basis of security have been properly
secured and whether the terms on which they have been
made are not prejudicial to the interests of the Multi-State
cooperative society or its members,
(b) Whether transactions of the Multi-State co-operative society
which are represented merely by book entries are not
prejudicial to the interests of the Multi-State co-operative
society
(c) Whether personal expenses have been charged to revenue
account
(d) Where it is Stated in the books and papers of the Multi-State
co- operative society that any shares have been allotted for
cash, whether cash has actually, been received in respect of
such allotment, and if no cash has actually been so received,
whether the position as stated in the account books and the
balance sheet as correct regular and not misleading.
9.12.5 Power of Central Government to direct special audit
 Under section 77 of the Multi-State Co-operative Societies Act, 2002,
where the Central Government is of the opinion:
(a) that the affairs of any Multi-State co-operative society are not
being managed in accordance with self-help and mutual deed
and co- operative principles or prudent commercial practices
or with sound business principles
(b) that any Multi-State co-operative society is being managed in
a manner likely to cause serious injury or damage to the
interests of the trade industry or business to which it pertains
(c) that the financial position of any Multi-State co-operative
society is such as to endanger its solvency

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(d) The Central Government may at any time by order direct that
a special audit of the Multi-State co-operative society’s
accounts for such period or periods as may be specified in the
order, shall be conducted and appoint either a chartered
accountant or the Multi-State co-operative society’s auditor
himself to conduct the special audit.
 However, Central Government shall order for special audit only if
that Government or the State Government either by itself or both
hold fifty-one percent or more of the paid-up share capital in such
Multi-State co- operative society.
9.12.6 Inquiry by Central Registrar
 The Central Registrar may, on a request from a
(a) federal co-operative to which a Multi-State Co-operative
society is affiliated or
(b) a creditor or
(c) not less than one-third of the members of the board or
(d) not less than one-fifth of the total number of members of a
Multi-state co-operative society, hold an inquiry or direct
some person authorized by him by order in writing in his
behalf to hold an inquiry into the constitutions, working and
financial condition of a Multi-State Co- operative society
 The Central Registrar shall authorized a person to conduct such
inquiry.
 The Central Registrar shall, within a period of three months of the
date of receipt of the report, communicate the report of inquiry to the
Multi-State co-operative society, the financial institutions, if any, to
which the society is affiliated, and to the person or authority, if any at
whose instance the inquiry is needed.
10 Audit of LLP
10.1 Requirement of Audit:
 The accounts of every LLP shall be audited in accordance with Rule
24 of LLP, Rules 2009.
 Such rules, inter-alia, provides that any LLP, whose turnover does not
exceed, in any financial year, forty lakh rupees, or whose
contribution does not exceed twenty five lakh rupees, is not required
to get its accounts audited

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 However, if the partners of such limited liability partnership decide

to get the accounts of such LLP audited, the accounts shall be audited
only in accordance with such rule.
Regulatory filings:
10.2
 An LLP shall be under obligation to maintain annual accounts
reflecting true and fair view of its state of aff airs. A “Statement of
Accounts and Solvency” in prescribed form shall be fi led by every
LLP with the Registrar every year
 Every LLP would be required to fi le annual return in Form 11 with
ROC within 60 days of closer of financial year. The annual return will
be available for public inspection on payment of prescribed fees to
Registrar.
 Every LLP is also required to submit Statement of Account and
Solvency in Form 8 which shall be fi led within a period of thirty days
from the end of six months the financial year to which the Statement
of Account and Solvency relates
Appointment of Auditor: The auditor may be appointed by the
10.3 designated partners of the LLP –
(1) At any time for the first financial year but before the end of first
financial year,
(2) At least thirty days prior to the end of each financial year(other than
the first financial year),
(3) To fill the causal vacancy in the office of auditor,
(4) To fill the casual vacancy caused by removal of auditor.
The partners may appoint the auditors if the designated partners
have failed to appoint them.
Audit of Hire purchase and leasing Companies
11
Hire purchase agreement is in writing and is signed by all parties.
11.1
Hire purchase agreement specifies clearly-
11.2
(a) The hire-purchase price of the goods to which the agreement relates;
(b) The cash price of the goods, that is to say, the price at which the
goods may be purchased by the hirer for cash;
(c) The date on which the agreement shall be deemed to have
commenced;

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(d) The number of instalments by which the hire- purchase price is to be

paid, the amount of each of those instalments, and the date, or the
mode of determining the date, upon which it is payable, and the
person to whom and the place where it is payable; and
(e) The goods to which the agreement relates, in a manner sufficient to
identify them
Ensure that instalment payments are being received regularly as per the
11.3 agreement
In respect of leasing transaction entered into by the leasing company,
11.4 the following procedures may be adopted by the auditor:
The object clause of leasing company to see that the goods like capital goods,
11.4.1
consumer durables etc. in respect of which the company can undertake such
activities. Further, to ensure that whether company can undertake financing
activities or not.
Whether there exists a procedure to ascertain the credit analysis of lessee
11.4.2
like lessee’s ability to meet the commitment under lease, past credit
record, capital strength, availability of collateral security, etc

11.4.3 The lease agreement should be examined and the following points may
be noted:
(i) The description of the lessor, the lessee, the equipment and the
location where the equipment is to be installed.

(ii) The amount of tenure of lease, dates of payment, late charges,

deposits or advances etc. should be noted.
(iii) Whether the equipment shall be returned to the lessor on termination
of the agreement and the cost shall be borne by the lessee.
(iv) Whether the agreement prohibits the lessee from assigning the
subletting the equipment and authorises the lessor to do so.



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PRACTICE
QUESTIONS
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BRIEF ANSWERS – PRACTICE

QUESTIONS

CHAPTER 1
NATURE SCOPE AND OBJECTIVES OF AUDITING
(READ WITH CHAPTER 1 CONTENT)
Q. No Question and Answer
1 Explain clearly meaning of Auditing. How would you as an auditor
perform the audit
Ans. Topic 1.1 & 1.2

2 “The independent audit of an entity’s financial statements is a vital

service to investors, trade payables, and other participants in economic
exchange.” Explain
Ans. Topic 6

3 State the objectives of Audit according to SA 200

Ans. Refer SA 200 from Annexure

4 “The Code of Ethics for Professional Accountants, prepared by the

International Federation of Accountants (IFAC) identifies five types of
threats.” Explain
Ans. Topic 8.5

5 Explain Inherent Limitations of Auditing

Ans. Topic 5

6 Explain Scope of audit and Principal Aspects to be covered

Ans. Topic 3

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7 Mention the Contents of letter of Engagement

Ans. Topic 11.2

8 During the course of audit management of X ltd is proposing some

changes in the terms of engagement. What will be your response.
Ans. Topic 11.5

9 Explain the elements of system of quality control

Ans. Topic 9

10 M/s Sureshchandra & Co. has been appointed as an auditor of SC Ltd. for
the financial year 2014-15. CA. Suresh, one of the partners of M/s
Sureshchandra & Co., completed entire routine audit work by 29th May,
2015. Unfortunately, on the very next morning, while roving towards
office of SC Ltd. to sign final audit report, he met with a road accident and
died. CA. Chandra, another partner of M/s Sureshchandra & Co., therefore,
signed the accounts of SC Ltd., without reviewing the work performed by
CA. Suresh State with reasons whether CA. Chandra is right in expressing
an opinion on fi nancial statements the audit of which is performed by
another auditor.

Ans. Relying on Work Performed by Another Auditor: As per SA 220 “Quality Control
for an Audit of Financial Statements”, an engagement partner taking over an
audit during the engagement may apply the review procedures such as
(a) The work has been performed in accordance with professional
standards and regulatory and legal requirements;
(b) Significant matters have been raised for further consideration
(c) There is a need to revise the nature, timing and extent of work
performed; the work performed supports the conclusions reached and is
appropriately documented
(d) The evidence obtained is sufficient and appropriate to support the
auditor’s report; and the objectives of the engagement procedures have
been achieved.

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Further, one of the basic principles, which govern the auditor’s

professional responsibilities and which should be complied with
wherever an audit is carried, is that when the auditor delegates work to
assistants or uses work performed by other auditor and experts, he will
continue to be responsible for forming and expressing his opinion on the
financial information.

However, he will be entitled to rely on work performed by others,

provided he exercises adequate skill and care and is not aware of any
reason to believe that he should not have so relied. This is the
fundamental principle which is ethically required as per Code of Ethics.

However, the auditor should carefully direct, supervise and review work
delegated. He should obtain reasonable assurance that work
performed by other auditors/experts and assistants is adequate
for his purpose.

In the given case, all the auditing procedures before the moment of
signing of final report have been performed by CA. Suresh. However, the
report could not be signed by him due to his unfortunate death. Later on,
CA. Chandra signed the report relying on the work performed by CA.
Suresh. Here, CA. Chandra is allowed to sign the audit report, though, will
be responsible for expressing the opinion. He may rely on the work
performed by CA. Suresh provided he further exercises adequate skill and
due care and review the work performed by him.

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CHAPTER 2
AUDIT STRATEGY, PLANNING AND PROGRAMMING

Q.No Question and Answer

1 “Once the overall audit strategy has been established, an audit plan can
be developed to address the various matters identified in the overall
audit strategy” Explain
Ans. The establishment of the overall audit strategy and the detailed audit plan are
not necessarily discrete or sequential processes, but are closely inter-related
since changes in one may result in consequential changes to the other.
The auditor shall develop an audit plan that shall include a description of
(a) The nature, timing and extent of planned risk assessment procedures, as
determined under SA 315 “Identifying and Assessing the Risks of Material
Misstatement through Understanding the Entity and Its Environment”.
(b) The nature, timing and extent of planned further audit procedures at the
assertion level, as determined under SA 330 “The Auditor’s Responses to
Assessed Risks”.
(c) Other planned audit procedures that are required to be carried out so
thatthe engagement complies with SAs

2 Planning is not a discrete phase of an audit, but rather a continual and

iterative process”. Discuss
Ans. Topic 1.3
Planning is not a discrete phase of an audit, but rather a continual and iterative
process that often begins shortly after (or in connection with) the completion of
the previous audit and continues until the completion of the current audit
engagement.
Planning, however, includes consideration of the timing of certain activities and
audit procedures that need to be completed prior to the performance of further
audit procedures.
For example, planning includes the need to consider matters such as:
(1) The analytical procedures to be applied as risk assessment procedures.
(2) Obtaining a general understanding of the legal and regulatory
framework applicable to the entity and how the entity is complying with
that framework.
(3) The determination of materiality.
(4) The involvement of experts.
(5) The performance of other risk assessment procedures

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3 “The nature, timing and extent of the direction and supervision of

engagement team members and review of their work vary depending on
many factors.” Explain
Ans. Topic 7
Factors affecting DSR:
(1) The size and complexity of the entity.
(2) The area of the audit.
(3) The assessed risks of material misstatement.
(4) The capabilities and competence of the individual team members
performing the audit work

4 “The utility of the audit programme can be retained and enhanced only by
keeping the programme and also the client’s operations and internal
control under periodic review so that inadequacies or redundancies of the
programme may be removed” Discuss stating clearly the advantages of an
audit programme.

Ans. Topic 8.4

The advantages of an audit programme are:
(a) It provides the assistant carrying out the audit with total and clear set of
instructions of the work generally to be done.
(b) It is essential, particularly for major audits, to provide a total perspective
of the work to be performed.
(c) Selection of assistants for the jobs on the basis of capability becomes
easier when the work is rationally planned, defined and segregated.
(d) Without a written and pre-determined programme, work is unorganised.
(e) The assistants, by putting their signature on programme, accept the
responsibility.
(f) The principal can control the progress of the various audits in hand by
(g) Examination of audit programmes initiated by the assistants deputed to
the jobs for completed work.

5 “Determining materiality involves the exercise of professional judgment”.

Discuss stating the factors that may affect the identification of an
appropriate benchmark. Also give examples“Determining materiality
involves the exercise of professional judgment”. Discuss stating the factors
that may affect the identification of an appropriate benchmark. Also give
examples

Ans. Topic 9.5

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CHAPTER 3
AUDIT EVIDENCE AND DOCUMENTATION

Q. No Question and Answer

1 The auditor P of PAR and Co., a firm of Chartered Accountants is

conducting audit of Kapur Industries Ltd. The auditor requests
management to provide Banker’s certificate in support of Fixed deposits
whereas management provides only written representation on the
matter. How Would you deal with this situation?

Ans. Although written representations provide necessary audit evidence, they do

not provide sufficient appropriate audit evidence on their own about any of the
matters with which they deal. Furthermore, the fact that management has
provided reliable written representations does not affect the nature or extent
of other audit evidence that the auditor obtains about the fulfillment of
management’s responsibilities, or about specific assertions.
Applying the above to the given problem, the auditor would further request the
management to provide him with the Banker’s certificate in support of
fixed deposits held by the company.

2 Paramount Exports Ltd is a manufacturer exporter having its own

production capacity and also gets the job work done through various job
workers. The auditor of Paramount Exports Ltd. Considers that inventory
held with job workers is material to the financial statements.
Suggest the audit procedures in the given case

Ans. When inventory under the custody and control of a third party is material to
the financial statements, the auditor shall obtain sufficient appropriate audit
evidence regarding the existence and condition of that inventory by
performing one or both of the following:
(a) Request confirmation from the third party as to the quantities and
condition of inventory held on behalf of the entity.
(b) Perform inspection or other audit procedures appropriate in the
circumstances

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3 Pride India Ltd is a manufacturer of various FMCG (fast moving

consumable goods) range of products. The company is having several
cases of litigation pending in courts. The auditor wanted to identify
litigation and claims resulting to risk of material misstatements.
Suggest the auditor with reference to SAs

Ans. The auditor shall design and perform audit procedures in order to identify
litigation and claims involving the entity which may give rise to a risk of
material misstatement, including:
(a) Inquiry of management and, where applicable, others within the entity,
including in-house legal counsel;
(b) Reviewing minutes of meetings of those charged with governance and
correspondence between the entity and its external legal counsel; and
(c) Reviewing legal expense accounts.
If the auditor assesses a risk of material misstatement regarding
litigation or claims that have been identified, or when audit procedures
performed indicate that other material litigation or claims may exist,
the auditor shall, in addition to the procedures required by other SAs,
seek direct communication with the entity’s external legal counsel

4 While conducting the audit of Jay Kay Ltd, the auditor K of KLM and
Associates, Chartered Accountants observes that there are large number
of Trade payables and receivables standing in the books of accounts as on
31st March. The auditor wanted to send confirmation request to few
trade receivables but the management refused the auditor to send
confirmation request. How would the auditor proceed?
Ans. If management refuses to allow the auditor to send a confirmation request, the
auditor shall:
(a) Inquire as to management’s reasons for the refusal, and seek audit
evidence as to their validity and reasonableness;
(b) Evaluate the implications of management’s refusal on the auditor’s
assessment of the relevant risks of material misstatement, including the
risk of fraud, and on the nature, timing and extent of other audit
procedures; and

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(c) Perform alternative audit procedures designed to obtain relevant and

reliable audit evidence.
If the auditor concludes that management’s refusal to allow the auditor to send
a confirmation request is unreasonable, or the auditor is unable to obtain
relevant and reliable audit evidence from alternative audit procedures. The
auditor also shall determine the implications for the auditor’s opinion in
accordance with SA 705.

5 When we find in the balance sheet, an item under current assets reading as
“cash in hand - 8,000” the obvious assertions that would strike the mind are?

Ans. Chapter 9 – Refer introduction the obvious assertions that would strike the
mind are the following:
(a) The firm concerned had 8,000 in hand in valid notes and coins on the
balance sheet day;
(b) That the cash was free and available for expenditure to the firm; and
(c) That the books of account show a cash balance of identical amount at the
end of the day on which the balance sheet is drawn up

6 Define audit documentation. Also give some examples

Ans. Audit documentation may be recorded on paper or on electronic or other

media
Example:
 Audit programmes.
 Analyses.
 Issues memoranda.
 Summaries of significant matters.
 Letters of confirmation and representation.
 Checklists.
 Correspondence (including e-mail) concerning significant matters. The
auditor may include copies of the entity’s records.

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7 “Audit documentation summary may facilitate effective and efficient reviews

and inspections of the audit documentation, particularly for
large and complex audits”. Explain
Ans. The auditor may consider it helpful to prepare and retain as part of the audit
documentation a summary (sometimes known as a completion memorandum)
that describes-
 The significant matters identified during the audit and
 How they were addressed.
Such a summary may facilitate effective and efficient review and inspection of
the audit documentation, particularly for large and complex audits.

8 “Although written representations provide necessary audit evidence yet they

do not provide sufficient appropriate audit evidence on their
own about any of the matters with which they deal”. Discuss
Ans. Although written representations provide necessary audit evidence, they do
not provide sufficient appropriate audit evidence on their own about any of the
matters with which they deal. Furthermore, the fact that management has
provided reliable written representations does not affect the nature or extent
of other audit evidence that the auditor obtains about the fulfillment of
management’s responsibilities, or about specific assertions.

9 Discuss the objective of Auditor with respect to Opening balances – in

conducting an initial audit engagement
Ans. Initial audit engagement:
An engagement in which either:
(i) The financial statements for the prior period were not audited; or
(ii) The financial statements for the prior period were audited by a
predecessor auditor Objective:
(a) Opening balances contain misstatements that materially affect the
current period’s financial statements; and
(b) Appropriate accounting policies reflected in the opening balances
have been consistently applied in the current period’s financial
statements, or changes thereto are properly accounted for

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10 Define Risk of material misstatement. Explain its components also

Ans. Refer Chapter 4 Topic 1.2

11 “When deviations from controls upon which the auditor intends to rely
are detected, the auditor shall make specific inquiries to understand these
matters and their potential consequences” Explain

Ans. When deviations from controls upon which the auditor intends to rely are
detected, the auditor shall make specific inquiries to understand these matters
and their potential consequences, and shall determine whether:
(a) The test of controls that have been performed provide an appropriate
basis for reliance on the controls;
(b) Additional test of controls are necessary; or
(c) The potential risks of misstatement need to be addressed using
substantive procedures

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CHAPTER 4
RISK ASSESSMENT AND INTERNAL CONTROL

Q.No Question and Answer

1 XYZ Ltd is engaged in the business and running several stores dealing in
variety of items such as ready made garments for all seasons, shoes, gift
items, watches etc.
There are security tags on each and every item. Moreover, inventory
records are physically verified on monthly basis.
Discuss the types of inherent, control and detection risks as perceived by
the auditor.
Ans. Inherent Risk:
Because items may have been misappropriated by employees, therefore, risk to
the auditor is that inventory records would be inaccurate.
Control Risk:
There is a security tag on each item displayed. Moreover, inventory records are
physically verified on monthly basis. Despite various controls being
implemented at the stores, still collusion among employees may be there and
risk to auditor would again be that inventory records would be inaccurate.
Detection Risk:
Auditor checks the efficiency and effectiveness of various control systems in
place. He would do that by making observation, inspection, enquiry, etc.
In addition to these, the auditor would also employ sampling techniques to
check few sales transactions from beginning to end. However, despite all these
procedures, the auditor may not detect the items which have been stolen or
misappropriated

2 The auditor of ABC Textiles Ltd chalks out an audit plan without
understanding the entity’s business. Since he has carried out many audits
of textile companies, there is no need to understand the nature of
business of ABC Ltd. Advise the auditor how he should proceed
Ans. Obtaining an understanding of the entity and its environment, including the
entity’s internal control (referred to hereafter as an “understanding of the
entity”), is a continuous, dynamic process of gathering, updating and analysing
information throughout the audit. The auditor should proceed accordingly
{REFER CHAPTER 2 “understanding the entity”}

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3 Prince Blankets is engaged in business of blankets. Its major portion of

sales is taking place through internet. Advise the auditor how he would
proceed in this regard as to understanding the entity and its environment.

Ans. While understanding entity and its environment, internet sales is being
perceived as risky area by the auditor and thereby would be spending
substantial time and extensive audit procedures on this particular area {REFER
CHAPTER 2 “understanding the entity”}

4 Auditor GR and Associates, appointed for audit of PNG Ltd, a manufacturing

company engaged in manufacturing of various food items. While planning an
audit, the auditor does not think that it would be necessary to understand
internal controls. Advise the auditor in this regard

Ans. The auditor shall obtain an understanding of internal control relevant to the
audit. Although most controls relevant to the audit are likely to relate to
financial reporting, not all controls that relate to financial reporting are relevant
to the audit. It is a matter of the auditor’s professional judgment whether a
control, individually or in combination with others, is relevant to the audit.
{REFER TOPIC 7}

5 “The auditor shall obtain an understanding of the major activities that the
entity uses to monitor internal control over financial reporting” Explain
Ans. (a) Monitoring of controls Defined: Monitoring of controls is a process to
assess the effectiveness of internal control performance over time.
(b) Helps in assessing the effectiveness of controls on a timely basis: It
involves assessing the effectiveness of controls on a timely basis and
taking necessary remedial actions.
(c) Management accomplishes through ongoing activities, separate
evaluations etc.:
(d) Management accomplishes monitoring of controls through ongoing
activities, separate evaluations, or a combination of the two.
(e) Ongoing monitoring activities are often built into the normal recurring
activities of an entity and include regular management and supervisory
activities.

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(f) Management’s monitoring activities include: Management’s monitoring

activities may include using information from communications from
external parties such as customer complaints and regulator comments
that may indicate problems or highlight areas in need of improvement.
(g) (v) In case of Small Entities: Management’s monitoring of control is often
accomplished by management’s or the owner-manager’s close
involvement in operations. This involvement often will identify
significant variances from expectations and inaccuracies in fi nancial data
leading to remedial action to the control.

6 Risk of material misstatement consists of two components” Explain

clearly defining risk of material misstatement

Ans. Refer topic 1.2

7 The SAs do not ordinarily refer to inherent risk and control risk
separately, but rather to a combined assessment of the “risks of material
misstatement”” Explain

Ans. Refer Topic 1.2

8 “The auditor shall obtain an understanding of the control environment”

Explain stating what is included in control environment.

Ans. Topic 8.1

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CHAPTER 5
AUDITOR’S RESPONSIBILITY IN RELATION TO FRAUD

Q.No Question and Answer

1 What do you understand by the term ‘fraud’? Provide its meaning as
given under the Standard on Auditing (SA) 240
Ans. Meaning: “an intentional act by one or more individuals among management,
those charged with governance, employees, or third parties, involving the use of
deception to obtain an unjust or illegal advantage
Two types of intentional misstatements are relevant to the auditor–
(a) Misstatements resulting from fraudulent financial reporting and
(b) Misstatements resulting from misappropriation of assets

2 Briefly explain self-revealing errors with the help of some illustration

Ans. These are such errors the existence of which becomes apparent in the process of
compilation of accounts. A few illustrations of such errors are given hereunder,
showing how they become apparent:
(a) Omission to post a part of a journal entry to the ledger.
(b) Wrong totaling of the Purchase Register
(c) A mistake in recording amount received from X in the account of Y.

3 There are many ways for cash defalcation, one of which is by suppressing
cash receipts. List out few techniques of how the receipts are suppressed
Ans. Few techniques of how receipts are suppressed are:
(a) Teeming and Lading: Amount received from a customer being
misappropriated; also to prevent its detection the money received from
another customer subsequently being credited to the account of the
customer who has paid earlier
(b) Adjusting unauthorised or fictitious rebates, allowances, discounts, etc.
to customer’ accounts and misappropriating amount paid by them
(c) Writing off as debts in respect of such balances against which cash has
already been received but has been misappropriated
(d) (4) Not accounting for cash sales fully

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4 Fraud Risk Factors are the events or conditions that indicate an incentive
or pressure to commit fraud or provide an opportunity to commit fraud.
Further, the nature of the industry or the entity’s operations also provides
opportunities to engage in fraudulent financial reporting. List
out some of the cases from where theses opportunities may arise.
Ans. Opportunities: The nature of the industry or the entity’s operations provides
opportunities to engage in fraudulent financial reporting that can arise from the
following:
(1) Significant related-party transactions not in the ordinary course of
business or with related entities not audited or audited by another fi rm.
(2) A strong financial presence or ability to dominate a certain industry
sector that allows the entity to dictate terms or conditions to suppliers or
customers that may result in inappropriate or non-arm’s-length
transactions.
(3) Assets, liabilities, revenues, or expenses based on signifi cant estimates
that involve subjective judgments or uncertainties that are difficult to
corroborate.
(4) Significant, unusual, or highly complex transactions, especially those
close to period end that pose difficult “substance over form” questions. 5.
Signifi cant bank accounts or subsidiary or branch operations in tax-
haven jurisdictions for which there appears to be no clear business
justification.

5 You notice a misstatement resulting from fraud or suspected fraud during

the audit and conclude that it is not possible to continue the performance
of audit. As a Statutory Auditor, how would you deal?

Ans. If, as a result of a misstatement resulting from fraud or suspected fraud, the
auditor encounters exceptional circumstances that bring into question the
auditor’s ability to continue performing the audit, the auditor shall:
(a) Determine the professional and legal responsibilities applicable in the
circumstances, including whether there is a requirement for the auditor
to report to the person or persons who made the audit appointment or,
in some cases, to regulatory authorities;
(b) Consider whether it is appropriate to withdraw from the engagement,
where withdrawal is possible under applicable law or regulation; and

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(c) If the auditor withdraws:

(i) Discuss with the appropriate level of management and those
charged with governance the auditor’s withdrawal from the
engagement and the reasons for the withdrawal; and
(ii) Determine whether there is a professional or legal requirement to
report to the person or persons who made the audit appointment
or, in some cases, to regulatory authorities, the auditor’s
withdrawal from the engagement and the reasons for the
withdrawal.

6 Fraud can be committed by management overriding controls using such

techniques as engaging in complex transactions that are structured to
misrepresent the financial position or financial performance of the entity.
In view of the above-mentioned circumstances of management fraud,
explain briefly duties and responsibilities of an auditor in case of material
misstatement resulting from such Management Fraud.

Ans. Fraud involving one or more members of management or those charged with
the governance is referred to as “management fraud”. The primary
responsibility for the prevention and detection of fraud rests with those charged
with the governance and the management of the entity.
Owing to the inherent limitations of an audit, there is an unavoidable risk 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.
The risk of the auditor not detecting a material misstatement resulting from
management fraud is greater than for employee fraud, because management is
frequently in a position to directly or indirectly manipulate accounting records
Reporting fraud as per Sec 143(12) of Companies Act, 2013 to the central
government.
Reporting fraud as per Clause X of CARO 2016 in audit report.

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7 Intelligent Ltd. entered into an agreement with Mr. Intellectual on 15th

March, 2017, whereby it agreed to pay him 2 lakhs per month as
retainership fee for consultation in IT department. However, no amount
was actually paid and 24 lakhs was provided in the Statement of Profit
and Loss for the year ending on March 31st, 2017. Management of the
company uttered that need-based consultation was obtained throughout
the year. However, on investigation, no documentary or other evidence of
receipt of such service was found. As the auditor of Innocent Ltd., what
would be your approach? Would your approach be diff erent if the amount
involved is 1 crore or above

Ans. As per SA 240 on “The Auditor’s Responsibilities Relating to Fraud in an Audit of

Financial Statements”, fraud can be committed by management overriding
controls using such techniques as recording fi ctitious journal entries,
particularly close to the end of an accounting period, to manipulate operating
results or achieve other objectives
Explain auditor’s responsibilities as per Sec 143(12) of Companies Act, 2013 of
reporting fraud to Board of Directors and Audit Committee (since amount is less
than Rs. 1 Cr)
Reporting fraud as per Clause X of CARO 2016 in audit report
Consider Withdrawal from the engagement after ascertaining legal obligations
and discussing the matter with management and those charged with
governance.

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CHAPTER 6
AUDIT IN AN AUTOMATED ENVIRONMENT

Q.No Question and Answer

1 Briefly mention three reasons why IT should be considered relevant to an
audit of financial statements
Ans. The auditor should consider relevance of IT in an audit of financial statements
for the following reasons:
(a) Since auditors rely on the reports and information generated by IT
systems, there could be risks in the IT systems that could have an impact
on audit.
(b) Standards on auditing SA 315 and SA 330 require auditors to
understand, assess and respond to risks that arise from the use of IT
systems.
(c) By relying on automated controls and using data analytics in an audit, it
is possible to increase the eff ectiveness and effi ciency of the audit
process

2 Describe how risks in IT systems, if not mitigated, could have an impact

on audit
Ans. When risks in IT systems are not mitigated the audit impact could be as follows:
(a) The auditor may not be able rely on the reports, data obtained,
automated controls, calculations and accounting procedures in the IT
system.
(b) The auditor has to perform additional audit work by spending more time
and efforts.
(c) The auditor may have to issue a modified opinion, if necessary

3 What are the different testing methods used when auditing in an

automated environment. Which is the most effective and efficient method
of testing
Ans. When auditing in an automated environment, the following testing methods are
used:
(a) Inquiry
(b) Observation
(c) Inspection
(d) Reperformance

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A combination of inquiry and inspection is generally the most effective and

efficient testing method.
However, determining the most effective and efficient testing method is a
matter of professional judgement and depends on the several factors including
risk assessment, control environment, desired level of evidence required,
history of errors/misstatements, complexity of business, assertions being
addressed.

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CHAPTER 7
AUDIT SAMPLING

Q.No Question and Answer

1 What is the meaning of Sampling? Also discuss the methods of
Sampling. Explain in the light of SA 530 “Audit Sampling
Ans. “Audit Sampling” means the application of audit procedures to less than 100%
of items within a population of audit relevance such that all sampling units have
a chance of selection in order to provide the auditor with a reasonable basis on
which to draw conclusions about the entire population
{REFER TOPIC 5}

2 With reference to Standard on Auditing 530, state the requirements

relating to audit sampling, sample design, sample size and selection of
items for testing
Ans. {REFER TOPIC 8}

3 While planning the audit of S Ltd. you want to apply sampling

techniques. What are the risk factors you should keep in mind?
Ans. {REFER TOPIC 3}

4 Short note on Advantages of Statistical sampling in Auditing

Ans. {REFER TOPIC 6.1.3}

5 Short note on Stratified sampling

Ans. {REFER TOPIC 5.6}

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CHAPTER 8
ANALYTICAL PROCEDURES

Q.No Question and Answer

1 Define Analytical Procedures
Ans. Topic 1

2 What are the factors that determine the extent of reliance that the auditor
places on results of analytical procedures? Explain with
reference to SA-520 on “Analytical procedures
Ans. Topic 7

3 While carrying out the statutory audit of a large entity, what are the
substantive procedures to be performed to assess the risk of material
misstatement
Ans. Substantive procedures to be performed to assess the risk of material
misstatement:
As per SA 330, “The Auditor’s Response to Assessed Risk”, substantive
procedure is an audit procedure designed to detect material misstatements at
the assertion level.
They comprise tests of details and substantive analytical procedures.
 Test of details: The nature of the risk and assertion is relevant to the
design of tests of details. For example, tests of details related to the
existence or occurrence assertion may involve selecting from items
contained in a financial statement amount and obtaining the relevant
audit evidence. On the other hand, tests of details related to the
completeness assertion may involve selecting from items that are
expected to be included in the relevant financial statement amount and
investigating whether they are included. In designing tests of details, the
extent of testing is ordinarily thought of in terms of the sample size.
 Substantive analytical procedures: Substantive analytical procedures are
generally more applicable to large volumes of transactions that tend to be
predictable over time. The application of planned analytical procedures is
based on the expectation that relationships among data exist and continue
in the absence of known conditions to the contrary. However, the suitability
of a particular analytical procedure will depend upon the auditor’s
assessment of how effective it will be in detecting a misstatement that,
individually or when aggregated with other misstatements, may cause the
financial statements to be materially misstated.

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CHAPTER 9
AUDIT OF ITEMS OF FINANCIAL STATEMENTS

Q.No Question and Answer

(HOW WILL YOU VOUCH/VERIFY THE FOLLOWING)
1 Goods sent out on Sale or Return Basis
Ans. (a) Check whether a separate memoranda record of goods sent out on sale
or return basis is maintained.
(b) See that price of such goods is unloaded from the sales account and the
trade receivable’s record.
(c) Ensure that the goods in respect of which the period of approval has
expired at the close of the year either have been received back
subsequently or customers’ accounts have been debited.
(d) Confirm that the inventory of goods sent out on approval, the period
of approval in respect of which had not expired till the close of the year
lying with the party, has been included in the closing inventory.
a)
2 Borrowing from Banks.
Ans. (a) Reconcile the balances in the overdraft or loan account with that shown
in the pass book(s) and confirm the last mentioned balance by obtaining
a certificate from the bank showing the balance in the accounts as at the
end of the year.
(b) Obtain a certificate from the bank showing particulars of securities
deposited with the bank as security for the loans or of the charge
created on an asset or assets of the concern and confirm that the same
has been correctly disclosed and duly registered with Registrar of
Companies and recorded in the Register of charges.
(c) Verify the authority under which the loan or draft has been raised. In the
case of a company, only the Board of Directors is authorised to raise a
loan or borrow from a bank.
(d) Confirm, in the case of a company, that the restraint contained in Section
180 of the Companies Act, 2013 as regards the maximum amount of
loan that the company can raise has not been contravened.

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3 Goods sent on consignment

Ans. (a) Verify the accounts sales submitted by the consignee showing goods
sold and inventory of goods in hand.
(b) Reconcile the figure of the goods on hand, as given in the last accounts
sales, with the Performa invoices and accounts sales received during the
year.
(c) Obtain confirmation from the consignee for the goods held on
consignment on the balance sheet date.
(d) Ensure that the quantity of goods in hand with the consignee has been
valued at cost plus proportionate non-recurring expenses, e.g., freight,
dock dues, customs due, etc., unless the value is lower. In case net
realisable value is lower, the inventory in hand of the consignee should
be valued at net realisable value. Also see that the allowance has been
made for damaged and obsolete goods in making the valuation.
(e) See that goods in hand with the consignee have been shown
distinctly under inventories.
a)
4 Foreign travel expenses
Ans. (a) Examine Travelling Allowance bills submitted by the employees stating
the details of tour, details of expenses, etc.
(b) Verify that the tour programme was properly authorised by the
competent authority.
(c) Check the T.A. bills along with accompanying supporting documents
such as air tickets, travel agents bill and hotel bills with reference to the
internal rules for entitlement of the employees and also make sure that
the bills are properly passed
5 Receipt of capital subsidy
Ans. (a) Refer to application made for the claim of subsidy to ascertain the
purpose and the scheme under which the subsidy has been made
available.
(b) Examine documents for the grant of subsidy and note the conditions
attached with the same relating to its use, etc.
(c) See that conditions to be fulfilled and other terms especially whether the
same is for a specific asset or is for setting up a factory at a specific
location.
(d) Check relevant entries for receipt of subsidy.
(e) Check compliance with requirements of AS 12 on “Accounting for
Government Grants” i.e. whether it relates to specific amount or in the
form of promoters’ contribution and accordingly accounted for as also
compliance with the disclosure requirements.

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6 Provision for income tax

Ans. (a) Obtain the computation of income prepared by the auditee and verify
whether it is as per the Income-tax Act, 1961 and Rules made
thereunder.
(b) Review adjustments, expenses, disallowed special rebates, etc. with
particular reference to the last available completed assessment.
(c) Examine relevant records and documents pertaining to advance tax, self
assessment tax and other demands.
(d) Compute tax payable as per the latest applicable rates in the Finance Act.
(e) Ensure that overall provisions on the date of the balance sheet is
adequate having regard to current year provision, advance tax paid,
assessment orders, etc.
(f) Ensure that the requirements of AS 22 on Accounting for Taxes on
Income have been appropriately followed for the period under audit.
a)
7 Payment of taxes
Ans. (a) Payment on account of income-tax and other taxes consequent upon a
regular assessment should be verified by reference to the copy of the
assessment order, assessment form, notice of demand and the receipted
challan.
(b) Payments or advance payments of income-tax should also be verified
with the notice of demand and the receipted challan acknowledging the
amount paid.
(c) The interest allowed on advance payments of income-tax should be
included as income and penal interest charged for non-payment should
be debited to the interest account.
(d) Nowadays, electronic payment of taxes is also in trend. Electronic
payment of taxes means payment of taxes by way of internet banking
facility or credit or debit cards.
(e) The assessee can make electronic payment of taxes also from the
account of any other person. However, the challan for making such
payment must clearly indicate the Permanent Account Number (PAN) of
the assessee on whose behalf the payment is made.

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8 Advertisement Expenses
Ans. (a) Verify the bill/invoice from advertising agency to ensure that rates
charged for different types of advertisement are as per contract.
(b) See that advertisement relates to client’s business.
(c) Inspect the receipt issued by the agency
(d) Compare the statement of account with the ledger account.

9 Sale of Scrap
Ans. (a) Review the internal control as regards generation, storage and disposal
of scrap.
(b) Check whether the organization is maintaining reasonable record for
generation of Scrap.
(c) Analyze the raw material used, production and generation pattern of
scrap and compare the same with figures of earlier year.
(d) Check the rates at which scrap has been sold and compare the rate with
previous year.
(e) Vouch sales, with invoices raised, advertisement for tender, rate
contract with scrap dealers.

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CHAPTER 10
COMPANY AUDIT

Q.No Question and Answer

1 Mr. A, a practicing Chartered Accountant, is holding securities of XYZ Ltd.

having face value of 900. Whether Mr. A is qualified for appointment
as an auditor of XYZ Ltd.?

Ans. Mr. A is Disqualified under section 141(3)(d)(i) of Companies Act, 2013.

Person/Partner not allowed to hold securities in the company and its subsidiary
company, holding company, associate company, subsidiary of such holding
company.
Relative can hold upto Rs. 1 lakh face value in the company

2 Mr. P is a practicing Chartered Accountant and Mr. Q, the relative of Mr.

P, is holding securities of ABC Ltd. having face value of 90,000. Whether
Mr. P is qualifi ed from being appointed as an auditor of ABC Ltd.?

Ans. Mr. P is not Disqualified under section 141(3)(d)(i) of Companies Act, 2013.
Person/Partner not allowed to hold securities in the company and its subsidiary
company, holding company, associate company, subsidiary of such holding
company.
Relative can hold upto Rs. 1 lakh face value in the company

3 M/s BC & Co. is an Audit Firm having partners Mr. B and Mr. C, and Mr. A
the relative of Mr. C, is holding securities of MWF Ltd. having face value of
1,01,000. Whether M/s BC & Co. is qualifi ed from being appointed as
an auditor of MWF Ltd.?

Ans. M/s BC & Co. is Disqualified under section 141(3)(d)(i) of Companies Act, 2013.
Person/Partner not allowed to hold securities in the company and its subsidiary
company, holding company, associate company, subsidiary of such holding
company.
Relative can hold upto Rs. 1 lakh face value in the company

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4 M/s RM & Co. is an audit fi rm having partners CA. R and CA. M. The fi rm
has been off ered the appointment as an auditor of Enn Ltd. for the
Financial Year 201617. Mr. Bee, the relative of CA. R, is holding 5,000
shares (face value of 10 each) in Enn Ltd. having market value of
1,50,000. Whether M/s RM & Co. is disqualifi ed to be appointed as
auditors of Enn Ltd?

Ans. M/s RM & Co. is not Disqualified under section 141(3)(d)(i) of Companies Act,
2013.
Person/Partner not allowed to hold securities in the company and its subsidiary
company, holding company, associate company, subsidiary of such holding
company.
Relative can hold upto Rs. 1 lakh face value in the company.

5 CA. Poshin is providing the services of investment banking to C Ltd.

Later on, he was also offered to be appointed as an auditor of the company
for the current financial year. Advise.

Ans. CA Poshin cannot be appointed as auditor when he is also simultaneously

engaged in providing investment banking service because:
According to Sec 141(3)(i) of Companies act, 2013 person cannot be appointed
as auditor if he is providing consultancy services prescribed in Sec 144 of
Companies Act, 2013 either directly or indirectly to the Company, its holding
Company & Subsidiary Company.
Investment Banking is a service which is prescribed under Section 144.

6 Managing Director of Pigeon Ltd. himself wants to appoint CA. Champ, a

practicing Chartered Accountant, as first auditor of the company

Ans. As per Sec 139(6) of Companies Act, 2013 Board of Directors appoint first
auditor in case of non-government Company within 30 days of date of
registration .
Hence, Managing Director itself cannot appoint first auditor.

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7 Rano Pvt. Ltd. is a private limited Company, having paid up share capital of
18 crore but having public borrowing from nationalized banks and
financial institutions of 72 crore. Is rotation of auditor applicable

Ans. Manner of rotation of auditor will be applicable under Section 139(2) of

Companies Act, 2013.
Applicability of Rotation
Private limited companies having Paid up Share Capital of Rs.50 Crore or More
OR
Borrowings from banks and financial institution of Rs. 50 Crore or More as per
immediately preceding financial year

8 Jolly Ltd., a listed company, appointed M/s Polly& Co., a Chartered

Accountant fi rm, as the statutory auditor in its AGM held at the end of
September, 2016 for 11 years.

Ans. Here, the appointment of M/s Polly & Co. is not valid as the appointment can be
made only for one term of five consecutive years and then another one more
term of fi ve consecutive years. It can’t be appointed for two terms in one AGM
only. Further, a cooling period of five years from the completion of term is
required i.e. the fi rm can’t be re-appointed for further 5 years after completion
of two terms of fi ve consecutive years.

9 XYZ Ltd., a public company having paid up capital of 9 crore but having
turnover of 150 crore, will be required to constitute an Audit Committee
under section 177 because the requirement for constitution of Audit
Committee arises if the company falls into any of the prescribed category.
Examine.

Ans. Audit Committee is required to be constituted. Listed Company- Mandatory

Unlisted public Company having Paid up Share Capital of Rs. 10 crore or More
Turnover Rs. 100 crore or MoreBorrowings Rs. 50 crore or More as per latest
audited financial statements

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10 ABC & Co.” is an Audit Firm having partners “Mr. A”, “Mr. B” and “Mr. C”,
Chartered Accountants. “Mr. A”, “Mr. B” and “Mr. C” are holding
appointment as an Auditor in 4, 6 and 10 Companies respectively. (i)
Provide the maximum number of Audits remaining in the name of “ABC &
Co.” (ii) Provide the maximum number of Audits remaining in the name of
individual partner i.e. Mr. A, Mr. B and Mr. C. (iii) Can ABC & Co. accept the
appointment as an auditor in 60 private companies having paid-up share
capital less than 100 crore, 2 small companies and 1 dormant company?
(iv) Would your answer be diff erent, if out of those 60 private companies,
45 companies are having paid-up share capital of 110 crore each?
Ans. As per Section 141(3)(g) of Companies Act, 2013 an individual cannot hold
appointment as an auditor, at any point of time, of more than 20 companies
excluding companies other than public companies and private limited
companies with paid up share capital of Rs. 100 crore or More as on date of
appointment.
Firm is already holding audit of 20 companies. It can hold audit of maximum 60
companies (3 CA partners * 20 Companies each= 60 Companies).
Case 1:
ABC & Co. can accept the appointment as an auditor in 60 private companies
having paid-up share capital less than 100 crore, 2 small companies and 1
dormant company.
Case 2:
If out of those 60 private companies, 45 companies are having paid-up share
capital of 110 crore each then maximum 40 companies can be accepted

11 The head accountant of a company entered fake invoices of credit

purchases in the books of account aggregate of 50 lakh and cleared all
the payments to such bogus creditor. What is your duty as an auditor

Ans. Here, the auditor of the company is required to report the fraudulent activity to
the Board or Audit Committee (as the case may be) within 2 days of his
knowledge of fraud. Further, the company is also required to disclose the same
in Board’s Report. It may be noted that the auditor need not to report the
central government as the amount of fraud involved is less than 1 crore,
however, reporting under CARO, 2016 is required.

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12 Ashu Pvt. Ltd. has fully paid capital and reserves of 50 lakh. During the
year, the company had borrowed 70 lakh each from a bank and a
financial institution independently. It has the turnover of 900 lakh.
Comment whether CARO 2016 is applicable?
Ans. In the given case of Ashu Pvt. Ltd., it has paid capital and reserves of 50 lakh
i.e. less than 1 crore, turnover of 9 crore i.e. less than 10 crore. However, it
has maximum outstanding borrowings of 1.40 crore ( 70 lakh + 70 lakh)
collectively from bank and financial institution. Therefore, it fails to fulfi ll the
condition relating to borrowings. Thus, CARO, 2016 shall be applicable to Ashu
Pvt. Ltd. accordingly.

13 The company has dispensed with the practice of taking inventory of their
inventories at the year-end as in their opinion the exercise is redundant,
time consuming and intrusion to normal functioning of the operations.
Explain reporting requirement under CARO, 2016

Ans. Clause (ii) of Para 3 of CARO, 2016, requires the auditor to report whether
physical verification of inventory has been conducted at reasonable intervals by
the management and whether any material discrepancies were noticed and if
so, whether they have been properly dealt with in the books of account. The
physical verification of inventory is the responsibility of the management of the
company which should verify all material items at least once in a year and more
often in appropriate cases. In the given case, the above requirement of physical
verification of inventory by the management has not been taken place and
therefore the auditor should point out the same under CARO, 2016. He
may consider the impact on financial statement and report accordingly

14 An auditor purchased goods worth 501,500 on credit from a company

being audited by him. The company allowed him one month’s credit,
which it normally allowed to all known customers. Comment

Ans. Disqualified under Sec 141(3)(d)(ii) of Companies Act, 2013.

Even though it is at arms length price but indebtedness cannot exceed Rs. 5
Lakh.

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15 Ram and Hanuman Associates, Chartered Accountants in practice have

been appointed as Statutory Auditor of Krishna Ltd. for the accounting
year, 2015-2016. Mr. Hanuman holds 100 equity shares of Shiva Ltd., a
subsidiary company of Krishna Ltd. Discuss

Ans. Ram and Hanuman Associates is Disqualified under section 141(3)(d)(i) of

Companies Act, 2013.
Person/Partner not allowed to hold securities in the company and its subsidiary
company, holding company, associate company, subsidiary of such holding
company.
Relative can hold upto Rs. 1 lakh face value in the company

16 Under what circumstances the retiring Auditor cannot be reappointed

Ans. As per Sec 139(9) of Companies Act, 2013 retiring auditor cannot be
reappointed if
(a) His term has expired under section 139(2) of Companies Act, 2013.
(b) He is disqualified under section 141(3) of Companies Act, 2013
(c) A specific resolution has been passed in general meeting stating
expressly that retiring auditor cannot be reappointed
(d) He is not willing to be reappointed.

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CHAPTER 11
AUDIT REPORT

Q. No Question and Answer

1 “The auditor shall form an opinion on whether the financial statements
are prepared, in all material respects, in accordance with the applicable
financial reporting framework.” Explain
Ans. Topic 1.1 & 1.2

2 “The auditor shall evaluate whether the financial statements are

prepared, in all material respects, in accordance with the requirements
of the applicable financial reporting framework. This evaluation shall
include consideration of the qualitative aspects of the entity’s
accounting practices, including indicators of possible bias in
management’s judgments.” Discuss stating clearly qualitative aspects
of the entity’s accounting practices.
Ans. (a) In considering the qualitative aspects of the entity’s accounting
practices, the auditor may become aware of possible bias in
management’s judgments.
(b) The auditor may conclude that lack of neutrality together with
uncorrected misstatements causes the financial statements to be
materially misstated. Indicators of a lack of neutrality include the
following:
 The selective correction of misstatements brought to
management’s attention during the audit
 Possible management bias in the making of accounting estimates

3 Discuss the factors affecting the decision of the auditor regarding

which type of modified opinion is appropriate.
Ans. The decision regarding which type of modified opinion is appropriate depends
upon:
(a) The nature of the matter giving rise to the modification, that is, whether
the financial statements are materially misstated or, in the case of an
inability to obtain sufficient appropriate audit evidence, may be
materially misstated; and
(b) The auditor’s judgment about the pervasiveness of the effects or
possible effects of the matter on the financial statements

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4 Discuss the objective of the auditor as per Standard on Auditing (SA)

705 “Modifications to The Opinion in The Independent Auditor’s
Report”.

Ans. As per Standard on Auditing (SA) 705 “Modifications To The Opinion In The
Independent Auditor’s Report”, the objective of the auditor is to express
clearly an appropriately modified opinion on the financial statements that is
necessary when:
(a) The auditor concludes, based on the audit evidence obtained, that the
financial statements as a whole are not free from material misstatement;
or
(b) The auditor is unable to obtain sufficient appropriate audit evidence to
conclude that the financial statements as a whole are free from material
misstatement.

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CHAPTER 12
AUDIT OF BANKS

Q.No Question and Answer

1 The functioning of banking industry in India is regulated by the Reserve
Bank of India (RBI) which acts as the Central Bank of our country. Explain
Ans. The functioning of banking industry in India is regulated by the Reserve Bank of
India (RBI) which acts as the Central Bank of our country. RBI is responsible for
development and supervision of the constituents of the Indian financial system
(which comprises banks and non-banking financial institutions) as well as for
determining, in conjunction with the Central Government, the monetary and
credit policies keeping in with the need of the hour.
Important functions of RBI are issuance of currency; regulation of currency issue;
acting as banker to the central and state governments; and acting as banker to
commercial and other types of banks including term-lending institutions.
Besides, RBI has also been entrusted with the responsibility of regulating the
activities of commercial and other banks. No bank can commence the business of
banking or open new branches without obtaining licence from RBI. The RBI also
has the power to inspect any bank.

2 “The engagement team should hold discussions to gain better

understanding of the bank and its environment, including internal control,
and also to assess the potential for material misstatements of the financial
statements. All these discussions should be appropriately documented for
future reference”. Explain
Ans. The engagement team discussion ordinarily includes a discussion of the following
matters:
 Errors that may be more likely to occur;
 Errors which have been identified in prior years
 Method by which fraud might be perpetrated by bank personnel or others
within particular account balances and/or disclosures;
 Audit responses to Engagement Risk, Pervasive Risks, and Specific Risks;
 Need to maintain professional skepticism throughout the audit
engagement;
 Need to alert for information or other conditions that indicates that a
material misstatement may have occurred (e.g., the bank’s application of
accounting policies in the given facts and circumstances).

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3 Write a short note on reversal of income under bank audit

Ans. Reversal of Income :
 If any advance, including bills purchased and discounted, becomes NPA as
at the close of any year, the entire interest accrued and credited to income
account in the past periods, should be reversed or provided for if the same
is not realised.
 This will apply to Government guaranteed accounts also. In respect of
NPAs, fees, commission and similar income that have accrued should cease
to accrue in the current period and should be reversed or provided for
with respect to past periods, if uncollected.
 Further, in case of banks which have wrongly recognised income in the
past should reverse the interest if it was recognised as income during the
current year or make a provision for an equivalent amount if it was
recognized as income in the previous year(s).
 Furthermore, the auditor should enquire if there are any large debits in
the Interest Income account that have not been explained.
 It should be enquired is there are any communications from borrowers
pointing out differences in Interest charge, and whether action as justified
has been taken in this regard.

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CHAPTER 13
AUDIT OF DIFFERENT TYPES OF ENTITIES

Q.No Question and Answer

1 You have been appointed as an auditor of an NGO, briefly state the points
on which you would concentrate while planning the audit of such an
organisation?
Ans. While planning the audit of an NGO, the auditor may concentrate on the
following:
(a) Knowledge of the NGO’s work, its mission and vision, areas of
operations and environment in which it operate.
(b) Updating knowledge of relevant statutes especially with regard to
recent amendments, circulars, judicial decisions related to the statutes.
(c) Reviewing the legal form of the Organisation and its Memorandum of
Association, Articles of Association, Rules and Regulations.
(d) Reviewing the NGO’s Organisation chart, then Financial and
Administrative Manuals, Project and Programme Guidelines, Funding
Agencies Requirements and formats, budgetary policies if any.
(e) Examination of minutes of the Board/Managing Committee/Governing
Body/Management and Committees thereof to ascertain the impact of
any decisions on the financial records.
(f) Study the accounting system, procedures, internal controls and
internal checks existing for the NGO and verify their applicability.

2 The general transactions of a hospital include patient treatment,

collection of receipts, donations, capital expenditures. You are required
to mention special points of consideration while auditing such
transactions of a hospital?
Ans. Special points of consideration while auditing certain transactions of a hospital
are stated below
(a) Register of Patients: Vouch the Register of patients with copies of bills
issued to them. Verify bills for a selected period with the patients’
attendance record to see that the bills have been correctly prepared.
Also see that bills have been issued to all patients from whom an
amount was recoverable according to the rules of the hospital.
(b) Collection of Cash: Check cash collections as entered in the Cash Book
with the receipts, counterfoils and other evidence for example, copies of
patients bills, counterfoils of dividend and other interest warrants,
copies of rent bills, etc.

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(c) Legacies and Donations: Ascertain that legacies and donations received
for a specific purpose have been applied in the manner agreed upon.
(d) Reconciliation of Subscriptions: Trace all collections of subscription and
donations from the Cash Book to the respective Registers. Reconcile the
total subscriptions due (as shown by the Subscription Register and the
amount collected and that still outstanding).
(e) Authorisation and Sanctions: Vouch all purchases and expenses and
verify that the capital expenditure was incurred only with the prior
sanction of the Trustees or the Managing Committee and that
appointments and increments to staff have been duly authorised.

3 Mention the special points to be examined by the auditor in the audit of a

charitable institution running hostel for students pursuing the Chartered
Accountancy Course and which charges only 500 per month
from a student for his lodging/boarding
Ans. (1) General
(i) Study the constitution under which the charitable institution has
been set up whether under the Society Registration Act, as a trust
or as a company limited by guarantee.
(ii) Examine the internal control structure particularly with reference
to admission to hostel, expenses incurred on diff erent kinds of
activities.
(iii) Verify the broad nature of expenses likely to be incurred with
reference to the previous year’s annual audited accounts
(2) Verification of the receipts
(i) Check the amounts received on account of, monthly rentals, etc.,
and receipts issued for the same.
(ii) Ascertain that there is adequate internal control over the issue of
official receipts, custody of unused receipt books, printing of
receipt books, etc.
(3) Verification of expenses
(i) Check the day-to-day administration expenses incurred along with
the necessary vouchers, supporting for the same like salary
registers, repairs register, etc.
(ii) Verify whether the expenses incurred are in conformity with the
budgets prepared internally or filed with the relevant authorities.
(iii) Verify investments made from surplus funds as well as existing
investments by physically verifying the same and that they are in
the name of the institution and that there is no charge/pledge
against the same

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(iv) Verify all capital expenditure and expenditure on repairs, etc.,

incurred with the vouchers and also whether proper tenders, etc.,
were invited for the same. See that all furniture, glass, cutlery,
kitchen utensils, liner, etc. are adequately depreciated
(v) Verify whether the institution is eligible for income tax exemption
and if not, whether provision for taxation has been made

4 Explain in detail the duties of Comptroller and Auditor General of India

Ans. The Comptroller & Auditor General’s (Duties, Powers and Conditions of
Service) Act, 1971 lays down duties of the C&AG as under
(a) Compile and submit Accounts of Union and States - The C&AG shall be
responsible for compiling the accounts of the Union and of each State
from the initial and subsidiary accounts rendered to the audit and
accounts offices
(b) To audit and report all transactions of the Union and of the States
relating to Contingency Funds and Public Accounts
(c) Where any body or authority is substantially financed by grants or loans
from the Consolidated Fund of India or of any State or of any Union
Territory having a Legislative Assembly, the Comptroller and Auditor
General shall, subject to the provisions of any law for the time being in
force applicable to the body or authority, as the case may be, audit all
receipts and expenditure of that body or authority and to report on the
receipts and expenditure audited by him
(d) Where any grant or loan is given for any specific purpose from the
Consolidated Fund of India or of any State or of any Union Territory
having a Legislative Assembly to any authority or body, not being a
foreign State or international organisation, the Comptroller and Auditor
Genera l shall scrutinise the procedures by which the sanctioning
authority satisfies itself as to the fulfillment of the condition
(e) Where any grant or loan is given for any specific purpose from the
Consolidated Fund of India or of any State or of any Union Territory
having a Legislative Assembly to any authority or body, not being a
foreign State or international organisation, the Comptroller and Auditor
General shall scrutinise the procedures by which the sanctioning
authority satisfies itself as to the fulfillment of the condition.
(f) The Comptroller and Auditor General shall have authority to audit and
report on the accounts of stores and inventory kept in any office or
department of the Union or of a State.

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(g) The duties and powers of the Comptroller and Auditor General in
relation to the audit of the accounts of government companies shall be
performed and exercised by him in accordance with the provisions of
the Companies Act, 2013

5 An NGO operating in Delhi had collected large scale donations for

Tsunami victims. The donations so collected were sent to different NGOs
operating in Tamil Nadu for relief operations. This NGO operating in
Delhi has appointed you to audit its accounts for the year in which it
collected and remitted donations for Tsunami victims. Draft audit
programme for audit of receipts of donations and remittance of the
collected amount to different NGOs. Mention six points each, peculiar to
the situation, which you will like to incorporate in your audit programme
for audit of said receipts and remittances of donations
Ans. Receipt of Donations:
(a) Internal Control System: Existence of internal control system
particularly with reference to division of responsibilities in respect of
authorised collection of donations, custody of receipt books and safe
custody of money.
(b) Custody of Receipt Books: Existence of system regarding issue of
receipt books, whether unused receipt books are returned and the same
are verified physically including checking of number of receipt books
and sequence of numbering therein.
(c) Receipt of Cheques: Receipt Book should have carbon copy for
duplicate receipt and signed by a responsible official. All details relating
to date of cheque, bank’s name, date, amount, etc. should be clearly
stated. (iv) Bank Reconciliation: Reconciliation of bank statements with
reference to all cash deposits not only with reference to date and
amount but also with reference to receipt book.
(d) Cash Receipts: Register of cash donations to be vouched more
extensively. If addresses are available of donors who had given cash, the
same may be cross-checked by asking entity to post thank you letters
mentioning amount, date and receipt number.
(e) Foreign Contributions, if any, to receive special attention to compliance
with applicable laws and regulations.

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(f) Remittance of Donations to Different NGOs: (i) Mode of Sending

Remittance: All remittances are through account payee cheques.
Remittances through Demand Draft would also need to be scrutinised
thoroughly with reference to recipient.
(g) Confirming Receipt of Remittance: All remittances are supported by
receipts and acknowledgements
(h) Identity: Recipient NGO is a genuine entity. Verify address, 80G
Registration Number, etc.
(f) Direct Confirmation Procedure: Send confirmation letters to entities
to whom donations have been paid.
(g) Donation Utilisation: Utilisation of donations for providing relief to
Tsunami victims and not for any other purpose.
(h) System of NGOs’ Selection: System for selecting NGO to whom
donations have been sent.



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PART – C
MULTIPLE
CHOICE
QUESTIONS
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MULTIPLE CHOICE QUESTIONS

MCQ Page
Ch. No Chapter Name
No. number

1 Nature Scope and Objectives of Audit 246 – 272

2 Audit Strategy, Planning and Programming 273 – 281

3 Audit Evidence and Documentation 282 – 317

4 Risk Assessment and Internal Control 318 – 330

5 Auditor’s responsibility in relation to 331 – 341

Fraud

6 Audit in an Automated Environment 342 – 347

7 Audit Sampling 348 – 352

8 Analytical Procedures 353 – 356

9 Audit of Items of Financial Statements 357 – 362

10 Company Audit 363 – 381

11 Audit Report 382 – 391

12 Audit of Banks
392 – 410
13 Audit of Different Types of Entities

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CHAPTER 1
NATURE SCOPE AND OBJECTIVES OF AUDITING
(READ WITH CHAPTER 1 CONTENT)

(1) ___________ is an independent examination of financial information of any entity,

whether profit oriented or not, and irrespective of its size or legal structure, where
such as examination is conducted with a view to express an opinion.
(a) Auditing (b) Investigation
(c) Verification (d) Checking

(2) No business or institution can effectively carry on its activities without the help of
proper :
(a) Audit (b) Record and accounts
(c) neither (a) nor (b) (d) both (a) and (b)

(3) The main objective of financial audit is

(a) Expression of opinion
(b) Detection and prevention of fraud and error
(c) Designing internal control system
(d) All of these

(4) To ensure the financial statements as a whole are free from material misstatements is
the
(a) Scope of audit (b) Aspects to be covered under the audit
(c) Objective of audit (d) All of the above

(5) The audit should be organized to cover adequately all aspects of the enterprise
relevant to the financial statements being audited, is one of the merit consideration is
regard to
(a) Scope of audit
(b) Aspects to be covered under the audit
(c) Objectives of audit
(d) None

(6) Auditor gives regarding the financial statements

(a) Correct and fair view (b) Correct view
(c) Fair view (d) Completely correct
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(7) Auditing begins where ends.

(a) Selling (b) Inventory valuation
(c) Accounting (d) Purchase

(8) Which type of organizations use auditing services?

(a) Non-profit-organizations (b) Business
(c) Governments (d) All of the above

(9) Auditing should be

(a) Independent (b) Compulsory
(c) On the request of government (d) None of the above

(10) Users of financial statements includes

(a) Management, Shareholders, Employees
(b) Financial Institution, Suppliers, Customers
(c) overnment
(d) All of the above

(11) An audit which is governed by law is called as

(a) Government Audit (b) Internal Audit
(c) Statutory Audit (d) Cost Audit

(12) The scope of work of the audit is specified by the management for
(a) External Auditor (b) Branch Auditor
(c) Joint Auditor (d) Internal Auditor

(13) Who is responsible to express opinion on the correct and fair view of the financial
statements
(a) External Auditor (b) Joint Auditor
(c) Internal Auditor (d) Both (a) and (b)

(14) State which of the following statement is not correct with reference to the scope of audit
(a) To form an opinion, the auditor should be satisfied that accounting information
is reliable and sufficient as the basis for the preparation of the financial
statements
(b) All aspects of the enterprise to be covered in audit
(c) The professional skill required of an auditor includes that of a technical expert
for determining physical condition of certain assets
(d) None
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(15) The principal aspects to be covered in an audit concerning final statements of account
are
(i) An examination of the system of accounting and internal control
(ii) Reviewing the system and procedures
(iii) Checking of the arithmetical accuracy of the books of account
(iv) The audit should be organized to cover adequately all aspects of the enterprise
relevant to the financial statements being audited
(a) Only (iv) (b) Both (iii) and (iv) (c) Except (iv)

(16) The chief utility of audit lies in reliable financial statements on the basis of which the
state of affairs may be easy to understand. Apart from this obvious utility, other
advantages of audit are
(a) It safeguards the financial interest of persons who are not associated with the
management
(b) Audit ascertains whether the necessary books of accounts and allied records
have been properly kept.
(c) Government may require audited and certified statement before it gives
assistance or issues a license for a particular trade
(d) All of the above

(17) It naturally calls on the part of the auditor to have a through and sound knowledge of
generally accepted principles of accounting before he can review the financial
statements.
Which of the following discipline matches the above statement?
(a) Auditing and Financial Management
(b) Auditing and Statistics & Mathematics
(c) Auditing and Accounting
(d) All of the above

(18) _____ ____ along with other discipline such as accounting and law, equips you with
all knowledge that is required to enter into auditing as a profession.
(a) Auditing (b) Taxation
(c) Finance (d) Taxation and Finance both

(19) Independence comprises

(a) Independence of mind (b) Independence in appearance
(c) Both (a) and (b) (d) None of these

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(20) Chartered Accountants have an important role in

(a) Entity (b) Society
(c) Audit Firm (d) Audit Committee

(19) Independence comprises

(a) Independence of mind (b) Independence in appearance
(c) Both (a) and (b) (d) None of these

(20) Chartered Accountants have an important role in

(a) Notes to accounts (b) Annexure
(c) Both (a) and (b) (d) None of the above

(21) Which of the following categories of people use the work of Chartered Accountnat
(a) Investors (b) Government
(c) The public at large (d) All of the above

(22) The term financial statement shall exclude

(a) Notes to accounts (b) Annexure
(c) Both (a) and (b) (d) None of the above

(23) Which of the following companies will be exempted from complying with Schedule III
of the Companies Act, 2013
(a) Banking Companies
(b) Unlisted Companies
(c) Private Limited Companies having turnover less than Rs. 10 Crore
(d) All of the above

(24) Which of the following requires that the auditor should examine the accounts with a
view to verify that all assets, liabilities, income and expenses are stated as amounts
which are in accordance with accounting principles and policies which are relevant
and no material amount, item or transaction has been omitted
(a) Going Concern (b) Consistency
(c) The Concept of correct and fair (d) Auditor’s Independence

(25) What constitute a ‘correct and fair’ view is a matter of auditor’s judgement in the
particular circumstances of a case. In more specific terms, to ensure correct and fair
view, an auditor has to see
(a) Accounting policies have been followed consistently
(b) The charge, if any, on assets are disclosed
(c) Material liabilities should not be omitted
(d) All of the above

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(26) Which of the following helps in better understanding of accounting information and
meaningful comparison
(a) Accrual (b) Going Concern
(c) Assertions (d) Consistency

(27) There is no single list of accounting policies which are applicable to all circumstances
(a) Correct (b) Incorrect

(28) The auditor shall report on the accounts examined by him

(a) To the shareholders (b) To the general public
(c) To CAG (d) To CG

(29) If auditor maintains high degree of independence, it will result in

(a) Attention of media
(b) Reward by CG
(c) Enhanced reliability on financial statements
(d) Good relationship with the entity.

(30) Which of following is the responsibilities of management

(a) Preparation and presentation of the financial statement in accordance with
applicable financial reporting
(b) Design, implement and maintain of internal control
(c) Safeguard of the assets
(d) All of the above

(31) Which of the following involves detailed examination of some specific areas?
(a) Auditing (b) Vouching
(c) Investigation (d) Verification

(32) Auditor should have knowledge of

(a) Accounting (b) Auditing
(c) Law applicable on the entity (d) All of these

(33) Auditor should have communication skills in following areas:

(a) Accounting (b) Auditing
(c) Law applicable on the entity (d) All of these

(34) Function of audit is to

(a) Detect errors (b) Detect fraud
(c) Safeguard the interest of stakeholders (d) All the above

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(35) Which is NOT the function of an auditor?

(a) To give a correct and fair view
(b) To take care of all the statutory acts applicable
(c) To do arithmetic checking
(d) To prepare accounts

(36) The basic requirement which is absent is auditing is

(a) Exact accounts (b) Certainty in financial statements
(c) Conclusive evidence (d) All of the above

(37) Which of the following statement is not correct

(a) The auditor shall express an opinion on financial statements
(b) Auditor’s opinion is not guarantee to future viability of business
(c) Auditor is responsible for prevention and detection of fraud and error in
financial statements
(d) Auditor should examine whether recognized accounting principles have been
followed

(38) Auditor should be done by

(a) A professional accountant
(b) A certified management accountant
(c) A competent and independent person
(d) A chartered accountant

(39) Which of the following is least likely to be required in an audit?

(a) Test appropriateness of journal entries and adjustment
(b) Review accounting estimates for biases
(c) Evaluate the business rationale for significant, unusual transactions
(d) Make a legal determination of whether fraud has occurred

(40) It is not uncommon in auditing

(a) Giving the satisfaction to the owner regarding the profits made
(b) Protecting the rights of shareholders
(c) Helping to give correct and fair profits of the organization
(d) All of the above
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(41) Auditing has all features except

(a) Done every financial year (b) Based on conclusive evidence
(c) Mandatory for companies (d) None of the above

(42) Which of the following is not correct about opinion on financial statements?
(a) The auditor should express an opinion on financial statements
(b) His opinion is no guarantee to future viability of business
(c) He is responsible for detection and prevention of frauds and errors in the
financial statements
(d) He should examine whether recognized accounting principle have been
followed consistently

(43) The primary objective of the ordinary examination of financial statement by an auditor
is the expression of an opinion on
(a) The competence of management in accounting matters which is implied by
whether the opinion is qualified or not
(b) The conformity of the statements with the book of account
(c) The conformity of the financial statements with generally accepted auditing
standards applied on a basis consistent with that of the prior year
(d) The fairness with which the financial statements present cash flows and results
of operations

(44) The principal objective of an audit is the examination of financial statements of an

enterprise with a view for the auditor to form and express an independent opinion on
the truth and fairness for the benefit of which one of the following?
(a) The members
(b) Corporate Governance
(c) The Corporate Affairs Commission
(d) Government authorities

(45) Apart from the technical qualities, the auditor should also possess which of the
following personal qualities
(a) Confidentiality of client information
(b) Reliability and trust
(c) Effective communication skills
(d) All of the above

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(46) The factor which distinguishes an error from fraud and other irregularity is
(a) Whether it is a dollar amount or a process
(b) Intent
(c) Materiality
(d) Whether it is caused by the auditor or the client

(47) Which of the following statement is CORRECT?

(a) An external auditor is required for all types of entity
(b) External auditors are appointed by an entity’s management
(c) Staff auditors make a report for the baseline employees
(d) Staff auditors work is to identify potential risk areas for a company

(48) Pick the odd one

(a) Those Charged with Governance (b) Management
(c) Employees (d) Auditor

(49) Pick the odd one

(a) Preparation of financial statements
(b) Designing, implementation and maintenance of internal control system
(c) Reporting on correct and fair view of financial statements
(d) Compliance with the applicable law and regulation

(50) Pick the odd one

(a) Balance sheet (b) Audit Report
(c) Profit & Loss Account (d) Cash Flow Statement

(51) When the auditor is an employee of the organization being audited (Auditee), the audit
is classified as
(a) Internal audit (b) External audit
(c) Both (a) and (b) (d) None of these

(52) Professional skepticism requires the auditor assume that management is

(a) Reasonably honest
(b) Neither honest nor dishonest
(c) Not necessarily honest
(d) Dishonest unless proved otherwise

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(53) Professional skepticism requires that the auditor should be _______ indicating
(a) Ignorant, Possible misstatements
(b) Alert, Possible misstatements
(c) Alert, Management bias
(d) Ignorant, Possible misstatements.

(54) Professional skepticism includes being alert to, for example

(a) Audit evidence that contradicts other audit evidence obtained
(b) Overlooking unusual circumstances
(c) Conditions that may indicate possible fraud
(d) All of above

(56) If the professional becomes a witness where the part to litigation is his client, it will
result in
(a) Self- review threat
(b) Advocacy threat
(c) Familiarity threat
(d) Self-interest threat

(57) If the auditor is having long association with client it will give rise to
(a) Self- review threat
(b) Advocacy threat
(c) Familiarity threat
(d) Self-interest threat

(58) If the professional who is preparing the books of accounts is also auditing the financial
statements, it shall give rise to
(a) Self-review threat
(b) Advocacy threat
(c) Familiarity threat
(d) Self-interest threat

(59) If the auditor is facing threat from the client to be dismissed if he refuses to act as per
their wishes, it shall give rise to
(a) Familiarity threat
(b) Intimidation threat
(c) Advocacy threat
(d) Self-review threat

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(60) Auditor should have communication skills in following areas:

(a) Oral Skills (b) Written Skills
(c) Both (a) and (b) (d) None of these

(61) Pick the odd one

(a) Auditing and Accounting
(b) Auditing and Law
(c) Auditing and Financial Management
(d) Auditing and History

(62) The auditor shall obtain assurance in an audit of financial statements whether
financial statements are free from material misstatements whether due to fraud or
error.
(a) Absolute (b) Reasonable
(c) (a) or (b) (d) None of these

(63) Which of the following is not a limitation of audit

(a) Auditor’s Objectivity
(b) Test Checking
(c) Persuasiveness of audit evidence
(d) Inherent limitation of internal control system

(64) Standards on Auditing are applicable on

(a) Auditing Engagement (b) Review Engagement
(c) Assurance Engagement (d) Related Service Engagement

(65) Standards on Auditing are issued by

(a) Accounting Standard Board
(b) Quality Review Board
(c) Auditing & Assurance Standard Board
(d) Board of Studies

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(66) In the financial audit, the auditor expresses opinion on

(a) Correct and Fair view of financial statements
(b) Correct and Correct view of financial statements
(c) Effective operation of internal control system
(d) Business operation of the entity

(67) Which of the following is not component of financial statement

(a) Profit and Loss Account (b) Balance Sheet
(c) Notes to Accounts (d) Board’s Report

(68) Pick the odd one

(a) Checking the vouchers (b) Preparation of vouchers
(c) Evaluation of internal control (d) None of the above

(69) The Institute of Chartered Accountants of India constitutes the to review the existing
auditing practices in India to develop Engagement and Quality Control Standards one
(a) AASB (b) IFAC (c) IAASB (d) None

(70) _______________ is a member of the IFAC and is committed to work towards the
implementation of the guidelines issued by the IFAC
(a) The Institute of the Chartered Accountants of India
(b) Auditing Practices Committee
(c) Auditing and Assurance Standards Board
(d) All of the above

(71) Auditing Practices Committee has been converted into

(a) IFAC (b) ICSI (c) AASB (d) IAASB

(72) Which of the following is not type of engagement standard

(a) Standards on Auditing
(b) Standard on Quality Control
(c) Standards on Review Engagement
(d) Standards on Assurance Engagement

(73) In which of the following engagement opinion is not expressed

(a) Related Services Engagement (b) Auditing Engagement
(c) Review Engagement (d) Assurance Engagement
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(74) In which of the following engagement an opinion is expressed on a subject matter

other than the historical financial information
(a) Auditing Engagement (b) Review Engagement
(c) Assurance Engagement (d) Related Services Engagement

(75) Which of the following is not code of ethics

(a) Objectivity
(b) Integrity
(c) Communication skills
(d) Professional competence and due care

(76) Pick the odd one

(a) Standards on Auditing
(b) Standard on Quality Control
(c) Standards on Review Engagement
(d) Standards on Assurance Engagement

(77) How many Standards on Auditing have been issued

(a) 32 (b) 34
(c) 36 (d) 38

(78) Standards on Auditing are

(a) Mandatory 2 (b) Optional
(c) Discretionary (d) All of these

(79) General purpose financial statements are prepared as per

(a) General purpose financial reporting framework
(b) Special purpose financial reporting framework
(c) Both (a) and (b)
(d) None of these

(80) Designing, implementation and maintenance of internal control system are the
responsibilities of
(a) Management of entity (b) External Auditor of entity
(c) Both (a) and (b) (d) Internal Auditor of entity

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(81) Designing, implementation and maintenance of internal control system are the
responsibilities of
(a) Management of entity (b) External Auditor of entity
(c) Both (a) and (b) (d) Internal Auditor of entity

(82) Scope of financial audit is

(a) Financial information (b) Non-financial information
(c) Both (a) and (b) (d) None of these

(83) __________along with other disciplines such as accounting and law equips you with all
the knowledge that is required to enter into auditing as a profession.
(a) Auditing (b) Taxation
(c) Finance (d) Taxation and Finance both

(84) No business or institution can effectively carry on its activities without the help of
proper.
(a) Audit (b) Records and accounts
(c) Neither (a) nor (b) (d) Both (a) and (b)

(85) ______________ increases the revenue earning capacity of the business

(a) Capital expenditure
(b) Revenue expenditure
(c) Both (a) and (b)
(d) Both (a) and (b) and deferred revenue expenditures)

(86) The purpose of providing depreciation is

(a) Adherence to matching concept
(b) Keeping the capital invested in fixed asset intact
(c) Compliance with statutory requirement and presenting correct and fair view
(d) All of these

(87) As per SA-200 “Overall Objectives of the Independent Auditor,” in conducting an audit
of financial statements, the overall objectives of the auditor are:
(a) To obtain reasonable assurance
(b) To report on the financial statements
(c) Both (a) and (b) above
(d) None of the above
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(88) The auditor cannot obtain an absolute assurance due to

(a) Lack of accounting knowledge
(b) Lack of auditing knowledge
(c) Both (a) and (b)
(d) Inherent limitations of auditing

(89) Which of the following statement is correct with respect of inherent limitation of audit?
(a) The auditor cannot reduce the audit risk to zero but can obtain absolute that the
financial statements are free from material misstatement.
(b) The auditor can reduce the audit risk to zero but cannot obtain absolute
assurance that the financial statements are free from material misstatement.
(c) The auditor cannot reduce the audit risk to zero and cannot obtain absolute
assurance that the financial statements are not free from material
misstatement.
(d) The auditor cannot reduce the audit risk to zero and cannot obtain absolute
assurance that the financial statements are free from material misstatements.

(90) The auditor’s safeguard the auditor’s ability to form an audit opinion without being
affected by any influences.
(a) Objectivity (b) Independence
(c) Confidentiality (d) Integrity

(91) SA series 300-499 cover the aspect of

(a) Risk assessment and responses to assess risk
(b) Specialized area
(c) Introductory matters
(d) General principles and responsibilities
(92) SA Series 500-599 cover the aspects of
(a) Introductory matters
(b) General Principles and Responsibilities
(c) Audit Evidence
(d) Audit Conclusion and Reporting

(93) SA Series 700-799 cover the aspects of _______________

(a) Introductory matters (b) General Principles and Responsibilities
(c) Audit Evidence (d) Audit Conclusion and Reporting

AUDIT 259 PART C - MULTIPLE CHOICE QUESTIONS

INTER C.A. – AUDIT

(94) SA Series 200-299 cover the aspects of

(a) Introductory matters
(b) General Principles and Responsibilities
(c) Audit Evidence
(d) Audit Conclusion and Reporting

(95) SA Series 600-699 cover the aspects of.

(a) Using the work of others
(b) Audit Evidence
(c) Risk Assessment and Auditor’s Response
(d) Audit Conclusion and Reporting

(96) The _____________ have been issued with a view to securing compliance by members on
matters which, in the opinion of the Council, are critical for proper discharging of their
functions.
(a) Statements (b) Guidance Notes
(c) Standards on Audit (d) All of these

(97) ____________ are designed to provide guidance to members on the matters which may
arise in the course of their professional work and on which they may desire assistance
in resolving issues that may pose difficulty.
(a) Statements (b) Guidance Notes
(c) Standards on Audit (d) All of these

(98) Guidance notes are.

(a) Mandatory (b) Recommendatory (c) None of these

(99) Internal audit may cover the aspects

(a) Financial (b) Non-Financial
(c) Both (a) and (b) (d) None of these

(100) Internal auditor is appointed by

(a) Management (b) The shareholders
(c) CG (d) External auditor

(101) The area of work is determined by management

(a) Insurance audit (b) Sole proprietorship audit
(c) Internal audit (d) Bank audit

AUDIT 260 PART C - MULTIPLE CHOICE QUESTIONS

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(102) ______________ audit assists the management in finding out new ideas for marketing and
other business areas.
(a) Secretarial audit (b) Insurance audit
(c) Internal audit (d) Tax audit

(103) Which of the following is not a basic principle governing audit or ethical requirement
to be followed by auditor
(a) Independence, Integrity, Confidentiality
(b) Compliance Framework, Fair Presentation Framework
(c) Audit Documentation, Accounting System and Internal Control
(d) Reporting Requirements, Skills, Using the work of others.

(104) Professional judgement is based on _________

(a) Skills (b) Knowledge
(c) Experience (d) All of the above

(105) An audit which is compulsory by law is called as

(a) Government Audit (b) Internal Audit
(c) Cost Audit (d) Statutory Audit

(106) For which of the following entities statutory audit of financial statement is not
conducted as _____________
(a) Banking Companies (b) Insurance Companies
(c) Partnership Firm (d) One Person Company

(107) Accounting and Internal Control system are the responsibilities of:
(a) TCWG & Management of entity (b) External Auditor of entity
(c) Internal Auditor of the entity (d) All of above

(108) Compliance with Laws and Regulations which are applicable of the entity, is the
responsibility of:
(a) TCWG and Management of entity (b) External Auditor of entity
(c) Internal Auditor of the entity (d) All of above

(109) Which of the following is not basic principle of auditing

(a) Integrity, Objectivity and Independency (b) Confidentiality
(c) Written Representation (d) Audit Planning

(110) Which of the following is basic principle of auditing

(a) Audit Documentation (b) Audit Evidence
(c) Skills and competence (d) All of above

AUDIT 261 PART C - MULTIPLE CHOICE QUESTIONS

INTER C.A. – AUDIT

(111) Which of the following is exception of confidentiality by auditor

(a) If permitted by client to disclose any information
(b) If there is any legal professional duty of auditor to disclose any information
(c) Both (a) and (b)
(d) None of these

(112) Auditor must have sound knowledge of

(a) Accountancy
(b) Auditing
(c) Client’s Nature of Business
(d) All of above

(113) Advantage of independent examination are

(a) Credibility of financial statement is enhanced
(b) It is helpful in settling tax liability
(c) It acts as moral check on the employees from committing fraud
(d) All of above

(114) Accounting policy refers to

(a) Specific accounting principle
(b) Method of applying accounting principle
(c) Both (a) and (b)
(d) None of these

(115) Under which of the following circumstances accounting policy can be changed
(a) If it is required by law
(b) For compliance with accounting standards
(c) On the opinion of management for better presentation of financial statement
(d) All of above

(116) Fundamental accounting assumptions are

(a) Going Concern
(b) Consistency
(c) Accrual
(d) All of above

AUDIT 262 PART C - MULTIPLE CHOICE QUESTIONS

INTER C.A. – AUDIT

 ANSWERS 

1 a 21 d 41 c 61 b 81 a 101 c
2 a 22 a 42 d 62 a 82 a 102 b
3 c 23 c 43 a 63 a 83 b 103 d
4 a 24 d 44 d 64 c 84 a 104 d
5 a 25 d 45 b 65 a 85 d 105 c
6 c 26 a 46 d 66 d 86 c 106 a
7 d 27 a 47 d 67 b 87 d 107 a
8 a 28 c 48 c 68 a 88 d 108 c
9 d 29 d 49 b 69 a 89 b 109 d
10 c 30 c 50 a 70 c 90 a 110 c
11 d 31 d 51 b 71 b 91 c 111 d
12 d 32 c 52 b 72 a 92 d 112 a
13 c 33 d 53 d 73 c 93 b 113 d
14 c 34 d 54 d 74 c 94 a 114 c
15 d 35 d 55 b 75 b 95 a 115 d
16 c 36 c 56 c 76 d 96 b 116 d
17 a 37 c 57 a 77 a 97 b
18 c 38 d 58 b 78 a 98 c
19 b 39 d 59 c 79 a 99 a
20 d 40 b 60 d 80 d 100 c

AUDIT 263 PART C - MULTIPLE CHOICE QUESTIONS

INTER C.A. – AUDIT

STANDARDS
SA 200
SA 200 (SA COVERED IN CHAPTER 1 IN MODULE)

(1) As per SA 200, which level of assurance the auditor shall obtain that financial
statements are free from material misstatements
(a) Reasonable Assurance (b) Absolute Assurance
(c) Moderate Assurance (d) None of these

(2) Reasonable assurance is level of assurance but it is not assurance.

(a) High, Absolute (b) Absolute, Guaranteed
(c) Moderate, Absolute (d) None of these

(3) The inherent limitations of an audit arise from

(a) Involvement of judgement (b) Test Checking
(c) Time Limitation (d) All of above

(4) In the case of certain assertions or subject matters, the potential effects of the
limitations on the auditor’s ability to detect material misstatements are particularly
significant. Such assertions or subject matters include:
(a) Fraud, particularly fraud involving senior management or collusion
(b) The occurrence of non-compliance with laws and regulations
(c) The existence and completeness of related part relationship and transaction
(d) All of above

(5) Which of the following statement is INCORRECT

(a) Fraud, particularly fraud involving senior management or collusion
(b) The occurrence of non-compliance with laws and regulations
(c) The existence and completeness of related part relationship and transaction
(d) All of above

AUDIT 264 PART C - MULTIPLE CHOICE QUESTIONS

INTER C.A. – AUDIT

(6) Which of the following is responsibility of auditor

(a) To ensure that financial statement comply with applicable financial reporting
framework
(b) To express an opinion on correct and fair view of the financial statements
(c) To ensure compliance with laws and regulations applicable on the entity
(d) To design, implement and maintain system of internal control.

 ANSWERS 

1 a 2 a 3 d 4 d 5 c 6 b

SA 210

(1) Which of the following SAs deals with auditor’s responsibilities in agreeing the terms
of audit engagement
(a) SA 210 (b) SA 220
(c) SA 230 (d) SA 240

(2) The primary purpose of establishing quality control policies and procedures for
deciding on client evaluation to
(a) Ensure adherence to generally accepted auditing standards
(b) Acceptance or continuance of client’s relationship
(c) Ensure audit fees is charged according to the type of audit work assigned
(d) All of above

(3) The auditor shall establish existence of preconditions for an audit of financial
statements
(a) Before confirming common understanding between the auditor and management
of the terms of audit engagement.
(b) After confirming common understanding between the auditor and management
of the terms of audit engagement
(c) Before appointment of auditor
(d) After the date of auditor’s report

AUDIT 265 PART C - MULTIPLE CHOICE QUESTIONS

INTER C.A. – AUDIT

(4) Terms of auditing engagement are discussed through

(a) Letter of appointment (b) Letter of acceptance
(c) Engagement letter (d) Letter of weakness

(5) Engagement letter is provided by

(a) Management to auditor
(b) Auditor to Management/TCWG
(c) Internal auditor to External Auditor
(d) CG to Auditor

(6) Engagement letter isby

(a) Always required when auditor is appointed
(b) Always required when auditor is reappointed
(c) Not always required when auditor is reappointed but except for certain
exceptions
(d) (a) and (C)

(7) Which of the following reduce the possibility of misunderstanding to a great extent
(a) Statements issued by the ICAI
(b) Guidance notes issued by the ICAI
(c) Engagement Letter
(d) All of the above

(8) Which of the following is not a term of engagement letter

(a) Object and Scope of audit
(b) Responsibilities of management and TCWG of the entity
(c) Fact that audit process may be subject to peer review under Chartered
Accountants Act, 1949
(d) Audit Planning

(9) The audit engagement letter generally should include to each of the following except
(a) Limitation of auditing
(b) Responsibilities of management with respect to audit work
(c) Expectation of receiving a written representation letter
(d) A description of the auditor’s method of sample selection

AUDIT 266 PART C - MULTIPLE CHOICE QUESTIONS

INTER C.A. – AUDIT

(10) In which of the following circumstances a new engagement letter is required in

recurring audit engagement
(a) Any change in the senior management of the entity
(b) Any change in the nature of business of the entity
(c) Any change in legal requirement
(d) All of the above

(11) If auditor is requested by management to change the audit engagement to an

engagement that conveys a lower level of assurance, then the auditor shall
(a) Reject the management’s request
(b) Accept the management’s request
(c) Determine that there is a reasonable justification for doing so
(d) Shall not entertain any such request

(12) If auditor is unable to agree to change of the terms of the audit engagement and it is
not permitted by management to continue the original audit engagement, the auditor
shall
(a) Withdraw from the audit engagement where possible under applicable law or
regulation
(b) Determine whether there is any obligation, either contractual or otherwise, to
report the circumstances to other parties, such as those charged with
governance, owners or regulators
(c) Combination of both (a) and (b) so
(d) Either (a) or (b)

(13) As per SA 210, when at management’s request auditor determines to change any term
of auditing engagement, the revised terms of auditing engagement
(a) Shall be recorded in the engagement letter
(b) Need not be recorded in written agreement
(c) Other suitable form of written agreement
(d) Either (a) or (c)

(14) The use of an audit engagement letter is the best method of assuring the audit will have
(a) Auditor will obtain sufficient appropriate audit evidence
(b) Management representative letter
(c) Access to all books, accounts and vouchers required for audit purpose
(d) Cooperation from other auditors
AUDIT 267 PART C - MULTIPLE CHOICE QUESTIONS
INTER C.A. – AUDIT

(15) In order to establish whether the preconditions for an audit of financial statements are
present, the auditor shall
(a) Determine whether the financial reporting framework is acceptable
(b) Obtain the agreement of management that it acknowledges and understands its
responsibilities its responsibility for the preparation of the financial statements
in accordance with the applicable FRF
(c) To provide the auditor with access to all information such as records,
documents and other matters
(d) All of the above

 ANSWERS 

1 a 2 b 3 a 4 c 5 b

6 d 7 c 8 d 9 d 10 d

11 c 12 c 13 d 14 c 15 d

SA 220

(1) Which of the following SAs deals with responsibilities of auditor regarding quality
control procedures for an audit of financial statements
(a) SA 200 (b) SA 210
(c) SA 220 (d) SA 260

(2) The objective of SA 220 is to implement quality control procedures at the engagement
level that provide the auditor with reasonable assurance that
(a) The audit complies with professional standards and regulatory requirements
(b) The auditor’s report issued is appropriate in the circumstances
(c) Both (a) and (b)
(d) None of these

(3) The partner who is responsible for the auditing engagement and its performance and
for the report that is issued on behalf of the firm is called as:
(a) Active partner (b) Performing partner
(c) Engagement Partner (d) Working Partner

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(4) Which of the following is not a function of engagement partner?

(a) Designing and implementing internal control
(b) Compliance with professional standards
(c) Whether to accept the client or not
(d) Monitoring of quality control system of firm

(5) SQC-1 sets out

(a) The responsibilities of the firm for establishing policies and procedures
regarding compliance with relevant ethical requirements
(b) The engagement partner’s responsibilities with respect to relevant ethical
requirements
(c) Both (a) and (b)
(d) None

(6) Safeguards the auditor’s ability to form an audit opinion without being affected by any
influences.
(a) The engagement partner’s responsibilities
(b) The auditor’s independence
(c) Both (a) and (b)
(d) None
(7) Which of the following partner can act as engagement partner.
(a) Any Partner
(b) Any CA Partner
(c) Any CA Partner in full time or part time practice
(d) Any CA Partner in full time practice

(8) Who will take responsibility for overall quality in an audit of financial statements.
(a) All the partners of firm (b) All CA partners of firm
(c) Engagement partner (d) Engagement team

(9) Which of the following information assist the auditor in accepting and continuing of
client relationship.
(a) The integrity of the principal owners, key management and TCWG of the entity
(b) Whether the firm and the engagement partner can comply with the relevant
ethical requirements
(c) Whether the engagement team is competent to perform the audit engagement
and has the necessary capabilities, including time and resources
(d) All of these

AUDIT 269 PART C - MULTIPLE CHOICE QUESTIONS

INTER C.A. – AUDIT

(10) Appointment of engagement quality control reviewer is mandatory in case of audit of

financial statements of
(a) Any entity
(b) Any entity except One Person Company and Small Company
(c) Listed Entity
(d) None of these

(11) Which of the following in not element of quality control in an audit of financial
statements
(a) Leadership Responsibilities
(b) Assignment of Engagement Team
(c) Acceptance and Continuance of Client Relationship and Audit Engagements
(d) Signing on Audit Report

(12) If any difference of opinion arise within engagement team or between engagement
partner and quality control reviewer, the engagement team follow
(a) Engagement partner
(b) Engagement quality control reviewer
(c) Firm’s policies and procedures
(d) Majority of members of engagement team

(13) Auditing firms should establish quality control policies and procedures for personnel
management in order to provide reasonable assurance that
(a) Employees promoted possess the appropriate characteristics to perform
competently
(b) Personnel will have the knowledge required to fulfill responsibilities assigned
(c) The extent of supervision and review in a given instance will be appropriate
(d) All of the above are reasons

(14) The least important element in the evaluation of an audit firm’s system of quality
control would relate to
(a) Assignment of audit assistants
(b) Consultation with experts
(c) System for determining audit fees
(d) Confidentiality of client’s information

AUDIT 270 PART C - MULTIPLE CHOICE QUESTIONS

INTER C.A. – AUDIT

(15) The engagement partner may identify a threat to independence regarding the audit
engagement that safeguards may not be able to eliminate or reduce to an acceptable
level. In that case
(a) The engagement partner reports to the relevant person(s) within the firm to
determine appropriate action.
(b) Withdraw from audit engagement, where withdrawal is legally permitted.
(c) Where applicable law or regulation does not permit withdrawal of the auditor
from the engagement, disclose through a public report
(d) All of the above

(16) In pursuing its quality control objectives with respect to independence, an auditing
firm may use policies and procedures such as
(a) Emphasizing independence of mental attitude in firm training programs and in
supervision and review of work.
(b) Prohibiting employees from owning stock of public companies.
(c) Suggesting that employees conduct their banking transactions with banks that
do not maintain accounts with client firms
(d) Assigning employees who may lack independence to research positions that do
not require participation in field audit work

(17) Policies and procedures w.r.t human resources address which of the following issues
as ___________
(a) Recruitment (b) Capabilities
(c) Competence (d) All of above

(18) Throughout the audit engagement, the engagement partner shall remain alert for
evidence of non- compliance with relevant ethical requirements by engagement team
through
(a) Inquiry (b) Observation
(c) (a) and (b) (d) Review of audit documentation

(19) As per SQC-1, the firms’ system of quality control should include policies and
procedures addressing which of the following element
(a) Leadership responsibilities for quality
(b) Audit planning
(c) Auditor’s judgment
(d) All of the above

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(20) The engagement quality control reviewer shall perform an object evaluation of the
significant judgments made by the engagement team, and the conclusions reached in
formulating the auditor’s report. This evaluation shall involve
(a) Discussion of significant matters with engagement team.
(b) Review of the financial statements and the proposed auditor’s report
(c) Review of selected audit documentation relating to the significant judgements
and the engagement team made and the conclusions it reached
(d) All of the above

(21) Duties of Engagement Quality Control Reviewer

(a) Whether to accept the client or not
(b) Discuss significant matters with engagement partner
(c) To resolve issues of engagement team
(d) All of the above

(22) Which of the following is not function of engagement partner

(a) Design and implementing internal control
(b) Compliance with professional standards
(c) Whether to accept the client or not
(d) Monitoring of quality control system of firm
(23) The firm should establish policies and procedures designed to provide it with
reasonable assurance that the policies and procedures relating to the system of quality
control are relevant, adequate, operating effectively and complied with in practice,
which refers to ____________
(a) Engagement Performance (b) Human Resources
(c) Monitoring (d) Firm’s Quality Control Policies.

 ANSWERS 

1 c 2 c 3 c 4 a 5 a 6 b

7 d 8 c 9 d 10 c 11 d 12 c

13 b 14 c 15 d 16 a 17 d 18 c

19 a 20 d 21 b 22 a 23 c

AUDIT 272 PART C - MULTIPLE CHOICE QUESTIONS

INTER C.A. – AUDIT

CHAPTER 2
AUDIT PLANNING AND PROGRAMMING
(READ WITH CHAPTER 2 CONTENT)

(1) Which of the following SAs deals with auditor’s responsibilities w.r.t. audit planning in
an audit of financial statements.
(a) SA 300 (b) SA 315
(c) SA 320 (d) SA 330

(2) The auditor shall

(a) Establish audit strategy on the basis of overall audit plan.udit
(b) Develop overall audit plan on the basis of audit strategy
(c) Both (a) and (b)
(d) None of these

(3) The audit plan is detailed than the overall audit strategy.
(a) Less (b) More (c) Equal

(4) Which of the following enable the auditor to conduct an effective audit in an efficient
and timely manner?
(a) Audit Strategy
(b) Audit Plan
(c) Audit Programme
(d) Knowledge of the client’s accounting system

(5) Audit Plan should be based on

(a) Knowledge of client’s business
(b) Knowledge of the applicable financial reporting standards
(c) Knowledge of the required accounting and auditing standards
(d) Nature and size of the business

(6) Planning is _________ process of an audit that often begins shortly after (or in connection
with) the completion of the previous audit and continues until the completion of the
current audit engagement.
(a) Continuous
(b) Discreet
(c) Neither continuous nor discreet.

AUDIT 273 PART C - MULTIPLE CHOICE QUESTIONS

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(7) The auditor shall develop an audit plan that include a description of:
(a) The nature, timing and extent of planned risk assessment procedures.
(b) The nature, timing and extent of planned further audit procedures at the
assertion level.
(c) Other planned audit procedures that are required to be carried out so that the
(d) All of the above

(8) An auditor who accepts an audit but does not possess the industry expertise of the
business entity should
(a) Engage experts
(b) Obtain knowledge of matters that relate to the nature of entity’s business
(c) Inform management about it
(d) Take help of other auditors

(9) Auditor can obtain knowledge of client’s business from

(a) Discussion with people within client entity
(b) Publication relating to industry
(c) Previous experience
(d) All of these

(10) Benefit(s) of audit planning is

(a) Helping auditor to devote appropriate attention on important areas of the audit
(b) Better preparation of engagement letter
(c) Effective communication with retiring auditor
(d) It ensure compliance with applicable law and regulation

(11) Planning should be made to cover, among other things:

(a) acquiring knowledge of the client’s accounting system, policies and internal
(b) establishing the expected degree of reliance to be placed on internal control
(c) coordinating the work to be performed
(d) all of above

(12) Which of the following is INCORRECT

(a) In establishing the audit strategy the auditor shall identify characteristics of the
(b) The auditor shall develop an audit plan that shall include a description of the
(c) The auditor shall establish audit strategy on the basis of overall audit plan.
(d) The auditor shall update and change the audit strategy and audit plan as necessary

(13) The overall audit strategy and the audit plan remain the ___________ responsibility.
(a) Auditor’s (b) Management’s
(c) Those charged with governance (d) All of the above
AUDIT 274 PART C - MULTIPLE CHOICE QUESTIONS
INTER C.A. – AUDIT

(14) Prior to commencing field work, an auditor usually discusses the general audit
strategy with the client’s management. Which of the following details do management
and the auditor usually agree upon at this time?
(a) The specific matters to be included in the communication with the audit
(b) The minimum amount of misstatements that may be considered to be reportable
(c) The schedules and analyses that the client’s staff should prepare
(d) The effects that inadequate controls may have over the safeguarding of assets

(15) Which of the following is not a source of obtaining knowledge of client’s business
(a) Annual reports circulated among the shareholders
(b) Communication from previous auditor
(c) Client’s policy and procedure manual
(d) Discussion with client

(16) In establishing the overall audit strategy, the auditor shall:

i. Identify the characteristics of the engagement that define its scope
ii. Ascertain the nature, timing and extent of resources necessary to perform the
iii. Ascertain the reporting objective of the engagement to plan the timing of the audit
iv. Consider the factors that, in the auditor’s professional judgement are significant in
(a) Both (i) and (ii) (b) All (i), (ii) and (iii)
(c) Both (iii) and (iv) (d) All of the above

(17) State which of the following statement is not correct with reference to SA 300?
(a) The nature and extent of planning activities will not vary according to the size
and complexity of the entity, the key engagement team member’s previous
experience with the entity, and changes in circumstances that occur during the
audit engagement.
(b) Planning is not a discrete phase of an audit, but rather a continual and iterative
(c) Planning an audit involves establishing the overall audit strategy for the
(d) The auditor may decide to discuss elements of planning with the entity’s

(18) The methodology of audit planning is

(a) Not prescribed in any law
(b) Prescribed in Companies Act, 2013
(c) Prescribed in Chartered Accountants Act, 1949
(d) Prescribed by the appointing authority.

(19) shall be involved in the planning of audit

(a) Engagement partner
(b) Other key members of engagement team
(c) Both (a) and (b)
(d) Either (a) or (b)
AUDIT 275 PART C - MULTIPLE CHOICE QUESTIONS
INTER C.A. – AUDIT

(20) The auditor shall consider the factors that, in the auditor’s professional judgement, are
significant, are significant in directing the engagement team’s effort, while
(a) Establishing the overall audit strategy
(b) Developing the audit programme
(c) Designing the audit programme
(d) All of the above

(21) The auditor may summarize in the form of a memorandum that contains key
decisions regarding the overall scope, timing and conduct of the audit.
(a) The overall audit plan (b) The overall audit strategy
(c) Audit programme (d) Audit note

(22) __________ refers to such audit programme where plans for the auditor are not fixed.
(a) Special audit (b) Fixed audit
(c) Pre-determined audit (d) None of above

(23) When a company engage a Chartered Accountant as its Internal Auditor, the external
auditor
(a) Need not check the areas covered by internal auditor
(b) Should ignore the existence of internal auditor
(c) Should incorporate the internal auditors report with his own
(d) Should examine the system and efficiency of internal audit and devise a suitable

(24) Which of the following in INCORRECT w.r.t audit programme

(a) An audit programme consists of a series of verification procedures to be applied.
(b) It is desirable in respect of each audit and more particularly for bigger audits an
(c) An audit programme is a summarized plan
(d) There should be periodic review of the audit programme to assess whether the

(25) sets the scope, timing and direction of the audit.

(a) Overall audit strategy (b) Adequate planning
(c) Audit programme (d) Overall objective of audit

(26) State which of the following statement is not correct

(a) Evolving one audit programme applicable to all business under all circumstances
(b) An audit programme is a detailed plan of applying the audit procedures in the
(c) An audit programme consists a series of verification procedures to be applied to
opinion on such statements.
(d) The auditor may summarize the audit note in the form of a memorandum that

AUDIT 276 PART C - MULTIPLE CHOICE QUESTIONS

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(27) The auditor can formulate his entire audit programme only after
(a) How far the weakness have been removed at an interim date
(b) He has had a satisfactory understanding of the internal control system and their
(c) The existence and operation of internal control
(d) None of the above

(28) An audit programme is:

(a) List of examination and verification steps to be applied
(b) Examination in depth
(c) List of audit queries
(d) All of these

(29) Responsibility fixing is a feature of

(a) Audit plan (b) Audit
(c) Audit programme (d) All of the above

(30) Pick the odd one

(a) Audit programme helps in distribution of work amongst the people doing audit
(b) Audit programme is mechanical
(c) Audit program acts as a evidence against change of negligence
(d) Audit programme helps in covering all the areas where audit is required

(31) Audit programme is a failure if

(a) Instructions are not followed property
(b) Audit plan is not made correctly
(c) The instructions are ambiguous
(d) All of the above

(32) Pick the odd one

(a) A hard and fast audit programme may kill the initiative of efficient and
(b) An audit programme can make the audit exercise rigid and mechanical.
(c) The principal can control the progress of the various audits in hand by
(d) There is a risk that if any matter escaped attention of auditor at the time of audit
programming may remain unaudited during the entire audit.

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SA 320
(SA covered in Chapter 2 in module)

(33) While determining materiality of any item financial statements, the auditor considers
(a) Quantity of item
(b) Quality of item
(c) Legal or Regulatory consideration of item
(d) All of these

(34) Materiality in terms of amount or amounts set by the auditor for particular classes of
transactions, account balances or disclosures is called as
(a) Materiality for financial statement as a whole
(b) Performance Materiality
(c) Item Materiality
(d) None of these

(35) Determining a percentage to be applied to a chosen benchmark (in relation ton

materiality) involves the exercise of
(a) Independence (b) Professional judgement
(c) Professional scepticism (d) All of the above

(36) In determining the level of materiality for an audit, what should not be considered?
(a) Prior year’s errors
(b) The auditor’s remuneration
(c) Adjusted interim financial statements
(d) Prior year’s financial statements.

(37) Audit materiality is to be considered from

(a) Qualitative angle (b) Quantitative angle
(c) Both (a) and (b) (d) None of these

(38) Which of the following SA prescribes auditor’s responsibilities for materiality in

planning and performing an audit
(a) SA 320 (b) SA 300 (c) SA 330 (d) SA 500

(39) As per SA 320, materiality is to be applied

(a) In planning the audit
(b) In performing an audit
(c) In planning and performing an audit
(d) In planning, performing and concluding an audit

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(40) Materiality of item depends upon

(a) Size of item (b) Nature of item
(c) Statutory provision (d) All of these

(41) Factors that may affect identification of an appropriate benchmark include

(a) Elements of financial statements (b) Nature of entity
(c) Entity’s ownership structure (d) All of these

(42) Performance materiality means the amount or amounts set by the auditor at the
amount of materiality level for the financial statements as a whole.
(a) Less than (b) More than (c) Equal to (d) Any of above

(43) If the misstatement influences the decision of the user of financial statement, then
(a) The item is said to be material
(b) The auditor shall apply additional procedures
(c) Both a and b
(d) None of the above

(44) State which of the following is not correct with reference to SA 320?
(a) Audit materiality is not inversely proportional to the audit risk
(b) Higher the audit materiality, lower is the audit risk
(c) An item is said to be material, if the misstatement influences the decision of the
(d) Even a small value items can be considered material if taken on cumulative basis

(45) State which of the following statement is correct?

(a) Inherent risk refers to wrong evaluation of internal control or internal control is
(b) Detection risk refers to the risk which is unavoidable in nature
(c) Control risk refers to audit is unable to find any misstatement
(d) None of the above

(46) The materiality differs from client to client and transaction to transaction, the auditor
fixes the materiality level in the following ways, except
(a) Disclosure (b) Class of transaction
(c) Account Balance (d) Nature and size of audit

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(47) Benchmark approach may not include

(a) Net Asset value (b) Total revenue
(c) Net liability value (d) Gross profit

(48) The concept of materiality is applied by the auditor for both

(i) Planning and performing the audit,
(ii) Evaluating the effect of identified misstatements on the audit (iii)Uncorrected
(iv) None of the above
(a) Both i and ii (b) Only i, ii, and iii
(c) Both iii and iv (d) All of the above

(49) Which of the following is an important consideration for an auditor to evaluate

whether the financial statements reflect a correct or fair view or not.
(a) Materiality (b) Benchmark (c) Audit plan (d) Audit note

(50) The auditor shall determine materiality for the financial statements as a whole. When,
(a) At the time of initially planning of the audit
(b) At the time of evaluating the results of audit procedures
(c) Establishing the overall audit strategy
(d) There is one or more particular classes of transactions

(51) also refers to the amount or amounts set by the auditor at less than the materiality
level or levels for particular classes of transactions, account balances or disclosures.
(a) Benchmark (b) Undetected misstatements
(c) Performance materiality (d) Overall audit strategy

(52) If an entity is financed solely by debt rather than equity, users may put more emphasis
on
(a) Entity’s gross earnings (b) Entity’s net earnings
(c) Assets, and claims on them (d) Both a and c

(53) from continuing operations is often used for profit-oriented entities

(a) Total equity or net asset value (b) Profit before tax
(c) Gross profit and total expenses (d) Total revenue

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INTER C.A. – AUDIT

 ANSWERS 

1 a 2 b 3 b 4 b 5 a 6 a

7 d 8 b 9 d 10 a 11 d 12 c

13 a 14 c 15 b 16 d 17 a 18 a

19 c 20 a 21 b 22 d 23 d 24 c

25 a 26 d 27 b 28 a 29 c 30 b

31 d 32 c 33 d 34 b 35 b 36 b

37 c 38 a 39 c 40 d 41 d 42 a

43 a 44 a 45 d 46 d 47 c 48 b

49 a 50 c 51 c 52 c 53 b

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INTER C.A. – AUDIT

CHAPTER 3
AUDIT DOCUMENTATION AND AUDIT EVIDENCE

SA 200
SA 200 (SA COVERED IN CHAPTER 1 IN MODULE)

(1) ______________refers to the record of audit procedures performed, relevant audit

evidence obtained, and conclusions the auditor reached.
(b) Audit Techniques (b) Audit Evidence
(c) Audit Documentation (d) None of the above

(2) may be defined as one or more folders or other storage media, in physical or electronic
form, containing the records that comprise the audit documentation for a specific
engagement.
(b) Audit File (b) Audit Evidence
(c) Completion Memorandum (d) Both (a) and (b) above

(3) As per SQC-1 “An appropriate time limit within which to complete the assemble of the
final audit file is ordinarily not more than days after the date of auditor’s report.
(a) 30 (b) 60
(c)) 90 (d) 45

(4) As per SQC-1, auditor should retain audit documentation for at least years
(a) 5 (b) 6
(c) 7 (d) 8

(5) Which of the following factors may affect the form, content and extent of audit
documentation:
(a) Size and complexity of the entity
(b) Identified risk of material misstatements
(c) Significance of audit evidence obtained
(e) All of above

(6) Audit documentation can be made by auditor:

(a) Paper mode
(b) Electronic mode
(c) Both (a) and (b)

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(7) Who is the owner of audit working papers?

(a) Auditee (b) Auditor
(c) (a) and (b) (d) ICAI

(8) Additional numbers of purposes served by audit documentation are:

(a) Enabling the engagement team to plan and perform the audit
(b) Enabling the engagement team to be accountable for its work
(c) To enable the engagement partner for direction, supervision and review the
work performed by engagement team members.
(d) All of above

(9) If in exceptional circumstances the auditor departs from Standards on Auditing, he

shall
(a) Document the reason for departure
(b) Perform alternative procedures
(c) Both (a) and (b)
(d) Auditor is not allowed to depart from SAs.

(10) Which of the following is not content of permanent audit file:

(a) Record of study and evaluation of internal control
(b) Audit planning and audit documentation
(c) Memorandum and Article of Association
(d) Notes relating to significant accounting policies

(11) Which of the following is content of current audit file:

(a) Correspondence relating to acceptance of annual reappointment
(b) Copies of communication with experts or other auditors
(c) Audit evidence obtained
(d) All of above

(12) Loan agreement are the integral parts of

(a) Permanent audit file (b) Current audit file
(c) Temporary audit file (d) None of the above

(13) Working on trial balance is the part of

(a) Permanent audit (b) Current audit file
(c) Temporary audit file (d) None of the above

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(14) Pick the odd one

(a) Written representations and confirmation from clients.
(b) Audit planning and audit programme
(c) Correspondence relating to annual reappointment
(d) Memorandum and Article of Association of the Company.

(15) From the initial client interview to the preparation of audit report an auditor must
keep a record of all the work you do in
(a) Audit file
(b) Audit report
(c) Audit papers
(d) None of the above

(16) Which of the following is not true of working papers?

(a) They record the audit evidence to provide support for the auditor’s opinion
(b) They assist in review of the audit work
(c) They are a direct aid in the planning of the audit
(d) They provide proof of the correctness of the financial statements.

(17) The audit working papers should contain information on planning the audit work, the
nature, timing and extent of audit procedures performed,and the conclusion drawn
leading to an opinion.
(a) The results of the audit procedures
(b) The auditor’s opinion of management
(c) All gratuities received by auditor
(d) Names of the employees who cooperated with the auditor.

(18) The extent of what is included in working paper is

(a) Thoroughly specified in SAs
(b) Determined by each staff auditor
(c) Thoroughly specified under law
(d) A matter of professional judgement.

(19) Which of the following factors would least likely affect the quantity and content of an
auditor’s working papers
(a) The nature of auditor’s report
(b) The assessed level of control risk
(c) The possibility of peer review
(d) The content of management representation letter.

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(20) A current audit file would always contain which of following?

(a) Loan agreements, pension plans, agreements with parent company and
subsidiaries
(b) Company documents such as corporate charter or articles of association and
corporate bylaws.
(c) A record of the nature, timing and extent of audit procedures performed and the
results of such procedures.
(d) Prior year analysis of fixed assets, long term debt, and terms of stock and bond
issues.

(21) Which of the following SAs deals with auditor’s responsibilities w.r.t. audit
documentation:
(a) SA 580 (b) SA 230
(c) SA 505 (d) SA 700

(22) Audit documentation may be useful for

(a) Engagement team (b) Quality control reviewer
(c) External inspector (d) All of these

(23) After assembly of audit file, the auditor

(a) May delete audit documentation if it is of no use
(b) May delete audit documentation if it is occupying much of its space
(c) Shall not delete audit documentation before its retention time period
(d) May delete audit documentation before its retention period if it is required by
any law.

(24) The auditor shall not document the following

(a) Overall audit strategy
(b) Changes made during the audit engagement which are insignificant
(c) Audit plan and reason for such change
(d) Audit plan

(25) The client had received an assessment order from the income tax department. Mr. A,
the auditor was approached for the same. However, Mr. A did not retain the working
papers relating to his audit findings for the particular period. He has failed to comply
with
(a) SA 220
(b) SA 210
(c) SA 230
(d) SA 250

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(26) Preparing sufficient and appropriate audit documentation , helps to enhance the
quality of the audit and facilitates the effective review and evaluation of the audit
evidence obtained and conclusions reached before the auditor’s report is finished.
(a) Based on engagement
(b) Based on time
(c) Based on objective
(d) Based on audit plan

(27) Documentation prepared after the audit work has been performed is likely to be
(a) More accurate than documentation prepared at the time such work is
performed
(b) Less accurate than documentation prepared at the time such work is performed
(c) More appropriate than documentation prepared at the time such work is
performed
(d) None of the above

(28) State which of the following statement is true

(a) Auditor is bound to provide copies of the working papers to the CEO of the
Company
(b) Extract & Copies of important legal documents, agreements relevant to audit is
part of current audit file
(c) The auditee has no rights to compel the auditor to provide copies of the
working papers
(d) All of the above

(27) There is no single list of accounting policies which are applicable to all circumstances
(a) Correct (b) Incorrect

(28) The auditor shall report on the accounts examined by him

(a) To the shareholders (b) To the general public
(c) To CAG (d) To CG

SA 500
(SA covered in Chapter 3 in module)

(29) Which of following SA deals with auditor’s responsibility to design and perform audit
procedures in such a way to enable the auditor to obtain sufficient and appropriate
audit evidence to be able to draw reasonable conclusions on which to base the
auditor’s opinion
(a) SA 500 (b) SA 501
(c) SA 330 (d) SA 315

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(30) Sufficient audit evidence is a measurement of

(a) Quality of audit evidence
(b) Quantity of audit evidence
(c) Both of (a) and (b)
(d) None of these

(31) Appropriate audit evidence is a measurement of

(a) Quality of audit evidence
(b) Quantity of audit evidence
(c) Both of (a) and (b)
(d) None of these

(32) The auditor must obtain following audit evidence to draw reasonable conclusion
(a) Sufficient audit evidence
(b) Appropriate audit evidence
(c) Sufficient and appropriate audit evidence
(d) None of these

(33) Which of the following is the least persuasive type of audit evidence?
(a) Bank statements obtained from the client
(b) Documents obtained by auditor from third parties directly
(c) Carbon copies of sales invoices inspected by the auditor
(d) Computations made by the auditor.

(34) Following audit procedures are performed by auditor to obtain sufficient appropriate
audit evidence
(a) Risk assessment procedures
(b) Test of controls
(c) Substantive audit procedures
(d) Both (b) and (c)

(35) Which of the following is not a factor to determine sufficient audit evidence
(a) Reliability of information
(b) Materiality of item
(c) Risk of material misstatements
(d) Size and characteristics of the population

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(36) Which of the following is a factor to determine sufficient audit evidence

(a) Materiality of item involved
(b) Risk of material misstatements population
(c) Size and characteristics of the population
(d) All of these

(37) Which of the following is a factor to determine appropriate audit evidence

(a) Reliability of information (b) Relevancy of information
(c) Both (a) and (b) (d) None of these

(38) Depending upon nature audit evidence can be classified as

(a) Visual evidence (b) Oral evidence
(c) Documentary evidence (d) All of these

(39) Depending upon source audit evidence can be classified as

(a) Internal audit evidence
(b) External audit evidence
(c) Both (a) and (b)
(d) None of these
(40) Which of the following is not internal audit evidence
(a) Bank Reconciliation Statement
(b) Bank Statement
(c) Copy of Sales Invoice
(d) Voucher

(41) Which of the following is not external audit evidence

(a) Bank Statements (b) Purchase Invoice
(c) External Confirmation (d) Salary Sheet

(42) Techniques to obtain audit evidence are

(a) Inspection (b) Recalculation
(c) External confirmation (d) All of these

(43) Pick the odd one.

(a) Confirmation
(b) Inquiry
(c) Re-computation
(d) Ledger posting
AUDIT 288 PART C - MULTIPLE CHOICE QUESTIONS
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(44) Pick the odd one

(a) Bank reconciliation statement
(b) Copy of sales invoice
(c) Purchase invoice
(d) Minutes book

(45) Which of following statement is incorrect

(a) Recalculation consists checking reasonableness of appropriates of accounting
policies
(b) Inspection consists of examining records, documents whether internal or
external in paper form or electronic form and physical examination of assets
(c) An external confirmation represents audit evidence obtained by auditor as
direct written response to the auditor from a third party.
(d) Evaluating responses of inquiry is an integral part of inquiry process.

(46) Observation consists

(a) Review of financial statements
(b) Looking at a process, procedure being performed by others
(c) Independent execution of procedure or controls that were originally performed
as part of entity’s internal control.
(d) All of these

(47) Before using the work of an expert the auditor shall evaluate
(a) Competency of expert.
(b) Capability of expert
(c) Objectivity of expert
(d) All of above

(48) Information regarding the competence, capabilities and objectivity of management’s

expert may come from a variety sources such as:
(a) Discussion with expert
(b) Personal experience with previous work of that expert
(c) Published papers or books written by that expert
(d) All of these

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(49) Pick the odd one

(a) Received from third party
(b) Received from reliable third party
(c) Received from audited organization resources
(d) Both a & b

(50) Which is NOT a technique of obtaining evidence

(a) Correction (b) Computation
(c) Confirmation (d) Both a & b

(51) Which of the following statements is, generally correct about the reliability of audit
evidence?
(a) To be reliable, evidence should be conclusive rather than persuasive
(b) Effective internal control system provides reliable audit evidence
(c) Evidence obtained from outside sources routed through the client
(d) All are correct

52. In case of inconsistency between audit evidences obtained by auditor for ant item of
the financial statement, the auditor shall
(a) Withdraw from audit engagement
(b) Perform alternative audit procedures
(c) Perform additional audit procedures to obtain corroborative audit evidence
(d) All of the above

(53) Which of the following is incorrect w.r.t. inquiry

(a) Inquiries may range from formal written inquiries to informal oral inquiries
(b) Conducting inquiry alone is not sufficient to obtain sufficient and appropriate
audit evidence
(c) Inquiry can be conducted with the person within the entity and with the person
outside the entity
(d) Evaluation of responses of enquiries is not an integral part

(54) Which of the following is correct

(a) Audit procedures and audit techniques are not one and same thing.
(b) Audit procedures and audit techniques are often used interchangeably.
(c) Inspection of bank reconciliation statement is an audit technique.
(d) All of the above

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(55) Audit is usually conducted in three steps:

(1) A pre-examination or opening meeting with the auditee marks the beginning of
the process
(2) Involves a suitability audit of the documented procedures against the selected
reference standard
(3) The auditor examines in depth the implementation of the quality system
(a) True (b) False ( c) Partially false (d) None of the above

(56) In auditing most of the time we deal with persuasive audit evidence which helps the
auditor
(a) To understand the nature of audit
(b) To understand the source of audit evidence
(c) For conclusion of the audit
(d) None of the above

(57) State which of the following techniques are not used for obtaining audit evidence
(a) Questioning the management with objective to get suitable response
(b) Involve inspection record or documents internal or external
(c) Detailed examination of some specific areas
(d) Trend analysis

(58) Reperformance involves

(a) Evaluation of financial information using financial and non-financial data.
(b) Questioning the management with objective to get suitable response
(c) Auditor’s independent execution of procedures or controls that were originally
performed by management
(d) Checking the mathematical accuracy documents or record. It can be manually or
electronically

(59) State which of the following statement is true

(a) Audit evidence are persuasive in nature
(b) Audit evidence are conclusive in nature
(c) Both (a) and (b)
(d) None of the above

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(60) Which of the following are designed to obtain audit evidence as to completeness,
accuracy and validity of data produced by the accounting system
(a) Test of controls
(b) Substantive procedures
(c) Analytical procedures
(d) All of the above

(61) Substantive procedures does not involves

(a) Checking of transactions
(b) Analytical review
(c) Checking of balance
(d) Checking whether internal controls are working effectively

(62) Test of controls involves in

(a) Testing of transaction and balance
(b) Analytical review
(c) Check the internal control exist and operating effectively
(d) All of the above

(63) The reliability of audit evidence is influenced by its

(a) Source
(b) Nature
(c) Circumstances
(d) All of the above

SA 501
(SA covered in Chapter 3 in module)

(64) Which of the following SA deals with deals with special consideration by auditor in
obtaining sufficient appropriate audit evidence with respect to existence and
condition of inventory, completeness of litigation and claim and presentation and
disclosure of segment information:
(a) SA 500 (b) SA 501
(c) SA 505 (d) SA 510

(65) The responsibility for determining the quantity and value of inventory rests with
(a) Management (b) Auditor
(c) Auditor and Management both (d) None of these

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(66) The auditor shall obtain sufficient appropriate audit evidence regarding the existence
and condition of inventory by attending physical inventory count, unless impracticable,
to
(a) Evaluate the management’s instruction and procedures for recording and
controlling the results of the entity’s physical inventory counting
(b) Observe the performance of management’s count procedures
(c) Inspect the inventory
(d) All of above

(67) If auditor is unable to attend physical inventory counting due to unforeseen

circumstances the auditor shall
(a) Obtain a written representation from management of entity
(b) Conduct external confirmation form third party
(c) Make or observe some physical count on an alternative date, and perform audit
procedures on intervening transactions
(d) All of these.

(68) If attendance at physical inventory counting is impracticable, the auditor shall

(a) Perform Alternative audit procedures
(b) Perform Additional audit procedures
(c) Obtain written representation from management of entity
(d) None of the above

(69) When inventory under the custody and control of a third party is material to the
financial statements, the auditor shall obtain sufficient appropriate audit evidence
regarding the existence and condition of that inventory by
(a) Request confirmation from third part as to the quantities and condition of
inventory held by third party
(b) Perform inspection or other audit procedures appropriate in the circumstances
(c) Both (a) and (b)
(d) None of the above

(70) Litigation and claim involving the entity may have a material effect on the financial
statements and thus may be required
(a) To be disclosed in the financial statements
(b) To be accounted in the financial statements
(c) Either (a) or (b)
(d) Both (a) and (b)

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(71) The auditor shall design and perform audit procedures in order to identify litigation
and claims involving the entity which may give rise to a risk of material misstatement
including:
(a) Inquiry of management and others within the entity
(b) Performing analytical procedures as are appropriate
(c) Reviewing minutes of meetings of members
(d) All of above

(72) When the audit procedures performed indicated that other material litigation or claims
may exist, then the auditor shall
(a) Seek direct communication with the entity’s internal legal counsel through a
letter of inquiry, prepared by auditor and sent by the management.
(b) Seek direct communication with the entity’s external legal counsel through a
letter of inquiry, prepared by management and sent by the auditor
(c) Seek direct communication with the entity’s external legal counsel through a
letter of inquiry, prepared by auditor and sent by the management
(d) Seek direct communication with the entity’s internal legal counsel through a
letter of inquiry, prepared by management and sent by the auditor

(73) If management does not permit auditor to communicate with legal counsel or legal
counsel refuses to respond to auditor, the auditor shall
(a) Express unmodified opinion
(b) Modify opinion
(c) Provide key audit matter section in his report
(d) All of these

(74) With respect to segment information, the auditor shall obtain evidences regarding of
segment information as per .
(a) Preparation, Standard on auditing
(b) Disclosure, Standard on auditing
(c) Preparation, Financial reporting framework
(d) Presentation and Disclosure, Financial reporting framework.

(75) State which of the following is covered under AS 17 and SA 501

(a) Claims & Litigation
(b) Segment Reporting
(c) Both (a) and (b)
(d) None of the above

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SA 505
(SA covered in Chapter 3 in module)

(76) ______________ means audit evidence obtained as direct written response from a third
party in paper/electronic form.
(a) Internal Confirmation
(b) External Confirmation
(c) Written Representation
(d) All of above

(77) Which of the following SAs deals with auditor’s responsibilities to design and perform
external confirmation procedures to obtain relevant and reliable audit evidence
(a) SA 580 (b) SA 330 (c) SA 500 (d) SA 505

(78) A request that the confirming party respond directly to the auditor indicating whether
the confirming party agrees or disagrees with the information in the request, or
providing the requested information, is
(a) Negative Confirmation Request (b) Exception
(c) Positive Confirmation Request (d) Non-Response

(79) A request that the confirming party respond directly to the auditor only if the
confirming party disagrees with the information provided in the request, is
(a) Negative Confirmation Request
(b) Positive Confirmation Request
(c) Exception
(d) Non Response

(80) A response that indicates a difference between information requested to be confirmed,

or contained in the entity’s records, and information provided by the confirming party,
is
(a) Error (b) Exception
(c) Fraud (d) All of above

(81) A failure of the confirming party to respond, or fully respond, to a positive

confirmation request, or a confirmation request returned undelivered is called
(a) Disagreement (b) Confirmation failure
(c) Restriction on auditor’s scope (d) Non-Response

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(82) The auditor should use negative confirmation request if

(a) Population comprises a large number of small, homogeneous account balances
or transactions
(b) The auditor has assessed the risk of material misstatement as low
(c) A very low exception rate is expected
(d) All of above

(83) Factors to be considered when designing confirmation request:

(a) Prior experience of auditor (b) Assertions being addressed
(c) Information to be confirmed (d) All of above

(84) In case any exception is identified by auditor by conducting external confirmation, he

shall perform
(a) Alternative audit procedures (b) Additional audit procedures
(c) Test of Controls (d) Both (a) and (b)

(85) In case of non-response in the process of external confirmation, the auditor shall
perform
(a) Alternative audit procedures
(b) Additional audit procedures
(c) Test of Controls
(d) Both (a) and (b)

(86) _____________ should carefully plan and control external confirmation

(a) Management
(b) TCWG
(c) Auditor
(d) All of these in consultation with one another

(87) Where no reply is received during the performance of direct confirmation procedures
as part of audit of accounts receivable balances, the auditor should perform:
(a) No additional testing
(b) Additional testing including agreeing the balance to cash received; agreeing the
detail of the respective balance to the customer’s remittance advice
(c) Additional testing including preparing a detailed analysis of the balance,
ensuring it consists of identifiable transactions and confirming that these
revenue transactions actually occurred
(d) Both (b) and (c)

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(88) Which of the following statement is not true, if management refuses to allow the
auditor to send a confirmation request
(a) Inquire as to management’s reasons for the refusal, and seek audit evidence as to
their validity and reasonableness
(b) The auditor also shall determine the implication for the audit and the auditor’s
opinion in accordance with standards on auditing
(c) Evaluate the implication of management’s refusal on the auditor’s assessment of
the relevant risk of material misstatement, including the risk of fraud, and on the
nature, timing and extent of other audit procedures.
(d) Auditor shall withdraw from engagement.

(89) The auditor shall investigate exceptions to determine whether or not

(a) They are indicative of misstatements
(b) The audit evidence is sufficient and appropriate
(c) It is conclusive to conclude
(d) All of the above

(90) State which of the following statement is true, with the auditor’s use of external
confirmation procedures to obtain audit evidence as per SA 505
(a) Positive confirmation provide less persuasive audit evidence than negative
confirmation
(b) Positive confirmation provide less conclusive audit evidence than negative
confirmation
(c) Negative confirmation provide less conclusive audit evidence than positive
confirmation
(d) Negative confirmation provide less persuasive audit evidence than positive
confirmation

(91) The auditor shall not use negative confirmation requests as the sole substantive audit
procedure to address an assessed risk of material misstatements at
(a) At initial audit engagement level
(b) The time, when the auditor is aware of circumstances or condition that would
cause recipients of negative confirmation requests to disregard such requests
(c) The assertion level
(d) All of the above

(92) A refusal by management to allow the auditor to send a confirmation request

(a) is a limitation on the scope of audit
(b) is a limitation on the audit evidence
(c) is a limitation on the audit documentation
(d) All of the above

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(93) State which of the following circumstance, refusal by management to allow the auditor
to send a confirmation request is reasonableness as per SA 505
(a) Existence of a legal dispute
(b) Ongoing negotiation with TCWG
(c) When the reason for exception available
(d) All of the above

(94) When the auditor evaluates the evidence obtained and response received from the
third party is unreliable, then which one of the best option available to the auditor
(a) Perform alternative audit procedure to obtain relevant and reliable audit
evidence
(b) Revise the assessment of the risk of material misstatement at the assertion level
and modify planned audit
(c) The auditor shall communicate with TCWG in accordance with SA 260
(d) The auditor shall determine the implications for the audit and auditor’s opinion
in accordance with SA

SA 510
(SA covered in Chapter 3 in module)

(95) Which of the following SA deals with the auditor’s responsibilities relating to Opening
balances when conducting an initial audit engagement?
(a) SA 500 (b) SA 510
(c) SA 710 (d) SA 540

(96) An initial audit engagement in engagement in which:

(a) The financial statements for the prior period were not audited
(b) The financial statements for the prior period were audited by a predecessor
auditor
(c) Either (a) or (b)
(d) None of (a) or (b)

(97) Predecessor auditor is:

(a) Joint auditor
(b) Auditor of component’
(c) Internal auditor
(d) The auditor from a different audit firm, who audited the financial statements of
an entity in the prior period and who has been replaced by the current auditor.

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(98) To obtain information relevant to opening balances including disclosures, the auditor
shall
(a) Read the most recent financial statement, if any and auditor’s report thereon
(b) Conduct written communication with predecessor auditor
(c) Inquire with management
(d) All of the above

(99) Which of the following is true

(a) If auditor concludes that opening balances contain misstatements that
materially affects the current period’s financial statements, the auditor shall
express disclaimer of opinion.
(b) If the auditor is unable to obtain sufficient appropriate audit evidence regarding
the opening balances, the auditor shall express a qualified opinion or disclaimer
of opinion, as appropriate, in accordance with SA 705.
(c) If auditor concludes that the current period’s accounting policies are not
consistently applied in relation to opening balances, or a change in accounting
policies is not properly accounted for , or not adequately disclosed in
accordance with applicable reporting framework, the auditor shall express a
qualified opinion or an adverse opinion as appropriate, in accordance with SA
705.
(d) Both (b) and (c)

(100) Auditors of M/s A Ltd were changed for the accounting year 2017-18. The closing stock
of the company as on 31-03-2017 amounting to Rs 100 Lakhs continued as it is and
became closing stock as on 31-03- 2018. The auditors of the company propose to
exclude from their audit programme the audit of closing stock of Rs. 100 Lakhs on the
understanding that it pertains to the preceding year which was audited by another
auditor.
(a) Auditor’s contention is wrong
(b) Auditor’s contention is right
(c) Auditor can choose to skip them as it is audited by predecessor auditor
(d) Auditor can rely on the previous audit report

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(101) If auditor concludes that the opening balances contain a misstatement and such
misstatement materially affects the current period’s financial statements and the effect of
the misstatement is not properly accounted for or not adequately presented or disclosed
(a) The auditor shall express a disclaimer of opinion
(b) The auditor shall perform additional procedures and advise management to
revise financial statements
(c) The auditor shall express a qualified opinion or an adverse opinion
(d) All of the above

(102) Which of the following is incorrect, in relation to the predecessor auditor’s report
(a) Evaluate the effect of the matter giving rise to the modification in assessing the
risks of material misstatement in the current period
(b) If the prior period’s financial statements were audited by predecessor auditor
and there was a modification to the opinion, the auditor shall also modify his
opinion
(c) Evaluate the effect of the matter giving rise to the modification in the internal
control
(d) Auditor shall express a qualified opinion or an adverse opinion if no
appropriate disclosure is made.

(103) If a change in accounting policies is not properly accounted for or not adequately
presented or disclosed in accordance with the applicable financial reporting
framework
(a) The auditor shall express a disclaimer of opinion
(b) The auditor shall perform additional procedures and advise management to
update financial statements
(c) The auditor shall express a qualified opinion or an adverse opinion
(d) All of the above

(104) If the auditor concludes that the current period’s accounting policies are not
consistently applied in relation to opening balances in accordance with applicable
financial reporting framework
(a) The auditor shall express a disclaimer of opinion
(b) The auditor shall perform additional procedures and advise management to
revise financial statements
(c) The auditor shall express a qualified or an adverse opinion
(d) All of the above

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INTER C.A. – AUDIT

(105) The auditor shall obtain sufficient appropriate audit evidence about whether the
opening balances contain misstatement that
(a) Materially affect the current period’s financial statements
(b) Materially affect the prior period’s financial statements
(c) Materially affects one or more prior period’s financial statements
(d) All of the above

(106) The auditor shall obtain sufficient appropriate audit evidence about whether the
reflected in the opening balances have been consistently applied in the current
period’s financial statements
(a) Accounting policies
(b) Accounting estimates
(c) Fundamental accounting assumptions
(d) Applicable financial reporting framework

SA 550
(SA covered in Chapter 3 in module)

(107) Which of the following SA deals with auditor’s responsibilities regarding related party
relationships and transactions when performing an audit of financial statements
(a) SA 540 (b) SA 550
(c) SA 560 (d) SA 570

(108) A transaction conducted on such terms and conditions as between a willing buyer and
a willing seller who are unrelated and are acting independently of each other and
pursuing their own best interest is called as:
(a) Arm’s length transaction (b) Related party transaction
(c) Significant transaction (d) None of these

(109) Related party transaction may be conducted

(a) In the normal course of business
(b) Not under normal market terms and conditions
(c) With no exchange consideration
(d) All of these

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INTER C.A. – AUDIT

(110) A related party transaction may have the following features:

(a) A person or entity under common control
(b) Owners who are close family members
(c) Common key management
(d) All of above

(111) Which of the following is not a record or document that may provide information
about related party relationships and transactions:
(a) Entity income tax return
(b) Internal auditor’s report
(c) Memorandum of Association
(d) Life insurance policies acquired by the entity.

(112) To identify and assess risk of material misstatements due to fraud or error that could
result the entity’s related party relationships and transaction the auditor shall:
(a) Inquiry with management and others within the entity
(b) Perform other risk assessment procedures
(c) Both (a) and (b)
(d) None of these

(113) If auditor identifies significant related party transactions, not conducted on the terms
and conditions like normal rate and market conditions then, he should evaluate-
(a) Business rationale behind these transactions
(b) Consistency of terms with management’s explanation
(c) Accounting and disclosure of such transactions in financial statements
(d) All of above

(114) Statement (1)

As per SA-550, auditor should examine whether related party transactions have been
appropriately accounted for and disclosed in the financial statements as per financial
reporting framework; though he need not check authorization of such transactions by
management.
Statement (2)
Auditor should consider whether management has appropriately accounted and
disclosed the related party transactions in their financial statements as per applicable
financial framework as it might affect his audit opinion.
(a) Only Statement (1) is true
(b) Only Statement (2) is true
(c) Both the statements are true
(d) None of the Statements is true
AUDIT 302 PART C - MULTIPLE CHOICE QUESTIONS
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(115) Statement (1)

Regarding related party relationships and transactions with them, auditor shall not
obtain any written representation; rather obtain extra evidences independently as he
cannot rely on written representations when it comes to related party transactions.
Statement (2)
As per SA-550, he should maintain documentation regarding name and nature of
related party relationships.
(a) Only Statement (1) is true
(b) Only Statement (2) is true
(c) Both the statements are true
(d) None of the Statements is true

(116) As per Accounting Standard 18, the facts to be disclosed in the financial statements by
the auditor shall include-
(a) Related party name and nature of relationship
(b) If there is a transaction between related parties, the nature of transaction, the
price at which it has been made and amount of transaction outstanding at the
balance sheet date.
(c) Both a and b
(d) None of these

(117) For identifying existence of related parties, apart from obtaining written
representation from management and TCWG, the auditor should also consider-
(a) Key man insurance policies
(b) Income tax returns
(c) Internal auditor’s reports
(d) None of these

(118) SA- pertains to management’s responsibilities to examine whether related party

transactions have been appropriately accounted for and disclosed in the financial
statements.
(a) SA-240
(b) SA-550
(c) SA-560
(d) None of these

AUDIT 303 PART C - MULTIPLE CHOICE QUESTIONS

INTER C.A. – AUDIT

SA 560
(SA covered in Chapter 3 in module)

(119) SA-
(a) SA-550
(b) SA-560
(c) SA-570
(d) None of these

(120) Subsequent events as per SA 560 are-

(a) Events occurring between the date of financial statements and the date of
auditor’s report
(b) Facts that become known to the auditor after the date of auditor’s report
(c) Both (a) and (b)
(d) None of these

(121) The auditor shall obtain sufficient and appropriate evidence that all events after the
balance sheet date but before or up to the date of that require adjustment or disclosure
in have been identified.
(a) Board’s approval; Board report
(b) Board’s approval; financial statements
(c) Auditor’s report; Board report
(d) Auditor’s report; financial statements

(122) Regarding subsequent events, auditor shall comply with the requirements given in SA-
560. State which of the following is not correct in this regard?
(a) The auditor shall inquire the management and those charged with governance
regarding the subsequent events.
(b) Auditor should read the entity’s subsequent interim financial statements, if any
(c) The auditor may inquire entity’s lawyer regarding the pending cases and
outcomes therefrom.
(d) Auditor need not consider whether subsequent event may have an impact on
going concern assumption.

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(123) Statement (1)

Generally, auditor has no obligation to perform any audit procedures regarding the
financial statements after the date of auditor’s report.
Statement (2)
In case auditor comes to know about a fact after the date of auditor’s report, he should
not consider the same.
(a) Only Statement (1) is true
(b) Only Statement (2) is true
(c) Both the statements are true
(d) None of the Statements is true

(124) In case facts become known to the auditor after the date of audit report but before the
date financial statements are issued, then auditor shall-
(a) Discuss with management and TCWG the matter whether there is need to
amend financial statements and treatment in financial statements.
(b) Should not ask the management and TCWG to amend the financial statements in
any case because it may give rise to many complications.
(c) He should ask the management and TCWG to inform about the situation to
everyone in receipt of previously issued financial statements and amend the
financial statements
(d) He need not provide a new report even if facts are such that had it been known
to the auditor at the date of audit report, it might have affected his audit report.

(125) Statement (1)

If auditor comes to know about the facts which are of such nature that had those been
known to the auditor at the date of audit report, it might have affected his audit report,
and he asks the management and TCWG to amend the financial statements but
management does not amend the financial statements, then, he should provide a new
report.
Statement (2)
If he comes to know about the facts after the date financial statements are issued, then,
he does not have any obligation because financial statements have already been issued
to third parties. At the most he can provide a public notice.
(a) Only Statement (1) is true
(b) Only Statement (2) is true
(c) Both the statements are true
(d) None of the Statements is true
AUDIT 305 PART C - MULTIPLE CHOICE QUESTIONS
INTER C.A. – AUDIT

(126) A limited company is having a pending case filed against it on 31th March, 2018. A
decision has been received from the court on 14th April, 2018. i.e. after the balance
sheet date.
(a) It is a subsequent event
(b) It should be considered by the management while preparing the financial
statements.
(c) Auditor needs to check whether it has been dealt with in the financial
statements as per applicable financial reporting framework.
(d) All of these

(127) When after the financial statements have been issued, a fact becomes known to the
auditor that, had it been known to the auditor at the date of auditor’s report, may have
caused the auditor to amend the auditor’s report, the auditor shall
(a) Discuss the matter with management and TCWG
(b) Determine whether the financial statements need amendment
(c) Inquire how management intends to address the matter in the financial
statements
(d) All of above

SA 570
(SA covered in Chapter 3 in module)

(128) Statement (1)

Under the going concern assumption, an entity is viewed as continuing in business
forever.
Statement (2)
General purpose financial statements are prepared on a going concern basis if
management neither intends to liquidate the entity nor to cease the operations
(a) Only Statement (1) is true
(b) Only Statement (1) is true
(c) Both the statements are true
(d) None of the Statements is true

(129) In case financial statements have not been prepared on a going concern basis,-
(a) The fact need not be appropriately disclosed
(b) The auditor shall comply with SA-570
(c) Both a and b
(d) None of these

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INTER C.A. – AUDIT

(130) Statement (1)

As per SA-570, the auditor need not consider whether there is material uncertainty
about the entity’s ability to continue as a going concern because it is management’s
responsibility to consider the same.
Statement (2)
The absence of any reference to going concern uncertainty in the auditor’s report may
be viewed as a guarantee as to the entity’s ability to continue as a going concern.
(a) Only Statement (1) is true
(b) Only Statement (2) is true
(c) Both the statements are true
(d) None of the Statements is true

(131) As per SA-570, the auditor shall

(a) Consider the events or conditions that may cast significant doubt on the entity’s
ability to continue as a going concern.
(b) Plan and perform his audit considering professional skepticism
(c) Remain alert throughout the audit
(d) All of these

(128) Statement (1)

Under the going concern assumption, an entity is viewed as continuing in business
forever.
Statement (2)
General purpose financial statements are prepared on a going concern basis if
management neither intends to liquidate the entity nor to cease the operations
(a) Only Statement (1) is true
(b) Only Statement (1) is true
(c) Both the statements are true
(d) None of the Statements is true

(129) In case financial statements have not been prepared on a going concern basis,-
(a) The fact need not be appropriately disclosed
(b) The auditor shall comply with SA-570
(c) Both a and b
(d) None of these

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INTER C.A. – AUDIT

(130) Statement (1)

As per SA-570, the auditor need not consider whether there is material uncertainty
about the entity’s ability to continue as a going concern because it is management’s
responsibility to consider the same.
Statement (2)
The absence of any reference to going concern uncertainty in the auditor’s report may
be viewed as a guarantee as to the entity’s ability to continue as a going concern.
(a) Only Statement (1) is true
(b) Only Statement (2) is true
(c) Both the statements are true
(d) None of the Statements is true

(131) As per SA-570, the auditor shall

(a) Consider the events or conditions that may cast significant doubt on the entity’s
ability to continue as a going concern.
(b) Plan and perform his audit considering professional skepticism
(c) Remain alert throughout the audit
(d) All of these

(128) Statement (1)

Under the going concern assumption, an entity is viewed as continuing in business
forever.
Statement (2)
General purpose financial statements are prepared on a going concern basis if
management neither intends to liquidate the entity nor to cease the operations
(a) Only Statement (1) is true
(b) Only Statement (1) is true
(c) Both the statements are true
(d) None of the Statements is true

(129) In case financial statements have not been prepared on a going concern basis,-
(a) The fact need not be appropriately disclosed
(b) The auditor shall comply with SA-570
(c) Both a and b
(d) None of these

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INTER C.A. – AUDIT

(130) Statement (1)

As per SA-570, the auditor need not consider whether there is material uncertainty
about the entity’s ability to continue as a going concern because it is management’s
responsibility to consider the same.
Statement (2)
The absence of any reference to going concern uncertainty in the auditor’s report may
be viewed as a guarantee as to the entity’s ability to continue as a going concern.
(a) Only Statement (1) is true
(b) Only Statement (2) is true
(c) Both the statements are true
(d) None of the Statements is true

(131) As per SA-570, the auditor shall

(a) Consider the events or conditions that may cast significant doubt on the entity’s
ability to continue as a going concern.
(b) Plan and perform his audit considering professional skepticism
(c) Remain alert throughout the audit
(d) All of these

(128) Statement (1)

Under the going concern assumption, an entity is viewed as continuing in business
forever.
Statement (2)
General purpose financial statements are prepared on a going concern basis if
management neither intends to liquidate the entity nor to cease the operations
(a) Only Statement (1) is true
(b) Only Statement (1) is true
(c) Both the statements are true
(d) None of the Statements is true

(129) In case financial statements have not been prepared on a going concern basis,-
(a) The fact need not be appropriately disclosed
(b) The auditor shall comply with SA-570
(c) Both a and b
(d) None of these

AUDIT 309 PART C - MULTIPLE CHOICE QUESTIONS

INTER C.A. – AUDIT

(130) Statement (1)

As per SA-570, the auditor need not consider whether there is material uncertainty
about the entity’s ability to continue as a going concern because it is management’s
responsibility to consider the same.
Statement (2)
The absence of any reference to going concern uncertainty in the auditor’s report may
be viewed as a guarantee as to the entity’s ability to continue as a going concern.
(a) Only Statement (1) is true
(b) Only Statement (2) is true
(c) Both the statements are true
(d) None of the Statements is true

(131) As per SA-570, the auditor shall

(a) Consider the events or conditions that may cast significant doubt on the entity’s
ability to continue as a going concern.
(b) Plan and perform his audit considering professional skepticism
(c) Remain alert throughout the audit
(d) All of these

(128) Statement (1)

Under the going concern assumption, an entity is viewed as continuing in business
forever.
Statement (2)
General purpose financial statements are prepared on a going concern basis if
management neither intends to liquidate the entity nor to cease the operations
(a) Only Statement (1) is true
(b) Only Statement (1) is true
(c) Both the statements are true
(d) None of the Statements is true

(129) In case financial statements have not been prepared on a going concern basis,-
(a) The fact need not be appropriately disclosed
(b) The auditor shall comply with SA-570
(c) Both a and b
(d) None of these

AUDIT 310 PART C - MULTIPLE CHOICE QUESTIONS

INTER C.A. – AUDIT

(130) Statement (1)

As per SA-570, the auditor need not consider whether there is material uncertainty
about the entity’s ability to continue as a going concern because it is management’s
responsibility to consider the same.
Statement (2)
The absence of any reference to going concern uncertainty in the auditor’s report may
be viewed as a guarantee as to the entity’s ability to continue as a going concern.
(a) Only Statement (1) is true
(b) Only Statement (2) is true
(c) Both the statements are true
(d) None of the Statements is true

(131) As per SA-570, the auditor shall

(a) Consider the events or conditions that may cast significant doubt on the entity’s
ability to continue as a going concern.
(b) Plan and perform his audit considering professional skepticism
(c) Remain alert throughout the audit
(d) All of these

(128) Statement (1)

Under the going concern assumption, an entity is viewed as continuing in business
forever.
Statement (2)
General purpose financial statements are prepared on a going concern basis if
management neither intends to liquidate the entity nor to cease the operations
(a) Only Statement (1) is true
(b) Only Statement (1) is true
(c) Both the statements are true
(d) None of the Statements is true

(129) In case financial statements have not been prepared on a going concern basis,-
(a) The fact need not be appropriately disclosed
(b) The auditor shall comply with SA-570
(c) Both a and b
(d) None of these
AUDIT 311 PART C - MULTIPLE CHOICE QUESTIONS
INTER C.A. – AUDIT

(130) Statement (1)

As per SA-570, the auditor need not consider whether there is material uncertainty
about the entity’s ability to continue as a going concern because it is management’s
responsibility to consider the same.
Statement (2)
The absence of any reference to going concern uncertainty in the auditor’s report may
be viewed as a guarantee as to the entity’s ability to continue as a going concern.
(a) Only Statement (1) is true
(b) Only Statement (2) is true
(c) Both the statements are true
(d) None of the Statements is true

(131) As per SA-570, the auditor shall

(a) Consider the events or conditions that may cast significant doubt on the entity’s
ability to continue as a going concern.
(b) Plan and perform his audit considering professional skepticism
(c) Remain alert throughout the audit
(d) All of these

(132) The following type of indicators may give rise to a doubt on going concern assumption
adopted by management:
(a) Financial indicators
(b) Operating indicators
(c) Other indicators
(d) All of these

(133) If the management has prepared financial statements based on going concern
assumption but auditor concludes that use of going concern basis is inappropriate,
then auditor shall-
(a) Express a qualified opinion
(b) Express an adverse opinion
(c) Disclaim his opinion
(d) Either option (a) or option (b)

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INTER C.A. – AUDIT

(134) If auditor concludes that use of going concern basis of accounting is appropriate but a
material uncertainty exists which is adequately disclosed in the financial statements,
then auditor shall-
(a) Express a qualified opinion
(b) Express an adverse opinion
(c) Either option (a) and option (b)
(d) None of these

(135) If going concern basis of accounting is appropriate, however, there is a material

uncertainty which is not disclosed in the financial statements, then auditor shall
express-
(a) Qualified opinion
(b) Adverse opinion
(c) (a) or (b)
(d) Disclaimer of opinion

(136) The auditor’s report shall include a separate section under the heading “material
uncertainty relating to going concern” in case-
(a) Adequate disclosure of a material uncertainty has been made in the financial
statements
(b) Adequate disclosure of material uncertainty is not made in the financial
statements
(c) Management may be unwilling to make or extend his assessment
(d) All of these

(137) If auditor identifies events or conditions that may cast significant doubt on going
concern, he shall communicate the same to-
(a) Management
(b) TCWG
(c) Option (a) and option (b) both
(d) Either (a) or option (b)

(138) The matters relating to going concern may-

(a) Be a key audit matter as per SA 701
(b) Should not be a key audit matter as per SA-701 because these are dealt only in
SA-570
(c) Key audit matters must not include going concern matters
(d) None of these

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INTER C.A. – AUDIT

(139) While performing audit procedures to obtain audit evidence for management’s use of
going concern assumption, the auditor shall consider same time period as covered by
management in its assessment, but such period shall not be less than
(a) 3 Months
(b) 6 Months
(c) 10 Months
(d) 12 Months

(140) Which of the following is financial event or condition which may cast significant doubt
on the entity’s ability to continue as going concern
(a) Loss of franchise
(b) Shortage of supplies
(c) Negative operating cash flows
(d) Non-compliance with statutory requirement

(141) Which of the following is operating event or condition which may cast significant doubt
on the entity’s ability to continue as going concern
(a) Loss of major market segment
(b) Loss of key customer
(c) Inability to pay creditors on due date
(d) (a) and (b)

(142) The auditor found that entity has recurring losses and has negative net worth, these
are indicators of-
(a) Operating nature
(b) Financial nature
(c) Other indicators
(d) All of these

(143) If auditor concludes that management’s use of going concern basis of accounting is
appropriate but material uncertainty exists which has been properly disclosed by
management in financial statement, the auditor shall
(a) Introduce EOM para in his report in accordance with SA 706
(b) Introduce separate section in his report under the heading ‘Material
Uncertainty Related to Going Concern’
(c) Introduce OM para in his report in accordance with SA 706
(d) Qualify his opinion in accordance with SA 705

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INTER C.A. – AUDIT

(144) In case of management’s unwillingness to make or extend its going concern

assumption, the auditor shall
(a) Consider the implications for the auditor’s report
(b) Withdraw from engagement
(c) Introduce EOM para in his report in accordance with SA 706
(d) Introduce OM para in his report in accordance with SA 706

(145) When any event or condition is identified by auditor which may cast significant doubt
on the entity’s ability to continue as going concern, the auditor’s additional procedure
shall include the following
(a) Communicating the facts to the regulatory auditory of the entity
(b) Communicate the matter to the Central Government
(c) Request written representation from management or TCWG regarding their
future action and feasibility of these plan
(d) All of the above

SA 580
(SA covered in Chapter 3 in module)

(146) SA 580 relates to

(a) External Confirmation
(b) Audit Materiality
(c) Written Representation
(d) Going Concern

(147) Written representation are obtained from

(a) TCWG
(b) Management
(c) Third Parties
(d) TCWG or Management

(148) Written representation is a written statement by management provided to auditor

(a) To confirm certain matters
(b) To support other audit evidence
(c) (a) or (b)
(d) None of these
AUDIT 315 PART C - MULTIPLE CHOICE QUESTIONS
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(149) Statement 1
Written representation do not include financial statements and supporting records etc.
Statement 2
Written representation should be addressed to the management and TCWG
(a) Only Statement 1 is true
(b) Only Statement 2 is true
(c) Both the statements are true
(d) None of the Statements is true

(150) If auditor concludes that there is a sufficient doubt about the integrity of management
such that written representation are not reliable or management does not provide the
necessary written representation, he shall
(a) Express unmodified opinion
(b) Disclaim an opinion
(c) Express adverse opinion
(d) Withdraw from engagement.

(151) Pick the odd one out

(a) Written representation is a written statement by management or TCWG of the
entity to the auditor
(b) Written representation shall be dated before the date of auditor’s report
(c) Written representations do not include financial statements or supporting
books and records
(d) Written representation is a substitution of audit procedures

(152) Which of the following is incorrect

(a) Written representation is a written statement by management provided to
auditor to confirm certain matters or to support other audit evidence
(b) Written representation includes financial statements or supporting books and
records
(c) Written representation shall be for all financial statements and period(s)
referred to in auditor’s report
(d) Written representation shall be dated before the date of auditor’s report.

AUDIT 316 PART C - MULTIPLE CHOICE QUESTIONS

INTER C.A. – AUDIT

 ANSWERS 

1 C 26 B 51 B 76 B 101 C 126 D 151 D

2 A 27 B 52 C 77 D 102 B 127 D 152 B
3 B 28 C 53 D 78 C 103 C 128 B
4 C 29 A 54 D 79 A 104 C 129 D
5 D 30 B 55 A 80 B 105 A 130 D
6 C 31 A 56 C 81 D 106 A 131 D
7 B 32 C 57 C 82 D 107 B 132 D
8 D 33 C 58 C 83 D 108 A 133 B
9 C 34 D 59 A 84 B 109 D 134 D
10 B 35 A 60 B 85 A 110 D 135 C
11 D 36 D 61 D 86 C 111 C 136 A
12 A 37 C 62 C 87 D 112 C 137 B
13 B 38 D 63 D 88 D 113 D 138 A
14 D 39 C 64 B 89 A 114 B 139 D
15 A 40 B 65 A 90 D 115 B 140 C
16 D 41 D 66 D 91 C 116 C 141 D
17 A 42 D 67 C 92 A 117 D 142 B
18 A 43 D 68 A 93 A 118 B 143 B
19 A 44 C 69 C 94 B 119 B 144 A
20 C 45 A 70 C 95 B 120 C 145 C
21 B 46 B 71 A 96 C 121 D 146 C
22 D 47 D 72 B 97 D 122 D 147 D
23 C 48 D 73 B 98 A 123 A 148 C
24 B 49 B 74 D 99 D 124 A 149 A
25 C 50 A 75 B 100 A 125 D 150 B

AUDIT 317 PART C - MULTIPLE CHOICE QUESTIONS

INTER C.A. – AUDIT

CHAPTER 4
SAS AND OTHER CONTENT
(1) Which of the following is a type of audit procedure.
(c) Risk Assessment Procedures (b) Further Audit Procedures
(c) Both (a) and (b) (d) None of these

(2) Which of the following SAs deals with auditor’s responsibilities w.r.t. risk assessment
(c) SA 315 (b) SA 320
(c) SA 330 (d) SA 450

(3) Risk assessment procedures are performed by auditor

(a) To detect material misstatements in the financial statements
(b) To identify and assess material misstatements in the financial statements
(c) To identify and assess operational risk in the operations of the entity
(d) All of these

(4) Components of risk of material misstatements are

(a) Inherent Risk and Control Risk
(b) Inherent Risk and Detection Risk
(c) Control Risk and Detection Risk
(d) Inherent Risk, Control Risk and Detection Risk

(5) Audit Risk refers to risk that

(a) If financial statements are materially misstated then auditor may express an
inappropriate opinion.
(b) Audit sample may be inappropriate
(c) Auditor may be unable to complete auditing engagement in timely manner
(d) All of these

(6) The risk for the company that an auditor may issue an unqualified report due to
auditor’s failure to detect some misstatement either due to fraud or error is
(a) Financial accounting risk (b) Analytical risk
(c) Taxation risk (d) Audit risk

AUDIT 318 PART C - MULTIPLE CHOICE QUESTIONS

INTER C.A. – AUDIT

(7) For better assessing the audit risk, auditor inquires different groups in the
organizations EXCEPT:
(a) Board of governance and top level management
(b) Legal counsel
(c) Middle level management
(d) Stakeholders

(8) Which is not included in audit risk

(a) Ordinarily insignificant (b) Adverse publicity
(c) Loss from litigation (d) All of the above

(9) Components of audit risk are

(a) Inherent Risk, Control Risk and Sampling Risk
(b) Inherent Risk, Control Risk and Detection Risk
(c) Inherent Risk and Control Risk
(d) None of these

(10) Risk of material misstatements is a function of

(a) Audit risk and control risk
(b) Control risk and detection risk
(c) Inherent risk and control risk
(d) None of the above All of the above

(11) If inherent risk and control risk are assessed as high, then
(a) Audit risk should be higher so that overall detection risk can be controlled
(b) Detection risk should be lower so that overall audit risk can be controlled
(c) Audit risk should be lower so that overall detection risk can be controlled
(d) Detection risk should be higher so that overall audit risk can be controlled

(12) Which of the following increase control risk?

(a) Lack of segregation of duties
(b) Reduction in the size of the internal audit group
(c) Both (a) and (b)
(d) None of these

AUDIT 319 PART C - MULTIPLE CHOICE QUESTIONS

INTER C.A. – AUDIT

(13) Which of the following is correct

(a) Audit risk is the risk of a material misstatement in the financial statements
(b) The risk of a material misstatement in the financial statements consists of
control risk
(c) Audit risk is the risk that auditor will not detect a material a material
misstatement that exists in the financial statements
(d) Audit risk is the risk of a material misstatement in the financial statements and
that the auditor did not detect the material misstatement.

(14) Risk of material misstatement has components

(a) One (b) Two
(c) Three (d) Four

(15) What techniques should the auditor use in assessing the risk of material
misstatements?
(a) The auditor should obtain written representation from the entity’s management
(b) The auditor should relate the identified risks to what can go wrong at assertions
level
(c) The auditor should consider the implications of the identified risks for the
auditor’s report
(d) The auditor should familiarize themselves with the client’s industry and current
market conditions.

(16) Which one of the following is not one of the categories of assertions identified in SA
315
(a) Accounting policies
(b) Presentation and disclosure
(c) Account balances at the period end
(d) Classes of transactions and events for the period under audit.

AUDIT 320 PART C - MULTIPLE CHOICE QUESTIONS

INTER C.A. – AUDIT

(17) For purposes of the SAs, which of the following meaning attributed to the term
“Assertions”
(a) Representations by management, explicit or otherwise, that are embodied in
the financial statements, as used by the auditor to consider the different types
of potential misstatements that may occur.
(b) A risk resulting from significant conditions, events, circumstances, actions or
inactions that could adversely affect an entity’s ability to achieve its objectives
and execute its strategies or from the setting of inappropriate objectives and
strategies.
(c) An identified and assesses risk of material misstatements that, in the auditor’s
judgement, requires special audit consideration.
(d) The audit procedures performed to obtain an understanding of the entity and
its environment, including the entity’s internal control to identify and assess the
risk of material misstatement, whether due to fraud or error, at the financial
statement and assertion levels.

(18) The auditor shall identify and assess the risk of material misstatements at
(a) The financial statement level
(b) The assertion level for classes of transactions account balances and disclosures
(c) Both (a) and (b)
(d) None of the above

(19) Obtaining an understanding of the entity and its environment, including the entity’s
internal control is a
(a) Initial process of gathering, updating and analyzing information of an audit
(b) Continuous, dynamic process of gathering, updating and analyzing information
throughout the audit
(c) Dynamic process of gathering, updating and analyzing information at the time
of initial audit engagement
(d) None of the above

(20) An understanding of the entity’s selection and application of accounting policies may
encompass such matters
(a) The methods the entity uses to account for significant and unusual transactions
(b) Financial reporting standards an laws and regulations that are new to entity
and when and how the entity will adopt such requirements
(c) Changes in the entity’s accounting policies
(d) All of the above
AUDIT 321 PART C - MULTIPLE CHOICE QUESTIONS
INTER C.A. – AUDIT

(21) An identified and assessed risk of material misstatement that, in the auditor’s
professional judgement, requires special audit consideration is called as
(a) Inherent Risk (b) Audit Risk
(c) Sampling Risk (d) Significant Risk

(22) Inherent Risk refers to

(a) Risk of an inappropriate opinion
(b) Risk of failure of internal control in the prevention or detection of material
misstatements
(c) Susceptibility of account balances or class of transaction to be materially
misstated, assuming there were no internal controls
(d) Risk of non-detection of material misstatements in financial statements

(23) Possibility of deficiencies leading to material misstatement in the financial statement

in future, is the best
(a) Risk of material misstatement
(b) Significant Deficiency in internal control
(c) Deficiency in professional judgement
(d) None of the above

(24) Which of the following does not refers to significant deficiency in internal control?
(a) Susceptibility to loss or fraud of the related assets or liability
(b) Amount in financial statements exposed to deficiency
(c) Subjectivity and complexity of determining estimated amounts
(d) Transactions are executed in accordance with management’s general or specific
authorization.

(25) Parameters for significant deficiency to be reported to those charged with governance,
state which of the following is not correct with reference to the above?
(a) Disclosure of material misstatement due to fraud error where the management
is involved
(b) Evidence of ineffective response by management
(c) Identification of fraud where management is also involved, which entity’s
internal controls are unable to prevent.
(d) Transactions are executed in accordance with management general or specific
authorization.

(26) Evaluation and assessment of audit findings and control deficiencies involves applying
(a) Professional Skepticism (b) Professional Judgement
(c) Both (a) and (b) (d) None of the above

AUDIT 322 PART C - MULTIPLE CHOICE QUESTIONS

INTER C.A. – AUDIT

(27) In assessing which risks are significant risk, which one of the following is not required
to be considered by the auditor
(a) The complexity of transaction
(b) Whether the risk is risk of fraud
(c) Whether the firm has an internal audit department
(d) The degree of subjectivity in the measurement of financial information

(28) Business risk may arise from which of the following?

(a) Globalization
(b) Industry and economic factors
(c) Corporate objectives and strategies
(d) All of the above

(29) Control Risk refers to

(a) Risk of an inappropriate opinion
(b) Risk of failure of internal control in the prevention or detection of material
misstatements
(c) Susceptibility of account balances or class of transaction to be materially
misstated, assuming there were no internal controls
(d) Risk of non-detection of material misstatements in financial statements

(30) If before considering the internal controls at the audited entity, there is a high
probability of certain errors in the financial statements, we particularly speak of
(a) a high sampling risk (b) a high inherent risk
(c) a high control risk (d) a high detection risk

(31) Detection Risk refers to

(a) Risk of an inappropriate opinion
(b) Risk of failure of internal control in the prevention or detection of material
misstatements
(c) Susceptibility of account balances or class of transaction to be materially
misstated, assuming there were no internal controls
(d) Risk of non-detection of material misstatements in financial statements

(32) The risk that an auditor’s procedures will lead to the conclusion that a material
misstatement does not exist in an account balance when, in fact, such misstatement
actually does exist is
(a) Audit risk (b) Sampling risk
(c) Control risk (d) Detection risk

AUDIT 323 PART C - MULTIPLE CHOICE QUESTIONS

INTER C.A. – AUDIT

(33) There is inverse relationship between

(a) Inherent risk and control risk
(b) Combined risk of inherent and control risk with risk of material misstatements
(c) Materiality and Audit Risk
(d) Detection Risk and Audit Risk

(34) For a given level of audit risk, the acceptable level of detection risk bears relationship
to the assessed risk of material misstatement at the assertion level
(a) Direct (b) Inverse
(c) No (d) None of the above

(35) There is inverse relationship between

(a) Inherent Risk and Control Risk
(b) Combined risk of inherent and control risk with risk of material misstatements
(c) Combined risk of inherent and control risk with detection risk
(d) Sampling Risk and Non-Sampling Risk

(36) The sequence of steps in the auditor’s consideration of internal control is as follows:
(a) Obtain an understanding, design substantive test, perform tests of control, and
make a preliminary assessment of control risk.
(b) Design substantive test, obtain an understanding, perform tests of control, and
make a preliminary assessment of control risk.
(c) Obtain an understanding, make a preliminary assessment of control risk,
perform tests of control, design substantive test
(d) Perform tests of control, Obtain an understanding, make a preliminary
assessment of control risk, Design substantive test

(37) An auditor should study and evaluate internal controls to

(a) Determine whether assets are safeguarded
(b) Suggest improvements in internal control
(c) Plan audit procedures
(d) Express and opinion

(38) The overall attitude and awareness of an entity’s board of directors concerning the
importance of internal control is reflected in
(a) Accounting controls (b) Control environment
(c) Control procedures (d) Supervision

AUDIT 324 PART C - MULTIPLE CHOICE QUESTIONS

INTER C.A. – AUDIT

(39) Objective of internal control excluding

(a) Transactions are executed in accordance with managements general or specific
authorization
(b) Internal control is designed, implemented and maintained to address
unidentified business risks.
(c) The recorded assets are compared with the existing assets at reasonable
intervals and appropriate action is taken with regard to any differences.
(d) Assets are safeguarded from unauthorized access, use or disposition, maintain
accountability for assets.

(40) A number of checks and controls exercised in a business to ensure its efficient working
is known as
(a) Internal check (b) Internal control
(c) Internal audit (d) Interim check

(41) An auditor assesses control risk because it

(a) Affects the audit risk
(b) Affects the level of detection risk that auditor may accept
(c) Helps him to fix materiality level for each financial assertion
(d) Is directly related to inherent risk

(42) The SAs do not ordinarily refer to inherent risk and control risk separately, but rather
to a combined assessment of the “risks of material misstatement”
(a) The management may make separate or combined assessments depending on
methodologies and practical considerations
(b) The auditor may make separate or combined assessments depending on
methodologies and practical considerations
(c) The management and those charged with governance may make separate or
combined assessments depending on methodologies and practical
considerations
(d) None of the above

(43) In comparison to the independent auditor, an internal auditor is more likely to be

concerned with
(a) Cost accounting system (b) Internal control system
(c) Legal compliance (d) Accounting system

AUDIT 325 PART C - MULTIPLE CHOICE QUESTIONS

INTER C.A. – AUDIT

(44) When an independent auditor decides that the work performed by internal auditors
may have bearing on the nature, timing and extent of planned audit procedures, the
independent auditor should evaluate objectivity of the internal auditor. The most
important factor influencing it would be
(a) Organizational level to which he reports
(b) Qualification of internal auditor
(c) System of quality control of his work
(d) All of the above

(45) When an independent auditor relies on the work of an internal auditor, he or she
should
(a) Examine the scope of internal auditor’s work
(b) Examine the system of supervising review and documentation of internal
auditor’s work
(c) Adequacy of related audit programme
(d) All of the above

(46) The independence of an internal auditor will most likely be assured if he reports to the
(a) President finance (b) President system
(c) Managing Director (d) CEO

(47) In respect of some risks, the auditor may judge that it is not possible or practicable to
obtain sufficient appropriate audit evidence only from
(a) Test of control (b) Substantive procedures
(c) Both a and b (d) All of the above

(48) M Ltd. Conducts quarterly review of operations. It discovers that unrest in a Middle
east country may affect the supply of raw materials to it the next quarter. This is an
example of:
(a) Risk assessment (b) Control procedure
(c) Supervision (d) Control environment

(49) Which of the following statements is correct

(a) Audit risk is the risk of material misstatement in the financial statements
(b) The risk of a material misstatement in the financial statements consists of
control risk
(c) Audit risk is the risk that the auditor will not detect a material misstatement
that exists in the financial statements
(d) Audit risk is the risk of a material misstatement in the financial misstatements
and that the auditor did not detect the material misstatement.
AUDIT 326 PART C - MULTIPLE CHOICE QUESTIONS
INTER C.A. – AUDIT

(50) Which of the following statement is not correct

(a) Inherent risk and control risk cannot be controlled by the management
(b) Detection risk is related directly to the effectiveness of the auditor procedures
(c) Detection risk is related inversely to control risk
(d) Inherent risk and control risk are highly interrelated

(51) Proper segregation of duties reduces the opportunities in which a person would both
(a) Establish controls and executes them
(b) Records cash receipts and cash payments
(c) Perpetuate errors and frauds and conceals them
(d) Record the transaction in journal and ledger

(52) The risk assessment procedures shall include the following except
(a) Inquiries of management and of others within the entity
(b) Regular reconciliation
(c) Analytical procedures
(d) Observation and inspection

(53) Which of the following is not likely to a fraud risk factor relating to management
characteristics
(a) Tax evasion
(b) Failure to correct known weakness in internal control system
(c) Adoption of conservative accounting principles
(d) High management turnover

(54) Factors relevant to the auditor’s judgement about whether a control, individually or in
combination with others, is relevant to the audit may include such matters as the
following
(a) Materiality
(b) The significance of the related risk
(c) The diversity and complexity of the entity’s operations
(d) All of the above

(55) Which of the following in not an assertion about classes of transactions and events for
the period under audit:
(a) Occurrence (b) Accuracy
(c) Classification (d) Existence
AUDIT 327 PART C - MULTIPLE CHOICE QUESTIONS
INTER C.A. – AUDIT

(56) Which of the following is not an assertion about classes account balances at the period
end
(a) Existence (b) Valuation
(c) Accuracy (d) Rights and Obligations

(57) XYZ Limited decided that it wanted to improve earnings. To do this, they understated
their expenses by omitting unpaid expenses from the accrued liabilities account at year
end. Which management assertion has been violated?
(a) Rights and obligations (b) Completeness
(c) Existence (d) Disclosure

(58) Pick the odd one

(a) Occurrence (b) Existence
(c) Right and obligation (d) Valuation

(59) Pick the odd one

(a) Occurrence (b) Accuracy
(c) Cut-off (d) Valuation

(60) A Ltd, is in a highly competitive industry with majority of the competition coming from
middle east countries. The company’s products have a relatively short life cycle and
product development is continuous in order to keep up with competitors.
For the inventory account, the assertion upon which most audit efforts should be
concentrated is
(a) Existence (b) Completeness
(c) Right and Obligation (d) Valuation and Allocation

(61) B Ltd is engaged in business of selling accessories for laptops through online, as an
auditor how would you proceed in this regard as to understanding the entity and its
environment
(a) Spending substantial time (b) Extensive audit procedures
(c) Both (a) and (b) (d) Monitoring

(62) Which of the following are performed as risk assessment procedures

(a) Observation (b) Inquiry
(c) Analytical Review (d) All of these

AUDIT 328 PART C - MULTIPLE CHOICE QUESTIONS

INTER C.A. – AUDIT

(63) Significant risk refers to

(a) Audit Risk
(b) Sampling Risk
(c) Risk of material misstatements
(d) Risk of material misstatements requiring special audit considerations

(64) Which of the following is not a component of Internal Control

(a) Information system
(b) Control environment
(c) Entity’s risk assessment procedures
(d) Quality review

(65) Control activities, whether within IT or manual system, have various objectives and are
applied at various organizational and functional levels. Which of the following is an
example of control activities?
(a) Authorization (b) Performance reviews
(c) Information processing (d) All of the above

(66) The auditor must have a thorough understanding of the entity, the client’s business
strategies, processes, and measurement indicators for critical success. This analysis
helps the auditor
(a) Decide if they want to accept the engagement
(b) Identify risks associated with the client’s strategy that could affect the financial
statements
(c) Assess the level of materiality that is appropriate for the audit
(d) Identify the potential for fraud in the financial reporting process

(67) Which assertion is common among income statement and balance sheet captions:
(a) Existence (b) Valuation
(c) Completeness (d) Measurement

(68) Direct confirmation procedures are performed during audit of accounts receivable
balances to address the following balance sheet assertion:
(a) Rights and obligations (b) Existence
(c) Valuation (d) Completeness

AUDIT 329 PART C - MULTIPLE CHOICE QUESTIONS

INTER C.A. – AUDIT

 ANSWERS 

1 c 2 a 3 b 4 a 5 a 6 d

7 d 8 d 9 b 10 c 11 b 12 c

13 d 14 b 15 b 16 a 17 a 18 c

19 b 20 c 21 d 22 c 23 b 24 d

25 d 26 b 27 c 28 d 29 b 30 c

31 d 32 d 33 c 34 b 35 c 36 c

37 c 38 b 39 b 40 b 41 b 42 b

43 b 44 a 45 d 46 c 47 b 48 a

49 d 50 a 51 c 52 b 53 c 54 d

55 d 56 c 57 b 58 a 59 d 60 d

61 c 62 d 63 d 64 d 65 d 66 b

67 c 68 b

AUDIT 330 PART C - MULTIPLE CHOICE QUESTIONS

INTER C.A. – AUDIT

CHAPTER 5
SA 240 AND OTHER CONTENT
(READ WITH CHAPTER 5 CONTENT)

(1) Which of the following SA deals with auditor’s responsibilities in relation to fraud in an
audit of financial statements
(a) SA 240 (b) SA 250 (c) SA 315 (d) SA 330

(2) When credit purchases of Rs. 5100 is recorded on credit side and credit sales of Rs. 5100
is recorded on debit side, this kind of error is called
(a) Error of omission. (b) Compensating error.
(c) Error of principle. (d) Error of commission.

(3) Procedural error arises

(a) As a result of transaction have been recorded in a fundamentally incorrect manner
(b) Where there is error in implementation of the procedure
(c) Both (a) and (b) (d) None

(4) If, as a result of s misstatement resulting from fraud, the auditor encounters exceptional
circumstances that bring into question his ability to continue performing the auditor
shall-
(a) Withdraw from the engagement immediately.
(b) Report to audit team regarding withdrawal.
(c) Determine the professional and legal responsibilities applicable in the
circumstances.
(d) Ask the management for his withdrawal.

(5) Which of the following is an example of inflating cash payments?

(a) Making payments against purchase vouchers.
(b) Teeming and lading.
((c) Not accounting for cash sales fully.
d) Making payments against inflated vouchers.

(6) The type of errors, existence of which becomes apparent in the process of compilation of
accounts is known as-
(a) Self-revealing errors. (b) Intentional errors.
(c) Concealed errors. (d) Unconcealed errors.

AUDIT 331 PART C - MULTIPLE CHOICE QUESTIONS

INTER C.A. – AUDIT

(7) Misappropriation of assets may occur because there is-

(a) Adequate record keeping with respect to assets.
(b) Know history of violations of securities laws.
(c) Lack of complete and timely reconciliations of assets.
(d) Dispute between shareholders in a closely held entity.

(8) The risk of management fraud increases in the presence of:

(a) Frequent changes in supplies
(b) Improved internal control system
(c) Substantial increases in sales
(d) Management incentive system based on sale done in a quarter.

(9) Which of the following is an example of fraudulent financial reporting

(a) Defalcation of cash by cashier
(b) Misappropriation of inventory by store keeper
(c) Overvaluation of assets
(d) All of these

(10) Which of the following frauds is more difficult to detect

(a) Fraud by employees (b) Fraud by management & TCWG
(c) Both (a) and (b) (d) None of these

(11) Primarily prevention and detection of fraud are the responsibilities of

(a) TCWG and Management of entity (b) Internal Auditor of entity
(c) External Auditor of entity (d) All of above

(12) Which of the following in not a fraud through suppressing cash receipts:
(a) Not accounting for cash sales fully
(b) Not accounting for miscellaneous receipts
(c) Not accounting for bad debt recovered
(d) Making payment against fictitious vouchers.

(13) Teeming and lading is a technique of fraud through

(a) Inflating cash payment
(b) Wrongs casting in cash book
(c) Suppressing cash receipts
(d) None of these

AUDIT 332 PART C - MULTIPLE CHOICE QUESTIONS

INTER C.A. – AUDIT

(14) Which of the following error will affect the trial balance
(a) Error of partial omission (b) Error of principles
(c) Error of complete omission (d) Compensatory errors

(15) Examples of fraudulent financial reporting

(a) Inflating or suppressing purchases and expenses
(b) Inflating or suppressing sales and other items of income
(c) Overvaluation of assets
(d) All of above

(16) Which of the following is not an example of suppressing cash receipts

(a) Teeming and Lading
(b) Payment against fictitious vouchers
(c) Not accounting for cash sales fully
(d) Not accounting for miscellaneous receipts.

(17) Which of the following is not self-revealing error

(a) Wages paid for installation of machine debited in wages account.
(b) Omission to post a part of a journal entry to ledger
(c) A failure to record in the cash book, cash paid into or withdrawn from bank
(d) Goods purchased from Mr. A omitted to be recorded.

(18) Teeming and Lading is a technique for

(a) Inflating cash payments (b) Wrong casting in the cash book
(c) Suppressing cash receipts (d) None of these

(19) Which of following is fraud risk factor

(a) Incentive/Pressure (b) Opportunities
(c) Attitude/Rationalization (d) All of above

(20) Which of the following is not likely to be a fraud risk factor relating to management’s
characteristics
(a) Tax evasion
(b) Failure to correct known weakness in internal control system
(c) Adoption of conservative accounting principles
(d) High management turnover

AUDIT 333 PART C - MULTIPLE CHOICE QUESTIONS

INTER C.A. – AUDIT

(21) Which of the following statements is not correct?

(a) Management fraud is more difficult to detect than employee fraud
(b) Internal control system reduces the possibility of occurrence of employee fraud
and management fraud.
(c) The auditor’s responsibility for detection and prevention of error and fraud is
similar
(d) All statements are correct

(22) Which of the following is an indicator of fraud due to problematic or unusual

relationship between auditor and management
(a) Unsupported or unauthorized transaction
(b) Unusu
al delays by the entity in providing requested information
(c) Last minute adjustments that significantly affect financial results
(d) All of above.

(23) Which of the following is least likely to be included in an auditor’s inquiry of

management while obtaining information to identify the risks of material misstatement
due to fraud?
(a) Are financial reporting operations controlled by and limited to one location?
(b) Does it have knowledge of fraud or suspect fraud?
(c) Does it have programs to mitigate fraud risks?
(d) Has it reported to the audit committee the nature of the company’s internal
control?

(24) Which of the following is most likely to be presumed to present a fraud risk on an audit?
(a) Capitalization of repairs and maintenance expense into the property, plant and
equipment asset account
(b) Improper revenue recognition
(c) Improper interest expense accrual
(d) Introduction of significant new products

(25) Degree of detection risk is generally high which respect to

(a) Management’s Fraud
(b) Employee’s Fraud
(c) Error
(d) All of above.
AUDIT 334 PART C - MULTIPLE CHOICE QUESTIONS
INTER C.A. – AUDIT

(26) Due to inherent limitations of audit, there is __________ that some mis-statements will
(a) Reasonable assurance, not be detected
(b) Unavoidable risk, not be detected
(c) Avoidable risk, not be detected
(d) Unavoidable risk , not be prevented

(27) Fraud is an intentional act involving use of deception to obtain an unjust advantage and
can be committed by
(a) TCWG (b) Employees (c) Third parties (d) Any of these

(28) State which of the following statement is not correct

(a) Management is responsible for identification of fraud
(b) Auditor is appointed for the sole purpose to identify the fraud
(c) TCWG takes major decision about the entity
(d) Management is involved in operation of entity

(29) Where auditor comes across a situation where any misstatement due to fraud or error
could exist then
(a) The auditor shall issue modified report
(b) The auditor should discuss significant matter with engagement partner’
(c) The auditor should apply additional procedures to confirm or dispel his suspicion
(d) The auditor shall qualify the report.

(30) Circumstances relating to possibility of fraud include

(a) Accounting policies that appear to be variance with industry norms
(b) Yearly changes in accounting estimates that do not appear to result from changed
circumstances
(c) Short period provided by management to resolve complex issues
(d) All of the above

(31) The management may override the controls in order to take advantage of the situation,
whereby, they may pass INCORRECT entries in the book, is known as
(a) Misappropriation of assets (b) Fraudulent financial reporting
(c) Pilferage/misappropriation of receipts (d) None of the above

(32) State which of the following statement is misappropriation of assets

(a) Ledger alteration (b) Concealment of facts
(c) Significant alteration (d) Pilferage/Misappropriation of receipts

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(33) The accountant receives money from customer 2 but adjust it to customer 1’s account.
This process goes on and at no point of time will the customer balance shown properly,
it refers as
(a) Misapplication of accounting principles (b) Intentional Omission
(c) Teeming and Lading (d) Engaging in complex transaction

(34) Which of the following is not likely to be a fraud risk factor relating to management’s
characteristics
(a) Tax evasion
(b) Failure to correct known weakness in internal control system
(c) Adoption of conservative accounting principles
(d) High management turnover.

(35) State which of the following constitutes possibility of fraud

(a) Discrepancies in accounting records
(b) Conflicting or missing evidence
(c) Problematic or unusual relationship between auditor and management
(d) All of the above

(36) Incentive or pressure to commit fraudulent financial reporting exist when

(a) An individual believes internal control can be overridden
(b) Management is under pressure
(c) Some individual possess an attitude, character or set of ethical values that allow
them knowingly and intentionally to commit a dishonest act
(d) All of the above

(37) A perceived opportunity to commit fraud may exist when

(a) An individual believes internal control can be overridden
(b) Management is under pressure
(c) Some individual possess an attitude, character or set of ethical values that allow
them knowingly and intentionally to commit a dishonest act
(d) Both (b) and (c)

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(38) Fraudulent financial reporting may be accomplished by

(a) Manipulation/ Falsification
(b) Misapplication of accounting policies
(c) Both (a) and (b)
(d) None of these

(39) Fraud can be committed by management overriding controls using the following
techniques. State which of the following options is correct?
(a) Inflating cash payments
(b) Recording fictitious journal entries
(c) Causing an entity to pay for goods and service not received.
(d) All of the above

(40) Misappropriation of assets is often accompanied by

(a) Incorrect or misleading records
(b) Documents in order to conceal the fact that the assets are missing.
(c) Documents in order to conceal the fact that the assets have been pledged without
proper authorization.
(d) All of the above

(41) ‘Fraud’ deals with but, ‘error’, on the other hand, refers to in ____________ financial
information.
(a) Unintentional mistake, misrepresentation
(b) Intentional misrepresentation, unintentional mistake
(c) Unintentional misrepresentation, intentional mistake.
(d) Misapplication, Misrepresentation.

(42) Even though the audit is properly planned and performed in accordance with Sass, some
material misstatements of the financial statements will not be detected, this is due to
(a) Internal control is not effective
(b) Inherent limitation of an audit
(c) Inherent limitation of an internal control
(d) Deficiencies in internal control.

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(43) Which of the following statement is not correct, in respect of risk factors relating to
misstatements arising from fraudulent financial reporting?
(a) Financial stability or profitability is threatened by economic, industry, or entity
operating conditions, as indicated by, high degree of competition or market
saturation, accompanied by declining margins.
(b) The nature of the industry or the entity’s operations provides opportunities to
engage in fraudulent financial reporting that can arise from, recurring negative
cash flows from operations or an inability to generate cash flows from operations
while reporting earnings and earnings growth
(c) The relationship between management and the current or the predecessor auditor
is strained, or exhibited by, frequent disputes with the current or predecessor
auditor on accounting, auditing, or reporting matters.
(d) Both a and c

(44) Discrepancies in the accounting records, including

(a) Unsupported or unauthorized balances or transactions
(b) Missing documents
(c) Significant unexplained items on reconciliations
(d) Both b and c

(45) Conflicting or missing evidence, does not includes

(a) Transactions that are not recorded in a complete or timely manner or are
improperly recorded as to amount, accounting period, classification, or entity
policy.
(b) Unusual discrepancies between the entity’s records and confirmation replies.
(c) Significant unexplained items on reconciliations
(d) Both b and c

(46) Problematic or unusual relationships between the auditor and management, including
(a) Unwillingness to facilitate auditor access to key electronic files for testing through
the use of computer assisted audit techniques
(b) Undue time pressures imposed by management to resolve complex or contentious
issues.
(c) An unwillingness to add or revise disclosures in the financial statements to make
them more complete and understandable
(d) All of the above

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(47) Which one of the following statements about fraud is correct?

(a) Fraud can be intentional or unintentional
(b) Fraud always involves misappropriation of assets
(c) Fraud always involves the use of deception to obtain an unjust or illegal advantage
(d) Fraud is always perpetrated by management, those charged with governance or
employees.

(48) Which one of the following does not necessarily constitute fraud?
(a) Alteration of accounting records from which the financial statements are prepared.
(b) Overriding internal controls to record transactions outside the usual course of an
entity’s business
(c) Intentional omission from the financial statements of transactions or other
significant information.
(d) Intentionalmisapplication of accounting principles relating to amounts,
classification, manner of presentation or disclosure.

(49) Which of the following fraudulent activities constitutes misappropriation of assets?

(a) Causing an entity to pay for goods and services not received
(b) Omitting, advancing or delaying recognition of events and transactions
(c) Concealing, or not disclosing, facts that could affect the recorded amounts.
(d) Engaging in complex transactions that misrepresent the financial position of the
entity

(50) Which one of the following does not constitute an appropriate audit planning procedure
that the auditor should employ relating to the risk of fraud?
(a) Increase the level of professional skepticism
(b) Make enquiries to obtain information and so identify the risks of material
misstatement due to fraud
(c) Incorporate an element of unpredictability in the selection of the nature, timing
and extent of the audit procedures to be performed.
(d) The engagement team needs to discuss the susceptibility of the entity’s financial
statements to material misstatement due to fraud

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(51) When planning the audit, the auditor must make enquiries of management. Which one of
the following is not an appropriate enquiry of management about fraud?
(a) The auditor should ask about management’s communications with employees
about ethical behavior.
(b) The auditor should ask management about their assessment of the risk that the
financial statements may be materially misstated due to fraud.
(c) The auditor should ask management if they are personally engaged in fraudulent
activity, including fraudulent financial reporting and misappropriation of assets.
(d) The auditor should ask management about any communications with those
charged with governance regarding its processes for identifying and responding to
the risks of fraud in the entity.

(52) With respect to financial statement fraud, which one of the following statements is not
correct?
(a) Enquiries of management are more useful for detecting management fraud than
employee fraud.
(b) The auditor must consider the risk of material fraud at both the financial statement
level and the assertion level
(c) Excessive pressure on management to meet expectations of third parties creates
incentives for management fraud
(d) The auditor needs to consider the likelihood of collusion in determining the
appropriate level to report suspicions of fraud.

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 ANSWERS 

1 a 11 a 21 b 31 b 41 b 51 c

2 b 12 d 22 b 32 d 42 b 52 a

3 b 13 c 23 a 33 c 43 b

4 c 14 a 24 b 34 c 44 a

5 d 15 d 25 a 35 d 45 a

6 a 16 b 26 b 36 b 46 d

7 c 17 a 27 d 37 a 47 c

8 d 18 c 28 b 38 c 48 b

9 c 19 d 29 c 39 b 49 a

10 b 20 c 30 d 40 d 50 a

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CHAPTER 6
AUTOMATED ENVIRONMENT
(READ WITH CHAPTER 6 CONTENT)

(1) _________ basically refers to a business environment where the processes, operations,
accounting and even decisions are carried by using computer system.
(a) Automated environment (b) Computer environment
(c) IT environment (d) None of these

(2) Some of the key features of an automated environment are

(a) Enables faster business operations
(b) Better security and controls
(c) Provide latest information
(d) All of above

(3) Which of the following is not IT related risk

(a) Unauthorized access to data
(b) Unauthorized changes to system of program
(c) Sampling Risk
(d) Lack of adequate segregation of duties

(4) Types of Controls in an Automated Environment

(a) General IT Controls (b) Application Controls
(c) IT Dependent Manual Controls (d) All of above

(5) are policies and procedures that relates to many applications and support the effective
functioning application controls
(a) General IT Controls (b) IT Dependent Manual Controls
(c) Both (a) and (b) (d) None of these

(6) Which of the following the auditor should consider to obtain an understanding of the
company’s automated environment
(a) Information system being used
(b) Key Persons
(c) Outsourced activities
(d) All of the above

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(7) General IT Controls that maintain integrity of information and security of data
commonly include controls over following
(a) Inputs
(b) Access Security
(c) Processing
(d) Output

(8) Which of the following is not method for testing of controls in automated environment
(a) Inspect the configuration defined in an application
(b) Inspect technical manual/user manual of system and application
(c) Analytical Review
(d) Observe how a user processes transactions under different scenarios.

(9) Which of the following is an automated control?

(a) Program change (b) System generated report
(c) Application control (d) Configuration

(10) General IT control that ensure backups, performance monitoring, recovery from failures
commonly include controls over
(a) Program Change
(b) Access Security
(c) Data Center and Network Operations
(d) Application System acquisition, development and maintenance

(11) The objective of which of the following is to ensure that modified system continue to
meet financial reporting objectives
(a) Data Center and Network Operation
(b) Program Change
(c) Access Security
(d) Application system, acquisition, development and maintenance

(12) The objective of which of the following is to ensure that access to programs and data is
authenticated and authorized to meet financial reporting objectives
(a) Data Center and Network Operations
(b) Program Change
(c) Access Security
(d) Application system, acquisition, development and maintenance

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(13) The objectives of which of the following is to ensure that system are developed,
configured and implemented to meet financial reporting objectives
(a) Data Center and Network Operations
(b) Program Change
(c) Access Security
(d) Application system, acquisition, development and maintenance.

(14) The combination of processes, tools and techniques that are used to tap vast amounts of
electronic data to obtain meaningful information is called
(a) Data Analytics (b) Data base
(c) Information system (d) None of these

(15) Edit checks and validation of input data, sequence number checks, user limit checks,
reasonableness checks, mandatory data fields, these are examples of
(a) General IT Control (b) Manual Application Controls
(c) Automated Application Controls (d) None of these

(16) IT dependent controls are basically

(a) Manual Control (b) Automated Control
(c) Both (a) and (b) (d) None of these

(17) Which of the following is General IT control?

(a) IT Environment
(b) Application Control
(c) Access Security
(d) IT Department Control

(18) _________ can be used in testing of electronic records and data residing in IT systems using
spreadsheets and specialized audit tools to perform fraud investigation analysis of
journal entries as required by SA 240 and selection of audit sample.
(a) Data base (b) Data analytics
(c) Information system (d) None of these

(19) __________ is a term that is used to describe a very large computer with high computing
power, memory and storage that are required for running large business operations.
(a) Application (b) Read Access Memory
(c) Automated (d) Mainframe

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(20) is a computer program or collection of computer programs that provides an interface to

a user for performing a specific activity, task, operation or transaction in electronic form
through a computer or information system.
(a) Software (b) System
(c) Mainframe (d) Information Technology

(21) __________ is a type of super user access to information system that enforces less or no
limits on using that system.
(a) General Controls (b) Privileged Access
(c) Software (d) CAAT

(22) __________ refers to a collection of electronic, hardware, software, networks and

processes that are used in a business to carry out operations and transactions.
(a) Software (b) Information Technology
(c) System/Information System (d) Operating System

(23) ___________ is a task or activity that is routinely performed by a computer system and
does not require manual efforts
(a) Automated (b) Computerized Information System
(c) Electronic Data Processing (d) Computer System

(24) ___________ are a collection of computer based tools and techniques that used in audit for
analyzing data in electronic form to obtain audit evidence.
(a) Data (b) Database (c) Data Analytics (d) CAATs

(25) ___________ refers to the digital content that is stored in electronic form within computer
system
(a) Operating System (b) Data
(c) Software (d) Application System

(26) ___________ refers to a system software that is installed in a computer to convert high
level user instructions or commands into low level machine understandable format and
enable interaction with a computer.
(a) Software (b) Application
(c) Operating System (d) Information Technology

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(27) __________ refers to the systematic recording, storage, retrieval, modification and
transformation of electronic data using information system.
(a) Data (b) Data Analytics
(c) Data Processing (d) Information

(28) _________ is logical subsystem within a larger information where electronic data is stored
in a predefined form and retrieved for use.
(a) Data (b) Data Analytics
(c) Data Processing’ (d) Database

(29) __________ is a backed modification that is made directly to data that is stored in a
database bypassing business rules built-in to a business application software.
(a) Direct Data Change (b) Information Technology
(c) Information System (d) Change Technology

(30) __________ is a type of business application software that provides an integrated platform
to automate multiple interrelated business processes and operations.
(a) Automated (b) ERP (Enterprise Resource Planning)
(c) Database (d) Information Technology

(31) __________ is electronic data residing in computer system that is organized in a logical and
meaningful manner that is easy to read, understand and analyse.
(a) Data (b) Database
(c) Information (d) Information System

(32) ___________ is the branch of science and engineering that involves designing, building,
implementing and maintaining computer systems and networks that can be used in a
variety of ways including operating businesses and setting up information system
(a) Information (b) Information System
(c) Internal Controls (d) Information Technology

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 ANSWERS 

1 a 11 b 21 b 31 d

2 d 12 c 22 c 32 d

3 c 13 d 23 a

4 d 14 a 24 d

5 a 15 c 25 b

6 d 16 a 26 c

7 b 17 c 27 c

8 c 18 b 28 d

9 d 19 d 29 a

10 c 20 a 30 b

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CHAPTER 7
AUDIT SAMPLING SA 530
(READ WITH CHAPTER 5 CONTENT)

(1) Which of following SAs deals with auditor’s responsibilities w.r.t audit sampling:
(a) SA 200 (b) SA 580 (c) SA 530 (d) SA 500

(2) When auditor decides to select less than 100% of the population for testing, the
auditor is
said using
(a) Audit sampling (b) Representative sampling
(c) Poor judgement (d) None of the above

(3) The entire set of data from which a sample is selected and about which the auditor
wishes to draw conclusions is called as
(a) Population (b) Monitor
(c) Data center (d) Source data

(4) The individual items constituting a population is called as

(a) Transaction (b) Sampling unit
(c) Sample (d) Data

(5) is the risk that auditor’s conclusion based on a sample may be different from conclusion
if the entire population were subjected to the same audit procedure.
(a) Audit Risk (b) Inherent Risk
(c) Control Risk (d) Sampling Risk

(6) Size of sample is affected by

(a) Tolerable error (b) Expected error
(c) Sampling risk (d) All of these

(7) Type 1 sampling risk affects

(a) Audit efficiency (b) Audit effectiveness
(c) Both (a) and (b) (d) None of above

(8) Type 2 sampling risk affects

(a) Audit efficiency (b) Audit effectiveness
(c) Both (a) and (b) (d) None of above

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(9) the risk that the auditor reaches an erroneous conclusion for any reason not related to
sampling risk.
(a) Inherent Risk (b) Control Risk
(c) Sampling Risk (d) Non-Sampling Risk

(10) Which of the following item is not suitable for test checking?
(a) Purchase transactions (b) Sale transactions
(c) Balance Sheet items (d) All of above

(11) Precautions to be considered by auditor while performing audit engagement on the

basis
of test checking are
(a) Auditor should identify the items which are not suitable for test checking
(b) There should be no personal bias
(c) Examination in depth should be done
(d) All of above

(12) Appoches to sampling are

(a) Non- Statistical Sampling (b) Statistical Sampling
(c) Both (a) and (b) (d) None of these

(13) In non-statistical sampling, the sample size and its composition are determined on the
basis of
(a) Personal experience of auditor (b) Knowledge of auditor
(c) Judgement of auditor (d) All of above

(14) is a method of audit testing which is more scientific than testing based entirely on the
auditor’s own judgement because it involves use of mathematical laws of probability in
determining the appropriate sample size.
(a) Statistical Sampling (b) Non statistical Sampling
(c) Haphazard Sampling (d) Cluster Sampling

(15) Judgmental sampling is

(a) Based on probability theory (b) Not having any personal bias
(c) Widely accepted way of sampling (d) None of these

(16) The main advantage of using statistical sampling techniques is that such techniques:
(a) Mathematically measure risk
(b) Eliminate the need for judgmental sampling
(c) Defines the values of tolerable error
(d) All of them

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(17) Which of the following factor is (are) considered in determining the sample size for test
of controls?
(a) Projected error (b) Tolerable error
(c) Expected error (d) Both (b) and (c)

(18) Tolerable error, is the maximum monetary error that the auditor is prepared to accept in
the population and still concludes that audit objectives has been achieved, is directly
related to
(a) Sample size (b) Audit risk
(c) Materiality (d) Expected error

(19) Which of the following is source of Non Sampling risk

(a) Human Mistakes
(b) Applying audit procedures not appropriate to the objectives of audit
(c) Misinterpreting the sample results
(d) All of the above

(20) Which of the following is more scientific

(a) Statistical (b) Non-Statistical
(c) Both (a) and (b) (d) None of the above

(21) In which of the following sampling, population is divided into number of groups
(a) Block Sampling (b) Haphazard Sampling
(c) Cluster Sampling (d) None of these

(22) In which of the following sampling, sampling units are selected from population on the
basis of random number tables
(a) Systematic Sampling (b) Random Sampling
(c) Cluster Sampling (d) Both (b) and (c)

(23) In which of the following sampling, sampling units are selected from population at fixed
intervals
(a) Random Sampling (b) Systematic Sampling
(c) Block Sampling (d) Cluster Sampling

(24) In which of the following sampling, sampling units are selected from population in a
defined block of consecutive items
(a) Random Sampling (b) Systematic Sampling
(c) Block Sampling (d) Haphazard sampling

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(25) In which of the following sampling, population is divided into number of groups
(a) Random Sampling (b) Interval Sampling
(c) Block Sampling (d) Cluster Sampling

(26) Which of the following is a type of random sampling

(a) Simple Random (b) Stratified Random
(c) Both (a) and (b) (d) Haphazard Random

(27) In random sample, each item of population

(a) Has equal chance of selection
(b) Has varying chances of selection depending upon the placing of items
(c) May have a chance of selection depends upon the auditor’s professional judgement
(d) None of these

(28) Simple random sample can be selected by

(a) Random number bias
(b) Help of computers
(c) Just by picking up a number without any order
(d) All of these

(29) In stratified random sampling

(a) Sample is taken from whole of the population
(b) It requires special attention to judge contents of stratum
(c) There is application of different concept and not an extension of simple random
sampling
(d) All of these

(30) Tolerable error is in population that auditor is willing to for a given sample size.
(a) Minimum, Forego (b) Maximum, Forego
(c) Minimum, Accept (d) Maximum, Accept

(31) The kind of relationship between tolerable error and sample size is
(a) Inverse
(b) Direct
(c) They both are same
(d) There is no relationship as such

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(32) Which of the following is INCORRECT

(a) There are two types of sampling risk
(b) Audit sample should be representative of the population’
(c) These is direct relationship between sampling risk and audit sample
(d) If auditor examines any population on the basis of test checking, there will always
be a sampling risk

(33) is the process of dividing a population into sub-population, each of which is a group of
sampling units, which have similar characteristics (often monetary value)
(a) Cluster
(b) Stratification
(c) Sub-Division
(d) None of these

(34) sample sizes are justified when the population is expected to be error free
(a) Smaller
(b) Large
(c) (a) or (b)

 ANSWERS 

1 c 11 d 21 c 31 a

2 a 12 c 22 d 32 c

3 a 13 d 23 b 33 b

4 b 14 a 24 c 34 a

5 d 15 d 25 d

6 d 16 a 26 c

7 b 17 d 27 a

8 a 18 c 28 d

9 d 19 d 29 b

10 c 20 a 30 d

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CHAPTER 8
ANALYTICAL PROCEDURES

(1) ________________means evaluation of financial information through analysis of plausible

relationships among both financial and non-financial data.
(a) Risk assessment (b) Analytical Procedures
(c) Substantive Procedures (d) Test of Controls

(2) Which of the following SAs deals with auditor’s responsibilities to design and perform
analytical procedures as substantive analytical procedure?
(a) SA 315 (b) SA 330 (c) SA 520 (d) SA 500

(3) What are analytical procedures?

(a) Substantive tests designed to assess control risk.
(b) Substantive tests designed to evaluate the validity of management’s
representative letter.
(c) Substantive tests designed to study relationship between financial and non-
financial.
(d) All of the above.

(4) Analytical procedures used in the planning stage of an audit, generally

(a) Helps to determine the nature, timing and extent of other audit procedures
(b) Directs attention to potential risk areas
(c) Indicate important aspects of business
(d) All of above.

(5) The basic assumption underlying the use of analytical procedures is

(a) It helps the auditor to study relationship among elements of financial
information
(b) Relationship among data exist and continue in the absence of known condition
to the contrary
(c) Analytical procedures will not be able to detect unusual relationships
(d) None of the above.

(6) Which of the following is not an analytical procedure?

(a) Tracing of purchases recurred in the purchase book to purchase invoices.
(b) Comparing aggregate wages paid to number of employees.
(c) Comparing the actual costs with standard costs.
(d) All of them are analytical procedures.

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(7) Analytical procedures used in the planning stage of an audit, generally:

(a) Helps to determine the nature, timing and extent of other audit procedures
(b) Directs attention to potential risk areas
(c) Indicates important aspects of business
(d) All of the above

(8) The basic assumption underlying the use of analytical procedures is:
(a) It helps the auditor to study relationship elements of financial information.
(b) Relationship among data exist and continue in the absence of known conditions
to the contrary
(c) Analytical procedures will not be able to detect unusual relationships.
(d) None of the above.

(9) What is the primary objective of analytical procedures used in the overall review stage
of an audit?
(a) To help to corroborate the conclusions drawn from individual components of
financial statements
(b) To reduce specific detection risk
(c) To direct attention to potential risk areas
(d) To satisfy doubts when questions arise about a client’s ability to continue

(10) Which of the following is a technique available as substantive analytical procedure?

(a) External confirmation (b) Ratio Analysis
(c) Trend Analysis (d) Both (b) and (c)

(11) Timing of analytical procedure is

(a) At Planning stage only
(b) Throughout the audit engagement
(c) At planning stage and in addition these are also required during completion
phase.
(d) None of these

(12) Reliability of data is influenced by

(a) Its source
(b) Its nature
(c) Circumstances under which it is obtained
(d) All of these
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(13) Which of the following is not a typical analytical procedure?

(a) Study of relationships of the financial information with relevant nonfinancial
information
(b) Comparison of the financial information with similar information regarding the
industry in which the entity operates
(c) Comparison of recorded amounts of major disbursements with appropriate
invoices
(d) Comparison of the financial information with budgeted amounts

(14) Which of the following is not a technique for substantive analytical procedures
(a) Ratio Analysis (b) Trend Analysis
(c) Structural Modelling (d) None of these

(15) Which of the following is not a reasonableness test

(a) Sales discounts and commissions against sales volume
(b) Inventory turnover
(c) Interest expenses against interest bearing obligation
(d) Rental revenues based on occupancy of premises

(16) Which of the following is relevant factor for determining whether data is reliable for
purposes of designing substantive analytical procedures
(a) Complexity of information
(b) Source of information is available
(c) Nature and relevance of the information
(d) Comparability of the information available

(17) Analytical procedures are least likely to be use in the audit of

(a) Cash balance (b) Investments
(c) Bills receivables (d) Debtors

(18) Substantive analytical procedures are generally more applicable to of transactions that
tend to be predictable over time
(a) No effect on volume of data
(b) Low volume
(c) Large volume
(d) Any type

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 ANSWERS 

1 b 2 c 3 c 4 d 5 b 6 a

7 d 8 b 9 a 10 d 11 c 12 d

13 c 14 d 15 b 16 a 17 a 18 c

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CHAPTER 9
AUDIT OF ITEMS OF FINANCIAL STATEMENTS

(1) Which of the following is not correct w.r.t. voucher

(a) All the vouchers should be serially numbered
(b) All the vouchers should be properly dated
(c) Purchase vouchers should be within the name of supplier
(d) None of these

(2) Which of the following factor should be considered for examining validity of
transactions
(a) Transaction should be take place in compliance with terms and conditions of
the agreement, if any
(b) If there are legal requirements, transaction should take place in compliance
with legal requirements.
(c) Transaction should take place in compliance with internal rules and regulations.
(d) All of the above

(3) Which of the following is not purpose of capital expenditure

(a) For acquiring fixed assets
(b) For maintaining the fixed assets
(c) For making additions / enhancements to the existing fixed assets
(d) Minimizing cost of production

(4) Which of the following document is not relevant for vouching of cash sales?
(a) Daily cash sales summary
(b) Salesmen’s summary
(c) Monthly statements sent to customers
(d) Bank Statement

(5) To test whether sales have been recorded, the auditor should draw a sample from a file
of
(a) Purchase orders (b) Sales orders
(c) Sales invoices (d) Bill of loading

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(6) For vouching of which item, the auditor is most likely to examine cost records
(a) Commission earned (b) Bad debt recovered
(c) Credit sales (d) Sale of scrap

(7) Which of the following would prevent double payment of the same voucher?
(a) The person signing the cheque should cancel the supporting documents
(b) Cheques should be signed by at least two persons
(c) Both (a) and (b)
(d) None of these

(8) In order to vouch which of the following expenses, the auditor will examine Bill of
Entry?
(a) Custom (b) Excise Duties
(c) Sales Tax (d) Income Tax

(9) In case of unclaimed wages, the auditor should examine whether

(a) The amount has been deposited in a separate bank account
(b) The amount has been deposited with cashier
(c) The amount has held in a safe deposit box
(d) All of these

(10) On case of sales return, the auditor should examine which of the following document
(a) Credit notes, advice notes and inward return notes
(b) Debit notes, advice notes and inward return notes
(c) Purchase invoices, advise notes and inward return notes
(d) Credit notes, inspection report and inward return notes

(11) In order to vouch bought ledger, the auditor obtain confirmations from creditors. The
principal reason for the auditor to examine suppliers statements at a balance sheet
date is to obtain evidence that
(a) The supplier exist
(b) There are no unrecorded liabilities
(c) Recorded purchases actually account
(d) To link creditors with cash book entries

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(12) Which of the following is most crucial to a purchase department?

(a) Reducing the cost of acquisition
(b) Selecting suppliers
(c) Authorizing the acquisition of goods
(d) Assuring the quality of goods

(13) Vendors should be approved by Management before purchase department executes an

order, if this is not done, then which of the following situation may arise:
(a) Purchases could be made from vendors whose product quality may not be good
(b) Purchases may be made from related parties without management’s knowledge
(c) Purchase could be made from vendors who sells goods at excessive price
(d) All of the above

(14) The creditor’s accounts, generally, have credit balance. Debit balance may be due to
(a) Advance paid against an order
(b) Goods returned
(c) Wrong debit to supplier account
(d) Any of the above

(15) In case of vouching, the auditor is least likely to examine authorization by appropriate
authority in case of
(a) Bad debts written off
(b) Sales return
(c) Purchase return
(d) Discount allowed to customers as per entity’s policy

(16) Which of the following is not correct with regard to verification of assets?
(a) It invoices substantiation of occurrence of transactions
(b) Its objective is to establish existence, ownership, possession, valuation and
disclosure of assets
(c) The auditor has to form an opinion on different aspects
(d) All are correct

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(17) Which of the following statements is not correct?

(a) Valuation of assets is the responsibility of management
(b) The auditor can rely on a certificate issued by an authorization valuer as to the
valuation of assets in the balance sheet.
(c) The auditor should value the asset as per generally accepted accounting
principles
(d) Valuation is no part of auditor’s duty

(18) Which of the assets is least likely to be subjected to lien

(a) Freehold land (b) Plant and machinery
(c) Leasehold property (d) Motor vehicles

(19) While verifying intangible assets, an auditor would recompute amortization charges
and determine whether amortization period is reasonable. The auditor tries to
establish by doing it
(a) Valuation (b) Existence
(c) Disclosure (d) Possession

(20) Which of the following controls would ensure that securities are not lost, stolen or
diverted?
(a) Establish physical barriers over investment securities
(b) Maintain files of authorized signatures
(c) Segregate investment approval form accounting and form custody of securities
(d) All of the above

(21) Which of the following would give the assurance that debtors mentioned on the date of
balance sheet actually exist?
(a) Sending debtor’s confirmation letters
(b) Reviewing subsequent collection
(c) Verify debtors against sales document
(d) Both (a) and (b)

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(22) Obtaining trade receivables ageing report and analysis and identification of doubtful
debts is performed during audit of accounts receivable balances to address the
following balance sheet assertion:
(a) Valuation (b) Rights and obligations
(c) Existence (d) Completeness

(23) Observing inventory being counted and personally performing test counts to verify
counts is performed during audit of inventory balances to address the following
balance sheet assertion:
(a) Rights and obligations (b) Valuation
(c) Completeness (d) Existence

(24) Wages paid to workers would always qualify as:

(a) Revenue expenditure
(b) Capital expenditure
(c) Revenue or capital expenditure depending upon facts and circumstances
(d) None of the above

(25) During the course of audit of intangible assets, expenditure incurred during following
phase is generally not capitalized:
(a) Development phase (b) Research phase
(c) None of the above (d) Both (a) and (b)

(26) Search for unrecorded liability is performed during audit of current liabilities to
address the following balance sheet assertion:
(a) Valuation (b) Rights and obligations
(c) Existence (d) Completeness

(27) Cut-off testing is performed during audit of sales to address the following income
statement assertion:
(a) Occurrence (b) Measurement
(c) Completeness (d) All of the above

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(28) ABC’s investee company-XYZ declares final dividend for financial year 2016-2017 in
the meeting of board of directors held on April 10, 2017. In which financial year should
ABC account for the dividend income:
(a) Proportionately i.e. considering 10 days of financial year 2017-18 and 355 days
of financial year 2016-17
(b) Financial year 2016-17
(c) Financial year 2017-18
(d) Equally between financial year 2016-17 and financial year 2017-18

(29) All inventory units held by the audit entity and that should have been recorded, has
been recognized in the financial statements. The assertion involved is:
(a) Existence (b) Completeness
(c) Rights and obligations (d) Valuation

(30) Which of the following is not an example of revenue expenditure-

(a) Salaries and wages of employees engaged directly or in-directly in production
(b) Repairs, maintenance and renewals of fixed assets
(c) Legal and professional expenses
(d) Development expenditure on land

 ANSWERS 

1 C 2 D 3 B 4 C 5 C 6 D

7 A 8 A 9 A 10 D 11 B 12 C

13 D 14 D 15 D 16 A 17 C 18 C

19 A 20 D 21 D 22 A 23 D 24 C

25 B 26 D 27 C 28 C 29 B 30 D

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CHAPTER 10
COMPANY AUDIT

(1) Which of the following section of Companies Act, 2013 deals with eligibility,
qualification and disqualification of auditor
(a) Section 140 (b) Section 141
(c) Section 142 (d) Section 143

(2) Which of the following section of the Companies Act, 2013, defines meaning of
Chartered accountant
(a) 2(17) (b) 2(77)
(c) 2(87) (d) 2(7)

(3) Which of the following is eligible for appointment as auditor of company

(a) Any Chartered Accountant
(b) A Company whose all the directors are chartered accountants
(c) Chartered Accountant holding valid certificate of practice
(d) All of these

(4) A partnership firm can be appointed as auditor of Company if

(a) All the partners of partnership firm are chartered accountants
(b) If at least one partner of partnership firm is chartered accountant
(c) If majority of partners of the firm is of chartered accountants
(d) If at least 2/3rd partners of the firm are chartered accountants

(5) In case of partnership firm as auditor of company, audit report shall be signed by:
(a) Any partner of the partnership firm
(b) Any CA employee of the firm
(c) All CA partner of the firm
(d) Any CA partner of the firm

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(6) Which of the following statement is INCORRECT

(a) Limited liability partnership firm can be appointed as auditor of company
(b) A Body corporate can be appointed as auditor of company
(c) A person who is chartered accountant within the meaning of the Chartered
Accountants Act, 1949 and holding valid certificate of practice can be appointed
as auditor of company.
(d) None of these.

(7) Which of the following is disqualified for appointment as auditor of company

(a) Any officer or employee of Co
(b) Any officer or employee of holding co of the Co
(c) Any officer or employee of subsidiary co of the Co
(d) All of these

(8) Which of the following is not covered within the meaning of relative u/s 2(77) of the
Co Act, 2013
(a) Step Father (b) Step Mother
(c) Step Sister (d) Step Daughter

(9) Which of the following is covered within the meaning of relative u/s 2(77) of the Co
Act, 2013
(a) Brother’s wife (b) Step brother
(c) Sister’s husband (d) Step daughter

(10) Which of the following is INCORRECT

(a) Any partner of officer of company shall not be appointed as auditor of company
(b) Any employee of officer of company shall not be appointed as auditor of
company
(c) Any partner of employee of company shall not be appointed as auditor of
company
(d) Any employee of employee of company can be appointed as auditor of company

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(11) An individual is disqualified for appointment as auditor of Co

(a) Only if he is holding security of co having total face value exceeding Rs. 1 Lakh
(b) Only if he is holding security of co having total face value exceeding Rs. 1,000/-
(c) If he is holding any security of company, irrespective of face value of security
(d) None of these

(12) An individual is disqualified for appointment as auditor of co if

(a) His father is holding security of co having total face value of Rs 1 Lakh
(b) His father is holding security of co having total face value exceeding Rs. 1 Lakh
(c) His sister’s husband is holding security of co having total face value exceeding
Rs. 1 Lakh
(d) His step daughter is holding security of co having total face value exceeding
Rs. 1 Lakh

(13) If a relative acquires security exceeding Rs 1 Lakh, then auditor shall take corrective
action within days of such acquisition so as to maintain the limit of Rs 1 Lakh.
(a) 60 (b) 30 (c) 60 (d) 120

(14) An individual is disqualified for appointment as auditor of co if he is indebtedness to co

(a) Rs. 5, 00,000
(b) Exceeding Rs. 5,00,000
(c) Exceeding Rs. 1,00,000
(d) Any amount

(15) Which of the following transaction is not covered within the meaning of business
relationship for the purpose of disqualification of auditor
(a) Commercial transactions which are in the nature of professional services
permitted to be rendered by an auditor under the Co Act, 2013 and Chartered
Accountants Act, 1949 and rules or regulations made under those Acts
(b) Commercial transaction which are in the ordinary course of business of the
company at arm’s length price - like sale of product or services to the auditor, as
customer, in the ordinary course of business.
(c) Both (a) and (b)
(d) None of these

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(16) A person shall not be appointed as auditor of co, if

(a) His relative is director of the company
(b) His relative is in the employment of company as key managerial personnel
(c) Both (a) and (b)
(d) His relative is manager of subsidiary company of the company.

(17) Audit of which of the following companies is excluded from ceiling limit of audit
(a) Government Companies
(b) Private Limited Company having paid up share capital Rs 100 Crore or more
(c) Audit of Public Companies
(d) Dormant Companies

(18) A person shall not be appointed as auditor of co if he has been convicted by court for
an offence involving fraud and a period of years has not been elapsed since such
conviction
(a) 10 Years (b) 7 Years (c) 8 Years (d) 5 Years

(19) Which of the following is not disqualification of company’s auditor

(a) Any person who is officer or employee of the company
(b) Any person who is indebtedness to company exceeding Rs. 5,00,000
(c) Any person who has been convicted by court for an offence involving fraud and
a period of 10years has not been elapsed since the date of such conviction
(d) Any person whose age is exceeding 65 years.

(20) Audit of private limited company is exempted from ceiling on number of audits if its
(a) Paid up share capital is less than Rs. 10 crore
(b) Paid up share capital is less than 20 crore
(c) Paid up share capital is less than Rs. 50 crore
(d) Paid up share capital is less than Rs. 100 crore

(21) First auditor of non- Government Company is appointed

(a) By BoD within 1 month of incorporation of Co
(b) By BoD within 30 days of incorporation of Co
(c) By Members within 90 days of incorporation of Co
(d) By Members within 60 days of incorporation of Co

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(22) First auditor of Government Company is appointed

(a) By BoD within 1 month of incorporation of co
(b) By CAG within 1 month of incorporation of co
(c) By CAG within 60 days of incorporation of Co
(d) By Members within 90 days of incorporation of Co

(23) Subsequent auditor of Non-government Company is a appointed

(a) By Members in EGM by passing ordinary resolution
(b) By Members in AGM by passing special resolution
(c) By Members in AGM by passing ordinary resolution
(d) By BoD in Board Meeting

(24) Subsequent auditor of Government Company is appointed by CAG within ___________

days from commencement of FY which is subject to audit
(a) 60 days (b) 180 days (c) 120 days (d) 150 days

(25) The provision of section 139(1) are applicable to all companies except:
(a) Government Companies
(b) One person companies
(c) Dormant companies
(d) None of these

(26) The auditor shall furnish his written consent and a certificate to the company
(a) Before his appointment
(b) Within 15 days of his appointment
(c) Not required to furnish
(d) None of these

(27) Which of the following Form is filed by Co with RoC as intimation of appointment of
subsequent auditor
a) ADT-1 b) ADT-2 c) ADT-3 d) ADT-4

(28) ADT-1 is filed with RoC within

(a) Within 15 days of appointment of auditor
(b) Within 30 days of appointment of auditor
(c) Within 1 month of appointment of auditor
(d) Within 60 days of appointment of auditor

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(29) Tenure of subsequent auditor of Non-government Company is

(a) Till conclusion of next AGM
(b) Till conclusion of 5th AGM
(c) Till conclusion of 5 years.
(d) Till conclusion of 6th AGM

(30 Tenure of subsequent auditor of Government Company is

(a) Till conclusion of next AGM (b) Till conclusion of 5th AGM
(c) Till conclusion of 5 years (d) Till conclusion of 6th AGM

(31) If at AGM no auditor is appointed or reappointed, the following consequence will be

there
(a) CG shall appoint the auditor
(b) CAG shall appoint the auditor
(c) Existing auditor shall continue to be auditor of company
(d) Due to casual vacancy, BoD shall appoint the auditor

(32) Which of the following company in required to constitute an audit committee

(a) Listed Company (b) Small Company
(c) One Person Company (d) All of these

(33) Before making any appointment or reappointment of auditor also including filling of
casual vacancy recommendation of shall be considered if company falls under section
177(1).
(a) Board of Director (b) Audit Committee
(c) Tribunal (d) Company Law Board

(34) Any casual vacancy in the office of auditor of Non-government Company is filled by
(a) Members within 15 days
(b) Members within 30 days
(c) BoD within 15 days
(d) BoD within 30 days

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(35) Any casual vacancy in the office of auditor of Government Company is filled by
(a) BoD within 30 days
(b) CAG within 30 days
(c) CAG within 60 days
(d) Members within 90 days

(36) If vacancy in the office of auditor of other than Government Company is caused by
resignation by auditor, then appointment by BoD shall also be approved by company at
general meeting within months of the recommendation of BoD
(a) 1 (b) 3 (c) 5 (d) 6

(37) Which of the following in not a case of casual vacancy in the office of auditor of
company
(a) Death of person appointed as auditor
(b) Dissolution of partnership firm appointed as auditor
(c) Refusal of appointment by auditor
(d) If any disqualification is attracted to auditor after appointment of auditor

(38) Any auditor appointed to fill a casual vacancy shall hold office of auditor of company
(a) Till conclusion of 6th AGM
(b) Till conclusion of next AGM
(c) Till he submits his audit report
(d) None of these

(39) Pick the odd one out

(a) Section 139(6) (b) Section 139 (1)
(c) Section 139(8) (d) Section 139(10)

(40) At any AGM, a retiring auditor may be re-appointed if

(a) He is not disqualified for re-appointment
(b) He has not given the company a notice in writing of his unwillingness to be re-
appointed
(c) A special resolution has not been passed at that AGM appointing some other
auditor or providing expressly that he shall not be re-appointed.
(d) All of above

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(41) Remuneration of auditor of company is fixed

(a) By company in general meeting (b) By BoD of Co
(c) By CG (d) By CAG

(42) Remuneration of auditor of Government Company is fixed

(a) By company in general meeting (b) By BoD of Co
(c) By CG (d) By CAG

(43) At any AGM, a retiring auditor may be re-appointed if

(a) He is not disqualified for re-appointment
(b) He has not given the company a notice in writing of his unwillingness to be re-
appointed
(c) A special resolution has not been passed at AGM appointing some other auditor
or providing expressly that he shall not be reappointed.
(d) All of the above

(44) Rotation of auditor is not applicable on

(a) Dormant Company (b) One Person Company
(c) Small Company (d) Both (b) and (c)

(45) Rotation of auditor is applicable on unlisted public company if

(a) Its paid up share capital is more than Rs 10 Crore
(b) Its paid up share capital is equal to or more than Rs 10 Crore
(c) Its paid up share capital is more than Rs. 50 Crore
(d) Its paid up share capital is equal to or more than Rs 50 Crore.

(46) Rotation of auditor is applicable of private limited company if

(a) Its paid up share capital is more than Rs 10 Crore
(b) Its paid up share capital is equal to or more than Rs 10 Crore
(c) Its paid up share capital is more than Rs 50 Crore
(d) Its paid up share capital is equal to or more than Rs 50 Crore

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(47) Rotation of auditor is always applicable on

(a) Listed Companies
(b) Government Companies
(c) Private Limited Companies
(d) All of these

(48) If rotation of auditor is applicable on company, term of an individual auditor will be

(a) One term of 5 consecutive years
(b) Two terms having 5 consecutive years in each term
(c) Till conclusion of next AGM
(d) None of these

(49) If rotation of auditor is applicable on company, term of partnership firm as auditor will be
(a) 10 Years
(b) Two terms having 5 consecutive years in each term
(c) Till conclusion of next AGM
(d) None of these

(50) A break in the term for continuous period of years shall be considered as fulfilling the
requirement of rotation
(a) 1 Year (b) 5 Years (c) 10 Years (d) 20 Years

(51) As on date of appointment no audit firm having a common partner or partners to audit
firm, whose tenure has expired in a company, shall be appointed as auditor of the same
company for a period of years
(a) 1 (b) 3 (c) 5 (d) 10

(52) Which of the following services is not prohibited for auditor of company
(a) Internal Audit (b) Tax Audit
(c) Book-keeping (d) Actuarial Service

(53) Which of the following is prohibited service for auditor of company

(a) Tax Audit (b) Income Tax Representative
(c) Tax Consultant (d) None of these

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(54) Pick the odd one out

(a) Representing client before taxation authorities
(b) Management Services
(c) Internal Audit
(d) Actuarial Service

(55) Auditor shall not render prohibited services as specified u/s 144 of the Co Act, to
(a) The Company
(b) Holding Company of the Company
(c) Subsidiary Company of the Company
(d) All of the above

(560 Auditor shall not render prohibited services to the company or its holding company or
its subsidiary company
(a) Directly (b) Indirectly
(c) Directly or Indirectly (d) None of these

(57) Which one of the following is INCORRECT

(a) Auditor of company can be appointed as internal auditor of holding company of
the company.
(b) Auditor of company can be appointed as internal auditor of associate company
of the company.
(c) Any relative of auditor cannot be appointed as internal auditor of the company
(d) Any partner of auditor cannot be appointed as internal auditor of the company.

(58) Which of the following in not mentioned along with signing on audit report
(a) Membership number of individual/partner
(b) Firm’s registration number in case of partnership firm as auditor
(c) Date
(d) Time

(59) In case of removal of auditor under section 140 (1), an application for obtaining
approval of such removal is made to
(a) CG (b) CAG (c) ROC (d) NCLT

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(60) CG approval is required when auditor is to be removed

(a) After expiry of term
(b) Before expiry of term
(c) By order of tribunal
(d) All of the above

(61) For removal of auditor before expiry of term of auditor, which of the following form is
filed with CG for getting approval of such removal
(a) ADT-1 (b) ADT-2 (c) ADT-3 (d) ADT-4

(62) Which of the following form is filed by auditor in case of his resignation
(a) ADT-1 (b) ADT-2 (c) ADT-3 (d) ADT-4

(63) In case of resignation by auditor, ADT-3 shall be filed by auditor within days of
resignation
(a) 7 (b) 10 (c) 15 (d) 30

(64) In case resigning auditor does not file ADT-3 as required, the minimum penalty shall be
(a) Rs 50,000
(b) Remuneration of auditor
(c) Rs 50,000 or remuneration of auditor, which is less
(d) Rs 50,000 or remuneration of auditor, whichever is higher

(65) Under section 140(4), the retiring auditor is entitled to

(a) Make a representation against his removal
(b) Request the company to circulate the representation to members
(c) Personally communicate the members on one to one basis
(d) Both (a) and (b)

(66) _____________may order that the representation received u/s 140(4) shall not be
circulated and read out at meeting
(a) CAG (b) ROC (c) Tribunal (d) CG

(67) Under section 140(5), the power of order to change of auditor has been given to
(a) Tribunal (b) CAG (c) ROC (d) BOD
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(68) Any auditor removed under section 140(5) shall not be appointed as auditor of any
company for a period of years from the date of order of Tribunal
(a) 10 (b) 8 (c) 5 (d) 3

(69) Special notice is requires when auditor is to be removed

(a) After expiry of term (b) Before expiry of term
(c) By order of Tribunal (d) All of the above

(70) If the branch office is situated in a country outside India, the accounts of the branch
office shall be audited by
(a) The Company’s Auditor
(b) By An Accountant
(c) By any other person duly qualified to act as an auditor of the accounts of the
branch office in accordance with the laws of that country
(d) Any of the above

(71) Which of the following is INCORRECT

(a) Branch office in relation to company means any establishment described as
branch by the company.
(b) The provisions of regarding reporting of fraud by the auditor shall not be
applicable to the branch auditor.
(c) The duties and power of the company’s auditor with reference to the audit of
the branch and branch auditor, if any, shall be as contained u/s 143(1) to
143(4).
(d) The branch auditor shall prepare a report on the accounts of the branch
examined by him and sent it to the auditor of the company who shall deal with
it in his report in such manner as he considers necessary.

(72) Auditor’s right to access to books of account and vouchers of company extends to all
the books
(a) Kept at registered office
(b) Kept at any other place
(c) Kept at registered office or at any other place
(d) He is not entitled to such a right

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(73) The auditor should comply with Auditing Standards. It is __________of the auditor
(a) Right (b) Duty
(c) Moral responsibility (d) None of these

(74) Under section 143(3), auditor has duty to report on internal financial controls of the
company.
However, this requirement shall not apply to
(a) A listed company (b) A foreign company
(c) One Person Company (d) A Public Company

(75) Reporting on fraud is made by auditor to CG

(a) Within 2 days of his knowledge of fraud
(b) Within 15 days of his knowledge of fraud
(c) Within 45 days of his knowledge of fraud
(d) Within 60 days of his knowledge of fraud

(76) Reporting on fraud is made by auditor to CG when fraud amount is

(a) Exceeding Rs. 10 Lakhs (b) Exceeding Rs. 50 Lakhs
(c) Exceeding Rs. 1 Crore (d) Rs. 1Crore or above

(77) Reporting on fraud is made by auditor to CG in statement in the form

(a) ADT-1 (b) ADT-2 (c) ADT-3 (d) ADT-4

(78) For the purpose of reporting on fraud to CG, CG means

(a) RoC (b) CBI
(c) Director General (d) Secretary of Ministry of Corporate Affairs.

(79) Which of the following in not right of auditor:

(a) To attend general meetings
(b) To receive all notices and other communications relating to any general
meeting
(c) To make a representation against his removal
(d) To be heard at such meeting on any part of the business which concerns him as
the auditor

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(80) CARO (2016) is applicable on which of the following companies

(a) One Person Company (b) Small Company
(c) Public Company (d) Banking Company

(81) A Private Limited Company is exempted from applicability of CARO (2016) if which of
following conditions is satisfied
(a) Paid up Share Capital and Reserve & Surplus is not more than Rs. 1 Crore
(b) Borrowing from Bank/FI is not more than Rs. 1 Crore at any point of time
during FY
(c) Revenue as per Schedule III is not more than Rs. 10 Crore during FY
(d) All of these

(82) CARO (2016) is applicable from FY

(a) FY 2014-15 (b) FY 2015-16
(c) FY 2016-17 (d) FY 2017-18

(83) Which of the following statement is INCORRECT

(a) CARO is applicable on reporting of consolidated financial statements
(b) One Person Companies and Small Companies are exempted from applicability of
CARO
(c) If CARO is applicable of the company, it will also be applicable on audit of
branch offices of the company
(d) Insurance Companies are exempted from applicability of CARO.

(84) Which of the following is not reporting requirement w.r.t fixed assets under CARO
(2016)
(a) Purchase and sale of fixed assets made during the FY
(b) Maintenance of proper records
(c) Physical verification by management at reasonable intervals
(d) Title deeds of immovable properties

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INTER C.A. – AUDIT

(85) Which of the following is reporting requirement w.r.t inventories under CARO (2016)
(a) Purchase and sale of inventories made during the FY
(b) Maintenance of proper records
(c) Physical verification by management at reasonable intervals
(d) All of these

(86) Outstanding statutory dues as at last day of financial year concerned for a period of
more than months from the day they became payable, shall be indicated by the auditor.
(a) 1 (b) 2 (c) 5 (d) 6

(87) In respect of loans, investments, guarantees and security whether provisions of section
185 and 186 of the Companies Act, 2013 have been complied with. If not, provide
details thereof. This matter is to be reported under which clause of para 3 of the CARO
(2016)
(a) Clause (i) (b) Clause (ii)
(c) Clause (iii) (d) Clause (iv)

(88) With respect of cost records, what is the reporting requirement under CARO (2016)
(a) Whether such accounts and record are properly audited
(b) Whether such accounts and records have been made and maintained
(c) Both (a) and (b)
(d) None of these

(89) Reporting on fraud is made by auditor under which of the following clause of para 3 of
CARO (2016)
(a) Clause (x) (b) Clause (xii)
(c) Clause (xiii) (d) Clause (xiv)

(90) Which of the following frauds are reported by auditor under CARO (2016)
(a) Any fraud on the company by vendor of the company
(b) Any fraud by the company or any fraud on the company by its officers or
employees
(c) All types of frauds
(d) None of these

AUDIT 377 PART C - MULTIPLE CHOICE QUESTIONS

INTER C.A. – AUDIT

(91) Any default in the repayment of loans or borrowings to ____________ are reported by
auditor under CARO (2016)
(a) Bank, Financial Institution (b) Government
(c) Debenture holders (d) All of above

(92) Application of money raised by way of public offer is reported under which clause of
CARO (2016)
(a) Clause (vii) (b) Clause (viii)
(c) Clause (ix) (d) Clause (x)

(93) Application of money raised by way of preferential allotment or private placement is

reported under which clause of CARO (2016)
(a) Clause (xi) (b) Clause (xii)
(c) Clause (xiii) (d) Clause (xiv)

(94) Compliance with provision of section 192 of the Companies Act, 2013 w.r.t non cash
transactions entered by company with directors or persons connected with him, is
reported under which of the following clause of para 3 of CARO (2016)
(a) Clause (xv) (b) Clause (xvi)
(c) Clause (xi) (d) Clause (xii)

(95) For the purpose of applicability of CARO(2016), status of company is considered

(a) As on 1st day of FY
(b) Though out the FY
(c) As on Balance Sheet date of FY
(d) As on Balance Sheet date of immediate preceding FY

(96) How many matters are specified under CARO(2016) for reporting by Co’s auditor
(a) 12 (b) 13 (c) 15 (d) 16

(97) The auditor shall address audit report on the financial statement of company
(a) To BoD of Company (b) To the Members of Company
(c) To CG (d) To RoC

AUDIT 378 PART C - MULTIPLE CHOICE QUESTIONS

INTER C.A. – AUDIT

(98) The date on auditor’s report shall be

(a) As on balance sheet date
(b) Any date after balance sheet date
(c) After balance sheet date but not earlier than the date of approval of financial
statement of the entity
(d) Date of AGM

(99) Under section 148, the maintenance of cost accounting records are not required for
(a) A micro enterprise or small enterprise
(b) The company whose revenue from exports in Forex exceeds 75% of total
revenue
(c) Which is operating from SEZ
(d) All of these

(100) Cost audit will not be applicable to those companies

(a) Whose revenue from exports in Forex exceeds 75% of total revenue
(b) Which is operating from SEZ
(c) Which is engaged in generation of electricity for captive consumption through
captive generation plant.
d) All of these

(101) Cost auditor of company is appointed by

(a) CG (b) BoD
(c) Members (d) CAG

(102) Cost auditor of company shall be appointed by BoD within days from commencement
of FY
(a) 30 (b) 60
(c) 120 (d) 180

(103) Intimation of appointment of cost auditor is filed by Co to CG in the form

(a) ADT-1 (b) CRA-1
(c) CRA-2 (d) CRA-3

AUDIT 379 PART C - MULTIPLE CHOICE QUESTIONS

INTER C.A. – AUDIT

(104) Any casual vacancy in the office of cost auditor of company is filed by
(a) BoD within 1 month
(b) BoD within 30 days
(c) CG within 30 days
(d) CAG within 60 days

(105) Cost Auditor performs cost audit in accordance with

(a) Standards on Auditing
(b) Basic principles of cost audit
(c) Cost Audit Standards
(d) Standards on Related Services

(106) Cost audit report shall be submitted in Form

(a) CRA-1 (b) CRA-2
(c) CRA-3 (d) CRA-4

(107) Cost audit report shall be submitted by Cost auditor to BoD within days from closure of FY
(a) 90 (b) 120
(c) 150 (d) 180

(108) Company shall within __________ days from receipt of cost audit report furnish the CG
with such report along with full information and explanation on every reservation or
qualification contained therein, in Form .
(a) 30, CRA-4 (b) 60, CRA-5
(c) 120, CRA-6 (d) 180, CRA-7

AUDIT 380 PART C - MULTIPLE CHOICE QUESTIONS

INTER C.A. – AUDIT

 ANSWERS 

1 b 21 b 41 a 61 b 81 d 101 b
2 a 22 c 42 a 62 c 82 b 102 d
3 c 23 c 43 d 63 d 83 a 103 c
4 c 24 b 44 d 64 c 84 a 104 b
5 d 25 a 45 b 65 d 85 c 105 c
6 b 26 a 46 d 66 c 86 d 106 c
7 a 27 a 47 a 67 a 87 d 107 d
8 d 28 a 48 a 68 c 88 b 108 a
9 b 29 d 49 b 69 a 89 a
10 d 30 a 50 b 70 d 90 b
11 c 31 c 51 c 71 b 91 d
12 b 32 a 52 b 72 c 92 c
13 a 33 b 53 d 73 b 93 d
14 b 34 d 54 a 74 c 94 a
15 c 35 b 55 d 75 d 95 c
16 c 36 b 56 c 76 d 96 d
17 d 37 c 57 a 77 d 97 b
18 a 38 b 58 d 78 d 98 c
19 d 39 d 59 a 79 a 99 a
20 d 40 d 60 b 80 c 100 d

AUDIT 381 PART C - MULTIPLE CHOICE QUESTIONS

INTER C.A. – AUDIT

CHAPTER 11
AUDIT REPORT
SA 700/SA701/SA705/SA706/710

(1) In order to form an opinion, the auditor shall take into account:
(a) Whether sufficient appropriate audit evidence has been obtained
(b) Whether uncorrected misstatements are material, individually or in aggregate
(c) Evaluation of accounting estimations
(d) All of above

(2) In order to form the opinion, the auditor shall conclude as to whether the auditor has
obtained about whether the financial statements as a whole are free from material
misstatement, whether due to fraud or error.
(a) Reasonable assurance (b) Absolute assurance
(c) Limited assurance (d) None of the above

(3) Which of the following is a not a type of modified opinion

(a) Qualified opinion (b) Adverse opinion
(c) Disclaimer of opinion (d) None of these

(4) The auditor shall express opinion when the auditor, having obtained sufficient
appropriate audit evidence, concludes that misstatements, individually or in the
aggregate, are both material and pervasive to the financial statements.
(a) Adverse (b) Qualified
(c) Disclaimer (d) None of the above

(5) When auditor concludes that financial statements as a whole are free from material
misstatements and he has no reservation for any material item of the financial
statements, he shall express
(a) Qualified opinion (b) Unmodified opinion
(c) Adverse opinion (d) Disclaimer of opinion

(6) When auditor concludes that financial statements are not free from material
misstatements and effect of material misstatements is not pervasive, he shall express
(a) Unmodified opinion (b) Disclaimer of opinion
(c) Qualified opinion (d) Adverse opinion
AUDIT 382 PART C - MULTIPLE CHOICE QUESTIONS
INTER C.A. – AUDIT

(7) If auditor is unable to obtain sufficient appropriate audit evidence with respect to any
material item(s) of the financial statements and possible effect if material but not
pervasive, he shall express
(a) Unmodified opinion (b) Adverse opinion
(c) Disclaimer of opinion (d) Qualified opinion

(8) If auditor is unable to obtain sufficient appropriate audit evidence with respect to any
material item(s) of the financial statements and possible effect if pervasive, he shall
express
(a) Unmodified opinion (b) Adverse opinion
(c) Disclaimer of opinion (d) Qualified opinion

(9) Which of the following SAs deals with auditor’s responsibilities for forming an opinion
and reporting on financial statements
(a) SA 700 (b) SA 701 (c) SA 705 (d) SA 706

(10) Which of the following is title of auditor’s report

(a) Auditor’s Report
(b) Independent Auditor’s Report
(c) Audit Report on the Financial Statements
(d) Reporting on the Financial statements

(11) As per SA 700, which of the following is addressee of auditor’s report

(a) Those Charged With Governance of the Entity
(b) Members of the Entity
(c) It depends upon circumstances of the engagement
(d) Central Government

(12) If auditor concludes an unmodified opinion, which heading will auditor use for opinion
section
(a) Opinion (b) Unmodified Opinion
(c) Unqualified Opinion (d) Reporting on Correct and Fair View

(13) To form an opinion, auditor conclusions include which of the following

(a) The auditor’s conclusions in accordance with SA 330
(b) The auditor’s conclusions in accordance with SA 450
(c) Whether financial statements are prepared in accordance with applicable FRF
(d) All of the above

AUDIT 383 PART C - MULTIPLE CHOICE QUESTIONS

INTER C.A. – AUDIT

(14) Under which of the following section auditor shall mention in his report that he has
conducted audit engagement in accordance with SAs issued by ICAI and has complied
with code of ethics and relevant ethical requirements
(a) Opinion (b) SA and Code of Ethics
(c) Compliance with Standards (d) Basis for Opinion

(15) Which of the following is not content of basis of opinion section

(a) Name of the entity
(b) Statement that audit was conducted in accordance with SAs
(c) Statement that auditor believes that audit evidence the auditor has obtained is
sufficient and appropriate to provide a basis for the auditor’s opinion.
(d) Reference to the section of auditor’s report that describes the auditor’s
responsibilities under the SAs.

(16) Under which of the following heading, auditor shall report those matters in his report
which are required to be reported by him as his duties as per the law and regulation
basis upon which audit has been conducted
(a) Opinion
(b) Basis for Opinion
(c) Reporting on the Audit of Financial Statements
(d) Reporting on Other Legal and Regulatory Requirements

(17) The date in auditor’s report represent the date

(a) Balance Sheet Date
(b) Date when financial statements are approved by management of the entity
(c) Date when audit report is signed by auditor
(d) Date when audit report is submitted to management of the entity.

(18) The place in auditor’s report represent

(a) Address of auditor
(b) Name of city, where audit report has been signed
(c) Name of city, where office of entity is situated
(d) None of these

AUDIT 384 PART C - MULTIPLE CHOICE QUESTIONS

INTER C.A. – AUDIT

(19) If partnership firm is appointed as auditor, audit report shall be signed by

(a) Any partner of the firm
(b) Any practicing chartered accountant partner of the firm
(c) All the partners of the firm
(d) Any partner or any CA employee of the firm.

(20) Which of the following is not mentioned along with signing in auditor’s report
(a) Membership number of individual/partner
(b) Firm’s Registration Number
(c) Date & Place
(d) Time

(21) The opinion section of the auditor’s report shall:

(a) Identify the entity whose financial statements have been audited;
(b) State that the financial statements have been audited;
(c) Identify the title of each statement comprising the financial statements
(d) All of the above

(22) Which of the following SAs deals with auditor’s additional responsibilities w.r.t
modified opinion
(a) SA 700 (b) SA 701 (c) SA 705 (d) SA 706

(23) When auditor modifies the opinion the opinion the auditor shall give reason of
modified opinion in a section under the heading
(a) Basis for Opinion
(b) ‘Basis for Qualified Opinion’ or ‘Basis for Adverse Opinion’ or ‘Basis for
Disclaimer of Opinion’ as appropriate
(c) Reason for Modified Opinion
(d) None of these

AUDIT 385 PART C - MULTIPLE CHOICE QUESTIONS

INTER C.A. – AUDIT

SA 701
(24) Which of the following SAs deals with auditor’s responsibility to communicate key
audit matters in the auditor’s report
(a) SA 701 (b) SA 705 (c) SA 706 (d) SA 700

(25) ___________ are those matters that in the auditor’s professional judgement, were of most
significance in the audit of the financial statements of the current period.
(a) Significant Matters (b) Key Audit Matters
(c) Noteworthy Audit Matters (d) Remarkable Audit Matters

(26) Key Audit Matters are selected from matters

(a) Communicated to members of engagement team
(b) Communicated to management of the entity
(c) Communicated to TCWG of the entity
(d) Communicated to CG.

(27) In making determination of key audit matters, the auditor shall consider the following
(a) Areas of higher assessed risk of material misstatements or significant risk
identified in accordance with SA 315
(b) Significant auditor judgements relating to area in the financial statements that
involved significant management judgement, including accounting estimates
that have been identified as having estimation uncertainty.
(c) The effect on audit of significant events or transaction that occurred during the
period.
(d) All of the above

(28) The auditor shall describe each key audit matter, using an appropriate subheading, in a
separate section of the audit report under the heading
(a) Audit Matters
(b) Key Audit Matters
(c) Any appropriate heading as per the auditor’s judgement
(d) None of the above.

AUDIT 386 PART C - MULTIPLE CHOICE QUESTIONS

INTER C.A. – AUDIT

(29) Which of following statement is INCORRECT’

(a) Communicating key audit matters in the auditor’s report is not a separate
opinion on individual matters.
(b) SA 701 also applies when the auditor is required by law or regulation to
communicate key audit matters in the auditor’s report.
(c) The purpose of communicating key audit matters to enhance the
communicative value of the auditor’s report by providing greater transparency
about the audit that has been performed.
(d) Key audit matter is a substitute for expressing a modified opinion.

(30) The auditor shall describe each key audit matter in the auditor’s report unless
(a) Law or regulation precludes public disclosure about the matter
(b) In extremely rare circumstances, the auditor determines that the matter should
not be communicated in the auditor’s report because the adverse consequences
of doing so would reasonably be expected outweigh the public interest benefits
of such communication
(c) (a) or (b)
(d) None of these

(31) The auditor’s report shall not include a Key Audit Matter section in accordance with SA
701, in case of
(a) Disclaimer of Opinion (b) Adverse Opinion
(c) Qualified Opinion (d) All of the above

(32) Which of the following sequence in audit report is correct

(a) Title, Opinion section , Basis For Opinion section, Addressee, Key Audit Matter
section
(b) Title, Addressee, Basis For Opinion section, Opinion section, Key Audit Matter
section
(c) Title, Addressee, Key Audit Matter section, Opinion section, Basis For Opinion
section
(d) Title, Addressee, Opinion section, Basis for opinion section, Key Audit Matter
section.

AUDIT 387 PART C - MULTIPLE CHOICE QUESTIONS

INTER C.A. – AUDIT

SA 706
(33) Which of the following SA deals with auditor’s responsibility to communicate emphasis
of matter and other matter paragraph in independent auditor’s report
(a) SA 700 (b) SA 701 (c) SA 705 (d) SA 706

(34) ___________is a paragraph included in the auditor’s report that refers to a matter
appropriately presented or disclosed in the financial statements that, in the auditor’s
judgement, is of such importance that is fundamental to user’s understanding of the
financial statements.
(a) Emphasis of Matters Paragraph
(b) Other Matters Paragraph
(c) Key Audit Matter
(d) None of the above

(35) ___________is a paragraph included in the auditor’s report that refers to a matter other
than those presented or disclosed in the financial statements that, in the auditor’s
judgement, is of such importance that is fundamental to user’s understanding of audit,
the auditor’s responsibilities or the auditor’s report.
(a) Emphasis of Matters Paragraph
(b) Other Matters Paragraph
(c) Key Audit Matter
(d) None of the above

(36) To disclose the fact that financial statements of the prior period have been audited by
predecessor auditor, the auditor shall introduce paragraph in his report.
(a) Emphasis of Matter (b) Other Matter
(c) Key Audit Matter (d) None of the above

(37) To disclose an early application by entity (where permitted) of a new accounting

standards that has a pervasive effect on the financial statements in advance of its
effective date, auditor shall introduce paragraph in his report.
(a) Emphasis of Matter (b) Other Matter
(c) Key Audit Matter (d) Basis for Modified Opinion

AUDIT 388 PART C - MULTIPLE CHOICE QUESTIONS

INTER C.A. – AUDIT

(38) Emphasis of matter paragraph shall in auditor’s report

(a) Immediately following opinion section
(b) Immediately following Basis for opinion section
(c) Immediately following management’s responsibility section
(d) Immediately following auditor’s responsibility section

SA 710 (SA covered in chapter 11 in module)

(39) SA___________ relates to comparative information.

(a) 520 (b) 705 (c) 710 (d) 720

(40) ______________financial statements include comparative information which are included

for comparison with current financial statements but if audited are referred to in the
auditor’s opinion----
(a) Comparative (b) Prior period
(c) Corresponding (d) All of these
(41) ___________ framework means comparative information is included as an integral part of
current period financial statements---
(a) Corresponding figures
(b) Comparative financial statements
(c) Both option (a) and option (b)
(d) Either option (a) or option (b)

(42) As per SA 710, the auditor shall also consider—

(a) SA 510 (b) SA 560
(c) SA 720 (d) Both (a) and (b)

(43) In SA-710, if there is a doubt of material misstatement in comparative information,

then auditor shall not-
(a) Apply professional scepticism
(b) Perform additional audit procedures
(c) Obtain sufficient appropriate evidences regarding existence of material
misstatements
(d) None of these

AUDIT 389 PART C - MULTIPLE CHOICE QUESTIONS

INTER C.A. – AUDIT

(44) If the prior year’s financial statements were audited by another auditor, then current
year auditor shall as per SA 710, state in other matters paragraph---
(a) That last year financial statements are audited by predecessor auditor
(b) Type of opinion expressed by him
(c) Date of that report
(d) All of these

(45) If last year financial statements are unaudited, then as per SA 710 the auditor shall
state in _____________ section of audit report that corresponding financial statements are
unaudited---
(a) Auditor’s responsibility
(b) Opinion
(c) Emphasis of matter
(d) Other matters

(46) Statement (1)

If client has disclosed comparative information as per corresponding figures
framework, the auditor shall not refer to corresponding figures in any case.

Statement (2)
In the case of comparative financial statements, the audit opinion shall refer to each
period for which financial statements are presented and on which opinion is
expressed.
(a) Only statement 1 is correct
(b) Only statement 2 is correct
(c) Both the statements are correct
(d) None of the statement is correct

AUDIT 390 PART C - MULTIPLE CHOICE QUESTIONS

INTER C.A. – AUDIT

 ANSWERS 

1 d 2 a 3 d 4 a 5 b 6 c

7 d 8 c 9 a 10 b 11 c 12 a

13 d 14 d 15 a 16 d 17 c 18 b

19 b 20 d 21 d 22 c 23 b 24 a

25 b 26 c 27 d 28 b 29 d 30 c

31 a 32 d 33 d 34 a 35 b 36 b

37 a 38 b 39 c 40 a 41 a 42 d

43 d 44 d 45 d 46 b

AUDIT 391 PART C - MULTIPLE CHOICE QUESTIONS

INTER C.A. – AUDIT

CHAPTER 12 & 13
AUDIT OF BANKS &
AUDIT OF DIFFERENT TYPES OF ENTITIES
(READ WITH CHAPTER 12 & 13 CONTENT)

(1) Local self –government means the administration of a locality, a village, town or any
other area smaller than
(a) State (b) Country (c) City (d) Region

(2) Municipal Government in India covers following

(a) Municipal Corporation (b) Municipal Council
(c) Cantonment Committee (d) All of these

(3) Local bodies receive following grants from state administration

(a) General Purpose Grants (b) Specific Purpose Grants
(c) Statutory Grants (d) All of these

(4) Which of the following is not objective of audit of local bodies

(a) Reporting on the fairness of the content and presentation of financial statements
(b) Reporting on office infrastructure and maintenance of local bodies
(c) Reporting on the adherence to legal and/or administrative requirements
(d) Detection and prevention of error, fraud and misuse of resources

(5) ___________ is generally in charge of the audit of municipal accounts.

(a) CAG (b) CG
(c) Local Fund Audit Wing of the State Government
(d) ROC

AUDIT OF LIMITED LIABILITY PARTNERSHIP FIRM

(6) LLP, whose turnover does not exceed Rs. _____________or whose contribution does not
exceed Rs. _______________ is not required to get its accounts audited.
(a) 40 Lakhs, 25 Lakhs (b) 50 Lakhs, 25 Lakhs
(c) 40 Lakhs, 20 Lakhs (d) 60 Lakhs, 30 Lakhs

AUDIT 392 PART C - MULTIPLE CHOICE QUESTIONS

INTER C.A. – AUDIT

(7) Who of the following can be appointed as auditor of LLP

(a) A Chartered Accountant
(b) A Chartered Accountant in Practice
(c) A Cost Accountant
(d) A Chartered Accountant or A Cost Accountant

(8) The auditor LLP is appointed by designated partner

(a) At any time for the first FY but before the end of first FY
(b) At least 30 days prior to the end of each FY (Other than first FY)
(c) Both (a) and (b)
(d) Within 180 days from commencement of FY which is subject to audit

(9) If designated partners of LLP have failed to appoint auditor then auditor of LLP is
appointed by
(a) Registrar
(b) Central Government
(c) Local Fund Audit Wing of State Government
(d) Partner of LLP

(10) The auditor of LLP shall hold office of auditor till the period
(a) The new auditor is appointed (b) Auditor is reappointed
(c) (a) or (b) (d) 180 days from closure of FY.

(11) Every LLP shall file an annual return duly authenticated with the _________ within ________
days of closure of its FY
(a) Registrar, 30 (b) Registrar, 60
(c) Central Government, 30
(d) Local Fund Audit Wing of State Government, 60

(12) LLP shall file Annual return with Registrar in

(a) Form 11 (b) Form 12
(c) Form 13 (d) Form 14

AUDIT 393 PART C - MULTIPLE CHOICE QUESTIONS

INTER C.A. – AUDIT

(13) LLP are required to maintain books of accounts which shall contain
(a) Particulars of all sums of money received and expended by the LLP and the matters
in respect of which the receipt and expenditure take place
(b) A record of the assets and liabilities of the LLP
(c) Statements of cost of goods purchased , inventories, work-in progress, finished
goods and costs of goods sold
(d) All of these

(14) LLP is required to submit Statement of Account and Solvency with the within a period
(a) Central Government, 6 Months of FY to which the Statement of Account and
Solvency relates
(b) Registrar, 6 Months of FY to which the Statement of Account and Solvency relates
(c) Registrar, 30 Days from end of 6 months of the FY of FY to which the Statement of
Account and Solvency relates.
(d) Local Fund Audit Wing of State Government, 6 Months of FY to which the
Statement of Account and Solvency relates

(15) Which of the following document of LLP is not available for inspection by any person
(a) Agreements entered by LLP
(b) Incorporation Document
(c) Statement of Account and Solvency
(d) Annual Return

(16) The fees for inspection of document of LLP is

(a) Rs 100 and Rs 10 per page for certified copy or extract of any document
(b) Rs 50 and Rs 5 per page for certified copy or extract of any document
(c) Rs 50 and Rs 10 per page for certified copy or extract of any document
(d) Rs 100 and Rs 5 per page for certified copy or extract of any document

UNIT-2 BANK AUDIT. (Chapter 12)

(17) Which of the following is not type of bank

(a) Commercial Banks (b) Regional Rural Bank
(c) Payment Bank (d) None of these

(18) ___________ are the most wide spread banking in India

(a) Small Finance Banks (b) Co-Operative Banks
(c) Commercial Banks (d) Development Banks

AUDIT 394 PART C - MULTIPLE CHOICE QUESTIONS

INTER C.A. – AUDIT

(19) Main functions of Commercial banks are

(a) Accepting Deposits (b) Granting Advances
(c) Both (a) and (b) (d) None of these

(20) The functioning of banking industry in India is regulated by the

(a) Finance Ministry (b) Reserve Bank of India
(c) President of India (d) CAG

(21) acts as Central Bank of India

(a) Reserve Bank of India (b) State Bank of India
(c) Central Bank of India (d) Union Bank of India

(22) Important functions of RBI are

(a) Issuance of currency
(b) Regulation of currency issue
(c) Acting as banker to Central and State Governments
(d) All of the above

(23) No bank can commence business of banking or open new branches without obtaining
license from
(a) President of India (b) Finance Ministry
(c) Reserve Bank of India (d) State Bank of India

24) Which of the following are principal enactments which govern the functioning of various
types of banks
(a) Banking Regulation Act, 1949 (b) Companies Act, 2013
(c) Information Technology Act, 2000 (d) All of these

(25) Which of the following section of the banking Regulation Act, 1949 deal with from and
content of financial statements of banking company
(a) Section 128 (b) Section 129 (c) Section 29 (d) Section 28

(26) Auditor of nationalized bank is appointed by

(a) BoD of the Bank (b) Reserve Bank of India
(c) CAG (d) Central Government

AUDIT 395 PART C - MULTIPLE CHOICE QUESTIONS

INTER C.A. – AUDIT

(27) Auditor of the State Bank of India is appointed by

(a) BoD of the SBI (b) CAG
(c) Reserve Bank of India (d) Central Government

(28) The auditors of Subsidiaries of SBI are to be appointed by

(a) Reserve Bank of India (b) CAG
(c) Central Government (d) SBI

(29) The auditor of regional rural banks is appointed by

(a) Bank concerned with the approval of the Central Government
(b) Bank concerned without any previous approval of the Central Government
(c) RBI
(d) CAG

(30) The matters which the banks require their auditors to deal with in the Long Form Audit
Report is to be specified by
(a) CAG (b) RBI
(c) Central Government (d) Banking Regulation Act, 1949

(31) The LFAR is to be submitted before _____________ every year

(a) 30th September (b) 31st July
(c) 30th June (d) 31st May

(32) Advances comprises of funded amounts by way of

(a) Term loans
(b) Cash Credits, Overdrafts, Demand Loans
(c) Bills Discounted and Purchased
(d) All of the above

(33) In case of banking companies, Accounts showing stress signals are classified as
(a) SMA 0 (b) SMA 1 (c) SMA 2 (d) None of these

(34) In case of banking companies, Accounts overdue between 31 to 60 days, are classified as
(a) SMA 0 (b) SMA 1 (c) SMA 2 (d) None of these

(35) In case of banking companies, Accounts overdue between 31 to 60 days, are classified as
(a) SMA 0 (b) SMA 1 (c) SMA 2 (d) None of these

AUDIT 396 PART C - MULTIPLE CHOICE QUESTIONS

INTER C.A. – AUDIT

(36) NPA Loans of Banking Companies are classifies as

(a) Substandard
(b) Doubtful
(c) Loss
(d) Any of the above, depending upon circumstances

(37) Assets which does not disclose any problem and does not carry more than normal risk
attached to the business, are classifies as
(a) Standard Assets (b) Substandard Assets
(c) Good Assets (d) Genuine Assets

(38) Assets which has been classifies as NPA for a period not exceeding 12 months, are
classified as
(a) Standard Assets (b) Substandard Assets
(c) Doubtful Assets (d) Loss Assets

(39) Assets which has been classifies as NPA for a period exceeding 12 months, are classified
as
(a) Standard Assets (b) Substandard Assets
(c) Doubtful Assets (d) Loss Assets

(40) Asset in respect of which loss has been identified by the bank or internal
auditor/external
auditor or the RBI inspection, but the amount has not been written off, wholly or partly,
is classifies as
(a) Substandard Asset (b) Doubtful Asset
(c) Written off Asset (d) Loss Asset

(41) Which of the following is not classified as NPA

(a) Impaired (b) Sub-standard
(c) Doubtful (d) Loss

(42) Erosion in the value of security can be reckoned as significant when the realizable value
of the security is less than % of the value assessed by the bank or accepted by RBI at the
time of last inspection, as the case may be
(a) 20 (b) 50 (c) 60 (d) 75

AUDIT 397 PART C - MULTIPLE CHOICE QUESTIONS

INTER C.A. – AUDIT

(43) In case of classification of advance as standard assets, provision is required by the bank
(a) 40% (b) 50% (c) 75% (d) 80%

(44) In case of classification of commercial real estate advance, as standard assets provision
is
required by the bank
(a) 40% ( b) 50% (c) 75% (d) 1.00%

(45) In case of classification of advance as sub-standard assets, provision is required by the

bank for secured portion
(a) 10% (b) 15% (c) 20% (d) 25%

(46) In case of classification of advance as sub-standard assets, provision is required by the

bank for unsecured portion
(a) 10% (b) 15% (c) 20% (d) 25%

(47) In case of classification of advance as doubtful assets, provision is required by the bank
for unsecured portion
(a) 100% (b) 75% (c) 60% (d) 50%

(48) In case of classification of advance as doubtful assets (up to one year), provision is
required by the bank for secured portion
(a) 10% (b) 25% (c) 40% (d) 100%

(49) In case of classification of advance as doubtful assets (more than one year but up to 3
year), provision is required by the bank for secured portion
(a) 10% (b) 25% (c) 40% (d) 100%

(50) In case of classification of advance as doubtful assets (more than 3 years), provision is
required by the bank for secured portion
(a) 10% (b) 25% (c) 40% (d) 100%

(51) In case of classification of advance as loss assets, provision is required by the bank
(a) 100% (b) 75% (c) 60% (d) 50%

(52) __________ refers to the security offered by the borrower for bank finance or the one
against which credit has been extended by the bank.
(a) Primary Security (b) Collateral Security
(c) Healthy Security (d) None of these
AUDIT 398 PART C - MULTIPLE CHOICE QUESTIONS
INTER C.A. – AUDIT

(53) ___________ is an additional security. Security can be in any form i.e. tangible or intangible
asset, movable or immovable asset
(a) Primary Security (b) Collateral Security
(c) Healthy Security (d) None of these

(54) Most common types of securities accepted by banks are the following
(a) Personal Security of Guarantor (b) Immovable Property
(c) Life Insurance Policies (d) All of these

(55) Which of the following is not a type of mortgage

(a) Registered Mortgage (b) Equitable Mortgage
(c) Both (a) and (b) (d) None of these

(56) __________ can be effected by a registered instrument called the “Mortgage Deed” signed
by the mortgagor.
(a) Registered Mortgage (b) Equitable Mortgage
(c) Both (a) and (b) (d) None of these

(57) __________ is effected by a mere delivery of title deeds or other documents of title with
intent to create security thereof
(a) Registered Mortgage (b) Equitable Mortgage
(c) Both (a) and (b) (d) None of these

(58) ___________ involves bailment or delivery of goods by the borrower to the lending bank,
with the intention of creating a charge thereon as security for the advance
(a) Mortgage (b) Pledge
(c) Hypothecation (d) Assignment

(59) __________ is the creation of an equitable charge, which is created in favour of the lending
bank by execution of agreement in respect of movable securities belonging to the
borrower
(a) Mortgage (b) Pledge
(c) Hypothecation (d) Assignment

(60) _________ is a transfer of an existing or future debt, right or property belonging to a

person
in favour of another person.
(a) Mortgage (b) Pledge
(c) Hypothecation (d) Assignment
AUDIT 399 PART C - MULTIPLE CHOICE QUESTIONS
INTER C.A. – AUDIT

(61) ___________ is a statutory right of a creditor to adjust, wholly or partly, the debit balance in
the debtor’s account against any credit balance lying in another account of the debtor.
(a) Adjustment (b) Agreement
(c) Set-off (d) Deduction

(62) ___________ is creation of legal charge with consent of the owner, which gives lender a
legal
right to seize and dispose /liquidate the asset under lease.
(a) Set-off (b) Lien (c) Disposal (d) Release

(63) An advance will be classified as NPA, if

(a) It ceases to generate income for a bank
(b) Interest and/or installment of principal in respect of such an advance have been
remain overdue or out of order for a specified period of time (exceeding 90 days as
on balance sheet date)
(c) (a) or (b)
(d) None of these

(64) An account should be treated as ‘Out-of-Order’ if

(a) Outstanding balance remains continuously in excess of the sanctioned
limit/drawing power
(b) There are no credits continuously for 90 days as on the balance sheet date or the
credits are not enough to cover the interest debited during the same period
(c) (a) or (b)
(d) None of these

(65) Where it appears that an account has inherent weakness and few credits near balance
sheet tries to make it regular, the account should be classified as
(a) Standard Asset
(b) Non-Performing Asset
(c) Loss Asset
(d) None of these

AUDIT 400 PART C - MULTIPLE CHOICE QUESTIONS

INTER C.A. – AUDIT

(66) Which of the following statement is INCORRECT w.r.t classification of advance as NPA
(a) All the facilities granted by bank to borrower will have to be treated as NPA and
not the particular facility or part thereof.
(b) In case of consortium advance, asset classification should be based on the record of
recovery of individual member of banks.
(c) In case of advance with moratorium period for payment of interest, payment of
interest becomes due only after the expiry of moratorium period, therefore such
interests do not become overdue and hence do not become NPA with reference to
date of debit of interest.
(d) The credit facilities backed by State Government though overdue, will be classified
as NPA only when the State Government repudiates its guarantee when invoked.

(67) The credit facilities backed by though overdue, will be classified as NPA only when the
___________ repudiates its guarantee when invoked
(a) Central Government (b) State Government
(c) RBI (d) Any Guarantor

(68) Loan granted for short duration crop shall be classified as NPA if interest and/or
instalments of principal is overdue for
(a) One crop season (b) Two crop season
(c) Exceeding 90 days (d) Exceeding 120 days

(69) Loan granted for long duration crop shall be classified as NPA if interest and/or
instalments of principal is overdue for
(a) One crop season (b) Two crop season
(c) Exceeding 90 days (d) Exceeding 120 days

(70) Credit card account shall be classified as NPA, if ___________ amount due, as mentioned
in the credit card statement is not paid fully within days from next statement date
(a) Total, 90 (b) Minimum, 30
(c) Minimum, 90 (d) None of these

(71) Which of the following is not exception to norms for classification of assets as NPA
(a) Temporary Deficiencies
(b) Natural Calamities w.r.t. short term agricultural advance
(c) Advances against Term Deposits, NSC, KVP, IVP
(d) Facilities Backed by State Government

AUDIT 401 PART C - MULTIPLE CHOICE QUESTIONS

INTER C.A. – AUDIT

(72) Banks should recognize income from NPA

(a) On cash basis
(b) On accrual basis
(c) As the policy of the Bank
(d) Substandard assets on accrual basis, and other NPAs on cash basis.

(73) Interest income from advances though overdue but not classifies as NPA as secured
against Term Deposits, NSC, KVP, IVP may be recognize
(a) On cash basis
(b) On accrual basis
(c) Substandard assets on accrual basis, and other NPAs on cash basis.
(d) On Secured portion accrual basis and on secured portion on cash basis.

(74) Interest income from advances though overdue but not classifies as NPA as secured
against guarantee of the Central Government, recognized as
(a) On cash basis
(b) On accrual basis
(c) Substandard assets on accrual basis, and other NPAs on cash basis
(d) On Secured portion accrual basis and on secured portion on cash basis

(75) The auditor can obtain sufficient appropriate audit evidence about advances by study
and
evaluation of the internal controls relating to advances, and by:
(a) Examining loan documents
(b) Examining the existence, enforceability and valuation of the security
(c) Checking compliance with RBI norms including classification and provisioning
(d) All of the above

(76) If a loan/advance is treated as NPA for the first time, interest accrued which had not
been
realized but credited to the income account should be reversed by transfer to a separate
account called
(a) Suspense Account
(b) Income Reversal Account
(c) Interest Suspense Account
(d) Account Suspense

AUDIT 402 PART C - MULTIPLE CHOICE QUESTIONS

INTER C.A. – AUDIT

(77) In carrying out audit of advance, the auditor is primarily concerned with obtaining
evidence about the following
(a) Amounts included in balance sheet in respect of advances are outstanding at the
date of the balance sheet
(b) Advances represents amount due to bank
(c) There are no unrecorded advances
(d) All of the above

UNIT-3 CO-OPERATIVE SOCIETY AUDIT

(78) Who can be appointed as auditor of Co-Operative Society

(a) Chartered Accountant within the meaning of the Chartered Accountants Act, 1949
(b) Personholding a government diploma in co-operative accounts
(c) Person who has served as an auditor in the co-operative department of
government to act as an auditor.
(d) Any of the above

(79) Auditor of Co-Operative Society is appointed by

(a) Managing Committee of Co-Operative Society
(b) Registrar of Co-Operative Society
(c) Members of Co-Operative Society
(d) None of these

(80) The auditor of Co-Operative Society submits his audit report to

(a) The Members of Co-Operative Society
(b) The Registrar of Co-Operative Society
(c) The Co-Operative Society
(d) Both (b) and (c)

(81) The audit fees to the auditor of Co-Operative Society are paid by on the basis of
____________ .
(a) Society, Statutory scale of fees prescribed by the Registrar
(b) Registrar, Statutory scale of fees prescribed by the Registrar
(c) Society, Decision of Managing Committee of Society
(d) Society, Resolution passed by its Members.

AUDIT 403 PART C - MULTIPLE CHOICE QUESTIONS

INTER C.A. – AUDIT

(82) In case of a society where the liability of a member of society is limited, no member of a
society other than a registered society can hold such portion of the share capital of the
society as exceed a maximum of
(a) 20% of the total number of shares
(b) Value of Shareholding to Rs. 1,000
(c) (a) or (b)
(d) None of these

(83) Which of the following is correct

(a) A registered society shall not make a loan to any person other than a member.
(b) With the special sanction of the Registrar, a registered society may make a loan to
another registered society.
(c) The State Government may further put such restrictions as it thinks fit on the
loaning powers of the society
(d) All of these

(84) A Society may invest its funds

(a) In stock market through stock exchange
(b) In the Central or Other Co-Operative Bank
(c) In the shares, securities, bonds or debentures of any other society whether limited
liability or unlimited liability
(d) None of these

(85) A Society may invest its funds

(a) In any of the securities specified in section 20 of the Indian Trusts Act, 1882
(b) In the shares, securities, bonds or debentures of any other society with limited
liability
(c) In any co-operative bank, other than a Central or State Co-Operative bank, as
approved by the Registrar on specified terms and conditions.
(d) Any of the above

(86) ___________ % of the profits should be transferred to Reserve Fund, before distribution as
dividend or bonus to members.
(a) 10 (b) 20 (c) 25 (d) 30

AUDIT 404 PART C - MULTIPLE CHOICE QUESTIONS

INTER C.A. – AUDIT

(87) A registered society may, with the sanction of the Registrar, contribute an amount not
exceeding of for any charitable purpose.
(a) 10%, Net profits remaining after the compulsory transfer to the reserve fund
(b) 10%, Net profits before compulsory transfer to the reserve fund
(c) 5%, Net profits remaining after the compulsory transfer to the reserve fund
(d) 5%, Net profits before compulsory transfer to the reserve fund

(88) Society may use the Reserve Fund

(a) In the business of a society, as working capital
(b) May invest as per the provision of the Co-Operative Societies Act, 1912
(c) May be used for some public purposes likely to promote the objective of the
society
(d) Any of the above

(89) Special Report to the Registrar is required

(a) If auditor detect fraud
(b) Personal profiteering by members of the managing committee in transaction of the
society
(c) Mis-management
(d) All of the above

(90) Who can be appointed as auditor of Multi State Co-Operative Society

(a) Chartered Accountant within the meaning of the Chartered Accountants Act, 1949
(b) Personholding a government diploma in co-operative accounts
(c) Person who has served as an auditor in the co-operative department of
government to act as an auditor.
(d) Any of the above

(91) The First Auditor of Multi State Co-Operative Society shall be appointed by __________
within ____________ .
(a) Registrar of Society, One month of date of registration of such society
(b) Board, One month of date of registration of such society
(c) Members, 90 days of date of registration of such society
(d) Central Registrar, One month of date of registration of such society.
AUDIT 405 PART C - MULTIPLE CHOICE QUESTIONS
INTER C.A. – AUDIT

(92) Subsequent Auditor of Multi State Co-Operative Society is appointed

(a) At Board’s Meeting (b) By Central Registrar
(c) At AGM (d) By Secretary of the Society

(93) Subsequent Auditor of Multi State Co-Operative Society shall hole office of auditor until
(a) Submission of audit report (b) Conclusion of 6th AGM
(c) Conclusion of 5 Years (d) Conclusion of next AGM

(94) The audit report on the financial statements of society shall contain schedule with
particular of
(a) All transactions which appears to be contrary to the provisions of the Act, Rules or
Byelaws of society
(b) All sums, which ought to have been, but have not brought into account by the s
(c) Any material, or property belonging to society which appears to the auditor to be
bad or doubtful of recovery
(d) All of the above

(95) ____________ has power to direct Special Audit in certain cases of Multi-State
Co-Operative Society
(a) Central Government (b) Central Registrar
(c) Managing Committee (d) Members of Society

(96) Under which of the following circumstances order of Special Audit is passed
(a) The affairs of any MSCO are not being managed in accordance with self-help and
mutual did and co- operative principles or prudent commercial practices or with
sound business principles; or
(b) Any MSCO is being managed in a manner likely to cause serious injury or damage
to the interests of the trade industry or business to which it pertains; or
(c) The financial position of any MSCO is such as to endanger its solvency.
(d) Any of the above

(97) The Special Auditor shall submit his report to

(a) Managing Committee of Society (b) Members of Society
(c) Central Government (d) Central Registrar

AUDIT 406 PART C - MULTIPLE CHOICE QUESTIONS

INTER C.A. – AUDIT

(98) Which of the following may request to Central Registrar to conduct an inquiry
(a) Central Government
(b) A Creditor
(c) At least 10% of members of the Board
(d) At least 15% of the total number of members.

(99) Inquiry by Central Registrar may be conducted into the

(a) Constitution (b) Working
(c) Financial Condition (d) Any of the above

UNIT-4 GOVERNMENT AUDIT

(100) In India, the function of government audit is discharged by the independent statutory
authority of _________ through the agency of ___________.
(a) CG, ROC
(b) CAG, Indian audit and Account Department
(c) Both (a) and (b)
(d) None of these

(101) CAG of India is appointed by

(a) Prime Minister of India (b) Parliament
(c) President of India (d) CBI

(102) CAG can resign any time through a resignation letter addressed to
(a) Prime Minister of India (b) Parliament
(c) CBI (d) President of India

(103) The CAG shall be paid salary equivalent to

(a) Judge of High Court (b) Judge of Supreme Court
(c) Prime Minister (d) President of India
(104) ___________ is competent to make laws to determine salary and other conditions of
service
(a) The Parliament (b) President of India
(c) Prime Minister of India (d) CBI

AUDIT 407 PART C - MULTIPLE CHOICE QUESTIONS

INTER C.A. – AUDIT

(105) The CAG shall hold office

(a) For 6 Years (b) Up to the age of 65 Years
(c) (a) or (b) whichever is earlier (d) (a) or (b) whichever is later

(106) The CAG shall audit

(a) Receipts of Union or State
(b) Account of Store and Stock
(c) Grants and Loans given from Consolidated Fund of
(d) All of these

(107) Which of the following is not power of CAG

(a) To inspect any office of accounts under the control of the union or a State
Government
(b) To require that any account, book, paper and other documents which deal with or
are otherwise relevant to the transaction under audit, be sent to specified places
(c) To attend Parliament Session
(d) To put such questions or make such observations as he may consider necessary
to the person in charge.

(108) CAG has a right to order conduct of supplementary audit within ___________ days from
the date of receipt of audit report
(a) 30 (b) 60 (c) 90 (d) 120

(109) Which of the following section of the Companies Act, 2013 provides right to the CAG to
conduct test audit of accounts of Government Companies
(a) 143(5) (b) 143(6) (c) 143(7) (d) 143(12)

(110) Which of the following is not a standard for audit of public expenditure
(a) Audit of Rules and Orders
(b) Audit of Sanction
(c) Audit of Propriety
(d) None of these
AUDIT 408 PART C - MULTIPLE CHOICE QUESTIONS
INTER C.A. – AUDIT

(111) According to ______________, the auditor try to bring out cases of improper, avoidable, or
infructuous expenditure even though the expenditure has been incurred in conformity
with the existing rules and regulation.
(a) Propriety Audit (b) Audit of Sanction
(c) Audit of Performance (d) Audit against Provision of Funds

(112) Public money should not be utilized for the benefit of a particular person or a section of
the community or for the person who is sanctioning the expenditure. These are the
principles covered in
(a) Performance Audit (b) Audit against rules and orders
(c) Propriety Audit (d) Performance Audit

(113) In the case of Government audits, performance audit covers the following
(a) Efficiency Audit (b) Economy Audit
(c) Effectiveness Audit (d) All of these

(114) While auditing a cinema hall, the auditor needs to verify that
(a) Entrance to the cinema hall during show is only through printed tickets
(b) Tickets are serially numbered and bound into books
(c) That for advance booking a separate series of tickets is issued
(d) All of above

(115) Reports of CAG relating to the accounts of the Union/State shall be submitted to the
who shall cause to be laid
(a) President/Governor
(b) Prime Minister/Chief Minister
(c) Union Finance Minister/State Finance Minister
(d) All of the above

(116) _______________ aims at ascertaining that the expenditure incurred has been on the
purpose for which the grant and appropriation had been provided and that the amount
of such expenditure does not exceed the appropriation made
(a) Audit against provision of funds
(b) Propriety audit
(c) Audit of sanction
(d) Audit against rules and orders

AUDIT 409 PART C - MULTIPLE CHOICE QUESTIONS

INTER C.A. – AUDIT

 ANSWERS 

1 a 21 a 41 a 61 c 81 a 101 c
2 d 22 d 42 b 62 b 82 c 102 d
3 d 23 c 43 a 63 c 83 d 103 b
4 b 24 d 44 d 64 c 84 b 104 a
5 c 25 c 45 b 65 b 85 d 105 c
6 a 26 a 46 d 66 d 86 c 106 d
7 b 27 b 47 a 67 a 87 a 107 c
8 c 28 d 48 b 68 b 88 d 108 b
9 d 29 a 49 c 69 a 89 d 109 c
10 c 30 b 50 d 70 c 90 a 110 d
11 b 31 c 51 a 71 d 91 b 111 a
12 a 32 d 52 a 72 a 92 c 112 c
13 d 33 a 53 b 73 b 93 d 113 d
14 c 34 b 54 d 74 a 94 d 114 d
15 a 35 c 55 d 75 d 95 a 115 a
16 b 36 d 56 a 76 c 96 d 116 a
17 d 37 a 57 b 77 d 97 c
18 c 38 b 58 b 78 d 98 b
19 c 39 c 59 c 79 b 99 d
20 b 40 d 60 d 80 d 100 b



AUDIT 410 PART C - MULTIPLE CHOICE QUESTIONS

PART – D
CORRECT
OR
INCORRECT
QUESTIONS
INTER C.A. – AUDIT

PART D - CORRECT / INCORRECT

QUESTIONS

Ch.No Chapter Name Page number

1 Nature Scope and Objectives of Audit 412

2 Audit Strategy, Planning and Programming

413
3 Audit Evidence and Documentation

4 Risk Assessment and Internal Control

414
5 Auditor’s responsibility in relation to Fraud

6 Audit in an Automated Environment

7 Audit Sampling 415

8 Analytical Procedures

9 Audit of Items of Financial Statements No questions

10 Company Audit 416

11 Audit Report 417

12 Audit of Banks

13 Audit of Different Types of Entities 418

14 RTP M18 419

15 RTP N18 420

16 RTP M19 421

AUDIT 411 PART D : CORRECT OR INCORRECT QUESTIONS

INTER C.A. – AUDIT

COMMENT ALONGWITH REASONS WHETHER FOLLOWING ARE

CORRECT OR INCORRECT

CHAPTER 1
Basic Concepts of an Audit
(1) Financial statements include P&L Account and Balance Sheet but not notes to
accounts.

(2) Audit is independent examination of operations conducted by management.

(3) Auditor’s opinion is on Correct & Fair view of financial statements.

(4) Auditor needs to be independent.

(5) Audited financial statements help the lenders.

(6) Auditor does not need communication skills, as he is concerned only with
financial information.

(7) Auditor must maintain confidentiality subject to certain exceptions.

(8) Auditor does not need knowledge of accounting.

(9) Auditor should have knowledge of CIS.

(10) Audit doesn’t require knowledge of business operations on part of auditor.

(11) Documentation is required to be kept by auditor.

(12) Financial statements are responsibility of management.

(13) Disclosure of accounting policy, which is adopted in preparation of financial

statements, is not required.

(14) As per AS -1 disclosure of fundamental accounting assumptions is needed

whether these are followed or not.

(15) The basic objective of audit does not change with reference to nature, size or
form of an entity

(16) The purpose of an audit is to enhance the degree of confidence of intended users
in the financial statements.

(17) The auditor is not expected to, and cannot, reduce audit risk to zero and cannot
therefore obtain absolute assurance that the financial statements are free from
material misstatement due to fraud or error.

AUDIT 412 PART D : CORRECT OR INCORRECT QUESTIONS

INTER C.A. – AUDIT

(18) Specific disclosure is required of the fundamental accounting assumptions

followed in the financial statements

(19) The audit engagement letter is sent by the client to auditor.

CHAPTER 2
Audit Strategy Planning and Programming

(20) Planning is indispensable part of audit process.

(21) Audit program helps the assistants in several ways.

(22) Audit program cannot be of any use in future.

(23) Audit program does not suffer from limitations.

(24) Final audit reduces the chance of manipulation in accounts.

(25) In continuous audit auditor goes to client site only at end of year.

(26) Continuous audit doesn’t have any limitation.

(27) Results of surprise checks are always included in auditor’s report.

(28) Material items are only quantitative in nature.

(29) There is inverse relation between materiality & audit risk.

CHAPTER 3
Audit Strategy Planning and Programming

(30) Evidence should be sufficient and appropriate.

(31) Auditor should consider consistency of evidence.

(32) Substantive procedures are carried out to check data produced by accounting
system.

(33) External confirmation means representation from management.

(34) Reply is required in all cases in positive confirmation request.

(35) Auditor should carefully plan & control external confirmation.

AUDIT 413 PART D : CORRECT OR INCORRECT QUESTIONS

INTER C.A. – AUDIT

CHAPTER 4
Risk Assessment and Internal Control

(36) Maintenance of Internal Control System is the responsibility of the Statutory

Auditor.

(37) As per section 138 of the Companies Act, 2013 private companies are not
required to appoint internal auditor.

(38) Tests of control are performed to obtain audit evidence about the effectiveness
of Internal Controls Systems.

CHAPTER 5
FRAUD RESPONSIBILITY

(39) Teeming and lading is one of the techniques of inflating cash payments.

(40) Fraud intentional error.

(41) Auditor Government in case of fraud involving 20 Lakh rupees.

(42) The primary responsibility for the prevention and detection of fraud rests with
both those charged with governance of the entity and management.

(43) Fraudulent financial reporting only involve manipulation, falsification or

alteration of accounting records or supporting documents from which financial
statements are prepared

CHAPTER 6
AUDIT IN AN AUTOMATED ENVIRONMENT

(44) All automated environments are complex.

(45) In an audit of financial statements, the auditor should plan response to all IT
risks.

(46) General IT controls support the functioning of Application controls.

(47) Inquiry is often the most efficient audit testing method, but least effective.

(48) Specialised audit tools like IDEA, ACL are required to perform data analytics.

AUDIT 414 PART D : CORRECT OR INCORRECT QUESTIONS

INTER C.A. – AUDIT

CHAPTER 7
Audit Sampling

(49) The method which involves dividing the population into groups of items is
knows as block sampling.

(50) Universe refers to the entire set of data from which a sample is selected and
about which the auditor wishes to draw conclusions.

(51) Non Statistical sampling is an approach to sampling that has the random
selection of the sample items; and the use of probability theory to evaluate
sample results, including measurement of sampling risk characteristics.

(52) Sample need not be representative

(53) The objective of stratification is to increase the variability of items within each
stratum and therefore allow sample size to be reduced without increasing
sampling risk.

CHAPTER 8
Analytical Procedure

(54) As per the Standard on Auditing (SA) 520 “Analytical Procedures” ‘the term
“analytical procedures” means evaluations of financial information through
analysis of plausible relationships among financial data only.

(55) Auditor can depend on routine checks to disclose all the mistakes or
manipulation that may exist in accounts.

(56) Only purpose of analytical procedures is to obtain relevant and reliable audit
evidence when using substantive analytical procedures.

(57) Analytical Procedures are required in the planning phase only.

(58) Substantive analytical procedures are generally less applicable to large volumes
of transactions that tend to be predictable over time.

AUDIT 415 PART D : CORRECT OR INCORRECT QUESTIONS

INTER C.A. – AUDIT

CHAPTER 10
COMPANY AUDIT

(59) First auditor can be appointed by inclusion of their name in articles.

(60) Statutory auditor has certain rights w.r.t branch office of Client Company as
well.

(61) The right of lien is not un-conditional.

(62) Auditor must send audit report to every member of company.

(63) Auditor should use uniform regular font throughout his audit report.

(64) Auditor should try to quantify the effect of qualification in his audit report.

(65) The first auditor of a Government company was appointed by the Board in its
meeting after 10 days from the date of registration.

(66) Director’s relative can act as an auditor of the company.

(67) If an LLP (Limited Liability Partnership Firm) is appointed as an auditor of a

company, every partner of a firm shall be authorized to act as an auditor.

(68) AB & Co. is an audit firm having partners Mr. A and Mr. B. Mr. C, the relative of
Mr. B is holding securities having face value of Rs. 2,00,000 in XYZ Ltd. AB & Co.
is qualified for being appointed as an auditor of XYZ Ltd.

(69) The auditor of a Ltd. Company wanted to refer to the minute books during audit
but board of directors refused to show the minute books to the auditors.

(70) Manner of rotation of auditor will not be applicable to company A, which is

having paid up share capital of Rs. 15 crores and having public borrowing from
nationalized bank of Rs. 50 crore because it is a Private Limited Company.

(71) The auditor should study the Memorandum and Articles of Association to see
the validity of his appointment.

(72) Managing director of A Ltd. himself appointed the first auditor of the company.

(73) A Chartered Accountant holding securities of S Ltd. having face value of Rs. 950
is qualified for appointment as an auditor of S Ltd.

(74) Mr. N, a member of the Institute of Company Secretary of India, is qualified to be

appointed as auditor of XYZ Limited.
AUDIT 416 PART D : CORRECT OR INCORRECT QUESTIONS
INTER C.A. – AUDIT

CHAPTER 11
AUDIT REPORT

(75) The auditor shall express a qualified opinion when the auditor concludes that
the financial statements are prepared, in all material respects, in accordance
with the applicable financial reporting framework.

(76) There is no need of addressee in the Auditor’s report.

(77) The auditor shall modify the opinion in the auditor’s report only when the
auditor concludes that, based on the audit evidence obtained, the financial
statements as a whole are not free from material misstatement.

(78) The auditor shall express a disclaimer of opinion when the auditor, having
obtained sufficient appropriate audit evidence, concludes that misstatements,
individually or in the aggregate, are both material and pervasive to the financial
statements.

(79) Communicating key audit matter in the auditor’s report constitutes a substitute
for disclosure in the financial statements.

CHAPTER 12
AUDIT REPORT

(80) RBI has been entrusted with the responsibility of regulating the activities of
commercial banks only.

(81) In the computerised environment, the auditor need not be familiar with latest
applicable RBI guidelines that have bearing on the classification/ provisions and
income recognition.

(82) The auditor can assume that the system generated information is correct and
relied upon without evidence that demonstrates that the system driven
information is based on validation of the required parameters for the time being
in force and applicable.

(83) Collateral security refers to the security offered by the borrower for bank
finance or the one against which credit has been extended by the bank.

AUDIT 417 PART D : CORRECT OR INCORRECT QUESTIONS

INTER C.A. – AUDIT

(84) Registered mortgage is effected by a mere delivery of title deeds or other

documents of title with intent to create security thereof.

(85) Any amount due to the bank under any credit facility is ‘overdue’ if it is not paid
within 90 days of becoming due.

(86) An account should be treated as ‘out of order’ if the outstanding balance remains
continuously in excess of the sanctioned limit/drawing power.

CHAPTER 13
Audit of different types of entities

(87) The external control of municipal expenditure is exercised by the Central

Government through the appointment of auditors to examine municipal
accounts.

(88) NGOs may be defined as non-profit making organisations which raise funds
from members, donors or contributors apart from receiving donation of time,
energy and skills for achieving their social objectives.

(89 Article 150 of the Constitution provides that the accounts of the Union and of
the States shall be kept in such form as the Finance Minister may on the advice
of the C&AG prescribe.

(90) According to ‘propriety audit’, the auditors try to bring out cases of improper,
avoidable, or in fructuous expenditure even though the expenditure has been
incurred in conformity with the existing rules and regulations.

(91) Expenditure incurred by the municipalities and corporations can be broadly

classified under the following heads: (a) general administration and revenue
collection, (b) public health, (c) public safety, (d) education, (e) public works,
and (f) others such as interest payments.

(92) Audit of government enterprises is conducted by central government.

(93) CAG is appointed by judge of Supreme Court.

(94) Term of office for CAG is 5 years or 60 years of age whichever is less.

(95) In government audit, propriety is major concern to be checked.

(96) Performanceaudit seeks to check costs & benefits of government expenditure.

AUDIT 418 PART D : CORRECT OR INCORRECT QUESTIONS

INTER C.A. – AUDIT

 CORRECT OR INCORRECT FROM RTP MAY 2018 

State with reason (in short) whether the following statements are correct
or Incorrect:

(i) The objective of audit is to obtain absolute assurance and to report on the
financial statements.

(ii) Teeming and lading is one of the techniques of suppressing cash receipts.

(iii) There is direct relationship between materiality and the degree of audit risk.

(iv) As per SA 230 on “Audit Documentations”, the working papers are not the
property of the auditor.

(v) Control risk is the susceptibility of an account balance or class of transactions to

misstatement that could be material either individually or, when aggregated
with misstatements in other balances or classes, assuming that there were no
related internal controls.

(vi) As per section 138 of the Companies Act, 2013 private companies are not
required to appoint internal auditor.

(vii) The term “internal audit” is defined as the “checks on day to day transactions
which operate continuously as part of the routine system whereby the work of
one person is proved independently or is complementary to the work of
another, the object being the prevention or early detection of errors or fraud”.

(viii) A Chartered Accountant holding securities of S Ltd. having face value of 950 is
qualified for appointment as an auditor of S Ltd.

AUDIT 419 PART D : CORRECT OR INCORRECT QUESTIONS

INTER C.A. – AUDIT

 CORRECT OR INCORRECT FROM RTP NOV 2018 

State with reason (in short) whether the following statements are correct or
Incorrect:

(a) The preparation of financial statements does not involve judgment by

management in applying the requirements of the entity’s applicable financial
reporting framework to the facts and circumstances of the entity.

(b) Audit procedures used to gather audit evidence may be effective for detecting an
intentional misstatement.

(c) An audit is an official investigation into alleged wrongdoing.

(d) The matter of difficulty, time, or cost involved is in itself a valid basis for the
auditor to omit an audit procedure for which there is no alternative.

(e) There is no relation between Audit Plans and knowledge of the client’s business

(f) Planning is not a discrete phase of an audit, but rather a continual and iterative
process.

(g) Audit documentation is a substitute for the entity’s accounting records.

(h) An appropriate time limit within which to complete the assembly of the final
audit file is ordinarily not more than 30 days after the date of the auditor’s
report.

(i) When the auditor has determined that an assessed risk of material
misstatement at the assertion level is a significant risk, the auditor shall not
perform substantive procedures that are specifically responsive to that risk.

(j) The SAs ordinarily refer to inherent risk and control risk separately.

AUDIT 420 PART D : CORRECT OR INCORRECT QUESTIONS

INTER C.A. – AUDIT

 CORRECT OR INCORRECT FROM RTP MAY 2019 

State with reason (in short) whether the following statements are correct or
Incorrect:

(i) The preparation of financial statements does not involve judgment by

management in applying the requirements of the entity’s applicable financial
reporting framework to the facts and circumstances of the entity.

(ii) Audit procedures used to gather audit evidence may be effective for detecting an
intentional misstatement.

(iii) An audit is an official investigation into alleged wrongdoing.

(iv) The matter of difficulty, time, or cost involved is in itself a valid basis for the
auditor to omit an audit procedure for which there is no alternative.

(v) There is no relation between Audit Plans and knowledge of the client’s business

(vi) Planning is not a discrete phase of an audit, but rather a continual and iterative
process.

(vii) Audit documentation is a substitute for the entity’s accounting records.

(viii) An appropriate time limit within which to complete the assembly of the final
audit file is ordinarily not more than 30 days after the date of the auditor’s
report.

(ix) When the auditor has determined that an assessed risk of material
misstatement at the assertion level is a significant risk, the auditor shall not
perform substantive procedures that are specifically responsive to that risk.

AUDIT 421 PART D : CORRECT OR INCORRECT QUESTIONS

INTER C.A. – AUDIT

 ANSWERS 

Ch.No Chapter Name Page number

1 Nature Scope and Objectives of Audit 423

2 Audit Strategy, Planning and Programming 425

3 Audit Evidence and Documentation 427

4 Risk Assessment and Internal Control

5 Auditor’s responsibility in relation to Fraud 428

6 Audit in an Automated Environment 429

7 Audit Sampling 430

8 Analytical Procedures 431

9 Audit of Items of Financial Statements No questions

10 Company Audit 432

11 Audit Report 435

12 Audit of Banks 436

13 Audit of Different Types of Entities 437

14 RTP M18 439

15 RTP N18 440

16 RTP M19 442

AUDIT 422 PART D : CORRECT OR INCORRECT QUESTIONS

INTER C.A. – AUDIT

CHAPTER 1
NATURE SCOPE AND OBJECTIVES OF AUDIT

1. INCORRECT  Financial statements mean whole set of accounts including P&L

account, Balance sheet and disclosure i.e., notes to accounts.

2. INCORRECT  Audit is independent examination of financial statements of an

entity to express opinion thereon. It is thus examining financial
information, not operations of entity.

3. CORRECT  For reporting on correct & fair view, it is seen whether

acceptable policies are consistently applied, regulations have
been observed & appropriate disclosures have been made in
financial statements.

4. CORRECT  Independence means that judgement of a person is not

subordinate to wishes of any person. Independent audit
enhances credibility of financial statements of client.

5. CORRECT  Lenders can rely on audited financial statements while making

decision about credit worthiness of loan applicant & later on,
they can judge recoverability of their funds.

6. INCORRECT  During conduct of audit, he has to interact with various officers

and staff of client & third parties, which requires good written
& oral communication skills.

7. CORRECT  He (Auditor) should not disclose any confidential information

relating to client. However, he can disclose if it is permitted by
client or required by law.

8. INCORRECT  Auditor expresses opinion on financial statements. If he does

not have expert knowledge on accounting, he cannot check
whether financial statements prepared by entity’s management
are correct & fair or not.

9. CORRECT  Now a days, most of the client maintain their accounts in

computer information system. Thus, working knowledge on
computer is required for auditors to conduct audit in an
effective way.

AUDIT 423 PART D : CORRECT OR INCORRECT QUESTIONS

INTER C.A. – AUDIT

10. INCORRECT  In financial statements of client, results of various

operations/functions are shown. Unless auditor has knowledge
about basic business operations, he can’t judge their financial
results in effective way.

11. CORRECT  He should document matters relating to the audit (maintain

working papers).Working papers are maintained to
demonstrate that the audit was carried out accordance with the
basic principles.

12. CORRECT  The management is responsible for maintaining an up to date

and proper accounting of various transactions entered into
during the course of the year.

13. INCORRECT  The profit or loss can be significantly affected by adopting

different accounting policies. Thus disclosure of accounting
policies followed becomes necessary, so that readers of
financial statements can properly understand the view
presented.

14. INCORRECT If all three fundamental accounting assumptions are being
followed in preparation & presentation of financial statements,
specific disclosure is not needed. Thus, disclosure is needed
only in case of non- compliance with the fundamental
accounting assumption.

15. CORRECT  An audit is an independent examination of financial information

of any entity, whether profit oriented or not, and irrespective of
its size or legal form, when such an examination is conducted
with a view to expressing an opinion thereon. It is clear that the
basic objective of auditing, i.e., expression of opinion on
financial statements does not change with reference to nature,
size or form of an entity.

16. CORRECT  As per SA 200 “Overall Objectives of the Independent Auditor

and the Conduct of an Audit in Accordance with Standards on
Auditing”, the purpose of an audit is to enhance the degree of
confidence of intended users in the financial statements. This is
achieved by the expression of an opinion by the auditor on
whether the financial statements are prepared, in all material
respects, in accordance with an applicable financial reporting
framework.
AUDIT 424 PART D : CORRECT OR INCORRECT QUESTIONS
INTER C.A. – AUDIT

17. CORRECT  As per SA 200 “Overall Objectives of the Independent Auditor

and the Conduct of an Audit in Accordance with Standards on
Auditing”, the auditor is not expected to, and cannot, reduce
audit risk to zero and cannot therefore obtain absolute
assurance that the financial statements are free from material
misstatement due to fraud or error. This is because there are
inherent limitations of an audit, which result in most of the
audit evidence on which the auditor draws conclusions and
bases the auditor’s opinion being persuasive rather than
conclusive.

18. INCORRECT As per AS 1, “Disclosure of Accounting Policies”, specific

disclosure of the fundamental accounting assumption is
required if they are not followed in statements.

19. INCORRECT  As per SA 210 “Agreeing the Terms of Audit Engagements”, the
Audit engagement letter is sent by the auditor to his client

CHAPTER 2
AUDIT STRATEGY PLANNING AND PROGRAMMING

20. CORRECT  The auditor should plan his work to enable him to conduct an
effective audit in an efficient and timely manner. It should be
based on knowledge of the client business.

21. CORRECT  It contains instruction for staff as to work to be done. Moreover

due to properly written program there is no chance of
forgetting /overlooking some important matter. Program
clearly sets out as to who is required to do a particular work,
thus responsibility can be fixed.

22. INCORRECT  It serves as a guide for audits to be carried out in succeeding

years. Moreover, in case auditor faces some case for negligence,
he can defend himself by showing it.

23. INCORRECT  The program often becomes rigid & inflexible. Assistants are
not able to change it as per requirements of specific case.
Moreover hard & fast program hurts the initiative &
judgemental skills of hard working assistants.

AUDIT 425 PART D : CORRECT OR INCORRECT QUESTIONS

INTER C.A. – AUDIT

24. CORRECT  Final Audit begins after the books have been closed at end of
accounting period & then carried on continually till completion.
Work is carried out in single continuous sitting. Thus there will
be no manipulation in accounts, once closed.

25. INCORRECT  When audit is conducted during the financial year i.e., accounts
are checked the whole year round it is termed as continuous
audit. Usually Audit staff is present at client’s site almost during
entire accounting period.

26. INCORRECT  (a) Records may be altered after being examined by auditor,

(b) Not suitable for small organisation,

(c) Audit staff may overlook a matter not completely examined

on last visit.

27. INCORRECT  It is not necessary in all cases for the results of the surprise
checks to be included in the auditor’s report on the accounts.
They should however be included if, in the opinion of the
auditor, they are material and affect a Correct and fair view of
the accounts.

28. INCORRECT  Material items are those which may influence the judgement of
users of financial statements. It may be quantitative and
qualitative as well.

29. CORRECT  Generally management /employees don’t commit fraud in high

value items. Moreover, as a general practice, auditor checks
high value items in detail. Thus it is less risky that high value
fraud and error may not be detected. So, high materiality level
leaves audit risk at lower degree.

AUDIT 426 PART D : CORRECT OR INCORRECT QUESTIONS

INTER C.A. – AUDIT

CHAPTER 3
AUDIT DOCUMENTATION AND EVIDENCE

30. CORRECT  Auditor should obtain sufficient & appropriate evidence.

Sufficiency refers to quantum of audit evidence. Appropriateness
refers to quality of audit evidence.

31. CORRECT  The audit evidences obtained through different sources or of

different nature should be consistent. If there is inconsistency
among different evidences relating to a single item, auditor
should perform additional procedures to resolve inconsistency.

32. CORRECT  Substantive procedures are undertaken to check completeness,

accuracy and validity of data produced by accounting system
i.e., transactions and balances.

33. INCORRECT  It is the process of obtaining and evaluating audit evidence

through a direct communication from a third party in response
to a request for information about a particular item.

34. CORRECT  It asks the respondent to reply to the auditor in all cases either
by indicating the respondent’s agreement/disagreement with
the given information or by asking the respondent to fill in
information.

35. CORRECT  The auditor should maintain control over the process of
selecting those to whom a request will be sent, the preparation
and sending of confirmation requests and the responses to
those requests.

CHAPTER 4
AUDIT DOCUMENTATION AND EVIDENCE

36. INCORRECT  The management is responsible for maintaining an adequate

accounting system incorporating various internal controls to
the extent appropriate to the size and nature of the business.
Maintenance of internal Control System is responsibility of
management because the internal control is the process
designed, implemented and maintained by those charged with
governance / management to provide reasonable assurance
about the achievement of entity’s objectives.

AUDIT 427 PART D : CORRECT OR INCORRECT QUESTIONS

INTER C.A. – AUDIT

37. INCORRECT  Section 138 of the Companies Act, 2013 requires every private
company to appoint an internal auditor having turnover of Rs.
200 crore or more during the preceding financial year; or
outstanding loans or borrowings from banks or public financial
institutions exceeding Rs. 100 crore or more at any point of
time during the preceding financial year.

38. Correct  Tests of Control are performed to obtain audit evidence about
the effectiveness of : the design of the accounting and internal
control systems that is whether, they are suitably designed to
prevent or detect or correct material misstatements and the
operation of the internal controls throughout the period.

CHAPTER 5
AUDITOR’S RESPONSIBILITY IN RELATION TO FRAUD

39. INCORRECT  Teeming and Lading is one of the techniques of suppressing

cash receipts and not of inflating cash payments. Money
received from one customer is misappropriated and the
account is adjusted with the subsequent receipt from so on.

40. CORRECT  Fraud is the word used to mean intentional error. This is
done deliberately which implies that there is intent to deceive,
to mislead or at least to conceal the truth. It follows that other
things being equal, they are more serious than unintentional
errors because of the implication of dishonesty which
accompanies them.

41. INCORRECT  As per section 143(12) of the Companies Act 2013, if an

auditor of a company, in the course of the performance of his
duties as auditor, has reason to believe that an offence
involving fraud is being or has been committed against the
company by officers or employees of the company, he shall
immediately report the matter to the Central Government (in
case amount of fraud is Rs. 1 crore or above) or Audit
Committee or Board in other cases (in case the amount of fraud
involved is less than Rs. 1 crore) within such time and in such
manner as may be prescribed. Thus fraud involving amount of
20 lakh rupees should be reported to Audit Committee.

AUDIT 428 PART D : CORRECT OR INCORRECT QUESTIONS

INTER C.A. – AUDIT

42. CORRECT  As per SA 240 “The Auditor’s Responsibilities Relating to Fraud

in an Audit of Financial Statements”, it is important that
management, with the oversight of those charged with
governance, place a strong emphasis on fraud prevention,
which may reduce opportunities for fraud to take place, and
fraud deterrence, which could persuade individuals not to
commit fraud because of the likelihood of detection and
punishment. This involves a commitment to creating a culture
of honesty and ethical behavior which can be reinforced by an
active oversight by those charged with governance.

43. INCORRECT  As per SA 240 “The Auditor’s Responsibilities Relating to

Fraud in an Audit of Financial Statements”, fraudulent financial
reporting may involve manipulation, falsification or alteration
of accounting records or supporting documents from which
financial statements are prepared, misrepresentation in, or
intentional omission from, financial statements of events,
transactions or other significant information or Intentional
misapplication of accounting principles relating to amounts,
classification, manner of presentation or disclosure.

CHAPTER 6
AUDIT IN AN AUTOMATED ENVIRONMENT

44. INCORRECT  The complexity of an automated environment depends on

various factors including the nature of business, level of
automation, volume of transactions, use of ERP and so on.
There could be environments where dependence on IT and
automation is relatively less or minimal and hence, considered
less complex or even non-complex.

45. INCORRECT  The auditor should plan response to those IT risks that are
relevant to financial reporting and not “all” IT risks.

46. CORRECT  General IT controls support the functioning of automated

application controls and IT dependent controls.

47. CORRECT  Inquiry is the most efficient but least effective. Moreover,
testing through inquiry alone is not sufficient. Inquiry should be
corroborated by applying any one or a combination of
observation, inspection or reperformance.

AUDIT 429 PART D : CORRECT OR INCORRECT QUESTIONS

INTER C.A. – AUDIT

48. INCORRECT Even though specialised audit tools are very useful, such tools
are not always required or necessary to carry out data
analytics. More commonly available spreadsheet applications
like MS-Excel can also be effectively used for carrying out
data analytics.

CHAPTER 7
AUDIT SAMPLING

49. INCORRECT  The method which involves dividing the population into groups
of items is known as cluster sampling whereas block sampling
involves the selection of a defined block of consecutive items.

50. INCORRECT  Population refers to the entire set of data from which a sample
is selected and about which the auditor wishes to draw
conclusions.

51. INCORRECT  Statistical sampling is an approach to sampling that has the

random selection of the sample items; and the use of
probability theory to evaluate sample results, including
measurement of sampling risk characteristics.

52. INCORRECT  Whatever may be the approach non-statistical or statistical

sampling, the sample must be representative. This means that it
must be closely similar to the whole population although not
necessarily exactly the same. The sample must be large enough
to provide statistically meaningful results.

53. INCORRECT  The objective of stratification is to reduce the variability of items

within each stratum and therefore allow sample size to be
reduced without increasing sampling risk.

AUDIT 430 PART D : CORRECT OR INCORRECT QUESTIONS

INTER C.A. – AUDIT

CHAPTER 8
ANALYTICAL PROCEDURES

54. INCORRECT  As per the Standard on Auditing (SA) 520 “Analytical

Procedures” ‘the term “analytical procedures” means
evaluations of financial information through analysis of
plausible relationships among both financial and non-financial
data.

55. INCORRECT  Routine checks cannot be depended upon to disclose all the
mistakes or manipulation that may exist in accounts, certain
other procedures also have to be applied like trend and ratio
analysis in addition to reasonable tests.

56. INCORRECT  Analytical procedures use comparisons and relationships to

assess whether account balances or other data appear
reasonable. Analytical procedures are used for the following
purposes:
 To obtain relevant and reliable audit evidence when using
substantive analytical procedures; and
 To design and perform analytical procedures near the end
of the audit that assist the auditor when forming an overall
conclusion as to whether the financial statements are
consistent with the auditor’s understanding of the entity.
57. INCORRECT  Analytical Procedures are required in the planning phase and it
is often done during the testing phase. In addition these are also
required during the completion phase.

58. INCORRECT  Substantive analytical procedures are generally more

applicable to large volumes of transactions that tend to be
predictable over time.

AUDIT 431 PART D : CORRECT OR INCORRECT QUESTIONS

INTER C.A. – AUDIT

CHAPTER 10
COMPANY AUDIT

59. Incorrect  The only method of appointment of first auditors is as laid

down in Sec. 139(6) and (7). Therefore the auditors of a newly
formed company cannot be appointed through the
memorandum or association.

60. CORRECT  If the accounts of any branch office are audited by a person
other than companies auditor, then, statutory auditor has right
to visit the branch office and to access at all times to the books,
accounts and vouchers of the company maintained at the
branch office.

61. CORRECT  conditions are

(a) The book must belong to the company;
(b) The document must have come into the possession of
auditors with the authority of the Board;
(c) The auditor has done work assigned to him on such
documents; &
(d) Such of the books can be retained which are connected with
the work on which fees has not been paid.

62. INCORRECT  It is the duty of the auditor to make a report to the members.
However he is not required to send his report to every member.

63. INCORRECT  The observation or comments of the auditors which have any
advance effect on the functioning of the company should be in
thick type or in italics so as to attract reader’s attention?

64. CORRECT  The auditor should quantify wherever possible the effect of the
qualification on the financial statements if the same is material.
Where it is not possible to quantify the effect of the
qualification, he may use management estimates or may state
the reason for not quantifying the effect on the qualification.

AUDIT 432 PART D : CORRECT OR INCORRECT QUESTIONS

INTER C.A. – AUDIT

65. Incorrect  According to section 139(7) of the Companies Act, 2013, in the
case of a Government company, the first auditor shall be
appointed by the Comptroller and Auditor-General of India
within 60 days from the date of registration of the company. If
CAG fails to make the appointment within 60 days, the Board
shall appoint in next 30 days.

66. Incorrect  As per section 141(3) of the Companies Act, 2013, a person
shall not be eligible for appointment as an auditor of a company
whose relative is a Director or is in the employment of the
Company as a director or key Managerial Personnel.

67. Incorrect  As per section 141(2) of the Companies Act, 2013, where a firm
including a limited liability partnership (LLP) is appointed as an
auditor of a company, only the partners who are Chartered
Accountants shall be authorised to act and sign on behalf of the
firm.

68. Incorrect  As per the provisions of the Companies Act, 2013, a person is
disqualified to be appointed as an auditor of a company if his
relative is holding any security of or interest in the company of
face value exceeding Rs. 1 lakh. Therefore, AB & Co. shall be
disqualified for being appointed as an auditor of XYZ Ltd. as Mr.
C, the relative of Mr. B who is a partner in AB & Co., is holding
securities in XYZ Ltd. having face value of Rs. 2 lakh.

69. Incorrect  The provisions of Companies Act, 2013 grant rights to the
auditor to access books of account and vouchers of the
company. He is also entitled to require information and
explanations from the company. Therefore, he has a statutory
right to inspect the minute book.

70. INCORRECT  According to section 139 of the Companies Act, 2013, the
provisions related to rotation of auditor are applicable to all
private limited companies having paid up share capital of Rs. 20
crore or more; and all companies having paid up share capital
of below threshold limit mentioned above, but having public

AUDIT 433 PART D : CORRECT OR INCORRECT QUESTIONS

INTER C.A. – AUDIT

borrowings from financial institutions, banks or public deposits

of Rs. 50 crore or more. Although company A is a private
limited company yet it is having public borrowings from
nationalized bank of Rs. 50 crores, therefore it would be
governed by provisions of rotation of auditor.

71. INCORRECT  The auditor should study the Memorandum of Association to

check the objective of the company to be carried on, amount of
authorized share capital etc. and Articles of Association to
check the internal rules, regulations and ensuring the validity of
transactions relating to accounts of the company. To see the
validity of appointment, the auditor should ensure the
compliance of the provisions of section 139, 140 and 141 of the
Companies Act, 2013. In addition, the auditor should study the
appointment letter & the prescribed Form submitted to the
Registrar of the Companies to see the validity of his
appointment.

72. INCORRECT  As per section 139(6) of the Companies Act, 2013, the first
auditor of a company, other than a government company, shall
be appointed by the Board of directors within 30 days from the
date of registration of the company. Therefore, the appointment
of first auditor made by the managing director of A Ltd. is in
violation of the provisions of the Companies Act, 2013.

73. INCORRECT  As per the provisions of the Companies Act, 2013, a person is
disqualified to be appointed as an auditor of a company if he is
holding any security of or interest in the company. As the
chartered accountant is holding securities of S Ltd. having face
value of Rs. 950, he is not eligible for appointment as an auditor
of S Ltd.

74. INCORRECT  As per section 141 of the Companies Act, 2013,

a person shall be eligible for appointment as an auditor of a
company only if he is a chartered accountant. Thus, Mr. N is
disqualified to be appointed as an auditor of XYZ Limited.

AUDIT 434 PART D : CORRECT OR INCORRECT QUESTIONS

INTER C.A. – AUDIT

CHAPTER 11
AUDIT REPORT

75. INCORRECT  The auditor shall express an unmodified opinion when the
auditor concludes that the financial statements are prepared, in
all material respects, in accordance with the applicable financial
reporting framework.
76. INCORRECT  The auditor’s report shall be addressed, as appropriate,
based on the circumstances of the engagement. Law, regulation
or the terms of the engagement may specify to whom the
auditor’s report is to be addressed. The auditor’s report is
normally addressed to those for whom the report is prepared,
often either to the shareholders or to those charged with
governance of the entity whose financial statements are being
audited.
77. INCORRECT  The auditor shall modify the opinion in the auditor’s report
when:
 The auditor concludes that, based on the audit evidence
obtained, the financial statements as a whole are not free
from material misstatement; or
 The auditor is unable to obtain sufficient appropriate audit
evidence to conclude that the financial statements as a
whole are free from material misstatement.

78. CORRECT  The auditor shall express an adverse opinion when the
auditor, having obtained sufficient appropriate audit evidence,
concludes that misstatements, individually or in the aggregate,
are both material and pervasive to the financial statements.

79. INCORRECT  Communicating key audit matters in the auditor’s report is

in the context of the auditor having formed an opinion on the
financial statements as a whole. Communicating key audit
matters in the auditor’s report is not a substitute for
disclosures in the financial statements that the applicable
financial reporting framework requires management to make,
or that are otherwise necessary to achieve fair presentation.

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INTER C.A. – AUDIT

CHAPTER 12
AUDIT OF BANKS

80. INCORRECT  RBI has been entrusted with the responsibility of regulating the
activities of commercial and other banks.

81. INCORRECT  In the Computerised environment, it is imperative that the

auditor is familiar with, and is satisfied that, all the
norms/parameters as per the latest applicable RBI guidelines
are incorporated and built into the system that generates
information/data having a bearing on the classification/
provisions and income recognition.

82. INCORRECT  The auditor should not go by the assumption that the system
generated information is correct and can be relied upon
without evidence that demonstrates that the system driven
information is based on validation of the required parameters
for the time being in force and applicable.

83. INCORRECT  Primary security refers to the security offered by the borrower
for bank finance or the one against which credit has been
extended by the bank. This security is the principal security for
an advance.

84. INCORRECT  Equitable mortgage, on the other hand, is effected by a mere

delivery of title deeds or other documents of title with intent to
create security thereof.

85. INCORRECT  Any amount due to the bank under any credit facility is
‘overdue’ if it is not paid on the due date fixed by the bank.

86. CORRECT  An account should be treated as ‘out of order’ if the outstanding

balance remains continuously in excess of the sanctioned
limit/drawing power.

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CHAPTER 13
AUDIT OF DIFFERENT ENTITIES

87. INCORRECT  The external control of municipal expenditure is exercised by

the state governments through the appointment of auditors to
examine municipal accounts.

88. CORRECT  NGOs can be defined as non-profit making organisations which

raise funds from members, donors or contributors apart from
receiving donation of time, energy and skills for achieving their
social objectives like imparting education, providing medical
facilities, economic assistance to poor, managing disasters and
emergent situations.

89. INCORRECT  Article 150 of the Constitution provides that the accounts of the
Union and of the States shall be kept in such form as the
President may on the advice of the C&AG prescribe.

90. CORRECT  According to ‘propriety audit’, the auditors try to bring out
cases of improper, avoidable, or in fructuous expenditure even
though the expenditure has been incurred in conformity with
the existing rules and regulations.

91. CORRECT  Expenditure incurred by the municipalities and corporations

can be broadly classified under the following heads: (a) general
administration and revenue collection, (b) public health, (c)
public safety, (d) education, (e) public works, and (f) others
such as interest payments, etc.

92. INCORRECT  In India, the function of government audit is discharge by the

independent comptroller and auditor: general & not by central
government.

93. INCORRECT  The comptroller and auditor general shall be appointed by the
president of India and shall not but removed from the office
except on the ground of proven misbehavior or incapacity.

94. INCORRECT  Comptroller and Auditor General shall hold office for a term of
six years or up to age of 65 years whichever is earlier.

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95. CORRECT  According to propriety audit, the auditors try to bring out the
cases of improper avoidable or wasteful expenditure even
through the expenditure has been incurred as per existing rules
and regulations.

96. CORRECT  Performance audit aims to ascertain that government

programmes have achieved the desire- objectives at the lowest
cost and given the intended benefits.

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FROM RTP MAY 18

(i) Incorrect: As per SA-200 “Overall Objectives of the Independent Auditor”, in

conducting an audit of financial statements, the overall objectives of the auditor
are:
(a) To obtain reasonable assurance about whether the financial statements
as a whole are free from material misstatement; and
(b) To report on the financial statements, and communicate as required by
the SAs, in accordance with the auditor’s findings.
(ii) Correct: Teeming and Lading is one of the techniques of suppressing cash
receipts Money received from one customer is misappropriated and the account
is adjusted with the subsequent receipt from another customer and so on.
(iii) Incorrect: There is an inverse relationship between materiality and the degree
of audit risk. The higher the materiality level, the lower the audit risk and vice
versa. For example, the risk that a particular account balance or class of
transactions could be misstated by an extremely large amount might be very
low but the risk that it could be misstated by an extremely small amount might
be very high.
(iv) Incorrect: As per SA 230 on “Audit Documentations” the working papers are the
property of the auditor and the auditor has right to retain them. He may at his
discretion can make available working papers to his client. The auditor should
retain them long enough to meet the needs of his practice and legal or
professional requirement.
(v) Incorrect: Inherent risk is the susceptibility of an account balance or class of
transactions to misstatement that could be material either individually or, when
aggregated with misstatements in other balances or classes, assuming that there
were no related internal controls.
(vi) Incorrect: Section 138 of the Companies Act, 2013 requires every private
company to appoint an internal auditor having turnover of 200 crore or more
during the preceding financial year; or outstanding loans or borrowings from
banks or public financial institutions exceeding 100 crore or more at any point
of time during the preceding financial year.
(vii) Incorrect: As defined in scope of Standards on Internal Audit, “Internal Audit
means an independent management function, which involves a continuous and
critical appraisal of the functioning of an entity with a view to suggest
improvements thereto and add value to and strengthen the overall governance
mechanism of the entity, including the entity’s strategic risk management and
internal control system”.
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(viii) Incorrect: As per the provisions of the Companies Act, 2013, a person is
disqualified to be appointed as an auditor of a company if he is holding any
security of or interest in the company. As the chartered accountant is holding
securities of S Ltd. having face value of 950, he is not eligible for appointment
as an auditor of S Ltd.
(ix) Incorrect: According to section 139 of the Companies Act, 2013, the provisions
related to rotation of auditor are applicable to all private limited companies
having paid up share capital of 50 crore or more; and all companies having
paid up share capital of below threshold limit mentioned above, but having
public borrowings from financial institutions, banks or public deposits of 50
crore or more. Although company A is a private limited company having paid up
share capital of 15 crores yet it is having public borrowings from nationalized
bank of 50 crores, therefore it would be governed by provisions of rotation of
auditor.
(x) Incorrect: As per section 141(2) of the Companies Act, 2013, where a firm
including a limited liability partnership (LLP) is appointed as an auditor of a
company, only the partners who are Chartered Accountants shall be authorised
to act and sign on behalf of the firm.

FROM RTP N18

a. Incorrect: The preparation of financial statements involves judgment by

management in applying the requirements of the entity’s applicable financial
reporting framework to the facts and circumstances of the entity. In addition,
many financial statement items involve subjective decisions or assessments or a
degree of uncertainty, and there may be a range of acceptable interpretations or
judgments that may be made.
b. Incorrect: Fraud may involve sophisticated and carefully organized schemes
designed to conceal it. Therefore, audit procedures used to gather audit
evidence may be ineffective for detecting an intentional misstatement that
involves, for example, collusion to falsify documentation which may cause the
auditor to believe that audit evidence is valid when it is not. The auditor is
neither trained as nor expected to be an expert in the authentication of
documents.
c. Incorrect: An audit is not an official investigation into alleged wrongdoing.
Accordingly, the auditor is not given specific legal powers, such as the power of
search, which may be necessary for such an investigation.

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d. Incorrect: The matter of difficulty, time, or cost involved is not in itself a valid
basis for the auditor to omit an audit procedure for which there is no
alternative. Appropriate planning assists in making sufficient time and
resources available for the conduct of the audit. Notwithstanding this, the
relevance of information, and thereby its value, tends to diminish over time, and
there is a balance to be struck between the reliability of information and its cost.
e. Incorrect: The auditor should plan his work to enable him to conduct an
effective audit in an efficient and timely manner. Plans should be based on
knowledge of the client’s business
f. Correct: According to SA-300, “Planning an Audit of Financial Statements”,
planning is not a discrete phase of an audit, but rather a continual and iterative
process that often begins shortly after (or in connection with) the completion of
the previous audit and continues until the completion of the current audit
engagement.
g. Incorrect: The auditor may include copies of the entity’s records (for example,
significant and specific contracts and agreements) as part of audit
documentation. Audit documentation is not a substitute for the entity’s
accounting records.
h. Incorrect: SQC 1 “Quality Control for Firms that perform Audits and Review of
Historical Financial Information, and other Assurance and related services”,
requires firms to establish policies and procedures for the timely completion of
the assembly of audit files. An appropriate time limit within which to complete
the assembly of the final audit file is ordinarily not more than 60 days after the
date of the auditor’s report.
i. Incorrect: When the auditor has determined that an assessed risk of material
misstatement at the assertion level is a significant risk, the auditor shall perform
substantive procedures that are specifically responsive to that risk. When the
approach to a significant risk consists only of substantive procedures, those
procedures shall include tests of details.
j. Incorrect: The SAs do not ordinarily refer to inherent risk and control risk
separately, but rather to a combined assessment of the “risks of material
misstatement”. However, the auditor may make separate or combined
assessments of inherent and control risk depending on preferred audit
techniques or methodologies and practical considerations. The assessment of
the risks of material misstatement may be expressed in quantitative terms, such
as in percentages, or in non-quantitative terms. In any case, the need for the
auditor to make appropriate risk assessments is more important than the
different approaches by which they may be made.

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FROM RTP M19

(i) Incorrect: The preparation of financial statements involves judgment by

management in applying the requirements of the entity’s applicable financial
reporting framework to the facts and circumstances of the entity. In addition,
many financial statement items involve subjective decisions or assessments or a
degree of uncertainty, and there may be a range of acceptable interpretations or
judgments that may be made.
(ii) Incorrect: Fraud may involve sophisticated and carefully organized schemes
designed to conceal it. Therefore, audit procedures used to gather audit
evidence may be ineffective for detecting an intentional misstatement that
involves, for example, collusion to falsify documentation which may cause the
auditor to believe that audit evidence is valid when it is not. The auditor is
neither trained as nor expected to be an expert in the authentication of
documents.
(iii) Incorrect: An audit is not an official investigation into alleged wrongdoing.
Accordingly, the auditor is not given specific legal powers, such as the power of
search, which may be necessary for such an investigation.
(iv) Incorrect: The matter of difficulty, time, or cost involved is not in itself a valid
basis for the auditor to omit an audit procedure for which there is no
alternative. Appropriate planning assists in making sufficient time and
resources available for the conduct of the audit. Notwithstanding this, the
relevance of information, and thereby its value, tends to diminish over time, and
there is a balance to be struck between the reliability of information and its cost.
(v) Incorrect: The auditor should plan his work to enable him to conduct an
effective audit in an efficient and timely manner. Plans should be based on
knowledge of the client’s business
(vi) Correct: According to SA-300, “Planning an Audit of Financial Statements”,
planning is not a discrete phase of an audit, but rather a continual and iterative
process that often begins shortly after (or in connection with) the completion of
the previous audit and continues until the completion of the current audit
engagement.
(vii) Incorrect: The auditor may include copies of the entity’s records (for example,
significant and specific contracts and agreements) as part of audit
documentation. Audit documentation is not a substitute for the entity’s
accounting records.

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(viii) Incorrect: SQC 1 “Quality Control for Firms that perform Audits and Review of
Historical Financial Information, and other Assurance and related services”,
requires firms to establish policies and procedures for the timely completion
of the assembly of audit files. An appropriate time limit within which to
complete the assembly of the final audit file is ordinarily not more than 60 days
after the date of the auditor’s report.
(ix) Incorrect: When the auditor has determined that an assessed risk of material
misstatement at the assertion level is a significant risk, the auditor shall perform
substantive procedures that are specifically responsive to that risk. When the
approach to a significant risk consists only of substantive procedures, those
procedures shall include tests of details.



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PART – E
PAST
QUESTION
PAPERS
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PAST QUESTION PAPERS

PAPER – 6
AUDITING AND ASSURANCE
Question No.1 is compulsory.
Attempt any four questions from the remaining five questions.

Question :
Examine with reasons (in short) whether the following statements are correct or
incorrect:
(a) Few members of the Board of Directors oppose the appointment of Mr. N, an
employee of the company, as an Internal Auditor, stating that Mr. N is not a
chartered accountant and further he is an employee of the company.
(b) An Auditor is considered to lack independence if the partner of the audit firm
deals with shares and securities of the audited entity.
(c) The Audit Engagement documentations should ordinarily be retained by the
auditor for minimum of six years from the date of the auditor's report or the
date of the group auditor's report, whichever is later.
(d) Inquiry alone is sufficient to test the operating effectiveness of controls.
(e) During the audit process, the Auditor can easily identify all mistakes or
manipulations that may exist in the accounts through routine checking
processes.
(f) PQR & Co., Chartered Accountants, resigned from the audit of a Government
Company and filed the resignation with the company and the registrar within 30
days. Comment, whether PQR & Co. has complied with the provisions of the
Companies Act, 2013.
(g) K Ltd., a non-government company, was incorporated on 01-10-2017. Mr. B,
Managing Director of K Ltd., himself appointed the first auditor of the company
on 31-12-2017.
(h) The statutory auditor of ABC Ltd. is of the opinion that communicating key audit
matters in the auditor's report constitutes a substitute for disclosure in the
financial statements.

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(i) When statistical sampling is used to select a sample, sample need not be
representative because the statistical sampling takes care of the representation.
(j) Mr. A is a statutory auditor of ABC Ltd. The branch of ABC Ltd. is audited by Mr.
B, another Chartered Accountant. Mr. A requests for the photocopies of the audit
documentation of Mr. B pertaining to the branch audit. (2 x 10 = 20 Marks)
Answer
(a) Incorrect: As per section 138, the internal auditor shall either be a chartered
accountant or a cost accountant (whether engaged in practice or not), or such
other professional as may be decided by the Board to conduct internal audit of
the functions and activities of the companies. The internal auditor may or may
not be an employee of the company.
(b) Correct: As per section 141 (3)(d), a person shall not be eligible for appointment
as an auditor of a company namely- a person, or his relative or partner is
holding any security of or interest in the company or its subsidiary, or of its
holding or associate company or a subsidiary of such holding company. From
the above it can be concluded that if the partner deals with shares and securities
of the audited entity, he would be lacking independence, hence, disqualified to
be appointed as an auditor.
Further, the Code of Ethics for Professional Accountants, prepared by the
International Federation of Accountants (IFAC) identifies five types of threats
and if partner of the firm deals with shares and securities of the audited firm
then such threat is known as the Advocacy Threats and auditor will be lacking
independence.
(c) Incorrect: SQC 1 requires firms to establish policies and procedures for the
retention of engagement documentation. The retention period for audit
engagements ordinarily is no shorter than seven years from the date of the
auditor’s report, or, if later, the date of the group auditor’s report.
(d) Incorrect: Inquiry along with other audit procedures (for example observation,
inspection, external confirmation etc.) would only enable the auditor to test the
operating effectiveness of controls. Inquiry alone is not sufficient to test the
operating effectiveness of controls.
(e) Incorrect: Routine checking cannot be depended upon to disclose all the
mistakes or manipulation that may exist in accounts. Certain other procedures
also have to be applied like trend and ratio analysis including review of internal
control.
(f) Incorrect: As per section 140(2) the auditor who has resigned from the
company shall file within a period of 30 days from the date of resignation, a
statement in the prescribed Form with the company and the Registrar, and in

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case of the companies referred to in section 139(5) i.e. Government company,

the auditor shall also file such statement with the Comptroller and Auditor-
General of India, indicating the reasons and other facts as may be relevant with
regard to his resignation. In this case, the PQR & Co., was also required to file
prescribed Form with C & AG of India but it did not file the same. Therefore, it
did not comply with the provisions of the Companies Act, 2013.
(g) Incorrect: Section 139(6) of the Companies Act, 2013 lays down that the first
auditor of a company shall be appointed by the Board of Directors within 30
days from the date of registration of the company. In view of the above, the
appointment of first auditor made by the managing director is in violation of the
provisions of the Companies Act, 2013
(h) Incorrect: Communicating key audit matters in the auditor’s report is not a
substitute for disclosures in the financial statements that the applicable
Financial reporting framework requires management to make, or that are
otherwise necessary to achieve fair presentation.
(i) Incorrect: Whatever may be the approach non-statistical or statistical sampling,
the sample must be representative. This means that it must be closely similar to
the whole population although not necessarily exactly the same. The sample
must be large enough to provide statistically meaningful results.
(j) Incorrect: SA 230 issued by ICAI on Audit Documentation, and “Standard on
Quality Control (SQC) 1, provides that, unless otherwise specified by law or
regulation, audit documentation is the property of the auditor. He may at his
discretion, make portions of, or extracts from, audit documentation available to
clients, provided such disclosure does not undermine the validity of the work
performed, or, in the case of assurance engagements, the independence of the
auditor or of his personnel.

Question 2
Discuss the following:
(a) Name the assertions for the following audit procedures:
(i) Year end inventory verification.
(ii) Depreciation has been properly charged on all assets.
(iii) The title deeds of the lands disclosed in the Balance Sheet are held in the
name of the company.
(iv) All liabilities are properly recorded in the financial statements.
(v) Related party transactions are shown properly. (5 Marks)

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(b) Expenses which are essentially of a revenue nature if incurred for creating an
asset or adding to its value for achieving higher productivity are regarded as
expenses of a capital nature. Describe any five such expenses.
(5 Marks)
(c) Principal aspects to be considered by an auditor while conducting an audit of
final statements of accounts. (5 Marks)
(d) List any five points that an auditor should consider to obtain an understanding
of the Company's automated environment. (5 Marks)
Answer
(a) (i) Year end inventory verification: Existence Assertion.
(ii) Depreciation has been properly charged on all assets: Valuation
Assertion.
(iii) Title deed of lands disclosed in the Balance Sheet are held in the name
of the Company: Rights & Obligations Assertion.
(iv) All liabilities are properly recorded in the financial statements:
Completeness.
(v) Related party transactions are shown properly: Presentation &
Disclosure.
(b) Expenses which are essentially of a Revenue Nature, if incurred for creating
an asset or adding to its value for achieving higher productivity, are regarded as
expenditure of a capital nature. Examples of capital expenditure are-
(i) Material and wages- capital expenditure when expended on the
construction of a building or erection of machinery.
(ii) Legal expenses- capital expenditure when incurred in connection with the
purchase of land or building.
(iii) Freight- capital expenditure when incurred in respect of purchase of
plant and machinery.
(iv) Repair- Major repairs of a fixed asset that increases its productivity.
(v) Wages- Wages paid on installation costs incurred in Plant & machinery.
(vi) Interest- Interest paid for the qualification period as per AS-16 i.e. before
the asset is constructed.
Whenever, therefore, a part of the expenditure, ostensibly of a revenue nature,
is capitalised it is the duty of the auditor not only to examine the precise
particulars of the expenditure but also the considerations on which it has been
capitalised.

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(c) Aspects to be covered in an audit: The principal aspects to be covered in an

audit concerning final statements of account are the following:
(i) An examination of the system of accounting and internal control to
ascertain whether it is appropriate for the business and helps in properly
recording all transactions.
(ii) Reviewing the system and procedures to find out whether they are
adequate and comprehensive and incidentally whether material
inadequacies and weaknesses exist to allow frauds and errors going
unnoticed.
(iii) Checking of the arithmetical accuracy of the books of account by the
verification of postings, balances, etc.
(iv) Verification of the authenticity and validity of transaction entered
into by making an examination of the entries in the books of accounts
with the relevant supporting documents.
(v) Ascertaining that a proper distinction has been made between items
of capital and of revenue nature and that the amounts of various items
of income and expenditure adjusted in the accounts corresponding to the
accounting period.
(vi) Comparison of the balance sheet and profit and loss account or other
statements with the underlying record in order to see that they are in
accordance therewith.
(vii) Verification of the title, existence and value of the assets appearing in
the balance sheet.
(viii) Verification of the liabilities stated in the balance sheet.
(ix) Checking the result shown by the profit and loss and to see whether
the results shown are true and fair.
(x) Where audit is of a corporate body, confirming that the statutory
requirements have been complied with.
(xi) Reporting to the appropriate person/body whether the statements of
account examined do reveal a true and fair view of the state of affairs and
of the profit and loss of the organisation.
(d) Understanding of the Company’s Automated Environment: Given below are
some of the points that an auditor should consider to obtain an understanding of
the company’s automated environment
• Information systems being used (one or more application systems and
what they are)
• their purpose (financial and non-financial)
• Location of IT systems - local vs global

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• Architecture (desktop based, client-server, web application, cloud based)

• Version (functions and risks could vary in different versions of same
application)
• Interfaces within systems (in case multiple systems exist)
• In-house vs Packaged
• Outsourced activities (IT maintenance and support)
• Key persons (CIO, CISO, Administrators)

Question 3
(a) What constitutes a 'true and fair' view, is the matter of an auditor's judgement in
the particular circumstances of a case. In order to ensure 'true and fair' view,
auditor has to review certain points. Mention any such 5 (five) points in brief.
(5 Marks)
(b) Mention any five attributes to be considered by an auditor while verifying for a
depreciation and amortisation expenses. (5 Marks)
(c) As statutory auditor of the company, list out audit procedures required to be
undertaken for the following:
(i) Interest income from fixed deposits. (4 Marks)
(ii) Dividend income. (2 Marks)
(iii) Gain/(loss) on sale of investment in Mutual funds. (2 Marks)
Also indicate disclosure requirements of above as per Companies Act, 2013.
(2 Marks)
Answer
(a) True and Fair View: To ensure true and fair view, an auditor has to see:
(i) that the assets are neither undervalued or overvalued, according to the
applicable accounting principles,
(ii) no material asset is omitted;
(iii) the charge, if any, on assets are disclosed;
(iv) material liabilities should not be omitted;

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(v) the profit and loss account and balance sheet discloses all the matters required
to be disclosed;
(vi) accounting policies have been followed consistently; and
(vii) all unusual, exceptional or non-recurring items have been disclosed separately.
(b) Depreciation and Amortisation Expenses: Auditor needs to consider the
following attributes while verifying for depreciation and amortisation expenses:
• Obtain the understanding of entity’s accounting policy related to
depreciation and amortisation.
• Ensure that the Company’s policy for charging depreciation and
amortisation is as per the relevant provisions of Companies Act and
applicable accounting standards.
• Whether the depreciation has been calculated after making adjustment of
residual value from the cost of the assets.
• Whether depreciation and amortisation charges are valid.
• Whether depreciation and amortisation charges are accurately calculated
and recorded.
• Whether all depreciation and amortisation charges are recorded in the
appropriate period.
• Ensure the parts (components) of each item of property, plant and
equipment that are to be depreciated separately has been properly
identified.
• Whether the most appropriate depreciation method for each separately
depreciable component has been used.
(c) (i) For verifying interest income on fixed deposits:
• Obtain a listing of fixed deposits opened during the period under
audit along with the applicable interest rate and the number of days
for which the deposit was outstanding during the period. Verify the
arithmetical accuracy of the interest calculation made by the entity
by multiplying the deposit amount with the applicable rate and
number of days during the period under audit.
• For deposits still outstanding as at the period- end, trace the same to
the direct confirmation obtained from the respective bank/ financial
institution.
• Obtain a confirmation of interest income from the bank and verify
that the interest income as per bank reconciles to the calculation
shared by the entity.

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• Also, obtain a copy of Form 26AS (TDS withholding by the bank/

financial institution) and reconcile the interest reflected therein to
the calculation shared by client.
(ii) Dividend Income: For Dividends, verify that the same are recognised in
the statement of profit and loss only when the entity’s right to receive
payment of the dividend is established, provided it is probable that the
economic benefits associated with the dividend will flow to the entity and
the amount of the dividend can be measured reliably.
(iii) Gain/(loss) on sale of investment in mutual funds: Verify that
Gain/(loss) on sale of investment in mutual funds is recorded as other
income only on transfer of title from the entity and is determined as the
difference between the redemption price and carrying value of the
investments. For the purpose, obtain the mutual fund statement and trace
the gain / loss as recorded in the books of account to the gain/ loss as
reflected in the statement.
Disclosure Requirements: Ensure whether the following disclosures as
required under Ind AS compliant Schedule III to Companies Act, 2013
have been made:
Whether ‘other income’’ has been classified as:
 Interest income
 Dividend income
 Other non-operating income (net of expenses directly attributable to
such income)
Question 4
(a) M & Co. was appointed as auditor of IGI Ltd.. As an auditor what are the factors
that would be considered in the development of overall audit plan? (5 Marks)
(b) State the matters to be included in the auditor's report as per CARO, 2016,
regarding:
(i) Private Placement of Preferential Issues. (2 Marks)
(ii) Utilisation of IPO and further public offer. (2 Marks)
(c) Briefly discuss the limitations of Internal Control. (6 Marks)
(d) Discuss the techniques available as Substantive Analytical Procedures.
(5 Marks)

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Answer

(a) Development of an Overall Plan: The auditor should consider the following
matters in developing his overall plan for the expected scope and conduct of the
audit-

 The terms of his engagement and any statutory responsibilities.

 The nature and timing of reports or other communication.

 The applicable legal or statutory requirements.

 The accounting policies adopted by the client and changes in those

policies.

 The effect of new accounting or auditing pronouncements on the audit.

 The identification of significant audit areas.

 The setting of materiality levels for audit purposes.

 Conditions requiring special attention, such as the possibility of material

error or fraud or the involvement of parties in whom directors or persons
who are substantial owners of the entity are interested and with whom
transactions are likely.

 The degree of reliance he expects to be able to place on accounting

system and internal control.

 Possible rotation of emphasis on specific audit areas.

 The nature and extent of audit evidence to be obtained.

 The work of internal auditors and the extent of their involvement, if any,
in the audit.

 The involvement of other auditors in the audit of subsidiaries or branches

of the client.

 The involvement of experts.

 The allocation of work to be undertaken between joint auditors and the

procedures for its control and review.

 Establishing and coordinating staffing requirements.

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(b) (i) The auditor is required to report as per clause xiv of paragraph 3 of
CARO 2016, whether the company has made any preferential allotment or
private placement of shares or fully or partly convertible debentures
during the year under review and if so, as to whether the requirement of
section 42 of the Companies Act, 2013 have been complied with and the
amount raised have been used for the purposes for which the funds were
raised. If not, provide the details in respect of the amount involved and
nature of non-compliance;

(ii) It is duty of the auditor to report as per clause ix of paragraph 3 of

CARO 2016, whether moneys raised by way of initial public offer or
further public offer (including debt instruments) and term loans were
applied for the purposes for which those are raised. If not, the details
together with delays or default and subsequent rectification, if any, as may
be applicable, be reported.

(c) Limitations of Internal Control:

(i) Internal control can provide only reasonable assurance: Internal

control, no matter how effective, can provide an entity with only
reasonable assurance about achieving the entity’s financial reporting
objectives. The likelihood of their achievement is affected by inherent
limitations of internal control.

(ii) Human judgment in decision-making: Realities that human judgment

in decision- making can be faulty and that breakdowns in internal control
can occur because of human error.

(iii) Lack of understanding the purpose: Equally, the operation of a control

may not be effective, such as where information produced for the
purposes of internal control (for example, an exception report) is not
effectively used because the individual responsible for reviewing the
information does not understand its purpose or fails to take appropriate
action.

(iv) Collusion among People: Additionally, controls can be circumvented by

the collusion of two or more people or inappropriate management
override of internal control. For example, management may enter into
side agreements with customers that alter the terms and conditions of the
entity’s standard sales contracts, which may result in improper revenue
recognition. Also, edit checks in a software program that are designed to
identify and report transactions that exceed specified credit limits may
be overridden or disabled.

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(v) Judgements by Management: Further, in designing and implementing

controls, management may make judgments on the nature and extent of
the controls it chooses to implement, and the nature and extent of the
risks it chooses to assume.

(vi) Limitations in case of Small Entities: Smaller entities often have fewer
employees due to which segregation of duties is not practicable. However,
in a small owner-managed entity, the owner-manager may be able to
exercise more effective oversight than in a larger entity. This oversight
may compensate for the generally more limited opportunities for
segregation of duties.

On the other hand, the owner-manager may be more able to override

controls because the system of internal control is less structured. This is
taken into account by the auditor when identifying the risks of material
misstatement due to fraud.

(d) Techniques available as Substantive Analytical Procedures : The

design of a substantive analytical procedure is limited only by the
availability of reliable data and the experience and creativity of the audit
team. Substantive analytical procedures generally take one of the
following forms:

Trend analysis — A commonly used technique is the comparison of

current data with the prior period balance or with a trend in two or more
prior period balances. We evaluate whether the current balance of an
account moves in line with the trend established with previous balances
for that account, or based on an understanding of factors that may cause
the account to change.

Ratio analysis — Ratio analysis is useful for analysing asset and liability
accounts as well as revenue and expense accounts. An individual balance
sheet account is difficult to predict on its own, but its relationship to
another account is often more predictable (e.g., the trade receivables
balance related to sales). Ratios can also be compared over time or to the
ratios of separate entities within the group, or with the ratios of other
companies in the same industry.

Reasonableness tests — Unlike trend analysis, this analytical procedure

does not rely on events of prior periods, but upon non-financial data for
the audit period under consideration (e.g., occupancy rates to estimate
rental income or interest rates to estimate interest income or expense).
These tests are generally more applicable to income statement accounts
and certain accrual or prepayment accounts.

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Structural modelling — A modelling tool constructs a statistical model

from financial and/or non-financial data of prior accounting periods to
predict current account balances (e.g., linear regression).

Question 5

(a) Define Emphasis of Matter Paragraph and how it should be disclosed in

the Independent Auditor's Report? (5 Marks)

(b) At the AGM of HDB Pvt. Ltd., Mr. R was appointed as the statutory auditor.
He, however, resigned after 3 months since he wanted to pursue his
career in banking sector. The Board of Director has appointed Mr. L as the
statutory auditor in board meeting within 30 days. Comment on the
matter with reference to the provisions of Companies Act, 2013.

(5 Marks)

(c) XYZ & Associates, Chartered Accountants, while evaluating the operating
effectiveness of internal controls, detects deviation from controls. In such
a situation, state the specific inquiries to be made by an auditor to
understand these matters and their potential consequences. (5 Marks)

(d) Mr. A is appointed as statutory auditor of a company for the Financial

Year ended 31st March, 2018. During the course of audit, it was found
that few doubtful transactions had been committed by finance manager
who retired in March, 2018. The fraud was going on since last 2-3 years
and the total amount misappropriated exceeding 100 lakhs. As a
statutory auditor, what would be reporting responsibilities of Mr. A?

(5 Marks)

Answer

(a) Emphasis of Matter paragraph: A paragraph included in the auditor’s report

that refers to a matter appropriately presented or disclosed in the financial
statements that, in the auditor’s judgment, is of such importance that it is
fundamental to users’ understanding of the financial statements.

When the auditor includes an Emphasis of Matter paragraph in the

auditor’s report,the auditor shall:

(i) Include the paragraph within a separate section of the auditor’s report
with an appropriate heading that includes the term “Emphasis of Matter”;

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(ii) Include in the paragraph a clear reference to the matter being

emphasized and to where relevant disclosures that fully describe the
matter can be found in the financial statements. The paragraph shall refer
only to information presented or disclosed in the financial statements;
and

(iii) Indicate that the auditor’s opinion is not modified in respect of the matter
emphasized.
(b) Casual Vacancy by Resignation: As per Section 139(8), any casual vacancy in
the office of an auditor shall in the case of a company other than a company
whose accounts are subject to audit by an auditor appointed by the Comptroller
and Auditor-General of India, be filled by the Board of Directors within 30 days.
If such casual vacancy is as a result of the resignation of an auditor, such
appointment shall also be approved by the company at a general meeting
convened within three months of the recommendation of the Board and he shall
hold the office till the conclusion of the next annual general meeting.
Further, as per section 140(2) the auditor who has resigned from the company
shall file within a period of 30 days from the date of resignation, a statement in
the prescribed Form with the company and the Registrar. In the instant case, R
resigned after three months of his appointment as statutory auditor as he
wanted to pursue his career in banking sector.
Therefore, the board of director has appointed Mr. L as the statutory auditor
with in 30 days is in order subject to such appointment shall also be approved
by the company at a general meeting convened within three months of the
recommendation of the Board. Further, it is also the duty of the auditor to file,
within a period of 30 days from the date of resignation, a statement in the
prescribed Form with the company and the Registrar in compliance with section
140(2) of the Companies Act, 2013.
(c) Evaluating the Operating Effectiveness of Controls: When evaluating the
operating effectiveness of relevant controls, the auditor shall evaluate whether
misstatements that have been detected by substantive procedures indicate that
controls are not operating effectively. The absence of misstatements detected by
substantive procedures, however, does not provide audit evidence that controls
related to the assertion being tested are effective.
When deviations from controls upon which the auditor intends to rely are
detected, the auditor shall make specific inquiries to understand these matters
and their potential consequences, and shall determine whether:
(a) The tests of controls that have been performed provide an appropriate
basis for reliance on the controls;

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(b) Additional tests of controls are necessary; or

(c) The potential risks of misstatement need to be addressed using

substantive procedures.

A material misstatement detected by the auditor’s procedures is a strong

indicator of the existence of a significant deficiency in internal control.

(d) Reporting to the Central Government - As per section 143(12) of the

Companies Act, 2013 read with Rule 13 of the Companies (Audit and Auditors)
Rules, 2014, if an auditor of a company in the course of the performance of his
duties as auditor, has reason to believe that an offence of fraud, which involves
or is expected to involve individually an amount of 1 crore or above, is being
or has been committed in the company by its officers or employees, the auditor
shall report the matter to the Central Government within such time and in such
manner as prescribed.

The manner of reporting the matter to the Central Government is as follows:

(1) The auditor shall report the matter to the Board or the Audit Committee, as the
case may be, immediately but not later than 2 days of his knowledge of the
fraud, seeking their reply or observations within 45 days;

(2) On receipt of such reply or observations, the auditor shall forward his report
and the reply or observations of the Board or the Audit Committee along with
his comments (on such reply or observations of the Board or the Audit
Committee) to the Central Government within 15 days from the date of receipt
of such reply or observations;

(3) In case the auditor fails to get any reply or observations from the Board or the
Audit Committee within the stipulated period of 45 days, he shall forward his
report to the Central Government along with a note containing the details of his
report that was earlier forwarded to the Board or the Audit Committee for
which he has not received any reply or observations;

(4) The report shall be sent to the Secretary, Ministry of Corporate Affairs in a
sealed cover by Registered Post with Acknowledgement Due or by Speed Post
followed by an e-mail in confirmation of the same;

(5) The report shall be on the letter-head of the auditor containing postal address,
e-mail address and contact telephone number or mobile number and be signed
by the auditor with his seal and shall indicate his Membership Number; and

(6) The report shall be in the form of a statement as specified in Form ADT-4.

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The auditor is also required to report under clause (x) of paragraph 3 of

Companies (Auditor’s Report) Order, 2016 [CARO, 2016], whether any fraud by
the company or any fraud on the Company by its officers or employees has been
noticed or reported during the year. If yes, the nature and the amount involved
is to be indicated.

Question 6
Answer any four:
(a) M/s. ABC & Co. is an Audit firm, having partners CA. A, CA. B and CA. C. The firm
has been offered the appointment as an Auditor of XYZ Ltd. for the Financial
Year 2017 -18.
Mr. D, the relative of CA. A, is holding 25,000 shares (face value of 10 each) in
XYZ Ltd. having market value of 90,000. Are M/s. ABC & Co. qualified to be
appointed as Auditors of XYZ Ltd.? (5 Marks)
(b) Mr. M, has served as an auditor in the Co-Operative Department of a
Government, is appointed as a statutory auditor by a Co-Operative Society that
has receipts over 3 crores during the financial year. He is not a Chartered
Accountant. Mr. D, Chartered Accountant is appointed to conduct tax audit of the
society under section 44AB of the Income Tax Act, 1961. Comment. (5 Marks)
(c) Mr. A approaches a bank for financial assistance for his upcoming project. The
Bank Branch Manager, after verifying the proposal, is agreeable to financing Mr.
A, but asks for the security to be offered to the bank. Discuss the nature of
securities required to be offered to the bank. (5 Marks)
(d) State the objectives of audit of Local Bodies. (5 Marks)
(e) The auditor should understand and consider the risks that may arise from the
use of Information Technology (IT) Systems. (5 Marks)

Answer
(a) As per section 141(3)(d)(i), a person shall not be eligible for appointment as an
auditor of a company, who, or his relative or partner is holding any security of
or interest in the company or its subsidiary, or of its holding or associate
company or a subsidiary of such holding company. However, as per proviso to
this section, the relative of the person may hold the securities or interest in the
company of face value not exceeding of 1,00,000.
In the instant case, M/s ABC & Co. is an audit firm having partners CA. A, CA. B
and CA.

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C. Mr. D is a relative of CA. A and he is holding shares in XYZ Ltd. of face

value of 2,50,000 (25,000 shares x rupees 10 per share). Market value of
90,000 would not be relevant.
Therefore, M/s ABC & Co. is disqualified for appointment as an auditors of XYZ
Ltd. as the relative of CA. A (i.e. partner of M/s ABC & Co.) is holding the
securities in XYZ Ltd. which is exceeding the limit mentioned in proviso to
section 141(3)(d)(i) of the Companies Act, 2013.
(b) Qualifications and Appointment of Auditors - Apart from a chartered
accountant within the meaning of the Chartered Accountants Act, 1949, some of
the State Co-operative Acts have permitted persons holding a government
diploma in co-operative accounts or in co- operation and accountancy and also a
person who has served as an auditor in the co- operative department of a
government to act as an auditor.
An auditor of a co-operative society is appointed by the Registrar of Co-
operative Societies and the auditor so appointed conducts the audit on behalf of
the Registrar and submits his report to him as also to the society.
Thus, in view of above provisions, appointment of Mr. M as statutory auditor
and Mr. D as tax auditor under Section 44 AB is in order.
(c) Nature of Security:
I. Primary security refers to the security offered by the borrower for bank
finance or the one against which credit has been extended by the bank.
This security is the principal security for an advance.
II. Collateral security is an additional security. Security can be in any form
i.e. tangible or intangible asset, movable or immovable asset.
Examples of most common types of securities accepted by banks are the
following.
• Personal Security of Guarantor
• Goods / Stocks / Debtors / Trade Receivables
• Gold Ornaments and Bullion
• Immovable Property
• Plantations (For Agricultural Advances)
• Third Party Guarantees
• Banker’s General Lien
• Life Insurance Policies
• Stock Exchange Securities and Other Instruments

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(d) Objective of Audit of Local Bodies: The external control of municipal

expenditure is exercised by the state governments through the appointment of
auditors to examine municipal accounts. The municipal corporations of Delhi,
Mumbai and a few others have powers to appoint their own auditors for regular
external audit. The important objectives of audit are:
(i) Reporting on the fairness of the content and presentation of financial
statements;
(ii) Reporting upon the strengths and weaknesses of systems of financial
control;
(iii) Reporting on the adherence to legal and/or administrative requirements;
(iv) Reporting upon whether value is being fully received on money spent;
and
(iv) Detection and prevention of error, fraud and misuse of resources.

(e) Having obtained an understanding of the IT systems and the automated

environment of a company, the auditor should now understand the risks that
arise from the use of IT systems.
Given below are some such risks that should be considered,
• Inaccurate processing of data, processing inaccurate data, or both
• Unauthorized access to data
• Direct data changes (backend changes)
• Excessive access / Privileged access (super users)
• Lack of adequate segregation of duties
• Unauthorized changes to systems or programs
• Failure to make necessary changes to systems or programs
• Loss of data

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PAPER – 6 : AUDITING AND ASSURANCE

Question No.1 is compulsory.
Attempt any four questions from the remaining five questions.

Examine with reasons (in short) whether the following statements are correct or
incorrect:
(a) Judgemental matters are transactions that are unusual due to either its size or
nature and that therefore occur infrequently.
(b) A well designed and drafted audit plan and audit strategy which takes care of all
the uncertainties and conditions, need not be changed during the course of
audit.
(c) An auditor is not concerned with consistency of accounting policies relating to
opening balances.
(d) Audit evidence obtained from external confirmation is always reliable.
(e) Banks recognize income on Non-Performing Assets on accrual basis.
(f) Management of the organization is solely responsible for the compliance of
auditing standards while preparing financial statements.
(g) The Board of Director of ABC Ltd., a listed company at Bombay Stock Exchange,
is required to fill the casual vacancy of an auditor only after taking into account
the recommendations of the audit committee.
(h) Any partner of an LLP, who is appointed as an auditor of a company, can sign the
audit report.
(i) When auditing in an automated environment, inquiry is often the most efficient
and effective audit testing method.
(j) An auditor should issue disclaimer of opinion when there is difference of
opinion between him and the management on a particular point.
(2  10 = 20 Marks)
Answer
(a) Incorrect: Significant risks often relate to significant non-routine transactions
or judgemental matters. Non-routine transactions are transactions that are
unusual, due to either size or nature, and that therefore occur infrequently.
Judgemental matters may include the development of accounting estimates for
which there is significant measurement uncertainty. Thus judgemental matters
are not always unusual due to their size or nature.

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(b) Incorrect: The auditor shall update and change the overall audit strategy and
the audit plan as necessary during the course of the audit. As a result of
unexpected events, changes in conditions, or the audit evidence obtained from
the results of audit procedures, the auditor may need to modify the overall audit
strategy and audit plan and thereby the resulting planned nature, timing and
extent of further audit procedures, based on the revised consideration of
assessed risks.
(c) Incorrect: In conducting an initial audit engagement, one of the objective of the
auditor with respect to opening balances is to obtain sufficient appropriate
audit evidence about whether appropriate accounting policies reflected in the
opening balances have been consistently applied in the current period’s
financial statements, or changes thereto are properly accounted for and
adequately presented and disclosed in accordance with the applicable financial
reporting framework.
(d) Incorrect: The reliability of information to be used as audit evidence, and
therefore of the audit evidence itself, is influenced by its source and its nature,
and the circumstances under which it is obtained, including the controls over
its preparation and maintenance where relevant. Even when information to be
used as audit evidence is obtained from sources external to the entity,
circumstances may exist that could affect its reliability.
For example, information obtained from an independent external source
may not be reliable if the source is not knowledgeable, or a management’s
expert may lack objectivity.
(e) Incorrect: Income from non-performing assets (NPA) is not recognised on
accrual basis due to its uncertainty but is booked as income only when it is
actually received.
(f) Incorrect: As per Section 143(9) of the Companies Act, 2013, every auditor shall
comply with the auditing standards.
(g) Correct: Where a company is required to constitute an Audit Committee under
section 177, all appointments, including the filling of a casual vacancy of an
auditor under this section shall be made after taking into account the
recommendations of such committee.
(h) Incorrect: Section 141(2) of the Companies Act, 2013 states that where a firm
including a limited liability partnership is appointed as an auditor of a
company, only the partners who are chartered accountants shall be authorised
to act and sign on behalf of the firm.

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(i) Incorrect: There are basically four types of audit tests that should be used in
an automated environment. They are inquiry, observation, inspection and re-
performance. Inquiry is the most efficient audit test but it also gives the least
audit evidence. Hence, inquiry should always be used in combination with any
one of the other audit testing methods. Inquiry alone is not sufficient. Applying
inquiry in combination with inspection gives the most effective and efficient
audit evidence.
(j) Incorrect: The auditor shall disclaim an opinion when the auditor is unable to
obtain sufficient appropriate audit evidence on which to base the opinion, and
the auditor concludes that the possible effects on the financial statements of
undetected misstatements, if any, could be both material and pervasive.
In case of difference of opinion, either the auditor will issue qualified report or
adverse report and not disclaimer of opinion.

Question 2
Discuss the following:
(a) Factors that should be considered for deciding upon the extent of checking on a
sampling plan. (5 Marks)
(b) "An adequate planning benefits the audit of financial statements." Discuss.
(5 Marks)
(c) "Professional judgment is essential to the proper conduct of an audit." Discuss.
(5 Marks)
(d) With respect to audit in an automated environment, explain the following:
(i) CAATs
(ii) Data Analytics
(iii) Database
(iv) Information Systems
(v) Privileged access (5 Marks)
Answer
(a) The factors that should be considered for deciding upon the extent of checking
on a sampling plan are following:
(i) Size of the organisation under audit.
(ii) State of the internal control.
(iii) Adequacy and reliability of books and records.
(iv) Tolerable error range.
(v) Degree of the desired confidence.

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(b) Benefits of Planning in the audit of financial statements: Planning an audit

involves establishing the overall audit strategy for the engagement and
developing an audit plan. Adequate planning benefits the audit of financial
statements in several ways, including the following:
1. Helping the auditor to devote appropriate attention to important areas of
the audit.
2. Helping the auditor identify and resolve potential problems on a timely
basis.
3. Helping the auditor properly organize and manage the audit engagement
so that it is performed in an effective and efficient manner.
4. Assisting in the selection of engagement team members with appropriate
levels of capabilities and competence to respond to anticipated risks, and
the proper assignment of work to them.
5. Facilitating the direction and supervision of engagement team members
and the review of their work.
6. Assisting, where applicable, in coordination of work done by auditors of
components and experts.

(c) Professional judgment is essential to the proper conduct of an audit. This is

because interpretation of relevant ethical requirements and the SAs and the
informed decisions required throughout the audit cannot be made without the
application of relevant knowledge and experience to the facts and
circumstances. Professional judgment is necessary in particular regarding
decisions about:
(i) Materiality and audit risk.
(ii) The nature, timing, and extent of audit procedures used to meet the
requirements of the SAs and gather audit evidence.
(iii) Evaluating whether sufficient appropriate audit evidence has been
obtained, and whether more needs to be done to achieve the objectives of
the SAs and thereby, the overall objectives of the auditor.
(iv) The evaluation of management’s judgments in applying the entity’s
applicable financial reporting framework.
(v) The drawing of conclusions based on the audit evidence obtained, for
example, assessing the reasonableness of the estimates made by
management in preparing the financial statements.

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(d) (i) CAATs: Short form for Computer Assisted Audit Techniques, are a
collection of computer based tools and techniques that are used in an audit
for analysing data in electronic form to obtain audit evidence.
(ii) Data Analytics: A combination of processes, tools and techniques that are
used to tap vast amounts of electronic data to obtain meaningful
information
(iii) Database: A logical subsystem within a larger information system where
electronic data is stored in a predefined form and retrieved for use.
(iv) Information Systems: Refers to a collection of electronic hardware,
software, networks and processes that are used in a business to carry out
operations and transactions.
(v) Privileged access: A type of super user access to information systems that
enforces less or no limits on using that system.

Question 3
(a) M/s Pankaj & Associates, Chartered Accountants, have been appointed as an
auditor of ABC Limited. CA Pankaj did not apply any audit procedures
regarding opening balances. He argued that since financial statements were
audited by the predecessor auditor therefore he is not required to verify them.
Is CA Pankaj correct in his approach? (5 Marks)
(b) "While the auditor may choose to analyse the monthly trends for expenses like
rent, power and fuel but for other expenses, an auditor generally prefers to
verify other attributes." Mention those attributes. (5 Marks)
(c) Write the audit procedures to be performed as an auditor for valuation
(assertion) of following:
(i) Loans and Advances and other current assets. (5 Marks)
(ii) Finished goods and goods for resale. (5 Marks)
Answer
(a) Initial audit engagement is an engagement in which either :
(i) The financial statements for the prior period were not audited; or
(ii) The financial statements for the prior period were audited by a
predecessor auditor.
From the above, it is quite clear that CA Pankaj is not correct in his approach
and therefore would be required to follow the initial audit engagement and also
apply audit procedures regarding opening balances.

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Audit Procedures regarding Opening Balances; The auditor shall read the
most recent financial statements, if any, and the predecessor auditor’s report
thereon, if any, for information relevant to opening balances, including
disclosures.
The auditor shall obtain sufficient appropriate audit evidence about whether the
opening balances contain misstatements that materially affect the current
period’s financial statements by:
(a) Determining whether the prior period’s closing balances have been
correctly brought forward to the current period or, when appropriate,
any adjustments have been disclosed as prior period items in the current
year’s Statement of Profit and Loss;
(b) Determining whether the opening balances reflect the application of
appropriate accounting policies; and
(c) Performing one or more of the following:
(i) Where the prior year financial statements were audited, perusing
the copies of the audited financial statements including the other
relevant documents relating to the prior period financial
statements;
(ii) Evaluating whether audit procedures performed in the current
period provide evidence relevant to the opening balances; or
(iii) Performing specific audit procedures to obtain evidence regarding
the opening balances.
(b) While the auditor may choose to analyse the monthly trends for
expenses like rent, power and fuel, an auditor generally prefers to vouch
for other expenses to verify following attributes:
(i) Whether the expenditure pertained to current period under audit;
(ii) Whether the expenditure qualified as a revenue and not capital
expenditure;
(iii) Whether the expenditure had a valid supporting like travel tickets,
insurance policy, third party invoice etc.;
(iv) Whether the expenditure has been classified under the correct
expense head;
(v) Whether the expenditure was authorised as per the delegation of
authority matrix;
(vi) Whether the expenditure was in relation to the entity’s business and
not a personal expenditure
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(c) (i) Audit procedure for valuation of Loans and Advances and other
current assets
 Assess the allowance for doubtful accounts. Review the process
followed by the Company to derive an allowance for doubtful
accounts. This will include a consistency comparison with the
method used in the last year, and a determination of whether
the method is appropriate for the underlying business
environment.
 Obtain the ageing report of loans and advances, split between
not currently due, 30 days old, 30-60 days old, 60- 180 days
old, 180- 365 days old and more than 365 days old. Also, obtain
the list of loans and advances under litigation and compare
with previous year.
 Scrutinize the analysis and identify those loans and advances
that appear doubtful; Discuss with management their reasons,
if any of these loans/ advances are not included in the
provision for bad recoverable; Perform further testing where
any disputes exist; Reach a final conclusion regarding the
adequacy of the bad and doubtful loans/ advances provision.
 Assess bad loans/ advances write-offs. Prepare schedule of
movements on Bad loans/ advances – Provision Accounts and
loans/ advances written off.
 Check that write-offs or other reductions in the recoverable
balances have been approved by an appropriate and authorised
member of senior management, for example the financial
controller or finance director.
 Check that the restatement of foreign currency loans and
advances/ other current assets has been done properly.
(ii) Audit procedure for valuation of finished goods and goods for
resale
 Enquire into what costs are included, how these have been
established and ensure that the overheads included have been
determined based on normal costs and appear reasonable in
relation to the information disclosed in the draft financial
statements.

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 Ensure that inventories are valued at net realizable value if

they are likely to fetch a value lower than their cost. For any
such items, also verify if the relevant semi/ partly processed
inventories (work in progress) and raw materials have also
been written down.
 Follow up for items that are obsolete, damaged, slow moving
and ascertain the possible realizable value of such items. For
the purpose, request the client to provide inventory ageing
split between less than 30 days, 30-60 days old, 60- 90
days old, 90- 180 days old, 180- 385 days old and more than
365 days old (refer screenshot below)
 Follow up any inventories which at time of observance of
physical counting were noted as being damaged or obsolete.
 Compare recorded costs with replacement costs. Examine
vendor price lists to determine if recorded cost is less than
current prices.
 Calculate inventory turnover ratio. Obsolete inventory may
be revealed if ratio is significantly lower.
 In manufacturing environments, test overhead allocation rates
and ensure that only direct labor, direct material and overhead
have been included.
 Verify the correct application of lower-of-cost-or-net realizable
value principles.

Question 4
(a) "Planning is not a discrete phase of an audit, but rather a continual and iterative
process." Discuss. (5 Marks)
(b) "The company has raised funds by issuing fully convertible debentures. These
funds were raised for the expansion and diversification of the business.
However, the company utilized these funds for repayment of long term loans
and advances." Advise the auditor regarding reporting requirements under
CARO, 2016. (4 Marks)
(c) "A multinational co. wants to appoint you to carry the statutory audit."
Discuss with reference to SA 330 the substantive procedures to be performed to
assess the risk of material misstatement. (6 Marks)

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(d) "MMJ Ltd., an unlisted public company, did not appoint any internal auditor for
the financial year ending on 31st March, 2019. The company had paid up capital
of 20 crores and reserves of 25 crores. Its turnover for the preceeding 3
years were 75 crores for the year ended 31st March, 2018, 150 crores for
March, 2017 and 190 crores for March, 2016. The company had availed term
loan from the bank of 130 crores. The outstanding balance of the term loan as
on 31st March, 2018 is 90 crores."
As an auditor of the company, how would you deal with the above? (5 Marks)

Answer
(a) Audit Planning- a Continuous Process
Planning is not a discrete phase of an audit, but rather a continual and iterative
process that often begins shortly after (or in connection with) the completion of
the previous audit and continues until the completion of the current audit
engagement. Planning, however, includes consideration of the timing of certain
activities and audit procedures that need to be completed prior to the
performance of further audit procedures. For example, planning includes the
need to consider, prior to the auditor’s identification and assessment of the
risks of material misstatement, such matters as:
(i) The analytical procedures to be applied as risk assessment procedures.
(ii) Obtaining a general understanding of the legal and regulatory
framework applicable to the entity and how the entity is complying with
that framework.
(iii) The determination of materiality.
(iv) The involvement of experts.
(v) The performance of other risk assessment procedures.
(b) The auditoris required to report as per clause xiv of paragraph 3 of CARO
2016, whether the company has made any preferential allotment or private
placement of shares or fully or partly convertible debentures during the year
under review and if so, as to whether the requirement of section 42 of the
Companies Act, 2013 have been complied with and the amount raised have been
used for the purposes for which the funds were raised. If not, provide the details
in respect of the amount involved and nature of non-compliance;
In view of the above clause, the auditor would report that funds raised by the
company for expansion and diversification of business have not been used for
the said purpose rather the company has utilised these funds for repayment of
long term loans and advance.

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(c) Substantive procedures to be performed to assess the risk of material

misstatement:
Irrespective of the assessed risks of material misstatement, the auditor shall
design and perform substantive procedures for each material class of
transactions, account balance, and disclosure.
1. This requirement reflects the facts that:
(i) The auditor’s assessment of risk is judgmental and so may not
identify all risks of material misstatement; and
(ii) There are inherent limitations to internal control, including
management override.
2. Depending on the circumstances, the auditor may determine that:
• Performing only substantive analytical procedures will be sufficient
to reduce audit risk to an acceptably low level. For example, where
the auditor’s assessment of risk is supported by audit evidence from
tests of controls.
• Only tests of details are appropriate.
• A combination of substantive analytical procedures and tests of
details are most responsive to the assessed risks.
3. Substantive analytical procedures are generally more applicable to large
volumes of transactions that tend to be predictable over time. SA 520,
“Analytical Procedures” establishes requirements and provides guidance
on the application of analytical procedures during an audit.
4. The nature of the risk and assertion is relevant to the design of tests of
details. For example, tests of details related to the existence or occurrence
assertion may involve selecting from items contained in a financial
statement amount and obtaining the relevant audit evidence. On the other
hand, tests of details related to the completeness assertion may involve
selecting from items that are expected to be included in the relevant
financial statement amount and investigating whether they are
included.
5. Because the assessment of the risk of material misstatement takes
account of internal control, the extent of substantive procedures may
need to be increased when the results from tests of controls are
unsatisfactory.

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6. In designing tests of details, the extent of testing is ordinarily thought of

in terms of the sample size. However, other matters are also relevant,
including whether it is more effective to use other selective means of
testing.
(d) Every unlisted public company having-
(i) paid up share capital of fifty crore rupees or more during the preceding
financial year; or
(ii) turnover of two hundred crore rupees or more during the preceding
financial year; or
(iii) outstanding loans or borrowings from banks or public financial
institutions exceeding one hundred crore rupees or more at any point of
time during the preceding financial year; or
(iv) outstanding deposits of twenty five crore rupees or more at any point of
time during the preceding financial year;
In view of above provisions, MMJ Ltd would have to appoint internal auditor for
the financial year 31-03-2019 because it had availed a term loan from the bank
of 130 Crores. The outstanding balance of term loan as on 31-03-2018 90
crores would not make any difference because section is contemplating
outstanding at any point of time during the preceding financial year.

Question 5
(a) "An auditor is required to make specific evaluations while forming an opinion in
an audit report." State them. (5 Marks)
(b) "Mr. A is offered by ABC Ltd. for appointment as cost auditor and asked to
certify certain requirements before such appointment." Discuss those
requirements with reference to the provisions of the Companies Act, 2013.

(5 Marks)
(c) Briefly mention the matters that are relevant in planning attendance at physical
inventory counting. (5 Marks)
(d) Write any five circumstances of conflicting or missing evidence that indicate
the possibility of fraud. (5 Marks)

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Answer
(a) Specific Evaluations by the auditor: In particular, the auditor shall evaluate
whether :
(i) The financial statements adequately disclose the significant accounting
policies selected and applied;
(ii) The accounting policies selected and applied are consistent with the
applicable financial reporting framework and are appropriate;
(iii) The accounting estimates made by management are reasonable;
(iv) The information presented in the financial statements is relevant,
reliable, comparable, and understandable;
(v) The financial statements provide adequate disclosures to enable the
intended users to understand the effect of material transactions and
events on the information conveyed in the financial statements; and
(vi) The terminology used in the financial statements, including the title of
each financial statement, is appropriate.
(b) Cost Auditor: Rule 6 of the Companies (Cost Records and audit) rules, 2014
required the companies prescribed under the said rules to appoint an auditor
within 180days of the commencement of every financial year. However, before
such appointment is made, the written consent of the cost auditor to such
appointment and a certificate from him or it shall be obtained.
The certificate to be obtained from the cost auditor shall certify that the-
(1) The individual or the firm, as the case may be, is eligible for appointment
and is not disqualified for appointment under the Companies Act, 2013,
the Cost and Works Accountants Act, 1959 and the rules or regulations
made thereunder;
(2) The individual or the firm, as the case may be, satisfies the criteria
provided in section 141 of the Companies Act, 2013 so far as may be
applicable;
(3) The proposed appointment is within the limits laid down by or under the
authority of the Companies Act, 2013; and
(4) The list of proceedings against the cost auditor or audit firm or any
partner of the audit firm pending with respect to professional matters of
conduct, as disclosed in the certificate, is true and correct.

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(c) Matters relevant in planning attendance at physical inventory counting:

Matters relevant in planning attendance at physical inventory counting include,
for example:
(i) Nature of inventory.
(ii) Stages of completion of work in progress.
(iii) The risks of material misstatement related to inventory.
(iv) The nature of the internal control related to inventory.
(v) Whether adequate procedures are expected to be established and proper
instructions issued for physical inventory counting.
(vi) The timing of physical inventory counting.
(vii) Whether the entity maintains a perpetual inventory system.
(viii) The locations at which inventory is held, including the materiality of the
inventory and the risks of material misstatement at different locations, in
deciding at which locations attendance is appropriate
(ix) Whether the assistance of an auditor’s expert is needed.
(d) Conflicting or missing evidence, including:
(i) Missing documents.
(ii) Documents that appear to have been altered.
(iii) Significant unexplained items on reconciliations.
(iv) Unusual discrepancies between the entity's records and confirmation
replies.
(v) Large numbers of credit entries and other adjustments made to accounts
receivable records.
(vi) Missing or non-existent cancelled cheques in circumstances where
cancelled cheques are ordinarily returned to the entity with the bank
statement.
(vii) Missing inventory or physical assets of significant magnitude.
(viii) Unavailable or missing electronic evidence, inconsistent with the entity’s
record retention practices or policies.

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Question 6
Answer any four:
(a) "CA. NM who is rendering management consultancy service to LA Ltd. wants
to accept offer letter for appointment as an auditor of the LA Ltd. for the next
financial year." Discuss with reference to the provision of the Companies Act,
2013. (5 Marks)
(b) Briefly explain the provisions for qualification and appointment of Auditors
under the Multi - State Co-operative Societies Act, 2002. (5 Marks)
(c) "The Auditor should examine the efficacy of various internal controls over
advances, to determine the nature, timing and extent of his substantive
procedures." Discuss briefly. (5 Marks)
(d) Write basic standards set for Expenditure Audit of Government. (5 Marks)
(e) "Ramjilal & Co. had been allotted the branch audit of a nationalized bank for the
year ended 31st March, 2018. In the audit planning, the partner of Ramjilal &
Co., observed that the allotted branches are predominantly based in rural areas
and major portion of the advances were for agricultural purpose."
Now he needs your assistance on the following points so as to incorporate
them in the audit plan:
(i) for determination of NPA norms for agricultural advances
(ii) for accounts where there is erosion in the value of security/frauds committed by
the borrowers. (5 Marks)

Answer
(a) Section 141(3)(i) of the Companies Act, 2013 disqualifies a person for
appointment as an auditor of a company who is engaged as on the date of
appointment in management consultancy service as provided in section 144.
Section 144 of the Companies Act, 2013 prescribes certain services not to be
rendered by the auditor which are as under:
(i) Accounting and book keeping services
(ii) Internal audit.
(iii) Design and implementation of any financially information system.
(iv) Actuarial services
(v) Investment advisory services.
(vi) Investment banking services.

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(vii) Rendering of outsourced financial services

(viii) Management services and
(ix) Any other kind of services as may be prescribed
Therefore, CA. NM is advised not to accept the assignment of auditing as the
management consultancy service is specifically notified in the list of services
not to be rendered by him as per section 141(3)(i) read with section 144 of the
Companies Act, 2013.
(b) Qualification of Auditors - Section 72 of the Multi-State Co-operative Societies
Act, 2002 states that a person who is a Chartered Accountant within the
meaning of the Chartered Accountants Act, 1949 can only be appointed as
auditor of Multi-State co-operative society.
However, the following persons are not eligible for appointment as auditors of a
Multi-State co-operative society-
(a) A body corporate.
(b) An officer or employee of the Multi-State co-operative society.
(c) A person who is a member or who is in the employment, of an officer or
employee of the Multi-State co-operative society.
(d) A person who is indebted to the Multi-State co-operative society or who
has given any guarantee or provided any security in connection with the
indebtedness of any third person to the Multi-State co-operative society
for an amount exceeding one thousand rupees.
If an auditor becomes subject, after his appointment, to any, of the
disqualifications specified above, he shall be deemed to have vacated his office
as such.
Appointment of Auditors - Section 70 of the Multi-State Co-operative Societies
Act, 2002 provides that the first auditor or auditors of a Multi-State co-operative
society shall be appointed by the board within one month of the date of
registration of such society and the auditor or auditors so appointed shall hold
office until the conclusion of the first annual general meeting. If the board fails
to exercise its powers under this sub-section, the Multi- State co-operative
society in the general meeting may appoint the first auditor or auditors.
The subsequent auditor or auditors are appointed by Multi-State co-operative
society, at each annual general meeting. The auditor or auditors so appointed
shall hold office from the conclusion of that meeting until the conclusion of the
next annual general meeting.

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(c) Evaluation of Internal Controls over Advances: The auditor should

examine the efficacy of various internal controls over advances to
determine the nature, timing and extent of his substantive procedures. In
general, the internal controls over advances should include , inter alia,
the following:
(i) The bank should make an advance only after satisfying itself as to the
credit worthiness of the borrower and after obtaining sanction from the
appropriate authorities of the bank.
(ii) All the necessary documents (e.g., agreements, demand promissory notes,
letters of hypothecation, etc.) should be executed by the parties before
advances are made.
(iii) The compliance with the terms of sanction and end use of funds should be
ensured.
(iv) Sufficient margin as specified in the sanction letter should be kept against
securities taken so as to cover for any decline in the value thereof. The
availability of sufficient margin needs to be ensured at regular intervals.
(v) If the securities taken are in the nature of shares, debentures, etc., the
ownership of the same should be transferred in the name of the bank and
the effective control of such securities be retained as a part of
documentation.
(vi) All securities requiring registration should be registered in the name of
the bank or otherwise accompanied by documents sufficient to give title
to the bank.
(vii) In the case of goods in the possession of the bank, contents of the
packages should be test checked at the time of receipt. The godowns
should be frequently inspected by responsible officers of the branch
concerned, in addition to the inspectors of the bank.
(viii) Drawing Power Register should be updated every month to record the
value of securities hypothecated. These entries should be checked by an
officer.
(ix) The accounts should be kept within both the drawing power and the
sanctioned limit.
(x) All the accounts which exceed the sanctioned limit or drawing power or
are otherwise irregular should be brought to the notice of the controlling
authority regularly.
(xi) The operation of each advance account should be reviewed at least once a
year, and at more frequent intervals in the case of large advances.

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(d) The audit of government expenditure is one of the major components of

government audit. The basic standards set for audit of expenditure are to
ensure that there is provision funds authorised by competent authority
fixing the limits within which expenditure can be incurred. These
standards are—

(i) that the expenditure incurred conforms to the relevant provisions of

the statutory enactment and in accordance with the Financial Rules
and Regulations framed by the competent authority. Such an audit is
called as the audit against ‘rules and orders’.

(ii) that there is sanction, either special or general, accorded by

competent authority authorising the expenditure. Such an audit is
called as the audit of sanctions.

(iii) That there is a provision of funds out of which expenditure can be

incurred and the same has been authorised by competent authority.
Such an audit is called as audit against provision of funds.

(iv) That the expenditure is incurred with due regard to broad and
general principles of financial propriety. Such an audit is also called
as propriety audit.

(v) That the various programmes, schemes and projects where large
financial expenditure has been incurred are being run economically
and are yielding results expected of them. Such an audit is termed as
the performance audit.

(e) (i) NPA norms for Agricultural Advances: As per the guidelines,
Agricultural Advances are of two types, (1) Agricultural Advances for
“long duration” crops and (2) Agricultural Advances for “short duration”
crops

The “long duration” crops would be crops with crop season longer than
one year and crops, which are not “long duration” crops would be treated
as “short duration” crops.

The crop season for each crop, which means the period up to harvesting of
the crops raised, would be as determined by the State Level Bankers’
Committee in each State.

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The following NPA norms would apply to agricultural advances

(including Crop Term Loans):
 A loan granted for short duration crops will be treated as NPA, if
the instalment of principal or interest thereon remains overdue for
two crop seasons and,
 A loan granted for long duration crops will be treated as NPA, if
the instalment of principal or interest thereon remains overdue for
one crop season.
(ii) Accounts where there is erosion in the value of security / frauds
committed by borrowers
Not prudent to follow stages of asset classification. It should be
straightaway classified as doubtful or loss asset as appropriate.
(i) Erosion in the value of security can be reckoned as significant when
the realisable value of the security is less than 50 per cent of the
value assessed by the bank or accepted by RBI at the time of last
inspection, as the case may be. Such NPAs may be straightaway
classified under doubtful category and provisioning should be made
as applicable to doubtful assets.
(ii) If the realisable value of the security, as assessed by the bank/
approved valuers/ RBI is less than 10 per cent of the outstanding in
the borrowal accounts, the existence of security should be ignored
and the asset should be straightaway classified as loss asset. It may
be either written off or fully provided for by the bank.



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AUDITING AND ASSURANCE

STANDARDS

S. No AAS Title Page No.

1 SA 200 Overall Objectives of Independent Auditor and conduct of 485 – 489
audit in accordance with Standards on Auditing
2 SA 210 Agreeing to the terms of audit engagement 490 – 493
3 SA 220 Quality Control for an Audit of Financial Statements 494 – 498
4 SA 230 Audit Documentation 499 – 501
5 SA 240 The Auditor’s responsibilities Relating to Fraud in an Audit of 502 – 507
Financial Statements
6 SA 250 Consideration of Laws and Regulations in an Audit of 508 – 511
Financial Statements
7 SA 260 Communication with Those Charged with Governance Not in
syllabus
8 SA 265 Communicating Deficiencies in Internal Control to Those Not in
Charged with Governance and Management syllabus
9 SA 299 Responsibility of Joint Auditors 512 – 515
10 SA 300 Planning an Audit of Financial Statements 516 – 517
11 SA 315 Identifying and Assessing the Risks of Material Misstatement 518 – 522
through Understanding the Entity and its Environment
12 SA 320 Materiality in Planning and Performing an Audit 523 – 526
13 SA 330 The Auditor’s Responses to Assessed Risks Not in
syllabus
14 SA 402 Audit Considerations Relating to an Entity Using a Service Not in
Organization syllabus
15 SA 450 Evaluation of Misstatements Identified during the Audits Not in
syllabus
16 SA 500 Audit Evidence 527 – 529
17 SA 501 Audit Evidence - Specific Considerations for Selected Items 530 – 532
18 SA 505 External Confirmations 533 – 536
19 SA 510 Initial Audit Engagements-Opening Balances 537 – 539

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20 SA 520 Analytical Procedures 540 – 542

21 SA 530 Audit Sampling 543 – 546
22 SA 540 Auditing Accounting Estimates, Including Fair Value Not in
Accounting Estimates, and Related Disclosures syllabus
23 SA 550 Related Parties 547 – 552
24 SA 560 Subsequent Events 553 – 556
25 SA 570 Going Concern 557 – 560
26 SA 580 Written Representations 561 – 563
27 SA 600 Using the Work of Another Auditor Not in
syllabus
28 SA 610 Using the Work of Internal Auditors 564 – 567
29 SA 620 Using the Work of an Auditor’s Expert Not in
syllabus
30 SA 700 Forming an Opinion and Reporting on Financial 568 – 573
Statements
31 SA 701 Communicating Key Audit Matters in the Independent 574 – 576
Auditor’s Report
32 SA 705 Modifications to the Opinion in the Independent 577 – 579
Auditor’s Report
33 SA 706 Emphasis of Matter Paragraphs and Other Matter 580 – 583
Paragraphs in the Independent Auditor’s Report
34 SA 710 Comparative Information – Corresponding 584 – 587
Figures and Comparative Financial Statements
35 SA 720 The Auditor’s Responsibility in Relation to Other Information Not in
in Documents Containing Audited syllabus
Financial Statements
36 SQC 1 Quality Control for Firms that Perform Audits and Reviews of
Historical Financial Information, and Other Assurance and
Related Services Engagements

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INTRODUCTION
AUDITING AND ASSURANCE STANDARD BOARD, AUTHORITY OF THE
DOCUMENTS, CLASSIFICATION OF STANDARDS ETC.

S. N Main Point Details/Sub-point

1 History of AAS (a) 1955- The Council of the ICAI Set up a research
Auditing and committee
Assurance (b) 1964- The Council published “Statement on Auditing
Standards and Practices” as prepared by the research committee.
AASB i.e.
(c) 1977- International Federation of Accountants (IFAC)
Auditing and came into existence
Assurance
(d) International Auditing Practices Committee (IAPC) was
Standard Board
set up by IFAC
(e) International Standards on Auditing (ISA) issued by
IAPC
(f) 1982- Auditing Practices Committee (APC) constituted
by the ICAI
(g) “Statements on Auditing Practices” replaced by
“Standard Auditing Practices”(SAPs) and “Guidance
Notes” issued by APC
(h) 1978- IFAC established International Auditing
and Assurance Standard Board (IAASB)
(i) 2002- IFAC replaces IAPC with IAASB
(j) July, 2002- The ICAI converts APC into Auditing and
Assurance Standard Board i.e. AASB
(k) The ICAI renamed SAPs as AAS i.e. Auditing and
Assurance Standards

2 Scope and (a) To review the existing auditing practices in India and to
Function of develop Statements on Standards on Auditing (SAs) so that
AASB these may be issued by the Council of the Institute
(b) The SAs are issued under the authority of the Council of the
Institute
(c) AASB also issues Guidance Notes on the issues arising
from the SAs wherever necessary

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3 Auditing and Assurance Standards- Classification

3.1 SQC- (a) It prescribes General Quality Control Measures to be

Standards on implemented while providing assurance services
Quality Control (b) It contains extensive requirements in relation to
establishment and maintenance of a system of quality
control (QC) in the audit firms as well as even for sole
practitioners
(c) Total Standards Under this Category- 1

3.2 Standards on (a) It prescribed Standard audit practices for conducting

Auditing audit of financial statements
(b) SAs apply whenever an independent audit is carried
out; that is, in the independent examination of financial
information of any entity, whether profit oriented or
not, and
(c) irrespective of its size, or legal form
(d) Compliance of SAs is a mandatory requirement as per
the Companies Act, 2013 (refer Sec 143(9) and (10) of
Companies Act, 2013
(e) A member who does not perform his audit in
accordance with these statements and fails to disclose
the material departures there from, becomes liable to
the disciplinary proceedings of the Institute under
Clause (9) of Part I of the Second Schedule to the
Chartered Accountants Act, 1949.
(f) Total Standards Under this Category- 38
(g) (HIGHEST LEVEL OF ASSURANCE BUT NOT A
GUARANTEE)

3.3 Standards on (a) It is prescribed for conducting review of financial

Review statements
Engagement (b) Review means a moderate level of examination
(c) Example, as per SEBI requirements auditor has to
conduct quarterly review (not an in depth examination)
of interim financial statements
(d) Total Standards under this category- 2
(MODERATE LEVEL OF ASSURANCE)

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3.4 Standards on (a) Special Assurance Assignments other than audit/review

Assurance of financial statements
Engagement (b) Total Standards under this category- 3

3.5 Standards on (a) It includes agreed-upon procedures and compilation

Related engagement.
Services (b) It is not an assurance service.
(c) Example, certification of facts without expressing an
opinion, assist in preparation of summary or
consolidated financial statements etc.
(NO ASSURANCE ACTIVITY)

4 Authority Attached to the Documents issued by the Institute/MCA

4.1 Statements Statements issued by the ICAI are mandatory. It is the duty of
the members of the institute to examine whether statements
have been complied or not. Member should highlight in audit
report if there are material departures from statements.

4.2 Guidance Notes Guidance notes are recommendatory in nature.

A member should ordinarily follow recommendations in a
guidance note relating to an auditing matter except where he is
satisfied that in the circumstances of the case, it may not be
necessary to do so.
There are, however a few guidance notes in case of which the
Council has specifically stated that they should be considered
as mandatory on members while discharging their attest
function.

4.3 Accounting They become mandatory on the dates specified in the

Standards and respective document or notified by the council. There can be
Standards on situations in which certain matters are covered both by a
Auditing ‘Statement’ and by an ‘Accounting Standard’/ ‘Standards on
Auditing. In such a situation, the ‘Statement’ prevails till the
time the relevant ‘Accounting Standard’/ Standards on
Auditing becomes mandatory. Once an ‘Accounting Standard’/
‘Standards on Auditing’ becomes mandatory, the concerned
‘Statement’ or the relevant part thereof automatically stands
withdrawn.

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4.4 IND AS The IND AS are basically standards that have been harmonised
with the IFRS(international financial reporting standards) to
make reporting by Indian companies more globally accessible.
Since Indian companies have a far wider global reach now as
compared to earlier, the need to converge reporting standards
with international standards was felt, which has led to the
introduction of IND AS.
The Ministry of Corporate Affairs (MCA), in 2015, had notified
the Companies (Indian Accounting Standards (IND AS)) Rules
2015, which stipulated the adoption and applicability of IND AS
in a phased manner beginning from the Accounting period
2016-17. The MCA has since issued three Amendment Rules,
one each in year 2016, 2017, and 2018 to amend the 2015
rules.

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SA 200 OVERALL OBJECTIVES OF THE INDEPENDENT AUDITOR AND THE

CONDUCT OF AN AUDIT IN ACCORDANCE WITH STANDARDS ON
AUDITING (EFFECTIVE ON OR AFTER APRIL 1, 2010).

S.N Particulars
1 Introduction
1.1 This Standard on Auditing (SA) establishes the independent auditor’s overall
responsibilities when conducting an audit of financial statements in
accordance with SAs.
1.2 It also explains the scope, authority and structure of the SAs, and includes
requirements establishing the general responsibilities of the independent
auditor applicable in all audits, including the obligation to comply with the SAs.
1.3 As the basis for the auditor’s opinion, SAs require the auditor to obtain
reasonable assurance about whether the financial statements as a whole are
free from material misstatement, whether due to fraud or error. Reasonable
assurance is a high level of assurance. However, reasonable assurance is not an
absolute level of assurance, because there are inherent limitations of an audit
(Refer Q1)
2 Objective
2.1 In conducting an audit of financial statements, the overall objectives of the
auditor are:
2.1.a To obtain reasonable assurance about whether the financial statements as a
whole are free from material misstatement, whether due to fraud or error,
thereby enabling the auditor to express an opinion on whether the financial
statements are prepared, in all material respects, in accordance with an
applicable financial reporting framework
2.1.b To report on the financial statements, and communicate as required by the SAs,
in accordance with the auditor’s findings by providing reasonable assurance.
3 Definition
3.1 Applicable financial reporting framework:
The financial reporting framework adopted by management and, where
appropriate, those charged with governance in the preparation and
presentation of the financial statements that is acceptable in view of the nature
of the entity and the objective of the financial statements, or that is required by
law or regulation.

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3.1.a Fair Presentation Framework:

The term “fair presentation framework” is used to refer to a financial reporting
framework that requires compliance with the requirements of the framework
and:
(i) Acknowledges directly or indirectly that, to achieve fair presentation of
the financial statements, it may be necessary for management to provide
disclosures beyond those specifically required by the framework; or
(ii) Acknowledges directly that it may be necessary for management to
depart from a requirement of the framework to achieve fair presentation
of the financial statements. Such departures are expected to be
necessary only in extremely rare circumstances
3.1.b Compliance Framework:
The term “compliance framework” is used to refer to a financial reporting
framework that requires compliance with the requirements of the framework,
but does not contain the acknowledgements explained in Fair Presentation
Framework.
3.2 Audit Evidence (SA 500):
Information used by the auditor in arriving at the conclusions on which the
auditor’s opinion is based. Audit evidence includes both information contained
in the accounting records underlying the financial statements and other
information
3.2.a Sufficiency of Evidence:
Sufficiency of audit evidence is the measure of the quantity of audit evidence.
The quantity of the audit evidence needed is affected by the auditor’s
assessment of the risks of material misstatement and also by the quality of such
audit evidence
3.2.b Appropriateness of Evidence:
Appropriateness of audit evidence is the measure of the quality of audit
evidence; that is, its relevance and its reliability in providing support for the
conclusions on which the auditor’s opinion is based
3.3 Audit Risk : (Refer Q2, Q3 and Q4)
The risk that the auditor expresses an inappropriate audit opinion when the
financial statements are materially misstated. Audit risk is a function of the
risks of material misstatement and detection risk
3.4 Risk of Material Misstatement (SA 315):
The risk that the financial statements are materially misstated prior to audit.
This consists of two components, described as follows at the assertion level:
3.4.a Inherent Risk:
The susceptibility of an assertion about a class of transaction, account balance
or disclosure to a misstatement that could be material, either individually or
when aggregated with other misstatements, before consideration of any related
controls
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3.4.b Control Risk:

The risk that a misstatement that could occur in an assertion about a class of
transaction, account balance or disclosure and that could be material, either
individually or when aggregated with other misstatements, will not be
prevented, or detected and corrected, on a timely basis by the entity’s internal
control.
3.5 Detection Risk:
The risk that the procedures performed by the auditor (as per SA 330) to
reduce audit risk to an acceptably low level will not detect a misstatement that
exists and that could be material, either individually or when aggregated with
other misstatements.
3.6 Premise, relating to the responsibilities of management and, where
appropriate, those charged with governance, on which an audit is
conducted –
That management and, where appropriate, those charged with governance
have the following responsibilities that are fundamental to the conduct of an
audit in accordance with SAs. That is, responsibility:
1. For the preparation and presentation of the financial statements in
accordance with the applicable financial reporting framework; this
includes the design, implementation and maintenance of internal control
relevant to the preparation and presentation of financial statements that
are free from material misstatement, whether due to fraud or error; and
2. To provide the auditor with:
(a) All information, such as records and documentation, and other
matters that are relevant to the preparation and presentation of
the financial statements;
(b) Any additional information that the auditor may request from
management and, where appropriate, those charged with
governance; and
(c) Unrestricted access to those within the entity from whom the
auditor determines it necessary to obtain audit evidence
4 Requirements
4.1 Ethical Requirements: Independence is a pre-requisite for auditing. Apart
from Independence (Refer Q5), auditor is subject to following ethical
requirements as per Code of Ethics issued by the ICAI:
4.1.a Integrity-Honesty
4.1.b Objectivity- Being unbiased
4.1.c Professional Competence and due care- Skills, Knowledge and Questioning
Mind
4.1.d Confidentiality- should not disclose information acquired during the course of
audit without client’s prior consent unless required by law or regulation.

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4.1.e Professional Behaviour- Good Code of Conduct and systematic approach to

audit.
4.2 Professional Skepticism:
An attitude that includes a questioning mind, being alert to conditions which
may indicate possible misstatement due to error or fraud, and a critical
assessment of audit evidence.
The auditor shall plan and perform an audit with professional skepticism
recognising that circumstances may exist that cause the financial statements to
be materially misstated (Refer SA 240)
4.3 Professional Judgment:
The auditor shall exercise professional judgment in planning and performing an
audit of financial statements.
Professional judgment is not to be used as the justification for decisions that are
not otherwise supported by the facts and circumstances of the engagement or
sufficient appropriate audit evidence.
Professional judgment is necessary in particular regarding decisions about:
4.3.a Materiality and audit risk
4.3.b The nature, timing, and extent of audit procedures used to meet the
requirements of the SAs and gather audit evidence.
4.3.c Evaluating whether sufficient appropriate audit evidence has been obtained,
and whether more needs to be done to achieve the objectives of the SAs
4.3.d The evaluation of management’s judgments in applying the entity’s applicable
financial reporting framework
4.3.e The drawing of conclusions based on the audit evidence obtained, for example,
assessing the reasonableness of the estimates made by management in
preparing the financial statements
4.4 Sufficient Appropriate Audit Evidence and Audit Risk:
To obtain reasonable assurance, the auditor shall obtain sufficient appropriate
audit evidence to reduce audit risk to an acceptably low level and thereby
enable the auditor to draw reasonable conclusions on which to base the
auditor’s opinion
4.4.a Inherent risk is higher for some assertions and related classes of transactions,
account balances, and disclosures than for others. For example, it may be higher
for complex calculations or for accounts consisting of amounts derived from
accounting estimates that are subject to significant estimation uncertainty
4.4.b Control Risk is a function of the effectiveness of the design, implementation and
maintenance of internal control Internal control, no matter how well designed and
operated, can only reduce, but not eliminate, risks of material misstatement in the
financial statements, because of the inherent limitations of internal control.
4.4.c Detection Risk is a function of the effectiveness of an audit procedure and of its
application by the auditor to reduce the possibility that an auditor might select
an inappropriate audit procedure, misapply an appropriate audit procedure, or
misinterpret the audit results.

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4.4.d For a given level of audit risk, the acceptable level of detection risk bears an
inverse relationship to the assessed risks of material misstatement at the
assertion level. For example, the greater the risks of material misstatement the
auditor believes exists, the less the detection risk that can be accepted and,
accordingly, the more persuasive the audit evidence required by the auditor
4.4.e There is an inverse relationship between materiality and audit risk. Higher the
materiality/significance of financial items, lower will be the audit risk that
auditor would accept.
4.5 Conduct of an audit in accordance with SAs
4.5.a The auditor shall comply with all SAs relevant to the audit. An SA is relevant to
the audit when the SA is in effect and the circumstances addressed by the SA
exist.
4.5.b To achieve the overall objectives of the auditor, the auditor shall use the
objectives stated in relevant SAs in planning and performing the audit.
4.5.c In exceptional circumstances, the auditor may judge it necessary to depart from
a relevant requirement in an SA. In such circumstances, the auditor shall
perform alternative audit procedures to achieve the aim of that requirement.
4.5.d If an objective in a relevant SA cannot be achieved, the auditor shall evaluate
whether this prevents the auditor from achieving the overall objectives of the
auditor and thereby requires the auditor, in accordance with the SAs, to modify
the auditor’s opinion or withdraw from the engagement
4.5.e In performing an audit, the auditor may be required to comply with legal or
regulatory requirements in addition to the SAs. The SAs do not override laws
and regulations that govern an audit of financial statements. In the event that
those laws and regulations differ from the SAs, an audit conducted only in
accordance with laws and regulations will not automatically comply with SAs.

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SA 210 AGREEING THE TERMS OF AUDIT ENGAGEMENTS (EFFECTIVE ON

OR AFTER APRIL 1, 2010.

S.N Particulars
1 Introduction:
This Standard on Auditing (SA) deals with the auditor’s responsibilities in
agreeing the terms of the audit engagement with management and, where
appropriate, those charged with governance.
2 Objective:
The objective of the auditor is to accept or continue an audit engagement only
when the basis upon which it is to be performed has been agreed, through:
2.1 Establishing whether the preconditions for an audit are present
2.2 Confirming that there is a common understanding between the auditor and
management and, where appropriate, those charged with governance of the terms
of the audit engagement.
3 Definition
3.1 Preconditions for an audit – The use by management of an acceptable financial
reporting framework in the preparation of the financial statements and the
agreement of management and, where appropriate, those charged with
governance to the premise on which an audit is conducted.
4 Requirements
4.1 Pre-conditions for an Audit
4.1.a Determine whether the financial reporting framework to be applied in the
preparation of the financial statements is acceptable; and
4.1.b Obtain the agreement of management that it acknowledges and understands its
responsibility:
1. For the preparation of the financial statements in accordance with the
applicable financial reporting framework, including where relevant their
fair presentation
2. For such internal control as management determines is necessary to
enable the preparation of financial statements that are free from material
misstatement, whether due to fraud or error
3. To provide the auditor with:
(a) Access to all information of which management is aware that is
relevant to the preparation of the financial statements such as
records, documentation and other matters;

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(b) Additional information that the auditor may request from

management for the purpose of the audit; and
(c) Unrestricted access to persons within the entity from whom the
auditor determines it necessary to obtain audit evidence
4.1.c If the preconditions for an audit are not present, the auditor shall discuss the
matter with management. Unless required by law or regulation to do so, the
auditor shall not accept the proposed audit engagement.
4.2 Agreement on Audit Engagement Terms (LETTER OF ENGAGEMENT)
4.2.a Content:
the agreed terms of the audit engagement shall be recorded in an audit
engagement letter or other suitable form of written agreement and shall include:
(a) The objective and scope of the audit of the financial statements;
(b) The responsibilities of the auditor;
(c) The responsibilities of management;
(d) Identification of the applicable financial reporting framework for the
preparation of the financial statements; and
(e) Reference to the expected form and content of any reports to be issued by
the auditor and a statement that there may be circumstances in which a
Report may differ from its expected form and content
4.2.b Reference to applicable law
If law or regulation prescribes in sufficient detail the terms of the audit
engagement referred above, the auditor n eed not record them in a written
agreement, except for the fact that such law or regulation applies and that
management acknowledges and understands its responsibilities as discussed in
pre-conditions for an audit.
4.2.c Recurring audit engagement
On recurring audits, the auditor shall assess whether circumstances require the
terms of the audit engagement to be revised and whether there is a need to
remind the entity of the existing terms of the audit engagement.
4.3 Limitation on Scope Prior to Audit Engagement Acceptance
4.3.a If management or those charged with governance impose a limitation on the
scope of the auditor’s work in the terms of a proposed audit engagement then
auditor shall evaluate the possible effect of such changes.
4.3.b If the auditor believes the limitation will result in the auditor disclaiming an
opinion on the financial statements, the auditor shall not accept such a limited
engagement as an audit engagement, unless required by law or regulation to do
so.

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4.4 Acceptance of a Change in the Terms of the Audit Engagement

4.4.a The auditor shall not agree to a change in the terms of the audit engagement
where there is no reasonable justification for doing so.
4.4.b If, prior to completing the audit engagement, the auditor is requested to change
the audit engagement to an engagement that conveys a lower level of assurance,
the auditor shall determine whether there is reasonable justification for doing so.
4.4.c If the terms of the audit engagement are changed, the auditor and management
shall agree on and record the new terms of the engagement in an engagement
letter or other suitable form of written agreement.
4.4.d If the auditor is unable to agree to a change of the terms of the audit engagement
and is not permitted by management to continue the original audit engagement,
the auditor shall:
(i) Withdraw from the audit engagement where possible under applicable law
or regulation; and
(ii) Determine whether there is any obligation, either contractual or otherwise,
to report the circumstances to other parties, such as those charged with
governance, owners or regulators
4.5 Additional Considerations in Engagement Acceptance
4.5.a If financial reporting standards established by an authorised or recognised
standards setting organization are supplemented by law or regulation, the
auditor shall determine whether there are any conflicts between the financial
reporting standards and the additional requirements.
If such conflicts exist, the auditor shall discuss with management the nature of the
additional requirements and shall agree whether:
(i) The additional requirements can be met through additional disclosures in the
financial statements; or (ii) The description of the applicable financial reporting
framework in the financial statements can be amended accordingly.
If neither of the above actions is possible, the auditor shall determine whether it
will be necessary to modify the auditor’s opinion in accordance with SA 705
4.5.b In some cases, the law or regulation applicable to the entity prescribes the
layout or wording of the auditor’s report in a form or in terms that are
significantly different from the requirements of SAs. In these circumstances, the
auditor shall evaluate:
(a) Whether users might misunderstand the assurance obtained from the
audit of the financial statements and, if so,
(b) Whether additional explanation in the auditor’s report can mitigate
possible misunderstanding.

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If the auditor concludes that additional explanation in the auditor’s report cannot
mitigate possible misunderstanding, the auditor shall not accept the audit
engagement, unless required by law or regulation to do so.
An audit conducted in accordance with such law or regulation does not comply
with SAs. Accordingly, the auditor shall not include any reference within the
auditor’s report to the audit having been conducted in accordance with SAs
4.5.c Financial Reporting Framework Prescribed by Law or Regulation
If the auditor has determined that the financial reporting framework prescribed
by law or regulation would be unacceptable but for the fact that it is prescribed by
law or regulation, the auditor shall accept the audit engagement only if the
following conditions are present:
(i) Management agrees to provide additional disclosures in the financial
statements required to avoid the financial statements being misleading
(ii) The auditor’s report on the financial statements will incorporate an
Emphasis of Matter paragraph, drawing users’ attention to the additional
disclosures, in accordance with SA 706
(iii) The auditor’s opinion on the financial statements will not include phrases
such as “present fairly, in all material respects”, or “give a true and fair
view” unless required by law or regulation to do so.

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SA 220 QUALITY CONTROL FOR AN AUDIT OF FINANCIAL STATEMENTS

(EFFECTIVE ON OR AFTER APRIL 1, 2010)

S.N Particulars
1 Introduction
1.1 This Standard on Auditing (SA) deals with the specific responsibilities of the
auditor regarding quality control procedures for an audit of financial statements
1.2 This SA is premised on the basis that the firm is subject to SQC 1.
2 Objective:
The objective of the auditor is to implement quality control procedures at the
engagement level that provide the auditor with reasonable assurance that:
2.1 The audit complies with professional standards and regulatory and legal
requirements
2.2 The auditor’s report issued is appropriate in the circumstances
3 Definition
3.1 Engagement quality control review:
a process designed to provide an objective evaluation, before the report is issued,
of the significant judgments the engagement team made and the conclusions they
reached in formulating the report.
3.2 Engagement quality control reviewer:
(i) a partner,
(ii) other person in the firm,
(iii) suitably qualified external person, or
(iv) a team made up of such individuals, with sufficient and appropriate
experience and authority to objectively evaluate provided such team
should be headed by a member of the Institute
3.3 Engagement team:
All personnel performing an engagement, including any experts contracted by the
firm in connection with that engagement. The term “engagement team” excludes
individuals within the client’s internal audit function who provide direct
assistance on an audit engagement when the external auditor complies with the
requirements of SA 610.
3.4 Network Firms:
A firm or entity that belongs to a network. Network means a larger structure:
(i) That is aimed at cooperation, and

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(ii) That is clearly aimed at profit or cost-sharing or shares common

ownership, control or management, common quality control policies and
procedures, common business strategy, the use of a common brand name,
or a significant part of professional resources
4 Requirements
4.1 Leadership Responsibilities for Quality on Audits:
The engagement partner shall take responsibility for the overall quality on each
audit engagement to which that partner is assigned.
He shall deliver the following messages to the audit team clearly:
4.1.a Performing work that complies with professional standards and regulatory and
legal requirements
4.1.b Complying with the firm’s quality control policies and procedures as applicable
4.1.c Issuing auditor’s reports that are appropriate in the circumstances; and
4.1.d The engagement team’s ability to raise concerns without fear of reprisals
4.2 Relevant Ethical Requirements as discussed in Code of ethics issued by
the ICAI
4.2.a Throughout the audit engagement, the engagement partner shall remain alert,
through observation and making inquiries as necessary, for evidence of non-
compliance with relevant ethical requirements by members of the engagement
team
4.2.b If matters come to the engagement partner’s attention through the firm’s system
of quality control or otherwise that indicate that members of the engagement
team have not complied with relevant ethical requirements, the engagement
partner, in consultation with others in the firm, shall determine the
appropriate action
4.3 Independence
The engagement partner shall form a conclusion on compliance with
independence requirements that apply to the audit engagement. In doing so, the
engagement partner shall:
4.3.a Obtain relevant information from the firm and, where applicable, network firms,
to identify and evaluate circumstances and relationships that create threats to
independence
4.3.b Evaluate information on identified breaches, if any, of the firm’s independence
policies and procedures to determine whether they create a threat to
independence for the audit engagement

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4.3.c Take appropriate action to eliminate such threats or reduce them to an acceptable
level by applying safeguards, or, if considered appropriate, to withdraw from the
audit engagement, where withdrawal is permitted by law or
regulation.
4.4 Acceptance and Continuance of Client Relationships and Audit
Engagements:
Information such as the following assists the engagement partner in determining
whether the conclusions reached regarding the acceptance and
continuance of client relationships and audit engagements are appropriate:
4.4.a The integrity of the principal owners, key management and those charged with
governance of the entity
4.4.b Whether the engagement team is competent to perform the audit engagement
and has the necessary capabilities, including time and resources
4.4.c Whether the firm and the engagement team can comply with relevant ethical
requirements
4.4.d Significant matters that have arisen during the current or previous audit
engagement, and their implications for continuing the relationship
4.5 Assignment of Engagement Teams:
The engagement partner shall be satisfied that the engagement team, and any
auditor’s experts who are not part of the engagement team, collectively have the
appropriate competence and capabilities to:
4.5.a Perform the audit engagement in accordance with professional standards and
regulatory and legal requirements
4.5.b Enable an auditor’s report that is appropriate in the circumstances to be issued
4.6 Engagement Performance:
Following Measures must be taken to improve the engagement performance and
reduce audit risk to an acceptably low level:
4.6.a Direction:
Direction of the engagement team involves informing the members of the
engagement team of matters such as:
(i) Their responsibilities, including the need to comply with relevant ethical
requirements, and to plan and perform an audit with professional
skepticism
(ii) Responsibilities of respective partners where more than one partner is
involved in the conduct of an audit engagement

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(iii) The detailed approach to the performance of the engagement.

4.6.b Supervision:
It includes matters such as
(i) Tracking the progress of the audit engagement
(ii) Addressing significant matters arising during the audit engagement
(iii) Identifying matters for consultation or consideration by more experienced
engagement team members during the audit engagement
4.6.c Reviews:
Timely reviews of the following by the engagement partner at appropriate stages
during the engagement allow significant matters to be resolved on a timely basis
to the engagement partner’s satisfaction on or before the date of the auditor’s
report:
(i) Critical areas of judgment
(ii) Significant Risks identified as per SA 315
(iii) Other areas the engagement partner considers important
4.6.d Consultation:
It may be appropriate for the engagement team to consult outside the firm, for
example, where the firm lacks appropriate internal resources.
For E.g. They may take advantage of advisory services provided by other firms,
professional and regulatory bodies, or commercial organisations that provide
relevant quality control services.

4.6.e Engagement Quality Control Review:

For audits of financial statements of listed entities, and those other audit
engagements, if any, for which the firm has determined that an engagement
quality control review is required, the engagement partner shall determine that
engagement quality control reviewer has been appointed and not date auditor’s
report until such review is completed.
The reviewer shall:
(i) Discuss significant matters with the engagement partner
(ii) Review the financial statements and the proposed auditor’s report
(iii) Review of selected audit documentation relating to the significant
judgments the engagement team made
(iv) Evaluation of the conclusions reached in formulating the auditor’s report

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4.7 Differences of Opinion

If differences of opinion arise within the engagement team, with those consulted
or, where applicable, between the engagement partner and the engagement
quality control reviewer, the engagement team shall follow the firm’s policies and
procedures for dealing with and resolving differences of opinion
4.8 Monitoring
An effective system of quality control includes a monitoring process designed to
provide the firm with reasonable assurance that its policies and procedures
relating to the system of quality control are relevant, adequate, and operating
effectively.
4.9 Documentation
4.9.a Issues identified with respect to compliance with relevant ethical requirements
and how they were resolved
4.9.b Conclusions on compliance with independence requirements that apply to the
audit engagement
4.9.c Conclusions reached regarding the acceptance and continuance of client
relationships and audit engagements
4.9.d The nature and scope of, and conclusions resulting from, consultations
undertaken during the course of the audit engagement including
(i) The issue on which consultation was sought
(ii) The results of the consultation, including any decisions taken, the basis for
those decisions and how they were implemented
4.9.e Whether the engagement quality control review has been completed on or before
the date of the auditor’s report and findings of such review

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SA 230 AUDIT DOCUMENTATION

(EFFECTIVE ON OR AFTER APRIL 1, 2009)

S.N Particulars
1 Introduction
1.1 This Standard on Auditing (SA) deals with the auditor’s responsibility to prepare
audit documentation for an audit of financial statements
1.2 Nature and Purpose of Audit Documentation:
It acts as a basis for auditor’s conclusion and serves a number of additional
purposes as given below:
1.2.a Assisting the engagement team to plan and perform the audit.
1.2.b Enabling the engagement team to be accountable for its work
1.2.c Acts as an evidence that audit was done as per professional and legal standards
1.2.d Enabling the conduct of external inspections in accordance with applicable legal,
regulatory or other requirements
1.2.e Enabling the conduct of quality control reviews and inspections in accordance
with SQC 1 and SA 220.
2 Objective:
The objective of the auditor is to prepare documentation that provides:
2.1 A sufficient and appropriate record of the basis for the auditor’s report
2.2 Evidence that the audit was planned and performed in accordance with SAs and
applicable legal and regulatory requirements. Definitions
3 Definition
3.1 Audit documentation – The record of audit procedures performed, relevant
audit evidence obtained, and conclusions the auditor reached (terms such as
“working papers” or “workpapers” are also sometimes used).
4 Requirements
4.1 The auditor shall prepare audit documentation on a timely basis. Documentation
prepared after the audit work has been performed is likely to be less accurate
than documentation prepared at the time such work is performed.
4.2 Form, Content and Extent of Documentation:
The auditor shall prepare audit documentation that is sufficient to enable an
experienced auditor, having no previous connection with the audit, to
understand:

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4.2.a The nature, timing, and extent of the audit procedures performed to comply with
the SAs and applicable legal and regulatory requirements. In Documenting this,
the auditor shall record:
(i) Identifying characteristics of the specific items or matters tested
(ii) Who performed the audit work and the date such work was completed
(iii) Who reviewed the audit work performed and the date and extent of such
review
4.2.b The results of the audit procedures performed, and the audit evidence obtained
4.2.c Significant matters arising during the audit, the conclusions reached thereon, and
significant professional judgments made in reaching those conclusions
4.2.d document discussions of significant matters with management, those charged
with governance, and others, including the nature of the significant matters
discussed and when and with whom the discussions took place
4.2.e document how the auditor addressed the inconsistency to resolve the doubts as
identified during the course of audit.
4.3 Factors determining Form, Content and Extent of Audit Documentation:
4.3.a The size and complexity of the entity
4.3.b The nature of the audit procedures to be performed
4.3.c The identified risks of material misstatement
4.3.d The significance of the audit evidence obtained
4.3.e The nature and extent of exceptions identified
4.3.f The need to document a conclusion or the basis for a conclusion not readily
determinable from the documentation of the work performed or audit evidence
obtained
4.3.g The audit methodology and tools used
4.4 Departure from a Relevant Requirement:
If, in exceptional circumstances, the auditor judges it necessary to depart from a
relevant requirement in a SA, the auditor shall document how the alternative
audit procedures performed achieve the aim of that requirement, and the reasons
for the departure.
4.5 Matters Arising after the Date of the Auditor’s Report:
If, in exceptional circumstances, the auditor performs new or additional audit
procedures or draws new conclusions after the date of the auditor’s report, the
auditor shall document:
(a) The circumstances encountered;

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(b) The new or additional audit procedures performed, audit evidence

obtained, and conclusions reached, and their effect on the auditor’s report;
and
(c) When and by whom the resulting changes to audit documentation were
made and reviewed.
4.6 Assembly of the Final Audit File and Retention Period
4.6.a The auditor shall assemble the audit documentation in an audit file and complete
the administrative process of assembling the final audit file on a timely basis after
the date of the auditor’s report.
SQC 1 requires firms to establish policies and procedures for the timely
completion of the assembly of audit files. An appropriate time limit within which
to complete the assembly of the final audit file is ordinarily not more than 60
days after the date of the auditor’s report.
4.6.b After the assembly of the final audit file has been completed, the auditor shall not
delete or discard audit documentation of any nature before the end of its
retention period.
SQC 1 requires firms to establish policies and procedures for the retention of
engagement documentation. The retention period for audit engagements
ordinarily is no shorter than seven years from the date of the auditor’s report, or,
if later, the date of the group auditor’s report.
4.7 Ownership of Audit Documentation:
Standard on Quality Control (SQC) 1 issued by the Institute, provides that, unless
otherwise specified by law or regulation, audit documentation is the property of
the auditor.
He may at his discretion, make portions of, or extracts from, audit documentation
available to clients, provided such disclosure does not undermine the validity of
the work performed, or, in the case of assurance engagements, the independence
of the auditor or of his personnel

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SA 240 AUDITOR’S RESPONSIBILITIES IN RELATION TO FRAUD IN AN

AUDIT OF FINANCIAL STATEMENTS

S.N Particulars
1 Introduction
1.1 It expands on how SA 315, “Identifying and Assessing the Risks of Material
Misstatement Through Understanding the Entity and Its Environment,” and SA 330,
“The Auditor’s Responses to Assessed Risks,” are to be applied in
relation to risks of material misstatement due to fraud.
1.2 Although fraud is a broad legal concept, for the purposes of the SAs, the
auditor is concerned with fraud that causes a material misstatement in the financial
statements.
1.3 Two types of intentional misstatements are relevant to the auditor– misstatements
resulting from fraudulent financial reporting and misstatements resulting from
misappropriation of assets.
1.4 Although the auditor may suspect or, in rare cases, identify the occurrence of fraud,
the auditor does not make legal determinations of whether fraud has
actually occurred
1.5 The primary responsibility for the prevention and detection of fraud rests with
both those charged with governance of the entity and management
1.6 Owing to the inherent limitations of an audit, there is an unavoidable risk 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
1.7 The risk of not detecting a material misstatement resulting from fraud is higher
than the risk of not detecting one resulting from error
1.8 Auditor can be held liable for fraud only if it is proved that he was grossly negligent
while performing his duties.
2 Objective:
2.1 To identify and assess the risks of material misstatement in the financial statements
due to fraud.
2.2 To obtain sufficient appropriate audit evidence about the assessed risks of material
misstatement due to fraud, through designing and implementing appropriate
responses.
2.3 To deal appropriately with identified or suspected fraud.
3 Definition
3.1 Fraud - An intentional act by one or more individuals among management, those
charged with governance, employees, or third parties, involving the use of
deception to obtain an unjust or illegal advantage.

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3.2 Fraud risk factors - Events or conditions that indicate an incentive or pressure
to commit fraud or provide an opportunity to commit fraud.
4 Requirements
4.1 Professional Skepticism
4.1.a In accordance with SA 200, the auditor shall maintain professional skepticism
throughout the audit, recognizing the possibility that a material misstatement due
to fraud could exist, notwithstanding the auditor’s past experience of the honesty
and integrity of the entity’s management and those charged with governance
4.1.b Unless the auditor has reason to believe the contrary, the auditor may accept
records and documents as genuine. If conditions identified during the audit cause
the auditor to believe that a document may not be authentic, the auditor shall
investigate further by
 Confirming directly with the third party
 Using the work of an expert to assess the document’s authenticity
4.1.c Where responses to inquiries of management or those charged with
governance are inconsistent, the auditor shall investigate the inconsistencies.
4.2 Discussion among the engagement team:
SA 315 requires a discussion among the engagement team members especially
emphasizing on following matters:
4.2.a An exchange of ideas among engagement team members about how and where they
believe the entity’s financial statements may be susceptible to material
misstatement due to fraud.

4.2.b A consideration of the known external and internal factors affecting the entity that
may create an incentive or pressure for management or others to commit fraud,
provide the opportunity for fraud.

4.2.c A consideration of any unusual or unexplained changes in behaviour or lifestyle of

management or employees which have come to the attention of the engagement
team.

4.2.d A consideration of how an element of unpredictability will be incorporated into

the nature, timing and extent of the audit procedures to be performed.

4.2.e A consideration of any allegations of fraud that have come to the auditor’s attention.

4.3 Risk Assessment Procedures and Related Activities:

While performing risk assessment procedures as discussed in SA 315, the auditor
shall perform the procedures given in following paragraphs to obtain information
for use in identifying the risks of material misstatement due to fraud.

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4.3.a Inquiries of Management regarding:

(i) Management’s assessment of the risk that the financial statements may be
materially misstated due to fraud
(ii) Management’s process for identifying and responding to the risks of fraud in
the entity, including any specific risks of fraud that management has
identified or that have been brought to its attention
(iii) Management’s communication, if any, to those charged with governance
regarding its processes for identifying and responding to the risks of fraud in
the entity
(iv) Management’s communication, if any, to employees regarding its views on
business practices and ethical behaviour
(v) Whether they have knowledge of any actual, suspected or alleged fraud
affecting the entity
4.3.b Inquiries of Internal Auditor: In accordance with SA 610 following inquiries
can be done
(i) The procedures performed, if any, by the internal auditors during the year to
detect fraud
(ii) Whether management has satisfactorily responded to any findings resulting
from those procedures
4.3.c Inquiries of Those Charged With Governance:
(i) How those charged with governance exercise oversight of management’s
processes for identifying and responding to the risks of fraud in the entity
and the internal control that management has established to mitigate these
risks.
(ii) Whether they have knowledge of any actual, suspected or alleged fraud
affecting the entity.
4.3.d Unusual or Unexpected Relationship Identified:
The auditor shall evaluate whether unusual or unexpected relationships that have
been identified in performing analytical procedures, including those related to
revenue accounts, may indicate risks of material misstatement due to fraud (SA
315)
4.3.e Other Information:
The auditor shall consider whether other information obtained by the auditor
indicates risks of material misstatement due to fraud.

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4.3.f Evaluation of fraud risk factors:

The auditor shall evaluate whether the information obtained from the other risk
assessment procedures and related activities performed indicates that one or more
fraud risk factors are present.
While fraud risk factors may not necessarily indicate the existence of fraud,
however, they may indicate risks of material misstatement due to fraud.
4.4 Responses to the assessed Risks of Material Misstatement
4.4.a Responses to the assessed risks of material misstatement at Financial
Statement Level:
(i) Assign and supervise personnel taking account of the knowledge, skill and
ability of the individuals to be given significant engagement responsibilities
and the auditor’s assessment of the risks of material misstatement due to
fraud for the engagement.
(ii) Evaluate whether the selection and application of accounting policies by the
entity, particularly those related to subjective measurements and complex
transactions, may be indicative of fraudulent financial reporting resulting
from management’s effort to manage earnings.
(iii) Incorporate an element of unpredictability in the selection of the nature,
timing and extent of audit procedures.
4.4.b Responses to the assessed risks of material misstatement at assertion level:
(i) The nature, timing and extent of audit procedures to be performed may need
to be changed to obtain audit evidence that is more reliable and relevant or
to obtain additional corroborative information
(ii) For significant and unusual transactions, particularly those occurring at or
near year-end, investigating the possibility of related parties and the sources
of financial resources supporting the transactions
(iii) Conducting interviews of personnel involved in areas where a risk of
material misstatement due to fraud has been identified, to obtain their
insights about the risk and whether, or how, controls address the risk
(iv) Seeking additional audit evidence from sources outside of the entity being
audited.
(v) Performing computer-assisted techniques, such as data mining to test for
anomalies in a population
4.4.c Responses Related to Risk of Management Override of Control: Management is in a
unique position to perpetrate fraud because of management’s ability to manipulate
accounting records and prepare fraudulent financial statements by overriding
controls that otherwise appear to be operating effectively.
Irrespective of the auditor’s assessment of the risks of management override of
controls, the auditor shall design and perform audit procedures to:

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(i) Test the appropriateness of journal entries by

 Making inquiries of individuals involved in the financial reporting process
about inappropriate or unusual activity relating to the processing of journal
entries and other adjustments.
 Selecting journal entries and other adjustments made at the end of a
reporting period.
 Considering the need to test journal entries and other adjustments
throughout the period.
(ii) Review accounting estimates by
 Evaluating whether there are circumstances leading to biased
recognition.
 Verifying whether the judgments and decisions are individually
reasonable.
 Retrospectively Reviewing estimates reflected in the prior year.
4.4.c Evaluation of audit Evidence:
When the auditor identifies a misstatement, the auditor shall evaluate whether such
a misstatement is indicative of fraud. If there is such an indication, the auditor shall
evaluate the implications of the misstatement in relation to other aspects of the
audit, particularly the reliability of management representations.
4.5 Auditor is unable to continue the engagement:
If, as a result of a misstatement resulting from fraud or suspected fraud, the auditor
encounters exceptional circumstances that bring into question the auditor’s ability
to continue performing the audit, the auditor shall:
4.5.a Determine the professional and legal responsibilities applicable in the
circumstances, including whether there is a requirement for the auditor to report to
the person or persons who made the audit appointment or, in some cases, to
regulatory authorities.
4.5.b Consider whether it is appropriate to withdraw from the engagement, where
withdrawal from the engagement is legally permitted.
4.5.c If the auditor withdraws:
Discuss with the appropriate level of management and those charged with
governance, the auditor’s withdrawal from the engagement and the reasons for the
withdrawal and Fulfil professional and legal responsibilities applicable in the
circumstances.
4.6 Written Representation:
The auditor shall obtain written representations from management and, where
applicable, those charged with governance that:

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4.6.a They acknowledge their responsibility for the design, implementation and
maintenance of internal control to prevent and detect fraud.
4.6.b They have disclosed to the auditor the results of management’s assessment of the
risk that the financial statements may be materially misstated as a result of fraud.
4.6.c They have disclosed to the auditor their knowledge of fraud or suspected
fraud affecting the entity.
4.6.d They have disclosed to the auditor their knowledge of any allegations of fraud, or
suspected fraud, affecting the entity’s financial statements.
4.7 Communication to Management and those charged with Governance:
4.7.a If the auditor has identified a fraud or has obtained information that indicates that a
fraud may exist, the auditor shall communicate these matters on a timely basis to
the appropriate level of management in order to inform those with primary
responsibility for the prevention and detection of fraud of matters relevant to their
responsibilities.
4.7.b If the auditor suspects fraud involving management, the auditor shall communicate
these suspicions to those charged with governance and discuss with them the
nature, timing and extent of audit procedures necessary to complete the audit.
4.8 Communication to regulatory authorities:
If the auditor has identified or suspects a fraud, the auditor shall determine
whether there is a responsibility to report the occurrence or suspicion to a party
outside the entity. The auditor’s legal responsibilities may override the duty of
confidentiality in such circumstances.
4.9 Documentation- Maintain records for following matters:
4.9.a The identified and assessed risks of material misstatement due to fraud at the
financial statement level and at the assertion level
4.9.b The results of the audit procedures, including those designed to address the risk of
management override of controls
4.9.c Communications about fraud made to management, those charged with
governance, regulators and others

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SA 250 CONSIDERATION OF LAWS AND REGULATIONS IN AN AUDIT OF

FINANCIAL STATEMENTS
(Effective for audits of financial statements for periods beginning on or after April 1,
2009)

S.N Particulars
1 Introduction
1.1 This SA does not apply to other assurance engagements in which the auditor
is specifically engaged to test and report separately on compliance with specific
laws or regulations.
1.2 The effect on the financial statements of laws and regulations varies
considerably.
The provisions of some laws or regulations have a direct effect on the financial
statements in that they determine the reported amounts and disclosures in an
entity’s financial statements.
1.3 Other laws or regulations are to be complied with by management or set the
provisions under which the entity is allowed to conduct its business but do not
have a direct effect on an entity’s financial statements. However, Non- compliance
with laws and regulations may result in fines, litigation or other consequences for
the entity that may have a material effect on the financial
statements.
1.4 The requirements in this SA are designed to assist the auditor in identifying
material misstatement of the financial statements due to non-compliance with
laws and regulations. However, the auditor is not responsible for preventing
noncompliance and cannot be expected to detect non-compliance with all laws
and regulations.
2 Objective
2.1 To obtain sufficient appropriate audit evidence regarding compliance with the
provisions of those laws and regulations generally recognised to have a direct
effect on the determination of material amounts and disclosures in the financial
statements.
2.2 To obtain sufficient appropriate audit evidence regarding compliance with the
provisions of those laws and regulations generally recognised to have a direct
effect on the determination of material amounts and disclosures in the financial
statements.
2.3 To respond appropriately to non-compliance or suspected non-compliance
with laws and regulations identified during the audit.

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3 Definition
3.1 Non-Compliance- Acts of omission or commission by the entity, either intentional
or unintentional, which are contrary to the prevailing laws.
Non-compliance does not include personal misconduct (unrelated to the business
activities of the entity) by those charged with governance, management or
employees of the entity.
4 Requirements
4.1 Risk Assessment Procedure:
As part of obtaining an understanding of the entity and its environment in
accordance with SA 315, the auditor shall obtain a general understanding of
4.1.a The legal and regulatory framework applicable to the entity and the
industry or sector in which the entity operates e.g.
i) Update the understanding of those laws and regulations that directly
determine the reported amounts and disclosures in the financial
statements.
ii) Inquire of management as to other laws or regulations that may be
expected to have a fundamental effect on the operations of the entity.
4.1.b How the entity is complying with that framework e.g.
i) Inquire of management concerning the entity’s policies and procedures
regarding compliance with laws and regulations
ii) Inquire of management regarding the policies or procedures adopted for
identifying, evaluating and accounting for litigation claims
4.2 The auditor shall obtain sufficient appropriate audit evidence regarding
compliance with the provisions of those laws and regulations generally
recognised to have a direct effect on the determination of material amounts and
disclosures in the financial statements:
4.3 The auditor shall perform the following audit procedures to help identify
instances of non-compliance with other laws and regulations that may have a
material effect on the financial statements

4.3.a Inquiring of management and, where appropriate, those charged with

governance, as to whether the entity is in compliance with such laws and
regulations

4.3.b Inspecting correspondence, if any, with the relevant licensing or regulatory

authorities.

4.4 During the audit, the auditor shall remain alert to the possibility that other
audit procedures applied may bring instances of non-compliance or
suspected non-compliance with laws and regulations to the auditor’s
attention For example, such audit procedures may include:

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 Reading minutes;
 Inquiring of the entity’s management and in-house legal counsel or
external legal counsel concerning litigation, claims and assessments; and
 Performing substantive tests of details of classes of transactions, account
balances or disclosures

4.5 The auditor shall request management and, where appropriate, those charged
with governance to provide written representations that all known instances of
non-compliance or suspected non-compliance with laws and regulations whose
effects should be considered when preparing financial statements have been
disclosed to the auditor
4.6 Audit Procedures When Non-Compliance is Identified or Suspected:
4.6.a If the auditor becomes aware of information concerning an instance of
noncompliance or suspected non-compliance with laws and regulations, the
auditor shall obtain:
a) An understanding of the nature of the act and the circumstances in which
it has occurred
b) urther information to evaluate the possible effect on the financial
statements
4.6.b The auditor shall discuss the matter with management and, where appropriate,
those charged with governance. If management or, as appropriate, those charged
with governance do not provide sufficient information that supports that the
entity is in compliance with laws and regulations then the auditor shall consider
the need to obtain legal advice.

4.6.c If sufficient information about suspected non-compliance cannot be obtained, the

auditor shall evaluate the effect of the lack of sufficient appropriate audit
evidence on the auditor’s opinion

4.6.d The auditor shall evaluate the implications of non-compliance in relation to other
aspects of the audit, including the auditor’s risk assessment and the reliability of
written representations, and take appropriate action

4.7 Reporting of Identified or Suspected Non-Compliance

4.7.a Reporting Non-Compliance to Those Charged with Governance:

The auditor shall communicate with those charged with governance matters
involving noncompliance with laws and regulations that come to the auditor’s
attention during the course of the audit.
If it is believed to be intentional and material then auditor shall communicate the
matter to those charged with governance as soon as practicable.

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4.7.b If the auditor suspects that management or those charged with governance are
involved in non-compliance, the auditor shall communicate the matter to the next
higher level of authority at the entity, if it exists, such as an audit committee or
supervisory board.
Where no higher authority exists, or if the auditor believes that the
communication may not be acted upon or is unsure as to the person to whom to
report, the auditor shall consider the need to obtain legal advice

4.7.c Reporting Non-Compliance in the Auditor’s Report on the Financial

Statements:
i) If the auditor concludes that the non-compliance has a material effect on
the financial statements, and has not been adequately reflected in the
financial statements, the auditor shall, in accordance with SA 705, express
a qualified or adverse opinion on the financial statements.
ii) If the auditor is precluded by management or those charged with
governance from obtaining sufficient appropriate audit evidence to
evaluate whether non-compliance that may be material to the financial
statements has, or is likely to have, occurred, the auditor shall express a
qualified opinion or disclaim an opinion on the financial statements on the
basis of a limitation on the scope of the audit in accordance with SA 705

4.7.d Reporting Non-Compliance to Regulatory and Enforcement Authorities:

If the auditor has identified or suspects non-compliance with laws and
regulations, the auditor shall determine whether the auditor has a responsibility
to report the identified or suspected non-compliance to parties outside the entity

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SA 299 RESPONSIBILITY OF JOINT AUDITOR

S.N. Particulars
1 Introduction
1.1 This Standard lays down the principles for effective conduct of joint audit to
achieve the overall objectives of the auditor as laid down in SA 200 “Overall
Objectives of the Independent Auditor.
1.2 In addition to the requirements enunciated in this Standard, the joint auditors
also need to comply with all the relevant requirements of other applicable
Standards on Auditing
1.3 This Standard does not deal with the relationship between a principal auditor
who is appointed to report on the financial statements of an entity and another
auditor who is appointed to report on the financial statements of one or
morecomponent.

2 Objective

2.1 To identify the distinct areas of work and coverage thereof by each joint auditor.

2.2 To identify individual responsibility and joint responsibility of the joint auditors
in relation to audit.

3 Definition

3.1 A joint audit is an audit of financial statements of an entity by two or more

auditors appointed with the objective of issuing the audit report. Such auditors
are described as joint auditors

4 Requirements

4.1 Audit Planning, Risk Assessment and Allocation of Work

4.1.a The engagement partner and other key members of the engagement team from
each of the joint auditors shall be involved in planning the audit.

4.1.b The joint auditors shall jointly establish an overall audit strategy that sets the
scope, timing and direction of the audit, and that guides the development of the
audit plan

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4.1.c Prior to the commencement of the audit, the joint auditors shall discuss and
develop a joint audit plan. In developing the joint audit strategy, the joint
auditors shall:
(a) Identify division of audit areas and common audit areas amongst the joint
auditors that define the scope of the work of each joint auditor
(b) Ascertain the reporting objectives of the engagement to plan the timing of
the audit and the nature of the communications required.
(c) Consider and communicate among all joint auditors the factors that, in
their professional judgment, are significant in directing the engagement
team’s efforts
(d) Consider the results of preliminary engagement activities and, where
applicable, whether knowledge gained on other or similar engagements
performed earlier by the respective engagement partner(s) for the entity
is relevant.
(e) Ascertain the nature, timing and extent of resources necessary to perform
the engagement.
4.1.d Risks of material misstatement need to be considered and assessed by each of the
joint auditors and shall be communicated to other joint auditors, and
documented, whether pertaining to the overall financial statements level or to
the area of allocation among the other joint auditors.
4.1.e The joint auditors shall discuss and document the nature, timing, and the extent of
the audit procedures for common and specific allotted areas of audit to be
performed by each of the joint auditors and the same shall be communicated to
those charged with governance.
4.1.f The joint auditors shall obtain common engagement letter and common
management representation letter.
4.2 Responsibility division
4.2.a In respect of audit work divided among the joint auditors, each joint auditor
shall be responsible only for the work allocated to such joint auditor including
proper execution of the audit procedures.
It shall be the responsibility of each joint auditor to determine the nature, timing
and extent of audit procedures to be applied in relation to the areas of work
allocated to said joint auditor.
It is the individual responsibility of each joint auditor to study and evaluate the
prevailing system of internal control and assessment of risk relating to the
areas of work allocated to said joint auditor.

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4.2.b All the joint auditors shall be jointly and severally responsible for:
(i) the audit work which is not divided among the joint auditors and is carried
out by all joint auditors.
(ii) decisions taken by all the joint auditors under audit planning in respect of
common audit areas concerning the nature, timing and extent of the audit
procedures to be performed by each of the joint auditors.
(iii) matters which are brought to the notice of the joint auditors by any one of
them and on which there is an agreement among the joint auditors.
(iv) examining that the financial statements of the entity comply with the
requirements of the relevant statutes.
(v) presentation and disclosure of the financial statements as required by the
applicable financial reporting framework.
(vi) ensuring that the audit report complies with the requirements of the
relevant statutes, the applicable Standards on Auditing and the other
relevant pronouncements issued by ICAI.
4.3 Co-ordination amongst joint auditor
4.3.a Where, in the course of the audit, a joint auditor comes across matters which are
relevant to the areas of responsibility of other joint auditors and which deserve
their attention, or which require disclosure or require discussion with, or
application of judgment by other joint auditors, the said joint auditor shall
communicate the same to all the other joint auditors in writing prior to the
completion of the audit.
4.3.b Each joint auditor is entitled to assume that:
(i) The other joint auditors have carried out their part of the audit work and
the work has actually been performed in accordance with the Standards
on Auditing issued by the Institute of Chartered Accountants of India.
(ii) The other joint auditors have brought to said joint auditor’s notice any
departure from applicable financial reporting framework or significant
observations that are relevant to their responsibilities noticed in the
course of the audit.
4.3.c Where financial statements of a division/branch are audited by one of the joint
auditors, the other joint auditors are entitled to proceed on the basis that such
financial statements comply with all the legal and regulatory requirements and
present a true and fair view of the state of affairs and of the results ofoperations
of the division/branch concerned.

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4.3.d Before finalizing their audit report, the joint auditors shall discuss and
communicate with each other their respective conclusions that would form the
content of the audit report.
4.4 Reporting Responsibilities
4.4.a The joint auditors are required to issue common audit report, however, where
the joint auditors are in disagreement with regard to the opinion or any matters
to be covered by the audit report, they shall express their opinion in a separate
audit report.
It is important to note that each joint auditor with a differing opinion would be
required to issue a separate audit report and the reference to the other joint
auditors report would be required to be made by each such joint auditor in their
respective audit report.
4.4.b A joint auditor is not bound by the views of the majority of the joint auditors
regarding the opinion or matters to be covered in the audit report and shall
express opinion formed by the said joint auditor in separate audit report in
case of disagreement
4.4.c In such circumstances, the audit report(s) issued by the joint auditor(s) shall
make a reference to the separate audit report(s) issued by the other joint
auditor(s). Further, separate audit report shall also make reference to the audit
report issued by other joint auditors. Such reference shall be made under the
heading “Other Matter Paragraph” as per SA 706(Revised), “Emphasis of Matter
Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report.

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SA 300 Planning an Audit of Financial Statements (Effective for audits of

financial statements for periods beginning
on or after April 1, 2008)

S.N Particulars

1 Introduction

1.1 This Standard on Auditing (SA) deals with the auditor’s responsibility to plan an
audit of financial statements.

1.2 This SA is framed in the context of recurring audits

1.3 Additional considerations in initial audit engagements are separately identified.

2 Objective

2.1 The objective of the auditor is to plan the audit so that it will be performed in an
effective manner

3 Definition- (no definition)

4 Requirements

4.1 Involvement of Key Engagement Team Members:

The engagement partner and other key members of the engagement team shall
be involved in planning the audit, including planning and participating in the
discussion among engagement team members.

4.2 Preliminary Engagement Activities:

The auditor shall undertake the following activities at the beginning of the
current audit engagement:

4.2.1 Performing procedures required by SA 220, “Quality Control for an Audit of

Financial Statements” regarding the continuance of the client relationship and
the specific audit engagement.

4.2.2 Evaluating compliance with ethical requirements, including independence, as

required by SA 220

4.2.3 Establishing an understanding of the terms of the engagement, as required by SA

210

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4.3 Planning Activities:

4.3.1 The auditor shall establish an overall audit strategy that sets the scope, timing
and direction of the audit, and that guides the development of the audit plan.
In establishing the overall audit strategy, the auditor shall:
(a) Identify the characteristics of the engagement that define its scope
(b) Ascertain the reporting objectives of the engagement to plan the timing of
the audit and the nature of the communications required
(c) Consider the factors that, in the auditor’s professional judgment, are
significant in directing the engagement team’s efforts
(d) Consider the results of preliminary engagement activities and, where
applicable, whether knowledge gained on other engagements performed
by the engagement partner for the entity is relevant
(e) Ascertain the nature, timing and extent of resources necessary to perform
the engagement
4.3.2 The auditor shall develop an audit plan that shall include a description of:
(a) The nature, timing and extent of planned risk assessment procedures, as
determined under SA 315 “Identifying and Assessing the Risks of Material
Misstatement through Understanding the Entity and Its Environment
(b) The nature, timing and extent of planned further audit procedures at the
assertion level, as determined under SA 330 “The Auditor’s Responses to
Assessed Risks
(c) Other planned audit procedures that are required to be carried out so that
the engagement complies with SAs.
4.4 The auditor shall update and change the overall audit strategy and the audit
plan as necessary during the course of the audit.
4.5 The auditor shall plan the nature, timing and extent of direction and
supervision of engagement team members and the review of their work.
4.6 Additional Considerations in Initial Audit Engagements:
The auditor shall undertake the following activities prior to starting an initial
audit:
4.6.1 Performing procedures required by SA 220 regarding the acceptance of the client
relationship and the specific audit engagement.
4.6.2 Communicating with the predecessor auditor, where there has been a change of
auditors, in compliance with relevant ethical requirements

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SA 315 Identifying and Assessing the Risks of Material Misstatement Through

Understanding the Entity and its Environment (Effective for audits of financial
statements for periods beginning on or after April 1, 2008)

S.N Particulars
1 Introduction
1.1 This Standard on Auditing (SA) deals with the auditor’s responsibility to identify
and assess the risks of material misstatement in the financial statements,
through understanding the entity and its environment, including
the entity’s internal control.
2 Objective
2.1 The objective of the auditor is to identify and assess the risks of material
misstatement, whether due to fraud or error, at the financial statement and
assertion levels,
through understanding the entity and its environment,
including the entity’s internal control,
thereby providing a basis for designing and implementing responses to the
assessed risks of material misstatement.
This will help the auditor to reduce the risk of material misstatement to an
acceptably low level

3 Definition
3.1 Assertions – Representations by management, explicit or otherwise, that are
embodied in the financial statements, as used by the auditor to consider the
different types of potential misstatements that may occur
3.2 Risk assessment procedures – The audit procedures performed to obtain an
understanding of the entity and its environment, including the entity’s internal
control, to identify and assess the risks of material misstatement,
whether due to fraud or error, at the financial statement and assertion levels.
3.3 Significant Risks: An identified and assessed risk of material misstatement
that, in the auditor’s judgment, requires special audit consideration.
4 Requirements
4.1 The auditor shall perform risk assessment procedures to provide a basis for the
identification and assessment of risks of material misstatement at the financial
statement and assertion levels

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4.2 Risk assessment procedures by themselves, however, do not provide

sufficient appropriate audit evidence on which to base the audit opinion.
4.3 The risk assessment procedures shall include the following:
4.3.1 Inquiries of management, of appropriate individuals within the internal audit
function (if the function exists), and of others within the entity who in the
auditor’s judgment may have information that is likely to assist in identifying
risks of material misstatement due to fraud or error.
4.3.2 Analytical procedures
4.3.3 Observation and inspection
4.4 The auditor shall consider whether information obtained from the auditor’s
client acceptance or continuance process is relevant to identifying risks of
material misstatement
4.5 Where the engagement partner has performed other engagements for the
entity, the engagement partner shall consider whether information obtained is
relevant to identifying risks of material misstatement.
4.6 When the auditor intends to use information obtained from the auditor’s
previous experience with the entity and from audit procedures performed in
previous audits, the auditor shall determine whether changes have occurred
since the previous audit that may affect its relevance to the current audit
4.7 The engagement partner and other key engagement team members shall discuss
the susceptibility of the entity’s financial statements to material misstatement.
The engagement partner shall determine which matters are to be
communicated to engagement team members not involved in the discussion.
4.8 In order to provide a basis for further audit procedures the auditor shall:
4.8.1 Identify risks throughout the process of obtaining an understanding of the entity
and its environment, including relevant controls that relate to the risks, and by
considering the classes of transactions, account balances, and
disclosures in the financial statements.
4.8.2 Assess the identified risks, and evaluate whether they relate more pervasively
to the financial statements as a whole and potentially affect many assertions.
4.8.3 Relate the identified risks to what can go wrong at the assertion level, taking
account of relevant controls that the auditor intends to test;

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4.8.4 Consider the likelihood of misstatement, including the possibility of multiple

misstatements, and whether the potential misstatement is of a magnitude that
could result in a material misstatement
4.9 Understanding the entity and its environment:
The auditor shall obtain an understanding of the following:
4.9.1 Relevant industry, regulatory, and other external factors including the
applicable financial reporting framework
4.9.2 The nature of the entity, including:
(i) its operations;
(ii) its ownership and governance structures;
(iii) the types of investments that the entity is making and plans to make,
including investments in special-purpose entities; and
the way that the entity is structured and how it is financed

4.9.3 The entity’s selection and application of accounting policies, including the
reasons for changes thereto. The auditor shall evaluate whether the entity’s
accounting policies are appropriate for its business and consistent with the
applicable financial reporting framework and accounting policies used in the
relevant industry.

4.9.4 The entity’s objectives and strategies, and those related business risks that may
result in risks of material misstatement.

4.9.5 The measurement and review of the entity’s financial performance.

4.10 Components of Internal Control:

The division of internal control into the following five components provides a
useful framework for auditors to consider how different aspects of an entity’s
internal control may affect the audit:

4.10.1 The control environment

The control environment includes:
(i) the governance and management functions and
(ii) the attitudes, awareness, and actions of those charged
with governance and management.

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4.10.2 The entity’s risk assessment process:

The auditor shall obtain an understanding of whether the entity has a process for:
(a) Identifying business risks relevant to financial reporting objectives;
(b) Estimating the significance of the risks;
(c) Assessing the likelihood of their occurrence; and
(d) Deciding about actions to address those risks.
The entity’s risk assessment process forms the basis for the risks to be managed.
If that process is appropriate, it would assists the auditor in identifying risks of
material misstatement. Whether the entity’s risk assessment process is
appropriate to the circumstances is a matter of judgment.
4.10.3 The information system, including the related business processes, relevant to
financial reporting, and communication
The auditor shall obtain an understanding of the information system, including
the related business processes, relevant to financial reporting, including the
following are as:
a) The classes of transactions in the entity’s operations that are significant to
the financial statements;
b) The procedures by which those transactions are initiated, recorded,
processed, corrected as necessary, transferred to the general ledger and
reported in the financial statements
c) The related accounting records, supporting information and specific
accounts in the financial statements that are used to initiate, record,
process and report transactions;
4.10.4 Control activities
Control activities, whether within IT or manual systems, have various objectives
and are applied at various organisational and functional levels.
The auditor shall obtain an understanding of control activities relevant to the
audit, which the auditor considers necessary to assess the risks of material
misstatement. An audit requires an understanding of only those control
activities related to significant class of transactions, account balance, and
disclosure in the financial statements.
4.10.5 Monitoring of controls
Monitoring of controls is a process to assess the effectiveness of internal control
performance over time.
(i) Helps in assessing the effectiveness of controls on a timely basis:
(ii) Management accomplishes through ongoing activities, separate
evaluations etc.:

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4.11 Risks that require special audit consideration

4.11.1 Whether the risk is a risk of fraud.
4.11.2 Whether the risk is related to recent significant economic, accounting, or other
developments like changes in regulatory environment, etc., and, therefore,
requires specific attention.
4.11.3 The complexity of transactions.
4.11.4 Whether the risk involves significant transactions with related parties.
4.11.5 The degree of subjectivity in the measurement of financial information related to
the risk, especially those measurements involving a wide range of
measurement uncertainty.
4.11.6 Whether the risk involves significant transactions that are outside the normal
course of business for the entity, or that otherwise appear to be unusual.

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SA 320 Materiality in Planning and Performing an Audit (Effective for audits

of financial statements for periods beginning on or after April 1, 2010)

S.N Particulars
1 Introduction
1.1 This Standard on Auditing (SA) deals with the auditor’s responsibility to apply
the concept of materiality in planning and performing an audit of financial
statements.
SA 450, explains how materiality is applied in evaluating the effect of identified
misstatements on the audit and of uncorrected misstatements, if any, on the
financial statements
1.2 The auditor’s determination of materiality is a matter of professional judgment,
and is affected by the auditor’s perception of the financial information needs of
users of the financial statements. In this context, it is reasonable for the auditor
to assume that users:
a) Have a reasonable knowledge of business and economic activities and
accounting and a willingness to study the information in the financial
statements with reasonable diligence
b) Understand that financial statements are prepared, presented and audited
to levels of materiality
c) Recognize the uncertainties inherent in the measurement of amounts
based on the use of estimates, judgment and the consideration of future
events;
d) Make reasonable economic decisions on the basis of the information in the
financial statements
1.3 The materiality determined when planning the audit does not necessarily
establish an amount below which uncorrected misstatements, individually or in
aggregate, will always be evaluated as immaterial.
2 Objective
2.1 The objective of the auditor is to apply the concept of materiality appropriately
in planning and performing the audit.
3 Definition
3.1 Performance Materiality: For purposes of the SAs, performance materiality
means the amount or amounts set by the auditor at less than materiality
for the financial statements as a whole to reduce to an appropriately low

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level the probability that the aggregate of uncorrected and undetected

misstatements exceeds materiality for the financial statements as a whole.
If applicable, performance materiality also refers to the amount or
amounts set by the auditor at less than the materiality level or levels for
particular classes of transactions, account balances or disclosures
4 Requirements
4.1 Determining Materiality and Performance Materiality when Planning the
Audit
4.1.1 When establishing the overall audit strategy, the auditor shall determine
materiality for the financial statements as a whole.
4.1.2 If, in the specific circumstances of the entity, the auditor shall also determine
the materiality level or levels to be applied to those particular classes of
transactions, account balances or disclosures.
4.1.3 Determining materiality involves the exercise of professional judgment. A
percentage is often applied to a chosen benchmark as a starting point in
determining materiality for the financial statements as a whole.
4.1.4 Determining a percentage to be applied to a chosen benchmark involves the
exercise of professional judgment.
There is a relationship between the percentage and the chosen benchmark, such
that a percentage applied to profit before tax from continuing operations will
normally be higher than a percentage applied to total revenue. For example, the
auditor may consider five percent of profit before tax from continuing operations
to be appropriate for a profit oriented entity in a manufacturing industry, while
the auditor may consider one percent of total revenue or total expenses to be
appropriate for a not-for-profit entity. Higher or lower percentages, however,
may be deemed appropriate in different circumstances.
4.2 Performance Materiality
4.2.1 The auditor shall determine performance materiality for purposes of assessing
the risks of material misstatement and determining the nature, timing and
extent of further audit procedure.
4.2.2 Planning the audit solely to detect individually material misstatements overlooks
the fact that the aggregate of individually immaterial misstatements may cause
the financial statements to be materially misstated, and leaves no
margin for possible undetected misstatements.

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4.2.3 Performance materiality (which, as defined, is one or more amounts) is set to

reduce to an appropriately low level the probability that the aggregate of
uncorrected and undetected misstatements in the financial statements
exceeds materiality for the financial statements as a whole.

4.2.4 Similarly, performance materiality relating to a materiality level determined for

a particular class of transactions, account balance or disclosure is set to reduce to
an appropriately low level the probability that the aggregate of uncorrected and
undetected misstatements in that particular class of transactions, account
balance or disclosure exceeds the materiality level for
that particular class of transactions, account balance or disclosure

4.2.5 The determination of performance materiality is not a simple mechanical

calculation and involves the exercise of professional judgment.

4.2.6 It is affected by the auditor’s understanding of the entity, updated during the
performance of the risk assessment procedures; and the nature and extent of
misstatements identified in previous audits and thereby the auditor’s
expectations in relation to misstatements in the current period.

4.3 Revision as the Audit Progresses

4.3.1 The auditor shall revise materiality for the financial statements as a whole (and,
if applicable, the materiality level or levels for particular classes of transactions,
account balances or disclosures) in the event of becoming aware of information
during the audit that would have caused the auditor to
have determined a different amount (or amounts) initially.

4.3.2 If the auditor concludes that a lower materiality for the financial statements as a
whole (and, if applicable, materiality level or levels for particular classes of
transactions, account balances or disclosures) than that initially determined is
appropriate, the auditor shall determine whether it is necessary to revise
performance materiality, and whether the nature, timing and extent of the
further audit procedures remain appropriate

4.3.3 For example, if during the audit it appears as though actual financial results are

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likely to be substantially different from the anticipated period end financial

results that were used initially to determine materiality for the financial
statements as a whole, the auditor revises that materiality.

4.4 Documentation
The audit documentation shall include the following amounts and the factors
considered in their determination:

4.4.1 Materiality for the financial statements as a whole

4.4.2 If applicable, the materiality level or levels for particular classes of

transactions, account balances or disclosures

4.4.3 Performance materiality

4.4.4 Any revision of (a)-(c) as the audit progressed

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SA 500 Audit Evidence (This SA is effective for audits of financial statements for
periods beginning on or after April 1, 2009)

S.N Particulars
1 Introduction
1.1 This Standard on Auditing (SA) explains what constitutes audit evidence in an
audit of financial statements, and deals with the auditor’s responsibility to
design and perform audit procedures to obtain sufficient appropriate audit
evidence to be able to draw reasonable conclusions on which to base the
auditor’s opinion.
1.2 This SA is applicable to all the audit evidence obtained during the course of the
audit. Other SAs deal with specific aspects of the audit and with specific
procedures to be applied in the given situation.
2 Objective
2.1 The objective of the auditor is to design and perform audit procedures in such a
way as to enable the auditor to obtain sufficient appropriate audit evidence to
be able to draw reasonable conclusions on which to base the auditor’s opinion
3 Definition
3.1 Audit evidence – Information used by the auditor in arriving at the conclusions
on which the auditor’s opinion is based. Audit evidence includes both
information contained in the accounting records underlying the financial
statements and other information.

3.2 Sufficiency (of audit evidence) – The measure of the quantity of audit
evidence. The quantity of the audit evidence needed is affected by the auditor’s
assessment of the risks of material misstatement and also by the quality of
such audit evidence

3.3 Appropriateness (of audit evidence) – The measure of the quality of audit

evidence; that is, its relevance and its reliability in providing support for the
conclusions on which the auditor’s opinion is based.

3.4 Management’s expert – An individual or organisation possessing expertise in a

field other than accounting or auditing, whose work in that field is used by
theentity to assist the entity in preparing the financial statements

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4 Requirements
4.1 The auditor shall design and perform audit procedures that are appropriate in
the circumstances for the purpose of obtaining sufficient appropriate audit
evidence.
The sufficiency and appropriateness of audit evidence are interrelated.
4.2 Sufficiency is the measure of the quantity of audit evidence. The quantity of
audit evidence needed is affected by the auditor’s assessment of the risks of
misstatement (the higher the assessed risks, the more audit evidence is likely to
be required) and also by the quality of such audit evidence (the higher the
quality, the less may be required). Obtaining more audit evidence, however,
may not compensate for its poor quality
4.3 Appropriateness is the measure of the quality of audit evidence; that is, its
relevance and its reliability in providing support for the conclusions on which
the auditor’s opinion is based. The reliability of evidence is influenced by its
source and by its nature, and is dependent on the individual circumstances
under which it is obtained
4.4 When designing and performing audit procedures, the auditor shall consider
the relevance and reliability of the information to be used as audit evidence.
4.5 The reliability of information to be used as audit evidence, and therefore of the
audit evidence itself, is influenced by its source and its nature, and the
circumstances under which it is obtained, including the controls over its
preparation and maintenance where relevant.
 The reliability of audit evidence is increased when it is obtained from
independent sources outside the entity.
 The reliability of audit evidence that is generated internally is increased
when the related controls, including those over its preparation and
maintenance, imposed by the entity are effective.
 Audit evidence obtained directly by the auditor (for example,
observation of the application of a control) is more reliable than audit
evidence obtained indirectly or by inference (for example, inquiry about
the application of a control).
 Audit evidence in documentary form, whether paper, electronic, or other
medium, is more reliable than evidence obtained orally (for example, a
written record of a meeting is more reliable than a subsequent oral
representation of the matters discussed).

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Audit evidence provided by original documents is more reliable than audit

evidence provided by photocopies or facsimiles, or documents that have been
filmed, digitised or otherwise transformed into electronic form, the reliability of
which may depend on the controls over their preparation and maintenance.
4.6 When information to be used as audit evidence has been prepared using the
work of a management’s expert, the auditor shall, to the extent necessary,
having regard to the significance of that expert’s work for the auditor’s
purposes,:
(a) Evaluate the competence, capabilities and objectivity of that expert;
(b) Obtain an understanding of the work of that expert; and
(c) Evaluate the appropriateness of that expert’s work as audit evidence for
the relevant assertion.
4.7 Considerations when evaluating the appropriateness of the management’s
expert’s work as audit evidence for the relevant assertion may include:
 The relevance and reasonableness of that expert’s findings or
conclusions, their consistency with other audit evidence, and whether
they have been appropriately reflected in the financial statements;
 If that expert’s work involves use of significant assumptions and
methods, the relevance and reasonableness of those assumptions and
methods; and
 If that expert’s work involves significant use of source data, the
relevance, completeness, and accuracy of that source data
4.8 When designing tests of controls and tests of details, the auditor shall determine
means of selecting items for testing that are effective in meeting the purpose of
the audit procedure
4.9 If:
a) audit evidence obtained from one source is inconsistent with that
obtained from another; or
b) the auditor has doubts over the reliability of information to be used as
audit evidence,
The auditor shall determine what modifications or additions to audit
procedures are necessary to resolve the matter, and shall consider the effect of
the matter, if any, on other aspects of the audit.

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SA 501 AUDIT EVIDENCE- SPECIFIC CONSIDERATIONS FOR SELECTED ITEMS

S.N Particulars
1 Introduction
1.1 This Standard on Auditing (SA) deals with specific considerations by the auditor
in obtaining sufficient appropriate audit evidence in accordance with SA 330, SA
500 and other relevant SAs, with respect to certain aspects of inventory,
litigation and claims involving the entity, and segment information in an audit of
financial statements
2 Objective
The objective of the auditor is to obtain sufficient appropriate audit evidence
regarding the
2.1 Existence and condition of inventory.
2.2 Completeness of litigation and claims involving the entity.
2.3 Presentation and disclosure of segment information in accordance with the
applicable financial reporting framework.
3 Definition----
4 Requirements
Existence and Condition of Inventory
4.1 When inventory is material to the financial statements, the auditor shall obtain
sufficient appropriate audit evidence regarding the existence and condition of
inventory by:
4.1.1 Attendance at physical inventory counting, unless impracticable, to:
a) Evaluate management’s instructions and procedures for recording and
controlling the results of the entity’s physical inventory counting;
E.g.
 The application of appropriate control activities, for example,
collection of used physical inventory count records, accounting for
unused physical inventory count records, and count and re-count
procedures.
 The accurate identification of the stage of completion of work in
progress, of slow moving, obsolete or damaged items and of
inventory owned by a third party, for example, on consignment.

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b) Observe the performance of management’s count procedures

c) Inspect the inventory
d) Perform test counts
4.1.2 Performing audit procedures over the entity’s final inventory records to
determine whether they accurately reflect actual inventory count results
4.2 If physical inventory counting is conducted at a date other than the date of
the financial statements, the auditor shall, in addition to the procedures
required above, perform audit procedures to obtain audit evidence about
whether changes in inventory between the count date and the date of the
financial statements are properly recorded
4.3 If the auditor is unable to attend physical inventory counting due to
unforeseen circumstances, the auditor shall make or observe some physical
counts on an alternative date, and perform audit procedures on intervening
transactions
4.4 If attendance at physical inventory counting is impracticable, the auditor
shall perform alternative audit procedures to obtain sufficient appropriate audit
evidence regarding the existence and condition of inventory. If it is not possible
to do so, the auditor shall modify the opinion in the auditor’s report in
accordance with SA 705.
4.7 When inventory under the custody and control of a third party is material to
the financial statements, the auditor shall obtain sufficient appropriate audit
evidence regarding the existence and condition of that inventory by performing
one or both of the following:
4.7.1 Request confirmation from the third party as to the quantities and condition of
inventory held on behalf of the entity
4.7.2 Perform inspection or other audit procedures appropriate in the circumstances
Litigation and Claims
4.8 The auditor shall design and perform audit procedures in order to identify
litigation and claims involving the entity which may give rise to a risk of material
misstatement, including:
4.8.1 Inquiry of management and, where applicable, others within the entity, including
in-house legal counsel
4.8.2 Reviewing minutes of meetings of those charged with governance and
correspondence between the entity and its external legal counsel

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4.8.3 Reviewing legal expense accounts

4.9 If the auditor assesses a risk of material misstatement regarding litigation or
claims that have been identified, or when audit procedures performed indicate
that other material litigation or claims may exist, the auditor shall, in addition to
the procedures required by other SAs, seek direct communication with the
entity’s external legal counsel.
The auditor shall do so through a letter of inquiry, prepared by management and
sent by the auditor, requesting the entity’s external legal counsel to communicate
directly with the auditor. If law, regulation or the respective legal professional
body prohibits the entity’s external legal counsel from communicating directly
with the auditor, the auditor shall perform alternative
audit procedures.
4.10 If:
a) management refuses to give the auditor permission to communicate or
meet with the entity’s external legal counsel, or the entity’s external legal
counsel refuses to respond appropriately to the letter of inquiry, or is
prohibited from responding and
b) the auditor is unable to obtain sufficient appropriate audit evidence by
performing alternative audit procedures, the auditor shall modify the
opinion in the auditor’s report in accordance with SA 705.
4.11 The auditor shall request management and, where appropriate, those charged
with governance to provide written representations that all known actual or
possible litigation and claims whose effects should be considered when
preparing the financial statements have been disclosed to the auditor and
appropriately accounted for and disclosed in accordance with the applicable
financial reporting framework.
Segment Information:
The auditor shall obtain sufficient appropriate audit evidence regarding the
presentation and disclosure of segment information in accordance with the
applicable financial reporting framework by:
a) Obtaining an understanding of the methods used by management in
determining segment information, and
• Evaluating whether such methods are likely to result in disclosure in
accordance with the applicable financial reporting framework; and
• Where appropriate, testing the application of such methods
b) Performing analytical procedures or other audit procedures appropriate
in the circumstances.

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SA 505 EXTERNAL CONFIRMATION

S.N Particulars
1 Introduction
1.1 This Standard on Auditing (SA) deals with the auditor’s use of external
confirmation procedures to obtain audit evidence in accordance with the
requirements of SA 330 and SA 500. It does not address inquiries regarding
litigation and claims. SA 501 deals with obtaining sufficient appropriate audit
evidence from such inquiries.
1.2 Other SAs recognise the importance of external confirmations as audit evidence,
for example:
a) SA 240 indicates that the auditor may design confirmation requests to
obtain additional corroborative information as a response to address the
assessed risks of material misstatement, whether due to fraud at the
assertion level.
b) SA 500 indicates that corroborating information obtained from a source
independent of the entity, such as external confirmations, may increase
the assurance the auditor obtains from evidence existing within the
accounting records or from the representations made by the
management.
2 Objective
2.1 The objective of the auditor, when using external confirmation procedures, is to
design and perform such procedures to obtain relevant and reliable audit
evidence
3 Definition
3.1 External confirmation – Audit evidence obtained as a direct written response
to the auditor from a third party (the confirming party), in paper form, or by
electronic or other medium.
3.2 Positive confirmation request – A request that the confirming party respond
directly to the auditor indicating whether the confirming party agrees or
disagrees with the information in the request, or providing the requested
Information

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3.3 Negative confirmation request – A request that the confirming party respond
directly to the auditor only if the confirming party disagrees with the
information provided in the request.
3.4 Non-response – A failure of the confirming party to respond, or fully respond,
to a positive confirmation request, or a confirmation request returned
undelivered
3.5 Exception – A response that indicates a difference between information
requested to be confirmed, or contained in the entity’s records, and information
provided by the confirming party
4 Requirements
4.1 External Confirmation procedure:
When using external confirmation procedures, the auditor shall maintain control
over external confirmation requests, including:
4.1.1 Determining the information to be confirmed or requested
4.1.2 Selecting the appropriate confirming party
4.1.3 Designing the confirmation requests, including determining that requests are
properly addressed and contain return information for responses to be sent
directly to the auditor
4.1.4 Sending the requests, including follow-up requests when applicable, to the
confirming party
4.2 Management’s Refusal to Allow the Auditor to Send a Confirmation Request
If management refuses to allow the auditor to send a confirmation
request, the auditor shall:
4.2.1 Inquire as to management’s reasons for the refusal, and seek audit evidence
as to their validity and reasonableness
4.2.2 Evaluate the implications of management’s refusal on the auditor’s assessment of
the relevant risks of material misstatement, including the risk of fraud, and on
the nature, timing and extent of other audit procedures.
4.2.3 Perform alternative audit procedures designed to obtain relevant and reliable
audit evidence.
If the auditor concludes that management’s refusal to allow the auditor to send a
confirmation request is unreasonable, or the auditor is unable to obtain relevant and
reliable audit evidence from alternative audit procedures, the auditor shall communicate
with those charged with governance in accordance with SA 260.
The auditor also shall determine the implications for the audit and the auditor’s opinion
in accordance with SA 705.

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4.3 Negative Confirmation:

Negative confirmations provide less persuasive audit evidence than positive
confirmations. Accordingly, the auditor shall not use negative confirmation
requests as the sole substantive audit procedure to address an assessed risk of
material misstatement at the assertion level unless all of the following are
present:
4.3.1 The auditor has assessed the risk of material misstatement as low and has
obtained sufficient appropriate audit evidence regarding the operating
effectiveness of controls relevant to the assertion
4.3.2 The population of items subject to negative confirmation procedures comprises
a large number of small, homogeneous, account balances, transactions or
conditions
4.3.3 A very low exception rate is expected
4.3.4 The auditor is not aware of circumstances or conditions that would cause
recipients of negative confirmation requests to disregard such requests
4.4 Evaluating the Evidence obtained:
When evaluating the results of individual external confirmation requests, the
auditor may categorise such results as follows:
4.4.1 A response by the appropriate confirming party indicating agreement with the
information provided in the confirmation request, or providing requested
information without exception
4.4.2 A response deemed unreliable
4.4.3 A non-response
4.4.4 A response indicating an exception
4.5 Results of External Confirmation procedure
4.5.1 If the auditor identifies factors that give rise to doubts about the reliability of the
response to a confirmation request, the auditor shall obtain further audit
evidence to resolve those doubts
4.5.2 If the auditor determines that a response to a confirmation request is not reliable,
the auditor shall evaluate the implications on the assessment of the relevant
risks of material misstatement, including the risk of fraud, and on the
related nature, timing and extent of other audit procedures

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4.5.3 In the case of each non-response, the auditor shall perform alternative audit
procedures to obtain relevant and reliable audit evidence
4.5.4 The auditor shall investigate exceptions to determine whether or not they are
indicative of misstatements.
4.5.5 If the auditor has determined that a response to a positive confirmation request is
necessary to obtain sufficient appropriate audit evidence, alternative audit
procedures will not provide the audit evidence the auditor requires. If the
auditor does not obtain such confirmation, the auditor shall determine the
implications for the audit and the auditor’s opinion in accordance with SA 705.

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SA 510 Initial Audit Engagement- Verification of opening balances

(Effective for audits of financial statements for periods beginning on or
after April 1, 2010)

S.N Particulars
1 Introduction
1.1 This Standard on Auditing (SA) deals with the auditor’s responsibilities relating
to opening balances when conducting an initial audit engagement. In addition to
financial statement amounts, opening balances include matters requiring
disclosure that existed at the beginning of the period, such as
contingencies and commitments.
1.2 When the financial statements include comparative financial information, the
requirements and guidance in SA 710 also apply.
2 Objective
In conducting an initial audit engagement, the objective of the auditor
with respect to opening balances is to obtain sufficient appropriate audit
evidence about whether:
2.1 Opening balances contain misstatements that materially affect the current
period’s financial statements
2.2 Appropriate accounting policies reflected in the opening balances have been
consistently applied in the current period’s financial statements, or changes
thereto are properly accounted for and adequately presented and disclosed
in accordance with the applicable financial reporting framework
3 Definition
3.1 Initial audit engagement –
An engagement in which either:
(i) The financial statements for the prior period were not audited; or
(ii) The financial statements for the prior period were audited by a
predecessor auditor.
3.2 Opening balances
Those account balances that exist at the beginning of the period. Opening
balances are based upon the closing balances of the prior period and reflect the
effects of transactions and events of prior periods and accounting policies
applied in the prior period. Opening balances also include matters requiring
disclosure that existed at the beginning of the period, such as contingencies
and commitments.

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3.3 Predecessor auditor –

The auditor from a different audit firm, who audited the financial statements of
an entity in the prior period and who has been replaced by the current auditor.
4 Requirements
4.1 Audit Procedure
4.1.1 The auditor shall read the most recent financial statements, if any, and the
predecessor auditor’s report thereon, if any, for information relevant to opening
balances, including disclosures
4.1.2 The auditor shall obtain sufficient appropriate audit evidence about whether the
opening balances contain misstatements that materially affect the current
period’s financial statements by:
(a) Determining whether the prior period’s closing balances have been
correctly brought forward to the current period or, when appropriate, any
adjustments have been disclosed as prior period items in the current
year’s Statement of Profit and Loss
(b) Determining whether the opening balances reflect the application of
appropriate accounting policies
(c) Evaluating whether audit procedures performed in the current period
provide evidence relevant to the opening balances
4.2 If the prior period’s financial statements were audited by a predecessor
auditor and there was a modification to the opinion, the auditor shall
evaluate the effect of the matter giving rise to the modification in assessing the
risks of material misstatement in the current period’s financial statements
in accordance with SA 315
4.3 If the auditor obtains audit evidence that the opening balances contain
misstatements that could materially affect the current period’s financial
statements, the auditor shall perform such additional audit procedures as
are appropriate in the circumstances to determine the effect on the current
period’s financial statements.
If the auditor concludes that such misstatements exist in the current period’s
financial statements, the auditor shall communicate the misstatements with the
appropriate level of management and those charged with governance in
accordance with SA 450
4.4 The auditor shall obtain sufficient appropriate audit evidence about
whether the accounting policies reflected in the opening balances have
been consistently applied in the current period’s financial statements, and
whether changes in the accounting policies have been properly accounted for
and adequately presented and disclosed in accordance with the applicable
financial reporting framework.

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4.5 Audit Conclusions and Reporting

4.5.1 If the auditor is unable to obtain sufficient appropriate audit evidence
regarding the opening balances, the auditor shall express a qualified opinion
or a disclaimer of opinion, as appropriate, in accordance with SA 705
4.5.2 If the auditor concludes that the opening balances contain a misstatement
that materially affects the current period’s financial statements, and the
effect of the misstatement is not properly accounted for or not adequately
presented or disclosed, the auditor shall express a qualified opinion or an
adverse opinion, as appropriate, in accordance with SA 705
4.5.3 If the auditor concludes that:
(a) the current period’s accounting policies are not consistently applied
in relation to opening balances in accordance with the applicable financial
reporting framework; or
(b) a change in accounting policies is not properly accounted for or not
adequately presented or disclosed in accordance with the applicable
financial reporting framework, the auditor shall express a qualified
opinion or an adverse opinion as appropriate in accordance with SA 705
4.5.4 If the predecessor auditor’s opinion regarding the prior period’s financial
statements included a modification to the auditor’s opinion that remains
relevant and material to the current period’s financial statements, the auditor
shall modify the auditor’s opinion on the current period’s financial statements in
accordance with SA 705(Revised) and SA 710

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SA 520 ANALYTICAL PROCEDURES

(Effective for audits of financial statements for periods beginning on or
after April 1, 2010)

S.N Particulars
1 Introduction
1.1 This Standard on Auditing (SA) deals with the auditor’s use of analytical
procedures as substantive procedures (“substantive analytical procedures”), and
as procedures near the end of the audit that assist the auditor when forming an
overall conclusion on the financial statements.
The use of analytical procedures as risk assessment procedures is dealt with in
SA 315.
SA 330 includes requirements and guidance regarding the nature, timing and
extent of audit procedures in response to assessed risks; these audit procedures
may include substantive analytical procedures
2 Objective
The objectives of the auditor are:
2.1 To obtain relevant and reliable audit evidence when using substantive analytical
procedures.
2.2 To design and perform analytical procedures near the end of the audit that assist
the auditor when forming an overall conclusion as to whether the financial
statements are consistent with the auditor’s understanding of the entity.
3 Definition
3.1 For the purposes of the SAs, the term “analytical procedures” means evaluations
of financial information through analysis of plausible relationships among both
financial and non-financial data.
Analytical procedures also encompass such investigation as is necessary of
identified fluctuations or relationships that are inconsistent with other relevant
information or that differ from expected values by a significant amount.
The auditor’s choice of procedures, methods and level of application is a
matter of professional judgement.
4 Requirements
4.1 When designing and performing substantive analytical procedures, either
alone or in combination with tests of details, as substantive procedures in
accordance with SA 330, the auditor shall:

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4.1.1 Determine the suitability of particular substantive analytical procedures for

given assertions, taking account of the assessed risks of material
misstatement and tests of details, if any, for these assertions
4.1.2 Evaluate the reliability of data from which the auditor’s expectation of recorded
amounts or ratios is developed, taking account of source, comparability, and
nature and relevance of information available, and
controls over preparation
4.1.3 Develop an expectation of recorded amounts or ratios and evaluate whether the
expectation is sufficiently precise to identify a misstatement that, individually or
when aggregated with other misstatements, may cause the
financial statements to be materially misstated
4.1.4 Determine the amount of any difference of recorded amounts from expected
values that is acceptable without further investigation
4.2 The auditor shall design and perform analytical procedures near the end of the
audit that assist the auditor when forming an overall conclusion as to whether
the financial statements are consistent with the auditor’s understanding of the
entity.
4.3 Investigating Results of Analytical Procedures
If analytical procedures performed in accordance with this SA identify
fluctuations or relationships that are inconsistent with other relevant
information or that differ from expected values by a significant amount,
theauditor shall investigate such differences by:
4.3.1 Inquiring of management and obtaining appropriate audit evidence relevant
to management’s responses
4.3.2 Performing other audit procedures as necessary in the circumstances
4.4 Examples
4.4.1 Analytical procedures include the consideration of comparisons of the entity’s
financial information with, for example:
- Comparable information for prior periods.
- Anticipated results of the entity, such as budgets or forecasts, or
expectations of the auditor, such as an estimation of depreciation.
- Similar industry information, such as a comparison of the entity’s ratio
of sales to accounts receivable with industry averages or with other
entities of comparable size in the same industry.

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4.4.2 Analytical procedures also include consideration of relationships, for

example:
- Among elements of financial information that would be expected to
conform to a predictable pattern based on the entity’s experience, such as
gross margin percentages.
- Between financial information and relevant non-financial information,
such as payroll costs to number of employees.

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SA 530 AUDIT SAMPLING (EFFECTIVE FOR AUDITS OF FINANCIAL

STATEMENTS FOR PERIODS BEGINNING ON OR AFTER APRIL 1, 2009)

S.N Particulars
1 Introduction
1.1 This Standard on Auditing (SA) applies when the auditor has decided to use audit
sampling in performing audit procedures. It deals with the auditor’s use of
statistical and non-statistical sampling when designing and selecting the audit
sample, performing tests of controls and tests of details, and evaluating the
results from the sample.
1.2 This SA complements SA 500, which deals with the auditor’s responsibility to
design and perform audit procedures to obtain sufficient appropriate audit
evidence to be able to draw reasonable conclusions on which to base the audit
opinion.
SA 500 provides guidance on the means available to the auditor for selecting
items for testing, of which audit sampling is one means.
2 Objective
2.1 The objective of the auditor when using audit sampling is to provide a
reasonable basis for the auditor to draw conclusions about the population from
which the sample is selected

3 Definition
3.1 Audit sampling (sampling) – The application of audit procedures to less than
100% of items within a population of audit relevance such that all sampling units
have a chance of selection in order to provide the auditor with a reasonable basis
on which to draw conclusions about the entire population.
3.2 Population – The entire set of data from which a sample is selected and about
which the auditor wishes to draw conclusions.
3.3 Sampling risk – The risk that the auditor’s conclusion based on a sample may be
different from the conclusion if the entire population were subjected to the same
audit procedure. Sampling risk can lead to two types of erroneous conclusions:
(i) In the case of a test of controls, that controls are more effective than they
actually are, or in the case of a test of details, that a material misstatement
does not exist when in fact it does. The auditor is primarily concerned
with this type of erroneous conclusion because it affects audit
effectiveness and is more likely to lead to an inappropriate audit opinion.

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(ii) In the case of a test of controls, that controls are less effective than they
actually are, or in the case of a test of details, that a material misstatement
exists when in fact it does not. This type of erroneous conclusion affects
audit efficiency as it would usually lead to additional work to establish
that initial conclusions were incorrect
3.4 Non-sampling risk – The risk that the auditor reaches an erroneous conclusion
for any reason not related to sampling risk.
3.5 Anomaly – A misstatement or deviation that is demonstrably not representative
of misstatements or deviations in a population.
3.6 Statistical sampling – An approach to sampling that has the following
characteristics:
(i) Random selection of the sample items; and
(ii) The use of probability theory to evaluate sample results, including
A sampling approach that does not have characteristics (i) and (ii) is considered
non-statistical sampling
3.7 Tolerable misstatement – A monetary amount set by the auditor in respect of
which the auditor seeks to obtain an appropriate level of assurance that the
monetary amount set by the auditor is not exceeded by the actual misstatement
in the population.
3.8 Tolerable rate of deviation – A rate of deviation from prescribed internal
control procedures set by the auditor in respect of which the auditor seeks to
obtain an appropriate level of assurance that the rate of deviation set by the
auditor is not exceeded by the actual rate of deviation in the population.
4 Requirements
4.1 Sample Design, Size and Selection of Items for Testing
4.1.1 When designing an audit sample, the auditor shall consider the purpose of the
audit procedure and the characteristics of the population from which the sample
will be drawn.
4.1.2 The auditor shall determine a sample size sufficient to reduce sampling risk to
an acceptably low level.
4.1.3 The auditor shall select items for the sample in such a way that each sampling
unit in the population has a chance of selection.

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4.2 Performing Audit Procedure

4.2.1 The auditor shall perform audit procedures, appropriate to the purpose, on each
item selected
4.2.2 If the audit procedure is not applicable to the selected item, the auditor shall
perform the procedure on a replacement item
4.2.3 If the auditor is unable to apply the designed audit procedures, or suitable
alternative procedures, to a selected item, the auditor shall treat that item as a
deviation from the prescribed control, in the case of tests of controls, or a
misstatement, in the case of tests of details
4.3 Methods of Sampling
4.3.1 Random Sampling:
Random Sampling: Random selection ensures that all items in the population or
within each stratum have a known chance of selection. It may involve use of
random number tables. Random sampling includes two very popular methods
which are discussed below:
(i) Simple Random Sampling: Under this method each unit of the whole
population e.g. purchase or sales invoice has an equal chance of being
selected. The mechanics of selection of items may be by choosing numbers
from table of random numbers by computers or picking up numbers
randomly from a drum. It is considered that random number tables are
simple and easy to use and also provide assurance that the bias does not
affect the selection. This method is considered appropriate provided
the population to be sampled consists of reasonably similar units and
fall within a reasonable range.
(ii) Stratified Sampling: This method involves dividing the whole population
to be tested in a few separate groups called strata and taking a sample
from each of them. Each stratum is treated as if it was a separate
population and if proportionate of items area selected from each of these
stratum. The number of groups into which the whole population has to be
divided is determined on the basis of auditor judgment.
4.3.2 Systematic or Interval Sampling:
Systematic selection is a selection method in which the number of sampling units
in the population is divided by the sample size to give a sampling interval, for
example 50, and having determined a starting point within the first 50, each 50th
sampling unit thereafter is selected. When using systematic selection, the auditor
would need to determine that sampling units within the population are not
structured in such a way that the sampling interval corresponds with a
particular pattern in the population.

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4.3.3 Monetary Unit Sampling:

It is a type of value-weighted selection in which sample size, selection and
evaluation results in a conclusion in monetary amounts.
4.3.4 Block Sampling:
This method involves selection of a block(s) of contiguous items from within the
population. Block selection cannot ordinarily be used in audit sampling because
most populations are structured such that items in a sequence can be expected to
have similar characteristics to each other, but different characteristics from
items elsewhere in the population.
4.3.5 Haphazard Sampling:
Haphazard selection, in which the auditor selects the sample without following a
structured technique. Although no structured technique is used, the auditor
would nonetheless avoid any conscious bias or predictability (for example,
always choosing or avoiding the first or last entries on a page) and thus attempt
to ensure that all items in the population have a chance of selection. Haphazard
selection is not appropriate when using statistical sampling.
4.4 Nature and Cause of Deviations and Misstatements
4.4.1 The auditor shall investigate the nature and cause of any deviations or
misstatements identified, and evaluate their possible effect on the purpose of the
audit procedure and on other areas of the audit
4.4.2 In the extremely rare circumstances when the auditor considers a misstatement
or deviation discovered in a sample to be an anomaly, the auditor shall obtain a
high degree of certainty that such misstatement or deviation is not representative
of the population. The auditor shall obtain this degree of certainty by performing
additional audit procedures to obtain sufficient appropriate audit evidence that
the misstatement or deviation does not affect the remainder of the population
4.4.3 For tests of details, the auditor shall project misstatements found in the sample
to the population
4.4.4 The auditor shall evaluate:
a) The results of the sample
b) Whether the use of audit sampling has provided a reasonable basis for
conclusions about the population that has been tested

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SA 550 Related Parties (Effective for audits of financial statements for

periods beginning on or after April 1, 2010)

S.N Particulars
1 Introduction
1.1 This Standard on Auditing (SA) deals with the auditor’s responsibilities
regarding related party relationships and transactions when performing an audit
of financial statements. Specifically, it expands on how SA 315, SA 330 and SA
240 are to be applied in relation to risks of material misstatement associated
with related party relationships and transactions.
1.2 Many related party transactions are in the normal course of business. In such
circumstances, they may carry no higher risk of material misstatement of the
financial statements than similar transactions with unrelated parties.
However, the nature of related party relationships and transactions may, in some
circumstances, give rise to higher risks of material misstatement of the financial
statements than transactions with unrelated parties. For example:
 Related parties may operate through an extensive and complex range of
relationships and structures, with a corresponding increase in the
complexity of related party transactions.
 Information systems may be ineffective at identifying or summarising
transactions and outstanding balances between an entity and its related
parties.
 Related party transactions may not be conducted under normal market

terms and conditions; for example, some related party transactions may
be conducted with no exchange of consideration.
1.3 Because related parties are not independent of each other, many financial
reporting frameworks establish specific accounting and disclosure requirements
for related party relationships, transactions and balances to enable users of the
financial statements to understand their nature and actual or potential effects on
the financial statements
1.4 Owing to the inherent limitations of an audit, there is an unavoidable risk 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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In the context of related parties, the potential effects of inherent limitations on

the auditor’s ability to detect material misstatements are greater for such
reasons as the following:
 Management may be unaware of the existence of all related party
relationships and transactions, particularly if the applicable financial
reporting framework does not establish related party requirements.
 Related party relationships may present a greater opportunity for
collusion, concealment or manipulation by management
2 Objective
The objectives of the auditor are:
2.1 Irrespective of whether the applicable financial reporting framework establishes
related party requirements, to obtain an understanding of related party
relationships and transactions sufficient to be able:
a) To recognise fraud risk factors, if any, arising from related party
relationships and transactions that are relevant to the identification and
assessment of the risks of material misstatement due to fraud; and
b) To conclude whether the financial statements, insofar as they are affected
by those relationships and transactions: a. Achieve a true and fair
presentation (for fair presentation frameworks); or b. Are not misleading
(for compliance frameworks);
2.2 In addition, where the applicable financial reporting framework establishes
related party requirements, to obtain sufficient appropriate audit evidence about
whether related party relationships and transactions have been appropriately
identified, accounted for and disclosed in the financial statements in accordance
with the framework.
3 Definition
3.1 Arm’s length transaction–A transaction conducted on such terms and
conditions as between a willing buyer and a willing seller who are unrelated and
are acting independently of each other and pursuing their own best interests.
3.2 Related party – A party that is either:
1. A related party as defined in the applicable financial reporting
framework; or
2. Where the applicable financial reporting framework establishes minimal
or no related party requirements:

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a) A person or other entity that has control or significant influence

directly or indirectly through one or more intermediaries, over the
reporting entity
b) Another entity over which the reporting entity has control or
significant influence, directly or indirectly through one or more
intermediaries
c) Another entity that is under common control with the reporting
entity through having:
 Common controlling ownership;
 Owners who are close family members; or
 Common key management
Note: However, entities that are under common control by a state (i.e., a
national, regional or local government) are not considered related unless
they engage in significant transactions or share resources to a significant
extent with one another
4 Requirements
4.1 As part of the risk assessment procedures and related activities that SA 315 and
SA 240 require the auditor to perform during the audit, the auditor shall perform
the audit procedures and related activities given below to obtain information
relevant to identifying the risks of material misstatement
associated with related party relationships and transactions:
4.1.1 Understanding the Entity’s Related Party Relationships and Transactions:
The auditor shall inquire of management regarding:
a) The identity of the entity’s related parties, including changes from the
prior period
b) The nature of the relationships between the entity and these related
parties
c) Whether the entity entered into any transactions with these related
parties during the period and, if so, the type and purpose of the
transactions
4.1.2 Evaluating accounting system and related internal controls regarding
related party relationships and transactions:
The auditor shall inquire of management and others within the entity, and
perform other risk assessment procedures considered appropriate, to obtain an

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understanding of the controls, if any, that management has established to:

a) Identify, account for, and disclose related party relationships and
transactions in accordance with the applicable financial reporting
framework
b) Authorise and approve significant transactions and arrangements with
related parties.
c) Authorise and approve significant transactions and arrangements outside
the normal course of business
4.1.3 During the audit, the auditor shall remain alert, when inspecting records or
documents, for arrangements or other information that may indicate the
existence of related party relationships or transactions that management has
not previously identified or disclosed to the auditor
4.1.4 If the auditor identifies significant transactions outside the entity’s normal
course of business when performing the audit procedures the auditor shall
inquire of management about:
(a) The nature of these transactions; and
(b) Whether related parties could be involved
4.2 Auditor’s Responses to the Assessed Risks of Material Misstatement
4.2.1 Identification of Previously Unidentified or Undisclosed Related Parties or
Significant Related Party Transactions:
If the auditor identifies arrangements or information that suggests the existence
of related party relationships or transactions that management has not
previously identified or disclosed to the auditor, the auditor shall determine
whether the underlying circumstances confirm the existence of those
relationships or transactions.
During the audit, the auditor may inspect records or documents that may
provide information about related party relationships and transactions, for
example:
 Entity income tax returns.
 Information supplied by the entity to regulatory authorities.
 Shareholder registers to identify the entity’s principal shareholders.
 Statements of conflicts of interest from management and those charged
with governance.
 Records of the entity’s investments and those of its pension plans.

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 Contracts and agreements with key management or those charged with

governance.
 Significant contracts and agreements not in the entity’s ordinary course of
business.
 Specific invoices and correspondence from the entity’s professional
advisors.
 Life insurance policies acquired by the entity.
 Significant contracts re-negotiated by the entity during the period.
4.2.2 For identified significant related party transactions outside the entity’s
normal course of business, the auditor shall:
a) Inspect the underlying contracts or agreements, if any, and evaluate
whether:
 The business rationale (or lack thereof) of the transactions suggests
that they may have been entered into to engage in fraudulent
financial reporting or to conceal misappropriation of assets;
 The terms of the transactions are consistent with management’s
explanations
b) The transactions have been appropriately accounted for and disclosed in
accordance with the applicable financial reporting framework
c) Obtain audit evidence that the transactions have been appropriately
authorised and approved
4.2.3 Assertions That Related Party Transactions Were Conducted on Terms
Equivalent to Those Prevailing in an Arm’s Length Transaction:
When management has made an assertion in the financial statements to the
effect that a related party transaction was conducted on terms equivalent to
those prevailing in an arm’s length transaction, the auditor shall obtain sufficient
appropriate audit evidence about the assertion
Management is responsible for the substantiation of an assertion that a
related party transaction was conducted on terms equivalent to those
prevailing in an arm’s length transaction. Management’s support for the
assertion may include:
a) Comparing the terms of the related party transaction to those of an
identical or similar transaction with one or more unrelated parties.
b) Engaging an external expert to determine a market value and to confirm
market terms and conditions for the transaction.
c) Comparing the terms of the transaction to known market terms for
broadly similar transactions on an open market.

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4.2.4 In forming an opinion on the financial statements in accordance with SA 700, the
auditor shall evaluate:
a) Whether the identified related party relationships and transactions have
been appropriately accounted for and disclosed in accordance with the
applicable financial reporting framework
b) Whether the effects of the related party relationships and transactions:
 Prevent the financial statements from achieving true and fair
presentation
 Cause the financial statements to be misleading
4.3 Where the applicable financial reporting framework establishes related party
requirements, the auditor shall obtain written representations from management
and, where appropriate, those charged with governance that:
a) They have disclosed to the auditor the identity of the entity’s related
parties and all the related party relationships and transactions of which
they are aware; and
b) They have appropriately accounted for and disclosed such
relationships and transactions in accordance with the requirements of the
framework.
4.4 In meeting the documentation requirements of SA 230 and other SAs, the
auditor shall include in the audit documentation the names of the identified
related parties and the nature of the related party relationships.

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SA 560 SUBSEQUENT EVENTS (EFFECTIVE FOR AUDITS OF FINANCIAL

STATEMENTS FOR PERIODS BEGINNING ON OR AFTER APRIL 1, 2009)

S.N Particulars
1 Introduction
1.1 This Standard on Auditing (SA) deals with the auditor’s responsibilities
relating to subsequent events in an audit of financial statements. It does not
deal with matters relating to the auditor’s responsibilities for other information
obtained after the date of the auditor’s report, which are addressed in SA 720.
However, such other information may bring to light a subsequent event that is
within the scope of this SA.
1.2 Financial statements may be affected by certain events that occur after the date
of the financial statements. Many financial reporting frameworks specifically
refer to such events. Such financial reporting frameworks ordinarily identify two
types of events:
(a) Those that provide evidence of conditions that existed at the date of the
financial statements; and
(b) Those that provide evidence of conditions that arose after the date of
the financial statements.
2 Objective
2.1 To Obtain sufficient appropriate audit evidence about whether events occurring
between the date of the financial statements and the date of the auditor’s report
that require adjustment of, or disclosure in, the financial statements are
appropriately reflected in those financial statements
2.2 To Respond appropriately to facts that become known to the auditor after the
date of the auditor’s report, that, had they been known to the auditor at that date,
may have caused the auditor to amend the auditor’s report.
3 Definition
3.1 Date of the financial statements – The date of the end of the latest period
covered by the financial statements
3.2 Date of approval of the financial statements – The date on which all the
statements that comprise the financial statements, including the related notes,
have been prepared and those with the recognised authority have asserted

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that they have taken responsibility for those financial statements

3.3 Date of the auditor’s report – The date the auditor dates the report on the
financial statements in accordance with SA 700
3.4 Date the financial statements are issued – The date that the auditor’s report
and audited financial statements are made available to third parties
3.5 Subsequent events – Events occurring between the date of the financial
statements and the date of the auditor’s report, and facts that become known to
the auditor after the date of the auditor’s report.
4 Requirements
4.1 Events Occurring Between the Date of the Financial Statements and the Date
of the Auditor’s Report
4.1.1 Obtaining an understanding of any procedures management has established
to ensure that subsequent events are identified
4.1.2 Inquiring of management and, where appropriate, those charged with
governance as to whether any subsequent events have occurred which might
affect the financial statements
4.1.3 Reading minutes, if any, of the meetings, of the entity’s owners, management and
those charged with governance, that have been held after the date of the
financial statements
4.1.4 Reading the entity’s latest subsequent interim financial statements, if any.
4.1.5 Obtain written representations as per SA 580, that all events occurring
subsequent to the date of the financial statements and for which the applicable
financial reporting framework requires adjustment or disclosure have been
adjusted or disclosed
4.2 Facts Which Become Known to the Auditor After the Date of the Auditor’s
Report but Before the Date the Financial Statements are
Issued:
4.2.1 The auditor has no obligation to perform any audit procedures regarding the
financial statements after the date of the auditor’s report. However, when, after
the date of the auditor’s report but before the date the financial statements are
issued, a fact becomes known to the auditor that, had it been known to the
auditor at the date of the auditor’s report, may have caused the auditor to
amend the auditor’s report, the auditor shall:

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a) Discuss the matter with management and, where appropriate, those

charged with governance
b) Determine whether the financial statements need amendment and, if so,
c) Inquire how management intends to address the matter in the financial
statements
4.2.2 If management amends the financial statements, the auditor shall:
a) Carry out the audit procedures necessary in the circumstances on the
amendment.
b) Unless prohibited by law:
 Extend the audit procedures referred to such events up to the date
of the new auditor’s report and
 Provide a new auditor’s report on the amended financial statements.
The new auditor’s report shall not be dated earlier than the
date of approval of the amended financial statements.
4.3 Facts Which Become Known to the Auditor After the Financial
Statements have been Issued:
4.3.1 After the financial statements have been issued, the auditor has no
obligation to perform any audit procedures regarding such financial
statements. However, when, after the financial statements have been issued, a
fact becomes known to the auditor that, had it been known to the auditor at the
date of the auditor’s report, may have caused the auditor to amend the auditor’s
report, the auditor shall:
a) Discuss the matter with management and, where appropriate, those
charged with governance.
b) Determine whether the financial statements need amendment and, if so,
c) Inquire how management intends to address the matter in the financial
statements.
4.3.2 If the management amends the financial statements, the auditor shall:
a) Carry out the audit procedures necessary in the circumstances on the
amendment.
b) Review the steps taken by management to ensure that anyone in receipt
of the previously issued financial statements together with the
auditor’s report thereon is informed of the situation.
4.4 In some entities, management may not be required by the applicable law,
regulation or the financial reporting framework to issue amended financial
statements and, accordingly, the auditor need not provide an amended or new
auditor’s report. However, when management does not amend the financial

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statements in circumstances where the auditor believes they need to be

amended, then:
a) If the auditor’s report has not yet been provided to the entity, the auditor
shall modify the opinion as required by SA 705 and then provide the
auditor’s report; or
b) If the auditor’s report has already been provided to the entity, the auditor
shall notify management and, unless all of those charged with governance
are involved in managing the entity, those charged with governance, not
to issue the financial statements to third parties before the necessary
amendments have been made.
If the financial statements are nevertheless subsequently issued without the
necessary amendments, the auditor shall take appropriate action, to seek to
prevent reliance on the auditor’s report.
4.5 If management does not take the necessary steps to ensure that anyone
in receipt of the previously issued financial statements is informed of the
situation and does not amend the financial statements in circumstances
where the auditor believes they need to be amended, the auditor shall notify
management and those charged with governance.
 If, despite such notification, management or those charged with governance
do not take these necessary steps, the auditor shall take appropriate
action to seek to prevent reliance on the auditor’s report.

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SA 570 GOING CONCERN (EFFECTIVE FOR AUDITS OF FINANCIAL

STATEMENTS FOR PERIODS BEGINNING ON OR AFTER APRIL 1, 2017)

S.N Particulars
1 Introduction
1.1 This Standard on Auditing (SA) deals with the auditor’s responsibilities in the audit
of financial statements relating to going concern and the implications for
the auditor’s report
1.2 When the use of the going concern basis of accounting is appropriate, assets
and liabilities are recorded on the basis that the entity will be able to realize its
assets and discharge its liabilities in the normal course of business
1.3 Where the going concern basis of accounting is a fundamental principle in the
preparation of financial statements then it requires management to assess the
entity’s ability to continue as a going concern even if the financial reporting
framework does not include an explicit requirement to do so.
1.4 The auditor’s responsibilities are to obtain sufficient appropriate audit evidence
regarding, and conclude on, the appropriateness of management’s use of the going
concern basis of accounting in the preparation of the financial statements, and to
conclude, based on the audit evidence obtained, whether a material uncertainty
exists about the entity’s ability to continue as a going
concern.
2 Objective
2.1 To obtain sufficient appropriate audit evidence regarding, and conclude on, the
appropriateness of management’s use of the going concern basis of accounting in
the preparation of the financial statements
2.2 To conclude, based on the audit evidence obtained, whether a material uncertainty
exists related to events or conditions that may cast significant
doubt on the entity’s ability to continue as a going concern
2.3 To report in accordance with this SA
3 Definition--
4 Requirements
4.1 Risk Assessment Procedures and Related Activities

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4.1.1 When performing risk assessment procedures as required by SA 315, the auditor
shall consider whether events or conditions exist that may cast significant doubt on
the entity’s ability to continue as a going concern.
4.1.2 In so doing, the auditor shall determine whether management has already
performed a preliminary assessment of the entity’s ability to continue as a going
concern
4.1.3 If such an assessment has been performed, the auditor shall discuss the assessment
with management and determine whether management has identified events or
conditions that, individually or collectively, may cast significant doubt on the
entity’s ability to continue as a going concern and, if so, management’s plans to
address them;
4.1.4 If such an assessment has not yet been performed, the auditor shall discuss with
management the basis for the intended use of the going concern basis of accounting,
and inquire of management whether events or conditions exist that, individually or
collectively, may cast significant doubt on the entity’s ability to continue as a going
concern
4.1.5 The auditor shall remain alert throughout the audit for audit evidence of events or
conditions that may cast significant doubt on the entity’s ability to continue as a
going concern.
4.2 Evaluating Management’s Assessment
 If events or conditions have been identified that may cast significant doubt
on the entity’s ability to continue as a going concern, the auditor shall obtain
sufficient appropriate audit evidence to determine whether or not a material
uncertainty exists related to events or conditions that may cast significant
doubt on the entity’s ability to continue as a going concern.
 Where management has not yet performed an assessment of the entity’s
ability to continue as a going concern, requesting management to make its
assessment
4.2.1  In evaluating management’s assessment of the entity’s ability to continue as
a going concern, the auditor shall cover the same period as that used by
management to make its assessment as required by the applicable financial
reporting framework, or by law or regulation if it specifies a longer period.
 If management’s assessment of the entity’s ability to continue as a going
concern covers less than twelve months from the date of the financial
statements ,the auditor shall request management to extend its assessment
period to at least twelve months from that date

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4.2.2 The auditor shall consider whether management’s assessment includes all relevant
information of which the auditor is aware as a result of the audit.
4.2.3 The auditor shall inquire of management as to its knowledge of events or conditions
beyond the period of management’s assessment that may cast significant doubt on
the entity’s ability to continue as a going concern
4.2.4 Evaluating management’s plans for future actions in relation to its going concern
assessment, whether the outcome of these plans is likely to improve the situation
and whether management’s plans are feasible in the circumstances
4.2.5 Considering whether any additional facts or information have become available
since the date on which management made its assessment
4.2.6 Where the entity has prepared a cash flow forecast, and analysis of the forecast is a
significant factor in considering the future outcome of events or conditions in the
evaluation of management’s plans for future actions:
(i) Evaluating the reliability of the underlying data generated to prepare the
forecast; and (ii) Determining whether there is adequate support for the
assumptions underlying the forecast.
4.3 Auditor Conclusions
4.3.1 The auditor shall evaluate whether sufficient appropriate audit evidence has been
obtained regarding, and shall conclude on, the appropriateness of management’s
use of the going concern basis of accounting in the preparation of the financial
statements.
4.3.2 How do we conclude whether material uncertainty exists or not?
A material uncertainty exists when the magnitude of its potential impact and
likelihood of occurrence is such that, in the auditor’s judgment, appropriate
disclosure of the nature and implications of the uncertainty is necessary for:
(a) In the case of a fair presentation financial reporting framework, the fair
presentation of the financial statements, or
(b) In the case of a compliance framework, the financial statements not to be
misleading.
4.3.3 If the auditor concludes that management’s use of the going concern basis of
accounting is appropriate in the circumstances but a material uncertainty
exists, the auditor shall determine whether the financial statements:
a) Adequately disclose the principal events or conditions that may cast
significant doubt on the entity’s ability to continue as a going concern and
management’s plans to deal with these events or conditions and

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b) Disclose clearly that there is a material uncertainty related to events or

conditions that may cast significant doubt on the entity’s ability to continue
as a going concern and, therefore, that it may be unable to realize its
assets and discharge its liabilities in the normal course of business
4.3.4 If the financial statements have been prepared using the going concern basis of
accounting but, in the auditor’s judgment, management’s use of the going
concern basis of accounting in the preparation of the financial
statements is inappropriate, the auditor shall express an adverse opinion
4.3.5 If adequate disclosure about the material uncertainty is made in the financial
statements, the auditor shall express an unmodified opinion and the auditor’s
report shall include a separate section under the heading “Material
Uncertainty Related to Going Concern” to:
a) Draw attention to the note in the financial statements that discloses the
matters and
b) State that these events or conditions indicate that a material uncertainty
exists that may cast significant doubt on the entity’s ability to continue as a
going concern and that the auditor’s opinion is not modified in respect of
the matter.
4.3.6 Adequate Disclosure of a Material Uncertainty is Not Made in the Financial
Statements
If adequate disclosure about the material uncertainty is not made in the
financial statements, the auditor shall:
a) Express a qualified opinion or adverse opinion, as appropriate, in accordance
with SA 705 and
b) In the Basis for Qualified (Adverse) Opinion section of the auditor’s report,
state that a material uncertainty exists that may cast significant doubt on the
entity’s ability to continue as a going concern and that the financial
statements do not adequately disclose this matter
4.3.7 If management is unwilling to make or extend its assessment when
requested to do so by the auditor, the auditor shall consider the implications
for the auditor’s report.
4.4 If there is significant delay in the approval of the financial statements by
management or those charged with governance after the date of the financial
statements, the auditor shall inquire as to the reasons for the delay. If the auditor
believes that the delay could be related to events or conditions relating to the going
concern assessment, the auditor shall perform those additional audit procedures
necessary, as well as consider the effect on the auditor’s
conclusion regarding the existence of a material uncertainty.

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SA 580 WRITTEN REPRESENTATIONS (EFFECTIVE FOR AUDITS OF

FINANCIAL STATEMENTS FOR PERIODS BEGINNING ON OR
AFTER APRIL 1, 2009)

S.N Particulars
1 Introduction
1.1 This Standard on Auditing (SA) deals with the auditor’s responsibility to obtain
written representations from management and, where appropriate, those
charged with governance
1.2 Audit evidence is all the information used by the auditor in arriving at the
conclusions on which the audit opinion is based. Written representations are
necessary information that the auditor requires in connection with the audit of
the entity’s financial statements. Accordingly, similar to responses to inquiries,
written representations are audit evidence
1.3 Although written representations provide necessary audit evidence, they do not
provide sufficient appropriate audit evidence on their own about any of the
matters with which they deal. Furthermore, the fact that management has
provided reliable written representations does not affect the nature or extent of
other audit evidence that the auditor obtains about the fulfilment of
management’s responsibilities, or about specific assertions.
2 Objective
2.1 To obtain written representations from management and, where appropriate,
those charged with governance that they believe that they have fulfilled their
responsibility for the preparation of the financial statements and for the
completeness of the information provided to the auditor
2.2 To support other audit evidence relevant to the financial statements or specific
assertions in the financial statements by means of written representations, if
determined necessary by the auditor or required by other SAs
2.3 To respond appropriately to written representations provided by management
and, where appropriate, those charged with governance, or if management or,
where appropriate, those charged with governance do not provide the written
representations requested by the auditor.

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3 Definition
3.1 Written representations – A written statement by management provided to the
auditor to confirm certain matters or to support other audit evidence. Written
representations in this context do not include financial statements, the
assertions therein, or supporting books and records.
4 Requirements
4.1 The auditor shall request written representations from management with
appropriate responsibilities for the financial statements and knowledge of the
matters concerned
4.2 The auditor shall request management to provide a written representation that it
has fulfilled its responsibility for the preparation of the financial statements in
accordance with the applicable financial reporting framework, including where
relevant their fair presentation, as set out in the terms of the audit engagement.
4.3 The auditor shall request management to provide a written representation that:
a) It has provided the auditor with all relevant information and access as
agreed in the terms of the audit engagement, and
b) All transactions have been recorded and are reflected in the financial
statements.
4.4 Other SAs require the auditor to request written representations. If, in addition to
such required representations, the auditor determines that it is necessary to
obtain one or more written representations to support other audit evidence
relevant to the financial statements or one or more specific assertions in the
financial statements, the auditor shall request such other written
representations
4.5 The date of the written representations shall be as near as practicable to, but not
after, the date of the auditor’s report on the financial statements. The written
representations shall be for all financial statements and period(s)
referred to in the auditor’s report.
4.6 The written representations shall be in the form of a representation letter
addressed to the auditor. If law or regulation requires management to make
written public statements about its responsibilities, and the auditor determines
that such statements provide some or all of the representations mentioned
above, the relevant matters covered by such statements need not be included

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in the representation letter

Doubt as to the Reliability of Written Representations
4.7 If the auditor has concerns about the competence, integrity, ethical values or
diligence of management, or about its commitment to or enforcement of these,
the auditor shall determine the effect that such concerns may have on the
reliability of representations (oral or written) and audit evidence in general
4.8 In particular, if written representations are inconsistent with other audit
evidence, the auditor shall perform audit procedures to attempt to resolve the
matter. If the matter remains unresolved, the auditor shall reconsider the
assessment of the competence, integrity, ethical values or diligence of
management
4.9 If the auditor concludes that the written representations are not reliable, the
auditor shall take appropriate actions, including determining the possible effect
on the opinion in the auditor’s report in accordance with SA 705.
Requested Written Representations Not Provided
4.10 If management does not provide one or more of the requested written
representations, the auditor shall:
a) Discuss the matter with management;
b) Re-evaluate the integrity of management and evaluate the effect that this
may have on the reliability of representations (oral or written) and audit
evidence in general; and
c) Take appropriate actions, including determining the possible effect on
the opinion in the auditor’s report in accordance with SA 705
The auditor shall disclaim an opinion on the financial statements in accordance
with SA 705 if:
a) The auditor concludes that there is sufficient doubt about the integrity of
management such that the written representations are not reliable; or
b) Management does not provide the written representations

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SA 610 USING THE WORK OF INTERNAL AUDITORS (EFFECTIVE FOR

AUDITS OF FINANCIAL STATEMENTS FOR PERIODS BEGINNING ON OR
AFTER APRIL 1, 2016)

S.N Particulars
1 Introduction
1.1 This Standard on Auditing (SA) deals with the external auditor’s
responsibilities if using the work of internal auditors. This includes
a) using the work of the internal audit function in obtaining audit evidence
and
b) using internal auditors to provide direct assistance under the
direction, supervision and review of the external auditor
1.2 The external auditor has sole responsibility for the audit opinion expressed, and
that responsibility is not reduced by the external auditor’s use of the work of the
internal audit function or internal auditors to provide direct assistance on the
engagement.
Although they may perform audit procedures similar to those performed by the
external auditor, neither the internal audit function nor the internal auditors are
independent of the entity as is required of the external auditor in an audit of
financial statements in accordance with SA 200.
2 Objective
The objectives of the external auditor, where the entity has an internal audit
function and the external auditor expects to use the work of the function to
modify the nature or timing, or reduce the extent, of audit procedures to be
performed directly by the external auditor, or to use internal auditors to
provide direct assistance, are:
2.1 To determine whether the work of the internal audit function or direct
assistance from internal auditors can be used, and if so, in which areas and to
what extent; and having made that determination
2.2 If using the work of the internal audit function, to determine whether that work
is adequate for purposes of the audit
2.3 If using internal auditors to provide direct assistance, to appropriately direct,
supervise and review their work.

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3 Definition
3.1 Internal audit function – A function of an entity that performs assurance and
consulting activities designed to evaluate and improve the effectiveness of the
entity’s governance, risk management and internal control processes.
3.2 Direct assistance – The use of internal auditors to perform audit procedures
under the direction, supervision and review of the external auditor
4 Requirements
4.1 Evaluating Internal Audit Function
The external auditor shall determine whether the work of the internal audit
function can be used for purposes of the audit by evaluating the following:
4.1.1 The extent to which the internal audit function’s organizational status and
relevant policies and procedures support the objectivity of the internal auditors
4.1.2 The level of competence of the internal audit function
4.1.3 Whether the internal audit function applies a systematic and disciplined
approach, including quality control
Using the work of Internal Auditor without Direct Assistance.
4.2 Using the work of Internal Audit Function
4.2.1 The external auditor shall consider the nature and scope of the work that has
been performed, or is planned to be performed, by the internal audit function and
its relevance to the external auditor’s overall audit strategy and audit plan
4.2.2 The external auditor shall make all significant judgments in the audit engagement
and, to prevent undue use of the work of the internal audit function, shall plan to
use less of the work of the function and perform more of the work directly.
4.2.3 the external auditor shall discuss the planned use of its work with the function
as a basis for coordinating their respective activities
4.2.4 The external auditor shall read the reports of the internal audit function
relating to the work of the function that the external auditor plans to use
4.2.5 The nature and extent of the external auditor’s audit procedures shall be
responsive to the external auditor’s evaluation of:
a) The amount of judgment involved;
b) The assessed risk of material misstatement;

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c) The extent to which the internal audit function’s organizational status and
relevant policies and procedures support the objectivity of the internal
auditors; and
d) The level of competence of the function
Direct Assistance.
4.3 Determining Whether, in Which Areas, and to What Extent Internal
Auditors Can Be Used to Provide Direct Assistance
4.3.1 The external auditor may be prohibited by law or regulation from obtaining
direct assistance from internal auditors.
4.3.2 If using internal auditors to provide direct assistance is not prohibited by law or
regulation, and the external auditor plans to use internal auditors to provide
direct assistance on the audit, the external auditor shall evaluate
the existence and significance of threats to objectivity and the level of
competence of the internal auditors who will be providing such assistance.
4.3.3 In determining the nature and extent of work that may be assigned to internal
auditors and the nature, timing and extent of direction, supervision and review
that is appropriate in the circumstances, the external auditor shall consider:
a) The amount of judgment involved in:
 Planning and performing relevant audit procedures; and
 Evaluating the audit evidence gathered;
b) The assessed risk of material misstatement; and
c) The external auditor’s evaluation of the existence and significance of
threats to the objectivity and level of competence of the internal auditors
who will be providing such assistance.
4.3.4 The external auditor shall not use internal auditors to provide direct assistance to
perform procedures that:
a) Involve making significant judgments in the audit
b) Relate to higher assessed risks of material misstatement where the
judgment required in performing the relevant audit procedures or
evaluating the audit evidence gathered is more than limited;
c) Relate to work with which the internal auditors have been involved and
which has already been, or will be, reported to management or those
charged with governance by the internal audit function
d) Relate to decisions the external auditor makes in accordance with this SA
regarding the internal audit function and the use of its work or direct
assistance

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4.4 Using Internal Auditors to Provide Direct Assistance

4.4.1 Prior to using internal auditors to provide direct assistance for purposes of the
audit, the external auditor shall:
(a) Obtain written agreement from an authorized representative of the entity
that the internal auditors will be allowed to follow the external auditor’s
instructions, and that the entity will not intervene in the work the internal
auditor performs for the external auditor; and
(b) Obtain written agreement from the internal auditors that they will keep
confidential specific matters as instructed by the external auditor and
inform the external auditor of any threat to their objectivity
4.4.2 The external auditor shall direct, supervise and review the work performed
by internal auditors on the engagement in accordance with SA
220. In so doing:
(a) The nature, timing and extent of direction, supervision, and review shall
recognize that the internal auditors are not independent of the entity; and
(b) The review procedures shall include the external auditor checking back to
the underlying audit evidence for some of the work performed by the
internal auditors.
The direction, supervision and review by the external auditor of the work
performed by the internal auditors shall be sufficient in order for the external
auditor to be satisfied that the internal auditors have obtained sufficient
appropriate audit evidence to support the conclusions based on that work.
4.4.3 If the external auditor uses internal auditors to provide direct assistance on the
audit, the external auditor shall include in the audit documentation:
(a) The evaluation of the existence and significance of threats to the
objectivity of the internal auditors, and the level of competence of the
internal auditors used to provide direct assistance;
(b) The basis for the decision regarding the nature and extent of the work
performed by the internal auditors;
(c) Who reviewed the work performed and the date and extent of that review
in accordance with SA 230;
(d) The written agreements obtained from an authorized representative of the
entity and the internal auditors; and
(e) The working papers prepared by the internal auditors who provided
direct assistance on the audit engagement

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SA 700 FORMING AN OPINION AND REPORTING ON FINANCIAL

STATEMENTS (EFFECTIVE FOR AUDITS OF FINANCIAL STATEMENTS FOR
PERIODS BEGINNING ON OR AFTER APRIL 1, 2018)

S.N Particulars
1 Introduction
1.1 This Standard on Auditing (SA) deals with the auditor’s responsibility to form an
opinion on the financial statements. It also deals with the form and content
of the auditor’s report issued as a result of an audit of financial statements.
1.2 SA 701 deals with the auditor’s responsibility to communicate key audit matters
in the auditor’s report. SA 705 (Revised) and SA 706 (Revised) deal with how the
form and content of the auditor’s report are affected when the auditor expresses
a modified opinion or includes an Emphasis of Matter paragraph or an Other
Matter paragraph in the auditor’s report. Other SAs also contain reporting
requirements that are applicable when issuing an
auditor’s report.
1.3 This SA applies to an audit of a complete set of general purpose financial
statements and is written in that context. SA 8004 deals with special
considerations when financial statements are prepared in accordance with a
special purpose framework. SA 805 deals with special considerations relevant to
an audit of a single financial statement or of a specific element, account or item
of a financial statement. This SA also applies to audits for
which SA 800 or SA 805 apply.
2 Objective
2.1 To form an opinion on the financial statements based on an evaluation of the
conclusions drawn from the audit evidence obtained
2.2 To express clearly that opinion through a written report
3 Definition
3.1 General purpose financial statements – Financial statements prepared in
accordance with a general purpose framework
3.2 General purpose framework – A financial reporting framework designed to
meet the common financial information needs of a wide range of users. The

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financial reporting framework may be a fair presentation framework or a

compliance framework.
The term “fair presentation framework” is used to refer to a financial
reporting framework that requires compliance with the requirements of the
framework and:
(i) Acknowledges explicitly or implicitly that, to achieve fair presentation of
the financial statements, it may be necessary for management to provide
disclosures beyond those specifically required by the framework; or
(ii) Acknowledges explicitly that it may be necessary for management to
depart from a requirement of the framework to achieve fair presentation
of the financial statements. Such departures are expected to be necessary
only in extremely rare circumstances.
The term “compliance framework” is used to refer to a financial reporting
framework that requires compliance with the requirements of the framework,
but does not contain the acknowledgements in (i) or (ii) above
4 Requirements
4.1 The auditor shall form an opinion on whether the financial statements are
prepared, in all material respects, in accordance with the applicable financial
reporting framework
4.2 In order to form that opinion, the auditor shall conclude as to whether the
auditor has obtained reasonable assurance about whether the financial
statements as a whole are free from material misstatement, whether due to fraud
or error. That conclusion shall take into account:
(a) The auditor‟s conclusion, in accordance with SA 330, whether sufficient
appropriate audit evidence has been obtained.
(b) The auditor‟s conclusion, in accordance with SA 450, whether
uncorrected misstatements are material, individually or in aggregate
4.3 The auditor shall evaluate whether the financial statements are prepared, in all
material respects, in accordance with the requirements of the applicable
financial reporting framework. This evaluation shall include consideration of the
qualitative aspects of the entity‟s accounting practices, including indicators of
possible bias in management‟s judgments.
4.4 In particular, the auditor shall evaluate whether, in view of the requirements of
the applicable financial reporting framework:

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(a) The financial statements adequately disclose the significant accounting

policies selected and applied;
(b) The accounting policies selected and applied are consistent with the
applicable financial reporting framework and are appropriate;
(c) The accounting estimates made by management are reasonable;
(d) The information presented in the financial statements is relevant, reliable,
comparable, and understandable;
(e) The financial statements provide adequate disclosures to enable the
intended users to understand the effect of material transactions and
events on the information conveyed in the financial statements; and
(f) The terminology used in the financial statements, including the title of
each financial statement, is appropriate
4.5 If the auditor:
(a) concludes that, based on the audit evidence obtained, the financial
statements as a whole are not free from material misstatement; or
(b) is unable to obtain sufficient appropriate audit evidence to conclude that
the financial statements as a whole are free from material misstatement,
the auditor shall modify the opinion in the auditor‟s report in accordance
with SA 705
4.6 Elements of Audit Report
4.6.1 Title: The auditor’s report shall have a title that clearly indicates that it is the
report of an independent auditor. For example, “Independent Auditor’s Report,”
distinguishes the independent auditor’s report from reports issued by others
4.6.2 Addressee: The auditor’s report shall be addressed, as appropriate, based on the
circumstances of the engagement. Law, regulation or the terms of the
engagement may specify to whom the auditor’s report is to be addressed. The
auditor’s report is normally addressed to those for whom the report is prepared,
often either to the shareholders or to those charged with
governance of the entity whose financial statements are being audited
4.6.3 Auditor’s Opinion: The first section of the auditor’s report shall include the
auditor’s opinion, and shall have the heading “Opinion.” The Opinion section of
the auditor’s report shall also:
(a) Identify the entity whose financial statements have been audited;
(b) State that the financial statements have been audited;

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(c) Identify the title of each statement comprising the financial statements;
(d) Refer to the notes, including the summary of significant accounting
policies; and
(e) Specify the date of, or period covered by, each financial statement
comprising the financial statements
4.6.4 Basis for Opinion:
The auditor’s report shall include a section, directly following the Opinion
section, with the heading “Basis for Opinion”, that:
(a) States that the audit was conducted in accordance with Standards on
Auditing;
(b) Refers to the section of the auditor’s report that describes the auditor’s
responsibilities under the SAs;
(c) Includes a statement that the auditor is independent of the entity in
accordance with the relevant ethical requirements relating to the audit
and has fulfilled the auditor’s other ethical responsibilities in accordance
with these requirements.
(d) States whether the auditor believes that the audit evidence the auditor
has obtained is sufficient and appropriate to provide a basis for the
auditor’s opinion.
4.6.5 Going Concern: Where applicable, the auditor shall report in accordance
with SA 570 (Revised).
4.6.6 Key Audit Matters: For audits of complete sets of general purpose financial
statements of listed entities, the auditor shall communicate key audit matters in
the auditor’s report in accordance with SA 701.
When the auditor is otherwise required by law or regulation or decides to
communicate key audit matters in the auditor’s report, the auditor shall do so in
accordance with SA 701.
Law or regulation may require communication of key audit matters for audits of
entities other than listed entities.
The auditor may also decide to communicate key audit matters for other
entities, including those that may be of significant public interest, for example
because they have a large number and wide range of stakeholders and
considering the nature and size of the business.
4.6.7 Other Information
Where applicable, the auditor shall report in accordance with SA 720
4.6.8 Responsibilities for the Financial Statements: The auditor’s report shall
include a section with a heading “Responsibilities of Management for the
Financial Statements.”
SA 200 explains the premise, relating to the responsibilities of management and,
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where appropriate, those charged with governance, on which an audit in

accordance with SAs is conducted. Management and, where appropriate, those
charged with governance accept responsibility for the preparation of the
financial statements. Management also accepts responsibility for such internal
control as it determines is necessary to enable the preparation of financial
statements that are free from material misstatement, whether due to fraud or
error. The description of management’s responsibilities in the auditor’s report
includes reference to both responsibilities as it helps to explain to users the
premise on which an audit is conducted.
4.6.9 Auditor’s Responsibilities for the Audit of the Financial Statements:
This section of the auditor’s report shall:
(a) State that the objectives of the auditor are to:
(i) Obtain reasonable assurance about whether the financial
statements as a whole are free from material misstatement, whether
due to fraud or error; and
(ii) Issue an auditor’s report that includes the auditor’s opinion.
(b) State that reasonable assurance is a high level of assurance, but is not a
guarantee that an audit conducted in accordance with SAs will always
detect a material misstatement when it exists; and
(c) State that misstatements can arise from fraud or error, and either:
(i) Describe that they are considered material if, individually or in the
aggregate, they could reasonably be expected to influence the
economic decisions of users taken on the basis of these financial
statements; or
(ii) Provide a definition or description of materiality in accordance with
the applicable financial reporting framework

4.6.10 Other Reporting Responsibilities: If the auditor addresses other reporting

responsibilities in the auditor’s report on the financial statements that are in
addition to the auditor’s responsibilities under the SAs, these other reporting
responsibilities shall be addressed in a separate section in the auditor’s report
with a heading titled-
“Report on Other Legal and Regulatory Requirements” or otherwise as
appropriate to the content of the section, unless these other reporting
responsibilities address the same topics as those presented under the reporting
responsibilities required by the SAs in which case the other reporting
responsibilities may be presented in the same section as the related report
elements required by the SAs

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4.6.11 Signature of the Auditor: The auditor’s report shall be signed. The report is
signed by the auditor (i.e. the engagement partner) in his personal name. Where
the firm is appointed as the auditor, the report is signed in the personal name of
the auditor and in the name of the audit firm.
The partner/proprietor signing the audit report also needs to mention the
membership number assigned by the Institute of Chartered Accountants of India.
They also include the registration number of the firm, wherever applicable, as
allotted by ICAI, in the audit reports signed by them.
Auditor’s Address: The auditor’s report shall name specific location, which is
ordinarily the city where the audit report is signed.
Date of the Auditor’s Report: The auditor’s report shall be dated no earlier than
the date on which the auditor has obtained sufficient appropriate audit evidence
on which to base the auditor’s opinion

4.6.12  An auditor may be required to conduct an audit in accordance with, in

addition to the Standards on Auditing issued by ICAI, the International
Standards on Auditing or auditing standards of any other
jurisdiction.
 If this is the case, the auditor‟s report may refer to Standards on
Auditing in addition to the International Standards on Auditing or
auditing standards of such other jurisdiction, but the auditor shall do
so only if:
(a) There is no conflict between the requirements in the ISAs or such
auditing standards of other jurisdiction and those in SAs that would
lead the auditor
(i) to form a different opinion, or
(ii) not to include an Emphasis of Matter paragraph or Other
Matter paragraph that, in the particular circumstances, is
required by SAs; and
(b) The auditor‟s report includes, at a minimum, each of the elements
above when the auditor uses the layout or wording specified by the
Standards on Auditing

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SA 701 COMMUNICATING KEY AUDIT MATTERS ((EFFECTIVE FOR AUDITS

OF FINANCIAL STATEMENTS FOR PERIODS BEGINNING ON OR AFTER
APRIL 1, 2018)

S.N Particulars
1 Introduction
1.1  This Standard on Auditing (SA) deals with the auditor’s responsibility to
communicate key audit matters in the auditor’s report. It is intended to
address both the auditor’s judgment as to what to communicate in the
auditor’s report and the form and content of such communication.
 This SA applies to audits of complete sets of general purpose financial
statements of listed entities and circumstances when the auditor
otherwise
 decides to communicate key audit matters in the auditor’s report.
1.2  The purpose of communicating key audit matters is to enhance the
communicative value of the auditor’s report by providing greater
transparency about the audit that was performed.
 Communicating key audit matters provides additional information to
intended users of the financial statements (“intended users”) to assist
them in understanding those matters that, in the auditor’s professional
judgment, were of most significance in the audit of the financial
statements of the current period.
 Communicating key audit matters may also assist intended users in
understanding the entity and areas of significant management
judgment in
 the audited financial statements
1.3 Communicating key audit matters in the auditor’s report is in the context of the
auditor having formed an opinion on the financial statements as a whole.
Communicating key audit matters in the auditor’s report is not
a A substitute for disclosures in the financial statements that the applicable
financial reporting framework requires management to make, or that are
otherwise necessary to achieve fair presentation

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b A substitute for the auditor expressing a modified opinion when required by the
circumstances of a specific audit engagement in accordance with SA 705
(Revised)
c A substitute for reporting in accordance with SA 570 (Revised) when a material
uncertainty exists relating to events or conditions that may cast significant doubt
on an entity’s ability to continue as a going concern
d A separate opinion on individual matters
1.4 SA 705 (Revised) prohibits the auditor from communicating key audit
matters when the auditor disclaims an opinion on the financial
statements, unless such reporting is required by law or regulation.
2 Objective
2.1 The objectives of the auditor are to determine key audit matters and, having
formed an opinion on the financial statements, communicate those matters by
describing them in the auditor’s report
3 Definition
3.1 Key audit matters - Those matters that, in the auditor’s professional judgment,
were of most significance in the audit of the financial statements of the current
period. Key audit matters are selected from matters communicated with those
charged with governance.
4 Requirements
4.1 The auditor shall determine, from the matters communicated with those charged
with governance, those matters that required significant auditor attention in
performing the audit. In making this determination, the auditor shall take into
account the following:
4.1.1 Areas of higher assessed risk of material misstatement, or significant risks
identified in accordance with SA 315 (For examples Refer SA 315)
4.1.2 Significant auditor judgments relating to areas in the financial statements that
involved significant management judgment, including accounting estimates that
have been identified as having high estimation uncertainty.
4.1.3 The effect on the audit of significant events or transactions that occurred during
the period.
4.1.4 The auditor’s decision-making process in determining key audit matters is
designed to select a smaller number of matters from the matters communicated
with those charged with governance, based on the auditor’s judgment about
which matters were of most significance in the audit of the financial statements
of the current period.

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4.1.5 Notwithstanding that the auditor’s determination of key audit matters is for the
audit of the financial statements of the current period and this SA does not
require the auditor to update key audit matters included in the prior period’s
auditor’s report, it may nevertheless be useful for the auditor to consider
whether a matter that was a key audit matter in the audit of the financial
statements of the prior period continues to be a key audit matter in the audit of
the financial statements of the current period.
4.2 The auditor shall determine which of the matters determined in accordance with
paragraph were of most significance in the audit of the financial statements of
the current period and therefore are the key audit matters.
4.3 The auditor shall describe each key audit matter, using an appropriate
subheading, in a separate section of the auditor’s report under the heading “Key
Audit Matters”. The introductory language in this section of the auditor’s report
shall state that:
(a) Key audit matters are those matters that, in the auditor’s professional
judgment, were of most significance in the audit of the financial
statements [of the current period]; and
(b) These matters were addressed in the context of the audit of the financial
statements as a whole, and in forming the auditor’s opinion thereon, and
the auditor does not provide a separate opinion on these matters.
4.4 The auditor shall describe each key audit matter in the auditor’s report
unless:
(a) Law or regulation precludes public disclosure about the matter; or
(b) In extremely rare circumstances, the auditor determines that the matter
should not be communicated in the auditor’s report because the adverse
consequences of doing so would reasonably be expected to outweigh the
public interest
4.5 If the auditor determines, depending on the facts and circumstances of the entity
and the audit, that there are no key audit matters to communicate or that the key
audit matters have been addressed by other paragraphs, the auditor shall include
a statement to this effect in a separate section of the auditor’s report under the
heading “Key Audit Matters”.
4.6 The auditor shall communicate with those charged with governance:
(a) Those matters the auditor has determined to be the key audit matters; or
(b) If applicable, depending on the facts and circumstances of the entity and
the audit, the auditor’s determination that there are no key audit matters
to communicate in the auditor’s report

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A 705 Modifications to the Opinion in the Independent Auditor’s Report

(Effective for audits of financial statements for periods beginning on or
after April 1, 2018)

S.N Particulars
1 Introduction
1.1 This Standard on Auditing (SA) deals with the auditor’s responsibility to issue an
appropriate report in circumstances when, in forming an opinion in accordance
with SA 700(Revised), the auditor concludes that a modification
to the auditor’s opinion on the financial statements is necessary
1.2 This SA also deals with how the form and content of the auditor’s report is
affected when the auditor expresses a modified opinion.
2 Objective
The objective of the auditor is to express clearly an appropriately modified
opinion on the financial statements that is necessary when:
2.1 The auditor concludes, based on the audit evidence obtained, that the
financial statements as a whole are not free from material misstatement
2.2 The auditor is unable to obtain sufficient appropriate audit evidence to conclude
that the financial statements as a whole are free from material
misstatement.
3 Definition
3.1 Pervasive – A term used, in the context of misstatements, to describe the effects
on the financial statements of misstatements or the possible effects on the
financial statements of misstatements, if any, that are undetected due to an
inability to obtain sufficient appropriate audit evidence. Pervasive effects on the
financial statements are those that, in the auditor’s judgment:
a) Are not confined to specific elements, accounts or items of the financial
statements;
b) If so confined, represent or could represent a substantial proportion of
the financial statements; or
c) In relation to disclosures, are fundamental to users’ understanding of the
financial statements.

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3.2 Modified opinion – A qualified opinion, an adverse opinion or a disclaimer of

opinion on the financial statements
4 Requirements
4.1 Circumstances When a Modification to the Auditor’s Opinion is Required
The auditor shall modify the opinion in the auditor’s report when:
4.1.1 The auditor concludes that, based on the audit evidence obtained, the financial
statements as a whole are not free from material misstatement.
4.1.2 The auditor is unable to obtain sufficient appropriate audit evidence to
conclude that the financial statements as a whole are free from material
misstatement. (also referred to as a limitation on the scope of the audit)
4.2 Qualified Opinion:
The auditor shall express a qualified opinion when:
4.2.1 The auditor, having obtained sufficient appropriate audit evidence, concludes
that misstatements, individually or in the aggregate, are material, but not
pervasive, to the financial statements
4.2.2 The auditor is unable to obtain sufficient appropriate audit evidence on which to
base the opinion, but the auditor concludes that the possible effects on the
financial statements of undetected misstatements, if any, could be material but
not pervasive
4.3 Adverse opinion
The auditor shall express an adverse opinion when the auditor, having obtained
sufficient appropriate audit evidence, concludes that misstatements, individually
or in the aggregate, are both material and pervasive to the financial statements
4.4 Disclaimer of Opinion
 The auditor shall disclaim an opinion when the auditor is unable to obtain
sufficient appropriate audit evidence on which to base the opinion, and
the auditor concludes that the possible effects on the financial statements
of undetected misstatements, if any, could be both material and pervasive.
 The auditor shall disclaim an opinion when, in extremely rare
circumstances involving multiple uncertainties, the auditor concludes
that, notwithstanding having obtained sufficient appropriate audit
evidence regarding each of the individual uncertainties, it is not possible
to form an opinion on the financial statements due to the potential
interaction of the uncertainties and their possible cumulative effect on
the financial statements.

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4.5 Additional Considerations relating to Adverse or Disclaimer of an opinion:

 When the auditor considers it necessary to express an adverse opinion or
disclaim an opinion on the financial statements as a whole, the auditor’s
report shall not also include an unmodified opinion with respect to the
same financial reporting framework on a single financial statement or one
or more specific elements, accounts or items of a financial statement.
 To include such an unmodified opinion in the same report3 in these
circumstances would contradict the auditor’s adverse opinion or
disclaimer of opinion on the financial statements as a whole
4.6 When the auditor modifies the audit opinion, the auditor shall use the heading
“Qualified Opinion,” “Adverse Opinion,” or “Disclaimer of Opinion,” as
appropriate, for the Opinion section
4.7 When the auditor modifies the opinion on the financial statements, the auditor
shall, in addition to the specific elements required by SA 700 (Revised):
(a) Amend the heading “Basis for Opinion” required by paragraph 28 of SA
700 (Revised) to “Basis for Qualified Opinion,” “Basis for Adverse Opinion,” or
“Basis for Disclaimer of Opinion,” as appropriate; and
(b) Within this section, include a description of the matter giving rise to the
modification
4.8 Changes in the report due to disclaimer of an opinion
4.8.1 When the auditor disclaims an opinion on the financial statements, the auditor’s
report shall not include following statements in Basis for Opinion Para as
discussed in SA 700:
(a) A reference to the section of the auditor’s report where the auditor’s
responsibilities are described; and
(b) A statement about whether the audit evidence obtained is sufficient and
appropriate to provide a basis for the auditor’s opinion
4.8.2 The auditor shall amend the description of the auditor’s responsibilities to
include only the following:
a) A statement that the auditor’s responsibility is to conduct an audit of the
entity’s financial statements in accordance with Standards on Auditing
and to issue an auditor’s report;
b) A statement that, however, because of the matter(s) described in the Basis
for Disclaimer of Opinion section, the auditor was not able to obtain
sufficient appropriate audit evidence to provide a basis for an audit
opinion on the financial statements; and
c) The statement about auditor independence and other ethical
responsibilities required by SA 700 in Basis for opinion paragraph.

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SA 706 EMPHASIS OF MATTER PARAGRAPHS AND OTHER MATTER

PARAGRAPHS IN THE INDEPENDENT AUDITOR’S REPORT (EFFECTIVE FOR
AUDITS OF FINANCIAL STATEMENTS FOR PERIODS BEGINNING ON OR
AFTER APRIL 1, 2018)

S.N Particulars
1 Introduction
1.1 This Standard on Auditing (SA) deals with additional communication in the
auditor’s report when the auditor considers it necessary to:
a) Draw users’ attention to a matter or matters presented or disclosed in the
financial statements that are of such importance that they are
fundamental to users’ understanding of the financial statements
b) Draw users’ attention to any matter or matters other than those
presented or disclosed in the financial statements that are relevant to
users’ understanding of the audit, the auditor’s responsibilities or the
auditor’s report.
1.2 SA 701 establishes requirements and provides guidance when the auditor
determines key audit matters and communicates them in the auditor’s report.
When the auditor includes a Key Audit Matters section in the auditor’s report,
this SA addresses the relationship between key audit matters and any additional
communication in the auditor’s report in accordance with this SA
1.3 SA 570 and SA 720 establish requirements and provide guidance about
communication in the auditor’s report relating to going concern and other
information, respectively
2 Objective
The objective of the auditor, having formed an opinion on the financial
statements, is to draw users’ attention, when in the auditor’s judgment it is
necessary to do so, by way of clear additional communication in the
auditor’s report, to:
2.1 A matter, although appropriately presented or disclosed in the financial
statements, that is of such importance that it is fundamental to users’
understanding of the financial statements

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2.2 As appropriate, any other matter that is relevant to users’ understanding of the
audit, the auditor’s responsibilities or the auditor’s report
3 Definition
3.1 Emphasis of Matter paragraph – A paragraph included in the auditor’s report
that refers to a matter appropriately presented or disclosed in the financial
statements that, in the auditor’s judgment, is of such importance that it is
fundamental to users’ understanding of the financial statements
3.2 Other Matter paragraph – A paragraph included in the auditor’s report that
refers to a matter other than those presented or disclosed in the financial
statements that, in the auditor’s judgment, is relevant to users’ understanding of
the audit, the auditor’s responsibilities or the auditor’s report
4 Requirements
4.1 When EOM Para is used?
If the auditor considers it necessary to draw users’ attention to a matter
presented or disclosed in the financial statements that, in the auditor’s
judgment, is of such importance that it is fundamental to users’ understanding
of the financial statements, the auditor shall include an Emphasis of Matter
paragraph in the auditor’s report provided:
4.1.1 The auditor would not be required to modify the opinion in accordance with SA
705 as a result of the matter and
4.1.2 When SA 701 applies, the matter has not been determined to be a key audit
matter to be communicated in the auditor’s report
4.2 Drafting EOM Para
When the auditor includes an Emphasis of Matter paragraph in the auditor’s
report, the auditor shall:
4.2.1 Include the paragraph within a separate section of the auditor’s report with an
appropriate heading that includes the term “Emphasis of Matter
4.2.2 Include in the paragraph a clear reference to the matter being emphasized and to
where relevant disclosures that fully describe the matter can be found in the
financial statements. The paragraph shall refer only to information presented or
disclosed in the financial statements
4.2.3 Indicate that the auditor’s opinion is not modified in respect of the matter
emphasized

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4.3 Circumstances Where EOM Para becomes Mandatory

4.3.1 When a financial reporting framework prescribed by law or regulation would be
unacceptable but for the fact that it is prescribed by law or regulation
4.3.2 To alert users that the financial statements are prepared in accordance with a
special purpose framework
4.3.3 When facts become known to the auditor after the date of the auditor’s report
and the auditor provides a new or amended auditor’s report (i.e., subsequent
events
4.4 When OM Para is used?
If the auditor considers it necessary to communicate a matter other than those
that are presented or disclosed in the financial statements that, in the
auditor’s judgment, is relevant to users’ understanding of the audit, the auditor’s
responsibilities or the auditor’s report, the auditor shall include an Other Matter
paragraph in the auditor’s report, provided:
4.4.1 This is not prohibited by law or regulation
4.4.2 When SA 701 applies, the matter has not been determined to be a key audit
matter to be communicated in the auditor’s report
4.5 Drafting OM Para
When the auditor includes an Other Matter paragraph in the auditor’s report, the
auditor shall include the paragraph within a separate section with the heading
“Other Matter,” or other appropriate heading
4.6 Circumstances where OM Para becomes Mandatory
4.6.1 In the rare circumstance where the auditor is unable to withdraw from an
engagement even though the possible effect of an inability to obtain sufficient
appropriate audit evidence due to a limitation on the scope of the audit imposed
by management is pervasive, the auditor may consider it necessary to include an
Other Matter paragraph in the auditor’s report to explain why it is not
possible for the auditor to withdraw from the engagement
4.6.2 Law, regulation or generally accepted practice may require or permit the auditor
to elaborate on matters that provide further explanation of the auditor’s
responsibilities in the audit of the financial statements or of the auditor’s report
thereon
4.6.3 the auditor may include an Other Matter paragraph in the auditor’s report,

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referring to the fact that another set of financial statements has been prepared
by the same entity in accordance with another general purpose framework and
that the auditor has issued a report on those financial statements
4.7 The placement of an Emphasis of Matter paragraph or Other Matter
paragraph in the auditor’s report depends on the nature of the information
to be communicated, and the auditor’s judgment as to the relative significance
of such information to intended users compared to other elements required to
be reported in accordance with SA 700

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SA 710 COMPARATIVE INFORMATION - CORRESPONDING FIGURES AND

COMPARATIVE FINANCIAL STATEMENTS (EFFECTIVE FOR AUDITS OF
FINANCIAL STATEMENTS FOR PERIODS BEGINNING ON OR
AFTER APRIL 1, 2011)

S.N Particulars
1 Introduction
1.1 This Standard on Auditing (SA) deals with the auditor’s responsibilities
regarding comparative information in an audit of financial statements. When the
financial statements of the prior period have been audited by a predecessor
auditor or were not audited, the requirements and guidance in SA
510 regarding opening balances also apply
1.2 The nature of the comparative information that is presented in an entity’s
financial statements depends on the requirements of the applicable financial
reporting framework. There are two different broad approaches to the auditor’s
reporting responsibilities in respect of such comparative information:
corresponding figures and comparative financial statements. The approach to be
adopted is often specified by law or regulation but may also be specified in
the terms of engagement.
1.3 The essential audit reporting differences between the approaches are:
(a) For corresponding figures, the auditor’s opinion on the financial
statements refers to the current period only; whereas
(b) For comparative financial statements, the auditor’s opinion refers to each
period for which financial statements are presented
This SA addresses separately the auditor’s reporting requirements for each
approach.
2 Objective
2.1 To obtain sufficient appropriate audit evidence about whether the comparative
information included in the financial statements has been presented, in all
material respects, in accordance with the requirements for comparative
information in the applicable financial reporting framework
2.2 To report in accordance with the auditor’s reporting responsibilities

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3 Definition
3.1 Comparative information – The amounts and disclosures included in the
financial statements in respect of one or more prior periods in accordance with
the applicable financial reporting framework
3.2 Corresponding figures – Comparative information where amounts and other
disclosures for the prior period are included as an integral part of the current
period financial statements, and are intended to be read only in relation to the
amounts and other disclosures relating to the current period (referred to as
“current period figures”). The level of detail presented in the corresponding
amounts and disclosures is dictated primarily by its relevance to the current
period figures
3.3 Comparative financial statements – Comparative information where amounts
and other disclosures for the prior period are included for comparison with the
financial statements of the current period but, if audited, are referred to in the
auditor’s opinion. The level of information included in those comparative
financial statements is comparable with that of the financial
statements of the current period (FINAL CA)
For purposes of this SA, references to “prior period” should be read as “prior periods”
when the comparative information includes amounts and disclosures for more than
one period.
4 Requirements
4.1 Audit Procedures
4.1.1 The auditor shall determine whether the financial statements include the
comparative information required by the applicable financial reporting
framework and whether such information is appropriately classified. For this
purpose, the auditor shall evaluate whether:
(a) The comparative information agrees with the amounts and other
disclosures presented in the prior period; and
(b) The accounting policies reflected in the comparative information are
consistent with those applied in the current period
4.1.2 If the auditor becomes aware of a possible material misstatement in the
comparative information while performing the current period audit, the auditor
shall perform such additional audit procedures as are necessary in the

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circumstances to obtain sufficient appropriate audit evidence to determine

whether a material misstatement exists
4.1.3 If the auditor had audited the prior period’s financial statements, the auditor
shall also follow the relevant requirements of SA 560
4.1.4 As required by SA 580, the auditor shall request written representations for all
periods referred to in the auditor’s opinion. The auditor shall also obtain a
specific written representation regarding any prior period item that is
separately disclosed in the current year’s statement of profit and loss.
4.2 Audit Reporting- Corresponding Figures
When corresponding figures are presented, the auditor’s opinion shall not refer
to the corresponding figures except in the circumstances described below:
4.2.1 If the auditor’s report on the prior period, as previously issued, included a
qualified opinion, a disclaimer of opinion, or an adverse opinion and the matter
which gave rise to the modification is unresolved, the auditor shall modify the
auditor’s opinion on the current period’s financial statements. In the Basis for
Modification paragraph in the auditor’s report, the auditor shall either:
(a) Refer to both the current period’s figures and the corresponding figures in
the description of the matter giving rise to the modification when the
effects or possible effects of the matter on the current period’s figures are
material; or
(b) In other cases, explain that the audit opinion has been modified because
of the effects or possible effects of the unresolved matter on the
comparability of the current period’s figures and the corresponding
figures
4.2.2 If the auditor obtains audit evidence that a material misstatement exists in the
prior period financial statements on which an unmodified opinion has been
previously issued, the auditor shall verify whether the misstatement has been
dealt with as required under the applicable financial reporting framework and, if
that is not the case, the auditor shall express a qualified opinion or an adverse
opinion in the auditor’s report on the current period financial statements
4.2.3 If the financial statements of the prior period were audited by a predecessor
auditor and the auditor is permitted by law or regulation to refer to the
predecessor auditor’s report on the corresponding figures and decides to do so,
the auditor shall state in an Other Matter paragraph in the auditor’s report:

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(a) That the financial statements of the prior period were audited by the
predecessor auditor;
(b) The type of opinion expressed by the predecessor auditor and, if the
opinion was modified, the reasons therefore; and
(c) The date of that report.
4.2.4 If the prior period financial statements were not audited, the auditor shall state
in an Other Matter paragraph in the auditor’s report that the corresponding
figures are unaudited. Such a statement does not, however, relieve the auditor of
the requirement to obtain sufficient appropriate audit evidence that the opening
balances do not contain misstatements that materially affect thecurrent period’s
financial statements.
4.3 Audit Reporting- Comparative Financial Statements (FINAL CA)

4.3.1 When comparative financial statements are presented, the auditor’s opinion
shall refer to each period for which financial statements are presented and on
which an audit opinion is expressed.
4.3.2 When reporting on prior period financial statements in connection with the
current period’s audit, if the auditor’s opinion on such prior period financial
statements differs from the opinion the auditor previously expressed, the auditor
shall disclose the substantive reasons for the different opinion in an
Other Matter paragraph in accordance with SA 706.
4.3.3 If the financial statements of the prior period were audited by a predecessor
auditor, in addition to expressing an opinion on the current period’s financial
statements, the auditor shall state in an Other Matter paragraph:
a) That the financial statements of the prior period were audited by a
predecessor auditor;
b) The type of opinion expressed by the predecessor auditor and, if the
opinion was modified, the reasons thereof; and
c) The date of that report,
4.3.4 If the prior period financial statements were not audited, the auditor shall state
in an Other Matter paragraph that the comparative financial statements are
unaudited. Such a statement does not, however, relieve the auditor of the
requirement to obtain sufficient appropriate audit evidence that the opening
balances do not contain misstatements that materially affect the current
period’s financial statements



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