CHAPTER

INDEX
01 NATURE, OBJECTIVE AND SCOPE
OF AUDIT
NO. OF
QUESTIONS

Part 1-Introduc on to Audit 1.1-1.2 2

Part 2-Core Audit Process 1.3-1.3 NA
Part 3-SA Intro 1.4-1.4 1
Part 4-SA 200 1.5-1.9 6
Part 5-SA 210 1.10-1.12 3
Part 6-SA 220 1.13 - 1.15 4
Part 7-Other Concepts 1.16 - 1.21 8

CHAPTER

02 AUDIT STRATEGY, AUDIT PLANNING

AND AUDIT PROGRAMME
Part 1-SA 300 2.1 - 2.4 7
Part 2-SA 320 2.5 - 2.7 4
Part 3-Other Concepts 2.8 - 2.11 6

CHAPTER

03 AUDIT DOCUMENTATION AND

AUDIT EVIDENCE
Part 01-SA 230 3.1 -3.6 8
Part 02-SA 330 3.7 -3.10 5
Part 03-SA 500 3.11 -3.16 5
Part 04-SA 501 3.17 -3.19 5
Part 05-SA 505 3.20 -3.21 3
Part 06-SA 510 3.22 - 3.22 1
Part 07-SA 550 3.23 - 3.24 3
Part 08-SA 560 3.25 - 3.25 2
Part 09-SA 570 3.26 - 3.28 5
Part 10-SA 580 3.29 - 3.29 1

CHAPTER

04 RISK ASSESSMENT AND INTERNAL CONTROL

Unit 1-SA 315 RISK 4.1 - 4.12 15
Unit 2-SA 315 ICS 4.13 - 4.20 14
Unit 3-SA 610 4.21 - 4.22 1
CHAPTER

05 FRAUD AND RESPONSIBILITIES OF

THE AUDITOR IN THIS REGARD
NO. OF
QUESTIONS

Unit 1-SA 240 5.1 -5.8 9

Unit 2-SA 250 5.9 -5.9 1
Unit 3-Other Concepts 5.10 -5.14 5

CHAPTER

06 AUDIT IN AN AUTOMATED ENVIRONMENT

Unit 1-AAE 6.1 -6.8 11

CHAPTER

07 SAMP-AUDIT SAMPLING
Unit 1-SA 530 7.1 -7.8 9

CHAPTER

08 ANALYTICAL PROCEDURES
Unit 1-SA 520 8.1 -8.6 10

CHAPTER

09 AUDIT OF ITEMS OF FINANCIAL

STATEMENTS
Unit 1-AIFS LIABILITY 9.1-9.5 5
Unit 2-AIFS ASSET 9.6-9.11 8
Unit 3-AIFS INCOME EXPENSE 9.12-9.14 7
Unit 4-Other Concepts 9.15-9.15 1

CHAPTER

10 THE COMPANY AUDIT

Part 1-COAUD 10.1-10.23 30
Part 2-COST AUDIT 10.24-10.24 2
Part 3-COACC MISC 10.25-10.25 1
Part 4-CARO 10.26-10.31 9
Part 5-SA 299 10.32-10.35 3
CHAPTER

11 AUDIT REPORT
NO. OF
QUESTIONS

Unit 1-SA 700 11.1-11.5 9

Unit 2-SA 701 11.6-11.6 1
Unit 3-SA 705 11.7-11.9 6
Unit 4-SA 706 11.10-11.10 1
Unit 5-SA 710 11.11-11.11 2

CHAPTER

12 AUDIT OF BANKS
Unit 1-BANK AUDIT PARAM 12.1-12.12 17

CHAPTER

13 AUDIT OF DIFFERENT TYPES OF ENTITIES

Unit 1-COOP SOCIETY 13.1-13.4 5

Unit 2-GOVT AUDIT 13.5-13.9 7
Unit 3-ADE 13.10-13.19 10
CA Ravi Taori

CHAPTER NATURE, OBJECTIVE AND SCOPE OF AUDIT

1

Part 1 -- Introduction to Audit

QNO— Audit & Related Concepts (Definition) Old Course -- (N19M/M20R)

INTRO.040 Bhaskar CNO - INTRO.040 New Course –(S17M/N19M/S20M/S21M/M20R/N21M)
Explain clearly meaning of Auditing. How would you as an auditor perform the audit.
OR
“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.”
Explain stating clearly how the person conducting this task should take care to ensure that financial
statements would not mislead anybody.
OR
"The person conducting audit should take care to ensure that financial statements would not mislead
anybody. Explain stating clearly the meaning of Auditing."
Answer ➢ Definition of Auditing:
“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.”
➢ Origin of the word Audit
Historically, the word ‘auditing’ has been derived from Latin word “audire” which
Audire means “to hear”. As earlier and even today much verification is through hearing
information and explanations of many people.
➢ 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:
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;
the accounts have been drawn up with reference to entries in the books of account;
the entries in the books of account are adequately supported by sufficient and
appropriate evidence;
the financial statement amounts are properly classified, described and disclosed in
conformity with accounting standards; and
the information conveyed by the statements is clear and unambiguous; (Cannot give
amounts in range, cannot give contradictory information)
the statement of accounts presents a true and fair picture of the operational results and
of the assets and liabilities.

Audit & Related Concepts (Advantages of Audit) Old Course -- (M08E/N13R/P16M/N15R/N16R/

QNO—
Bhaskar CNO - INTRO.100 M19R)
INTRO.100
New Course – (M18M/N18M)
RAG is proprietorship firm engaged in the manufacturing of textile and handloom products. It sells its
finished products both in the domestic as well as in the international market. The company is making
total turnover of Rs. 30 crores. It has also availed cash credit limit of Rs. 5 crores from Canara Bank. In
the year 2017-18, proprietor of the firm is worried about the financial position of the company and is
under the impression that since he is out of India, therefore firm might run into losses. He approaches a

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CA Ravi Taori
CA about advantages of getting his accounts audited throughout the year so that he may not suffer due
to accounting weaknesses. Advice regarding advantages of getting accounts audited.
OR
What is the importance of having the accounts audited by independent professional auditors?
OR
Advantages of independent audit.
OR
The chief utility of audit lies in reliable financial statements on the basis of which the state of affairs may
be easy to understand. Explain stating the advantages of independent audit.
OR
Having accounts audited by independent auditor, among other advantages, acts as a moral check on the
employees from committing fraud. Explain stating the advantages of independent audit
Answer ➢ 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, there are other advantages of audit.
Some or all of these are of considerable value even to those enterprises and organizations where
audit is not compulsory, these advantages are given below:
➢ As auditor regularly visits client
It acts as a moral check on the employees from committing defalcations or
embezzlement.
As an appraisal function, audit reviews the existence and operations of various controls
in the organizations and reports weaknesses, inadequacies, etc., in them.
(Delivery confirmation is not signed by customer, he can deny delivery or someone else
may take goods)
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 of
inadequacy of internal checks or internal control measures.
(Excessive Raw Material Cost per Unit / Labour Cost Per Unit / Overhead Cost Per Unit etc.
while doing analytical procedures)
➢ As auditor finishes audit
It safeguards the financial interest of persons who are not associated with the
management of the entity, whether they are partners or shareholders, bankers, FI’s,
public at large etc.
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.
➢ Post Audit Benefits
Government may require audited and certified statement before it gives assistance or
issues a license for a particular trade.
Audited statements of account are helpful in settling liability for taxes, negotiating loans
and for determining the purchase consideration for a business.
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 fi re or some other calamity.
Audited accounts are of great help in the settlement of accounts at the time of admission
or death of partner.
Author’s Note:
Following questions have the same answer, so it is advisable to remember only one answer as given in
above and reproduce it everywhere.
• Advantages of independent audit
• Advantages of audit of partnership firm.
• Advantages of Sole trader

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CA Ravi Taori

Part 2 – Core Audit Process

No Specific Question Asked.

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 Part 3 – SA INTRO

Statements and Guidance Notes of ICAI Old Course -- (P16M/M16M/M16R/M18M/N18R/M19M)

QNO
Bhaskar CNO SAINTRO.180 New Course – Relevant, Concept Covered in New Course SM
SAINTRO.05

"Statements" and "Guidance Notes" of ICAI- whether mandatory or recommendatory? Discuss

Answer ➢ AUTHORITY ATTACHED TO THE DOCUMENTS ISSUED BY THE INSTITUTE/MCA

Statements / Standards Mandatory
The Institute has from time to time, issued ‘Guidance Notes’ and ‘Statements’ on a number
of matters. The ‘Statements’ have been issued with a view to securing compliance by
members on matters which, in the opinion of the Council, are critical for the proper
discharge of their functions. ‘Statements’ therefore are mandatory.
Duty of Auditor for Statements / Standards
Accordingly, while discharging their attest function, it will be the duty of the members of
the Institute:
• to examine whether ‘Statements’ relating to accounting matters are complied
with in the presentation of financial statements covered by their audit. In the
event of any deviation from the ‘Statements’, it will be their duty to make
adequate disclosures in their audit reports so that the users of financial
statements may be aware of such deviations; and
• to ensure that the ‘Statements’ relating to auditing matters are followed in the
audit 0of financial information covered by their audit reports. If, for any reason, a
member has not been able to perform an audit in accordance with such
‘Statements’, his report should draw attention to the material departures,
therefrom.
Guidance Notes Recommendatory
‘Guidance Notes’ are primarily designed to provide guidance to members on matters which
may arise in the course of their professional work and on which they may rely in the course
of their professional work and on which they may desire assistance in resolving issues which
may pose difficulty. 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.
Duty of Auditor for Guidance Note
Similarly, while discharging his attest function, a member should examine whether the
recommendations in a guidance note relating to an accounting matter have been followed
or not. If the same have not been followed, the member should consider whether keeping
in view the circumstances of the case, a disclosure in his report is necessary.
Author’s Note
These two paragraphs in Duty of Auditor for Statements / Standards can be explained in just one line
that “it is auditor’s duty to comply with statements on accounting / accounting standards and
statements on auditing /standards on auditing”

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 Part 4 – SA 200

Inherent limitations of Audit- Master Answer Old Course -- (P16M/M16R/N16R/N17R/N19R)

QNO
Bhaskar CNO SA200.040 New Course -- (S17M/S20M/S21M/N20M/M20R/S21M
200.09
/N21R/N22R)
The process of auditing is such that it suffers from certain limitations, i.e., the limitation which cannot be
overcome irrespective of the nature and extent of audit procedures. Explain.
OR
What are the inherent limitations of audit?
OR
The process of auditing is such that it suffers from certain limitations Discuss.
OR
SMNO Ltd requested the auditor CA P to provide for absolute assurance in respect of its ten branches
scattered in Delhi and confirm that the financial statements are free from material misstatement due to
fraud or error. Advise.
OR
There are practical and legal limitations on the auditor’s ability to obtain audit evidence. Explain with
examples.
OR
Doing a statutory audit is full of risk’. Narrate the factors which cause the risk.
Answer The inherent limitations of an audit arise from:
➢ The Nature of Financial Reporting
Judgement Based:
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.
(Useful life of Fixed Assets & Residual Value / Valuation of Investments in Artistic Items Like
Painting / Costing of Inventory – FIFO, Weighted Average, Standard Costing, Retail Costing)
Uncertainty / Subjectivity / Range of Interpretations: -
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. Consequently, some financial statement items are subject to
an inherent level of variability which cannot be eliminated by the application of additional
auditing procedures.
(Uncertainty -- Useful life of Fixed Assets & Residual Value Subjectivity -- Valuation of
Investments in Artistic Items Like Painting Range of Interpretations -- Costing of Inventory –
FIFO, Weighted Average, Standard Costing, Retail Costing)
Estimates are most affected because of above:
Auditor should check Reasonableness of Estimates & Qualitative Aspects of Accounting
Practices (Including Management Bias) For example, this is often the case with respect to
certain accounting estimates. Nevertheless, the SAs require the auditor to give specific
consideration to whether accounting estimates are reasonable in the context of the
applicable financial reporting framework and related disclosures, and to the qualitative
aspects of the entity’s accounting practices, including indicators of possible bias in
management’s judgments.
➢ The Nature of Audit Procedures
There are practical and legal limitations on the auditor’s ability to obtain audit evidence.
For example:
• Intentional or Unintentional Misinformation from Management:
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

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 auditor. Accordingly, the auditor cannot be certain of the completeness of
information, even though the auditor has performed audit procedures to obtain
assurance that all relevant information has been obtained.
(E.g., Management has entered in agreement to share revenue with Suppliers,
Provision remained unrecorded)
• Sophisticatedly Designed Frauds:
Fraud may involve sophisticated and carefully organised 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.
(E.g., Supplier, Store Manager, Quality Engineer, Accountant, MD all are involved)
• No powers of Investigation:
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.
• Sampling & Persuasive Evidence (Extra Points)
➢ Timeliness of Financial Reporting and the Balance between Benefit and Cost
Delay reduces value of information:
Notwithstanding this, the relevance of information, and thereby its value, tends to
diminish over time, and there is a balance to be struck between their liability of
information and its cost. This is recognised in certain financial reporting frameworks (see,
for example, the “Framework for the Preparation and Presentation of Financial Statements”
issued by the Institute of Chartered Accountants of India (ICAI)).
Expectations of Users:
Therefore, there is an expectation by users off financial statements that the auditor will
form an opinion on the financial statements within a reasonable period of time and at a
reasonable cost, recognising that it is impracticable to address all information that may exist
or to pursue every matter exhaustively on the assumption that information is in error or
fraudulent until proved otherwise.
Difficulty, Time, or Cost not Valid basis to Omit Audit Procedures:
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 or to be satisfied with audit
evidence that is less than persuasive. Appropriate planning assists in making sufficient time
and resources available for the conduct of the audit.

Timeliness of Financial Reporting and the Balance Old Course -- (M18R/N20E)

QNO
between Benefit and Cost New Course – (M22M)
200.15
Bhaskar CNO SA200.040
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 or to be satisfied with audit evidence that is less than
persuasive. Explain.
Answer ➢ Timeliness of Financial Reporting and the Balance between Benefit and Cost:
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 or to be satisfied with audit evidence that is less
than persuasive. 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.
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 at a reasonable cost, recognising that it
is impracticable to address all information that may exist or to pursue every matter exhaustively
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 on the assumption that information is in error or fraudulent until proved otherwise.
Author’s Note
Answer is also covered in 200.09

QNO Professional Judgement #Unique Old Course – (N20M/M21M)

200.17 New Course -- (N18E/N20M)
“Professional judgment is essential to the proper conduct of an audit.” Discuss.
Answer ➢ 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:
Materiality and audit risk. (Planning)
The nature, timing, and extent of audit procedures used to meet the requirements of the
SAs and gather audit evidence.(Execution)
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. (Execution)
The evaluation of management’s judgments in applying the entity’s applicable financial
reporting framework.(Finalization)
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. (Finalization)

QNO Ethical Requirements- Fundamental Principles Old Course – (M19M/M20M)

200.19 Bhaskar CNO SA200.100 New Course – (M19M/M19R/M20M/N20E/M22R)
The auditor shall comply with relevant ethical requirements, including those pertaining to independence,
relating to financial statement audit engagements.
OR
Relevant ethical requirements ordinarily comprise the Code of Ethics for Professional Accountants (IESBA
Code) related to an audit of financial statements. Discuss with reference to those fundamental principles
of professional ethics.
OR
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 fundamental principles of professional ethics relevant to the auditor when
conducting an audit of financial statements. Explain
Answer ➢ Mandatory:
The auditor shall comply with relevant ethical requirements, including those pertaining to
independence, relating to financial statement audit engagements.
➢ Derived from Code of Ethics:
Relevant ethical requirements ordinarily comprise the Code of Ethics issued by the Institute
of Chartered Accountants of India.
The Code establishes the following as the fundamental principles of professional ethics
relevant to the auditor when conducting an audit of financial statements and provides a
conceptual framework for applying those principles; (O-C2BI) - Office of CBI
• Objectivity;
• Confidentiality; and
• Professional Competence and due care;
• Professional Behaviour.
• Integrity;
➢ Independence:
In the case of an audit engagement it is in the public interest and, therefore, required by
the Code of Ethics, that the auditor be independent of the entity subject to the audit.

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 The Code describes independence as comprising both independence of mind and
independence in appearance. The auditor’s independence from the entity safeguards the
auditor’s ability to form an audit Overall Objectives of the Independent Auditor opinion
without being affected by influences that might compromise that opinion.
Independence enhances the auditor’s ability to act with integrity, to be objective and to
maintain an attitude of professional skepticism.

QNO Integrity Vs Objectivity New Course-- (S21M)

200.24 Bhaskar CNO SA200.100
“Integrity’” and “Objectivity” are among the fundamental principles of professional ethics relevant to an
auditor enshrined in IESBA code. Distinguish between the two.
Answer The principle of “Integrity” requires auditor to be straight forward and honest in all professional and
business relationships. It implies fair dealing and truthfulness. It effectively means that he shall not be
associated with reports, returns communications or other informations which he believes contains a
materially false or misleading statement; contains statements or informations provided recklessly or omits
required information where such omission could be misleading.

The principle of objectivity requires auditor not to compromise professional judgment because of bias,
conflict of interest or undue influence of others.

Hence, integrity requires auditor to be involved in fair dealing and truthfulness with client and not be
associated with materially false or misleading statements, reports, returns or communications. However,
objectivity requires auditor not to compromise professional judgment because of bias, conflict of interest or
undue influence of others.

QNO Professional Skepticism Old Course – (P16M/N16R/N18R/N20R)

200.25 Bhaskar CNO SA200.120 New Course -- (N19E/N20R/N22R)
The auditor is responsible for maintaining an attitude of professional skepticism throughout the audit. Do
you agree with the statement?
Or
The auditor shall plan and perform an audit with professional skepticism recognizing that circumstances
may exist that cause the financial statement to be materially misstated. Discuss any four examples of
professional skepticism.
Answer ➢ What is Professional Scepticism?
Definition
• Professional scepticism: - 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.
(Some examples which are against professional scepticism,
o Only because last time there were no problems, blindly relying on management,
internal controls system.
o Accepting oral justifications, Xerox copies is important matters.
o Ignoring small unusual things such as withdrawal of Rs 5 from bank or small errors
such as negative inventory balance of small item etc)
➢ How to remain sceptical?
Questioning Mind
• Reliability
Information that brings into question the reliability of documents and responses to
inquiries to be used as audit evidence.
o (E.g., Figures are over written / 5-year-old document is appearing as if just printed)
• Suspicion
Conditions that may indicate possible fraud.
o (E.g., 20% increase in consumption of petrol while production increased 5%)

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 Critical Assessment
• Stop Blind Reliance
Also, don’t just rely blindly rely on past, current year evaluation is must
o (E.g., Only because management is not involved in any fraud in past doesn’t mean,
financial statement manipulation is not possible)
• Contradiction
Audit evidence that contradicts other audit evidence obtained.
o (E.g., Reconciliation given shows stock of 5,000 but insurance documents show
stock of 3,500)
• Beyond SAs
Circumstances that suggest the need for audit procedures in addition to those required by
the SAs.
o (E.g., SA 402 says rely on report if it is from Chartered Accountant, but we may not
rely because of bad past experience in other assignment)
The auditor shall plan and perform an audit with professional scepticism recognising that
circumstances may exist that cause the financial statements to be materially misstated.
➢ What if PS is not followed?
Maintaining professional scepticism throughout the audit is necessary if the auditor is, for
example, to reduce the risks of:
• Overlooking unusual circumstances.
o (E.g., % change in fuel consumption leads to discovery of fraud)
• Over generalising when drawing conclusions from audit observations.
o (E.g., Salary of one department was checked and it was declared salary of other 3
department would be same)
• Using inappropriate assumptions in determining the nature, timing, and extent of the audit
procedures and evaluating the results thereof.
o (E.g., Assuming that employees with more than 10 years with company are honest
hence no need to check sales executed by them)
The auditor may accept records and documents as genuine unless the auditor has reason to
believe the contrary.
The auditor cannot be expected to disregard past experience of the honesty and integrity of
the entity’s management and those charged with governance.
Nevertheless, a belief that management and those charged with governance are honest and
have integrity does not relieve the auditor of the need to maintain professional scepticism or
allow the auditor to be satisfied with less-than persuasive audit evidence when obtaining
reasonable assurance.

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 Part 5 – SA 210

QNO Pre-Conditions for Audit Old Course -- (M21R)

210.02 Bhaskar CNO SA210.020 New Course -- (M21R/M22M)
Explain preconditions for an audit as per SA 210. Discuss how would an auditor proceed to establish the
presence of pre-conditions for an audit.
Answer As per SA 210 “Agreeing the Terms of Audit Engagements”, preconditions for an audit may be defined
as 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.

In order to establish whether the preconditions for an audit are present, the auditor shall:

(a) Determine whether the financial reporting framework is acceptable; and

(b) 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;
(ii) For the internal control as management considers necessary; and
(iii) To provide the auditor with:

➢ Access to all information such as records, documentation and other matters;

➢ Additional information that the auditor may request from management for the
purpose of the audit; and
➢ Unrestricted access to persons within the entity from whom the auditor
determines it necessary to obtain audit evidence.

QNO Revision of Engagement Letter Old Course -- (P16M/N18R/M19M/M21R)

210.05 Bhaskar CNO SA210.080 New Course –(S17M/M21R)
R & Co, a firm of Chartered Accountants have not revised the terms of engagements and obtained
confirmation from the clients for last 5 years despite changes in business and professional environment.
OR
“It is not mandatory to send a new engagement letter in recurring audit, but sometimes it becomes
mandatory to send new letter”. Explain those situations where new engagement letter is to be sent.
Answer ➢ 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.
➢ The auditor may decide not to send a new audit engagement letter or other written agreement
each period. However, the following factors may make it appropriate to revise the terms of the
audit engagement or to remind the entity of existing terms:
External Changes:
• A change in legal or regulatory requirements. (New company act / GST)
• A change in the financial reporting framework adopted in the preparation of the
financial statements. (Ind AS)
Change form Management Side:
• A significant change in nature or size of the entity’s business. (E.g., Started
manufacturing along with trading and now turnover has increased 3 times as
compared to last year)
• A significant change in ownership. (E.g., Takeover from other business group,
pantaloons taken from Biyani to Aditya Birla Group)
• A recent change of senior management. (E.g., MD / CEO / CFO are replaced)

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 • Any indication that the entity misunderstands the objective and scope of the
audit. (E.g., They ask for Fraud Report / Compliance Report / Tax Report / Fixed
Asset assessment report etc)
Change from Auditors Side:
• Any revised or special terms of the audit engagement. (E.g., Separate Branch
Auditors / Use of CAAT / Use of Expert etc which are justified)
• A change in other reporting requirements. (E.g., Reporting on Internal Financial
Control)

Change in Terms of Engagement- Old Course -- (P16M/ M17M/M17R/M18R/M18E/N19R)

QNO
Master Answer(Theory) New Course – (N19R/S20M/S21M/M22M/N22R)
210.07
Bhaskar CNO SA210.100
“The auditor should not agree to a change of engagement where there is no reasonable justification for
doing so.” Discuss.
OR
As an auditor, how would you consider the acceptance of a change in audit engagement?
OR
An auditor who before the completion of the engagement is requested to change the engagement to one
which provides a lower level of assurance should consider the appropriateness of doing so. Discuss.
OR
An auditor who, before the completion of the engagement, is requested to change the engagement to
one which provides a lower level of assurance, should consider the appropriateness of doing so. Explain
stating the factors based on which client can request the auditor to change the engagement.
Answer Acceptance of a Change in Engagement:
➢ General Reasons for Change
A request from the client for the auditor to change the engagement may result from-
a change in circumstances affecting the need for the service
(E.g., Change in Law -- IFCR)
a restriction on the scope of the engagement, whether imposed by management or caused
by circumstances.
(E.g., Visit to foreign branches restricted to cut costs or because of war)
An auditor who, before the completion of the engagement, is requested to change the
engagement to one which provides a lower level of assurance, should consider the
appropriateness of doing so.
a misunderstanding as to the nature of an audit or related service originally requested.
➢ Examine reasons
The auditor would consider carefully the reason given for the request, particularly the implications
of a restriction on the scope of the engagement, especially any legal or contractual implications.
The auditor shall not agree to a change in the terms of the audit engagement where there is no
reasonable justification for doing so.
(E.g. 3 months after appointment company plans to appoint separate branch auditor for some
branches, this is change in terms of engagement which said all branches will be audited by
principle auditor, auditor will have to determine whether it is justified or not).
Justified
• If the auditor concludes that there is reasonable justification to change the
engagement and if the audit work performed complied with the SAs applicable to
the changed engagement, the report issued would be appropriate for the revised
terms of engagement. In order to avoid confusion, the report would not include
reference to-
o the original engagement; or
o any procedures that may have been performed in the original
engagement, except where the engagement is changed to an
engagement to undertake agreed-upon procedures and thus reference to
the procedures performed is a normal part of the report.
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 (E.g., If it is justified because of lack of time and need of report to be
submitted to investor quickly, we can accept such review assignment, then
it will become purely review assignment and no reference to audit will be
made.)
• 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.
(E.g., Continuing above example, if these are new branches with low turnover
located far away from offices from principal auditor, then such steps appear
justified as it will save time & cost of both principle auditor & company, in such
case sign revised engagement letter)
Unjustified
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:
• Withdraw from the audit engagement where possible under applicable law or
regulation; and
• 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.
(E.g., But if these branches are big branches of company contributing to 40% of
revenue and complicated matters then it is not justified then we will have to
withdraw from assignments and inform TCWG, CAG if required by law)
Author’s Note
This is a master answer of change in Terms of Engagement. Students are advised to write the appropriate
part of the answer as per the requirements of the question

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 Part 6 – SA 220

QNO Responsibility of Engagement Partner Old Course -- (N20R)

220.03 Bhaskar CNO SA220.080 New Course – (N18M/N19E/N20R)
As per SA 220, the engagement partner shall take responsibility for the overall quality on each audit
engagement to which that partner is assigned. While taking responsibility for the overall quality on each
audit engagement, analyse and explain the emphasis of the actions of the engagement partner and
appropriate messages to the other members of the engagement team. Also define engagement partner.
OR
The engagement partner shall take the responsibility for the overall quality on each audit engagement to
which that partner is assigned. Discuss with reference to SA 220 "Quality Control for an audit of financial
statement".
Answer ➢ 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,
emphasis:
The importance to audit quality of:
• The fact that quality is essential in performing audit engagements.
• Performing work that complies with professional standards and regulatory and
legal requirements;
• Complying with the firm’s quality control policies and procedures as applicable;
• Issuing auditor’s reports that are appropriate in the circumstances; and
• The engagement team’s ability to raise concerns without fear of reprisals; and
• The fact that quality is essential in performing audit engagements.
➢ Engagement partner defined:
Engagement partner refers to the partner or other person in the firm who is responsible for the
audit engagement and its performance, and for the auditor’s report that is issued on behalf of the
firm, and who, where required, has the appropriate authority from a professional, legal or
regulatory body.

QNO Consistency in Quality of Engagement Performance New Course – (M21R/N21R/N22R)

220.07 Bhaskar CNO SA220.160
Through its policies and procedures, the firm seeks to establish consistency in the quality of engagement
performance. This is often accomplished through written or electronic manuals, software tools or other
forms of standardized documentation, and industry or subject matter-specific guidance materials. Explain
the matters to be addressed in this context.
Answer The firm should establish policies and procedures designed to provide it with reasonable assurance
that engagements are performed in accordance with professional standards and regulatory and legal
requirements, and that the firm or the engagement partner issues reports that are appropriate in the
circumstances.

Through its policies and procedures, the firm seeks to establish consistenc y in the quality of
engagement performance. This is often accomplished through written or electronic manuals, software
tools or other forms of standardized documentation, and industry or subject matter -specific guidance
materials.

Matters addressed include the following:

• How engagement teams are briefed on the engagement to obtain an understanding of the
objectives of their work.
• Processes of engagement supervision, staff training and coaching.
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 • Methods of reviewing the work performed, the significant judgments made and the form of
report being issued.
• Appropriate documentation of the work performed and of the timing and extent of the
review.
• Processes to keep all policies and procedures current.

Monitoring Compliance with quality control policies Old Course -- (N20R)

QNO
and procedures – Purpose New Course – (N19R/N20R/N22M)
220.08
Bhaskar CNO SA220.180
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. 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. Explain in the above context the purpose of monitoring compliance
with quality control policies and procedures.
Answer ➢ 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.
➢ 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.
➢ The purpose of monitoring compliance with quality control policies and procedures is to provide an
evaluation of:
Adherence to professional standards and regulatory and legal requirements;
Whether the quality control system has been appropriately designed and effectively
implemented; and
Whether the firm’s quality control policies and procedures have been appropriately
applied, so that reports that are issued by the firm or engagement partners are
appropriate in the circumstances.
➢ Follow-up by appropriate firm personnel so that necessary modifications are promptly made to the
quality control policies and procedures.

QNO Relying on Work Performed by Others/ Death of original EP/ signed by New Course -- (S17M)
220.09 other partner. #Unique
M/s Suresh Chandra & 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 Suresh Chandra & 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 Suresh
Chandra& Co., therefore, signed the accounts of SC Ltd., without reviewing the work performed by CA.
Suresh. Required State with reasons whether CA. Chandra is right in expressing an opinion on financial
statements the audit of which is performed by another auditor.
Answer ➢ Takeover, New Partner Should Review Work Done
Whenever there is takeover of assignment by new engagement partner, new partner should
carefully review work of old engagement partner
➢ Review Procedures: -
Compliance of Law, Regulations, Prof Standards / Significant Matters Raised &
Considered / Appropriate Consultations / Conclusions Documented / Evidence is
Sufficient & Appropriate / Objectives Achieved / Need to Revise NTE
• The work has been performed in accordance with professional standards and
regulatory and legal requirements
(E.g., Sec 143 / IRDA Regulations / SAs
• Significant matters have been raised for further consideration
(E.g., Accounting for demerger
• Appropriate consultations have taken place and the resulting conclusions have
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 been documented and implemented;
(Consult Mr A in firm who has audited many such cases)
• The work performed supports the conclusions reached and is appropriately
documented;
(E.g., Check whether documents and explanation provide basis for accounting done)
• The evidence obtained is sufficient and appropriate to support the auditor’s
report; and
(E.g., Check that all areas are appropriately covered)
• The objectives of the engagement procedures have been achieved.
(We are able to form opinion with reasonable assurance)
• There is a need to revise the nature, timing and extent of work performed;
(E.g., High Court should be obtained, also written representation of CFO on
accounting)
Case Discussion
➢ Report not signed because of death, other ca signed without review just relying on work
done by his partner
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 couldn’t be signed by him due to his
unfortunate death. Later on, CA. Chandra signed the report relying on the work performed by CA.
Suresh.
Conclusion
➢ Non-compliance of SA 220 & no adequate skill and due care exercised
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.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.
Author’s Note:
Whenever there is change in partner because of any reason new partner has to come and review work
done by the team of old partner.
Only after detailed review new partner can sign FST & audit report. Review includes following things
(they are in practical life sequence).
➢ Whether audit related law, regulations, standards were complied.
➢ Reviewing significant matters and how they were considered (thought & examined).
➢ Whether consultations were obtained & documented.
➢ Evidence was sufficient & appropriate.
➢ Objectives achieved.
➢ Whether there is need to revise note.

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 Part 7 – Other Concepts

QNO Audit Vs Investigation Old Course -- (P16M)

COA.07 Bhaskar CNO C1OC.200 New Course – (S21M)
An audit is distinct from investigation. However, it is quite possible that sometimes investigation results
from the prima facie findings of the auditor. Discuss.
Answer We have to clearly understand that audit is distinct from investigation. Investigation is a critical
examination of the accounts with a special purpose. For example, if fraud is suspected and it is specifically
called upon to check the accounts whether fraud really exists, it takes character of investigation.

The objective of audit, on the other hand as we have already discussed, is 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.

Therefore, audit is never started with a pre-conceived notion about state of affairs; about wrong-doing;
about some wrong having been committed. The auditor seeks to report what he finds in normal course of
examination of accounts. However, it is quite possible that sometimes investigation results from the prima
facie findings of the auditor. It may happen that auditor has given some findings of serious concern. Such
findings may prompt for calling an investigation.

QNO-- Audit and Accounts Old Course -- (N20R)

COA.08 Bhaskar CNO C1OC.020 New Course -- (N20R)
Both accounting and auditing are closely related with each other. Explain
Answer 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. It naturally calls on the part of
the auditor to have a thorough and sound knowledge of generally accepted principles of accounting before
he can review the financial statements. In fact, auditing as a discipline is also closely related with various
other disciplines as there is lot of linkages in the work which is done by an auditor in his day-to-day
activities. To begin with, it may be noted that the discipline of auditing itself is a logical construct and
everything done in auditing must be bound by the rules of logic. Ethical precepts are the basis on which the
foundation of the entire accounting
profession rests. The knowledge of language is also considered essential in the field of auditing as the
auditor shall be required to communicate, both in writing as well as orally, in day-to-daywork.

QNO-- Auditing and Behavioural Science. Old Course -- (P16M/N18R/M19M/N21R)

COA.15 Bhaskar CNO C1OC.020 New Course – (N21R)
The discipline of behavioural science is closely linked with the subject of auditing. Discuss.
Answer ➢ 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 organization.
➢ The internal auditor or a management auditor is expected to deal with human beings rather than
financial figures.
➢ One of the basic elements in designing the internal control system is personnel.
➢ The knowledge of human behaviour is indeed very essential for an auditor so as to effectively
discharge his duties.

Auditor & Related Concepts (Personal qualities of Old Course -- (P16M/N16M/N17R/N18M/M21M)

QNO--
Auditor) New Course –(M19R/M21M/N21M)
COA.27
Bhaskar CNO C1OC.120
Lord Justice Lindley in the course of the judgment in the famous London & General Bank case had
succinctly summed up the overall view of what an auditor should be as regards the personal qualities.
Explain stating also the qualities of Auditor.
OR
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 “The auditor should possess specific knowledge of accountancy, auditing, taxation, etc. which are
acquired by him during the course of his theoretical education”. Explain stating briefly the qualities of
Auditors
OR
Apart from the knowledge acquired by the auditor in the formal manner, the auditor should also possess
certain personal qualities. Explain stating briefly the qualities of Auditors.
OR
All those personal qualities required to make a good person contribute to the making of a good auditor.
Explain stating the qualities of an Auditor.
OR
State briefly the qualities of an Auditor.
Answer ➢ Professional /Technical Qualities
Knowledge about the business practices and transactions.
Knowledge of the required acts:
• He should have an expert knowledge of various laws which are related to his
professional duties. He can’t be an expert of all laws. However, he should have
adequate knowledge of the laws relating to business, banking, companies, tax
etc.
Expert knowledge in accounting:
• He should be an expert in understanding various accounting systems.
• He should have a good knowledge on treatment of various events / transactions
and its effect on various parts of the financial statements.
Expert knowledge in auditing:
• This is the most important quality. Unless an auditor thoroughly knows the
techniques to be adopted in an audit, he cannot discharge his duties efficiently.
Continuing awareness of latest developments:
• Several developments affect the work of the auditor. For example, the recent
growth in the use of computers for maintaining accounting records had a
significant effect on auditing techniques. Another example is, any changes in law
may affect the auditor’s duties and responsibilities.
➢ Personal Qualities
(Ethical Requirements +Independence)
Ethics:
He must sincerely follow the professional ethics framed by ICAI.
Integrity:
It refers to the honesty of an auditor. He should not issue audit report containing untrue
statements.
Objectivity:
It refers to unbiased, being unaffected by personal feelings or prejudices.
Independence in decision making:
He should be independent in decision making with regard to audit matters i.e. the audit
decisions should be taken without giving importance to his personal wishes.
Confidentiality:
The nature of audit work is confidential. He should not reveal anything about his client to
others without the consent of the client.
Approach
Analytical in approach:
He should be highly analytical in approach. If the facts placed before him are not properly
analyzed, the conclusions reached by him will not be proper.
Application of practical approach:
He must be practical in his approach while doing audit or giving advice to his clients.
Firmness and patience:
He must be firm and patient.
Common sense:
Above all, he should have common sense.
➢ Comments by some famous Personality (Points are similar to as discussed above)
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 The qualities required, according to Dick see,
• Act, caution, firmness, good temper, integrity, discretion, industry, judgement,
patience, clear headedness and reliability.
Lord Justice Lindley in the course of the judgment in the famous London & General Bank
case had summed up the overall view of what an auditor should be as regards the
personal qualities.
• He said, “an auditor must be honest that is, he must not certify what he does not
believe to be true and must take reasonable care and skill before he believes that
what he certifies is true”.

QNO-- Importance of Independent Audit #Unique Old Course -- (M17M)

COA.31 New Course – (S17M/S20M/S21M)
The report of an independent auditor is the only real safeguard available to the various parties interested
in the financial affairs of the entity. It is due to the independence of the auditor, leading to an objective
report, that the risk of people being misled by untrue or fraudulent financial statement is minimized.
OR
The independent audit of an entity’s financial statements is a vital service to investors, trade payables,
and other participants in economic exchange. Explain
Answer ➢ Advantage of Independent Audit:- Informed, objective and forthright opinion
The principal advantage of an independent audit lies in the fact that the society is able to get an
informed, objective and forthright opinion on the financial statements of enterprises which are
used in making significant economic decisions by interested segments of the society, e.g.,
shareholders, trade payables, bankers, etc. Irrespective of the fact whether audit is compulsory,
statutory or voluntary, the audit of accounts by an independent professional auditor becomes
important for every individual and every type of Organization is only through audited accounts by
an independent professional auditor that the shareholders of a company are assured that the funds
invested by them are safe and they are being used for only the purposes for which they were raised
and collected. The chief utility of audit lies in ensuring reliable financial statements on the basis of
which the state of affairs may be easy to understand. Information contained in the statement of
accounts of a business are primarily intended for the owners.
➢ Use of audited financial statements
However, many others make use of the information for different purpose
Management of the business uses it for decision-making purposes
Lenders and trade payables examine it to establish the degree of safety of their money.
Government levies tax putting a prima facie reliance on the statements and regulates the
socio-economic state of affairs on a summary view of the information contained in various
accounting statement made available to it
Investors review the information for making investment decisions.
Financial analysts can use the information to assess the performance of an entity.
➢ Significance to workers of audited financial statements
Financial statements are of great significance to workers as well. They want to be assured that
reasonable and legitimate share of the revenue earned by the Organization has been paid to them
as bonus and the distribution pattern has not violated the norms of social justice. To ensure the
acceptable degree of reliability and accuracy of the financial statements, examination and appraisal
of accounts and the financial picture by an independent auditor is necessary.
➢ Importance of audited financial statement to company form of Organization
In the company form of Organization, there is a divorce between ownership and management
shareholders are so scattered that they have no direct control on the day-to-day administration of
the company while in a proprietary concern, accounts may be audited to get funds from financial
institution, etc.
➢ Importance to Partnership firm
May get its accounts audited to decide questions such as valuation of goodwill at the time of
admission, retirement and death of a partner.

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 ➢ Independence is real safeguard
The report of an independent auditor is, therefore, the only real safeguard available to the various
parties interested in the financial affairs of the entity. It is due to the independence of the auditor,
leading to an objective report, that the risk of people being misled by untrue or fraudulent financial
statement is minimized. As a by-product, managements get attuned to open and truthful financial
statements.

QNO-- Independence of mind & appearance Old Course -- (N20M)

COA.32 Bhaskar CNO C1OC.140 New Course – (M19E/N20M)
"Independence of mind and independence in appearance are interlinked perspectives of Independence
of auditors." Explain.
Answer ➢ Independence
Independence implies that the judgment of a person is not subordinate to the wishes or
direction of another person who might have engaged him.
The auditor should be independent of the entity subject to the audit.
There are two interlinked perspective of independence of auditors,
• independence of mind and
• independence in appearance.
The Code of Ethics for Professional Accountants issued by International Federation of
Accountants (IFAC) defines the term “Independence” as comprising both-
• Independence of mind
The state of mind that permits the provision of an opinion without being affected
by influences allowing an individual to act with integrity, and exercise objectivity
and professional skepticism; and
• Independence in appearance
The avoidance of facts and circumstances that are so significant that a third party
would reasonably conclude an auditor’s integrity, objectivity or professional
skepticism had been compromised.” Independence of the auditor has not only to
exist in fact, but also appear to so exist to all reasonable persons.

Auditor & Related Concepts -Types of Threats New Course --(S17M/N18M/M19M/N19R/S20M/S21M

QNO--
to Independence /M22R)
COA.33
Bhaskar CNO C1OC.160
The Code of Ethics for Professional Accountants prepared by the International Federation of Accountants
(IFAC) identifies five types of threats. Explain.
OR
The auditor should be straightforward, honest and sincere in his approach to his professional work. He
must be fair and must not allow prejudice or bias to override his objectivity. He should maintain an
impartial attitude, and both be and appear to be free of any interest which might be regarded as being
incompatible with integrity and objectivity. Many different circumstances, or combination of
circumstances, may be relevant and accordingly it is impossible to define every situation that creates
threats to independence and specify the appropriate mitigating action that should be taken. In addition,
the nature of assurance engagements may differ, and consequently different threats may exist requiring
the application of different safeguards. Explain stating clearly the five types of threats as contained in
Code of Ethics for Professional Accountants, prepared by the International Federation of Accountants
(IFAC).
OR
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. Explain.
OR
Write a note on “Self-review threats”
Answer ➢ The auditor should be
straightforward, honest and sincere in his approach to his professional work.
He must be fair and must not allow prejudice or bias to override his objectivity.

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 He should maintain an impartial attitude, and both be and appear to be free of any interest
which might be regarded as being incompatible with integrity and objectivity.
➢ Many different circumstances, or combination of circumstances, may be relevant and accordingly it
is impossible to define every situation that creates threats to independence and specify the
appropriate mitigating action that should be taken. In addition, the nature of assurance
engagements may differ, and consequently different threats may exist requiring the application of
different safeguards.
➢ The Code of Ethics for Professional Accountants prepared by the International Federation of
Accountants (IFAC) identifies five types of threats. These are:
Circumstances that may create self-interest threats
• A financial interest in a client or jointly holding a financial interest with a client.
• A loan to or from an assurance client or any of its directors or officers
• Having a close business relationship with a client. Concern about the possibility of
losing a client.
• Potential employment with a client
• Undue dependence on total fees from a client.
• Contingent fees relating to an assurance engagement.
Examples of circumstances that may create self-review threats
• Reporting on the operation of financial systems after being involved in their design
or implementation.
• Having prepared the original data used to generate records that are the subject
matter of the engagement.
• Performing a service for a client that directly affects the subject matter of the
assurance engagement.
• A member of the assurance team being, or having recently been, a director or officer
of that client.
• A member of the assurance team being, or having recently been, employed by the
client in a position to exert direct and significant influence over the subject matter
of the engagement.
• The discovery of a significant error during a re-evaluation of the work of the
professional accountant in public practice.
Examples of circumstances that may create advocacy threats:
• Promoting shares in a listed entity when that entity is a financial statement audit
client.
• Acting as an advocate on behalf of an assurance client in litigation or disputes with
third parties.
Examples of circumstances that may create familiarity threats
• A member of the engagement team having a close or immediate family relationship
with a director or officer of the client.
• A member of the engagement team having a close or immediate family relationship
with an employee of the client who is in a position to exert direct and significant
influence over the subject matter of the engagement.
• A former partner of the firm being a director or officer of the client or an employee
in a position to exert direct and significant influence over the subject matter of the
engagement.
• Accepting gifts or preferential treatment from a client, unless the value is clearly
insignificant.
• Long association of senior personnel with the assurance client
Examples of circumstances that may create intimidation threats
• Being threatened with dismissal or replacement in relation to a client engagement.
• Being threatened with litigation.
• Being pressured to reduce inappropriately the extent of work performed in order to
reduce fees.
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 ➢ Specific circumstances give rise to unique threats to compliance with one or more of the
fundamental principles. Such unique threats obviously cannot be categorized. In either
professional or business relationships, a professional accountant in public practice should always
be on the alert for such circumstances and threats.

QNO-- Others- Self Revealing Error #Unique New Course -- (S17M/S20M/S21M)

COA.39
Briefly explain the self revealing errors with the help of some illustration.
Answer ➢ The existence of these errors becomes apparent during the course of accounts preparation.
E.g., if a cheque issued is omitted, it will be revealed during the preparation of Bank Reconciliation
Statement.
Similarly, certain errors of commission cause difference in the Trail Balance.
Omission to post a part of a journal entry to Trial balance is thrown out of agreement.
the ledger.
Wrong totalling of the Purchase Register. Control Account (e.g., the Sundry Creditors
Account) balances and the aggregate of the
balances in the personal ledger will disagree.
A failure to record in the cashbook amounts Bank reconciliation statement will show up
paid into or withdrawn from the bank. error.
A mistake in recording amount received Statements of account of parties will reveal
from X in the account of Y. mistake.

➢ From the above, it is clear that certain apparent errors balance almost automatically by double
entry accounting procedure and by following established practices that lie within the accounting
system but not being generally considered to be a part of it, like bank reconciliation or sending
monthly statements of account for confirmation.
Author’s Note :
Self revealing error means woh error jo hone par, automatic pata chal hijata hai kyunki errors ki
wajah se kuch na kuch mismatch hota hai hai.

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 CHAPTER AUDIT STRATEGY, AUDIT PLANNING AND AUDIT
2 PROGRAMME

Part 1 -- SA 300

Factors for establishing Overall Audit Old Course -- (M16R/M17R)

QNO
Strategy New Course – (M22M)
300.03
Bhaskar CNO SA300.020
Explain the factors an auditor would consider in establishing the overall audit strategy.
OR
Discuss the factors the auditor will consider while establishing the overall strategy
Answer ➢ Establishing Overall Audit Strategy (Overall plan, first step in planning) (R-CRPF)
R-Resources (Nature / Timing & Extent)
C-Characteristics of Assignment
R-Reporting & Communication
P-Preliminary Engagement Activities Results
F-Significant Factors
Auditor’s Note:
• If the question is asked on “Development of Overall Audit Plan” give answer as per CNO-300.01
and if the question is asked on “Development of Overall Audit strategy” then give answer as per
CNO 300.03.
• Overall Audit plan is traditional audit theory and Overall audit strategy concept is given in SA 300.
Both are conceptually same.

QNO Reporting objectives of the engagement New Course -- (N19E/N21M)

300.05 Bhaskar CNO SA300.040
In establishing overall audit strategy, the auditor shall ascertain the reporting objectives of the
engagement to plan the timing of the audit and the nature of the communications required. Elucidate
those cases by which auditor can ascertain the reporting objectives of the engagement.
➢ Auditor can ascertain the reporting objectives of the engagement
The entity’s timetable for reporting, such as at interim and final stages.
The organization of meetings with management and those charged with governance to
discuss the nature, timing and extent of the audit work.
The discussion with management and those charged with governance regarding the
expected type and timing of reports to be issued and other communications, both written
and oral, including the auditor’s report, management letters and communications to those
charged with governance.
The discussion with management regarding the expected communications on the status of
audit work throughout the engagement.

Overall Audit Strategy -- For Resources Old Course – (M20R)

QNO Management New Course -- (S17M/M18M/N18M/M19E/M20R/N21M)
300.07 Bhaskar CNO SA300.060

The engagement partner of AST AND ASSOCIATES, firm of Chartered Accountants appointed as auditor of
Fabric India Ltd is considering as to management of key resources to be employed to conduct audit.
Discuss how overall audit strategy would assist the auditor.
OR
The engagement partner of SKC & Co., firm of Chartered Accountants appointed as auditor of Fabric India
Ltd is considering as to management of key resources to be employed to conduct audit. Discuss how

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 overall audit strategy would assist the auditor.
OR
The auditor T of Hand Fab Ltd is worried as to management of key resources to be employed to conduct
audit. Required How the audit strategy would be helpful to the auditor?
OR
"Overall audit strategy sets the scope, timing and direction of the audit, and guides the development of
the more detailed audit plan. The process of establishing the overall audit strategy assists the auditor to
determine such matters as for example - 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. Explain the other three such matters."
OR
Describe how the process of establishing the overall audit strategy assists the auditor in marshalling his
human resources.
Answer ➢ 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 audit or to determine, subject to
the completion of the auditor’s risk assessment procedures, such matters as:
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;
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;
When these resources are to be deployed, such as whether at an interim audit stage or at
key cut-off dates; and
How such resources are managed, directed and supervised, such as when team briefing,
and debriefing 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.

QNO Overall Audit Strategy-- Relationship with Audit Plan New Course -- (S17M/M19M/S20M/S21M)
300.15 Bhaskar CNO SA300.100
The establishment of the overall audit strategy and the detailed audit plan are closely inter-related.
Explain.
OR
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.
Answer Once the overall audit strategy has been established, anaudit plan can be developed to addressthevarious
matters identified in the overall audit strategy, taking in to account the need to achieve the audit
objectives through the efficient use of the auditor’s resources. 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.

QNO Audit Plan (3 Types of Plan) New Course -- (M22R)

300.23 Bhaskar CNO SA300.080
Engagement Partner CA Hitesh Kapur of Kapur and Associates wanted to develop an audit plan of
Sampurna Fabrics Ltd. Discuss the matters to be described in such an audit plan
The auditor shall develop an audit plan that shall include a description of :
(i) 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”.
(ii) 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”.
(iii) Other planned audit procedures that are required to be carried out so that the engagement complies
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 with SAs.
The audit plan is more detailed than the overall audit strategy that includes the nature, timing and extent of
audit procedures to be performed by engagement team members. Planning for these audit procedures
takes place over the course of the audit as the audit plan for the engagement develops.
Example
Planning of the auditor’s risk assessment procedures occurs early in the audit process. However, planning
the nature, timing and extent of specific further audit procedures depends on the outcome of those risk
assessment procedures. In addition, the auditor may begin the execution of further audit procedures for
some classes of transactions, account balances and disclosures before planning all remaining further audit
procedures.

Audit Plan (Documentation & Examples) Old Course - (N20R)

QNO
Bhaskar CNO SA300.180 New Course- (N18M/S20M/S21M/N20R/M21E
300.27
/N22R)
The auditor shall document the overall audit strategy, the audit plan, and any significant changes made
during the audit engagement to the overall audit strategy or the audit plan, and the reasons for such
changes. Explain.
Answer ➢ The auditor shall document:
the overall audit strategy;
the audit plan; and
any significant changes made during the audit engagement to the overall audit strategy or
the audit plan, and the reasons for such changes.
➢ Further Explanation
Overall Audit Strategy
The documentation of the overall audit strategy is a record of the key decisions considered
necessary to properly plan the audit and to communicate significant matters to the
engagement team.
Example: The auditor may summarize the overall audit strategy in the form of a
memorandum that contains key decisions regarding the overall scope, timing and conduct of
the audit.
Audit Plan
The documentation of the audit plan is a record of the planned nature, timing and extent of
risk assessment procedures and further audit procedures at the assert on level in response
to the assessed risks. It also serves as a record of the proper planning of the audit
procedures that can be reviewed and approved prior to their performance. The auditor may
use standard audit programs and/or audit completion checklists, tailored as needed to
reflect the particular engagement circumstances.
Significant Changes
A record of the significant changes to the overall audit strategy and the audit plan, and
resulting changes to the planned nature, timing and extend to f audit procedures, explains
whythesignificant changes were made,and the overall strategy and audit plan finally
adopted for the audit.It also reflects the appropriate response to the significant changes
occurring during the audit.

QNO Planning for DSR Old course – (M20M/N20R/N21R)

300.29 Bhaskar CNO SA300.120 New Course -(S17M/M20M/S20M/S21M/N20R/N21R/N22R)

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.
OR
"The auditor shall plan the nature, timing and extent of direction and supervision of engagement team
members and the review of their work. Explain the factors due to which above varies"
Answer ➢ The auditor shall plan the nature, timing and extent of direction and supervision of engagement
team members and the review of their work.

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 ➢ 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
The size and complexity of the entity.
The area of the audit.
The assessed risks of material misstatement
• Example:
An increase in the assessed risk of material misstatement for a given area of the audit
ordinarily requires a corresponding increase in the extent and timeliness of direction and
supervision of engagement team members, and a more detailed review of their work.
The capabilities and competence of the individual team members performing the audit
work.
• Example:
o We may have identified a problem related to the production process that raised
concerns about inventory obsolescence.
o After obtaining an understanding of the entity’s process that raised concerns about
inventory obsolescence (which we had identified as a significant class of
transactions), we concluded that additional tests of details were required.
o Therefore, the senior will likely take part, along with the team, in the discussions
with management about the provision for obsolescence and examine related
documentation supporting the provision, rather than just reading the memo on fi
le.
o These procedures should be completed as the work is being performed rather than
as an after the fact review. The extent of the senior’s involvement requires
judgment, taking into consideration the complexity of the area and the experience
of the team.

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 Part 2 – SA 320

QNO Materiality Old Course – (P16M/M16R/N17M/N17R/N18R/M21R)

320.01 Bhaskar CNO SA320.020 New Course - (M21R)
Discuss the concept of materiality in the context of the preparation and presentation of financial
statements.
OR
Concept of ‘Materiality’.
Answer ➢ Definition of Materiality
According to SA 200 “Overall Objectives of the Independent Auditor and the Conduct of an Audit in
Accordance with Standards on Auditing”, financial reporting frameworks often discuss the concept of
materiality in the context of the preparation and presentation of financial statements. Although financial
reporting frameworks may discuss materiality in different terms, they generally explain that:
Misstatements, including omissions, are considered to be material if they, individually or in the aggregate,
could reasonably be expected to influence the economic decisions of users taken on the basis of the
financial statements.
➢ Depends on Circumstances
Judgments about materiality are affected by the size or nature of a misstatement, by the auditor’s
perception of the financial information needs of users of the financial statements, or a combination of
both; and (CSR expenditure after Sec 135 was notified) and are made in the light of surrounding
circumstances.
➢ Common needs of users as group
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.
Judgments about matters that are material to users of the financial statements are based on a
consideration of the common financial information needs of users as a group. The possible effect of
misstatements on specific individual users, whose needs may vary widely, is not considered. (E.g.
Advertisement costs are analysed in depth in FMCG industry by public at large but some individuals may
pay more attention to employee costs)
➢ FRF
Such a discussion, if present in the applicable financial reporting framework, provides a frame of
reference to the auditor in determining materiality for the audit. If the applicable financial reporting
framework does not include a discussion of the concept of materiality, the characteristics referred above
provides the auditor with such a frame of reference.
➢ Assumption about users
In this context, it is reasonable for the auditor to assume that users:
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.
Understand that financial statements are prepared, presented and audited to levels of
materiality.
Recognize the uncertainties inherent in the measurement of amounts based on the use of
estimates, judgment and the consideration of future events; and
Make reasonable economic decisions on the basis of the information in the financial statements.
➢ Applied Throughout the audit
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.

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QNO Materiality Discussion, Multiple Points #Unique Old Course -- (N21R)
320.02 New Course -- (N21R)
What could be considered material for all situations cannot be defined precisely and an amount or transaction
material in one situation may not be material in other situation. Explain
Answer Materiality is an important consideration for an auditor to evaluate whether the financial statements
reflect a true and fair view or not. SA 320 on “Materiality in Planning and Performing an Audit” requires
that an auditor should consider materiality and its relationship with audit risk while conducting an audit.
When planning the audit, the auditor considers what would make the financial information materially
misstated. The auditor’s preliminary assessment of materiality related to specific account balances and
classes of transactions helps the auditor decide such questions as what items to examine and whether
to use sampling and analytical procedures. 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. It may be noted that the auditor’s assessment of materiality and
audit risk may be different at the time of initially planning of the audit as against at the time of
evaluating the results of audit procedures.

At the planning stage, the auditor needs to consider the materiality for the financial statements as a
whole. The auditor has to carry out a preliminary identification of significant components and material
classes of transactions, account balances and disclosure which he plans to examine. What could be
considered material for all situations cannot be defined precisely and an amount or transaction material
in one situation may not be material in other situation. For example, ` 5,000 may be material for a small
entity, but even ` 100,000 may not be material for a large entity.

Materiality at financial statement level vs materiality New Course--(S20M/S21M)

QNO
at TBD level
320.04
Bhaskar CNO SA320.060
Whether misstatements of lesser amounts than 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? Explain with examples
➢ Factors that may indicate the existence of one or more particular classes of transactions, account
balances or disclosures for which misstatements of lesser amounts than 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 include the following:
Whether law, regulations or the applicable financial reporting framework affect users’
expectations regarding the measurement or disclosure of certain items.
Example Related party transactions, and the remuneration of management and those charged
with governance.
The key disclosures in relation to the industry in which the entity operates.
Example Research and development costs for a pharmaceutical company.
Whether attention is focused on a particular aspect of the entity’s business that is separately
disclosed in the financial statements. Example A newly acquired business.

Relationship between Materiality and Old Course -- (P16M/M17M)

QNO
Audit Risk New Course – (M22R)
320.05
Bhaskar CNO SA320.100
Explain the Relationship between materiality and audit risk.
OR
While conducting the audit of Smart TV Ltd, engagement team of HTR& Co, has considered materiality and
audit risk throughout the audit. Discuss explaining the meaning of audit risk.
Answer Consider Materiality & Audit Risk in Audit Process
SA 320 on ‘Materiality in Planning and Performing an Audit’ requires that the auditor should
consider materiality and its relationship with audit risk when conducting an audit.
Inverse Relationship
There is an inverse relationship between Materiality and the degree of audit risk. Higher the
materiality level the lower the audit risk and vice-versa.
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 Materiality Depends on Circumstances
Materiality depends on the size and the nature of the items judged in the particular circumstances
of its misstatement.
Audit Risk should be within acceptable levels
The audit should be planned so that audit risk is kept at an acceptably low level. After the auditor
has assessed the inherent and control risks, he should consider the level of detection risk that he
is prepared to accept and, based upon his judgment, select appropriate substantive audit
procedures. If the auditor does not perform any substantive procedures, detection risk, that is,
the risk that the auditor will fail to detect a misstatement, will be high. The auditor’s assessment
of audit risk may change during the course of an audit according to the need and development
of the circumstances.

Author’s Note
It’s a traditional answer, concept of inverse relationship should be explained and apart from
that it should be explained that combination of materiality and audit risk is used at various
steps in audit, as explained below
Identifying and assessing the risks of material misstatement.
Determining the nature, timing and extent of further audit procedures; and
Evaluating the effect of uncorrected misstatements, if any, on the financial statements and in
forming the opinion in the auditor’s report.

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 Part 3 – Other Concepts

Audit Planning -- Not a Discrete Old Course -- (M20R/M21R)

QNO
Phase New Course – (S17M/N18M/N18E/N19R/S20M/S21M/M20R/M21R)
C2OC.040
Bhaskar CNO C2OC.040
Planning is not a discrete phase of an audit, but rather a continual and iterative process. Discuss.
OR
Planning is not a discrete phase of an audit, but rather a continual and iterative process that often
begins shortly after the completion of the previous audit and continues until the completion of the
current audit engagement. Analyse and Explain.
OR
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. Discuss stating clearly the broad points you would be
covering in framing plan to conduct audit in an efficient and effective manner.
OR
Plans should be further developed and revised as necessary during the course of the audit. Explain.
Answer ➢ Planning is not a discrete phase of an audit but rather a continual and iterative process. It often
begins shortly after (or in connection with) the completion of the previous audit and continues
until the completion of the current audit engagement. 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. Planning includes consideration of the timing of certain activities and audit
procedures. It also involves Audit Programming.
➢ Planning includes the need to consider such matters as:
o A- The analytical procedures to be applied as risk assessment procedures.
o M-The determination of materiality.
o O-The performance of other risk assessment procedures.
o L-Obtaining a general understanding of the legal and regulatory framework applicable
to the entity and how the entity is comply in g with that framework.
o E-The involvement of experts.

QNO Overall Audit Strategy -- Sharing with Management New Course -- (S17M)
C2OC.060 Bhaskar CNO C2OC.060
W, the auditor of SKM Ltd asks its finance and audit head to prepare audit strategy for conducting audit
of SKM Ltd. W also insist him to draw detailed audit procedures also. On the request of auditor W,
complete audit strategy as well as audit procedures are prepared by finance head of the company.
Subsequently, auditor realizes that effectiveness of the audit is compromised, and it was his
responsibility to prepare the overall audit strategy. Comment.
Answer ➢ Discussing Elements of Planning with Management
The auditor may decide to discuss elements of planning with the entity’s management to
facilitatethe conduct and management of the audit engagement.For example - to coordinate
some of the planned audit procedures with the work of the entity's personnel.
➢ Ultimate Responsibility of Auditor:
Although these discussions of ten occur but the overallaudit strategy and the audit plan
remainthe auditor's responsibility. When discussing matters about the overall audit strategyor
audit plan, careis required in order not to compromise the effectiveness of the audit to be taken
to see there is no compromise in the effectiveness of the audit. For Example - discussing the
nature and timing of detailed audit procedures with management may compromise the
effectiveness of the audit by making the audit procedures too predictable.
➢ Involvement of Engagement Partner & Other Key Members
The engagement partner and other key membersof the engagement team shall be involved in

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 planning the audit. The involvement of the engagement partner and other key members of the
engagement team in planning the audit Rawson their experience thereby enhancing the
effectiveness and efficiency of the planning process.
Hence in the above case approach of W was wrong and he should have prepared overall audit
strategy and detailed audit procedures.

QNO Audit Program (Significant Points) Old Course-(M18R)

C2OC.080 Bhaskar CNO C2OC.080 New Course (M19R/N19E/ N22R/N22M)
Explain the significant points auditor would consider while developing an audit programme.
OR
Arpan Hospitals Ltd having Gross Professional Charges of Rs 50 crores is engaged in providing
healthcare services. STP & Co., a firm of auditors is appointed as its auditors. Advise what special points
to be kept in mind for the purpose of construction of an Audit programme. Explain.
OR
State what special points you would keep in mind for the purpose of construction of an Audit
programme. Explain
OR
Discuss the points to be considered by auditor for the purpose of constructing an audit programme.
OR
While developing an audit programme, the auditor may conclude that relying on certain internal
controls is an effective and efficient way to conduct his audit. Explain stating clearly the points to be
kept in mind while developing an audit programme.
OR
XYZ & associates are appointed as the statutory auditors of Fisco Ltd. for the FY 2021 -22. While
constructing the audit programme, the engagement partner, CA X, should keep in mind various points.
List such points
Answer For the purpose of programme construction, the following points should be kept in mind:

Stay within the scope and limitation of the assignment.

Prepare a written audit programme setting forth the procedures that are needed to
implement the audit plan.
Determine the evidence reasonably available and identify the best evidence for deriving the
necessary satisfaction
Apply only those steps and procedures which are useful in accomplishing the verification
purpose in the specific situation.
Include the audit objectives for each area and sufficient details which serve as a set of
instructions for the assistants involved in audit and help in controlling the proper execution
of the work.
Consider all possibilities of error
Co-ordinate the procedures to be applied to related items.

QNO Audit Programme (One Audit Program for All Not Practical) Old Course-(M18R/N20R)
C2OC.085 Bhaskar CNO C2OC.080 New Course (M19R/N20R)
Evolving one audit programme applicable to all business under all circumstances is not practicable.
Explain
Answer ➢ Businesses vary in nature, size and composition; work which is suitable to one business may not
be suitable to others; efficiency and operation of internal controls and the exact nature of the
service to be rendered by the audit or are the other factors that vary from assignment to
assignment. On account of such variations, evolving one audit program applicable to all
business under all circumstances is not practicable.
➢ However, it becomes a necessity to specify in detail in the audit program the nature of work to
be done so that no time will be wasted on matters not pertinent to the engagement and any
special matter or any specific situation can be taken care of.

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QNO Audit Program (Periodic Review) New Course -- (S17M/M19R/S20M/S21M)
C2OC.090 Bhaskar CNO C2OC.080
The utility of the audit programme can be retained and enhanced only by keeping the programme as
also the client’s operations and internal control under periodic review so that inadequacies or
redundancies of the programme may be removed. Explain
Answer ➢ Periodic Review of The Audit Program
Why Periodic Review
There should be periodic review of the audit programme to assess whether the same
continues to be adequate ephorate in in grecque site knowledge and evidence about the
transactions. Unless this is done, any change in the business policy of the client may not be
adequately known, and consequently, audit work may be carried on, on the basis of an
obsolete programmed, for this negligence, the whole and it may be held as negligently
conducted and the audit or may have to face legal consequences.

Example-
• If the audit programme for the audit of a branch of a financing house, drawn up a
number of years ago, fails to take into consideration that the previous policy of
financing of a vehicle has been changed to financing of real estate acquisition, the
whole audit conducted thereunder would be entirely misdirected and may even
result into nothing more than a farce. [Pacific Acceptance Corporation Ltd. v.
Forsyth and Others.]
Changes in operation and ICS
The utility of the audit programmer can be retained and enhanced only by keeping the
programmer as also the client’s operations and internal control under periodic view so
that inadequacies or redundancies of the programmer may be removed. However, as a
basic feature, audit programme not only lists that as Kato be carried out but also contains
a few relevant in strictions, like the extent of checking, the sampling plan, etc.
Rigidity
So long as the programme is not officially changed by the principal, every assistant
deputed on the job should unfailingly carry out the detailed works according to the
instructions governing the work. Many persons believe that this brings an element of
rigidity in the audit programme. This is not true provided the periodic review is undertaken
to keep the programme as up to date as possible and by encouraging the assistants on the
job to observe all salient features of the various accounting functions of the client.

Advantages/Disadvantages of Audit Old Course-(P16M/M17R/M18R/N18M/N18E/N19R/N21R)

QNO
Programme New Course-(N18E/M19R/N19R/N21R/M22M/N22M)
C2OC.100
Bhaskar CNO C2OC.100
All the disadvantages of audit program may be eliminated by imaginative supervision of the work
carried on by the assistants. Explain stating the advantages and Disadvantages of an audit program.
OR
“All the disadvantages of audit program may be eliminated by imaginative supervision of the work
carried on by the assistants, the auditor must have a receptive attitude as regards the assistants; the
assistants should be encouraged to observe matters objectively and bring significant matters to the
notice of supervisor/principal.” Explain stating the advantages and disadvantages of an audit program.
OR
Surya and Chand Ltd is a manufacturing company engaged in the production of miscellaneous electrical
goods. Trilithon and Co. has been appointed as the auditors to carry out its audit. Auditor thinks that
Planning an audit would involve establishing the overall audit strategy for the engagement and
developing an audit plan. Also, Adequate planning benefits the audit of financial statements in several
ways. Analyse and Advise explaining the benefits of adequate planning.
OR
Planning an audit involves establishing the overall audit strategy for the engagement and developing an
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 audit plan. Adequate planning benefits the audit of financial statements in several ways. Discuss
OR
Explain the benefits of planning in the audit of financial statements.
Answer ➢ Advantages & Disadvantages of Audit Programme
Advantages
• provides the assistant carrying out the audit with total and clear set of instructions
of the work generally to be done.
• Selection of assistants for the jobs on the basis of capability becomes easier when
the work is rationally planned, defined and segregated.
• Without a written and pre-determined programme, work is necessarily to be carried
out on the basis of some ‘mental’ plan. In such a situation, there is always a danger
of ignoring or overlooking certain books and records. Under a properly framed
programme, the danger is significantly less, and the audit can proceed
systematically.
• 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.
• Helping the auditor to devote appropriate attention to important areas of the audit.
• Helping the auditor identify and resolve potential problems on a timely basis.
• Assisting, where applicable, in coordination of work done by auditors of components
and experts.
• The principal can control the progress of the various audits in hand by examination
of audit programmes initiated by the assistants deputed to the jobs for completed
work.
• It serves as a guide for audits to be carried out in the succeeding year.
• A properly drawn up audit programme serves as evidence in the event of any charge
of negligence being brought against the auditor. It may be of considerable value in
establishing that he exercised reasonable skill and care that was expected of
professional auditor.
Disadvantages
• 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.
• 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
• 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.
• A hard and fast audit programme may kill the initiative of efficient and enterprising
assistants
Author’s Note
Advantages & Disadvantages of planning
Advantages:- appropriate selection & assignment of work / responsibility & accountability of work
delegated improves / clear set of instructions to juniors / systematic plan with proper emphasis on
important areas / less chances of overlooking
e.g. EPS checking omitted / identify & resolve potential problems
e.g. need of expert in inventory determination & valuation / helps in co-ordination with other auditors
/supervising audit work / helps in controlling / serves as guide
succeeding years / serves as evidence in case of charge against negligence.
Disadvantages: -Fixed Pattern Not Applicable/ Rigid/ Mechanical / Good for inefficient assistants /Bad for
efficient assistants.

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CHAPTER AUDIT DOCUMENTATION AND AUDIT EVIDENCE
3

Part 1 -- [SA 230] AUDIT DOCUMENTATION

Audit Documentation- Master Answer-Meaning, Old Course - (P16M/N16R/M19R)

QNO
Nature and Purpose New -- (S17M/N18M/M19R/N19R/S20M/S21M)
230.01
Bhaskar CNO C2OC.020
Define audit documentation. Also give some examples.
OR
The audit working papers constitute the link between the auditor’s report and the client’s records. Explain
clearly stating the definition and purpose of audit documentation
OR
Audit documentation provides evidence of the auditor’s basis for a conclusion about the achievement of
the overall objectives of the auditor and evidence that the audit was planned and performed in
accordance with SAs and applicable legal and regulatory requirements. Explain stating clearly purpose of
audit documentation.
OR
Audit Working Papers.
OR
Discuss the meaning and nature of Audit Documentation.
OR
The audit working papers constitute the link between the auditor’s report and the client’s records. Explain
clearly stating the definition and purpose of audit documentation.
Answer ➢ Definition
The record of audit procedures performed, (Test of Controls / Substantive Procedures)
Relevant audit evidence obtained, and (Oral / Visual / Documentary)
Conclusions the auditor reached(Modified or Unmodified)
(Terms such as “working papers” or “work papers” are also sometimes used).
➢ Examples
Audit documentation may be recorded on paper or on electronic or other media.
Examples of audit documentation include:
• Audit programmes. (At initial stages)
• Checklists. (While Performing Audit)
• Analyses. (Throughout the audit)
• Issues memoranda. (Unresolved matters between auditor & client)
• Summaries of significant matters. (Significant Risk / Significant Difficulties / Material
Misstatements etc.)
• Correspondence (including e-mail) concerning significant matters.
• Letters of confirmation and representation. (Taken near end of the audit)
Author’s note
If question talks about purpose follow CNO-230.03

Working Papers (Master Answer)- Old Course -- (P16M/M16M/N17R/M21M/M21R)

QNO
Importance/Purpose/ Advantages New Course – (M21M/M21R)
230.03
Bhaskar CNO SA230.040
Explain in briefly the utility of Working Papers to an auditor.
OR
Importance of Working Papers.
OR
Explain the advantages of Audit Working Papers.

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 OR
Audit Working Papers are the record of audit procedures performed, relevant audit evidence obtained,
and conclusions the auditor reached. Explain stating meaning and advantages of working papers.
OR
What are audit working papers and why should they be carefully preserved by the Auditor?
Answer ➢ Audit Working Papers:
Meaning
As per SA 230 “Audit Documentation”, Audit Working Papers are the record of audit procedures
performed, relevant audit evidence obtained, and conclusions the audit or reached.
➢ Ownership of Working Papers:
Working papers are the property of the auditor and he may, at his discretion, make portions of or
extracts from his working papers to his client.
➢ Custody of Working Papers:
The auditor should adopter as on able procedures or safe custody and confidentiality of his
working papers
➢ Advantages of Audit Working Papers
Basic purpose
Working papers are the-
Evidence that the audit was planned and performed in accordance with SAs and applicable
legal and regulatory requirements.
Evidence of the auditor’s basis for a conclusion about the achievement of the overall
objective of the auditor; and
Additional purpose
Besides they serve a number of additional purposes, including the following:
• Assisting the engagement team to plan and perform the audit.
• Assisting members of the engagement team responsible for super vision direct and
supervise the audit work, and to discharge their review responsibilities in
accordance with SA 220.
• Enabling the engagement team to be accountable for its work.
• Enabling the conduct of quality control reviews and inspections in accordance with
SQC 1.
• Enabling the conduct of external inspections in accordance with applicable legal,
regulatory or other requirements.
• Retaining a record of matters of continuing significance to future audits.
➢ Property
Standard on Quality Control (SQC) 1, “Quality Control for Firms that Perform Audits and Reviews of
Historical Financial Information, and Other Assurance and Related Services Engagements”, issued by
the Institute, provides that, unless otherwise specified by law or regulation, working papers are
the property of the auditor. He may at his discretion, make portions of, or extracts from, working
papers 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.
➢ Retention of working papers:
Working papers should be retained, long enough, fora period of time sufficient to meet the needs
of his practice and satisfy any legal or professional requirement of record retention. SQC 1
requires firm steamtables 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.
Author’s Note
This is a master answer of Working Papers. Students are advised to write the appropriate part of the
answer as per the requirements of the question

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 Important matters to be recorded while documenting Old Course – (M21R)
QNO
NTE of Audit Procedures New Course – (M21R)
230.04
Bhaskar CNO SA230.080
While documenting the nature, timing and extent of audit procedures performed in case of audit of PQR Ltd,
explain the important matters its auditor should record.
Answer In documenting the nature, timing and extent of audit procedures performed, the auditor of PQR Ltd
shall record:
(i) The identifying characteristics of the specific items or matters tested.
(ii) Who performed the audit work and the date such work was completed; and
(iii) Who reviewed the audit work performed and the date and extent of such review.

Ownership of Working Paper Branch Auditor Vs Old Course - (P16M/N19E/M21M)

QNO
Company Auditor New Course - (M21M)
230.07
Bhaskar CNO SA230.200
Should branch auditor of a company comply with the request of the principal auditor of the company to
give photocopy of the working papers pertaining to the branch audit? Explain.
Or
The working papers of the branch auditor are also the property of the Principal Auditor and the
Management of the Company, so they have right to access them. State the relevant SA and comment.
Answer Ownership of Working Papers:
As per SA 230 “Audit Documentation”, working papers are the property of the auditor. He may at his
discretion, make available portions or extracts from his working paper to his client. The auditor should
adopt reasonable procedure elf or custody and confidentiality of his working papers.
An auditor is not required to provide the clients or other auditors’ access to his working papers.
Main auditor of the company does no have right of access to the working papers of the branch auditor.
In the case of a company, the main audit or has to consider the report of the branch auditor and has a right
to seek clarification and to visit the branch but can not ask for the copy of working paper and therefore,
the branch auditor is under no compulsion to give photo copies of his working paper to the principal
auditor.

QNO Assembly of Audit File New Course - (M18M/M19M/N19R/N19E/M22R)

230.15 Bhaskar CNO SA230.120
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. Discuss
OR
SQC 1 requires firms to establish policies and procedures for the timely completion of the assembly of
audit files. Explain
OR
Briefly explain the policies and procedures of assembling the final audit file on a timely basis after the
date of auditor's report under SQC-1.
Answer ➢ What is done in assembly?
The completion of the assembly of the final audit file after the date of the auditor’s report is
an administrative process that does not involve the performance of new audit procedures
or the drawing of new conclusions.
Changes may, however, be made to the audit documentation during the final assembly
process if they are administrative in nature. Examples of such changes include:
• Deleting or discarding superseded documentation.
• Sorting, collating and cross-referencing working papers.
• Signing off on completion check lists relating to the file assembly process.
• Documenting audit evidence that the auditor has obtained, discussed and agreed
with the relevant members of the engagement team before the date of the
auditor’s report.
➢ When to assemble?

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 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.
➢ Completion?
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.
➢ What after assembly?
After the assembly of the final audit file has been completed, the audit or shall not delete or discard
audit documentation of any nature before the end of its retention period.
➢ 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.

Completion Memorandum – Audit Documentation Old Course – (M20M)

CNO
Summary New Course - (S17M/M19E/M20M/S20M/S21M)
230.17
Bhaskar CNO SA230.140
Audit documentation summary may facilitate effective and efficient reviews and inspections of the audit
documentation, particularly for large and complex audits. Explain.
OR
"Completion Memorandum" is helpful as part of the audit documentation. Explain
Answer ➢ 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, or
that includes cross- references to other relevant supporting audit documentation that provides
such information.
➢ Such a summary may facilitate effective and efficient reviews and inspections of the audit
documentation, particularly for large and complex audits. Further, the preparation of such a summary
may assist the auditor’s consideration of the significant matters.
➢ It may also help the auditor to consider whether, in light of the audit procedures performed and
conclusions reached, there is any individual relevant SA objective that the auditor cannot achieve that
would prevent the auditor from achieving the overall objectives of the auditor

Judging the Significance of a Matter & Which is important for Old Course – (N20M)
QNO
Documentation New Course – (M19R/N20M/N20R)
230.19
Bhaskar CNO SA230.160
Judging the significance of a matter requires an objective analysis of the facts and circumstances.
Documentation of the professional judgments made, where significant, serves to explain the auditor’s
conclusions and to reinforce the quality of the judgment. Explain with the help of examples.
Answer ➢ Judging the significance of a matter requires an objective analysis of the facts and
circumstances.
Examples of significant matters include:
• Matters that give rise to significant risks.
• Circumstances that cause the auditor significant difficulty in applying necessary
audit procedures.
• Results of audit procedures indicating:
o a need to revise the auditor’s previous assessment of the risks of material
misstatement and the auditor’s responses to those risks.
o that the financial statements could be materially misstated, or
• Findings that could result in a modification to the audit opinion or the inclusion of
an Emphasis of Matter Paragraph in the auditor’s report.
➢ Documentation depends on Professional Judgement
An important factor in determining the form, content and extent of audit documentation of
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 significant matters is the extent of professional judgment exercised in performing the work
and evaluating the results.
Documentation of the professional judgments made, where significant, serves to explain
the auditor’s conclusions and to reinforce the quality of the judgment. Such matters are of
particular interest to those responsible for reviewing audit documentation, including those
carrying out subsequent audits, when reviewing matters of continuing significance (for
example, when performing a retrospective review of accounting estimates).
Examples of Professional Judgement:(SAF – Subjective, Authenticity, Factors)
Some examples of circumstances in which it is appropriate to prepare audit documentation
relating to the use of professional judgment include, where the matters and judgments are
significant:
• Subjective -The basis for the auditor’s conclusion on the reasonableness of areas
of subjective judgments(for example, the reasonableness of significant accounting
estimates). (SA 540)
• Authenticity -The basis for the auditor’s conclusions about the authenticity of a
document when further investigation (such as making appropriate use of an
expert or of confirmation procedures) is undertaken in response to conditions
identified during the audit that caused the auditor to believe that the document
may not be authentic. (SA 240)
• Factors -The rationale for the auditor’s conclusion when a requirement provides
that the auditor ‘shall consider’ certain information or factors, and that
consideration is significant in the context of the particular engagement. (SA 600 &
SA 620)

Documenting every matter considered & separate New Course – (N21M)

QNO
documentation showing compliance of SA not required
230.30
#Unique
Audit documentation provides evidence that the audit complies with SAs. However, it is neither
necessary nor practicable for the auditor to document every matter considered. Further, it is
unnecessary for the auditor to document separately compliance with matters for which compliance is
demonstrated by documents included within the audit file. Explain giving examples
Answer Audit documentation provides evidence that the audit complies with SAs. However, it is neither necessary
nor practicable for the auditor to document every matter considered, or professional judgment made, in
an audit. Further, it is unnecessary for the auditor to document separately (as in a checklist, for example)
compliance with matters for which compliance is demonstrated by documents included within the audit
file. For example:
➢ The existence of an adequately documented audit plan demonstrates that the auditor has planned the
audit.

➢ The existence of a signed engagement letter in the audit file demonstrates that the auditor has agreed
the terms of the audit engagement with management, or where appropriate, those charged with
governance.

➢ An auditor’s report containing an appropriately qualified opinion demonstrates that the auditor has
complied with the requirement to express a qualified opinion under the circumstances specified in the
SAs.

➢ In relation to requirements that apply generally throughout the audit, there may be a number of ways
in which compliance with them may be demonstrated within the audit file:
• For example, there may be no single way in which the auditor’s professional skepticism is
documented. But the audit documentation may nevertheless provide evidence of the
auditor’s exercise of professional skepticism in accordance with SAs. Such evidence may
include specific procedures performed to corroborate management’s responses to the
auditor’s inquiries
• Similarly, that the engagement partner has taken responsibility for the direction, supervision

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 and performance of the audit in compliance with the SAs may be evidenced in a number of
ways within the audit documentation. This may include documentation of the engagement
partner’s timely involvement in aspects of the audit, such as participation in the team
discussion required by SA 315

QNO Documentation -- Matters Arising After Date of Audit New Course – (N22R)
230.40 Report Bhaskar CNO SA230.120
CA R comes to know some very critical information with regards to the business cycle of an entity for
which he has issued the audit report, which become known to him as an auditor after the date of the
auditor’s report but which existed at that date and which, if known at that date, might have caused the
financial statements to be amended or the auditor to modify the opinion in the auditor’s report. He
wants to perform additional audit procedures to satisfy himself. As an auditor what he shall document,
on the matters arising after the date of audit report?
Answer As per SA 230, “Audit Documentation”, 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:
(i) The circumstances encountered;
(ii) The new or additional audit procedures performed, audit evidence obtained, and conclusions reached,
and their effect on the auditor’s report; and
(iii) When and by whom the resulting changes to audit documentation were made and reviewed.

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 Part 2 -- [SA 330] THE AUDITOR RESPONSE TO ASSESSED RISK

QNO Which control to test Old Course - (M16M/N20R)

330.01 Bhaskar CNO SA330.040 New Course - (N20R)
The auditor shall design and perform tests of controls to obtain sufficient appropriate audit evidence as to
the operating effectiveness of relevant controls.
Answer ➢ Tests of Controls:
The auditor shall design and perform tests of controls to obtain sufficient appropriate audit evidence
as to the operating effectiveness of relevant controls when-
• The auditor’s assessment of risks of material misstatement at the assertion level includes
an expectation that the controls are operating effectively (i.e., the auditor intends to rely
on the operating effectiveness of controls in determining the nature, timing and extent of
substantive procedures); or
• Substantive procedures alone cannot provide sufficient appropriate audit evidence at the
assertion level. A higher level of assurance may be sought about the operating effectiveness
of controls when the approach adopted consists primarily of tests of controls, in particular
where it is not possible or practicable to obtain sufficient appropriate audit evidence only
from substantive procedures

QNO Determining the extent of tests of controls Old Course - (M17R/M21E)

330.05 Bhaskar CNO SA330.040 New Course - (N20R)
Discuss the matters the auditor may consider in determining the extent of tests of controls.
OR
When more persuasive audit evidence is needed regarding the effectiveness of a control, it may be
appropriate to increase the extent of testing of the control as well as the degree of reliance on controls.
Discuss the matters the auditor may consider in determining the extent of test of controls.
Answer

➢ When more persuasive audit evidence is needed regarding the effectiveness of a control, it may be
appropriate to increase the extent of testing of the control as well as the degree of reliance on controls.
Matters the auditor may consider in determining the extent of tests of controls include the following:
FLERT

F - The Frequency of the performance of the control by the entity during the period. (Stock count
is weekly Vs Fixed asset count is half yearly)
L - The Length of time during the audit period that the auditor is relying on the operating
effectiveness of the control. (More time more checking)
E - The Expected rate of deviation from a control. (If expected rate is very close to tolerable rate
of deviation then we have to check more of that control, to extra sure)

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 R - The Relevance and reliability of the audit evidence to be obtained regarding the operating
effectiveness of the control at the assertion level. (Double payment is big risk so software feature
to detect same number of PO is relevant, so check more)
T -The extent to which audit evidence is obtained from Tests of other controls related to the
assertion. (If other controls on that assertion are not effective do more checking here)
Author’s Note
• Shortcut to remember
FLERT

QNO Using Audit Evidence Obtained in Previous Audit Old Course - (M18E/N21R)
330.09 Bhaskar CNO SA330.060 New Course - (N19E)
What are the considerations for an auditor regarding the operating effectiveness of controls using audit
evidence obtained in previous audits?
OR
Discuss the various points which auditor needs to consider in determining whether it is appropriate to use
audit evidence about operating effectiveness of controls obtained in previous audit, and if so, the length of
the time period that may elapsed before retesting.
➢ Factors
In determining whether it is appropriate to use audit evidence about the operating effectiveness of
controls obtained in previous audits, and, if so, the length of the time period that may elapse before
retesting a control, the auditor shall consider the following:
CPM @ MCG
The effectiveness of other elements of internal control, including the Control environment, the
entity’s monitoring of controls, and the entity’s risk assessment process;
(Poor attitude of management towards internal control system is encouragement to wrong
doers)
The risks arising from the characteristics of the control, including whether it is Manual or
automated;
(Quotation Selection & Issuing PO is subjective matter and depends on approving
authority, behavior can change over period of time)
The effectiveness of General IT-controls;
(Purchase entries are ID restricted, but people use each other’s computer, and they
know username passwords)
The effectiveness of the control and its application by the entity, including the nature and extent
of deviations in the application of the control noted in previous audits, and whether there have
been Personnel changes that significantly affect the application of the control;
(Purchase & Store Manager Retired at the beginning of the year, they were replaced
my new comers)
Whether the lack of a change in a particular control poses a risk due to Changing circumstances;
and (GST)
The risks of Material misstatement and the extent of reliance on the control.
(Higher risk less reliance on previous year evidence)

Specific inquiries by auditor when deviations from Old Course - (M19R/ N20E/M21M)
QNO
controls are detected New Course - (S17M/M18E/S20M/S21M/M21M)
330.13
Bhaskar CNO SA330.080
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.
OR
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.
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Answer

➢ Deviations Detected
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:
The tests of controls that have been performed provide an appropriate basis for reliance on
the controls; (Sample rate of deviation was 8% and tolerable rate is also 10%, so it is
appropriate basis to rely on controls, if sample rate of deviation would have been higher than
10% then it would not be reliable control)
Additional tests of controls are necessary; or (If junior officers’ signature is obtained in 20%
bills, check whether rate and quality was appropriate in such bills)
(c)The potential risks of misstatement need to be addressed using substantive procedures.
(If controls are not reliable auditor will have to work on substantive procedures)

QNO Substantive Procedures Old Course - (N19E)

330.15 Bhaskar CNO SA330.100 New Course - (S17M/N18E/S20M/S21M)
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.
OR
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?
OR
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. Analyse
and explain.
Answer ➢ Substantive Procedures for Material Items
Designing and Performing Substantive Procedures 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.
This requirement reflects the facts that:
The auditor’s assessment of risk is judgmental and so may not identify all risks of material
misstatement; and
There are inherent limitations to internal control, including management override.
➢ Types of Substantive Tests
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. (Electricity bills payments)
Only tests of details are appropriate. (Legal Expenses)
A combination of substantive analytical procedures and tests of details are most responsive to
the assessed risks (Salary)
➢ Substantive Analytical Procedures: Substantive analytical procedures are generally more applicable
to large volumes of transactions that tend to be predictable over time. SA 520, “Analytical

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 Procedures” establishes requirements and provides guidance on the application of analytical
procedures during an audit.
➢ 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. (List to actual stock→ Existence and actual stock to list→ Completeness)
➢ External Confirmation
Other Points
The auditor shall consider whether external confirmation procedures are to be performed as
substantive audit procedures.
➢ Effect of Test of Controls
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. 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.
➢ Closing Process
The auditor’s substantive procedures shall include the following audit procedures related to the
financial statement closing process:
Agreeing or reconciling the financial statements with the underlying accounting records; and
Examining material journal entries and other adjustments made during the course of preparing
the financial statements.
The nature, and also the extent, of the auditor’s examination of journal entries and other
adjustments depends on the nature and complexity of the entity’s financial reporting process and
the related risks of material misstatement.

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 Part 3 -- [SA 500] AUDIT EVIDENCE

QNO Audit Evidence Old Course -(P16M/M18R/N18R/M19M/N19R)

500.01 Bhaskar CNO SA500.020 New Course - (N19R/N22R)
Audit evidence includes both information contained in the accounting records underlying the financial
statements and other information. Discuss.
OR
What is “Audit Evidence”?
OR
Auditing is a logical process. An auditor is called upon to assess the actualities of the situation, review the
statements of account and give an expert opinion about the truth and fairness of such accounts. This he
cannot do unless he has examined the financial statements objectively. He needs evidence to obtain
information for arriving at his judgment. Discuss explaining clearly the detailed meaning of audit evidence.
Answer ➢ Definition: -
Audit Evidence means anything which gives information to form an opinion (Obtained from
client or Prepared by Auditor). Explaining this further, audit evidence includes:-
• The accounting records used for the preparation of financial statements and
• Other information that authenticates the accounting records and also supports the
auditor’s rationale behind the true and fair presentation of the financial statements.
o 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 and
other adjustments to the financial statements that are not reflected in journal
entries; and records such as work sheets and spread sheets supporting cost
allocations, computations, reconciliations and disclosures.
o Other information which the auditor may use as audit evidence includes,
(E.g., minutes of the meetings, written confirmations from trade
receivables and trade payables, manuals containing details of internal
control etc.).
A combination of tests of accounting records and other information is generally used by the
auditor to support his opinion on the financial statements.
➢ Carefully perform Audit
Auditing is a logical process. An auditor is called upon to assess the actualities of the situation,
review the statements of account and give an expert opinion about the truth and fairness of
such accounts. This he cannot do unless he has examined the financial statements objectively.
Objective examination connotes critical examination and scrutiny of the accounting statements
of the undertaking with a view to assessing how far the statements present the actual state of
affairs in the correct context and whether they give a true and fair view about the financial
results and state of affairs. An opinion founded on a rather reckless and negligent examination
and evaluation may expose the auditor to legal action with consequential loss of professional
standing and prestige . He needs evidence to obtain information for arriving at his judgment.

Author’s Note Summary

➢ Audit Evidence
Anything which gives information to form an opinion (Obtained from client or Prepared by Auditor)
It includes:-
Accounting Records: - Which are prepared specifically for accounting process or output
of accounting process.
(E.g., Working for depreciation / Interest / Cost Allocation / Voucher / Primary Books /
Secondary Books)

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 Other Information: - Which are prepared for various purposes, but which can be used to
verify accounting records.
(E.g., Legal Records such as AOA / MOA / BOD Minutes etc., Production Records such as
number of units produced & scrap generation or Employee Records such as their personal &
professional details.)
Auditor uses combination of both to support his opinion.
Further it should be Sufficient (Quantity) & Appropriate (Quality: - Reliable & Relevant)

QNO Management expert (Step1:Evaluate management Old Course - (N20E)

500.02 expert?) Bhaskar CNO SA500.160 New Course - (M21R/N22M)
Comment on the following in relation to SA: - Information regarding the competence, capability and
objectivity of the management’s expert may come from a variety of sources.
OR
CA Amar is the statutory auditor of XYZ Ltd. for the FY 2021-22. During the course of audit, CA Amar found
that a litigation is going against the company for which the company has hired an external legal team
(management expert). CA Amar wanted to use the information as audit evidence which is prepared using
the work of the management expert. What should CA Amar consider before using the work of such
management expert?
➢ Steps before relying on 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, -
Evaluate the competence, capabilities and objectivity of that expert;
Obtain an understanding of the work of that expert; and
Evaluate the appropriateness of that expert’s work as audit evidence for the relevant assertion.

➢ Competence, Capabilities and Objectivity – Sources of Evidence

The auditor may obtain information regarding the competence, capabilities and objectivity of a
management’s expert from a variety of sources, such as: -
knowledge of that expert’s qualifications;
published papers or books written by that expert.
personal experience with previous work of that expert;
discussions with that expert;
discussions with others who are familiar with that expert’s work;

Audit Evidence- Related Matters / Features / Old Course - (N19R)

QNO
Characteristic New Course - (N19R/S20M/S21M)
500.03
Bhaskar CNO SA500.120
Audit evidence is necessary to support the auditor’s opinion and report. It is cumulative in nature and is
primarily obtained from audit procedures performed during the course of the audit. Most of the auditor’s
work in forming the auditor’s opinion consists of obtaining and evaluating audit evidence. Explain
OR
Most of the auditor’s work in forming the auditor’s opinion consists of obtaining and evaluating audit
evidence. Explain

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Answe
r

Suffici • Sufficiency is measure of quantity of audit evidence.

ency • Appropriateness is measure of quality of audit evidence.
and
Appro
priate
Discuss • The auditor shall design and perform audit procedures that are appropriate in the circumstances for
ion the purpose of obtaining sufficient and appropriate audit evidence.
• Audit evidence is necessary to support the auditor’s opinion and report. It is cumulative in nature and
is primarily obtained from audit procedures performed during the course of the audit.
• It may, however, also include information obtained from other sources such as previous audits.
• In addition to other sources inside and outside the entity, the entity’s accounting records are an
important source of audit evidence.
• Also, information that may be used as audit evidence may have been prepared using the work of a
management’s expert.
• Audit evidence comprises both information that supports and corroborates management’s assertions,
and any information that contradicts such assertions.
• In addition, in some cases the absence of information (for example, management’s refusal to provide
a requested representation) is used by the auditor, and therefore, also constitutes audit evidence.

Most of the auditor’s work in forming the auditor’s opinion consists of obtaining and evaluating audit evidence.
Audit procedures to obtain audit evidence can include inspection, observation, confirmation, recalculation, re-
performance and analytical procedures, often in some combination, in addition to inquiry. Although inquiry
may provide important audit evidence, and may even produce evidence of a misstatement, inquiry alone
ordinarily does not provide sufficient audit evidence of the absence of a material misstatement at the assertion
level, nor of the operating effectiveness of controls.

As explained in SA 200, “Overall Objectives of the Independent Auditor and the Conduct of an Audit in
Accordance with Standards on Auditing”, reasonable assurance is obtained when the auditor has obtained
sufficient appropriate audit evidence to reduce audit risk (i.e., the risk that the auditor expresses an
inappropriate opinion when the financial statements are materially misstated) to an acceptably low level. The
sufficiency and appropriateness of audit evidence are interrelated.

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 Methods of Collecting Audit Old Course --(P16M/M16M/M17R/N17M/M18R/M18M/N18M/N18R/
QNO Evidence M19R/N19R/N19E)
500.05 Bhaskar CNO SA500.080/ New Course -- Relevant, Concept Covered in New Course SM
SA500.100/ SA500.140
What are the various audit procedures to obtain audit evidence? Mention the same in brief.
OR
Mr. A was appointed statutory auditor of P Ltd., but he was not able to gather the sufficient audit evidences.
Discuss how he should proceed to gather more audit evidences.
OR
What are the audit procedures to be performed by the Auditor to obtain Audit Evidence to draw
reasonable conclusions on which he can base the audit opinion
OR
Inquiry is one of the audit procedures to obtain audit evidence.
OR
Evaluating responses to inquiries is an integral part of the inquiry process. Explain
OR
“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”. Explain.
OR
Inquiry is used extensively throughout the audit in addition to other audit procedures. Explain.
Answer ➢ Observation
Observation consists of looking at a process or procedure being performed by others, for example, the
auditor’s observation of inventory counting by the entity’s personnel, or of the performance of control
activities. Observation provides audit evidence about the performance of a process or procedure but is
limited to the point in time at which the observation takes place, and by the fact that the act of being
observed may affect how the process or procedure is performed.
➢ Inspection
Definition
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.
Degree of Reliability
Inspection of records and documents provides audit evidence of varying degrees of reliability,
depending on their nature (Original Vs Duplicate) and
source (Internal Vs External) and, in the case of internal records and documents, on the
effectiveness of the controls over their production (Software/Register used).
Example of use in Test of Control
An example of inspection used as a test of controls is inspection of records for evidence of
authorization.
Example of use in Substantive testing (Test of Detail)
• Existence Some documents represent direct audit evidence of the existence of an asset,
for example, a document constituting a financial instrument such as a share
certificate or bond. Inspection of such documents may not necessarily provide audit
evidence about ownership or value.
• Occurrence & Classification In addition, inspecting an executed contract may provide audit
evidence relevant to the entity’s application of accounting policies, such as revenue
recognition.
• Not for Valuation & Rights & Obligation Inspection of tangible assets may provide reliable
audit evidence with respect to their existence, but not necessarily about the entity’s rights
and obligations or the valuation of the assets. Inspection of individual inventory items may
accompany the observation of inventory counting.
➢ Inquiry
Definition

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 Inquiry consists of seeking information of knowledgeable persons, both financial and non-
financial, within the entity or outside the entity.
Written or Oral
Inquiry is used extensively throughout the audit in addition to other audit procedures. Inquiries
may range from formal written inquiries to informal oral inquiries.
Responses
Evaluating responses to inquiries is an integral part of the inquiry process. Responses to inquiries
may provide the auditor with information not previously possessed or with corroborative audit
evidence. Alternatively, responses might provide information that differs significantly from
other information that the auditor has obtained, for example, information regarding the
possibility of management override of controls. In some cases, responses to inquiries provide a
basis for the auditor to modify or perform additional audit procedures.
Evidence about Management’s Intent
Although corroboration of evidence obtained through inquiry is often of particular importance,
in the case of inquiries about management intent, the information available to support
management’s intent may be limited. In these cases, understanding management’s past history
of carrying out its stated intentions, management’s stated reasons for choosing a particular
course of action, and management’s ability to pursue a specific course of action may provide
relevant information to corroborate the evidence obtained through inquiry. In respect of some
matters, the auditor may consider it necessary to obtain written representations from
management and, where appropriate, those charged with governance to confirm responses to
oral inquiries.
➢ Recalculation
Recalculation consists of checking the mathematical accuracy of documents or records. Recalculation
may be performed manually or electronically.
➢ 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.
➢ Analytical Procedures
Analytical procedures consist of evaluations of financial information made by a study of plausible
relationships among both financial and non-financial data.
Analytical procedures also encompass the investigation of identified fluctuations and relationships
that are inconsistent with other relevant information or deviate significantly from predicted amounts.
➢ 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.
➢ Written Representation
Written Statement by Management to confirm certain matters or to support other evidence.
Author’s Note
This is a master answer. Students are required to write the appropriate part as per the requirements of the
question.

Factors affecting reliability Old Course -- (N16M/P16M/M17R/M17M/M17E/M18R /N18M/N18R/

QNO
Bhaskar CNO SA500.140 M18R/M19E/ N19R/N21R)
500.09
New Course -- (N22R/M22M)
The auditor of a limited company has given a clean report on the financial statement on the basis of xerox
copies of the books of accounts, vouchers and other records which were taken away by the Income Tax
Department in search under section 132 of the I.T. Act, 1961. Comment.
OR
Discuss the principles, which are useful in assessing the reliability of audit evidence.

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 OR
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. Explain. Also state clearly generalisations about the
reliability of audit evidence.
OR
State the generalisations about the reliability of audit evidence
OR
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. Therefore, generalisations about the
reliability of various kinds of audit evidence are subject to important exceptions. While recognising that
exceptions may exist, state the generalisations about the reliability of audit evidence that may be useful.
OR
With reference to SA 500, Audit Evidence, discuss the different sources and their reliability, of audit
evidence.
OR
Audit evidence is influenced by its source, nature, and the circumstances under which it is obtained.
Elucidate the guiding principles which are useful in assessing the reliability of audit evidence.
OR
Manya Textiles is manufacturer of bed sheets, curtain cloths, other handloom items etc. having its plant at
Panipat. Auditors SJ & Co. is having doubts over the reliability of information given to him as audit evidence.
Also, auditors observed inconsistent information while conducting audit. Guide the auditor as to how they
should proceed in the given situation.
Answer ➢ Reliability
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.
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. While
recognising that exceptions may exist, the following generalisations about the reliability of
audit evidence may be useful:
• The reliability of audit evidence is increased when it is obtained from independent
sources outside the entity
• Audit evidence in documentary form, whether paper, electronic, or other medium, is
more reliable than evidence obtained orally
(E.g. a contemporaneously written record of a meeting is more reliable than a
subsequent oral representation of the matters discussed).
• 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.
• Audit evidence obtained directly by the auditor
(E.g. 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).
• 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
Applying the above, the degree of reliance which can be placed by the auditor on the
documentary audit evidence available in the present case will be considerably increased if the
xerox copies of account books and vouchers are certified to be true copies by the Income Tax
Department. If the tax authorities refuse to certify the same, the auditor should get the
certificate to this effect from the management of the company.

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 Part 4 -- [SA 501] AUDIT EVIDENCE: - SPECIFIC CONSIDERATIONS FOR SELECTED ITEMS

QNO Inventory-Physical Verification by auditor- Master Old course -- (P16M/N19E /M20M)

501.05 Answer Bhaskar CNO SA501.040 New course – (M18M/N18M/N19M/M20M/N21M)
ABC Ltd is engaged in manufacturing of different type of yarns. Ongoing through its financial statements for
the past years, it is observed that inventory is material to the financial statements. You as an auditor of the
company wanted to obtain sufficient appropriate audit evidence regarding the existence and condition of
the inventory as appearing in the financial statements. Discuss, how would you proceed as an auditor.
OR
Krishna Cycles Ltd is engaged in manufacturing of different type of Bicycles. On going through its financial
statements for the past years, it is observed that inventory is material to the financial statements. You as
an auditor of the company wanted to obtain sufficient appropriate audit evidence regarding the existence
and condition of the inventory as appearing in the financial statements. Discuss, how would you proceed
as an auditor.
OR
How would an auditor proceed to obtain sufficient appropriate audit evidence regarding the existence and
condition of inventory? Also state reporting requirements for the same in the case of a company.
OR
Write a short note on Physical attendance by auditor during inventory taking.
OR
While vouching, Aman auditor of Vee Ltd, found that some goods are lying with third party from a long
period, Advise Aman how will he vouch/verify them.
Answer ➢ When inventory is material to the financial statements, the auditor shall obtain sufficient appropriate
audit evidence regarding the existence and condition of inventory by:
Attendance at physical inventory counting, unless impracticable
• Evaluate management’s instructions and procedures for recording and controlling the
results of the entity’s physical inventory counting;
• Obtaining audit evidence as to the reliability of management’s count procedures
• Observe the performance of management’s count procedures;
• Inspect the inventory; and
• Perform test counts; and
Performing audit procedures over the entity’s final inventory records to determine whether
they accurately reflect actual inventory count results.

QNO Inventory Custody and Control With Third Party New course – (S17M)
501.07 Bhaskar CNO SA501.100
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.
Answer ➢ Basic Principle – If Custody & Control of Third Party then Request Confirmation or Other
Audit Procedures
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.
➢ Confirmation
SA 505 establishes requirements and provides guidance for performing external confirmation
procedures.
➢ Other Audit Procedures

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 Depending on the circumstances, for example where information is obtained that raises
doubt about the integrity and objectivity of the third party, the auditor may consider it
appropriate to perform other audit procedures instead of, or in addition to, confirmation with
the third party. Examples of other audit procedures include:
• Inspecting documentation regarding inventory held by third parties, for example,
warehouse receipts.
• Requesting confirmation from other parties when inventory has been pledged as
collateral. (Warehouse Owner)
• Obtaining another auditor’s report, or a service auditor’s report, on the adequacy of
the third party’s internal control for ensuring that inventory is properly counted and
adequately safeguarded.
• Arranging for another auditor to attend, the third party’s physical counting of
inventory, if practicable.

QNO Matter Relevant For Planning of Attending Physical Old course -- (N20M/M20R)
501.09 Verification Bhaskar CNO SA501.120 New course -- (N18E/S20M/S21M/M20R)
Briefly mention the matters that are relevant in planning attendance at physical inventory counting.
OR
Explain clearly the examples of matters relevant in planning attendance at physical inventory counting
Answer ➢ Matters relevant in planning attendance at physical inventory counting
(Visit Related)
The locations at which inventory is held05
Nature of inventory. (Solid / Liquid / Gaseous)
Stages of completion of work in progress. (100% Complete / In-complete)
(Risk Related)
The risks of material misstatement related to inventory. (Low: - Unsalable/ High: - Saleable)
The nature of the internal control related to inventory. (Strong / Weak)
Whether the entity maintains a perpetual inventory system.
(Physical Verification Related)
Whether adequate procedures are expected to be established and proper instructions issued
for physical inventory counting. (Adequate/ Inadequate)
The timing of physical inventory counting. (Year End / Latter)
Whether the assistance of an auditor’s expert is needed.

QNO Identification of risk of MMST for pending Old course -- (M20M/M21M)

501.11 litigation and claims Bhaskar CNO SA501.140 New course -- (S17M/M19E/M20M/M21M/M22R)
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.
OR
"P India" Ltd. is a manufacturer of various sports products. The company is having several cases of litigation
pending in courts. The auditor wanted to identify litigation and claims, which may give rise to risk of
material misstatements. Suggest the audit procedures in the given case.
Answer ➢ The auditor shall design and perform audit procedures to identify litigation and claims involving the
entity which may give rise to a risk of material misstatement, including
Inquiry of management and, where applicable, others within the entity, including in-house
legal counsel;
Reviewing minutes of meetings of those charged with governance and
Correspondence between the entity and its external legal counsel; and
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

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 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.

Audit Procedure regarding Presentation & Disclosure Old Course -- (M21M)

QNO
of Segment Information New Course -- (M21M, M22R)
501.14
Bhaskar CNO SA501.200
TRM Ltd. is a company engaged in manufacture of beauty products. It has hair care segment, skin care
segment and kids’ beauty products. The auditor wants to obtain sufficient appropriate audit evidence
regarding the presentation and disclosure of segment information in accordance with the applicable
financial reporting framework. Suggest the audit procedures in the given case.
OR
GPS & Co, Chartered Accountants, conducting the audit of Pratibha Ltd., a listed company for the year ended
31.03.2022 is concerned with the presentation and disclosure of segment information included in
Company's Annual Report. GPS & Co wanted to ensure that methods adopted by management for
determining segment information have resulted in disclosure in accordance with the applicable financial
reporting framework. Guide GPS & Co with 'Examples of Matters' that may be relevant when obtaining an
understanding of the methods used by the management with reference to the relevant Standards on
Auditing
Answer 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:
(1) Obtaining an understanding of the methods used by management in determining segment
information. Further,
(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; and
(2) Performing analytical procedures or other audit procedures appropriate in the circumstances.

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 Part 5 -- [SA 505] EXTERNAL CONFIRMATIONS

QNO External Confirmation- Examples- Area Old Course -- (P16M/M16R/M17R/M18R/N19R)

505.03 Bhaskar CNO SA505.020 New Course – (M22M/N22R)
Point out any eight areas where external confirmation are used as an audit procedure.
OR
What is meant by external confirmation? Mention four situations where external confirmation may be
useful for auditors.
OR
The auditor should determine whether the use of external confirmation is necessary to obtain sufficient
appropriate audit evidence to support certain financial statement assertions. Explain stating clearly the
meaning of external confirmation. Also mention four situations where external confirmation may be useful
for auditors.
OR
Write short notes on External confirmation as audit procedures
OR
External confirmation procedures frequently are relevant when addressing assertions associated with
account balances and their elements but need not be restricted to these items. Explain.
OR
External confirmation procedures frequently are relevant when addressing assertions associated with
account balances and their elements but need not be restricted to these items. Apart from confirmations
for bank balances and accounts receivables, what are the other situations where external confirmation
procedures may provide relevant audit evidence in responding to assessed risks of material misstatement?
Answer ➢ External Confirmation as an Audit Procedure External Confirmation as audit procedure:
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.
Other areas where external confirmations may be used include the following:
• Bank balances and other information from bankers.
• Accounts receivable balances.
• Inventories held by third parties.
• Property title deeds held by third parties.
• Investments purchased but delivery not taken.
• Loans from lenders.
• Accounts payable balances.
• Long outstanding share application money.
However, external confirmations need not be restricted to account balances only.
• For example, the auditor may request confirmation of the terms of agreements or
transactions an entity has with third parties; the confirmation request may be
designed to ask if any modifications have been made to the agreement and, if so,
what the relevant details are.
• External confirmation procedures also are used to obtain audit evidence about the
absence of certain conditions, for example, the absence of a “side agreement” that
may influence revenue recognition.
Author’s Note Summary
What is External Confirmation?
Direct written response to the auditor from a third party (the confirming party), in paper form,
or by electronic or other medium.
• It is more reliable because
• It comes from independent outside party
• It is from parties selected by auditor
• It is documentary form
• It comes directly to auditor
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 Situations where external confirmations can be obtained
(In sequence of balance sheet)
Property title deeds held by third parties | Investments purchased but delivery not taken | Stock
held by third parties | Debtor balances | Bank Balance and other information from bankers | Bank
loans | Creditor balances | Transactions & related details | Terms of agreement or transactions
with third parties.

QNO Overview of external confirmation-Types /Non- Old Course -- (M20R)

505.04 Response/Exception #Unique New Course -- (M20R)
"Define the following :
(i) Positive confirmation request
(ii) Negative confirmation request
(iii) Non-response
(iv) Exception"
Answer ➢ 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.
➢ 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.
➢ Non-response – A failure of the confirming party to respond, or fully respond, to a positive
confirmation request, or a confirmation request returned undelivered.
➢ 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.

QNO External Confirmation Procedures Old Course -- (N16E/M20R)

505.05 Bhaskar CNO SA505.040 New Course -- (S20M/S21M/M20R)
Discuss external confirmation procedure as per SA-505
OR
"When using external confirmation procedures, the auditor shall maintain control over external
confirmation requests including sending the requests, including follow -up requests when applicable, to the
confirming party. Explain the other points as to when using external confirmation procedures, the auditor
would be required to maintain control over external confirmation requests."
Answer ➢ External Confirmation Procedures:
Determining the Information to be confirmed or Requested:
External confirmation procedures frequently are performed to confirm or request
information regarding account balances and their elements. They may also be used to
confirm terms of agreements, contracts, or transactions between an entity and other parties,
or to confirm the absence of certain conditions, such as a “side agreement”.
Selecting the Appropriate Confirming Party: Responses to confirmation requests provide
more relevant and reliable audit evidence when confirmation requests are sent to a
confirming party the auditor believes is knowledgeable about the information to be
confirmed.
• For example, a financial institution official who is knowledgeable about the
transactions or arrangements for which confirmation is requested may be the most
appropriate person at the financial institution from whom to request confirmation.
Designing Confirmation Requests: 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.
Follow-Up on Confirmation Requests: The auditor may send an additional confirmation
request when a reply to a previous request has not been received within a reasonable time.
• For example, the auditor may, having re-verified the accuracy of the original
address, send an additional or follow-up request.

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 Part 6 -- [SA 510] INITIAL AUDIT ENGAGEMENTS OPENING BALANCES

QNO Objective with respect to Opening Balances New Course -- (S17M/S20M/S21M)

510.01 Bhaskar CNO SA510.020
Discuss the objective of Auditor with respect to Opening balances – in conducting an initial audit
engagement.
OR
M/s PQR and associates are the statutory auditors of TUV Ltd. for the FY 2020- 21-. They have been
appointed as statutory auditors of TUV Ltd. for the first time. What is the objective of the engagement
partner in terms of SA 510?
Answer ➢ 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:
Opening balances contain misstatements that materially affect the current period’s financial
statements; and
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.

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 Part 7 -- [SA 550] RELATED PARTIES

QNO Situation when RPT will lead to higher RMM New course-- (M20R/S20M/S21M)
550.02 Bhaskar CNO SA550.040
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.
Explain with the help of at least three examples.
Answer ➢ RPT in normal course doesn’t lead to higher RMM
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.
➢ Situation when RPT will lead to higher RMM
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:
They are not conducted at normal market prices, terms & conditions.
• E.g. Goods purchased at double the market price from MDs son proprietor firm or goods
sold to brother of MD at triple the market price)
Transactions are conducted through complex related party relationships & structures.
• (Indian Co pays Technical Consultancy Fees -- USA Sub pays Management Consultancy --
UK Sub pays Dividend -- Canada Holding Co where MD is having major stake)

Where there are no appropriate employees / register / software (systems) to identify,

authorize, record, summaries and disclose related party transactions which may lead to non-
compliance of AS 18.
• (E.g. Delhi based Company indirectly holds controlling stake in Australian company
through its subsidiaries in Mumbai and Chennai, but this thing is not disclosed in financial
statement as per AS 18, because of lack of expertise in staff managing related party
transactions (Non-CA / CS / CWA)

QNO Responsibility of Auditor New course-- (M19R/N20R)

550.03 Bhaskar CNO- SA550.060
There are specific accounting and disclosure requirements for related party relationships, transactions and
balances to enable users of the financial statements to understand their nature and effects on the financial
statements. Analyse and explain stating the responsibility of auditor in this regard.
Answer ➢ Presentation in Financial Statement
AS 18 / Ind AS 24 deals with Related Party, such standards generally provide accounting & disclosure
treatment, In India they provide only disclosure treatment
There are specific accounting and disclosure requirements for related party relationships, transactions
and balances to enable users of the financial statements to understand their nature and effects on the
financial statements.
➢ Risk Assessment & Further Audit Procedures
Auditor’s Responsibility to Assess RMM (Including ROF) and Perform Further Audit
Procedures
The auditor has a responsibility to perform audit procedures 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.
In addition, it is relevant to the auditor’s evaluation of whether fraud risk factors are present
as required by SA 240. This is because fraud may be more easily committed through related
parties.
➢ Conclusion

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 The auditor needs to obtain an understanding of the entity’s related party relationships and
transactions sufficient to be able to conclude whether the financial statements, insofar as they are
affected by those relationships and transactions:
Achieve a true and fair presentation; or
Are not misleading (for compliance frameworks).
➢ Problems / Issues
Inherent Limitations of Audit & It increases in context of RPT
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 for such reasons as the following:
• Management may be unaware of the existence of all related party relationships.
• Related party relationships may present a greater opportunity for Collusion.
• Concealment or Manipulation by management.
(Collusion – Transferring profits to Dubai / Concealment → Stolen stock shown as
sale to subsidiary in Mauritius / Manipulation → Gave loan to RP to purchase goods
& boost own sales)
➢ Solution
Importance of Professional Skepticism
Planning and performing the audit with professional skepticism as required by SA 200 is
therefore particularly important in this context, given the potential for undisclosed related
party relationships and transactions.
Matter of SA 550
The requirements in this SA are designed to assist the auditor in identifying and assessing
the risks of material misstatement associated with related party relationships and
transactions, and in designing audit procedures to respond to the assessed risks.

Records or Documents which can provide details of New course-- (N21R)

QNO
related party relationships or related party transactions
550.04
Bhaskar CNO- SA550.080
The auditor has a responsibility to perform audit procedures 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. During the audit, the auditor should maintain alertness for related
party information while reviewing records and documents. He may inspect the records or documents that
may provide information about related party relationships and transactions. Explain in detail with
examples.
Answer During the audit, the auditor should maintain alertness for related party information while reviewing
records and documents. He may inspect the following records or documents that may provide
information about related party relationships and transactions,
For Example:
1. Entity income tax returns.
2. Information supplied by the entity to regulatory authorities.
3. Shareholder registers to identify the entity’s principal shareholder s.
4. Statements of conflicts of interest from management and those charged with governance.
5. Records of the entity’s investments and those of its pension plans.
6. Contracts and agreements with key management or those charged with governance.
7. Significant contracts and agreements not in the entity’s ordinary course of business.
8. Specific invoices and correspondence from the entity’s professional advisors.
9. Life insurance policies acquired by the entity.
10. Significant contracts re-negotiated by the entity during the period.
11. Internal auditors’ reports.
12. Documents associated with the entity’s filings with a securities regulator e.g, prospectuses)

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 Part 8 -- [SA 560] SUBSEQUENT EVENTS

QNO Subsequent Event Definition by FRFs (In General) & SA 560 New course-- (N21R)
560.02 Bhaskar CNO- SA560.020
SA 560, “Subsequent Events” deals with the auditor’s responsibilities relating to subsequent events in an audit
of financial statements. 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. Explain those
events and also define subsequent events
Answer SA 560, “Subsequent Events” deals with the auditor’s responsibilities relating to subsequent events in
an audit of financial statements.
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.
SA 700 explains that the date of the auditor’s report informs the reader that the auditor has considered
the effect of events and transactions of which the auditor becomes aware and that occurred up to that
date.
Subsequent events refer to 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.

Auditor’s Obligation - Facts which become known to the Old Course -- (M20R)
QNO auditor after the date of the auditor’s report but before New Course -- (M20R/S20M/S21M/N21M)
560.06 the date the financial statements are issued
Bhaskar CNO- SA560.080
"The auditor has no obligation to perform any audit procedures regarding the financial statements after
the date of the auditor’s report. However, when, after the date of the auditor’s report but before the date
the financial statements are issued, a fact becomes known to the auditor that, had it been known to the
auditor at the date of the auditor’s report, may have caused the auditor to amend the auditor’s report.
Explain the auditor’s obligation in the above situation."
Answer ➢ 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:
Discuss the matter with management and, where appropriate, those charged with
governance.
Determine whether the financial statements need amendment and, if so,
Inquire how management intends to address the matter in the financial statements.

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 Part 9 -- [SA 570] GOING CONCERN

QNO Objectives of Auditor Regarding Going Concern New course-- (M19R/N19R/M21R/M22M)

570.01 Bhaskar CNO- SA570.020
On the basis of which assumption, the financial statements of a company are prepared. Explain. Also
describe the objectives of the auditor regarding going concern.
OR
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. Explain stating also the objective of the auditor regarding going concern.
Answer ➢ Going Concern Basis of Accounting
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. 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.
➢ The objectives of the auditor are:
To conclude, based on the audit evidence obtained, whether a material uncertainty exists
related to events or conditions that may cast significant doubt on the entity’s ability to
continue as a going concern; and
To obtain sufficient appropriate audit evidence about the appropriateness of
management’s use of the going concern assumption in the preparation and presentation of
the financial statements;
To determine the implications for the auditor’s report.

Objectives / Responsibilities of Auditor with respect to Going Concern New course-- (M21R)
QNO
and implication of inherent limitations on going concern evaluation
570.02
Bhaskar CNO- SA570.030
As described in SA 200, the potential effects of inherent limitations on the auditor’s ability to detect
material misstatements are greater for future events or conditions that may cause an entity to cease to
continue as a going concern. Explain stating the auditor’s responsibilities with regard to going concern.
Answer 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.
General purpose financial statements are prepared using the going concern basis of accounting, unless
management either

(i) intends to liquidate the entity or to cease operations,

(ii) or has no realistic alternative but to do so.

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.

The objectives of the auditor regarding Going Concern are:

(1) To obtain sufficient appropriate audit evidence regarding, and conclude on, the appropriateness of
management’s use of the going concern basis of accounting in the preparation of the financial
statements;
(2) To conclude, based on the audit evidence obtained, whether a material uncertainty exists related to
events or conditions that may cast significant doubt on the entity’s ability to continue as a going
concern; and
(3) To report in accordance with this SA.

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QNO Going Concern Assumption Invalid – Reporting Old Course -- (P16M)
570.05 #Unique New Course -- (S20M/S21M)
M/s ANS & Associates has been appointed as the statutory auditors of MNO Ltd. The company has been
suffering losses due to the emergence of highly successful competitor, thereby leading to negative net
worth. Also, the sales head, key management personnel, of the company left the company due to health
issues. When CA Amar, the engagement partner discussed the scenario with the management of the
company, he did not get any satisfactory reply from the management. What is the responsibility of M/s
ANS & Associates with regard to SA 570?
OR
TT Ltd. has suffered recurring losses due to steep fall in production and has negative net worth. Its
production head, an expert, has also left the company. Reply of the management is inadequate to these
developments and there is no sound action plan to mitigate these situations. Comment.
Answer ➢ As per SA 570, one of the objectives of the auditor regarding going concern is to obtain sufficient and
appropriate audit evidence regarding the same and to conclude on the appropriateness of the
management’s use of the going concern basis of accounting in the preparation of the financial
statements.
➢ Further it also contains the list of events or conditions that may cast significant doubt on the entity’s
ability to continue as a going concern which are:
Financial indicator- Negative net worth
Operating indicator- Loss of key management and emergence of highly successful competitor.
➢ In the present case, MNO Ltd. has negative net worth on account of emergence of highly successful
competitor and the sales head of the company has also left the company. Also, CA Amar did not get
any satisfactory reply when he discussed the going concern matter with the management.
➢ Thus, from the above facts, it appears that MNO Ltd. is not going concern. If the management of MNO
Ltd. has used the going concern basis of accounting, the auditor should first ask the management to
adjust the financial statements.
➢ If the management of MNO Ltd. does not agree with the same, CA Amar shall consider the impact on
his audit report.

Implication on Audit Report depending on adequacy of New course-- (N21R)

QNO
disclosure of material uncertainty in notes to accounts
570.10
Bhaskar CNO- SA570.090
While doing audit of ABC Pvt Ltd, on the basis of sufficient and appropriate evidence, auditor comes to a
conclusion that use of the Going Concern Basis of Accounting is appropriate, but a material uncertainty
exists. Discuss the implications for auditor’s report if:
(a) Adequate Disclosure of a Material Uncertainty is Made in the Financial Statements
(b) Adequate Disclosure of a Material Uncertainty is Not Made in the Financial Statements
Answer Use of the Going Concern Basis of Accounting is Appropriate but a Material Uncertainty Exists
The identification of a material uncertainty is a matter that is important to users’ understanding of the
financial statements. The use of a separate section with a heading that includes reference to the fact
that a material uncertainty related to going concern exists alerts users to this circumstance.

(a) Adequate Disclosure of a Material Uncertainty is Made in the Financial Statements

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.”

(b) 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:
(i) Express a qualified opinion or adverse opinion, as appropriate, in accordance with SA 705
(Revised); and

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 (ii) 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.

QNO Preliminary Assessment by Management Regarding New course-- (M21R)

570.15 Going Concern Bhaskar CNO- SA570.040
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.
In so doing, the auditor has determined that management of XYZ Ltd has already performed a preliminary
assessment of the entity’s ability to continue as a going concern. Explain how would auditor of XYZ Ltd proceed
in the above case. Also explain how would the auditor proceed if such an assessment has not yet been
performed by the management.
Answer 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.
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, and:

(i) 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; or

(ii) 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.

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 Part 10 -- [SA 580] WRITTEN REPRESENTATIONS

QNO WR (Refusal) Old Course -- (P16M/N16M/N18R/N18M/M19M/N19E)

580.09 Bhaskar CNO- SA580.020/SA580.100 New Course – Relevant, Concept Covered in New Course SM
The Partner of Vansh and Vaibhav, Chartered Accountants, asked the management to provide statements
from the creditors as part of audit evidence and also required written representation from the management
but the management did not provide the requested written representations. Discuss how the auditor would
proceed.
OR
What do you mean by "Written Representations"? As an auditor, how you will deal if management does
not provide requested written representations?
OR
The Partner of Ashish Surjeet and Company, Chartered Accountants, asked the management to provide
statements from the creditors as part of audit evidence and also required written representation from the
management but the management did not provide the requested written representations. Discuss how the
auditor would proceed.
OR
Written representations are to be provided by the management to the auditor when requested. Comment.
Answer ➢ Written Representations:
As per SA 580, “Written Representation” is a written statement by management provided to
the auditor to confirm certain matters or to support other audit evidence.
These representations are an important source of audit evidence. If management modifies
or does not provide the requested written representations, it may alert the auditor to the
possibility that one or more significant issues may exist.
Further, a request for written, rather than oral, representations in many cases may prompt
management to consider such matters more rigorously, thereby enhancing the quality of the
representations.
➢ Requested Written Representations not provided by Management:
If management does not provide one or more of the requested written representations, the auditor
shall-
Discuss the matter with management;
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
Take appropriate actions, including determining the possible effect on the opinion in the
auditor’s report.
The auditor shall disclaim an opinion on the financial statements if management does not provide the
written representations.

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 CHAPTER RISK ASSESSMENT AND INTERNAL CONTROL
4

Part 1 -- [SA 315] IDENTIFYING AND ASSESSING RISK OF MATERIAL MISSTATEMENT

THROUGH UNDERSTANDING ENTITY AND ITS ENVIRONMENT

QNO Audit Risk (All Components with Inter Relationships) Old Course -- (P16M)
315.01 -Master answer Bhaskar CNO- SA315-P1.020 New Course -- (S17M)
Audit Risk and inter-relationship of its components.
OR
XYZ Ltd is engaged in the business and running several stores dealing in variety of items such as readymade
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.
Answer

➢ Audit Risk:
An auditor’s judgement as to what is sufficient and appropriate audit evidence is affected by the
degree of risk of misstatement. Audit risk is the risk that an auditor may give an inappropriate
opinion on financial information which is materially misstated.
• For example,
o An auditor may give an unqualified opinion on financial statements without knowing
that they are materially misstated.
o Such risk may exist at overall level, while verifying various transactions and balance
sheet items.
As per SA 200 “Overall Objectives of the Independent Auditor and the Conduct of an Audit in
Accordance with Standards on Auditing”, the risks of material misstatement at the assertion level
consist of two components:
• Inherent risk and
• control risk.
Inherent risk and control risk are the entity’s risks; they exist independently of the audit of the
financial statements.
The nature of each of these types of risk is discussed below-
• Inherent risk:

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 It 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. External
circumstances giving rise to business risks may also influence inherent risk.
o For example,
Technological developments might make a particular product obsolete, thereby
causing inventory to be more susceptible to overstatement.
• Control Risk:
o It is 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.
o It is a function of the effectiveness of the design, implementation and
maintenance of internal control by management to address identified risks that
threaten the achievement of the entity’s objectives relevant to preparation of
the entity’s financial statements .
o 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.
• Detection Risk:
o It is 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.
o Detection risk relates to the nature, timing, and extent of the auditor’s
procedures that are determined by the auditor to reduce audit risk to an
acceptably low level. It is therefore a function of the effectiveness of an audit
procedure and of its application by the auditor.
Inter-relationship of Components of Audit Risk:
• Audit risk is a function of the risks of material misstatement and detection risk. The
inherent and control risks are functions of the entity’s business and its environment and
the nature of the account balances or classes of transactions, regardless of whether an
audit is conducted.
• Even though inherent and control risks cannot be controlled by the auditor, the auditor
can assess them and design his substantive procedures to produce on acceptable level of
detection risk, thereby reducing audit risk to an acceptably low level.
• 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.
o 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.
Author’s Note
This is a master answer. Students are required to write the appropriate part as per the requirements of the
question

QNO Inquiry for risk assessment New Course -- (N20R/N22M)

315.05.50 Bhaskar CNO- SA315-P1.040
Much of the information obtained by the auditor’s inquiries is obtained from management and those
responsible for financial reporting. However, the auditor may also obtain information, or a different
perspective in identifying risks of material misstatement, through inquiries of others within the entity and
other employees with different levels of authority. Explain with the help of examples.
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 OR
The risk assessment procedures shall include the 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. Explain giving at least three examples.

➢ Much of the information obtained by the auditor’s inquiries is obtained from management and
those responsible for financial reporting. However, the auditor may also obtain information, or a
different perspective in identifying risks of material misstatement, through inquiries of others
within the entity and other employees with different levels of authority.
Inquiries directed towards those charged with governance may help the auditor
understand the environment in which the financial statements are prepared.1
Inquiries directed toward internal audit personnel may provide information about internal
audit procedures performed during the year relating to the design and effectiveness of the
entity’s internal control and whether management has satisfactorily responded to findings
from those procedures. 3
Inquiries directed to the risk management function (or those performing such roles) may
provide information about operational and regulatory risks that may affect financial
reporting. 2
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
Inquiries directed towards marketing or sales personnel may provide information about
changes in the entity’s marketing strategies, sales trends, or contractual arrangements
with its customers. 6
Inquiries directed to information systems personnel may provide information about
system changes, system or control failures, or other information system related risks. 5
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. 7

QNO Analytical Procedure as substantive test for Risk New Course -- (N20R)
315.06 Assessment Bhaskar CNO- SA315-P1.040
Analytical procedures performed as risk assessment procedures may identify aspects of the entity of which
the auditor was unaware and may assist in assessing the risks of material misstatement in order to provide
a basis for designing and implementing responses to the assessed risks. Explain in detail.
➢ New Information which auditor was unaware
Analytical procedures performed as risk assessment procedures may identify aspects of the entity of
which the auditor was unaware and may assist in assessing the risks of material misstatement in
order to provide a basis for designing and implementing responses to the assessed risks.
➢ Financial as well as non-financial
Analytical procedures performed as risk assessment procedures may include both financial and non-
financial information, for example, the relationship between sales and square footage of selling
space or volume of goods sold.
➢ Unusual Items
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.
However, when such analytical procedures use data aggregated at a high level (which may be the
situation with analytical procedures performed as risk assessment procedures), the results of those
analytical procedures only provide a broad initial indication about whether a material misstatement
may exist.
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 ➢ Results of Analytical Procedures & Other Information will be helpful
Accordingly, in such cases, consideration of other information that has been gathered when
identifying the risks of material misstatement together with the results of such analytical procedures
may assist the auditor in understanding and evaluating the results of the analytical procedures.

QNO Understanding Entity & its Environment Old Course -- (P16M/N17R/N19M/N17E /M21R)
315.07 Bhaskar CNO- SA315-P1.060 New Course -- (M21R/M22R)
In performing an audit of financial statements, the auditor should have or obtain knowledge of the
business. Explain in the light of SA 315 Identifying and Assessing the Risks of Material Misstatement through
Understanding the Entity and its Environment.
OR
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.
OR
'Knowledge of Client business is one of the important principles in developing an overall audit plan. Explain.
Answer ➢ The auditor shall obtain an understanding of the following:
Relevant industry, regulatory, and other external factors including the applicable financial
reporting framework.
The nature of the entity, including:
• its operations;
• its ownership and governance structures;
• 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; to enable the auditor
to understand the classes of transactions, account balances, and disclosures to be
expected in the financial statements.
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.
The entity’s objectives and strategies, and those related business risks that may result in
risks of material misstatement.
The measurement and review of the entity’s financial performance.
➢ In addition to the importance of knowledge of the client’s business in establishing the overall
audit plan, such knowledge helps the auditor to identify areas of special audit consideration, to
evaluate the reasonableness both of accounting estimates and management representations,
and to make judgement regarding the appropriateness of accounting policies and disclosures.
➢ 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.

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 AUTHORS NOTE:
The above points can be arranged from macro to micro for remembrance and convenient:
1. State of Economy
2. Nature of Industry
3. Regulatory Requirement
4. Ownership and Governance
5. Financing and Structure
6. Types of Investment
7. Nature of Operations
8. Financial Reporting Framework
9. Selection & Application of Accounting Policies
10. Financial Performance
11. Objectives

QNO Understanding Entity & its Environment – Examples of types of Old Course -- (M20R)
315.08 understanding to be obtained Bhaskar CNO- SA315-P1.060 New Course -- (M20R)
"Knowledge of the Client’s business is one of the important principles in developing an overall audit plan.
In fact, 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 relevant industry, regulatory and other
external factors including the applicable financial reporting framework. Substantiate with the help of
examples."
Answer ➢ Examples are:
The competitive environment, including demand, capacity, product and price competition as
well as cyclical or seasonal activity.
Supplier and customer relationships, such as types of suppliers and customers (e.g., related
parties, unified buying groups) and the related contracts with those entities.
Technological developments, such as those related to the entity’s products, energy supply
and cost.
The effect of regulation on entity operations.

QNO Need for Understanding Entity & its Environment Old Course -- (M20R)
315.09 Bhaskar CNO- SA315-P1.080 New Course -- (S17M/M20R/ S20M/S21M)
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.

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 OR
"Obtaining an understanding of the entity and its environment, including the entity’s internal control, is a
continuous, dynamic process of gathering, updating and analysing information throughout the audit.
Analyse and explain giving examples."
Answer ➢ 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
understanding establishes a frame of reference within which the auditor plans the audit and
exercises professional judgment throughout the audit, for example, when: (M-ain AREAS)
M- Determining materiality in accordance with SA 320;
A-Considering the appropriateness of the selection and application of accounting policies;
R-Assessing risks of material misstatement of the financial statements;
E-Evaluating the sufficiency and appropriateness of audit evidence obtained, such as the
appropriateness of assumptions and of management’s oral and written representations.
A-Developing expectations for use when performing analytical procedures;
S-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;
➢ 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.

QNO Risk of Material Misstatement- Definition & New Course -- (S17M/ S20M/S21M)
315.11 Components Bhaskar CNO- SA315-P1.020
Define Risk of material misstatement. Explain its components also.
OR
Risk of material misstatement consists of two components Explain clearly defining risk of material
misstatement
Answer ➢ Risk of Material Misstatement
Definition
The risk that the financial statements are materially misstated prior to audit.
Components
As per SA 200, the risks of material misstatement at the assertion level consist of two
components: inherent risk and control risk. Inherent risk and control risk are the entity’s risks;
they exist independently of the audit of the financial statements. The nature of each of these
types of risk and their interrelationship is discussed below
➢ Inherent Risk
Definition
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. (E.g. Retail, Jewellery, Telecom)
➢ Control Risk
Definition
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.

QNO Combined assessment of the “risks of material New Course -- (S17M/N19R/ S20M/S21M)
315.13 misstatement Bhaskar CNO- SA315-P1.020
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.
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Answer ➢ Combined Vs Separate Assessment
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.
(In big assignments go for separate analysis, further if auditor is relying extensively on
test of controls then separate analysis id preferred)
It can be concluded from the above that-
Risk of Material Misstatement= Inherent Risk x Control Risk

QNO Identify & Assess Risk of Material Misstatement New Course -- (N18M/N20R/N22M)
315.15 Bhaskar CNO- SA315-P1.100
The auditor shall identify and assess the risks of material misstatement at both levels to provide a basis for
designing and performing further audit procedures. For the purpose of Identifying and assessing the risks
of material misstatement the auditor shall Identify risks, assess the identified risks, relate the identified
risks and consider the likelihood of misstatement. Explain the above in detail.
Answer ➢ Levels of Risk
The auditor shall identify and assess the risks of material misstatement at:
The financial statement level; and
The assertion level for classes of transactions, account balances, and disclosures; to provide
a basis for designing and performing further audit procedures.
➢ For this purpose, the auditor shall follow the following steps:
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; (Har
information collect karne ke baad risk ke baarein mein sochtein raho)
Relate the identified risks to what can go wrong at the assertion level, taking account of
relevant controls that the auditor intends to test; and (Kahi assertion level pet oh nahi)
Assess the identified risks, and evaluate whether they relate more pervasively to the financial
statements as a whole and potentially affect many assertions; (Ya financial statement level
pet oh nahi)
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. (Badi risk toh nahi hai, with big amount and more probability)

QNO Assertions-Brief Old Course -- (M20R)

315.16 Bhaskar CNO- SA315-P1.100 New Course -- (M20R)
"Companies prepare their financial statements in accordance with the framework of generally accepted
accounting principles (Indian GAAP), also commonly referred to as accounting standards (AS). In preparing
financial statements, Company’s management makes implicit or explicit claims (i.e. assertions) regarding
assets, liabilities, equity, income, expenses and disclosures in accordance with the applicable accounting
standards. Explain with example stating the relevant assertions involved in this regard. Also explain
financial statement audit."
Answer ➢ Companies prepare their financial statements in accordance with the framework of generally accepted
accounting principles (Indian GAAP), also commonly referred to as accounting standards (AS).
➢ A financial statement audit comprises the examination of an entity’s financial statements and
accompanying disclosures by an independent auditor. The result of this examination is a report by the
auditor, attesting to the truth and fairness of presentation of the financial statements and related
disclosures.

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 ➢ In preparing financial statements, Company’s management makes implicit or explicit claims (i.e.
assertions) regarding:
completeness.
cut-off.
existence/ occurrence.
valuation/ measurement.
rights and obligations; and
presentation and disclosure of assets, liabilities, equity, income, expenses and disclosures in
accordance with the applicable accounting standards.
➢ Example
If Company X’s balance sheet shows building with carrying amount of Rs 50 lakh, the auditor shall assume
that the management has claimed/ asserted that:
The building recognized in the balance sheet exists as at the period- end (existence assertion);
Company X owns and controls such building (Rights and obligations assertion);
The building has been valued accurately in accordance with the measurement principles (Valuation
assertion);
All buildings owned and controlled by Company X are included within the carrying amount of Rs 50
lakh (Completeness assertion).

Author’s Note
This is a brief answer for assertions. Use this answer if they talk about all the assertions and the marks
allocated are 3-4

Assertions-Detailed Old Course -- (P16M /M16M/N16R/N17M/N17R/N17E/M18M/N18M/

QNO
Bhaskar CNO- SA315-P1.100 N18R/M19R M20R)
315.17
New Course – (M20R)
What are the various assertions an auditor is concerned with while obtaining audit evidence from
substantive procedure?
OR
Risk of material misstatement at the assertion level for classes of transactions, account balances and
disclosures need to be considered. Explain stating the different categories of assertions used by the auditor.
OR
In the context of SA-3l5, state the assertions used by auditor to consider the different types of potential
mis-statements that may occur w.r.t. classes of transactions and events for period under audit.
OR
Assertions used by auditor to consider potential misstatements about presentation and disclosure at the
period end.
OR
Assertions used by auditor to consider potential misstatements about presentation and disclosure at the
period end.
OR
What does the Valuation assertion mean in respect of Assets, liabilities and equity balances? Explain with
the help of example in respect of Inventory.
Answer ➢ Risk of Material Misstatement at the Assertion Level:
According to SA 315 “Identifying and Assessing the Risk of Material Misstatement Through
Understanding the Entity and its Environment”, risks of material misstatement at the assertion
level for classes of transactions, account balances, and disclosures need to be considered because
such consideration directly assists in determining the nature, timing, and extent of further audit
procedures at the assertion level necessary to obtain sufficient appropriate audit evidence.
In identifying and assessing risks of material misstatement at the assertion level, the auditor may
conclude that the identified risks relate more pervasively to the financial statements as a whole
and potentially affect many assertions. Assertions used by the auditor to consider the different
types of potential misstatements that may occur fall into the following three categories and may
take the following forms –

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 • Assertions about classes of
transactions and events for
the period under audit:
o Occurrence—
transactions and
events that have
been recorded have
occurred and pertain
to the entity.
o Completeness—all
transactions and
events that should
have been recorded
have been recorded.
o Accuracy—amounts
and other data relating to recorded transactions and events have been recorded
appropriately.
o Cut-off—transactions and events have been recorded in the correct accounting
period.
o Classification—transactions and events have been recorded in the proper
accounts.
• Assertions about account balances at the period end:
o Existence—assets, liabilities, and equity interests exist.
o Rights and obligations—the entity holds or controls the rights to assets, and
liabilities are the obligations of the entity.
o Completeness—all assets, liabilities and equity interests that should have been
recorded have been recorded.
o Valuation and allocation—assets, liabilities, and equity interests are included in
the financial statements at appropriate amounts and any resulting valuation or
allocation adjustments are appropriately recorded.
- Example of Valuation and allocation
▪ Inventory has been recognized at the lower of cost and net realizable
value in accordance with AS 2 - Inventories.
▪ Any costs that could not be reasonably allocated to the cost of
production (e.g. general and administrative costs) and any abnormal
wastage have been excluded from the cost of inventory.
▪ An acceptable valuation basis (e.g. FIFO, Weighted average etc.) has
been used to value inventory as at the period-end.
• Assertions about presentation and disclosure:

o Occurrence and rights and obligations—disclosed events, transactions, and

other matters have occurred and pertain to the entity.
o Completeness—all disclosures that should have been included in the financial
statements have been included.
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 o Classification and understandability—financial information is appropriately
presented and described, and disclosures are clearly expressed.
o Accuracy and valuation—financial and other information are disclosed fairly and
at appropriate amounts.
Author’s Note
This is a master answer for Assertions. Students are required to write the appropriate part as per the
requirements of the question. For example student may be asked about one particular assertion, student
should write that only in the answer.

QNO Identifying Assertion for Audit Procedure-Cases Old Course -- (N20R/M21M)

315.19 Bhaskar CNO- SA315-P1.100 New Course -- (M18E/M21M)
Name the assertions for the following audit procedures:
1. The title deeds of the lands disclosed in the Balance Sheet are held in the name of the company.
2. Depreciation has been properly charged on all assets.
3. Year-end inventory verification
4. All liabilities are properly recorded in the financial statements.
5. Related party transactions are shown properly.
Answer
1. The title deeds of the lands disclosed in the Balance Rights and Obligations Assertions
Sheet are held in the name of the company

2. Depreciation has been properly charged on all assets Valuation Assertions

3. Year-end inventory verification Existence Assertions

4. All liabilities are properly recorded in the financial Completeness

statements
5. Related party transactions are shown properly Presentation and Disclosure

QNO Identifying Assertions of financial item (P&M) Old Course -- (M16M/N18E/M21M)

315.23 Bhaskar CNO- SA315-P1.100 New Course -- (M19M/M21M)
"Assertions in the following case:
Particulars Amount(Rs.) Amount(Rs.)
Plant and Machinery (at cost) 2,00,000
Less: Depreciation till the end of previous year 70,000
Depreciation for the year 13,000
83,000
1,17,000"
OR
State assertions that are implied in the extract of financial statement given below: (Rs.)
Plant & Machinery (at Cost) 400,000
Less: Depreciation: Up to Previous year 1,40,000
For the year 26,000 1,66,000
2,34,000
(i) Indicate assertions in respect of transactions and events for the period relating to Fixed Assets.
(ii) State specific assertions relating to the above extract of financial statement.

Answer ➢ Assertions about classes of transactions and events for the period under audit:
Occurrence—transactions and events that have been recorded have occurred and
pertain to the entity.
Completeness—all transactions and events that should have been recorded have been
recorded.
Accuracy—amounts and other data relating to recorded transactions and events have
been recorded appropriately.

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 Cut-off—transactions and events have been recorded in the correct accounting period.
Classification—transactions and events have been recorded in the proper accounts.
➢ The specific assertions are as follows:
the firm owns the plant and machinery;
the historical cost of plant and machinery is Rs. 4 lacs;
the plant and machinery physically exists;
the asset is being utilised in the business of the company productively;
total charge of depreciation on this asset is Rs. 1,66,000 to date on which Rs. 26,000
relates to the year in respect of which the accounts are drawn up; and
the amount of depreciation has been calculated on recognised basis and the calculation
is correct

Significant Risk Old Course --

QNO
Bhaskar CNO- SA315-P1.120 (P16M/N17M/M17R/M18R/N18R/N19R/N21R)
315.25
New Course – (N21R/N22M)
The auditor may exercise his judgement to identify which risks are significant risks. Explain the above in
context of SA-315.
OR
As part of the risk assessment, the auditor shall determine whether any of the risks identified are, in the
auditor’s judgment, a significant risk. In exercising judgment as to which risks are significant risks, state the
factors which shall be considered by the auditor. Explain the above in context of SA-315.
Answer ➢ Identification of Significant Risks:
SA 315 “Identifying and Assessing the Risk of Material Misstatement through understanding the
Entity and its Environment” defines ‘significant risk’ as an identified and assessed risk of material
misstatement that, in the auditor’s judgment, requires special audit consideration.
As part of the risk assessment, the auditor shall determine whether any of the risks identified
are, in the auditor’s judgment, a significant risk. In exercising this judgment, the auditor shall
exclude the effects of identified controls related to the risk.
In exercising judgment, as to which risks are significant risks, the auditor shall consider at least
the following:
(CFO-CSR)
• Whether the risk is related to recent significant economic, accounting, or other
developments like Changes in regulatory environment, etc., and, therefore, requires
specific attention
• Whether the risk is a risk of Fraud;
• Whether the risk involves significant transactions that are Outside the normal course of
business for the entity, or that otherwise appear to be unusual.
• The Complexity of transactions;
• The degree of Subjectivity in the measurement of financial information related to the
risk, especially those measurements involving a wide range of measurement uncertainty;
and
• Whether the risk involves significant transactions with Related parties;
• When the auditor has determined that a significant risk exists, the auditor shall obtain
an understanding of the entity’s controls, including control activities, relevant to that
risk.

Author’s Note
Shortcut to remember- (CFO-CSR)

Risk of Material Misstatement due to Non Old Course -- (N21R)

QNO Routine Transactions & Significant Judgemental New Course –(N21R)
315.26 Matters leads to Significant Risk
Bhaskar CNO- SA315-P1.140

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 Risks of material misstatement may be greater for significant non-routine transactions arising from matters
such as complex calculations. Also, risks of material misstatement may be greater for significant judgmental
matters that require the development of accounting estimates, arising from matters such as accounting
principles for accounting estimates may be subject to differing interpretation etc. Explain in detail.
Answer Risks of Material Misstatement– Greater for Significant Non-Routine Transactions
Risks of material misstatement may be greater for significant non-routine transactions arising from
matters such as the following:
➢ Greater management intervention to specify the accounting treatment.
➢ Greater manual intervention for data collection and processing.
➢ Complex calculations or accounting principles.
➢ The nature of non-routine transactions, which may make it difficult for the entity to implement
effective controls over the risks.

Risks of material misstatement– Greater for Significant Judgmental Matters

Risks of material misstatement may be greater for significant judgmental matters that require the
development of accounting estimates, arising from matters such as the following:
➢ Accounting principles for accounting estimates or revenue recognition may be subject to
differing interpretation.
➢ Required judgment may be subjective or complex, or require assumptions about the effects of
future events, for example, judgment about fair value.

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 CHAPTER: INTERNAL CONTROL SYSTEM
Control Environment, Its Elements Old Course -- (M19E/N19R/M20M/N20M)
QNO and Components New Course -- (S17M/M19M/N19R/M20M/N20M/S20M/S21M
ICS.03 Bhaskar CNO- SA315-P2.080/ /N21M)
SA315-P2.080
The auditor of XYZ Ltd, engaged in FMCG (Fast Moving Consumable Goods) obtains an understanding of
the control environment. As part of obtaining this understanding, the auditor evaluates whether:
(i) Management has created and maintained a culture of honesty and ethical behaviour; and
(ii) The strengths in the control environment elements collectively provide an appropriate foundation for
the other components of internal control.
Advise what is included in control environment. Also explain the elements of control environment.
OR
The auditor shall obtain an understanding of the control environment Explain stating what is included in
control environment.
OR
The auditor of FAST CARS Ltd obtains an understanding of the control environment. As part of obtaining
this understanding, the auditor evaluates whether management has created and maintained a culture of
honesty and ethical behaviour and the strengths in the control environment elements collectively provide
an appropriate foundation for the other components of internal control.
Advise what is included in control environment. Also explain the elements of control environment.
OR
"The division of internal control into five components provides a useful framework for auditors to consider
how different aspects of an entity's internal control may affect the audit. Mention those components of
internal control."
OR
"The auditor of MARUT Ltd, engaged in manufacturing of Smart Motor Bikes, obtains an understanding
of the control environment. As part of obtaining this understanding, the auditor evaluates whether:
(i) Management has created and maintained a culture of honesty and ethical behaviour; and
(ii) The strengths in the control environment elements collectively provide an appropriate foundation for
the other components of internal control.
Advise what is included in control environment. Also explain the elements of control environment."
Answer ➢ Control Environment:
Component of Internal Control: The auditor shall obtain an understanding of the control
environment. As part of obtaining this understanding, the auditor shall evaluate whether:
• Management has created and maintained a culture of honesty and ethical
behavior; and
• The strengths in the control environment elements collectively provide an
appropriate foundation for the other components of internal control.
➢ What is included in Control Environment?
The control environment includes:
the governance and management functions and
the attitudes, awareness, and actions of those charged with governance and management.

The control environment sets the tone of an organization, influencing the control
consciousness of its people.
➢ Elements of the control environment that may be relevant when obtaining an understanding
of the control environment include the following:
TCWG Related
• Participation by those charged with governance – Attributes of those charged
with governance such as:
o Their independence from management.
o Their experience and stature (Reputation).
o The extent of their involvement and the information they receive,
and the scrutiny of activities.
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 o The appropriateness of their actions, including the degree to
which difficult questions are raised and pursued with
management, and their interaction with internal and external
auditors.
Management Related
Management’s philosophy and operating style – Characteristics such as management’s:
• Approach to taking and managing business risks.
• Attitudes toward information processing and accounting functions and
personnel.
• Attitudes and actions toward financial reporting.
Human Resource
Human resource policies and practices – Policies and practices that relate to, for example,
recruitment, orientation, training, evaluation, counselling, promotion, compensation, and
remedial actions.
Competence:
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.
Organisational structure
Organisational structure – The framework within which an entity’s activities for achieving
its objectives are planned, executed, controlled, and reviewed.
Authority and Responsibility:
Assignment of authority and responsibility - Matters such as how authority and
responsibility for operating activities are assigned and how reporting relationships and
authorisation hierarchies are established.
Communication:
Communication and enforcement of integrity and ethical values – These are essential
elements that influence the effectiveness of the design, administration and monitoring of
controls.
➢ Division of Internal Control into Components:
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 t:
The control environment;
The entity’s risk assessment process;
Monitoring of controls.
Control activities; and
The information system, including the related business processes, relevant to financial
reporting, and communication;
➢ Satisfactory Control Environment - not an absolute deterrent to fraud:
The existence of a satisfactory control environment can be a positive factor when the
auditor assesses the risks of material misstatement. However, although it may help reduce
the risk of fraud, a satisfactory control environment is not an absolute deterrent to fraud.
Conversely, deficiencies in the control environment may undermine the effectiveness of
controls, in particular in relation to fraud.
For example, management’s failure to commit sufficient resources to address IT security
risks may adversely affect internal control by allowing improper changes to be made to
computer programs or to data, or unauthorized transactions to be processed. As explained
in SA 330, the control environment also influences the nature, timing, and extent of the
auditor’s further procedures.
The control environment in itself does not prevent, or detect and correct, a material
misstatement. It may, however, influence the auditor’s evaluation of the effectiveness of
other controls (for example, the monitoring of controls and the operation of specific
control activities) and thereby, the auditor’s assessment of the risks of material
misstatement.

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 Control Environment (Satisfactory) Positive but not Old Course -- (M16R/M17R/M17E/M18R)
QNO
absolute deterrent to fraud. New Course -- (M19R)
ICS.05
Bhaskar CNO- SA315-P2.110
The existence of a satisfactory control environment can be a positive factor when the auditor assesses the
risks of material misstatement. Analyse and explain.
Answer ➢ Satisfactory Control Environment - not an absolute deterrent to fraud:
The existence of a satisfactory control environment can be a positive factor when the auditor
assesses the risks of material misstatement. However, although it may help reduce the risk
of fraud, a satisfactory control environment is not an absolute deterrent to fraud.
Conversely, deficiencies in the control environment may undermine the effectiveness of
controls, in particular in relation to fraud.
For example, management’s failure to commit sufficient resources to address IT security risks
may adversely affect internal control by allowing improper changes to be made to computer
programs or to data, or unauthorized transactions to be processed. As explained in SA 330,
the control environment also influences the nature, timing, and extent of the auditor’s
further procedures.
The control environment in itself does not prevent, or detect and correct, a material
misstatement. It may, however, influence the auditor’s evaluation of the effectiveness of
other controls (for example, the monitoring of controls and the operation of specific
control activities) and thereby, the auditor’s assessment of the risks of material
misstatement.
Author’s Note
Answer is also covered in ICS.03

QNO Understanding Entity's Risk Assessment Process New Course -- (N22M)

ICS.05.50 Bhaskar CNO- SA315-P2.120

Explain what understanding should an auditor obtain regarding an entity’s risk assessment process (one
of the components of the internal control of the entity).
Answer The Entity’s Risk Assessment Process– Component of Control Environment
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 assist 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 .

QNO Internal Control Component - Control Activities Old Course -- (M21R)

ICS.06 Bhaskar CNO- SA315-P2.140 New Course –(M21R)
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. Explain in detail stating clearly the meaning
of control activities and also discuss control activities that are relevant to the audit.
Answer 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 and the assertions which the auditor finds relevant in his risk
assessment process.
Control activities are the policies and procedures that help ensure that management directives are
carried out.

Control activities, whether within IT or manual systems, have various objectives and

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 are applied at various organisational and functional levels.

Control activities that are relevant to the audit are:

• Control activities that relate to significant risks and those that relate to risks for which substantive
procedures alone do not provide sufficient appropriate audit evidence; or
• Those that are considered to be relevant in the judgment of the auditor;
• As part of the risk assessment, the auditor shall determine whether any of the risks identified are, in
the auditor’s judgment, a significant risk.

QNO Monitoring of Internal Control over Financial Old Course -- (M18E)

ICS.07 Reporting Bhaskar CNO- SA315-P2.160 New Course -- (S17M/N20E /S20M/S21M/N22R)
The auditor shall obtain an understanding of the major activities that the entity uses to monitor internal
control over financial reporting Explain
Answer ➢ The auditor shall obtain an understanding of the major activities that the entity uses to monitor
internal control over financial reporting.
Monitoring of controls Defined:
Monitoring of controls is a process to assess the effectiveness of internal control
performance over time.
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.
Management accomplishes through ongoing activities, separate evaluations etc.:
Management accomplishes monitoring of controls through ongoing activities, separate
evaluations, or a combination of the two. Ongoing monitoring activities are often built into
the normal recurring activities of an entity and include regular management and supervisory
activities.
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.
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 financial data leading to remedial action to
the control.

QNO Internal Control Component - Understanding Old Course -- (M21R)

ICS.08 Information System Bhaskar CNO- SA315-P2.195 New Course –(M21R/M22M)
The auditor shall obtain an understanding of the information system, including the related business processes,
relevant to financial reporting, including the classes of transactions in the entity’s operations that are
significant to the financial statements, controls surrounding journal entries etc. Explain the other
considerations in this regard.
Answer 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.
(d) How the information system captures events and conditions that are significant to the financial
statements.
(e) The financial reporting process used to prepare the entity’s financial statements.
(f) Controls surrounding journal entries.

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QNO Relevance of Controls for Audit Old Course -- (M21R/M21E)
ICS.14 Bhaskar CNO- SA315-P2.065 New Course -- (M21R/M22M/N22R)
Factors relevant to the auditor’s judgment about whether a control, individually or in combination with
others, is relevant to the audit may include such matters as materiality, the significance of the related risk etc.
Explain in detail.
Answer Controls Relevant to the Audit: Factors relevant to the auditor’s judgment about
whether a control, individually or in combination with others, is relevant to the audit may
include such matters as the following:
(i) Materiality.
(ii) The significance of the related risk.
(iii) The size of the entity.
(iv) The nature of the entity’s business, including its organisation and ownership
characteristics.
(v) The diversity and complexity of the entity’s operations.
(vi) Applicable legal and regulatory requirements.
(vii) The circumstances and the applicable component of internal control.
(viii) The nature and complexity of the systems that are part of the entity’s internal
control, including the use of service organisations.
(ix) Whether, and how, a specific control, individually or in combination with others,
prevents, or detects and corrects, material misstatement.

QNO ICS in Small Business Old Course -- (P16M/N20R)

ICS.27 Bhaskar CNO- SA315-P2.320 New Course – Relevant, Concept Covered in New Course SM
Write a short note on the internal control in small business.
Answer ➢ Internal Control in Small Business:
The auditor needs to obtain the same degree of assurance in order to give an unqualified
opinion on the financial statements of both small and large entities. However, many controls
which would be relevant to large entities are not practical in the small business e.g., in small
business accounting work may be performed by only a few persons. These persons may have
both operating and custodial responsibilities, and segregation of functions may be missing or
severally limited.
Inadequate segregation of duties may, in some cases, be offset by owner/manager
supervisory controls which may exist because of direct personal knowledge of the business
and involvement in the business transactions. In circumstances where segregation of duties
is limited or evidence of supervisory controls is lacking, the evidence necessary to support
the auditors’ opinion on the financial information may have to be obtained largely through
the performance of substantive procedure.

Inherent Limitations of ICS Old Course -- (P16M /M16M/N16M/N17R/M18M/N18M/N18R/M19R/

QNO
Bhaskar CNO- SA315-P2.360 M19M)
ICS.29
New Course -- (M18E/M19M)
Briefly discuss the limitations of Internal Control.
OR
Internal control can provide only reasonable but not absolute assurance that its objective relating to
prevention and detection of errors/frauds, safeguarding of assets etc., are achieved. In view of above,
briefly state some of the inherent limitations of Internal Control System.
OR
Internal Control System can provide only reasonable but not absolute assurance that its objective relating
to prevention and detection of errors/frauds, safeguarding of assets etc., are achieved. Briefly explain the
inherent limitations that the system suffers.
Answer
➢ 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.

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 Top Management
➢ 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.
Middle Management
➢ 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.
➢ 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.
Lower Management
➢ 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.
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.

QNO Benefits of Evaluation of Internal Controls Old Course – (M19E)

ICS.31 Bhaskar CNO- SA315-P2.200 New Course -- (M19R/N22R)
So far as the auditor is concerned, the examination and evaluation of the internal control system is an
indispensable part of the overall audit programme. The auditor needs reasonable assurance that the
accounting system is adequate and that all the accounting information which should be recorded has in fact
been recorded. Internal control normally contributes to such assurance. Explain stating clearly the benefits
of evaluation of internal control to the auditor.
OR
The examination and evaluation of internal control system is an indispensable part of the overall audit
programme. State the areas which the 'Review of Internal controls' will enable the auditor to know.
Answer ➢ Benefits of Evaluation of Internal Control to the Auditor: The review of internal controls will
enable the auditor to know:
Remember Shortcut:-A4R2IS2E2 for benefits
A- whether an adequate internal control system is in use and operating as planned by the
management;
A- whether any administrative control has a bearing on his work (for example, if the control
over worker recruitment and enrolment is weak, there is a likelihood of dummy names being
included in the wages sheet and this is relevant for the auditor);
A- what would be appropriate audit technique and the audit procedure in the given
circumstances;
A- what are the areas where control is weak and where it is excessive; and

R- how far and how adequately the management is discharging its function in so far as correct
recording of transactions is concerned;
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 R- how reliable the reports, records and the certificates to the management can be;

I- whether an effective internal auditing department is operating;

S- whether the controls adequately safeguard the assets;

S- whether some worthwhile suggestions can be given to improve the control system
E-whether errors and frauds are likely to be located in the ordinary course of operations of
the business;
E- the extent and the depth of the examination that he needs to carry out in the different
areas of accounting;

QNO Benefits of IT Controls Old Course -- (M19R)

ICS.33 Bhaskar CNO- SA315-P2.335 New Course – (M22R)
Explain how does IT benefits an entity’s internal control.
Answer -C2AATS is good IT system for companies
Generally, IT benefits an entity’s internal control by enabling an entity to:
Reduce the risk that Controls will be circumvented; (frauds may not be aware about hidden
systems , so that they cannot circumvent them)
Consistently apply predefined business rules and (E.g. Bonus calculation of 10,000 employees)
perform complex calculations in processing large
volumes of transactions or data;
Facilitate the Additional analysis of information; (average leaves and overtime analysis)
Enhance the Ability to monitor the performance of the (Anytime, anywhere access to server)
entity’s activities and its policies and procedures;
Enhance the Timeliness, availability, and accuracy of (Every day at 12pm automatic backup)
information
Enhance the ability to achieve effective Segregation of (Id based data and programme access)
duties by implementing security controls in
applications, databases, and operating systems.
Author’s Note

C2AATS is good IT system for companies

QNO Meaning of IFC in Detail New Course –(N21M)

ICS.33.400 Bhaskar CNO- SA315-P2.380
Explain the meaning of internal financial controls as per the Companies Act, 2013. Also explain its objectives
Answer Clause (e) of Sub-section 5 of Section 134 explains the meaning of internal financial controls as,
“the policies and procedures adopted by the company for ensuring the orderly and efficient conduct
of its business, including adherence to company’s policies, the safeguarding of its assets, the
prevention and detection of frauds and errors, the accuracy and completeness of the accoun ting
records, and the timely preparation of reliable financial information.”
From the above definition, it is clear that internal financial controls are the policies and procedures
adopted by the company for:
1. ensuring the orderly and efficient conduct of its business, including adherence to company’s
policies,
2. the safeguarding of its assets,
3. the prevention and detection of frauds and errors,
4. the accuracy and completeness of the accounting records, and
5. the timely preparation of reliable financial information.”

QNO Law Related to IFC Old Course -- (N21R)

ICS.33.500 Bhaskar CNO- SA315-P2.380 New Course –(N21R)

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 Auditor’s reporting on internal financial controls is a requirement specified in the Act and, therefore, will
apply only in case of reporting on financial statements prepared under the Act and reported under Section
143. Explain in detail quoting specifically the Law in the above context covering each and every aspect.
Answer Auditor’s reporting on internal financial controls is a requirement specified in the Act and, therefore,
will apply only in case of reporting on financial statements prepared under the Act and reported under
Section 143.

Accordingly, reporting on internal financial controls will not be applicable with respect to interim
financial statements, such as quarterly or half -yearly financial statements, unless such reporting is
required under any other law or regulation.

Objectives of an auditor in an audit of internal financial controls over financial reporting : The
auditor’s objective in an audit of internal financial controls over financial reporting is, “ to express an
opinion on the effectiveness of the company’s internal financial controls over financial reporting.”
It is carried out along with an audit of the financial statements.

Reporting under Section 143(3)(i) is dependent on the underlying criteria for internal financial
controls over financial reporting adopted by the management. However, any system of internal
controls provides only a reasonable assurance on achievement of the objectives for which it has been
established. Also, the auditor shall use the concept of materiality in determining the extent of testing
such controls.

Rule 8(5)(viii) of the Companies (Accounts) Rules, 2014 requires the board report of all companies
to state the details in respect of adequacy of internal financial controls with reference to the financial
statements.
The inclusion of the matters relating to internal financial controls in the directors responsibility
statement is in addition to the requirement of the directors stating that they have taken proper and
sufficient care for the maintenance of adequate accounting records in accordance with the provisions
of the 2013 Act for safeguarding the assets of the company and for preventing and detecting fraud
and other irregularities.

QNO Control risk assessment when control deficiencies Old Course -- (M20R)
ICS.43 are identified Bhaskar CNO- SA315-P1.022 New Course -- (M20R/ S20M/S21M)
"When auditor identifies deficiencies and report on internal controls, he determines the significant financial
statement assertions that are affected by the ineffective controls in order to evaluate the effect on control
risk assessments and strategy for the audit of the financial statements. Explain"
Answer ➢ Control risk assessment when control deficiencies are identified:
When auditor identifies deficiencies and report on internal controls, he determines the significant
financial statement assertions that are affected by the ineffective controls in order to evaluate the
effect on control risk assessments and strategy for the audit of the financial statements.
When control deficiencies are identified and auditor identifies and tests more than one control for
each relevant assertion, he evaluates control risk considering all of the controls he has tested. If
auditor determines that they support a ‘rely on controls’ risk assessment, or if compensating
controls are identified, tested and evaluated to be effective, he may conclude that the ‘rely on
controls’ is still appropriate. Otherwise we change our control risk assessment to ‘not rely on
controls.’
When a deficiency relates to an ineffective control that is the only control identified for an assertion,
he revises risk assessment to ‘not rely on controls’ for associated assertions, as no other controls
have been identified that mitigate the risk related to the assertion. If the deficiency relates to one
WCGW (what can go wrong) out of several WCGW’s, he can ‘rely on controls’ but performs
additional substantive procedures to adequately address the risks related to the deficiency.

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 Part 3 -- [SA 610] USING THE WORK OF INTERNAL AUDITORS

QNO Internal audit-Meaning , scope, objectives Old Course -- (M16R)

610.01 Bhaskar CNO- SA610.020 New Course -(M19R/S20M/N20E/S21M/M22E/M22R)
Explain the meaning, objectives and scope of internal audit functions as per SA 610. Also discuss who can be
appointed as Internal Auditor?
OR
Explain the activities of the Internal Audit function.
OR
One of the directors of Stability Establishment Limited was of the view that Internal Audit has no relation
with Internal Control of a company. Comment
OR
Saburi Textile Ltd is an established player in the textile manufacturing sector. It has developed strong internal
controls in almost every area. It has appointed you as an Internal Audit team head. Internal audit has a very
strong relation with internal control of the company. Internal Audit analyses the effectiveness with which
the internal control of the company is operating and also makes suggestions for improvement in that internal
control. Explain stating clearly activities relating to Internal Control.
Answer ➢ Who can be appointed as Internal Auditor?
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.
➢ Definition
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.
➢ Objective & Scope
The objectives and scope of internal audit functions typically include assurance and consulting
activities designed to evaluate and improve the effectiveness of the entity’s governance processes, risk
management and internal control such as the following:
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,
• communicating risk and control information to appropriate areas of the organization and
effectiveness of communication among those charged with governance, external and
internal auditors, and management.
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 and internal control
(including effectiveness of the financial reporting process). The internal audit function may
perform procedures to assist the entity in the detection of fraud.
Activities Relating to Internal Control
• 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.
• Evaluation of internal control:
The internal audit function may be assigned specific responsibility for reviewing controls,
evaluating their operation and recommending improvements thereto. In doing so, the
internal audit function provides assurance on the control. For example, the internal audit
function might plan and perform tests or other procedures to provide assurance to
management and those charged with governance regarding the design, implementation and

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 operating effectiveness of internal control, including those controls that are relevant to the
audit.
• Review of compliance with laws and regulations.
The internal audit function may be assigned to review compliance with laws, regulations and
other external requirements, and with management policies and directives and other internal
requirements.
• 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.

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 CHAPTER FRAUD AND RESPONSIBILITIES OF THE AUDITOR IN THIS REGARD
5

Part 1 -- [SA 240] THE AUDITOR’S RESPONSIBILITIES RELATING TO FRAUD IN AN AUDIT

OF FINANCIAL STATEMENTS

QNO Definition & Types of Fraud Old Course -- (M18R)

240.01 Bhaskar CNO- SA240.020 New Course -- (S17M/S20M/S21M)
What do you understand by the term ‘fraud’? Provide its meaning given under Auditing Standard
240.
OR
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. Explain.
Answer ➢ Definition of Fraud:
An intentional act by one or more individuals among management, those charged with
governance, employees, or third parties, to deceive, to mislead (Advance received from
customer shown as sales) or at least to conceal the truth (Contingent Liability not disclosed)
to obtain an unjust or illegal advantage.
It follows that other things being equal, they are more serious than unintentional errors
because of the implication of dishonesty which accompanies them. Its auditor’s secondary
/ incidental objective to find out with reasonable assurance whether material frauds &
errors exists. He may suspect or identify fraud and report it, but it is not his responsibility
to prove it in court of law.
Author’s Note
Refer chart of 240.03

Fraudulent Financial Old Course -- (P16M/N17M/N17R/N18M/ M19R/N19R/N19M/N20M/N20E)

QNO
Reporting New Course -- (N19M/N20M/S20M/S21M/N22R/M22M)
240.03
Bhaskar CNO- SA240.020
Fraudulent financial reporting involves intentional misstatements including omissions of amounts or
disclosures in financial statements to deceive financial statement users. Explain stating clearly how it can be
accomplished.
OR
Write a short note on Fraudulent financial reporting.
OR
Fraudulent financial reporting often involves management override of controls that otherwise may appear
to be operating effectively. Explain some techniques by which fraud can be committed by management
overriding controls.
➢ Fraudulent Financial Reporting: Fraudulent financial reporting involves intentional misstatements
including omissions of amounts or disclosures in financial statements to deceive financial statement
users. It can be caused by the efforts of management to manage earnings in order to deceive financial
statement users by influencing their perceptions as to the entity’s performance and profitability. Such
earnings management may start out with small actions or inappropriate adjustment of assumptions
and changes in judgments by management. Pressures and incentives may lead these actions to
increase to the extent that they result in fraudulent financial reporting.
➢ In some entities, management may be motivated to reduce earnings by a material amount to
minimize tax or to inflate earnings to secure bank financing.
➢ Fraudulent financial reporting may be accomplished by the following:
Manipulation, falsification (including forgery), or alteration of accounting records or
supporting documentation from which the financial statements are prepared.
Misrepresentation in or intentional omission from, the financial statements of events,
transactions or other significant information.

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 Intentional misapplication of accounting principles relating to amounts, classification,
manner of presentation, or disclosure.
➢ Fraudulent financial reporting often involves management override of controls that otherwise may
appear to be operating effectively.

Techniques of frauds committed by Management:

Fraudulent financial reporting often involves management override of controls that otherwise may
appear to be operating effectively. Fraud can be committed by management overriding controls using
such techniques as:
(1) Recording fictitious journal entries, particularly close to the end of an accounting period, to
manipulate operating results or achieve other objectives
(2) Inappropriately adjusting assumptions and changing judgments used to estimate account balances
(3) Omitting, advancing or delaying recognition in the financial statements of events and transactions
that have occurred during the reporting period
(4) Concealing, or not disclosing, facts that could affect the amounts recorded in the financial
statements
(5) Engaging in complex transactions that are structured to misrepresent the financial position or
financial performance of the entity
(6) Altering records and terms related to significant and unusual transactions.

QNO Fraud Risk Factors Old Course -- (M20M)

240.09 Bhaskar CNO- SA240.040 New Course -- (M18M/ N18M/ M19M/ M20M)
Fraud, whether fraudulent financial reporting or misappropriation of assets, involves incentive or pressure
to commit fraud, a perceived opportunity to do so and some rationalization of the act. Explain with
examples.
Answer ➢ Fraud risk factors:
Events or conditions that indicate an incentive or pressure to commit fraud or provide an
opportunity to commit fraud or rationalization
Incentive or pressure to commit fraudulent financial reporting may exist when
management is under pressure, from sources outside or inside the entity, to achieve an
expected (and perhaps unrealistic) earnings target or financial outcome – particularly since
the consequences to management for failing to meet financial goals can be significant.
Similarly, individuals may have an incentive to misappropriate assets, for example, because
the individuals are having habit of living beyond their means.
A perceived opportunity to commit fraud may exist when an individual believes internal
control can be overridden, for example, because the individual is in a position of trust or has
knowledge of specific deficiencies in internal control.
Individuals may be able to rationalize committing a fraudulent act. Some individuals
possess an attitude, character or set of ethical values that allow them knowingly and
intentionally to commit a dishonest act. However, even otherwise honest individuals can
commit fraud in an environment that imposes sufficient pressure on them.

QNO Fraud Risk Factors-Fraudulent Financial Reporting – New Course -- (S17M/N19E/ S20M/S21M/
240.11 Opportunities Bhaskar CNO- SA240.020/ SA240.040 M22M)
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 these opportunities may arise.
OR
"Inadequate internal control over assets may increase the susceptibility of misappropriation of those
assets." State any three example of such occurrence of misappropriation of such assets.

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Answer ➢ 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.
➢ Types of Fraud
The fraud risk factors identified here are examples of such factors that may be faced by auditors in a
broad range of situations. Separately presented are examples relating to the two types of fraud
relevant to the auditor’s consideration, i.e.,
fraudulent financial reporting, and
misappropriation of assets
➢ Fraud Risk Factors
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:
incentives/pressures,
opportunities, and
attitudes/rationalizations.
➢ Opportunities
Ability to dominate in industry (in appropriate or non- arm’s length transactions)
(E.g. Prices are hiked when sales need boost and later on discounts are given)
Significant operations located across international borders
(E.g. 30% sales are from Australian & European branches, it’s difficult to get information &
visit this branch)
Use of business intermediaries with no justification
(E.g. Sales to Russia are done through subsidiary in Dubai which is not audited as audit is not
compulsory in Dubai)
Bank accounts & subsidiaries in tax haven.
(E.g. 5 bank accounts in Mauritius)
Complex or unstable organization structure.
(E.g. Unnecessary frequent changes are made in managers and employees, before people
become comfortable in working transfers take place)
The monitoring of management is not effective (Very short time is allocated for supervision)
Many assets & liabilities depend on subjective judgment
(E.g. In information technology/ industry data / software / website are valued which involves
subjectivity)
Internal control components are deficient"
Significant related party transactions not in ordinary course audited by other or not audited.
(E.g. When sales need boost goods many transactions with related party are observed and
they are returned after few months)

QNO Fraud Indicators -- Discrepancies in the accounting Old Course -- (M20R)

240.12 records Bhaskar CNO- SA240.060 New Course -- (M20R)
"Discrepancies in the accounting records, including transactions that are not recorded in a complete or
timely manner or are improperly recorded as to amount, accounting period, classification, or entity policy
is one of the examples of circumstances that indicate the possibility of fraud. Explain at least four other
such examples relating to discrepancies in the accounting records."
Answer ➢ Discrepancies in the accounting records, including:
(System Access / Transactions Recording / Unsupported or Unauthorised / Last Minute Adjustments /
Complaints)
Evidence of employees’ access to systems and records inconsistent with that necessary to perform
their authorized duties.
• (E.g. entries during odd time, post 9 PM or pre 9 AM)
Transactions that are not recorded in a complete or timely manner or are improperly recorded as
to amount, accounting period, classification, or entity policy.
• (E.g. Some customer details such as PAN number, Addressee not recorded, interest on working
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 capital loan capitalised)
Unsupported or unauthorized balances or transactions.
• (E.g. Office expenses debited as production expenses, transactions from username which was
not authorised)
Last-minute adjustments that significantly affect financial results.
• (E.g. Adjustment to percentage completion of WIP)
Tips or complaints to the auditor about alleged fraud.
• (E.g. Chits in suggestion box alleging fraud)

QNO Fraud Indicators --Conflicting or Missing Evidence New Course -- (N18E/M21M)

240.13 Bhaskar CNO- SA240.060
Write any five circumstances of conflicting or missing evidence that indicate the possibility of fraud.
Answer ➢ Conflicting or missing evidence, including:
Missing Evidence
• Inability to produce evidence of key systems development and program change
testing and implementation activities for current-year system changes and
deployments. (Inadequate justification for change in sales software)
• Unavailability of other than photocopied or electronically transmitted
documents when documents in original form are expected to exist. (Transport bill
is available in Xerox)
• Unavailable or missing electronic evidence, inconsistent with the entity’s record
retention practices or policies. (Customer tax registration numbers missing)
• Missing documents. (Transport agreement missing)
• Documents that appear to have been altered. (Some customer orders have
different format)
Conflicting Evidence
• Unusual balance sheet changes or changes in trends or important financial
statement ratios or relationships, for example, receivables growing faster than
revenues.
• Inconsistent, vague, or implausible responses from management or employees
arising from inquiries or analytical procedures. (Management unable to explain
rapid growth in receivables)
• Unusual discrepancies between the entity's records and confirmation replies.
Inventory
• Missing inventory or physical assets of significant magnitude.
• Significant unexplained items on reconciliations. (Reconciliation of actual to system
stock has long outstanding sales return & GIT)
Accounts Receivable
• Large numbers of credit entries and other adjustments made to accounts
receivable records. (Many discounts, rebates etc in dealer schemes)
• Unexplained or inadequately explained differences between the accounts
receivable subledger and the control account, or between the customer
statements and the accounts receivable sub-ledger.
• Fewer responses to confirmations than anticipated or a greater number of
responses than anticipated.
Bank
• Missing or non-existent cancelled cheques in circumstances where cancelled
cheques are ordinarily returned to the entity with the bank statement.

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QNO Fraud Indicators --Problematic or Unusual Relationships Old Course -- (M18E/M19M/M21M)
240.15 Bhaskar CNO- SA240.060 New Course -- (M19M/N22R)
Write the circumstances that indicate the possibility of fraud due to problematic or unusual relationship
between the auditor and management.
Answer Problematic or unusual relationships between the auditor and management, including:
➢ Time
Undue time pressures imposed by management to resolve complex or contentious issues.
➢ Denial
Denial of access to records, facilities, certain employees, customers, vendors, or others
from whom audit evidence might be sought.
Unwillingness to facilitate auditor access to key electronic files for testing through the use
of computer-assisted audit techniques.
Denial of access to key IT operations staff and facilities, including security, operations, and
systems development personnel.
➢ Delay
Unusual delays by the entity in providing requested information.
➢ Management
Complaints by management about the conduct of the audit or management intimidation
of engagement team members, particularly in connection with the auditor’s critical
assessment of audit evidence or in the resolution of potential disagreements with
management.
An unwillingness to add or revise disclosures in the financial statements to make them
completer and more understandable.
An unwillingness to address identified deficiencies in internal control on a timely basis.

QNO Auditor Responsibility- Misstatements Management New Course -- (S17M)

240.19 Fraud #Unique
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.
Answer ➢ Relevant Standards and Provision:
SA 240, The Auditor’s Responsibilities Relating to Fraud in audit of Financial Statement

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 Sec 143 (12) of Companies Act
Clause (XI) of CARO 2020
➢ Explanation: As per SA 240
Nature of Management Fraud – Overriding Controls / Complex Transactions /
Misrepresent Financial Performance
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.
TCWG & Management Responsibility to Prevent, Detect Fraud & Obtain Reasonable
Assurance that FST are free from MMST
The primary responsibility for the prevention and detection of fraud rests with those
charged with the governance and the management of the entity. Further, 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.
Auditor Objective – Reasonable Assurance regarding MMST
Auditor’s opinion on the financial statements is based on the concept of obtaining
reasonable assurance, hence in an audit, the auditor does not guarantee that material
misstatements will be detected.
Employee Fraud Vs Management Fraud
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, present fraudulent financial
information or override control procedures designed to prevent similar frauds by other
employees
Because of Inherent Risk in Audit some MMST may not be detected
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.
➢ As per Sec 143 (12) - Reason to Believe – Fraud by of Officer or Employee on the company—
report to CG (if fraud >=1 crore) or to Audit Committee , BOD (if fraud is less than 1
crore)
Further, 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.
➢ Clause (xi) of CARO - Report on the company by officer or employee of the company or
fraud by company noticed or reported
The auditor is also required to report as per Clause (xi) of Paragraph 3 of CARO, 2020, whether any
fraud by the company or any fraud on the company has been noticed or reported during the year,
if yes, the nature and the amount involved is to be indicated;

QNO Fraud Case (Provision without Documentary or Other Evidence) #Unique New Course -- (S17M)
240.31
Intelligent Ltd. entered into an agreement with Mr. Intellectual on 15th March, 2017, whereby it agreed to
pay him Rs 2 lakhs per month as retainership fee for consultation in IT department. However, no amount
was actually paid and Rs 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
different if the amount involved is Rs 1 crore or above?
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Answer Part I -- Relevant Standards & Laws
▪ SA 240, The Auditor’s Responsibilities Relating to Fraud in audit of Financial Statements
▪ SA 450, Evaluation of Misstatement Identified during the Audit
▪ Sec 143 (12) of Companies Act
▪ Clause (XI) of CARO 2020
Part II -- Requirements of Relevant Standards & Laws
COMMON POINTS -- SA 240 & 450

➢ As per SA 240
Circumstances Indicates Possible Misstatement – Consider Potential Effect – If
Effect could be Material – Perform Modified & Additional Procedures
SA 240, “The Auditor’s Responsibilities Relating Fraud in an Audit of Financial Statements”,
requires that if circumstances indicate the possible existence of fraud or error, the auditor
should consider the potential effect of the suspected fraud or error on the financial
information. If the auditor believes the suspected fraud or error could have a material effect
on the financial information, he should perform such modified or additional procedures as
he determines to be appropriate.
If actual Misstatement – Evaluate whether Indicative of Fraud – if such Indication
– Implication on other aspects of audit, E.g. Cannot be isolated occurrence,
Reliability of WR
SA 240 also requires that 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, recognizing that an
instance of fraud is unlikely to be an isolated occurrence. When the auditor confirms that, or
is unable to conclude whether, the financial statements are materially misstated as a result
of fraud the auditor shall evaluate the implications for the audit.
➢ As per SA 450
After Misstatement Identified – Extend Audit Procedures to know materiality and Ask for
Adjustment for Misstatements and Must for Material Items –Even after extension unable to
conclude about materiality given or If rectification not done – give qualified or adverse
opinion as the case may be
Further, SA 450, also requires that in such circumstances, the auditor should consider requesting the
management to adjust the financial information or consider extending his audit procedures. If the
management refuses to adjust the financial information and the results of extended audit procedures
do not enable the auditor to conclude that the aggregate of uncorrected misstatements is not
material, the auditor should express a qualified or adverse opinion, as appropriate.
COMMON POINTS -- ABILITY / SEC 143 / CARO

➢ Ability to Continue as Auditor- Resulting from fraud or expected fraud – encounters

exceptional circumstances – not able to continue.
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:
➢ Consider is it appropriate to withdraw
If it is appropriate to with draw – inform, discuss with management & TCWG with
reasons / Report decision to persons, authorities as per legal & regulatory
requirement
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
• 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

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 authorities, the auditor’s withdrawal from the engagement and the reasons for the
withdrawal.
➢ As per Sec 143 (12) -Reason to Believe – Fraud by of Officer or Employee on the company—
report to CG (if fraud >=1 crore) or to Audit Committee , BOD (if fraud is less than 1
crore)
Further, 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.
➢ Clause (xi) of CARO - Report on the company by officer or employee of the company or
fraud by company noticed or reported
The auditor is also required to report as per Clause (xi) of Paragraph 3 of CARO, 2020, The auditor is
also required to report as per Clause (xi) of Paragraph 3 of CARO, 2020, whether any fraud by the
company or any fraud on the company has been noticed or reported during the year, if yes, the
nature and the amount involved is to be indicated
➢ Explanation
Entered into agreement with Consultant – Charged Fees of Rs 24 lakhs to P&L – No Evidence
for receipt of services
In the given case, Intelligent Ltd. has entered into an agreement with Mr. Intellectual, at year-end,
for consultation in IT department. It also charged yearly fee of Rs 24 lakhs in the Statement of Profit
and Loss, however, no documentary or other evidence of receipt of such service was found, on
investigation.
➢ Conclusion
Indicates Fictitious Journal Entry – Auditor should Perform Additional Detailed Examination
It is clear that company has passed fictitious journal entries, near year-end, to manipulate the
operating results.

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 [SA 250] CONSIDERATION OF LAWS AND REGULATIONS IN AN AUDIT OF FINANCIAL
STATEMENTS

(ICAI module is not having any content from SA 250, in New Course one question has been asked in RTP’s, MTP’s and
Exams, which is given below. We are strictly following recent ICAI module and New Course ICAI questions because they
are the base for drafting paper. Hence we excluding concepts other concepts from this SA).

Indicators of Non Compliance Old Course -(P16M/M16R/M16M/N16M/ M18M/ N18R /N18M/ N20E)
QNO
Bhaskar CNO- SA250.020 New Course -- (This Concept is relevant for new course, it was targeted
250.01
in nov 22 exam)
With reference of SA 250, give some examples or matters indicating to the auditor about non compliance
of laws & regulations by management.
OR
Matters indicating auditor about non-compliance of laws & regulations by management.
OR
M/s RR and Associates, Chartered Accountants, have been appointed as a statutory auditor of PK Limited
for the financial year 2019-20. Mention any four examples or matters indicating to the auditor about non-
compliance with laws and regulations by PK Limited.
Answer Non-compliance of Laws and Regulations by Management: As per SA 250 on "Consideration of Laws and
Regulation in an Audit of Financial Statements", M/s RR and Associates, Chartered Accountants of PK Limited
becomes aware of the existence of, or information about, the following matters, it may be an indication of
non-compliance with laws and regulations:
(i) Investigations by regulatory organizations and government departments or payment of fines or penalties.
(ii) Payments for unspecified services or loans to consultants, related parties, employees or government
employees
(iii) Sales commissions or agent's fees that appear excessive in relation to those ordinarily paid by the entity
or in its industry or to the services actually received.
(iv) Purchasing at prices significantly above or below market price.
(v) Unusual payments in cash, purchases in the form of cashiers' cheques payable to bearer or transfers to
numbered bank accounts.
(vi) Unusual payment towards legal and retainer ship fees.
(vii) Unusual transactions with companies registered in tax heavens.
(viii) Payments for goods or services made other than to the country from which the goods or services
originated.
(ix) Payments without proper exchange control documentation.
(x) Existence of an information system which foils, whether by design or by accident, to provide an adequate
audit trail or sufficient evidence.
(xi) Unauthorized transactions or improperly recorded transactions.
(xii) Adverse media comment.

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 Part 3 – OTHER CONCEPTS

Primary Responsibility to Prevent & Detect Fraud Old Course -- (M21R)

QNO
Rests with TCWG & Management New Course -- (M21R)
240.16
Bhaskar CNO- SA240.130
The primary responsibility for the prevention and detection of fraud rests with both those charged with
governance of the entity and management. Explain
Answer The primary responsibility for the prevention and detection of fraud rests with both those charged
with governance of the entity and management. 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 behaviour which can be reinforced by an active oversight by
those charged with governance. In exercising oversight responsibility, those charged with governance
consider the potential for override of controls or other inappropriate influence over the financial
reporting process, such as efforts by management to manage earnings in order to influence the
perceptions of analysts as to the entity’s performance and profitability.

QNO Auditor’s Responsibilities -Detection of Fraud and Error- Books of New Course -- (S17M)
240.17 Accounts Bhaskar CNO- C5OC.100
While auditing XYZ Ltd., the auditor was told by Mr. Mahesh, the CEO of the company, that he would be
responsible for the fraud & errors, if any, occurring in the books of accounts of the company.
OR
What are the auditor’s responsibilities for detection of Frauds and Errors?
Answer ➢ Overall Responsibility of Financial Statement
Auditor’s Responsibilities for Detection of Fraud and Error: As per SA 240 “The Auditor’s
Responsibilities relating to fraud in an audit of Financial Statements”, 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.
➢ Inherent limitations
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.
➢ Primary Responsibility of Auditor for Fraud
When obtaining reasonable assurance, the auditor is responsible for:
maintaining an attitude of professional skepticism throughout the audit,
considering the potential for management override of controls and recognizing the fact that
audit procedures that are effective for detecting error may not be effective in detecting
fraud.
➢ Secondary Responsibility of Auditor for Fraud
The auditor also has the responsibility to:
communicate the misstatement to the appropriate level of management on a timely basis
and consider the need to report to it then changed with governance.
He may also obtain legal advice before reporting on the financial information or before
withdrawing from the engagement.
The auditor should satisfy himself that the effect of fraud is properly reflected in the
financial information or the error is corrected in case the modified procedures performed
by the auditor confirm the existence of the fraud.
➢ Reporting Responsibility for Fraud
The auditor should also consider the implications of the frauds and errors and frame his report
appropriately. In case of a fraud, the same should be disclosed in the financial statement. If
adequate disclosure is not made, there should be a suitable disclosure in his audit report.

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QNO Defalcation of Cash- Master Answer Old Course -- (P16M/M16R)
240.23 Bhaskar CNO- C5OC.080 New Course -- (S20M/S21M)
How would you proceed to check the misappropriation of cash in a trading concern?
Answer ➢ Ways of Defalcation
Defalcation of cash has been found to perpetrate generally in the following ways:
By suppressing cash receipts: - Few Techniques of how receipts are suppressed are:
• Not accounting for cash sales fully.
(E.g. Omission, Lower Rates or Quantity on Bill)
• Not accounting for miscellaneous receipts,
(E.g., sale of scrap, quarters allotted to the employees, etc.)
• Adjusting unauthorised or fictitious rebates, allowances, discounts, etc. to
customer accounts and misappropriating amount paid by them.
• Writing off as debts in respect of such balances against which cash has already
been received but has been misappropriated.
• Writing down asset values in entirety, selling them subsequently and
misappropriating the proceeds.
(E.g. Write-off machine completely, make book value NIL and close account. Then
sale it but don’t account for cash received and misappropriate it)
• 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.
(E.g. Money received from A is not accounted, then money received from B is shown
received from A and so on)
By inflating cash payments.
Examples of inflation of payments:
• Making payments against fictitious vouchers.
(E.g. Fake bills, Duplicate Bills)
• Making payments against vouchers, the amounts whereof have been inflated.
• Manipulating totals of wage rolls either by including therein names of dummy
workers or by inflating them in any other manner.
(E.g. Inflate over time or reduce leave deduction)
By casting wrong totals in the cash book.
• Under casting receipts, Over casting payments.
• Casting a larger total for petty cash expenditure and adjusting the excess in the totals
of the detailed columns so that cross totals show agreement.
➢ Detection of Defalcation
With a view to check misappropriation of cash, the existence of internal check system is quite
essential. In particular, the following may be noted-
Existence of System / Segregation of Duties
Ascertaining the existence of system of cash receipts and cash sales and disbursements of
purchases and existence of internal checks at various stages is quite important. In particular,
the separation of duties and incompatible functions,
(E.g., an employee who receives and deposits cash and cheques should not prepare sales
invoices, or reconcile bank accounts, and should not approve vouchers for payment as
authorised signatory.)

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 Verification of cash sales from cash carbon copies & cash sales summary book
Verify cash sales with carbon copies of cash memos. If sales are quite voluminous then a
Cash Sales Summary Book is maintained, and the cash memos are traced into it; the totals of
the Summary Book are verified, and the daily totals of the Summary book traced into the
Cash Book.
Verification of Dates
One of the matters, to which attention of the auditor should be paid in the process, is that
the dates on the cash memos should tally with those on which cash collected in respect
thereof, as entered in the Cash Book. Checking of date of each receipt as it is entered in the
cash memo or the counterfoil of the receipt issued in respect thereof corresponds with the
date on which it is entered in the Cash Book. If there is a time lag between them, it is possible
that the person who had collected the amount had failed to deposit it with the cashier
immediately thereafter. When such a discrepancy is observed, the cause thereof should be
ascertained.
Verification of cash receipts with counter foils / types of frauds / efficient internal check
Checking of cash receipts with counterfoils of the receipts issued. But the issue of receipts
with counterfoils in respect of amounts collected by itself would not ensure that all the
amounts collected have been fully accounted for or have been correctly adjusted. For
instance, a receipt might be issued for a larger amount than entered on its counterfoils.
Again, only one receipt might have been issued for two or more amounts collected from a
party while the counterfoils may show that separate receipts have been issued in respect of
each amount collected and the one or more receipts forms, thus saved, may have been used
for issuing a receipt of another amount collected which have been misappropriated.
Therefore, before accepting counterfoils or receipts as evidence or the correctness of the
amount collected, the auditor should satisfy himself that there exists an efficient system
of internal check which would prevent any receipt from being misappropriated.
(E.g. CCTV or Signature of senior on receipt and counter foil)

Defalcation of Cash- Techniques-Ways-Suppressing Cash Old Course -- (M18E/M18R)

QNO
Receipts New Course --
240.27
Bhaskar CNO- C5OC.080 (S17M/S20M/N20E/N22M/S21M)
There are many ways for cash defalcation, one of which by suppressing cash receipts. List out few
techniques of how cash receipts are suppressed
OR
Saburi Yarns Ltd is engaged in manufacturing and trading of yarns of different types. Its huge amount is
locked up in account receivables. Moreover, Management of Saburi Yarns Ltd is worried about its Internal
Control system over receipts from account receivables and other receipts. Management wants to
understand from you as an auditor few techniques as to how receipts can be suppressed resulting into
frauds and finally incurring losses.
OR
Write short notes on Techniques of suppressing cash receipts.
Answer ➢ Defalcation of Cash: Defalcation of cash has been found to perpetrate generally in the
following ways:
By suppressing cash receipts: - Few Techniques of how receipts are suppressed are:
Not accounting for cash sales fully. (Omission, Lower Rates or Quantity on Bill)
Not accounting for miscellaneous receipts, e.g., sale of scrap, quarters allotted to the
employees, etc.
Adjusting unauthorised or fictitious rebates, allowances, discounts, etc. to customer
accounts and misappropriating amount paid by them.
Writing off as debts in respect of such balances against which cash has already been
received but has been misappropriated.
Writing down asset values in entirety, selling them subsequently and misappropriating the
proceeds. (Write-off machine completely, make book value NIL and close account. Then sale
it but don’t account for cash received and misappropriate it)
Teeming and Lading:

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 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.
(Money received from A is not accounted, then money received from B is shown received from
A and so on)

QNO Fraud detected after completion of audit Old Course -- (P16M/N17E/N20M/M21R)

240.29 Bhaskar CNO- C5OC.100 New Course -- (S17M/N20M)
After the completion of statutory audit of ABC Ltd., a fraud was detected at the office of the auditee. The
management of the company alleged that there is a failure on the part of the auditor to detect fraud and
that auditor would be responsible for not detecting fraud in the company.
OR
DEF & Co. Chartered Accountants successfully carried out the audit of Shree Garments for the FY 2015-2016.
After the completion of the audit, there were found material misstatements due to fraud in the financial
statements which were not noticed and reported by the auditor. Management alleges that it is failure on
the part of auditor. Comment.
OR
‘After the statutory audit has been completed a fraud has been detected at the office of the auditee.’ What
is your defence as an auditor?
OR
Is detection of fraud and error duty of an auditor?
Answer ➢ TCWG & Management responsibility to prevent & detect frauds
As per SA 240, the primary responsibility for the prevention and detection of fraud rests
with both:
• those charged with governance of the entity
• management.
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. Such a system reduces but does not
eliminate the possibility of fraud and error.
➢ Overall Responsibility & Inherent Limitations
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. 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.
➢ Fraud Detection Vs Error Detection
The risk of not detecting a material misstatement resulting from fraud is higher than the risk of not
detecting one resulting from error. This is because fraud may involve sophisticated and carefully
organized schemes designed to conceal it, such as forgery, deliberate failure to record transactions,
or intentional misrepresentations being made to the auditor. Such attempts at concealment may be
even more difficult to detect when accompanied by collusion.
➢ Subsequent Discovery Doesn’t Mean Failure of Auditor
The subsequent discovery of material misstatement of the financial information resulting from
fraud or error existing during the period covered by the auditor’s report does not, in itself, indicate
that whether the auditor has adhered to the basic principles governing an audit. The question of
whether the auditor has adhered to the basic principles governing an audit (such as performance of
the audit work with requisite skills and competence, documentation of important matters, details of
the audit plan and reliance placed on internal controls, nature and extent of compliance and
substantive tests carried out, etc.) is determined by the adequacy of the procedures undertaken in

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 the circumstances and the suitability of the auditor’s report based on the results of these
procedures.
➢ When is auditor liable for discovery of fraud?
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. Thus, in the instant case after the completion of the
statutory audit, if a fraud has been detected, the same by itself cannot mean that the auditor did
not perform his duty properly. 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.

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 CHAPTER AUDIT IN AN AUTOMATED ENVIRONMENT
6

QNO Automated Environments (Meaning and Key Features)- New Course -- (M19R/N20R)
AAE.01 Bhaskar CNO- AAE.020
Explain the meaning of automated environment. Also discuss the key features of an automated
environment.
OR
With the increasing adoption of information technology, business today relies on software systems and
applications more than ever. Many of these IT systems generate and process data that is used in the
preparation of financial statements of a company. The auditors also often rely on the data and reports
that are generated from these systems. Explain stating clearly the meaning of Automated environment
with example.
Answer ➢ Definition
An automated environment basically refers to a business environment where the
Processes, (Purchase Process, Production Process, Sales Process)
Operations or Procedures (Raising PRN, Selecting Quotation, Placing Purchase Order,
Receiving Goods, Storage)
Accounting and (Purchase Book, Creditor’s Ledger, Credit or Debit Notes, Periodical
Reconciliation)
Even Decisions (Re-Order Level / Order Size / Frequency etc.) are carried out by using
computer systems – also known as Information Systems (IS) or Information Technology (IT)
systems. Nowadays, it is very common to see computer systems being used in almost every
type of business.
➢ Example to further support above definition
Think about how banking transactions are carried out using ATMs (Automated Teller Machines), or
how tickets can be purchased using “apps” on mobile phones, etc. In these examples, you can see
how these computer systems enable us to transact business at any time and any day.
➢ Key features / Fundamental Principles of an Automated Environment
Some of the key features of an automated environment are as follows:
The fundamental principle of an automated environment is the ability to carry out business with less
manual intervention and more system driven. The complexity of a business environment depends on
the level of automation i.e., if a business environment is more automated, it is likely to be more
complex.
(Automated Environment = Less Manual Involvement = More Automation = More Complexity)
➢ Example to support above paragraph
If a company uses an integrated enterprise resource planning system (ERP) viz., SAP, Oracle etc., then
it is considered more complex to audit. On the other hand, if a company is using an off-the-shelf
accounting software, then it is likely to be less automated and hence less complex environment.
➢ Features of Automated Environment: (LIC FLASH )
L- Provides Latest information.
I- Integration between business operations
C- Connectivity and Networking capability.
F- Enables Faster business operations
L- Ability to process large volumes of transactions
A- Accuracy in data processing and computation
S- Better Security and controls.
H-Less prone to Human Errors.

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 Author’s Note

➢ The shortcut to remember features of automated environment

LIC FLASH policy has many automatic features.
➢ Text in ITALICS are examples by author for better understanding of answer.
➢ In second question no need to include features of automated environment.

QNO Important IT related terms in brief- #Unique New Course -- (M20M/S20M/S21M/N22M)

AAE.07
With respect to audit in an automated environment, explain the following: (any four)
(i) CAATs (ii) Data Analytics (iii) Database (iv) Information Systems (v) Privileged access
Answer (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.

QNO Important IT related terms in brief #Unique New Course -- (M22R)

AAE.
07.50
With respect to audit in an automated environment, explain the following:
(i) Applications
(ii) Automated
(iii) CAATs
(iv) Data Processing
(v) General (IT) Controls
Answer (i) Applications: These are computer software programs that provide a medium for recording, storage and
retrieval of business operations or transactions in electronic format.
(ii) Automated: A task or activity that is routinely performed by a computer system and does not require
manual effort
(iii) 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.
(iv) Data Processing: Refers to the systematic recording, storage, retrieval, modification and transformation
of electronic data using information systems
(v) General (IT) Controls: Are a type of internal controls that help in mitigating risks that arise due to use of
information technology and information systems in a business.

Relevance of IT- New Course --

QNO
Bhaskar CNO- AAE.040 (S17M/M19R/N19E/ S20M/N20R/N21R/S21M/ M22M/M22E/N22M)
AAE.10

Discuss the situations in which IT will be relevant to an audit.

OR
Briefly mention three reasons why IT should be considered relevant to an audit of financial statements.
OR
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 The auditors responsibility include reporting on Internal Financial Controls over Financial Reporting which
include and understanding IT environment of the company and relevant risks and control. Mention any
three situation where IT will be relevant to an audit.
OR
When a business operates in a more automated environment it is likely that we, as auditors, will see several
business functions and activities happening within the systems. Explain which of the aspect you will consider
relevant as an auditor.
Answer Given below are some situations in which IT will be relevant to an audit,
Shortcut to Remember
Hify CESS at PVR is relevant.
Text Examples
Hi-tech nature of business (H) Telecom, e-Commerce
Complexity of transactions has increased (C) multiple systems, network of systems
Increases Efficiency and effectiveness of audit. (E)
Increased use of Systems and Application Software in use of ERPs
Business (S)
Required by Indian and International Standards - (S) ISO, PCI-DSS, SA 315, SOC, ISAE.
Company Policy (P) Compliance
Volume of transactions are high (V) Insurance, Banking, Railways ticketing
Regulatory requirements - (R) Companies Act 2013 IFC, IT Act 2008.

➢ Relevance changes from company to company

In some of the above situations it is likely that carrying out audit using traditional substantive audit
procedures may be difficult or even not feasible if the company prepares, records and conducts
majority of business activities through IT systems only.
On the other hand, many companies may use less complex IT systems including desktop-based
accounting or spreadsheets. In such situations, the relevance of IT to an audit could be less.
However, the auditor is still required to carry out at least an understanding the IT environment of
the company and document the same.
➢ Data Analytics
Another area where IT can be relevant to audit is by using data analytics using computer assisted audit
techniques (CAATs). By using data analytics, it is possible to improve the effectiveness and efficiency
of an audit. We will learn more about data analytics in the later sections of this chapter.
From the above, we can see how IT is relevant to an audit under different situations viz., audit, non-
audit and meeting regulatory compliance requirements. We will learn more about understanding
risks, controls and documentation in further sections of this chapter
Author’s Note
➢ Shortcut to remember some situations in which IT will be relevant to an audit:
o H-ify CESS at PVR is relevant
➢ Text in ITALICS are examples by author for better understanding of answer.

QNO Understanding and Documenting New Course -- (M18R/M18E/N19R/N19M/S20M/N21M/S21M/

AAE.15 Automated Environment- M22M/N22R)
Bhaskar CNO- AAE.060

List any five points that an auditor should consider to obtain an understanding of the Company's automated
environment.
OR
Understanding the entity and its automated environment involves understanding how IT department is
organised, IT activities, the IT dependencies, relevant risks and controls. Explain stating the points that an
auditor should consider to obtain an understanding of the company’s automated environment.
OR

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 Give some of the points that an auditor should consider to obtain an understanding of the company’s
automated environment:

Answer ➢ An auditor is required to understand the entity and its business, including IT as per SA 315
Understanding the entity and its automated environment involves understanding how IT
department is organized, IT activities, the IT dependencies, relevant risks and controls.
Text Examples
Location of IT systems - local vs global.
Their purpose financial and non-financial.
Information systems being used one or more application systems and what they are.
Version functions and risks could vary in different versions of
same application.
In-house vs Packaged.
Architecture desktop based, client-server, web application, cloud
based.
Interfaces within systems in case multiple systems exist.
Key persons CIO, CISO, Administrators.
Outsourced activities IT maintenance and support.

Author’s Note
➢ Text in ITALICS are examples by author for better understanding of answer.

IT Risks- Old Course -- (N20E)

QNO
Bhaskar CNO- AAE.080 New Course -- (M18E/ N18M/ M19R/ N19R/S20M/ S21M/
AAE.20
N22R)
IT poses specific risks to an entity’s internal control. Explain
OR
The auditor should understand and consider the risks that may arise from the use of Information
Technology (IT) Systems.
OR
Having obtained an understanding of the IT systems and the automated environment of a company, the
auditor should consider the risks that arise from the use of IT systems. Explain.
Answer Part I -- Relevant Standards & Laws
▪ SA 315, Identifying And Assessing The Risk Of Material Misstatement Through Understanding The
Entity And Its Environment
Part II -- Requirements of Relevant Standards & Laws
IT system also poses specific risks to an entity’s Internal Control. They are–
➢ First Comes IT Personnel
IT Personnel gaining access, Privileges beyond necessary
• The possibility of IT personnel gaining access privileges beyond those necessary to
perform their assigned duties thereby breaking down segregation of duties. (Approved
Purchase & Payment)
➢ Then comes Data
Unauthorised Access to Data leading to destruction, unauthorised transaction, non-
existent transaction / Potential loss of Data
• Unauthorised access to data that may result in destruction of data or improper
changes to data, including the recording of unauthorised or non-existent

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 transactions, or inaccurate recording of transactions. Particular risks may arise
where multiple users access a common database.
• Potential loss of data or inability to access data as required. (Ransomware)
➢ Then happened processing
Manual Intervention / Inaccurate Processing / Processing Inaccurate Data
• Inappropriate manual intervention.
• Reliance on systems or programs that are inaccurately processing data, processing
inaccurate data, or both. (TDS Calculator / NPA Calculator)

➢ If required Changes
Failure to make Changes / Unauthorised changes to systems / Unauthorised changes
to Master Files
• Failure to make necessary changes to systems or programs. (Boss shifted to Office
365, Rest of the office on Office 2007)
• Unauthorised changes to systems or programs.
Unauthorised changes to data in master files.

QNO IT Risks (Impact)- New Course -- (S17M/M18R/S20M/ N20E/N21R/N21M/S21M/

AAE.25 Bhaskar CNO- AAE.100 N22M)
Describe how risks in IT systems, if not mitigated, could have an impact on audit.
Or
Discuss the impact of IT related risks on Substantive Audit, Controls and Reporting.
Answer The risks, if not mitigated, could have an impact on audit in different ways. Let us understand how:
➢ Impact on Controls:
Controls
cannot rely on automated controls, system calculation and accounting procedures built
into applications.
cannot rely on IT dependent manual controls.
Data reliability
system data and reports should be tested substantively for completeness and accuracy.
more substantive audit work is needed.
➢ Impact on Substantive Audit:
Data reliability & Effect on Audit Evidence
cannot rely on the data obtained from system.
system data and reports should be tested substantively for completeness and accuracy
more audit evidence is needed.
➢ Impact on Reporting:
communication to those charged with governance.
modified auditors report.
➢ In all the above scenarios, it is likely that the auditor will be required to obtain more audit evidence
and perform additional audit work. The auditor should also be able to demonstrate how the risks
were identified and what audit evidence was obtained and validated to address these IT risks.
Here, we should remember that as the complexity, automation and dependence of business
operations on IT systems increases, the severity and impact of IT risks too increases accordingly.
The auditor should apply professional judgement in determining and assessing such risks and plan
the audit response appropriately.
To mitigate the above (and more) risks and maintain the confidentiality, integrity, availability and
security of data, companies implement IT controls.

QNO General IT Controls (Program Change) New Course -- (S20M/S21M/N22M)

AAE.28 Bhaskar CNO- AAE.140
Explain the objective and enlist the activities involved in the General IT Controls over “Program Change”.

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 ➢ Objective
To ensure that modified systems continue to meet financial reporting objectives.
➢ Activities (Similar to Application System ADM)
Change Management Process – definition, roles & responsibilities.
Change Requests – record, manage, track.
Making Changes – analyse, design, develop
Test Changes – test plan, test cases, UAT Apply Changes in Production Emergency & Minor
Changes
Documentation – user/technical manuals
User Training

General IT Controls & Activities Performed by Data New Course -- (M21R)

QNO
Centre & Network Operations
AAE.29
Bhaskar CNO- AAE.120/ CNO- AAE.140
"Objective of Data Centre and Network Operations is to ensure that production systems are processed to
meet financial reporting objectives. Discuss the activities performed by Data Centre and Network
operations. Also explain the meaning of General IT Controls in detail."
Answer 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, mini frame, and end-user
environments.

Components of General IT Controls

General IT-controls that maintain the integrity of information and security of data commonly include
controls over the following:”
(i) Data centre and network operations
(ii) Program change
(iii) Access security
(iv) Application system acquisition, development, and maintenance (Business Applications)

These are IT controls generally implemented to mitigate the IT specific risks and applied commonly
across multiple IT systems, applications, and business processes. Hence, General IT controls are known
as “pervasive” controls or “indirect” controls. Let us now learn about each of the General IT controls
in more detail.

Data Centre and Network Operations

Objective: To ensure that production systems are processed to meet financial reporting objectives.

Activities:
1. Overall Management of Computer Operations Activities
2. Batch jobs – preparing, scheduling and executing
3. Backups – monitoring, storage & retention
4. Performance Monitoring – operating system, database and networks
5. Recovery from Failures – BCP, DRP
6. Help Desk Functions – recording, monitoring & tracking
7. Service Level Agreements – monitoring & compliance
8. Documentation – operations manuals, service reports

QNA Framework for Testing Internal financial control over New Course -- (S20M/S21M)
AAE.50 financial reporting (IFCR) #Unique
The directors and management have primary responsibility of implementing and maintaining an effective
internal controls framework and auditors are expected to evaluate, validate and report on the design and
operating effectiveness of internal financial controls. Explain the framework which helps the auditors in
fulfilling this responsibility.

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 ➢ The Guidance note on Audit of Internal Financial Controls over Financial Reporting issued by the
Institute of Chartered Accountants of India provides a framework that auditors should follow to fulfil
their responsibility.
➢ The below is a summary of this controls based audit approach :-

QNA Definition of multiple terms #Unique New Course --(S20M/S21M)

AAE.60
Explain the following terms in context of the audit of an Automated Environment :-
(a) Information Systems
(b) Material Weakness
(c) Privileged Access
(d) Segregation of Duties
(e) Significant Deficiency
(a) 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.
(b) Material Weakness
A control deficiency or a combination of deficiencies in internal controls that is important enough
to merit the attention of those charged with governance since there is a reasonable possibility that
a material misstatement will not be prevented or detected in a timely manner by management.
(c) Privileged Access
A type of super user access to information systems that enforces less or no limits on using that
system.

(d) Segregation of Duties

A type of internal control that is implemented in a company to prevent two or more conflicting
functions from being assigned to or being carried out by the same person.
(e) Significant Deficiency
A control deficiency or a combination of deficiencies in internal controls that is important enough
to merit the attention of those charged with governance since there is a reasonable possibility that
a misstatement will not be prevented or detected in a timely manner by management.
Author’s Note:

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 Word Significant Deficiency is used in SA 265, word material weakness is not used in standard in
auditing. Material weakness term is generally in USA. Conceptually both the terms have the same
meaning.

QNO Definition of Multiple Terms (Second) #Unique New Course -- (M21M)

AAE.65
With respect to audit in an automated environment, explain the following: (any four)
(i) Data Processing
(ii) ERP (Enterprise Resource Planning)
(iii) General IT control
(iv) Automated
(v) Direct Data change
Answer (i) Data Processing: Refers to the systematic recording, storage, retrieval, modification and
transformation of electronic data using information systems.
(ii) ERP (Enterprise Resource Planning):
A type of business application software that provides an integrated platform to automate multiple
interrelated business processes and operations.
(iii) General IT Control: Are a type of internal controls that help in mitigating risks that arise due to use
of information technology and information systems in a business.
(iv) Automated: A task or activity that is routinely performed by a computer system and does not
require manual effort.
(v) Direct Data Change: A backend modification that is made directly to data that is stored in a database
bypassing business rules built-in to a business application software.

QNO Definition of Multiple Terms (Third) #Unique New Course -- (M21M)

AAE.70
With respect to audit in an automated environment, explain the following: (any four)
(i) Applications
(ii) Control Deficiency
(iii) Data Processing
(iv) Enterprise Resource Planning
(v) Software
Answer (i) Applications: These are computer software programs that provide a medium for recording, storage
and retrieval of business operations or transactions in electronic format.
(ii) Control Deficiency: It Exists when an internal control is either missing or not operating effectively
to prevent or detect a misstatement in a timely manner by management.
(iii) Data Processing: It Refers to the systematic recording, storage, retrieval, modification and
transformation of electronic data using information systems.
(iv) Enterprise Resource Planning: A type of business application software that provides an integrated
platform to automate multiple interrelated business processes and operations.
(v) Software: A computer program or a collection of computer programs that provides an interface to
a user for performing a specific activity, task, operation or transaction in electronic form through a
computer or information system.

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 CHAPTER
SA 530 -- AUDIT SAMPLING
7

QNO Sample Design- Sample Size- Sampling Method- In Old Course -- (P16M/M16E/N18E/ M16R)
530.03 Short Bhaskar CNO- SA530.100 New Course -- (S17M/S20M/S21M/N21M/N22R)
State the requirements relating to audit sampling, sample design, sample size and selection of items for
testing.
OR
With reference to Standard on Auditing 530, state the requirements relating to audit sampling, sample
design, sample size and selection of items for testing.
Answer ➢ Audit Sampling:
As per SA 530 on “Audit Sampling”, the meaning of the term Audit Sampling is – 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.
The requirements relating to sample design, sample size and selection of items for testing
are explained below-
• 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.
• Sample Size- The auditor shall determine a sample size sufficient to reduce sampling
risk to an acceptably low level.
• 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.

QNO Purpose of Audit Procedure & Characteristic of Population Affects Sample Old Course -- (N21R)
530.04 Designing Bhaskar CNO- SA530.100 New Course -- (N21R)
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. Explain in detail
Answer Audit sampling enables the auditor to obtain and evaluate audit evidence about some characteristic of
the items selected in order to form or assist in forming a conclusion concerning the population from
which the sample is drawn. Audit sampling can be applied using either non-statistical or statistical
sampling approaches.

When designing an audit sample, the auditor’s consideration includes the specific purpose to be
achieved and the combination of audit procedures that is likely to best achieve that purpose.
Consideration of the nature of the audit evidence sought and possible deviation or misstatement
conditions or other characteristics relating to that audit evidence will assist the auditor in defining what
constitutes a deviation or misstatement and what population to use for sampling. In fulfilling the
requirement of relevant portion (paragraph 8) of SA 500, when performing audit sampling, the auditor
performs audit procedures to obtain evidence that the population from which the audit sample is drawn
is complete.

The auditor’s consideration of the purpose of the audit procedure includes a clear understanding of
what constitutes a deviation or misstatement so that all, and only, those conditions that are relevant to
the purpose of the audit procedure are included in the evaluation of deviations or projection of
misstatements. For example, in a test of details relating to the existence of accounts receivable, such as
confirmation, payments made by the customer before the confirmation date but received shortly after
that date by the client, are not considered a misstatement. Also, a mis-posting between customer
accounts does not affect the total accounts receivable balance. Therefore, it may not be appropriate to
consider this a misstatement in evaluating the sample results of this particular audit procedure, even

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 though it may have an important effect on other areas of the audit, such as the assessment of the risk
of fraud or the adequacy of the allowance for doubtful accounts.

In considering the characteristics of a population, for tests of controls, the auditor makes an assessment
of the expected rate of deviation based on the auditor’s understanding of the relevant controls or on
the examination of a small number of items from the population. This assessment is made in order to
design an audit sample and to determine sample size. For example, if the expected rate of deviation is
unacceptably high, the auditor will normally decide not to perform tests of controls. Similarly, for tests
of details, the auditor makes an assessment of the expected misstatement in the population. If the
expected misstatement is high, 100% examination or use of a large sample size may be appropriate
when performing tests of details.

In considering the characteristics of the population from which the sample will be drawn, the auditor
may determine that stratification or value-weighted selection is appropriate.
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.

QNO Factor effecting Sample size Old Course -- (M20M)

530.05 Bhaskar CNO- SA530.120 New Course -- (M18M/ N18M/ M19M/ M20M)
The level of sampling risk that the auditor is willing to accept affects the sample size required. The lower
the risk the auditor is willing to accept, the greater the sample size will need to be. Explain Stating the
examples of factors that the auditor may consider when determining the sample size for tests of controls.
OR
The sample size can be determined by the application of a statistically-based formula or through the
exercise of professional judgment. When circumstances are similar, the effect on sample size of factors will
be similar regardless of whether a statistical or non-statistical approach is chosen.
Explain stating the examples of factors (any four) that the auditor may consider when determining the
sample size for tests of controls.
Answer ➢ The auditor shall determine a sample size sufficient to reduce sampling risk to an acceptably low
level.
➢ The level of sampling risk that the auditor is willing to accept affects the sample size required. The
lower the risk the auditor is willing to accept, the greater the sample size will need to be.
➢ The sample size can be determined by the application of a statistically based formula or through the
exercise of professional judgment.
Story Situation Impact on Sample Size
Auditor sent to An increase in the The higher the auditor’s assessment of the risk of
Construction company auditor’s assessment material misstatement, the larger the sample size
for checking WAGES of the risk of material needs to be. The auditor’s assessment of the risk of
(High Inherent Risk) & Misstatement material misstatement is affected by inherent risk and
preliminary control risk.
assessment shows no
guidance or training
for payment staff
(High Control Risk).
So, resulting RMM is
High.
He gets call from Decrease in the use The less the auditor is relying on other substantive
colleague that he will of other substantive procedures (tests of details or substantive the same
not be coming so no procedures directed assertion analytical procedures) to reduce to an
analytical procedures at the same acceptable level the detection risk regarding a
and now things will be assertion. particular population, the more assurance the auditor
depending on his will require from sampling and, therefore, the larger
checking only. the sample size can be.
Last year file shows An increase in the The greater the amount of misstatement the auditor
many misstatements. amount of expects to find in the population, the larger the sample

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 Out of 3 supervisors 1 misstatement the size needs to be in order to make a reasonable estimate
is on leave & 1 is ill for auditor expects to of the actual amount of misstatement in the
past 9 months. find in the population population.
After performing test
Factors relevant to the auditor’s consideration of the
of controls, he
expected misstatement amount include the extent, to
concluded that
which item values are determined subjectively, the
controls are weak. It
results of risk assessment procedures, the results of
appears expected
tests of control, the results of audit procedures applied
misstatement is high.
in prior periods, and the results of other substantive
procedures.
Senior Accountant Stratification of the When there is a wide range (variability) in the monetary
Says that they cannot population when size of items in the population, it may be useful to
generate list of appropriate stratify the population. When a population cannot be
workers’ areas wise or Decrease appropriately stratified, the sample size from the
site-wise or month- population generally will be Higher than the sample
wise joining so size that would have been required to attain a given
stratification is not level of sampling risk, as compared to aggregate of
possible. samples from strata.
His senior calls and An increase in the The greater the level of assurance that the auditor
says he wants higher auditor’s desired requires that the results of the sample are in fact
level of assurance & level of assurance indicative of the actual amount of misstatement in the
lower tolerable that tolerable population, the larger the sample size needs to be.
misstatement misstatement is not
The lower the tolerable misstatement, the larger the
exceeded by actual
sample size needs to be.
misstatement in the
Population
Decrease in tolerable
misstatement
Further he observes Change in the Negligible effect for large populations, the actual size
number of workers number of sampling of the population has little, if any, effect on sample size.
has increased from units in the Thus, for small populations, audit sampling is often not
1000 to 3000 Population as efficient as alternative means of obtaining sufficient
appropriate audit evidence.
However, when using monetary unit sampling, an
increase in the monetary value of the population
increases sample size, unless this is offset by a
proportional increase in Materiality.
In MUS
𝑆𝑎𝑚𝑝𝑙𝑒 𝑆𝑖𝑧𝑒
𝑃𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛 𝑉𝑎𝑙𝑢𝑒
= 𝐶𝑜𝑛𝑓𝑖𝑑𝑒𝑛𝑐𝑒 𝐹𝑎𝑐𝑡𝑜𝑟 𝑋 )
𝑇𝑜𝑙𝑒𝑟𝑎𝑏𝑙𝑒 𝑀𝑖𝑠𝑠𝑡𝑎𝑡𝑒𝑚𝑒𝑛𝑡
From as Population Value increases and also Tolerable
Misstatement increases then effect will be nullified.
Author’s note
Above points are for factors affecting sample size in case of test of details. Similar points are there for
factors affecting sample size in case of test on control. Question may be silent on factors affecting sample
size whether in case of test of details or test of control , so write this common answer. Don’t forget to make
the necessary changes like substituting test of detail with control or vice versa.

QNO Advantages of Statistical Sampling Old Course -- (P16M/N17M/M19E/N20M/N20E)

530.09 Bhaskar CNO- SA530.160 New Course -- (S17M /S20M/N20M/S21M/N21M/M22M/M22R)
Advantages of Statistical sampling in Auditing.
OR
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 What are the advantages of Statistical sampling technique in auditing?
OR
CA X is not sure about the kind of Sampling method to be used for audit of a company. Advise him the
method of sampling to be used. Also explain briefly the advantages of the Sampling to be used by him in
auditing.
OR
ABC Ltd is a Large Company with huge purchase and sales transactions. Which sampling approach is
recommended in such a company? Explain giving features of such sampling approach along with example.
Answer

CA. X should obtain the knowledge before using the sampling methods. The principal methods are
as follows:
(1) Random selection.
(2) Systematic selection.
(3) Monetary Unit sampling.
(4) Haphazard selection.
(5) Block selection.
➢ The advantages of statistical sampling may be summarized as follows –
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.
The method provides a means of estimating the minimum sample size associated with a
specified risk and precision.
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.
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.
Author’s Note: In ca x question you will also have to explain statistical and non-statistical sampling as given
in 530.07

QNO Why auditors use sampling ? #Unique New Course -- (M21R)

530.10
In most of the circumstances, the evidence available is not conclusive and the auditor always takes a
calculated risk in giving his opinion. Even by undertaking hundred percent checking of the transactions, the
auditor does not derive absolute satisfaction. This state of uneasiness led pragmatic auditors to adopt the
statistical theory of sampling to derive the necessary satisfaction about the state of affairs by checking only a
part of the total population of entries. Explain in detail.
Answer In most of the circumstances, the evidence available is not conclusive and the auditor always takes a
calculated risk in giving his opinion. Even by undertaking hundred percent checking of the transactions,
the auditor does not derive absolute satisfaction. This state of uneasiness led pragmatic auditors to
adopt the statistical theory of sampling to derive the necessary satisfaction about the state of affairs by
checking only a part of the total population of entries.

Auditors realised that they can derive good satisfaction by undertaking a much lesser checking by
adoption of this technique in the auditing process. It is a mathematical truth that the sample, if picked
purely on a random basis would reveal the features and characteristics of the population.
By adopting the sampling technique, the auditor only checks a part of the whole mass of transactions.
The satisfaction he used to derive earlier, by checking all the transactions, can be derived by a sample

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 checking provided he can put reliance on the internal controls and checks within the client’s
organisation because they provide the reliability of the records. Sampling is used as a part of Test of
controls. Auditor will check few internal controls and their operating effectiveness. Based on the
conclusion derived, he can then design the sample size for test of details (i.e., checking of transactions
and balances)

If the internal control is satisfactory in its design and implementation, a much smaller sample can give
the auditor the necessary reliability of the result he obtains.
On the other hand, if in certain areas controls are slack or not properly implemented, the auditor may
have to take a much larger sample for getting satisfactory result.
Another truth about the sampling technique should be noted. It can never bring complete reliability; it
cannot give precisely accurate results. It is a process of estimation. It may have some error. What error
is tolerable for a particular matter under examination is a matter of the individual’s judgment in that
particular case.

QNO Methods of Sampling- Master Answer Old Course -- (P16M/M16E/N16R/M17E/N17R/N17E)

530.11 Bhaskar CNO- SA530.180 New Course -- (S17M/N19R/S20M/M20R/S21M/N22R)
Random selection ensures that all items in the population or within each stratum have a known chance of
selection. Explain.
OR
What is the meaning of Sampling? Also discuss the methods of Sampling. Explain in the light of SA 530 Audit
Sampling.
OR
The extent of the checking to be undertaken is primarily a matter of judgment of the auditor.
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 Explain. Discuss the methods of Sampling
in the light of SA 530.
OR
Write a short note on Random sampling.
OR
Stratified sampling
OR
Haphazard sampling
OR
Explain the sampling method which involves selection of a block(s) of contiguous items from within the
population. Also give example.
OR
This method is considered appropriate provided the population to be sampled consists of reasonably
similar units and fall within a reasonable range i.e. it is suitable for a homogeneous population having
a similar range. Explain about that method.
Answer ➢ Methods of Sampling:
There are many methods of selecting samples. The principal methods are as follows –
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–
• 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. For example the population can be considered homogeneous, if say,

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 trade receivables balances fall within the range of Rs 5,000 to Rs 25,000 and not in the
range between Rs 25 to Rs 2,50,000
• 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 are
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. For
example in the above case, trade receivables balances may be divided into four groups
as follows –
o balances in excess of Rs 1,00,000;
o balances in the range of Rs 75,000 to Rs 1,00,000;
o balances in the range of Rs 25,000 to Rs 75,000; and
o balances below Rs 25,000.
Systematic selection, 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. Although the starting
point may be determined haphazardly, the sample is more likely to be truly random if it is
determined by use of a computerised random number generator or random number tables.
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.
Monetary Unit Sampling is a type of value-weighted selection in which sample size, selection
and evaluation results in a conclusion in monetary amounts.
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, avoiding difficult to locate items, or 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.
Block selection 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. Although in some circumstances it may be an appropriate audit procedure to
examine a block of items, it would rarely be an appropriate sample selection technique when
the auditor intends to draw valid inferences about the entire population based on the
sample.
• Example
Take the first 200 sales invoices from the sales daybook in the month of September;
alternatively take any four blocks of 50 sales invoices. Therefore, once the first item in
the block is selected, the rest of the block follows items to the completion

QNO Multiple Definitions #Unique New Course – (M21R)

530.16
Explain the following terms with reference to Audit Sampling :
(i) Stratification
(ii) Tolerable misstatement
(iii) Tolerable rate of deviation
Answer (i) Stratification – The process of dividing a population into sub-populations, each of which is a group of
sampling units which have similar characteristics (often monetary value).

(ii) 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.
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 (iii) 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.

QNO Stratified sampling and Value weighted Sampling Old Course -- (N19M/N21R)
530.19 Bhaskar CNO- SA530.300 New Course -- (N19M/N21R)
XYZ Ltd is engaged in trading of electronic goods and having huge accounts receivables. For analysing the
whole accounts receivables, auditor wanted to use sampling technique. In considering the characteristics
of the population from which the sample will be drawn, the auditor determines that stratification or value-
weighted selection technique is appropriate. SA 530 provides guidance to the auditor on the use of
stratification and value - weighted sampling techniques. Advise the auditor in accordance with SA 530.
Answer ➢ Stratification and Value-Weighted Selection:
Depends on population
In considering the characteristics of the population from which the sample will be drawn, the
auditor may determine that stratification or value-weighted selection technique is appropriate.
SA 530 provides guidance to the auditor on the use of stratification and value-weighted sampling
techniques.

Stratification:
• Improves Efficiency
Audit efficiency 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.
Examples
• 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.
• Computation
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.
o For example, 20% of the items in a population may make up 90% of the
value of an account balance. The auditor may decide to examine a
sample of these items. The auditor evaluates the results of this sample
and reaches a conclusion on the 90% of value separately from the
remaining 10% (on which a further sample or other means of gathering
audit evidence will be used, or which may be considered immaterial).
• Projections
If a class of transactions or account balance has been divided into strata, the
misstatement is projected for each stratum separately. Projected misstatements
for each stratum are then combined when considering the possible effect of
misstatements on the total class of transactions or account balance.

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 Value-Weighted Selection:
• When performing tests of details it may be efficient to identify the sampling unit
as the individual monetary units that make up the population. Having selected
specific monetary units from within the population,
o 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.

QNO Extent of Checking On a Sampling Basis Old Course -- (N20R)

530.21 Bhaskar CNO- SA530.280 New Course -- (N18E/M19R/S20M/N20R/S21M)
Discuss the factors that should be considered for deciding upon the extent of checking on a sampling plan.
OR
Factors that should be considered for deciding upon the extent of checking on a sampling plan.
Answer ➢ The factors that should be considered for deciding upon the extent of checking on a sampling plan
are following:
Size of the organisation under audit. (Big)
State of the internal control. (Strong)
Adequacy and reliability of books and records. (Accurate & Reliable)
Tolerable error range. (Not very small)
Degree of the desired confidence. (Not very high)
(Then higher reliance on sampling)

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 CHAPTER SA 520 – ANALYTICAL PROCEDURES
8

QNO Analytical Procedures- Master Answer Old Course -- (P16M /M17M/M18R/N18R)

520.01 Bhaskar CNO - SA520.020 New Course -- (S17M/N19R/S20M/N21R/S21M)
Define Analytical Procedures.
OR
What do you mean by Analytical procedures? How such procedures are helpful in auditing?
OR
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. Analyse and Explain
stating clearly the meaning of analytical procedures.
Answer ➢ Definition
The term “analytical procedures” means evaluation 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.
Thus, analytical procedures include the consideration of comparisons of the entity’s financial
information with as well as consideration of relationships.
➢ Examples of Comparison of Financial Data

Text Examples
Analytical procedures include the consideration of comparisons of
the entity’s financial information with, for example:
• Comparable information for prior periods.
(Trend Analysis)
• Anticipated results of the entity, such as budgets or
forecasts, or expectations of the auditor, such as an (Comparative Analysis)
estimation of depreciation.
• Auditor’s own estimate (Predictive Analysis)
Similar industry information, such as a comparison of the entity’s
ratio of sales to accounts receivable with industry averages or (Intern Firm Analysis)
with other entities of comparable size in the same industry.
➢ 4 types of Comparisons as explained above
Thus, we can say that Analytical Procedures may be segregated into these major types as comparison of
client and industry data, comparison of client data with similar prior period data, comparison of client
data with client-determined expected results, comparison of client data with auditor-determined
expected results and comparison of client data with expected results, using non-financial data.
➢ Simple Comparisons to Complex Analysis
Various methods may be used to perform analytical procedures. These methods range from performing
simple comparisons to performing complex analyses using advanced statistical techniques. (Correlation
& Regression) Analytical procedures may be applied to consolidated financial statements, components
and individual elements of information.
➢ Routine checks V/s Analytical Procedures
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. These collectively are known as overall tests. With the passage of tests,
analytical procedures have acquired lot of significance as substantive audit procedure. SA-520 on
Analytical Procedures discusses the application of analytical procedures during an audit.

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 Author’s Note
Summarized Answer
➢ Definition: -
• Evaluation of financial information (TBD)
Through analysis of plausible relationships among financial & non-financial data
• Step-1 Studying suitable plausible (probable) interrelationships in financial and non-financial
data,
• Step-2 Collecting reliable data
• Step-3 May or may not performing calculations, computing ratios percentages etc.
• Step-4 Then comparing them with relevant data or expected values and investigating unusual
differences
• Examples of Relationships – Among Elements of Financial Info / Between Elements of Financial &
Non-Financial Info
• Simple Comparisons to Complex Analysis
• Examples of various comparisons: - Prior Period, Trend Analysis / Budgets, Comparative Analysis /
Auditor’s Estimate, Predictive Analysis / Others in Industry, Inter Firm Analysis)

QNO Financial Statement Based -- Common Used Ratios New Course -- (N21R)
520.03.20 #Unique
Analysis by computation of ratios includes the study of relationships between financial statement amounts.
State Commonly used ratios
Answer Analysis by computation of ratios includes the study of relationships between financial statement
amounts. Commonly used ratios include:
• Elements of income or loss as a percentage of sales
• Gross profit turnover
• Accounts receivable turnover
• Inventory turnover
• Profitability, leverage, and liquidity

QNO Analytical procedures (Planning phase) New Course -- (S20M/N20R/S21M/N21M)

520.03.50 Bhaskar CNO - SA520.080
Explain how a statutory auditor of a company can apply analytical procedures at the planning phase of
audit.
OR
In the planning stage, analytical procedures assist the auditor in understanding the client’s business and
in identifying areas of potential risk. Explain
Answer ➢ 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.
➢ Analytical Procedures in Planning the Audit: In the planning stage, analytical procedures assist the
auditor in understanding the client’s business and in identifying areas of potential risk by indicating
aspects of and developments in the entity’s business of which he was previously unaware. This
information will assist the auditor in determining the nature, timing and extent of his other audit
procedures.
➢ Analytical procedures in planning the audit use both financial data and nonfinancial information,
such as number of employees, square feet of selling space, volume of goods produced and similar
information.
➢ For example, analytical procedures may help the auditor during the planning stage to determine
the nature, timing and extent of audit procedures that will be used to obtain audit evidence for
specific account balances or classes of transactions.

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 SUBSTANTIVE ANALYTICAL PROCEDURES – Old Course -- (N20E)
QNO
STEPS New Course – (M20R/N22R)
520.04
Bhaskar CNO - SA520.100
"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 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. Explain the other
relevant points in this context."
OR
Explain the aspects to be considered by an auditor when designing and performing substantive
analytical procedures, either alone or in combination with test of details, as substantive procedures
in accordance with SA 330.
Answer ➢ 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:
• 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;
• 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;
• 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; and
• Determine the amount of any difference of recorded amounts from expected values that is
acceptable without further investigation.

QNO Matters to be consider to decide combination of New Course – (N20R)

520.04.50 analytical procedures and test of details #Unique
The decision about which audit procedures to perform, including whether to use substantive analytical
procedures, is based on the auditor’s judgment. Explain
Answer ➢ The auditor’s substantive procedures at the assertion level may be tests of details, substantive
analytical procedures, or a combination of both. The decision about which audit procedures to
perform, including whether to use substantive analytical procedures, is based on the auditor’s
judgment about the expected effectiveness and efficiency of the available audit procedures to
reduce audit risk at the assertion level to an acceptably low level.
➢ The auditor may inquire of management as to the availability and reliability of information needed
to apply substantive analytical procedures, and the results of any such analytical procedures
performed by the entity. It may be effective to use analytical data prepared by management,
provided the auditor is satisfied that such data is properly prepared.
Author’s Note : This question and answer is emphasizing that it is matter of auditor’s judgement to decide
whether to apply test of details or analytical procedures. But if question is emphasizing on factors to be
considered regarding suitability of analytical procedures then students are supposed to write “ V-RAT”
points as discussed in Notes.

Analytical Procedures- Factor affecting Suitability- Old Course -- (M19M)

QNO
Volume New Course -- (M19M/M22M)
520.05
Bhaskar CNO - SA520.120
Substantive analytical procedures are generally more applicable to large volumes of transactions that tend
to be predictable over time. Explain.
Answer Substantive Analytical Procedure:
➢ 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

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 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.
➢ In some cases, even an unsophisticated predictive model may be effective as an analytical procedure.
For example, where an entity has a known number of employees at fixed rates of pay throughout the
period, it may be possible for the auditor to use this data to estimate the total payroll Costs for the
period with a high degree of accuracy, thereby providing audit evidence for a significant item in the
financial statements and reducing the need to perform tests of details on the payroll. The use of
widely recognized trade ratios (such as profit margins for different types of retail entities) can often
be used effectively in substantive analytical procedures to provide evidence to support the
reasonableness of recorded amounts.

Analytical Procedures- Factor Affecting Reliability Old Course -- (P16M)

QNO
Bhaskar CNO - SA520.140 New Course -- (S17M/M18M/N18M/N19E/S20M
520.07
/S21M/N22R)
The reliability of data is influenced by its source and nature and is dependent on the circumstances under
which it is obtained. Accordingly, explain the factors that are relevant when determining whether data is
reliable for purposes of designing substantive analytical procedures.
OR
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.
OR
Extent of Reliance on Analytical Procedures.
OR
CA A, auditor of ABC Ltd. wants to design substantive analytical procedure and for that he wants to check
whether the data is reliable or not. Mention the relevant points which he has to consider whether data is
reliable for purpose of designing the substantive analytical procedures.
Answer ➢ SA 520 on ‘Analytical Procedures’ provides that 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 criteria when determining whether data is reliable for purposes of designing
substantive analytical procedures-
• Source of the information available. E.g. information may be more reliable when it is
obtained from independent sources outside the
entity;

• Comparability of the information E.g. broad industry data may need to be supplemented
available. to be comparable to that of an entity that produces
and sells specialized products;

• Nature and Relevance of the information E.g. whether budgets have been established as results
available. to be expected rather than as goals to be achieved;
and
• Controls over the preparation of the E.g. controls over the preparation, review and
information that are designed to ensure maintenance of budgets.
its completeness, accuracy and validity.
Author’s Note

• SR NCC cadets are reliable in event of war Criteria to determine reliability of data for substantive
analytical procedures: -
Source of Data / Relevance of Data / Nature of Data / Comparability of Data / Controls over
Preparation of Information to ensure (Completeness / Accuracy / Validity

Analytical Procedures -- Developing Expectations New Course – (M22R)

QNO
Factors
520.08
Bhaskar CNO - SA520.160

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 Discuss the 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.
Answer 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:
(i) The accuracy with which the expected results of substantive analytical procedures can be predicted.
For example, the auditor may expect greater consistency in comparing gross profit margins from one period
to another than in comparing discretionary expenses, such as research or advertising.
(ii) The degree to which information can be disaggregated.
For example, substantive analytical procedures may be more effective when applied to financial information
on individual sections of an operation or to financial statements of components of a diversified entity, than
when applied to the financial statements of the entity as a whole.
(iii) The availability of the information, both financial and non-financial.
For example, the auditor may consider whether financial information, such as budgets or forecasts, and non-
financial information, such as the number of units produced or sold, is available to design substantive
analytical procedures. If the information is available, the auditor may also consider the reliability of the
information.

QNO Analytical Procedure- trade receivables #Unique Old Course -- (P16M/M19E/M21R)

520.13 New Course -- (M21R/N21M)
Describe Analytical Review Procedures in Audit. Briefly discuss analytical procedures for verification of trade
receivables.
OR
Mention the Analytical Review procedures that may be useful as a means of obtaining audit evidence
regarding various assertions relating to Trade receivables, loans and advances.
Answer ➢ Analytical Review Procedure:
As per SA 520, Analytical Procedure means analysis of financial information through analysis of
relationship among financial and non-financial data. It includes comparison of the entity’s financial
information with comparable information with prior period, anticipated results of the entity like
budgets etc. or expectations of auditor and similar industry information. Therefore, an analytical
review procedure assists the auditor in planning the nature, timing and extent of other audit
procedures. It is an auditing procedure based on ratios among accounts and tries to identify significant
changes. Analytical review procedures can be used in the consideration of risks and/or as direct tests
of balances. When deciding whether to incorporate analytical review procedures into the examination
program as substantive tests of balances, the examiner should consider the extent to which the
underlying data should be tested.
➢ Analytical Procedures in case of trade receivables:
• Following are the analytical review procedures which may often be helpful as a means of
obtaining audit evidence regarding the various assertions relating to trade receivables-
• B - comparison of actual closing balances of trade receivables with the corresponding
budgeted figures, if available;
• B -Check the percentage of bad debts of previous years and current year.
• I - comparison of significant ratios relating to trade receivables with the industry norms,
if available.
• C- Check whether there is any change in credit policy of the organization.
• E- Find the reasons of major variations in the estimated values and actual values.
• P-comparison of closing balances of trade receivables with the corresponding figures for
the previous year;
• S-comparison of the relationship between current year trade receivable balances and
the current year sales with the corresponding budgeted figures, if available;
• S-comparison of significant ratios relating to trade receivables with similar ratios for
other firms in the same industry, if available;
• comparison of current year’s ageing schedule with the corresponding figures for the
previous year;

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 • These are only an illustrative list of analytical review procedures which an auditor may employ
in carrying out an audit of trade receivables. The exact nature of analytical review procedures
to be applied in specific situation is a matter of professional judgment of the auditor.
Author’s Note
• Shortcut for Shortcut to remember
Audit using B2-I-C-E-P-S2

QNO Analytical Procedures for Rental Payments #Unique Old Course -- (M21M)
520.21 New Course -- (M21M)
CA Amar wants to verify the payments made by XYZ Ltd. on account of building rent during the FY 2020-21.
The rent amounts to Rs.50,000/- per month for the year. The monthly rent payments are consistent with the
rent agreement. However, the other companies in the similar industry are paying rent of Rs. 10,000/- per
month for a similar location. How will applying the analytical procedures impact the verification process of
such rental payments by XYZ Ltd.?
Answer If CA Amar checks in detail the monthly rent payments, he may find that such payments are consistent
with the rent agreement i.e. XYZ Ltd. paid Rs. 50,000/- per month as rent and the same is getting
reflected in the rent agreement. Here, CA Amar may not be able to find out the inconsistency in the rent
payment with respect to rent payment prevalent in the similar industry for rent of the similar location.
If CA Amar applies analytical procedure i.e. compares the rent payment by XYZ Ltd. with the similar
payments made by companies in similar industry and similar area, he will notice an inconsistency in
such rent payments as the other companies are paying a very less monthly rent in similar industry for
similar area.
However, if CA Amar does not make such comparison and only checks the monthly payments and rent
agreement of XYZ Ltd., he would not have found such inconsistency and as such the misstatement may
remain undetected.

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CHAPTER AUDIT OF ITEMS OF FINANCIAL STATEMENTS
9

Part 1 – AIFS LIABILITY

QNO B/S (Shares at Discount)- New Course – (M19M/N19E/M22R/M22M)

AIFS.11 Bhaskar CNO - AIFS-P1.040
While conducting audit of Air Space Ltd, the auditor observes that it has issued shares at discount to its
creditors when its debt is converted into shares in pursuance of debt restructuring scheme in accordance
with any guidelines specified by the Reserve Bank of India. Discuss explaining clearly the provisions relating
to discount on issue of shares and its verification by the auditor.
OR
Any share issued by a company at a discounted price shall be void. Explain also stating the audit procedure
in this regard.
OR
Validity and consequence of issue of shares at discount, check with respect to the provisions of the
Companies Act, 2013.
Answer ➢ According to Section 53 of the Companies Act, 2013,
(1) 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.
(2) any share issued by a company at a discounted price shall be void.
(2A) Notwithstanding anything contained in sub-sections (1) and (2), a company may issue shares at a
discount to its creditors when its debt is converted into shares in pursuance of any statutory
resolution plan or debt restructuring scheme in accordance with any guidelines or directions or
regulations specified by the Reserve Bank of India under the Reserve Bank of India Act, 1934 or the
Banking (Regulation) Act, 1949.
(3) Where any company fails to comply with the provisions of this section, such company and every
officer who is in default shall be liable to a penalty which may extend to an amount equal to the
amount raised through the issue of shares at a discount or five lakh rupees, whichever is less, and
the company shall also be liable to refund all monies received with interest at the rate of twelve per
cent. per annum from the date of issue of such shares to the persons to whom such shares have
been issued.

➢ The auditor needs to check

(i) the movement in share capital during the year and wherever there is any issue,
(ii) he should 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.
(iii) Further, auditor should also verify that in case a company has issued shares at a discount to its
creditors when its debt is converted into shares in pursuance of any statutory resolution plan or debt
restructuring scheme in accordance with any guidelines or directions or regulations specified by the
Reserve Bank of India under the Reserve Bank of India Act, 1934 or the Banking (Regulation) Act, 1949.

➢ In the given case of Air Space Ltd, it is clear that it can issue shares to its creditors when its debt is
converted into shares in accordance with approved restructuring scheme.

QNO BS (Securities Premium)- New Course –

AIFS.13 Bhaskar CNO - AIFS-P1.040 (M19E/S20M/S21M/N22M)
ABC Ltd. has issued shares for cash at a premium of Rs 450, that is, at amount in excess of the nominal value
of the shares which is Rs 10 for cash. 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. Advise the means
in which the amount in the account can be applied.

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 OR
Y Ltd. utilised its securities premium to declare 45% dividend. State the provisions related to application of
securities premium account and comment on the statement given.
OR
Securities premium can be utilized only for certain purposes laid down in the Companies Act, 2013.
OR
Premium received on issue of shares prior to the date of Balance Sheet has been transferred to Statement
of Profit and Loss for arriving at the figure of commission payable to the managing director.
OR
The securities premium account may only be applied by the company towards the issue of unissued shares
of the company to the members of the company as fully paid bonus shares. Comment.
Answer Shares Issued at Premium:
➢ Meaning
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.

As per the section, where a company issues shares at a premium, whether for cash or otherwise, a sum
equal to the aggregate amount of the premium received on those shares shall be transferred to a
“securities premium account” and the provisions of this Act relating to reduction of share capital of a
company shall apply as if the securities premium account were the paid-up share capital of the
company.
➢ Utilization/Application of Securities Premium:
Section 52 of the Companies Act, 2013 deals with creation of Securities Premium Account for premium
received on issues of shares and its application thereon.
Section 52(2) lays down that the securities premium account may be applied by the company –
in writing off the preliminary expenses of the company;
in writing off the expenses of, or the commission paid, or discount allowed on, any issue of
shares or debentures of the company;
in providing for the premium payable on the redemption of any redeemable preference shares
or of any debentures of the company; or
for the purchase of its own shares or other securities under section 68.
in paying up unissued shares of the company to be issued to members of the company as fully
paid bonus shares;
Thus, it is clear from the above that securities premium can be utilized only for specific purposes.
➢ Section 123 of the Companies Act- Source of Dividend Payment
Further, section 123 of the Companies Act, 2013 also specifies the sources from which dividends can be
paid and requires the same to be only paid out of current/past profits or any other free reserve.
Declaration of dividends out of securities premium is not proper and, consequently, the auditor shall
have to qualify the audit report if declaration of dividends out of securities premium.
➢ Premium Received on Issue of Shares not be credited to P&l :
Premium received on issue of shares is capital receipt and should not be credited to Statement of Profit
and Loss. As per the provisions of Section 198 of the Companies Act, 2013 on calculation of profits,
premium on issue of shares should not be considered in computation of net profit. The same need to
be complied with for the purpose of managerial remuneration. The auditor should have qualified the
audit report and qualified the amount by which the profit stands inflated.
Author’s Note
This is a master answer you can write the relevant aspect of the master answer as per what the
question is asking.

QNA B/S (Share Capital, Reduction of Share Capital) New Course – (N20M)
AIFS.16 Bhaskar CNO - AIFS-P1.060

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 BNP Ltd has reduced its Share Capital to a greater extent in the year for which you are conducting the audit.
State how will you proceed for verifying the reduction of Capital.
➢ For verifying reduction of capital, the auditor needs to undertake the following procedures:
Verify that the Articles of Association authorizes reduction of capital;1
Verify that the meeting of the shareholder held to pass the special resolution was properly
convened and that the proposal was circularized in advance among all the shareholders; 2
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; 3
Verify that the Memorandum of Association of the company has been suitably amended. 4
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; 5
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; 6
Inspect the Registrar’s Certificate as regards to reduction of capital; 9
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. 8
Confirm whether the revaluation of assets has been properly disclosed in the Balance Sheet; 7

QNO Classification of Liability in Current Vs Not Current AND New Course – (M22M)
AIFS. Classification of Reserves & Surplus
17.50 Bhaskar CNO - AIFS-P1.080
While auditing the accounts of ABC Ltd, a member of audit team is not clear about :
(i) the criteria regarding classification of liability into current liability and non-current liability.
(ii) Classification of Reserves and Surplus
You being the senior member of audit team guide the member of the audit team about such criteria and
classification as per general instructions for preparation of balance sheet as per Schedule III.
(i) A liability shall be classified as current when it satisfies any of the following criteria:
(a) it is expected to be settled in the company’s normal operating cycle;
(b) it is held primarily for the purpose of being traded;
(c) it is due to be settled within twelve months after the reporting date; or
(d) the company does not have an unconditional right to defer settlement of the liability for at least
twelve months after the reporting date. Terms of a liability that could, at the option of the
counterparty, result in its settlement by the issue of equity instruments do not affect its
classification.
All other liabilities shall be classified as non-current.

(ii) Reserves and Surplus shall be classified as:

(a) Capital Reserves;
(b) Capital Redemption Reserve;
(c) Securities Premium;
(d) Debenture Redemption Reserve;
(e) Revaluation Reserve
(f) Share Options Outstanding Account;
(g) Other Reserves – (specify the nature and purpose of each reserve and the amount in respect
thereof);
(h) Surplus i.e. balance in Statement of Profit & Loss disclosing allocations and appropriations such as
dividend, bonus shares and transfer to/from reserves etc.

(Additions and deductions since last balance sheet to be shown under each of the specified heads)

Note: A reserve specifically represented by earmarked investments shall be termed as a ‘fund’.

Note: Debit balance of statement of profit and loss shall be shown as a negative figure under the head
‘Surplus’. Similarly, the balance of ‘Reserves and Surplus’, after adjusting negative balance of surplus, if
any, shall be shown under the head ‘Reserves and Surplus’ even if the resulting figure is in the negative.
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QNO B/S( Reserve vs Provision & Capital vs Revenue Old Course -- (M21E)
AIFS.19 Reserve) #Unique New Course -- (M19M/M19R/N22M)
Reserves are amounts appropriated out of profits whereas on the contrary, provisions are amounts charged
against revenue. Discuss explaining the difference between the two and also clearly explain revenue reserve
and capital reserve.
OR
Explain the difference between reserves and provisions.
OR
Specific reserves may sometimes be created under contractual obligation or legal compulsion. Explain with
examples.
OR
Reserves are a vital source of financing by internal means. Explain and also discuss the meaning
of reserves along with revenue reserve and capital reserve.

Answer ➢ General Concept – Reserve V/s Provision

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.
Provisions
On the contrary, provisions are amounts charged against revenue to provide for:
• Asset
o Renewal or diminution in the value of assets;
o Amounts contributed or transferred from profits to make good the diminution in value
of assets due to the fact that some of them have been lost or destroyed as a result of
some natural calamity or debts have proved to be irrecoverable are also described as
provisions. Provisions are normally charged to the Statement of Profit and Loss before
arriving at the amount of profit. Reserves are appropriations out of profits.
• Liability
o a known liability, the amount whereof could only be estimated and cannot be
determined with accuracy; or
o a claim which is disputed.

➢ Difference between Reserves and Provisions

Detail Definition
• Provisions
The difference between the two is that provisions are amounts set aside to meet specific/
identified liabilities or diminution in recoverable value of assets. These must be provided for
regardless of the fact whether the Company has earned profit or not.
• Reserves
Represent amounts appropriated out of profits, held for equalizing the dividends of the
company from one period to another or for financing the expansion of the company or for
generally strengthening the company financially.
Net worth Computation
If we examine the Balance Sheet of a company, at a given time, and deduct the total liabilities to
outside trade payables from the value of assets shown therein, the difference between the two
figures will represent the net worth of the company based on the book values of assets as on that
date. The same shall include the capital contributed by the shareholders as well as total
undistributed profit held either to the credit of the Statement of Profit and Loss or to reserves;
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 Reserves – Revenue v/s Capital
The reserves again will be segregated as revenue or capital reserves. Revenue reserves represent
profits that are available for distribution to shareholders held for the time being or any one or
more purpose.
• Examples- to supplement divisible profits in lean years, to finance an extension of business, to
augment the working capital of the business or to generally strengthen the company’s
financial position.
Capital Reserve
Represents a reserve which does not include any amount regarded as free for distribution through
the Statement of Profit and Loss
• Examples- share premium, capital redemption reserve.
It may be noted that if a company appropriates revenue profit for being credited to the asset
replacement reserve with the objective that these are to be used for a capital purpose, such
a reserve shall also be in the nature of a capital reserve.

Capital Reserve – Utilization

A capital reserve, generally, can be utilized for writing down fictitious assets or losses or (subject
to provisions in the Articles) for issuing bonus shares if it is realized.
But the amount of share premium or capital redemption reserve account can be utilized only for
the purpose specified in Sections 52 and 55 respectively of the Companies Act, 2013
Author’s Note
This is a master answer you can write the relevant aspect of the master answer as per what the
question is asking.

QNO B/S (Borrowing)- New Course –

AIFS.25 Bhaskar CNO - AIFS-P1.100 (S17M/S20M/S21M)
Borrowing from Banks.
Answer ➢ Borrowing from Banks: Borrowing from banks may be either in the form of overdraft limits or term
loans. In each case, the borrowings should be verified as follows-
Reconcile the balances in the overdraft or loan account with that shown in the passbook(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.
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.
Verify the authority under which the loan or draft has been raised. In the case of a company,
only the Board of Directors is authorized to raise a loan or borrow from a bank.
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. Ascertain the purpose for which loan has been raised and the
manner in which it has been utilized and that this has not prejudicially affected the Entity
Author’s Note
This answer is as per Study material 2020, however it is an old answer and has been copied from old study
material. Similar question on audit procedures for verification of existence of Borrowings was issued by ICAI
in May 18 Mock and November 18 Mock. Refer CNO AIFS.23

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 Part 2 – AIFS ASSETS

QNO Identify Assertions

BS (PPE Rights Verified by Audit Procedures
& Obligation)- New Course – New
(N19M/N19R/S20M)
Course – (N22R)
AIFS.31 #Unique
AIFS.
30.80
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.

Answer (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.

QNO BS (PPE Rights & Obligation) New Course –

AIFS.31 Bhaskar CNO-AIFS-P2.020 (N19M/N19R/S20M/S21M/N22M)
The auditor has to ensure whether PPE has been valued appropriately and as per generally accepted
accounting policies and practices and also the entity has valid legal ownership rights over the PPE claimed
to be held by the entity and recorded in the financial statements . Explain how the auditor will verify the
same.
OR
The auditor A of ABC & Co.- firm of auditors is conducting the audit of XYZ Ltd and while performing testing
of additions wanted to verify that all PPE (Property Planed and Equipment) purchase invoices are in the
name of the entity he is auditing. For all additions to land, building in particular, the auditor desires to have
concrete evidence about ownership. The auditor is worried about whether the entity has valid legal
ownership rights over the PPE claimed to be held by the entity and recorded in the financial statements.
Advise the auditor.
Answer The auditor has to ensure whether PPE has been valued appropriately and as per generally accepted
accounting policies and practices.

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.

• The auditor should:

o Verify that the entity has charged depreciation on all items of PPE unless any item of PPE is non-
depreciable like freehold land;
o Assess that the depreciation method used reflects the pattern in which the asset’s future economic
benefits are expected to be consumed by the entity. It could be Straight line method, diminishing
value method, unit of production method, as applicable.
o The auditor should also verify whether the management has done an impairment assessment to
determine whether an item of property, plant and equipment is impaired as per the requirements of
AS 28 - Impairment of Assets.

To verify whether the entity has valid legal ownership rights over the PPE claimed to be held by the entity
and recorded in the financial statements
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 • 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 and building in particular, the auditor should check the conveyance deed/ sale deed
to verify whether the entity is the legal and valid owner or not.
• The auditor should insist and verify the original title deeds for all immoveable properties held as at the
balance sheet date.
• In case the entity has given such immoveable property as security for any borrowings and the original title
deeds are not available with the entity, the auditor should request the entity’s management for obtaining a
confirmation from the respective lenders that they are holding the original title deeds of immoveable property
as security.
• In addition, the auditor should also verify the register of charges, available with the entity to assess that any
charge has been created against the PPE.

QNO Intangible Assets - Verifying Additions New Course – (M22M/N22M)

AIFS. Bhaskar CNO-AIFS-P2.040
35.50
XYZ Ltd made huge additions to Intangible assets during the period 01-04-2021 to 31-03-2022 i.e. period
under audit. You have been appointed as an auditor and you want to verify the additions made to intangible
assets during the period. Suggest the audit procedure to verify the additions to intangible assets.
Answer 1. Verify the movement in the intangible assets schedule (asset class wise like software, designs/ drawings,
goodwill etc.) compiled by the management i.e. Opening balances + Additions – Deletions = Closing
balances. Tally the closing balances to the entity’s books of account.
2. Check the arithmetical accuracy of the movement in intangible assets schedule.
For additions during the period under audit, obtain a listing of all additions from the management and
undertake the following procedures:
(i) For all material additions, verify whether such expenditure meets the criterion for recognition of an
intangible asset as per AS 26.
(ii) Ensure that no cost related to research (or from the research phase of an internal project) gets
recognized as intangible asset.
(iii) Check the certificate or report or other similar documentation maintained by the entity to verify the
date of use of the intangible which could be linked to date of commencement of commercial production/
economic use to the entity, for all additions to intangible assets during the period under audit.
(iv) Verify whether the additions (acquisitions) have been approved by appropriate entity’s personnel.
(v) Verify whether proper internal processes and procedures like inviting competitive quotations/ proper
tenders etc. were followed prior to finalizing the vendor for procuring item of intangible assets by testing
those documents on a sample basis.
(vi) In relation to deletions of intangible assets, understand from the management the reason and rationale
for deletion and the manner of disposal. Obtain the management approval and disposal note authoring
disposal of the asset from its active use. Verify the process followed for sale of discarded asset, example
inviting competitive quotes, tenders and the basis of calculation of sales proceeds. Verify that the
management has accurately recorded the deletion of intangible asset (original cost and accumulated
amortization up to the date of disposal) and the resultant gain/ loss on disposal in the entity’s books of
account.

QNO B/S (Intangible Fixed Assets, Research Activity)- Old Course -- (M21M)
AIFS.36 Bhaskar CNO - AIFS-P2.040 New Course -- (M19E/N20M/M21M)
You are an auditor of PQR Ltd. which has spent 10 lakhs on Research activities of the product during period
under audit. Board of Directors want to recognize it as an internally generated intangible assets. Advise and
discuss the conditions necessary to be fulfilled to recognize the intangible assets in the financial statements

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Answer ➢ As per AS 26 - “Intangible Asset”
An intangible asset shall be recognised if, and only if:
• the said asset is identifiable.
• the entity controls the asset i.e. the entity has the power to obtain the future economic
benefits flowing from the underlying resource and to restrict the access of others to those
benefits.
• it is probable that future economic benefits associated with the asset will flow to the entity.
• the cost of the item can be measured reliably.
No Intangible asset arising from research (or from the research phase of an internal project) shall
be recognised. Expenditure on research shall be recognised as an expense when it is incurred since
in the research phase of an internal project, an entity cannot demonstrate that an intangible asset
exists that will generate probable future economic benefits.
➢ Case Discussion
Auditor of PQR Ltd. which has spent 10 lakhs on Research activities of the product during period under
audit. Board of Directors want to recognize it as an internally generated intangible asset.
➢ Conclusion
Thus, board of directors of PQR Ltd cannot recognize the expense as internally generated intangible asset.

QN0 B/S (Trade receivable, Existence) New Course – (S20M/S21M/N21M)

AIFS.38 Bhaskar CNO-AIFS-P2.080
Write the audit Procedure for verification of existence of Trade Receivables.
➢ For Verification of Existence of Trade Receivables, the auditor should check the following:
Related to Controls:
• Check whether there are controls in place to ensure that invoices cannot be recorded more than
once and receivable balances are automatically recorded in the general ledger from the original
invoice. Ask for a period-end accounts receivable aging report and trace the balance as per the
report to the general ledger.
• Check 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.
Match & Reconcile:
• If any large balance is due for a long time, auditor should ask for reasons and justification for the
same.
Direct Confirmation Procedures:
• A list of trade receivables selected for confirmation should be given to the entity for preparing
request letters for confirmation which should be properly addressed.
• The auditor should maintain strict control to ensure the correctness and proper despatch of
request letters. It should be ensured that confirmations as well as any undelivered letters are
returned to the auditor and not to the client.
• Any discrepancies revealed by the confirmations received or by the additional tests carried out
by the auditor may have a bearing on other accounts not included in the original sample. The
Com.
• Where no reply is received, the auditor should perform alternate procedures regarding the
balances. This could include:
• Agreeing the balance to cash received subsequently.
• Preparing a detailed analysis of the balance, ensuring it consists of identifiable transactions and
confirming that these revenue transactions actually occurred. (examination in depth for those
balances)
• 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.
• Check that receivables for other than sales or services are not included in the list.

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 • Review a trend line of sales and accounts receivable, or a comparison of the two over time, to
check if there are any unusual trends i.e. perform Analytical procedures.. Make inquiries about
reasons for changes in trends with the management and document the same in audit work
papers.
Author’s Note:
Content given in module and our notes as compared to content in above answer is little bulky, because ICAI
has trimmed the answer. Specially they have trimmed points related to Direct confirmation.

QNA B/S (Trade Receivable, Completeness) New Course – (N22R)

AIFS. Bhaskar CNO-AIFS-P2.080
38.50
PK Pvt Ltd, based in Moradabad, is engaged in export of brassware goods. The company has huge export
receivables as on 31st March 2022. It is also analysed from Export Sales account of the company that large
number of small shipments were almost despatched daily during month of March 2022. List out few audit
procedures you would adopt as an auditor to verify completeness assertion of export trade receivables.
Completeness assertion in respect of account balances means that all balances which should have been
recorded have been recorded. The auditor needs to satisfy himself about cut off so that there is no
understatement or overstatement in account balances of export receivables.
In this context, while verifying completeness assertion of export trade receivables, following audit procedures
are required: -
(1) Check that in respect of invoices raised in last few days nearing the cut off date, goods have been actually
dispatched and not lying with the company.
(2) Check stock records, e-way bill, and transporter receipt regarding actual movement of goods. It would
provide assurance that export invoices in respect of which revenue was booked have been actually moved out
of company’s premises.
(3) Ensure that all goods invoiced prior to cut off date/year end have been included in export receivables on
test check basis.
(4) Ensure that no goods despatched after year end have been included in export receivables by tracing entries
in export sales, stock records of next year. The same can be verified from e-way bills also.
(5) Match invoices to despatch/shipping details. Further match invoices dates to despatch dates to see if sales
are being recorded in correct accounting period.
(6) Test invoices in receivable report. Select invoices from ageing report of export receivables and compare
them with supporting documentation to ensure that these are billed with correct names, dates and amounts.

QNO B/S (Bank Balance, Confirmation) New Course – (N20R)

AIFS.40 Bhaskar CNO - AIFS-P2.100
A significant and important audit activity is to contact banks/ financial institution s directly and ask them
to confirm the amounts held in current accounts, deposit accounts, EEFC account, cash credit accounts,
etc. as at the end of the reporting period under audit. Explain the audit procedure in this context.
➢ A significant and important audit activity is to contact banks/ financial institutions directly and ask
them to confirm the amounts held in current accounts, deposit accounts, EEFC (Exchange Earners
Foreign Currency) account, cash credit accounts, restrictive use accounts like dividend, escrow
accounts as of the end of the reporting period under audit. This should necessarily be done for all
account balances as at the period-end.
➢ The auditor should emphasize for confirmation of 100% of bank account balances. In remote
situations were no reply is received, the auditor should perform additional testing regarding the
balances. This testing could include:
Agreeing the balance to bank statement received by the Company or internet/ online login to
accounting auditor’s personal presence;
Prepare a final summary of the results of the circularization and draw the final conclusion
➢ The Company should be asked to investigate and reconcile the discrepancies, if any including seeking
written explanations/ clarifications from the banks/ financial institutions on any unresolved queries.
➢ 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.

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QNO B/S (Loans & Advances + Finished Goods, Valuation) New Course – (N18E/M20M)
AIFS.45 Bhaskar CNO - AIFS-P2.060/ AIFS-P2.120
Write the audit procedures to be performed as an auditor for valuation (assertion) of following:
(i) Loans and Advances and other current assets.
(ii) Finished goods and goods for resale.
Answer ➢ Valuation of Loans And Advances and Other Current Assets:
(Allowances / Provisions)
Process followed
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.
Ageing report followed by Scrutiny
• 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 day sold 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.
Approval of write-offs or other reductions
Check that write-offs or other reductions in the recoverable balances have been approved
by an appropriate and authorized member of senior management, for example the financial
controller or finance director.
Schedule of movements
Prepare schedule of movements on Bad loans/ advances – Provision Accounts and loans/
advances written off.
Restatement of foreign currency Items
Check that the restatement of foreign currency loans and advances/ other current assets
has been done properly.
➢ Valuation of Finished Goods and Goods for Resale:
Methods
Depending on how the business operates, the management may value inventory using
“first-in first- out,” “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.
Finished goods and goods for resale
• Cost
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.
• NRV
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.
• Obsolete Items
o 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
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 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
o Follow up any inventories which at time of observance of physical counting
were noted as being damaged or obsolete.
o Calculate inventory turnover ratio. Obsolete inventory may be revealed if
ratio is significantly lower.
o In manufacturing environments, test overhead allocation rates and ensure
that only direct labour, direct material and overhead have been included.
o Verify the correct application of lower-of-cost-or-net realizable value
principles.

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 Part 3 – AIFS INCOME & EXPENSE

QNO P&L (Sales Accuracy) New Course -- (N22M)

AIFS.45. Bhaskar CNO - AIFS-P3.020
55
While checking sales of the client, the auditor has to ensure that all sales are accurately measured as per
applicable accounting standards and correctly journalized, summarized, and posted. Explain the audit
procedures to ensure the same.
Answer While checking sales of the client, the auditor has to ensure that all sales are accurately measured
as per applicable accounting standards and correctly journalized, summarized, and posted. The auditor
can perform the following procedures to ensure the same.

• Trace a few transactions from inception to completion. (Examination in depth)

• E.g: Take few sales transaction, and check from the receipt of sales order to the payment of
receivable balance, every underlying document to ensure if it is properly rec orded at every stage
and measured accurately taking into consideration all the incentives, discounts, if any. The
recognition shall be according to the revenue recognition policy of the entity.
• If the client is engaged in export sales, then compliance with AS 11 shall be ensured.
• Auditor must understand client’s operations and related GAAP issues e.g. point of sale revenue
recognition vs. percentage of completion, wherever applicable.
• 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.

QNO Audit of Employee Benefit Expense New Course – (N22M)

AIFS.48. Bhaskar CNO - AIFS-P3.080
50
Explain how you would verify Employee Benefit Expense incurred by a Company.
Answer The auditor shall verify that:
i. Employee benefit expense has been incurred during the period in respect of the personnel
employed by the entity. Employee benefit expense does not include the cost of any unauthorized
personnel.
ii. Employee benefit expenses in respect of all personnel have been fully accounted for.
iii. Employee benefit expenses recognized during the period relates to the current accounting
period only.
iv. Employee benefit expense has been measured/ calculated accurately.
Any adjustments such as tax deduction at source have been correctly reconciled and accounted
for.
v. Employee benefit expense has been fairly allocated between:
— Operating expenses incurred in production activities;
— General and administrative expenses; and
— Cost of personnel relating to any self-constructed assets other than inventory.
Author’s Note:
Answer given by ICAI is in Short, you can alternatively give answer as per BHASKAR Regular Notes which is
taken from ICAI Module.

QNO P&L (Expenses Audit- Other Attributes)- New Course -- (N18E/N21M)

AIFS.53 Bhaskar CNO - AIFS-P3.120
While the auditor may choose to analyse the monthly trends for 5 expenses like rent, power and fuel but
for other expenses, an auditor generally prefers to verify other attributes.” Mention those attributes.
Answer ➢ Attributes to be Verified
Analytical Procedures
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 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:
• Test Of Details
o Whether the expenditure was authorized as per the delegation of authority matrix
o Whether the expenditure had a valid supporting like travel tickets, insurance policy,
third party invoice etc.;
o Whether the expenditure pertained to current period under audit;
o Whether the expenditure qualified as a revenue and not capital expenditure;
o Whether the expenditure has been classified under the correct expense head;
o Whether the expenditure was in relation to the entity’s business and not a personal
expenditure.

QNO P&L (Expenses Audit- Trend Analysis) New Course -- (N21M)

AIFS.54 Bhaskar CNO - AIFS-P3.120
The auditor may choose to analyse the monthly trend for Power & Fuel expense. Explain how this analysis
will be performed by the auditor
Answer 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.

QNO P&L (Rent and Fuel expenses)- New Course -- (M19R/N22M)

AIFS.55 Bhaskar CNO - AIFS-P3.120
Explain the audit procedure to vouch/verify:
(i) Rent expenses
(ii) Power and Fuel expenses
Answer
➢ Rent expense-
Schedule
Obtain a month wise expense schedule along with the rent agreements.
Agreement
• Obtain Rent Agreement
• Whether the rent amount is as per the underlying agreement.
• 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.
• Specific 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.
Accounting
Verify if expense has been recorded for all 12 months and
➢ Power and fuel expense-
Schedule
Obtain a month wise expense schedule.
Bills
Obtain power bills and check accuracy of expense.
Accounting
Verify if expense has been recorded for all 12 months.
Analytical
• 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.
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 • In relation to the units consumed, analyze the monthly power units consumed by
linking it to units of finished goods produced and investigate reasons for variance
in monthly trends.

QNO Evidence is the very basis for formulation of opinion - Example of New Course -- (M20R)
AIFS.62 evidence in respect of Sales #Unique
"Evidence is the very basis for formulation of opinion and an audit programme is designed to provide for
that by prescribing procedures and techniques.
Analyse and explain with the help of example of evidence in respect of Sales."
Answer ➢ Evidence is the very basis for formulation of opinion and an audit programme is designed to provide for
that by prescribing procedures and techniques. What is best evidence for testing the accuracy of any
assertion is a matter of expert knowledge and experience. This is the primary task before the auditor
when he draws up the audit programme. Transactions are varied in nature and impact; procedures to be
prescribed depend on prior knowledge of what evidence is reasonably available in respect of each
transaction.
➢ Example
Sales are evidenced by:
sales managers’ advice to the inventory section.
price list.
inventory-issue records.
acknowledgements of the receipt of goods by the customers
invoices raised by the client.
forwarding notes to client
collection of money against sales by the client.

QNO P&L (Profit / Loss on Sale of Investment & Disclosure Requirement)- Old Course -- (M21M)
AIFS.73 Bhaskar CNO - AIFS-P3.040 New Course -- (M18E/M21M)
As statutory auditor of the company lists out audit procedures required to be undertaken for the following:
Gain/(loss) on sale of investment in Mutual funds.
Also indicate disclosure requirements of above as per Companies Act, 2013
Answer ➢ Gain/(loss) on sale of investment in mutual funds:
Determination of Gain or loss and its recording
• 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
• It 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)

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 Part 4 – OTHER CONCEPTS

QNO P &L (Payment of Tax) #Unique New Course -- (S17M/S20M/S21M)

AIFS.59
How will you vouch and/or verify payment of taxes?
Answer ➢ Documents
Annual
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 form
• receipted challan
• assessment order
• notice of demand and the.
Quarterly
Payments or advance payments of income-tax should also be verified
• receipted challan acknowledging the amount paid and the
• with the notice of demand
➢ Interest
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.
➢ Electronic Payment
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.
The assesses 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 assesses on whose behalf the payment is made.

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 CHAPTER THE COMPANY AUDIT
10

Part 1 – Company Audit & Auditor’s (Sec 139 to 147)

QNO Sec-139 Relevance of MOA / AOA in appointment of Auditor New Course -- (S17M)
CoAud.01 #Unique
The auditor should study the Memorandum and Articles of Association to see the validity of his
appointment.
Answer Part I -- Relevant Standards & Laws
▪ Section 139, 140 and 141 of the Companies Act, 2013
Part II -- Requirements of Relevant Standards & Laws
➢ 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.

QNO Sec-177-Appointment of Auditor- if Audit Committee exists- Old Course -- (M20M)

CoAud.03 Applicable to specified company New Course -- (M19M/M20M)
Bhaskar CNO - CA.180
Where a company is required to constitute an Audit Committee, all appointments of an auditor under
this section shall be made after taking into account the recommendations of such committee. Explain
also stating the class of companies required to constitute Audit Committee.
Answer Part I -- Relevant Standards & Laws
▪ Section 177 of the Companies Act, 2013
Part II -- Requirements of Relevant Standards & Laws
➢ Applicability of section 177 i.e., Constitution of Audit Committee:
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.
➢ Listed Public Companies
➢ In addition to listed public companies, following classes of companies shall constitute an Audit
Committee – (i.e in case of unlisted companies)
all public companies with a paid-up capital of ten crore rupees or more;
all public companies, having in aggregate, outstanding loans or borrowings or
debentures or deposits exceeding fifty crore rupees.
all public companies having turnover of one hundred crore rupees or more;
➢ Exemptions
Wholly owned subsidiary
Joint Venture
Dormant Company

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QNO Applicability of Audit Committee - Case Study Old Course -- (N20E)
CoAud.04 Bhaskar CNO - CA.180 New Course -- (M22M/N22R)
XYZ Limited is engaged in the business of Shoes having geographical presence across
India. Following details are available from the last audited financial statements of XYZ
Limited for the financial year 2018-19
Particulars Amt (Rs)
Paid-up Capital as on 31st March, 2019 9.8 Crores
Turnover for Financial Year 2018-19 98 Crores
Outstanding Loan from Bank as on 31st March, 2019 25 Crores
Liability on Outstanding Debentures as on 31st March, 2019 26 Crores
Comment on the applicability of constitution of Audit Committee for XYZ Limited for the financial year 2019-
20 based on the above information.
Answer Applicability of Constitution of Audit Committee: According to Section 177 of the Companies Act,
2013, in addition to listed public companies, following classes of companies shall constitute and Audit
Committee -
(i) All public companies with a paid-up capital often crore rupees or more;
(ii) All public companies having turnover of one hundred crore rupees or more;
(iii) All public companies, having in aggregate, outstanding loans or borrowings or debentures or
deposits exceeding fifty crore rupees or more.

Explanation- The paid-up share capital or turnover or outstanding loans or borrowings or debentures
or deposits, as the case may be, as existing on the date of last audited Financial Statements shall be
taken into account for the purposes of this rule.
Therefore, provisions of constitution of audit committee are applicable only to listed
companies and public companies satisfying criteria as stated above.
In the given case, XYZ Limited, engaged in the business of Shoes, is a public company and it’s having
paid-up capital of 9.8 crore rupees and turnover of 98 crore which is less than prescribed limit (i.e., 10
crores for paid-up capital and 100 crores for turnover). However, aggregate of its outstanding loan
from bank (25 crores) and liability on outstanding debentures (26 crore) is exceeding the prescribed
limit i.e., 50 crore rupees. Therefore, provisions relating to constitution of Audit Committee will be
applicable for XYZ Limited.

QNO Sec-139 (1) Tenure of Auditor Old Course -- (M18R)

CoAud.05 Bhaskar CNO - CA.180/ CA.200/ CA.140 New Course – (N22M)
Section 139(1) of the Companies Act, 2013 provides that every company shall, at the first annual general
meeting appoint an auditor who shall hold office till the conclusion of its sixth annual general meeting.
Answer Part I -- Relevant Standards & Laws
▪ Section 139(1) of the Companies Act, 2013
Part II -- Requirements of Relevant Standards & Laws
➢ The following points need to be noted in this regard-
Consent & Certificate
• 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.
• The certificate shall also indicate whether the auditor satisfies the criteria provided
in section 141.
Tenure & Appointment
Section 139(1) of the Companies Act, 2013 provides that
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.
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 Intimation
The company shall inform the auditor concerned of his or its appointment, and also file a
notice of such appointment with the Registrar within 15 days of the meeting in which the
auditor is appointed

QNO Sec-139(1) Tenure of appointment New Course -- (S17M)

CoAud.07 Bhaskar CNO - CA.200
Jolly Ltd., a listed company, appointed M/s Polly & Co., a Chartered Accountant firm, as the statutory
auditor in its AGM held at the end of September 2016 for 11 years.
Answer Part I -- Relevant Standards & Laws
▪ Section 139(1) and (2) of the Companies Act, 2013
Part II -- Requirements of Relevant Standards & Laws
➢ As per section 139(2), no listed company or a company belonging to such class or classes of
companies as mentioned above, shall appoint or re-appoint-
(a) an individual as auditor for more than one term of five consecutive years; and
(b) an audit firm as auditor for more than two terms of five consecutive years.
Provided that –
• an individual auditorr 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;
• an audit fi rm 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.
Part III – Case Discussion
➢ Jolly Ltd., a listed company, appointed M/s Polly& Co., a Chartered Accountant firm, as the
statutory auditor in its AGM held at the end of September 2016 for 11 years.
Part IV – Conclusion
➢ 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 five consecutive years. It
can’t be appointed for two terms in one AGM only. Further, a cooling period of five years from
the completion of term is required i.e., the firm can’t be re-appointed for further 5 years after
completion of two terms of five consecutive years.

QNO Sec-139(1)-Procedure for appointment New Course --(M19R/N20R)

CoAud.11 Bhaskar CNO - CA.180
Explain the manner and procedure of selection and appointment of auditors as per Rule 3 of Companies
(Audit and Auditors) Rules, 2014
Answer

Part I -- Relevant Standards & Laws

▪ Section 139(1) of the Companies Act, 2013
▪ Rule 3 of CAAR, 2014
Part II -- Requirements of Relevant Standards & Laws
➢ Manner and procedure of selection and appointment of auditors-
Diagrammatic Presentation
Steps(brief)
• Selection & Recommendation of Auditor
• Consent & Certificate by Auditor
• Passing Resolution & Intimation of Appointment

Steps (in detail)

www.auditguru.in 10.3
 • Selection & Recommendation of Auditor

o Factors that should be considered

- Qualification
- Experience
- Whether competence & capabilities are commensurate with requirement of
company.
- Orders of misconduct passed against auditor.
- Misconduct proceedings pending against CA.
- They can call for more information from CA or CA Firm.
o Recommendation Process (Audit Committee- Applicable)
If Section 177 regarding Audit Committee is applicable.

o Recommendation Process (Audit Committee- Not Applicable)

www.auditguru.in 10.4
 • Step-2: - Consent & Certificate

• Step-3:- Resolution at AGM & Intimation of Appointment

Text from Bare Act

Rule 3 of CAAR, 2014 prescribes the following manner and procedure of selection and
appointment of auditors-
• In case of a company that is required to constitute an Audit Committee under section
177; the committee, and, in cases where such a committee is not required to be
constituted; the Board, shall take into consideration the qualifications and experience
of the individual or the firm proposed to be considered for appointment as auditor and
whether such qualifications and experience are commensurate with the size and
requirements of the company. It may be noted that while considering the
appointment, the Audit Committee or the Board, as the case may be, shall have regard
to any order or pending proceeding relating to professional matters of conduct against
the proposed auditor before the Institute of Chartered Accountants of India or any
competent authority or any Court.
• The Audit Committee or the Board, as the case may be, may call for such other
information from the proposed auditor as it may deem fit.
• Subject to the provisions of sub-rule (1), where a company is required to constitute the
Audit Committee, the committee shall recommend the name of an individual or a firm
as auditor to the Board for consideration and in other cases, the Board shall consider
and recommend an individual or a firm as auditor to the members in the annual
general meeting for appointment.

www.auditguru.in 10.5
 • If the Board agrees with the recommendation of the Audit Committee, it shall further
recommend the appointment of an individual or a firm as auditor to the members in
the annual general meeting.
• If the Board disagrees with the recommendation of the Audit Committee, it shall refer
back the recommendation to the committee for reconsideration citing reasons for such
disagreement.
• If the Audit Committee, after considering the reasons given by the Board, decides not
to reconsider its original recommendation, the Board shall record reasons for its
disagreement with the committee and send its own recommendation for
consideration of the members in the annual general meeting; and if the Board agrees
with the recommendations of the Audit Committee, it shall place the matter for
consideration by members in the annual general meeting.
• The auditor appointed in the annual general meeting shall hold office from the
conclusion of that meeting till the conclusion of the sixth annual general meeting, with
the meeting wherein such appointment has been made being counted as the first
meeting.

QNO Sec 139 -- Consent & Certificate New Course – (M22R)

CoAud. Bhaskar CNO - CA.180
11.50
Before appointment is made under Section 139(1) of the Companies Act, 2013, 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. Explain
stating clearly provisions of Section 139(1) along with Rule 4 of The Companies (Audit and Auditors)
Rules, 2014.
Answer Section 139(1) of the Companies Act, 2013 provides that 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.
The following points need to be noted in this regard-
(i) 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.
(ii) Under Rule 4 of The Companies (Audit and Auditors) Rules, 2014, the said certificate shall state the
following:-
(a) the individual or the firm, as the case may be, is eligible for appointment and is not disqualified for
appointment under the Act, the Chartered Accountants Act, 1949 and the rules or regulations made
thereunder;
(b) the proposed appointment is as per the term provided under the Act;
(c) the proposed appointment is within the limits laid down by or under the authority of the Act;
(d) the list of proceedings against the 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.
(iii) The company shall inform the auditor concerned of his or its appointment, and also file a notice of such
appointment with the Registrar within 15 days of the meeting in which the auditor is appointed.

QNO Sec-139(2) -Applicability of Old Course -- (P16M/ N16R/ M17E/ N18M/ M18R/ M19R)
CoAud.13 Rotation New Course -- (S17M/ N20E/N22R)
Bhaskar CNO - CA.200
Rano Pvt. Ltd., having paid up share capital of Rs18 crore, public borrowing from nationalized banks and
financial institutions of Rs 72 crore, manner of rotation of auditor will be applicable or not applicable.
Explain.
OR
Specify the class of companies to whom rotation of auditor applies, under the provisions of Companies
Act, 2013.

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 OR
“Provisions regarding rotation of auditors affect only specific class of companies”. Discuss.
OR
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.
OR
S Private Limited has a paid-up share capital of ` 49 Crores and borrowings from bank of ` 99 Crores. The
audit firm P & Company was appointed as statutory auditors of the Company for one term of five
consecutive years. Whether the provision of rotation of auditors applicable to the company? Comment.
Answer Part I -- Relevant Standards & Laws
▪ Section 139(2) of the Companies Act, 2013
Part II -- Requirements of Relevant Standards & Laws
➢ As per rules prescribed in Companies (Audit and Auditors) Rules, 2014, for applicability of section
139(2) the class of companies shall mean the following classes of companies excluding one person
companies and small companies:
all unlisted public companies having paid up share capital of rupees ten crore or more;
all private limited companies having paid up share capital of rupees fifty crore or more;
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
rupees fifty crores or more.
Part III – Case Discussion
➢ Rano Pvt. Ltd. is a private limited Company, having paid up share capital of Rs18 crore which is less
than fifty crores but public borrowing from nationalized banks and financial institutions of is 72
crore which is more than fifty crore.
Part IV – Conclusion
➢ Hence manner of rotation of auditor will be applicable to the company.

QNO Sec-139 (6) & (7) - Appointment of Old Course-

CoAud.17 Auditors -NGC & GC- Master Answer (N16M/P16M/M16R/N16R/M17E/M17M/N17R/N
Bhaskar CNO - CA.120/ CA.140 18M/
M18R/N18E/N18R/M19R/M21R)
New Course—
(M21R/N21M/MM2N)
Provisions regarding appointment of Auditors - First auditor of a Government company and a Non-
Government Company
AND
Provisions regarding appointment of Auditors -Subsequent auditor of a Government company and a
Non-Government company.
Answer (i)
Part I -- Relevant Standards & Laws
▪ Section 139(6) of the Companies Act, 2013
▪ Section 139(7) of the Companies Act, 2013
Part II -- Requirements of Relevant Standards & Laws
➢ Appointment of First Auditor of a Government Company:
Section 139(7) of the Companies Act, 2013 provides that 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 60 days from the date of registration of the company.
In case the Comptroller and Auditor-General of India does not appoint such auditor
within the above said period, the Board of Directors of the company shall appoint such
auditor within the next 30 days.

www.auditguru.in 10.7
 Further, in the case of failure of the Board to appoint such auditor within next 30 days,
it shall inform the members of the company who shall appoint such auditor within 60
days at an extraordinary general meeting. Auditors shall hold office till the conclusion
of the first annual general meeting.
➢ Appointment of First Auditor of a Non-Government Company:
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.
In the case of failure of the Board to appoint the auditor, it shall inform the members of
the company. The members of the company shall within 90 days at an extraordinary
general meeting appoint the auditor. Appointed auditor shall hold office till the
conclusion of the first annual general meeting.
(ii)
Part I -- Relevant Standards & Laws
▪ Section 139(5) of the Companies Act, 2013
Part II -- Requirements of Relevant Standards & Laws
➢ Appointment of Subsequent Auditor of a Government Company:
As per Section 139(5) of the Companies Act, 2013, 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 180 days from the commencement of the financial year, who shall
hold office till the conclusion of the annual general meeting.
➢ Appointment of Subsequent Auditor of a Non-Government Company:
As per section 139(1) of the Companies Act, 2013, 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.

QNO Sec-139(6) - First Auditor - NGC - MD Appoints Old Course—(P16M/M19R)

CoAud.19 Auditor New Course-- (S17M/M19R/S20M/S21M)
Bhaskar CNO - CA.120
Managing Director of Pigeon Ltd. himself wants to appoint CA. Champ, a practicing Chartered Accountant,
as first auditor of the company.
OR
Managing Director of PQR Ltd. himself wants to appoint Shri Ganpati, a practicing Chartered Accountant,
as first auditor of the company. Comment on the proposed action of the Managing Director.
Answer Part I -- Relevant Standards & Laws
▪ Section 139(6) of the Companies Act, 2013
Part II -- Requirements of Relevant Standards & Laws
➢ 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.
Part III – Case Discussion
➢ Managing Director of Pigeon Ltd. himself wants to appoint CA. Champ, a practicing Chartered
Accountant, as first auditor of the company.
➢ In the instant case, the proposed appointment of CA Champ, a practicing Chartered Accountant, as
first auditor by the Managing Director of Pigeon Ltd. by himself is in violation of Section 139(6) of
the Companies Act, 2013, which authorizes the Board of Directors to appoint the first auditor of
the company.
Part IV – Conclusion
➢ In view of the above, the Managing Director of Pigeon Ltd. should be advised not to appoint the
first auditor of the company.

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QNO Sec-139(7) First Auditor - GC Case Appointed by Old Course-- (M16E /P16M/N17M/M19R)
CoAud.23 BOD New Course—(M18M/M19M/M19R)
Bhaskar CNO - CA.120
The first auditors of Bhartiya Petrol Ltd., a Government company, were appointed by the Board of
Directors. Analyse.
OR
As an auditor, comment on the following situations/statements:
The first auditors of Health and Wealth Ltd., a Government company, was appointed by the Board of
Directors.
OR
The first auditor of a Government company was appointed by the Board in its meeting after 10 days from
the date of registration.
Answer Part I -- Relevant Standards & Laws
▪ Section 2(45) of the Companies Act, 2013
▪ Section 139(7) of the Companies Act, 2013
Part II -- Requirements of Relevant Standards & Laws
➢ Government company (Section 2(45) of the Companies Act, 2013)
A “Government company” is a company in which not less than 51% of the paid-up share capital is
held 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 and includes a company which
is a subsidiary company of such a Government company.
Directly/Indirectly
Sec 139 (7) covers company owned or controlled directly or indirectly by central / state or
partly by both. As per General circular issued on 26th Mar 2014 it is further clarified that
concept of deemed government company of old companies act 1956 will be covered here that
means 51% holding by CG / SG / Government Companies by one of them or in any
combination.
(i.e., CG + SG > 51% as more → Direct)
(CG + SG + Other Govt. Co. > 51% or more → Indirect)

➢ Section 139(7) provides that:

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
60 days from the date of registration of the company.
In case of failure of the Board to appoint such auditor within next 30 days, it shall inform the
members of the company who shall appoint such auditor within 60 days at an extraordinary

www.auditguru.in 10.9
 general meeting. Auditors shall hold office till the conclusion of the first annual general
meeting

Part III – Case Discussion

➢ In case the first auditors of Bhartiya Petrol Ltd., a Government company, were appointed by the
Board of Director.
Part IV – Conclusion
➢ Hence, Bhartiya Petrol Ltd., being a government company, the first auditor shall be appointed by
the Comptroller and Auditor General of India. Thus, the appointment of first auditor made by the
Board of Directors of Bhartiya Petrol Ltd., is null and void.

QNO Sec-139(8) Casual Vacancy (Theory) Old Course -- (P16M/M17M/M17R/S17M/M18R/S20M)

CoAud.27 Bhaskar CNO - CA.160 New Course – (S17M/S20M/S21M)
Filling of a casual vacancy of auditor in respect of a company audit.
Answer Part I -- Relevant Standards & Laws
▪ Section 139(8) of the Companies Act, 2013
Part II -- Requirements of Relevant Standards & Laws

➢ 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.

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 • 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.

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 30 days.
• It may be noted 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 30 days.

QNO Sec-139 (8)-Casual Vacancy -Resignation Old Course-- (P16M/M16R/N20R)

CoAud.35 Bhaskar CNO - CA.160 New Course—(M18E/N20R)
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.
OR
Due to the resignation of the existing auditor(s), the Board of directors of X Ltd. appointed CA. Hari as
the auditor. Is the appointment of Hari as auditor valid?
OR
At the AGM of ICI (P) Ltd., Mr. X was appointed as the statutory auditor. He, however, resigned after 3
months since he wanted to give up practice and join industry. State, how the NEW auditor will be
appointed by ICI (P) Ltd. and the conditions to be complied for.
Answer Part I -- Relevant Standards & Laws
▪ Section 139(8) of the Companies Act, 2013
Part II -- Requirements of Relevant Standards & Laws
➢ 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.
Part III – Case Discussion
➢ 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.
Part IV – Conclusion
➢ Therefore, the board of director has appointed Mr. L as the statutory auditor within 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.

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QNO Sec-139(9)-Retiring Auditor Cannot be Old Course— (P16M/M16M/N17M/M17E/N20E)
CoAud.37 Appointed New Course—(S17M/S20M/S21M/N21M/N22R)
Bhaskar CNO - CA.180
Under what circumstances the retiring Auditor cannot be reappointed?
OR
Provisions regarding re-appointment of a retiring auditor at the Annual General Meeting, for a company
not covered under auditor rotation provisions.
Answer Part I -- Relevant Standards & Laws
▪ Section 139(9) of the Companies Act, 2013
Part II -- Requirements of Relevant Standards & Laws
➢ As per Section 139(9) of the Companies Act, 2013
In the following circumstances, the retiring auditor cannot be reappointed-
The auditor proposed to be reappointed does not possess the qualification prescribed under
section 141 of the Companies Act, 2013.
The proposed auditor suffers from the disqualifications under section 141(3), 141(4) and 144
of the Companies Act, 2013.
He has given to the company notice in writing of his unwillingness to be reappointed.
A special resolution has been passed in AGM appointing somebody else or providing expressly
that the retiring auditor shall not be reappointed.
A written certificate has not been obtained from the proposed auditor to the effect that the
appointment or reappointment, if made, will be in accordance within the limits specified
under section 141(3)(g) of the Companies Act, 2013.

QNO Sec-140 (1) - Removal before and after tenure- difference in Old Course-- (P16M/N18R)
CoAud.41 provision-Reason New Course—(S20M/S21M)
Bhaskar CNO - CA.220
Why Central Government permission is required, when the auditors are to be removed before expiry of
their term, but the same is not needed when the auditors are changed after expiry of their term?
Answer Part I -- Relevant Standards & Laws
▪ Section 140(1) of the Companies Act, 2013
Part II -- Requirements of Relevant Standards & Laws
➢ Removal of auditor before expiry of term
Removal of auditor before expiry of his term i.e., before he has submitted his report is a
serious matter and may adversely affect his independence. Further, in case of conflict of
interest the shareholders may remove the auditors in their own interest.
Therefore, law has provided this safeguard so that central government may know the reasons
for such an action and if not satisfied, may not accord approval.

➢ Removal of auditor after expiry of term

On the other hand, if auditor has completed his term i.e., has submitted his report and thereafter
he is not re-appointed then the matter is not serious enough for central government to call for its
intervention.
➢ In view of the above, the permission of the Central Government is required when auditors are
removed before expiry of their term and the same is not needed when they are not reappointed
after expiry of their term.

QNO Sec 141(3) -- Disqualification, Meaning of Business Relationship Old Course-- (N21R)
CoAud.52 Bhaskar CNO - CA.080 New Course—(N21R/N22M)
Under the provisions of Section 141(3) of Companies Act, 2013 along with relevant rules, a person or a firm
who has “business relationship” with a company is not eligible to be appointed as an auditor of that
company. In this context, discuss meaning of term “business relationship”.
Answer Under provisions of section 141(3) of Companies Act, 2013, a person or a firm who, whether directly
or indirectly has business relationship with the Company, or its Subsidiary, or its Holding or Associate

www.auditguru.in 10.12
 Company or Subsidiary of such holding company or associate company, of such nature as may be
prescribed is not eligible to be appointed as auditor of the company.
The term “business relationship” shall be construed as any transaction entered for a commercial
purpose, except –
(i) commercial transactions which are in the nature of professional services permitted to be rendered
by an auditor or audit firm under the Act and the Chartered Accountants Act, 1949 and the rules or
the regulations made under those Acts;
(ii) 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.

QNO Sec-141(3) Disqualification - Security held by CA Old Course-- (N16M/P16M/N18M/M19R)

CoAud.53 Bhaskar CNO - CA.080 New Course—(S17M/N18M/M19R/S20M/S21M)
RGS & Co. a firm of Chartered Accountants has three partners, namely, R, G & S. The firm is allotted the
audit of BY Ltd. R, partner in the firm subsequently holds 100 shares in BY Ltd. Comment.
OR
State with reasons your views on the following:
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.
OR
Mr. A, a practicing Chartered Accountant, is holding securities of XYZ Ltd. having face value of Rs 900.
Whether Mr. A is qualified for appointment as an auditor of XYZ Ltd.?
Answer Part I -- Relevant Standards & Laws
▪ Section 141(3) of the Companies Act, 2013
Part II -- Requirements of Relevant Standards & Laws
➢ As per section 141(3)(d)(i),
A person shall not be eligible for appointment as an auditor of a company, who, or his relative or
partner is holding any security of or interest in the company or its subsidiary, or of its holding or
associate company or a subsidiary of such holding company.
However, as per proviso to this section, the relative of the person may hold the securities or
interest in the company of face value not exceeding of Rs 1,00,000

(CASE-1)
Part III – Case Discussion
➢ RGS & Co. a firm of Chartered Accountants has three partners namely, R, G, S. The firm is allotted
of BY Ltd. R, partner in the firm subsequently holds 100 shares in BY ltd.
Part IV – Conclusion
➢ Applying the above provisions to the given problem, it may be concluded that Firm of RGS,
Chartered Accountants is not eligible to continue as auditors. Firm shall vacate its office as
auditor and such vacation shall be treated as casual vacancy.
(CASE-2)
Part III – Case Discussion
➢ In the present case, Mr. Hanuman, Chartered Accountant, a partner of M/s Ram and Hanuman
Associates, holds 100 equity shares of Shiva Ltd. which is a subsidiary of Krishna Ltd.
Part IV – Conclusion
➢ Therefore, the firm, M/s Ram and Hanuman Associates would be disqualified to be appointed as
statutory auditor of Krishna Ltd., which is the holding company of Shiva Ltd., because one of the
partners Mr. Hanuman is holding equity shares of its subsidiary.
(CASE-3)
Part III – Case Discussion
➢ In the present case, Mr. A is holding security of Rs 900 in XYZ Ltd.
Part IV – Conclusion
➢ Therefore, he is not eligible for appointment as an auditor of XYZ Ltd..

www.auditguru.in 10.13
 Sec-141(3) Disqualification - Security held Old Course-- (M18R/M19R/M20M)
QNO
by relative of CA New Course— (S17M/ M18M/M18E/M19R/M20M/N20R)
CoAud.55
Bhaskar CNO - CA.080
(1)
M/s BC & Co. is an Audit Firm having partners Mr. Band Mr. C, and Mr. A the relative of Mr. C, is holding
securities of MWF Ltd. having face value of Rs1,01,000. Whether M/s BC & Co. is qualified from being
appointed as an auditor of MWF Ltd.?
OR
(2)
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 Rs 10 each) in XYZ Ltd. having market
value of Rs 90,000. Are M/s. ABC & Co. qualified to be appointed as Auditors of XYZ Ltd.?
OR
(3)
Mr. P is a practicing Chartered Accountant and Mr. Q, the relative of Mr. P, is holding securities of ABC
Ltd. having face value of Rs 90,000. Whether Mr. P is qualified from being appointed as an auditor of
ABC Ltd.?
OR
(4)
M/s RM & Co. is an audit firm having partners CA. R and CA. M. The firm has been offered the
appointment as an auditor of Enn Ltd. for the Financial Year 2016-17. Mr. Bee, the relative of CA. R, is
holding 5,000 shares (face value of Rs. 10 each) in Enn Ltd. having market value of Rs. 1,50,000. One of
the shareholders, complains that the appointment of RM & Co. as an auditor is invalid because it
incurred disqualification u/s 141 of the Companies Act, 2013. Analyse and advise.
Answer Part I -- Relevant Standards & Laws
▪ Section 141(3) of the Companies Act, 2013
Part II -- Requirements of Relevant Standards & Laws
➢ As per section 141(3)(d)(i),
a person is disqualified to be appointed as an auditor if he, or his relative or partner is holding
any security of or interest in the company or its subsidiary, or of its holding or associate
company or a subsidiary of such holding company.
• Further as per proviso to this section, the relative of the person may hold the
securities or interest in the company of face value not exceeding of Rs 1,00,000.
(CASE-1)
Part III – Case Discussion
➢ In the instant case, M/s BC & Co. is an Audit Firm having partners Mr. Band Mr. C, and Mr. A the
relative of Mr. C, is holding securities of MWF Ltd. having face value of Rs 1,01,000.
Part IV – Conclusion
➢ M/s BC & Co will be disqualified for appointment as an auditor of MWF Ltd. as the relative of Mr.
C (i.e., partner of M/s BC & Co.) is holding the securities in MWF Ltd. which is exceeding the limit
mentioned in proviso to section 141(3)(d)(i).
(CASE-2)
Part III – Case Discussion
➢ In the instant case, M/s ABC & Co. is an audit firm having partners CA. A, CA. B and CA. C. Mr. D is
a relative of CA. A and he is holding shares in XYZ Ltd. of face value of Rs 2,50,000 (25,000 shares
x rupees 10 per share). Market value of Rs 90,000 would not be relevant.
Part IV – Conclusion
➢ Therefore, M/s ABC & Co. is disqualified for appointment as an auditor 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.

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 (CASE-3)
Part III – Case Discussion
➢ In the present case, Mr. Q. (relative of Mr. P), is having securities of Rs 90,000 face value in ABC
Ltd., which is as per requirement of proviso to section 141(3)(d)(i).
Part IV – Conclusion
➢ Therefore, Mr. P will not be disqualified to be appointed as an auditor of ABC Ltd.
(CASE-4)
Part III – Case Discussion
➢ In the instant case, M/s RM & Co. is an audit firm having partners CA. R and CA. M. Mr. Bee is a
relative of CA. R and he is holding shares of Enn Ltd. of face value of Rs 50,000 only (5,000 shares
x Rs 10 per share).
Part IV – Conclusion
➢ Therefore, M/s RM & Co. is not disqualified for appointment as an auditor of Enn Ltd. as the
relative of CA. R (i.e., partner of M/s RM & Co.) is holding the securities in Enn Ltd. which is within
the limit mentioned in proviso to section 141(3)(d)(i) of the Companies Act, 2013.

QNO Sec-141 Disqualification- Partner is the Employee Old Course-- (P16M/M16R/M19R)

CoAud.56 Bhaskar CNO - CA.080 New Course—(S17M/M19R)
Mr. A, a chartered accountant, has been appointed as an auditor of Laxman Ltd. in the Annual General
Meeting of the company held in September 2016, which assignment he accepted. Subsequently in
January 2017 he joined Mr. B, another chartered accountant, who is the Manager Finance of Laxman Ltd.,
as partner.
Answer Part I -- Relevant Standards & Laws
▪ Section 141(3) of the Companies Act, 2013
Part II -- Requirements of Relevant Standards & Laws
➢ Section 141(3)(c) of the Companies Act, 2013 prescribes that
Any person who is a partner or in employment of an officer or employee of the company will be
disqualified to act as an auditor of a company.
➢ Sub-section (4) of Section 141 provides that
An auditor who becomes subject, after his appointment, to any of the disqualifications specified in
sub-sections (3) of Section 141, he shall be deemed to have vacated his office as an auditor.
Part III – Case Discussion
➢ Mr. A, a chartered accountant, has been appointed as an auditor of Laxman Ltd. in the Annual
General Meeting of the company held in September 2016, which assignment he accepted.
Subsequently in January 2017 he joined Mr. B, another chartered accountant, who is the Manager
Finance of Laxman Ltd., as partner
Part IV – Conclusion
➢ In the present case, Mr. A, an auditor of Laxman Ltd., joined as partner with Mr. B, who is Manager
Finance of Laxman Limited. The given situation has attracted sub-section (3)(c) of Section 141 and,
therefore, he shall be deemed to have vacated office of the auditor of Laxman Limited in
accordance with sub-section (4) of section 141.

Sec-141(3) Disqualification- Celling Old Course--

QNO
Limit (P16M/S17M/M17R/M18E/M19M/M19R/M20M/N20M)
CoAud.57
Bhaskar CNO - CA.080 New Course—(S17M/M19M/M20M/N20M/S20M/S21M)
“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 Rs 100 crore, 2 small companies and 1 dormant company?
(iv) Would your answer be different, if out of those 60 private companies, 45 companies are having
paid-up share capital of Rs 110 crore each?
OR
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 What are the provisions prescribed under Companies Act, 2013 in respect of ceiling on number of audits
in a company to be accepted by an auditor?
OR
Discuss the following:
Ceiling on number of audits in a company to be accepted by an auditor.
OR
"Companies Act, 2013 prescribes that a person shall not be eligible for appointment as an auditor of a
company if such person is at the date of such appointment or reappointment holding appointment as
auditor of more than twenty companies. Explain stating the relevant provisions."
Answer Part I -- Relevant Standards & Laws
▪ Section 141(3) of the Companies Act, 2013
Part II -- Requirements of Relevant Standards & Laws
➢ Section 141(3)(g) of the Companies Act, 2013 states that
The following persons shall not be eligible for appointment as an auditor of a company i.e.
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 person, or partner is at the date of such appointment, or reappointment
holding appointment as auditor of more than twenty companies other than
o one person companies,
o dormant companies,
o small companies and
o private companies having paid-up share capital less than Rs 100 crore.
The limit of 20 company audits is per person. In the case of an audit firm having 3 partners,
the overall ceiling will be 3 × 20 = 60 company audits. Sometimes, a chartered accountant is
a partner in a number of auditing firms. In such a case, all the firms in which he is partner or
proprietor will be together entitled to 20 company audits on his account.
Part III – Case Discussion
➢ In the instant case, Mr. A is holding appointment in 4 companies, whereas Mr. B is having
appointment in 6 Companies and Mr. C is having appointment in 10 Companies. In aggregate all
three partners are having 20 audits.
Part IV – Conclusion
(i) Therefore, ABC & Co. can hold appointment as an auditor of 40 more companies:
Total Number of Audits available to the Firm = 20*3 = 60
Number of Audits already taken by all the partners
In their individual capacity = 4+6+10 = 20
Remaining number of Audits available to the Firm =40
(ii) With reference to above provisions an auditor can hold more appointment as auditor =
ceiling limit as per section 141(3)(g)- already holding appointments as an auditor. Hence
Mr. A can hold: 20 - 4 = 16 more audits.
Mr. B can hold 20-6 = 14 more audits and
Mr. C can hold 20-10 = 10 more audits.
(iii) In view of above discussed provisions, ABC & Co. can hold appointment as an auditor in
all the 60 private companies having paid-up share capital less than Rs 100 crore, 2 small
companies and 1 dormant company as these are excluded from the ceiling limit of company
audits given under section 141(3)(g) of the Companies Act, 2013.
(iv) As per fact of the case, ABC & Co. is already having 20 company audits and they can also accept
40 more company audits. In addition, they can also conduct the audit of one person companies,
small companies, dormant companies and private companies having paid up share capital less
than Rs 100 crores. In the given case, out of the 60 private companies, ABC & Co. is offered 45
companies having paid-up share capital of Rs 110 crore each.
Therefore, ABC & Co. can also accept the appointment as an auditor for 2 small companies, 1
dormant company, 15 private companies having paid-up share capital less than Rs 100 crore and
40 private companies having paid-up share capital of Rs 110 crore each in addition to above 20
company audits already holding

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QNO Sec-141(3) Disqualification- Celling Limit Old Course-- (P16M/M21R)
CoAud.58 Bhaskar CNO - CA.080 New Course—(M21R)
KBC & Co. a firm of Chartered Accountants has three partners, namely, Mr. K, Mr. B & Mr. C. Mr. K is also
in whole time employment elsewhere and Mr. B & Mr. C. do not hold any audits in their personal capacity
or as partners of other firms. The firm is offered the audit of a public company ‘ABC Ltd.’ and is already
holding audit of 40 companies.
OR
PBS & Associates, a firm of Chartered Accountants, has three partners P, B and S. The firm is already
having audit of 45 companies and none of the partners are holding any audit in their personal capacity or
as partners of other firms. The firm is offered 20 public company audits. Decide and advise whether PBS
& Associates will exceed the ceiling prescribed under Section 141(3)(g) of the Companies Act, 2013 by
accepting the above audit assignments?
Answer Part I -- Relevant Standards & Laws
▪ Section 141(3) of the Companies Act, 2013
Part II -- Requirements of Relevant Standards & Laws
➢ Section 141(3)(g) of the Companies Act, 2013 states that
The following persons shall not be eligible for appointment as an auditor of a company i.e.
• 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 person,
or partner is at the date of such appointment, or reappointment holding
appointment as auditor of more than twenty companies other than
o one person companies,
o dormant companies,
o small companies and
o private companies having paid-up share capital less than Rs 100 crore.
Before appointment is given to any auditor, the company must obtain a certificate from
him to the effect that the appointment, if made, will not result in an excess holding of
company audit by the auditor concerned over the limit laid down in section 141(3)(g)
(i)
Part III – Case Discussion
➢ In the given case, Mr. K, a partner in the firm KBC & Co., is in whole-time employment elsewhere
Part IV – Conclusion
➢ Therefore, he will be excluded in determining the number of company audits that the firm can hold.
➢ Mr. B and Mr. C do not hold any audits in their personal capacity or as partners of other firms, the
total number of company audits that can be accepted by KBC & Co. is 40 others than
• one person companies,
• dormant companies,
• small companies and
• private companies having paid-up share capital less than Rs 100 crore
➢ In the given case company is already holding 40 audits, therefore, KBC & Co. can’t accept the offer
for audit of a public company ‘ABC Ltd.’.
(ii)
Part III – Case Discussion
➢ In the case of a firm of auditors, it has been further provided that ‘specified number of companies’
shall be construed as the number of companies specified for every partner of the firm who is not
in full time employment elsewhere.
Part IV – Conclusion
➢ As Mr. P, B and S do not hold any audits in their personal capacity or as partners of other firms, the
total number of company audits that can be accepted by M/s PBS & Associates is 60 other than
• one person companies,
• dormant companies,

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 • small companies and
• private companies having paid-up share capital less than Rs 100 crore.
➢ But the firm is already having audit of 45 companies. So, the firm can accept the audit of 15 public
companies only, which is well within the limit, specified by Section 141(3)(g) of the Companies Act,
2013.

QNO Sec-143(1)- Inquiry By Auditor Old Course-- (P16M/N16E/N20M)

CoAud.63 Bhaskar CNO - CA.300 New Course—(N18M/N20M/S20M/S21M)
The auditor is not required to report on the matters specified in sub-section (1) of Section 143 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. Explain clearly stating the matters for
which the auditor has to perform his duty of inquiry under this section.
OR
Write a short note on Audit enquiry under Section 143(1) of the Companies Act, 2013.
OR
The auditor has to make inquires on certain matters under section 143(1) of Companies Act, 2013.
Answer Part I -- Relevant Standards & Laws
▪ Section 143(1) of the Companies Act, 2013
Part II -- Requirements of Relevant Standards & Laws
➢ Sections 143 of the Companies Act, 2013 specifies:
The duties of an auditor of a company in a quite comprehensive manner. It is noteworthy that scope
of duties of an auditor has generally been extending over all these years.

➢ Section 143(1) - Duty of Auditor to Inquire on certain matters:

It is the duty of auditor to inquire into the following matters-
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;
whether transactions of the company which are represented merely by book entries are
prejudicial to the interests of the company;
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;
whether loans and advances made by the company have been shown as deposits;
whether personal expenses have been charged to revenue account;
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.
➢ Research Committee of the Institute of Chartered Accountants of India
The opinion of the Research Committee of the Institute of Chartered Accountants of India on section
143(1) is reproduced below:
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.

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 Sec 143(1) -- Significance of Power / Right of Old Course -- (N21R)
QNO
Auditor New Course -- (N21R)
CoAud.63.50
Bhaskar CNO - CA.280
Discuss significance of a company auditor’s right/power to obtain information and explanation from
officers of the company.
Answer The right of the auditor to obtain from the officers of the company such information and
explanations as he may think necessary for the performance of his duties as auditor is a wide and
important power. In the absence of such power, the auditor would not be able to obtain details of
amount collected by the directors, etc. from any other company, firm or person as well as of any
benefits in kind derived by the directors from the company, which may not be known from an
examination of the books. It is for the auditor to decide the matters in respect of which information
and explanations are required by him. Therefore, such a right/power is quite significant for
discharge of duty of an auditor of a company to report to the members of the company on accounts
examined by him.

Sec-143(1) -Right to Access Books & Papers- Old Course-- (M18R/M18E/M19M/N20R/M21R)

QNO
Secretarial Records New Course—(M19M/M21R)
CoAud.66
Bhaskar CNO - CA.300
During the audit of PQR Ltd. you as an auditor requested officers of the company to have access to
secretarial records and correspondence which they refused to provide. Comment.
OR
Auditor of a company shall have a right of access to the books of account and vouchers of the company
Explain
Answer Part I -- Relevant Standards & Laws
▪ Section 143(1) of the Companies Act, 2013
Part II -- Requirements of Relevant Standards & Laws
➢ Right of Access to secretarial records and correspondence:
Section 143(1) of the Companies Act, 2013
• The section grants powers to the auditor that every auditor has a right of access, at
all times, to the books of account and vouchers of the company kept at Registered
or Head Office, branches and subsidiaries in the case of a Holding Company for
conducting the audit.
• Further, he is also entitled to require from the officers of the company such
information and explanations which he considers necessary for the proper
performance of his duties as Auditor. Therefore, he has a statutory right to inspect
the secretarial records and correspondence.
• In order to verify actions of the company and to vouch and verify some of the
transactions of the company, it is necessary for the auditor to refer to the decisions
of the shareholders and/or the directors of the company. It is, therefore, essential
for the auditor to refer to the secretarial records and correspondence which also
includes Minute book. In the absence of the same, the auditor may not be able to
vouch/verify certain transactions of the company.
• The refusal to provide access to secretarial records and correspondence shall
constitute limitation of scope as far as the auditor’s duties are concerned.
• The auditor may examine whether by performing alternative procedures, the
auditor can substantiate the assertions or else he shall have to either qualify the
report or give a disclaimer of opinion.

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QNO Sec 143(2) -- Reporting to New Course – (M22M)
CoAud. Members
69.50 Bhaskar CNO - CA.300
Under provisions of Section 143(2), the auditor shall make a report to the members of the company on
the accounts examined by him. Explain along with relevant rule of The Companies (Audit and Auditors)
Rules, 2014
Answer Under provisions of Section 143(2), 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 thereunder or under any
order made under sub-section (11).
Further, auditor has to report whether to 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 following matters as prescribed under
relevant rules (Rule 11):-
(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.
(iv) (1) Whether the management has represented that, to the best of its knowledge and belief, other than
as disclosed in the notes to the accounts, no funds have been advanced or loaned or invested (either
from borrowed funds or share premium or any other sources or kind of funds) by the company to or
in any other person(s) or entity(ies), including foreign entities (“Intermediaries”), with the
understanding, whether recorded in writing or otherwise, that the Intermediary shall, whether,
directly or indirectly lend or invest in other persons or entities identified in any manner whatsoever
by or on behalf of the company (“Ultimate Beneficiaries”) or provide any guarantee, security or the
like on behalf of the Ultimate Beneficiaries;
(2) Whether the management has represented, that, to the best of its knowledge and belief, other
than as disclosed in the notes to the accounts, no funds have been received by the company from any
person(s) or entity(ies), including foreign entities (“Funding Parties”), with the understanding, whether
recorded in writing or otherwise, that the company shall, whether, directly or indirectly, lend or invest
in other persons or entities identified in any manner whatsoever by or on behalf of the Funding Party
(“Ultimate Beneficiaries”) or provide any guarantee, security or the like on behalf of the Ultimate
Beneficiaries; and
(3) Based on such audit procedures that the auditor has considered reasonable and appropriate in the
circumstances, nothing has come to their notice that has caused them to believe that the
representations under sub-clause (i) and (ii) contain any material mis-statement.
(v) Whether the dividend declared or paid during the year by the company is in compliance with section
123 of the Companies Act, 2013

Sec 143(3) -- Applicability of IFCR on Interim New Course -- (M21M)

QNO
Financial Statements
CoAud.73.50
Bhaskar CNO - CA.300
The auditor's reporting on internal financial control will be applicable with respect to interim financial
statements. Discuss
Answer Clause (i) of Sub-section 3 of Section 143 of the Act requires the auditors’ report to state whether
the company has adequate internal financial controls system in place and the operating
effectiveness of such controls.
It may be noted that auditor’s reporting on internal financial controls is a requirement specified
in
the Act and, therefore, will apply only in case of reporting on financial statements prepared under
the Act and reported under Section 143.
Accordingly, reporting on internal financial controls will not be applicable with respect to interim
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 financial statements, such as quarterly or half-yearly financial statements, unless such reporting
is
required under any other law or regulation.
In view of above, the given statement is incorrect.

QNO Sec-143(8) & 139 (1)- Appointment of Branch Auditor Old Course-- (P16M/M20R/M21M)
CoAud.74 Bhaskar CNO – CA.140/CA.360 New Course— (S20M/S21M/M20R)
During the year 2015-16, it was decided for the first time that the accounts of the branch office of AAS
Company Limited be audited by qualified Chartered Accountants other than the company auditor.
Accordingly, the Board had appointed branch auditors for the ensuing year. One of the shareholders
complained to the Central Government that the appointments was not valid as the Board of Directors
do not have power to appoint auditors, be they Company Auditor or Branch Auditors?
OR
"ABC Ltd is a company incorporated in India. It has branches within and outside India. Explain who can
be appointed as an auditor of these branches within and outside India. Also explain to whom branch
auditor is required to report."
Answer Part I -- Relevant Standards & Laws
▪ Section 143(8) of the Companies Act, 2013
▪ Section 139 (1) of the Companies Act, 2013
▪ Rule 12 of the Companies (Audit and Auditors) Rules, 2014,
Part II -- Requirements of Relevant Standards & Laws
➢ The Companies Act, 2013 leaves it to the company to designate or not to designate any
establishment of the company as 'branch office'. Under the Companies Act, 2013, only
establishment "described as such by the company" shall be treated as a 'branch office'.

➢ Further, as per Section 143(8) of the Companies Act, 2013,

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.
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 an accountant or by any other person duly qualified to act as an auditor of the
accounts of the branch office in accordance with the laws of that country and 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 is provided 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 Companies (Audit and Auditors) Rules, 2014,

Further as per rule 12 of the Companies (Audit and Auditors) Rules, 2014, the branch
auditor shall submit his report to the company’s auditor and reporting of fraud by the
auditor shall also extend to such branch auditor to the extent it relates to the concerned
branch.

➢ Section 139(1) of the Companies Act, 2013 provides that

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

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 Part III – Case Discussion
➢ In the present case, the board has appointed branch auditors. The board had appointed the
auditor where it did not have authority to do so.
Part IV – Conclusion
As such, the appointment is invalid. The shareholder’s complaint is right. The branch auditor should
ascertain before accepting the audit whether his appointment is valid

QNO Sec-145 signing of report. Old Course-- (N19R)

CoAud.78 Bhaskar CNO – CA.060/CA.440 New Course-- (N19R/S20M/S21M)
According to Companies Act, 2013, the person appointed as an auditor of the company shall sign the
auditor's report in accordance with the relevant provisions of the Act. Explain clearly the relevant
provisions relating to signing of report.
Answer Part I -- Relevant Standards & Laws
▪ Section 145 of the Companies Act, 2013
Part II -- Requirements of Relevant Standards & Laws

➢ Section 145 of the Companies Act, 2013

As per section 145 of the Companies Act, 2013, 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 section 141(2).

➢ 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 authorized to act
and sign on behalf of the firm.
The qualifications, observations or comments on financial transactions or matters, which
have any adverse effect on the functioning of the company mentioned in the auditor's
report shall be read before the company in general meeting.

QNO Sec 147 – Punishments New Course-- (M22M)

CoAud. #Unique
79.50
Section 147 of the Companies Act, 2013 prescribes punishments for contraventions by the Company,
its officers and auditors. Explain the provisions of Section 147 of the Companies Act, 2013.
Answer Section 147 of the Companies Act, 2013 prescribes following punishments for contravention:
(1) If any of the provisions of sections 139 to 146 (both inclusive) is contravened, 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 fine which shall not be less than ten thousand rupees, but which may extend to one lakh
rupees.
(2) If an auditor of a company contravenes any of the provisions of section 139, section 144 or section
145, the auditor shall be punishable with fine which shall not be less than twenty -five thousand
rupees, but which may extend to five lakh rupees or four times the remuneration of the auditor,
whichever is less.

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 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, whichever is less.
(3) Where an auditor has been convicted under sub-section (2), he shall be liable 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.
(4) The Central Government shall, by notification, specify any statutory body or 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 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.
(5) Where, in case of audit of a company being conducted by an audit firm, it is proved that the partner
or partners of the audit firm has or have acted in a fraudulent manner or abetted or colluded in a
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. However,
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

QNO Right to report to the members of the company Old Course-- (N19R)
CoAud.83 Bhaskar CNO - CA.300 New Course-- (N19R/S20M/S21M)
The auditor shall make a report to the members of the company on the accounts examined by him.
Explain with reference to relevant provisions of the Companies Act, 2013.
Answer Part I -- Relevant Standards & Laws
▪ Section 143(2)-Right to report to the members of the company on the accounts examined by
him
Part II -- Requirements of Relevant Standards & Laws
➢ The auditor shall make a report to the members of the company on the accounts examined by
him and on every financial statement which are required by or under this Act to be laid before
the company in general meeting
➢ 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.

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 Part 2 – COST AUDIT

QNO Content of certificate Old Course -- (N18E/M21M)

CoAud.81 Bhaskar CNO - COST.040 New Course -- (N18E/M21M)
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.
OR
You have been approached by M/s HK Ltd. to be appointed as Cost Auditor for the F.Y. 2019-20.
Company has requested you to provide a certificate conforming your eligibility as per the provisions of
Companies Act, 2013. List down the matters to be included in the certificate.
Answer Part I -- Relevant Standards & Laws
▪ Section 148 of the Companies Act, 2013
Part II -- Requirements of Relevant Standards & Laws
➢ Rule 6 of the Companies (Cost Records and audit) rules, 2014
It requires the companies prescribed under the said rules to appoint an auditor within
180 days 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
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;
➢ 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;
➢ the proposed appointment is within the limits laid down by or under the authority of the
Companies Act, 2013; and
➢ 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.

QNO Applicability of cost audit Old Course -- (P16M/N18E)

CoAud.81.50 Bhaskar CNO - COST.020 New Course -- (S20M/S21M)
Discuss the purpose of cost audit. What are the legal provisions regarding applicability of cost audit?
➢ The purpose of cost audit is to verify the cost of manufacture or production of any article, on the
basis of accounts as regards utilisation of material or labour or other items of costs, maintained
by the company.
➢ Rule 4 of the Companies (Cost Records and Audit) Rules, 2014 states the provisions related to
cost audit are applicable depending on the turnover of the company as follows-
Classes of companies specified under item (A) “Regulated Sectors” are required to get its
cost records audited if the overall annual turnover of the company from all its products and
services during the immediately preceding financial year is Rs 50 crore or more and the
aggregate turnover of the individual product(s) or service(s) for which cost records are
required to be maintained under rule 3 is Rs 25 crore or more.
Classes of companies specified under item (B) “Non-Regulated Sectors” are required to get
its cost records audited if the overall annual turnover of the company from all its products
and services during the immediately preceding financial year is Rs 100 crore or more and the
aggregate turnover of the individual product(s) or service(s) for which cost records are
required to be maintained under rule 3 is Rs 35 crore or more.
➢ However, the requirement for cost audit does not apply to the following companies:-
whose revenue from exports, in foreign exchange, exceeds seventy-five per cent of its total
revenue; or
Which is operating from a special economic Zone.
which is engaged in generation of electricity for captive consumption through Captive
Generating Plant

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 Part 3 – COMPANY ACCOUNTS

Section 128 (Book of Accounts), Section 129 (Financial Statements), Section 134 (Authentication of Financial
Statements and BOD Report) are relevant for doing audit in practical life. But they are not covered in CA INTER
ICAI module and no question is asked in New Course RTP’s, MTP’s and Exams on them. In Old Course they use to
asked questions on these sections in audit.

Considering above points we have not covered any questions on them, students can study these sections if time
permits from CA INTER LAW Books. From exam point of view they are not important.

Applicability of Internal Audit on the basis of New Course --(S20M/S21M)

QNO
Turnover
Co.Acc.41
Bhaskar CNO - COACC.040
Sweet Fruits Private Limited had a turnover of Rs 155 crore for the financial year 2019-20. Explain
whether during the financial year 2020-21, Sweet Fruits Private Limited would be required or not
required to appoint an internal auditor, keeping in view the provisions of Companies Act, 2013.
Answer ➢ During the financial year 2020-21, Sweet Fruits Private Limited would not be required to appoint
an internal auditor because according to Section 138 of the Companies Act, 2013 every private
company having a turnover of more than or equal to Rs 200 crore during the preceding financial
year is required to appoint an internal auditor.
➢ It is given in the question that Sweet Fruits Private Limited during the financial year 2018-19 had
a turnover of Rs 155 crore which is less than Rs 200 crore. Therefore, during the financial year
2020-21, Sweet Fruits Private Limited will not be required to appoint an internal auditor.

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 Part 4 – CARO, 2020
QNO Applicability (Theory) Old Course--
CARO.01 Bhaskar CNO - CARO.040 (M16M/P16M/N16E/N16R/ M18M/N19M)
New Course—(N19M)
Companies exempted from reporting under Companies (Auditor’s Report) Order, 2020.
OR
Discuss which class of companies are specifically exempt from the applicability of CARO 2020.
OR
CARO, 2020 applies to all companies. Discuss.
OR
What are the various types of companies covered under Companies (Auditor’s Report) Order, 2020 [CARO,
2020]?
Answer Companies Exempted from Reporting under CARO, 2020
➢ The CARO, 2020 is an additional reporting requirement Order. The order applies to every company
including a foreign company as defined in clause (42) of section 2 of the Companies Act, 2013.
➢ However, the Order specifically exempts the following class of companies- (IB-COPS)
• a Banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949;
• an Insurance company as defined under the Insurance Act,1938;
• a Company licensed to operate under section 8 of the Companies Act;
• a One Person Company as defined under clause (62) of sect ion 2 of the Companies Act;
• a Small company as defined under clause (85) of section 2 of the Companies Act; and
• a Private limited company, not being a subsidiary or holding company of a public company,
having a paid up capital and reserves and surplus not more than 1 crore as on the balance sheet
date and which does not have total borrowings exceeding 1 crore from any bank or financial
institution at any point of time during the financial year and which does not have a total revenue
as disclosed in Scheduled III to the Companies Act, 2013 (including revenue from discontinuing
operations) exceeding Rs 10 crore during the financial year as per the financial statements.
➢ It may be noted that the Order shall not be applicable to the auditor’s report on consolidated
financial statements.

QNO CARO (Cl 1 - Requirements) Old Course--(M19R/M19M/N21R)

CARO.05 Bhaskar CNO - CARO.070 New Course--(N18M/M19E/N21R/M22R)
Discuss the reporting requirements regarding Fixed Assets under CARO, 2020.
OR
Explain the Reporting requirements the auditor should ensure under CARO 2020 related to fixed assets.
Answer Reporting requirements regarding Fixed Assets under CARO, 2020 are:
➢ Whether the company is maintaining proper records showing full particulars
• including quantitative details and situation of Property, Plant and Equipment;
• intangible assets;
➢ whether these Property, Plant and Equipment 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.
➢ whether the title deeds of all the immovable properties (other than properties where the company
is the lessee and the lease agreements are duly executed in favour of the lessee) disclosed in the
financial statements are held in the name of the company, if not, provide the following details:
• Description of property
• Gross carrying value
• Asset held in name of
• Whether held in name of promoter, director or their relative or employee
• Period during which it was not held in name of the Company

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 • Reason for not being held in name of company
• Where ownership of the Asset is in dispute, details of such dispute;
➢ whether the company has revalued its Property, Plant and Equipment (including Right of Use assets)
or intangible assets or both during the year and, if so, whether the revaluation is based on the
valuation by a Registered Valuer; specify the amount of change, if change is 10% or more in the
aggregate of the net carrying value of each class of Property, Plant and Equipment or intangible
assets;
➢ whether any proceedings have been initiated or are pending against the company for holding any
benami property under the Benami Transactions (Prohibition) Act, 1988 (45 of 1988) and rules
made thereunder, if so, whether the company has appropriately disclosed the details in its financial
statements;

QNO Cl 1 & Cl 2 (Theory) Old Course--(M17R/N19R)

CARO.09 Bhaskar CNO – CARO.070/CARO.080 New Course-- (M22M/N22M)
Discuss the matters to be included in the auditor's report regarding Plant, Property & Equipment and
inventories as per CARO, 2020.
OR
Discuss the reporting requirements as per CARO, 2020, regarding Inventory
Answer ➢ Matters to be included in the auditor's report- fixed assets and inventories (CARO, 2020) – The
auditor's report on the accounts of a company to which this Order applies shall include a statement
on the following matters, namely: -
• Plant, Property & Equipment
• Refer from QNO CARO.05 above.
• Inventories
• whether physical verification of inventory has been conducted at reasonable intervals
by the management and whether, in the opinion of the auditor, the coverage and
procedure of such verification by the management is appropriate; whether any
discrepancies of 10% or more in the aggregate for each class of inventory were noticed
and if so, whether they have been properly dealt with in the books of account;
• whether during any point of time of the year, the company has been sanctioned
working capital limits in excess of five crore rupees, in aggregate, from banks or
financial institutions on the basis of security of current assets; whether the quarterly
returns or statements filed by the company with such banks or financial institutions are
in agreement with the books of account of the Company, if not, give details;

QNO Cl 1 & 7 – Requirements Old Course--(N18M/M20M)

CARO.11 Bhaskar CNO - CARO.070/CARO.130 New Course--(N18M/M20M)
State the matters to be included in the auditor's report as per CARO, 2020 regarding-
(i) Plant, Property & Equipment
(ii) Statutory dues
Answer ➢ Matters to be included in the Auditor's Report under CARO, 2020:
The auditor's report on the accounts of a company to which CARO applies shall include a statement
on the following matters, namely-
• Plant, Property & Equipment
Refer from QNO CARO.05 above.
• Reporting requirements regarding Statutory Dues under CARO, 2020 are:
• Whether the company is regular in depositing undisputed statutory dues including
Goods and Services Tax, 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 months from the date they became payable, shall be indicated;

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 • Where statutory dues referred to in subclause (a) 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).

Cl 3 & 5- Loan to Related Party and Accepting Deposits Old Course-- (M21M)
QNO
Bhaskar CNO - CARO.090/CARO.110 New Course--
CARO.15
(N19E/M21M/N22M)
M Ltd. has given certain loans to related parties and also has accepted certain deposits. As an auditor, how
you include the above items in paragraph 3 of CARO, 2020 ?
OR
Discuss the reporting requirements as per CARO, 2020, regarding
Deposits accepted by company or amounts which are deemed to be deposits
➢ Clause III
• whether during the year the company has made investments in, provided any guarantee or
security or granted any loans or advances in the nature of loans, secured or unsecured, to
companies, firms, Limited Liability Partnerships or any other parties, if so,-
• whether during the year the company has provide loans or provided advances in the
nature of loans, or stood guarantee, or provided security to any other entity [not
applicable to companies whose principal business is to give loans], if so, indicate
o the aggregate amount during the year, and balance outstanding at the balance
sheet date with respect to such loans or advances and guarantees or security
to subsidiaries, joint ventures and associates
o the aggregate amount during the year, and balance outstanding at the balance
sheet date with respect to such loans or advances and guarantees or security
to parties other than subsidiaries, joint ventures and associates;
• whether the investments made, guarantees provided, security given and the terms and
conditions of the grant of all loans and advances in the nature of loans and guarantees
provided are not prejudicial to the company’s interest;
• in respect of loans and advances in the nature of loans, whether the schedule of
repayment of principal and payment of interest has been stipulated and whether the
repayments or receipts are regular;
• if the amount is overdue, state the total amount overdue for more than ninety days,
and whether reasonable steps have been taken by the company for recovery of the
principal and interest;
• whether any loan or advance in the nature of loan granted which has fallen due during
the year, has been renewed or extended or fresh loans granted to settle the overdues
of existing loans given to the same parties, if so, specify the aggregate amount of such
dues renewed or extended or settled by fresh loans and the percentage of the
aggregate to the total loans or advances in the nature of loans granted during the year
[not applicable to companies whose principal business is to give loans];
• whether the company has granted any loans or advances in the nature of loans either
repayable on demand or without specifying any terms or period of repayment, if so,
specify the aggregate amount, percentage thereof to the total loans granted, aggregate
amount of loans granted to Promoters, related parties as defined in clause (76) of
section 2 of the Companies Act, 2013

➢ Clause V
In respect of deposits accepted by the company or amounts which are deemed to be 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 and the rules made thereunder, where
applicable, have been complied with, if not, the nature of such contraventions be stated; 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;

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QNO CARO (Cl 9 & 11 - Requirements) Old Course--N19E/M21M)
CARO.21 Bhaskar CNO - CARO.150/CARO.160/CARO.170 New Course--(M18M/M19M/M21M/M22M)
State the matters to be included in the auditor's report as per CARO, 2020 regarding-
(i) Default in repayment of loans or borrowing to a financial institution, bank etc.
(ii) Fraud by the company or on the Company by its officers or employees.
Answer ➢ Default in repayment of loans or borrowing to a financial institution, bank etc .
Clause 9:
• whether the company has defaulted in repayment of loans or other borrowings or in the
payment of interest thereon to any lender, if yes, the period and the amount of default to
be reported as below:
• Nature of borrowing, including debt securities
• Name of lender (Lender wise details to be provided in case of defaults to banks,
financial institutions and Government)
• Amount not paid on due date
• Whether principal or interest
• No. of days delay or unpaid
• Remarks, if any
• whether the company is a declared willful defaulter by any bank or financial institution or
other lender;
• whether term loans were applied for the purpose for which the loans were obtained; if not,
the amount of loan so diverted and the purpose for which it is used may be reported
• whether funds raised on short term basis have been utilized for long term purposes, if yes,
the nature and amount to be indicated;
• whether the company has taken any funds from any entity or person on account of or to
meet the obligations of its subsidiaries, associates or joint ventures, if so, details thereof
with nature of such transactions and the amount in each case;
• whether the company has raised loans during the year on the pledge of securities held in
its subsidiaries, joint ventures or associate companies, if so, give details thereof and also
report if the company has defaulted in repayment of such loans raised;
➢ Fraud by the company or on the Company by its officers or employees.
Clause 11:
• whether any fraud by the company or any fraud on the company has been noticed or
reported during the year, if yes, the nature and the amount involved is to be indicated;
• whether any report under sub-section (12) of section 143 of the Companies Act has been
filed by the auditors in Form ADT-4 as prescribed under rule 13 of Companies (Audit and
Auditors) Rules, 2014 with the Central Government ;
• whether the auditor has considered whistle-blower complaints, if any, received during the
year by the company;

QNO Cl 10 - Case of Debenture holder Money Old Course--(N20R)

CARO.23 Bhaskar CNO - CARO.160 New Course--(N18E/N21M)
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, 2020.
Answer ➢ The auditor is required to report as per clause x(b) of paragraph 3 of CARO 2020 whether the
company has made any preferential allotment or private placement of shares or convertible
debentures (fully, partially or optionally convertible) during the year and if so, whether the
requirements of section 42 and section 62 of the Companies Act, 2013 have been complied with and
the funds raised have been used for the purposes for which the funds were raised, if not, provide
details in respect of 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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QNO CARO (Cl 10 - Requirements) Old Course--(M21R)
CARO.26 Bhaskar CNO - CARO.170 New Course--(M21R)
Where the auditor notices that any fraud by the company or on the company by its officers or employees
has been noticed by or reported during the year, the auditor should, apart from reporting the existence
of fraud, also report under clause (x) of paragraph 3 of Companies (Auditor’s Report) Order, 2016, the
nature of fraud and amount involved. Explain the considerations an auditor would keep in mind for
reporting under this clause.
Answer Where the auditor notices that any fraud by the company or on the company by its officers or employees
has been noticed by or reported during the year, the auditor should, apart from reporting the existence of
fraud, also required to report under clause (x) of paragraph 3 of Companies (Auditor’s Report) Order, 2016,
the nature of fraud and amount involved. For reporting under this clause, the auditor may consider the
following:
(i) This clause requires all frauds noticed or reported during the year shall be reported indicating the nature
and amount involved. As specified the fraud by the company or on the company by its officers or employees
are only covered.
(ii) Of the frauds covered under section 143(12) of the Act, only noticed frauds shall be included here and
not the suspected frauds.
(iii) While reporting under this clause with regard to the nature and the amount involved of the frauds
noticed or reported, the auditor may also consider the principles of materiality outlined in Standards on
Auditing.

QNO Cl 11- Auditor’s Responsibility w.r.t fraud- fake invoices New Course -- (M20R)
CARO.29 of credit purchases by head accountant- Brief Old Course – (M20R)
Bhaskar CNO - CARO.170
"The head accountant of a company entered fake invoices of credit purchases in the books of account
aggregate of Rs 50 lakh and cleared all the payments to such bogus creditor. How will you deal as an auditor?"
Answer ➢ Report the fraudulent activity to the Board or Audit Committee {Sec 143(12)}
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.
➢ Disclosure in Board Report
Further, the company is also required to disclose the same in Board’s Report.
➢ Reporting to the central government- Not Required
It may be noted that the auditor need not to report the central government as the amount of fraud
involved is less than Rs 1 crore, however, reporting under Clause (xi), CARO, 2020 is required.
Author’s Note
In this question ICAI has given reference to CARO “clause ix”. Students can mention the whole clause.

CARO.35 Cl 14 – Requirements New Course -- (N22M)

Bhaskar CNO - CARO.200
Discuss the reporting requirements regarding statutory dues and Internal Audit as per CARO, 2020

Answer Matters to be included as per CARO, 2020:

➢ Statutory dues
Clause (vii) (a) whether the company is regular in depositing undisputed statutory dues including
Goods and Services Tax, 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 months from the date they
became payable, shall be indicated;

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 (b) where statutory dues referred to in sub-clause (a) 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);

➢ Internal Audit
Clause (xiv) (a) whether the company has an internal audit system commensurate with the size and
nature of its business.

(b) whether the reports of the Internal Auditors for the period under audit were considered by the
statutory auditor;

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 Part 5 -- [SA 299] RESPONSIBILITY OF JOINT AUDITORS

QNO Joint Audit-Advantages- Disadvantages Old Course-- (P16M/N19R)

299.01 Bhaskar CNO - SA299.020 New Course(N19R/S20M/S21M)
The practice of appointing Chartered Accountants as joint auditors is quite widespread in big companies
and corporations. Explain stating the advantages of the joint audit.
OR
Explain the concept of joint audit. Discuss its advantage and disadvantage
Answer ➢ Joint Audit:
The practices of appointing chartered accountants as joint auditors is quite widespread in big
companies and corporations, joint audit basically implies pooling together the resources and
expertise of more than one firm of auditors to render an expert job in a given time period which
may be difficult to accomplish acting individually. It essentially involves sharing of the total work.
When more than one auditor is appointed to audit large entities, such auditors are called joint
auditors. Joint auditors have a collective responsibility to report on the financial statements.
SA 299, “Joint Audit” deals with duties, rights and professional responsibilities of joint auditors.
The joint auditors should follow the principles of division of work and coordination while conducting
joint audits.
➢ “Advantages” of Joint Audit
Pooling and sharing of expertise.
Lower workload.
Advantage of mutual consultation.
Better quality of work performance.
Improved service to the client.
Lower staff development costs.
Lower costs to carry out the work.
A sense of healthy competition towards a better performance.
Special Point
Displacement of the auditor of the company in a take-over often obviated.
In respect of multinational companies, the work can be spread using the expertise if the
local firms which are in a better position to deal with detailed work and the local laws and
regulations.
➢ Disadvantages” of Joint Audit
Psychological problem where firms of different standing are associated in the joint audit.
General superiority complexes of some auditors.
Lack of clear definition of responsibility.
Problems of coordination of the work.
Areas of work of common concern being neglected.
The fees being shared.
Uncertainty about the liability for the work done.

QNO Developing the joint audit plan Old Course-- (M20R)

299.03 Bhaskar CNO - SA299.040 New Course(N19E/S20M/S21M/M20R)
"Before the commencement of audit, the joint auditors should discuss and develop a joint audit plan."
Discuss the points to be considered in developing the joint audit plan by the joint auditors.
➢ Prior to the commencement of the audit, the joint auditors shall discuss and develop a joint audit plan.
In developing the joint audit plan, the joint auditors shall:
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.
Identify division of audit areas and common audit areas amongst the joint auditors that
define the scope of the work of each joint auditor;

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 Ascertain the nature, timing and extent of resources necessary to perform the engagement.
Consider and communicate among all joint auditors the factors that, in their professional
judgment, are significant in directing the engagement team’s efforts;
Ascertain the reporting objectives of the engagement to plan the timing of the audit and
the nature of the communications required;

Responsibility- Co-ordination between Joint Old Course-- (P16M/N17E)

QNO
Auditors- Master Answer New Course—(S17M/S20M/S21M)
299.05
Bhaskar CNO - SA299.060/ SA299.080
A Joint Auditor is not bound by the views of the majority of the joint auditors regarding matters to be
covered in the report. Justify this statement in the light of responsibilities of Joint Auditors under SA 299.
OR
Short Notes on Joint Audit
OR
In Joint Audit, Each Joint Auditor is responsible only for the work allocated to him.
OR
Write a short note on responsibilities of Joint auditors.
Answe ➢ Main features of the said SA are discussed below
r
Specific Responsibilities
• 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
Joint Responsibilities
All the joint auditors shall be jointly and severally responsible for:
The audit work which is not divided among the joint auditors and is carried out by all joint
auditors;
• 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.
• 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;
• examining that the financial statements of the entity comply with the
requirements of the relevant statutes;
• Presentation and disclosure of the financial statements as required by the applicable
financial reporting framework;

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 • 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.

Coordination
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.

Reporting
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.
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. 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 Revised
SA 706, “Emphasis of Matter Paragraphs and Other Matter Paragraphs
Shortcut- ADDA in the Independent
Auditor’s Report”.
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 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.

Author’s Note
This is a master answer for Joint Auditor covering responsibility, coordination and reporting .Students are
required to write the appropriate part as per the requirements of the question

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 CHAPTER AUDIT REPORT
11

Part 1 -- [SA 700 Revised] FORMING AN OPINION AND REPORTING ON FINANCIAL

STATEMENTS

QNO Objectives & Framing Opinion New Course-- (S17M/N18M/ S20M/S21M)

700.03 Bhaskar CNO - SA700.120
In order to form the audit opinion as required by SA 700, 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. Explain the conclusions that the auditor shall take
into account. Also explain the objective of auditor as per SA 700.
OR
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.
Answer ➢ Objectives
The objectives of the auditor as per SA 700 (Revised), “Forming an Opinion and Reporting on Financial
Statements” are:
To form an opinion on the financial statements based on an evaluation of the conclusions
drawn from the audit evidence obtained; and
To express clearly that opinion through a written report.
➢ Forming Opinion
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.
To form opinion - Auditor to obtain Reasonable assurance
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:
whether sufficient appropriate audit evidence has been obtained;
whether uncorrected misstatements are material, individually or in aggregate;
The evaluations should include Qualitative Aspect

QNO True & Fair view Old Course--( P16M /M16E/N16R/N17R/N20M)

700.05 #Unique New Course—(M18E)
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.
OR
The concept of True and Fair is a fundamental concept in auditing. Discuss.
OR
Discuss the concept of True and Fair.
OR
What constitutes true and fair view is a matter of auditor’s judgement, but some specific points must be
seen by the auditor to ensure true and fair view.
OR
The auditor R of GR and Co., a firm of Chartered Accountants is conducting audit of B Industries Ltd. State
the specific points must be seen by the auditor to ensure true and fair view.

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Answer ➢ Concept of “True and Fair”:
The concept of “true and fair” is a fundamental concept in auditing. The phrase “true and fair” in the
auditor’s report signifies that the auditor is required to express his opinion as to whether the state
of affairs and the results of the entity as ascertained by him in the course of his audit are truly and
fairly represented in the accounts under audit.
➢ To ensure true and fair view, an auditor has to see:
that the assets are neither undervalued or overvalued, according to the applicable accounting
principles,
no material asset is omitted;
the charge, if any, on assets are disclosed;
material liabilities should not be omitted;
the profit and loss account and balance sheet discloses all the matters required to be disclosed;
accounting policies have been followed consistently; and
all unusual, exceptional or non-recurring items have been disclosed separately.

QNO Unqualified Opinion Old Course--(P16M/M18E/M19M/M20M/M21R)

700.07 Bhaskar CNO - SA700.040 New Course—(M19M/M20M/M21R)
The Auditor is fully satisfied with the audit of an entity in respect of its systems and procedures and wants
to issue a report without any hesitation. What type of opinion can be given and give reasoning.
OR
When does an auditor issue unqualified opinion and what does it indicate?
Answer
➢ An unqualified opinion should be expressed when the auditor concludes that the financial
statements give a true and fair view in accordance with the financial reporting framework used for
the preparation and presentation of the financial statements.
➢ An unqualified opinion indicates, implicitly, that any changes in the accounting principles or in the
method of their application, and the effects thereof, have been properly determined and disclosed
in the financial statements.
➢ An unqualified opinion also indicates that:
The financial statements have been prepared using the generally accepted accounting
principles, which have been consistently applied;
the financial statements comply with relevant statutory requirements and regulations; and
there is adequate disclosure of all material matters relevant to the proper presentation of the
financial information, subject to statutory requirements, where applicable.

QNO Opinion section of the auditor’s report Old Course--(M20R)

700.10 Bhaskar CNO - SA700.040 New Course—(S20M/S21M/M20R/N22R)
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 Identify the entity whose financial
statements have been audited. Apart from the above, explain the other relevant points to be included in
opinion section.
Answer ➢ 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:
• Identify the entity whose financial statements have been audited;
• State that the financial statements have been audited;
• Identify the title of each statement comprising the financial statements;
• Refer to the notes, including the summary of significant accounting policies; and
• Specify the date of, or period covered by, each financial statement comprising the
financial statements.

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 QNO Basis for Opinion Para Old Course-- (N19R/N20R)
700.11 Bhaskar CNO - SA700.040 New Course—(N19R/S20M/S21M/N20R/N19R)
The auditor’s report shall include a section, directly following the Opinion section, with the heading “Basis
for Opinion”. Explain what is included in this “Basis for Opinion” section.
Answer

QNO Management Responsibility Paragraph Old Course--(M17E/M19M/M20M/M21M)

700.13 Bhaskar CNO - SA700.040 New Course—(M19M/M20M/M21M/S20M/S21M)
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. Explain
OR
State in brief, the management’s responsibilities relating to the audit of financial statements.
Answer
Heading à Depending on circumstances (law applicable , nature of entity etc) heading can
refer to management or also TCWG as the case may be.
VII. Responsibilities of
Management for the
1. Description of Responsibility for FST (BASIC)
FST If compliance framework à Preparation of FST as per applicable FRF
If fair presentation framework à Preparation & Fair Presentation of FST

(2 MORE TO SUPPORT ABOVE)

2. Also responsibility to create & maintain internal control system to support above.

3. Responsibility to Assess whether going concern assessment is appropriate, disclosure of

issues regarding going concern and statement on appropriateness of going concern

(LAST TO COVER ALL ABOVE)

4. Identify people who are responsible for oversight of financial reporting process. If TCWG
is responsible include their name in heading.

➢ 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.
➢ This section of the auditor’s report shall describe management’s responsibility for :
Preparing the financial statements in accordance with the applicable financial reporting
framework, and for such internal control as management determines is necessary to enable
the preparation of financial statements that are free from material misstatement, whether

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 due to fraud or error;[because of the possible effects of fraud on other aspects of the audit,
materiality does not apply to management’s acknowledgement regarding its responsibility
for the design, implementation, and maintenance of internal control (or for establishing and
maintaining effective internal control over financial reporting) to prevent and detect fraud.]
and
Assessing the entity’s ability to continue as a going concern and whether the use of the
going concern basis of accounting is appropriate as well as disclosing, if applicable, matters
relating to going concern. The explanation of management’s responsibility for this
assessment shall include a description of when the use of the going concern basis of
accounting is appropriate.

QNO SA 700 aims to make audit report consistent & Old Course-- (M21R)
700.14 comparable #Unique New Course—(M21R)
The requirements of SA 700 are aimed at addressing an appropriate balance between the need for
consistency and comparability in auditor reporting globally. Explain
Answer The requirements of SA 700 are aimed at addressing an appropriate balance between the need for
consistency and comparability in auditor reporting globally and the need to increase the value of
auditor reporting by making the information provided in the auditor’s report more relevant to users.
This SA promotes consistency in the auditor’s report but recognizes the need for flexibility to
accommodate particular circumstances of individual jurisdictions. Consistency in the auditor’s report,
when the audit has been conducted in accordance with SAs, promotes credibility in the global
marketplace by making more readily identifiable those audits that have been conducted in
accordance with globally recognized standards. It also helps to promote the user’s understanding and
to identify unusual circumstances when they occur.

QNO Qualitative Aspects of Accounting Practices Old Course—(M20R)

700.17 Bhaskar CNO - SA700.160 New Course--(M18M/N18M/M19M/M20R/ S20M/S21M)
The auditor evaluated, in respect of T Ltd., whether the financial statements are prepared in accordance
with the requirements of the applicable financial reporting framework.
Auditor’s evaluation included consideration of the qualitative aspects of the entity’s accounting practices,
including indicators of possible bias in management’s judgments.
Advise the qualitative aspects of the entity’s accounting practices.
OR
In considering the qualitative aspects of the entity’s accounting practices, the auditor may become aware
of possible bias in management’s judgments. The auditor may conclude that lack of neutrality together with
uncorrected misstatements causes the financial statements to be materially misstated. Explain and analyse
the indicators of lack of neutrality with examples, wherever required.

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Answer 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.
Management makes a number of judgments about the amounts and disclosures in the financial statements.
Qualitative Aspects explained in SA 260 and it includes Management Bias
SA 260 (Revised) contains a discussion of the qualitative aspects of accounting practices in considering the
qualitative aspects of the entity’s accounting practices, the auditor may become aware of possible bias in
management’s judgments. The auditor may conclude that the cumulative effect of a lack of neutrality,
together with the effect of uncorrected misstatements, causes the financial statements as a whole to be
materially misstated.
Indicators of Lack of Neutrality
Indicators of a lack of neutrality that may affect the auditor’s evaluation of whether the financial
statements as a whole are materially misstated include the following:
The selective correction of misstatements brought to management’s attention during the audit.
(E.g., correcting misstatements with the effect of increasing reported earnings, but not)
correcting misstatements that have the effect of decreasing reported earnings).
Possible management bias in the making of accounting estimates.
SA 540 explains Management Bias
SA 540 addresses possible management bias in making accounting estimates. Indicators of possible
management bias do not constitute misstatements for purposes of drawing conclusions on the reasonableness
of individual accounting estimates. They may, however, affect the auditor’s evaluation of whether the financial
statements as a whole are free from material misstatement.

QNO Specific Evaluations Old Course—(M21M)

700.19 Bhaskar CNO - SA700.140 New Course--(N18E/ S20M/S21M/M21M/N21M/M22R)
An auditor is required to make specific evaluations while forming an opinion in an audit report.” State them.
Answer ➢ Specific Evaluations by the auditor:
In particular, the auditor shall evaluate whether:
The financial statements adequately disclose the Significant accounting policies selected and
applied;
The accounting Policies selected and applied are consistent with the applicable financial reporting
framework and are appropriate;
The accounting Estimates made by management are reasonable;
The information presented in the financial statements is Relevant, reliable, comparable, and
understandable;
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
The Terminology used in the financial statements, including the title of each financial statement, is
appropriate.
AUTHORS NOTE:
Shortcut to remember above points:
Specific STEP evaluation by DR is good.

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 Part 2 -- [SA 701] COMMUNICATING KEY AUDIT MATTERS IN THE INDEPENDENT
AUDITOR’S REPORT

QNO Is KAM substitute of Disclosure in FST Old Course--(M18R)

701.03 Bhaskar CNO - SA701.090 New Course—(N19R/S20M/S21M)
Communicating Key Audit Matter is not a substitute for disclosure in the Financial Statements rather
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. Analyse.
Answer ➢ 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;
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);
A substitute for reporting in accordance with SA 570 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; or
A separate opinion on individual matters.

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 Part 3 -- [SA 705] MODIFICATIONS TO THE OPINION IN THE INDEPENDENT AUDITOR’S
REPORT

QNO Objectives of Standards New Course – (S17M/ S20M/S21M)

SA705.01 Bhaskar CNO - SA705.020
Discuss the objective of the auditor as per Standard on Auditing (SA) 705 Modifications to The Opinion in
The Independent Auditor’s Report.
Answer ➢ 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:
The auditor concludes, based on the audit evidence obtained, that 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.

QNO Types of Modification New Course – (S17M/ S20M/S21M)

SA705.03 Bhaskar CNO - SA705.020
Discuss the factors affecting the decision of the auditor regarding which type of modified opinion is
appropriate.
Answer ➢ The decision regarding which type of modified opinion is appropriate depends upon:
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
The auditor’s judgment about the pervasiveness of the effects or possible effects of the
matter on the financial statements.
➢ The table below illustrates how the auditor’s judgment about the nature of the matter giving rise
to the modification, and the pervasiveness of its effects or possible effects on the financial
statements, affects the type of opinion to be expressed

QNO Disclaimer of opinion Old Course -- (P16M/N16R/N17R/M17M/N18E)

SA705.11 Bhaskar CNO - SA705.020 New Course – Relevant, Concept Covered in New Course SM
Disclaimer of opinion
Answer ➢ 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

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 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.

QNO Adverse vs qualified opinion #Unique New Course – (S20M/S21M)

SA705.18
Distinguish between an adverse opinion and a qualified opinion. Also draft an opinion paragraph for both
types of opinion.
Answer An auditor shall express an adverse opinion, when the auditor having obtained sufficient and appropriate
audit evidence, concludes that misstatements, individually or in aggregate are both material and pervasive.
Whereas, when the auditor, having obtained sufficient and appropriate audit evidence, concludes that
misstatements are material but not pervasive, shall express a qualified opinion.
SA705 – “Modifications To The Opinion In The Independent Auditor’s Report” deals with the form and
content of both types of report. The following are the draft of the opinion paragraphs of the reports.
(a) Adverse Report
Adverse Opinion
We have audited the accompanying consolidated financial statements of ABC Company Limited (hereinafter
referred to as the “Holding Company”) and its subsidiaries (the Holding Company and its subsidiaries
together referred to as “the Group”), its associates and jointly controlled entities, which comprise the
consolidated balance sheet as at March 31, 2021, the consolidated statement of profit and Loss,
(consolidated statement of changes in equity) and the consolidated statement of cash flows for the year then
ended, and notes to the consolidated financial statements, including a summary of significant accounting
policies (hereinafter referred to as the “consolidated financial statements”). In our opinion and to the best
of our information and according to the explanations given to us, because of the significance of the matter
discussed in the Basis for Adverse Opinion section of our report, the accompanying consolidated financial
statements do not give a true and fair view in conformity with the accounting principles generally accepted
in India, of their consolidated state of affairs of the Group, its associates and jointly controlled entities, as at
March 31, 2021, of its consolidated profit/loss, (consolidated position of changes in equity) and the
consolidated cash flows for the year then ended.
(b). Qualified Report
Qualified Opinion
We have audited the standalone financial statements of ABC Company Limited (“the Company”), which
comprise the balance sheet as at March 31, 2021, and the statement of Profit and Loss, (statement of
changes
in equity) and the statement of cash flows for the year then ended, and notes to the financial statements,
including a summary of significant accounting policies and other explanatory information (in which are
included the Returns for the year ended on that date audited by the branch auditors of the Company’s
branches located at (location of branches). In our opinion and to the best of our information and according
to the explanations given to us, except for the effects of the matter described in the Basis for Qualified
Opinion section of our report, the aforesaid financial statements give a true and fair view in conformity with
the accounting principles generally accepted in India, of the state of affairs of the Company as at March 31st,
2021 and profit/loss, (changes in equity) and its cash flows for the year ended on that date.

QNO Disclaimer-- Case Study Old Course-- (N21R)

SA705.25 Bhaskar CNO - SA705.060 New Course—(N21R)
Delightful Ltd. is a company engaged in the production of smiley balls. During the FY 2020-21 the company
transferred its accounts to computerised system (SAP) from manual system of accounts. Since the
employees of the company were not well versed with the SAP system, there were many errors in the
accounting during the transition period. As such the statutory auditors of the company were not able to
extract correct data and reports from the system. Such data was not available manually also. Further, the
employees and the management of the company were not supportive in providing the requisite
information to the audit team. The auditor believes that the possible effects on the financial statements
of undetected misstatements could be both material and pervasive. Explain the kind of audit report that
the statutory auditor of the company should issue in this case.

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Answer 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.

In the present case Delightful Ltd, the statutory auditor of the company is unable to extract correct
data and reports from the SAP system for conduct of audit. Also, such data and reports are not
available manually. Moreover, the auditor believes that the possible effects on the financial
statements of undetected misstatements could be both material and
pervasive.
As such, the statutory auditor of Delightful Ltd. should give a disclaimer of opinion.

QNO Limitation on Scope New Course – (M22M)

SA 705.40 Bhaskar CNO – SA705.120
While conducting audit of VED Ltd., you as an auditor are not only prevented in completing certain audit
procedures but also are not able to obtain audit evidence even by performing alternative procedures. How
you will deal with this situation?
Answer As per SA 705, “Modifications to the Opinion in the Independent Auditor’s Report”, if, after accepting
the engagement, the auditor becomes aware that management has imposed a limitation on the scope
of the audit that the auditor considers likely to result in the need to express a qualified opinion or to
disclaim an opinion on the financial statements, the auditor shall request that management remove
the limitation.
If management refuses to remove the limitation, the auditor shall communicate the matter to those
charged with governance, unless all of those charged with governance are involved in managing the
entity and determine whether it is possible to perform alternative procedures to obtain sufficient
appropriate audit evidence.
If the auditor is unable to obtain sufficient appropriate audit evidence, the auditor shall determine
the implications as follows:
(1) If the auditor concludes that the possible effects on the financial statements of undetected
misstatements, if any, could be material but not pervasive, the auditor shall qualify the opinion;or
(2) If the auditor concludes that the possible effects on the financial statements of undetected
misstatements, if any, could be both material and pervasive so that a qualification of the opinion
would be inadequate to communicate the gravity of the situation, the auditor shall:
(i) Withdraw from the audit, where practicable and possible under applicable law or regulation; or
(ii) If withdrawal from the audit before issuing the auditor’s report is not practicable or possible,
disclaim an opinion on the financial statements.
If the auditor withdraws, before withdrawing, the auditor shall communicate to those charged with
governance any matters regarding misstatements identified during the audit that would have given
rise to a modification of the opinion.

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 Part 4 -- [SA 706] EMPHASIS OF MATTER PARAGRAPHS & OTHER MATTER PARAGRAPHS
IN THE INDEPENDENT AUDITOR’S REPORT (REVISED)

QNO EMP – Master Answer Old Course—(N17E/N19M/N20M/N20R/N20E)

706.01 Bhaskar CNO - SA706.020 New Course--(M18E/M19R/S20M/N20M/N20R/S21M/N21M/ N22M)
Define Emphasis of Matter paragraph. When the auditor shall include an Emphasis of Matter paragraph in
the auditor’s report? Also explain how the auditor would include an Emphasis of Matter in the auditor’s
report.
OR
Define Emphasis of Matter Paragraph and how it should be disclosed in the Independent Auditor's Report?
OR
What is an Emphasis of Matter paragraph, when it is used, and manner of its use in an audit report?
Answer ➢ Definition
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.
➢ Conditions
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:
The auditor would not be required to modify the opinion in accordance with SA 705
(Revised) as a result of the matter; and
When SA 701 applies, the matter has not been determined to be a key audit matter to be
communicated in the auditor’s report.
➢ Content
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; and (No need to give reference of BOD report, Annual Report etc.)
Indicate that the auditor’s opinion is not modified in respect of the matter emphasized.

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 Part 5 -- [SA 710] COMPARATIVE INFORMATION CORRESPONDING FIGURES &
+

COMPARATIVE FINANCIAL STATEMENTS

QNO Definition of Comparative, 2 Approaches & Differences New Course -- (M19R)

710.03 Bhaskar CNO - SA710.020
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. Explain clearly stating the essential audit
reporting differences between the approaches. Also define comparative information and audit procedures
regarding comparative information.
Answer ➢ 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.
➢ The essential audit reporting differences between the approaches are:
For corresponding figures, the auditor’s opinion on the financial statements refers to the
current period only; whereas
For comparative financial statements, the auditor’s opinion refers to each period for which
financial statements are presented.
➢ Definition of 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.
➢ Audit Procedures regarding comparative information
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:
The comparative information agrees with the amounts and other disclosures presented in
the prior period; and
The accounting policies reflected in the comparative information are consistent with those
applied in the current period or, if there have been changes in accounting policies, whether
those changes have been properly accounted for and adequately presented and disclosed.

New Course -- (N22M)

QNO
Content of OMP when Audit is done by predecessor Auditor
710.06
Bhaskar CNO - SA710.050
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, what is required to be stated
by the auditor in an Other Matter paragraph.
Answer 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:

(i) That the financial statements of the prior period were audited by a predecessor auditor;
(ii) The type of opinion expressed by the predecessor auditor and, if the opinion was modified, the reasons
therefor; and
(iii) The date of that report, unless the predecessor auditor’s report on the prior period’s financial statements
is revised with the financial statements.

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1f
CHAPTER AUDIT OF BANK
12

QNO RBI Regulator New Course-- (S17M/S20M/S21M)

BA.01 Bhaskar CNO - BA.040
The functioning of banking industry in India is regulated by the Reserve Bank of India which acts as the
Central Bank of our country. Explain
Answer ➢ 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 (Shortcut RCB)
• Regulator
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 license from RBI. The RBI also has the power to inspect
any bank.
• Currency Related
• issuance of currency;
• regulation of currency issue;
• Banker
• acting as banker to the central and state governments; and
• acting as banker to commercial and other types of banks including term-lending
institutions.

QNO Types of Banks New Course-- (M21M)

BA.02 Bhaskar CNO - BA.060
There are different types of banks prevailing in India. Explain giving examples of such banks.
Answer There are different types of banking institutions prevailing in India which are as follows:
Commercial Banks Regional Rural Banks
Co-operative Banks. Payment Banks
Development Banks (more commonly
Small Finance Banks
known as ‘Term-Lending Institutions’).
1.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:-
(a) accepting deposits and
(b) granting advances.

2. Regional Rural Banks known as RRBs are the banks that have been set up in rural areas in different
states of the country to cater to the basic banking and financial needs of the rural communities.
Examples are :- Punjab Garmin Bank, Tripura Garmin Bank, Allahabad UP Garmin Bank , Andhra Pradesh
Grameen Vikas Bank, etc.

3. Co-operative Banks function like Commercial Banks only but are set up on the basis of Cooperative
Principles and registered under the Cooperative Societies Act of the respective state or the Multistate

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 Cooperative Societies Act and usually cater to the needs of the agricultural and rural sectors. Examples
are:- The Gujarat State Co-operative Bank Ltd., Chhattisgarh Rajya Sahakari Bank Mayardit, etc.

4. Payments Banks are a new type of banks which have been recently introduced by RBI. They are
allowed to accept restricted deposits but they cannot issue loans and credit cards.
However, customers can open Current & Savings accounts and also avail the facility of ATM cum Debit
cards, Internet-banking & Mobile banking. Examples are:- Airtel Payments Bank India Post Payments
Bank, Paytm Payments Bank, etc.

5. Development Banks had been conceptualized to provide funds for infrastructural facilities important
for the economic growth of the country. Examples are:- Industrial Finance Corporation of India (IFCI),
Industrial Development Bank of India (IDBI), Small Industries Development Bank of India (SIDBI), etc.

6. Small Finance Banks have been set up by RBI to make available basic financial and banking facilities
to the unserved and unorganised sectors like small marginal farmers, small & micro business units, etc.
Examples are:- Equites Small Finance Bank, AU Small Finance Bank ,etc.

QNO Funded Loans & Its types New Course-- (M21M/N21M)

BA.02.50 #Unique
In case of a Bank, explain the meaning of Funded loans. Also give examples.
Answer Funded loans are those loans where there is an actual transfer of funds from the bank to the borrower.
Advances comprise of funded amounts by way of:
· Term loans
· Cash credits, Overdrafts, Demand Loans
· Bills Discounted and Purchased
· Participation on Risk Sharing basis
· Interest-bearing Staff Loans

QNO Effective risk management system New Course-- (M19E/S20M/S21M/N22M)

BA .04 #Unique
Mr. Piyush, the Bank Manager develops controls to aid in managing key business and financial risks. Discuss
the various requirements for an effective risk management system in a bank
Answer An effective risk management system in a bank generally requires the following:
➢ 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.
➢ 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.

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 ➢ 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.
➢ 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.
➢ 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.

QNO NPA (Reversal of Income) New Course-- (S17M/S20M/S21M/M20R)

BA.05 Bhaskar CNO - BA.360
Write a short note on reversal of income under bank audit.
OR
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. 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. Analyse and
Explain.
Answer ➢ Reversal of Interest Income for First Time NPAs / Effect on Other Incomes / Ways of
Accounting to give Effect of Reversal
• 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 realized. This will apply to Government
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 guaranteed accounts also.
• 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 realized. 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.
➢ Memorandum Account:
On an account turning NPA, banks should reverse the interest already charged and not collected by
debiting Profit and Loss account and stop further application of interest. However, banks may continue
to record such accrued I n t e r e s t in a Memorandum account in their books for control purposes.
For the purpose of computing Gross Advances, interest recorded in the Memorandum account should
not be taken into account.
• 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 recognized income in the past should reverse
the interest if it was recognized 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.
➢ 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.

QNO NPA (Agriculture) New Course-- (N18E/N22M/N22M)

BA.07 NPA (Erosion)
Bhaskar CNO - BA.240/ BA.260
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 Ramjial & 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.
OR
When is an agricultural advance considered as non performing as per the RBI guidelines?
Answer ➢ Agricultural Advances:
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.
As per the guidelines, “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. Depending upon the duration of
crops raised by an agriculturist, the above NPA norms would also be made applicable to agricultural
term loans availed of by him.
➢ Erosion in Value of Securities/ Frauds Committed by Borrowers:
In respect of accounts where there are potential threats for recovery on account of erosion in the
value of security or non-availability of security and existence of other factors such as frauds
committed by borrowers, such accounts need not go through the stages of asset classification. In
such cases, the asset should be straightaway classified as doubtful or loss asset, as appropriate.
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 Further,
• Erosion in the value of securities by more than 50% of the value assessed by the bank or
accepted by RBI inspection team at the time of last inspection, as the case may be, would
be considered as “significant”, requiring the asset to be classified as doubtful straightaway
and provided for adequately.
• The realizable value of security as assessed by bank/approved valuers /RBI is less than 10%
of the outstanding in the borrower accounts, the existence of the security should be
ignored, and the asset should be classified as loss asset. In such cases the asset should either
be written off or fully provided for.

QNO Difference in provisioning of NPA- Secured/Unsecured New Course--

BA.09 #Unique (N19E/N21M/M22R)
"There is no difference in provisioning of NPA as regards to categories of NPA, whether the debt is secured
or unsecured." Critically evaluate the statement on the basis of provisioning norms of NPA of nationalised
bank.

Categories of NPA Provision

%
➢ Sub-standard Assets
• Secured Exposures 15
• Unsecured Exposures 25

➢ Doubtful Advances – Secured Portion

• For Doubtful up to 1 year 25
• For Doubtful > 1 year and up to 3 years 40
• For Doubtful > 3 years 100

➢ Doubtful Advances – Unsecured Portion 100

Sub-standard Assets — Sub-standard asset is one which has been classified as NPA for a period not exceeding
12 months. In the case of term loans, those where installments of principal are overdue for period exceeding
one year should be treated as sub-standard. In other words, such an asset will have well-defined credit
weaknesses that jeopardize the liquidation of the debt and are characterized by the distinct possibility that
the bank will sustain some loss, if deficiencies are not corrected.
Doubtful Assets — A doubtful asset is one which has remained sub-standard for a period of at least 12
months. A loan classified as doubtful has all the weaknesses inherent in that classified as sub-standard with
added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently
known facts, conditions and values, highly questionable and improbable.

QNO Special Mention Accounts (SMA) New Course-- (N22R)

BA.09.50 Bhaskar CNO - BA.240
CA. Puranjay is appointed as statutory branch auditor of two branches of a nationalized bank for year
2021-22. During the course of audit, he came across the following:

a. While verifying advances of one semi-urban branch, he noticed substantial number of accounts
categorized as SMA (Special mention accounts). In this context, explain the nature and
significance of SMA.

b. While verifying interest income of a mid-corporate branch of an urban centre having advances
consisting of only cash credit limits for large borrowers, it was noticed that advances of ` 300
crores were outstanding as on balance sheet date carrying average interest rate @8% p.a.

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 One articled clerk in audit team makes quick back of the envelope calculations of interest income of ` 24
crores on advances. However, schedule of profit & loss a/c shows interest income on advances for ` 10
crores. Discuss any two probable reasons for such variation.
Answer (a). Special Mention accounts (SMA) are those accounts which are resulting signs of incipient stress leading
to the possibility that borrowers may default on debt obligations. These are in the nature of warning system
to alert the banks about probable NPAs so that remedial action can be taken before accounts actually turn
NPAs. Therefore, their significance lies in the fact that proper and timely identification of SMAs can help in
preventing turning potential NPAs into actual NPAs.

(b) The probable reasons for difference in interest calculation could be due to following:

(i) Cash credit accounts, by their very nature, are running accounts and their utilization depends
upon needs of business. Further, interest on cash credit account is charged on the extent of
funds utilized by the borrower. It could be possible that all cash credit limits were not fully
utilized during the year which resulted in lower interest income.

(ii) Some large accounts may have been sanctioned during later part of the year resulting in lower
interest income on advances for whole year.

QNO Audit of Advances New Course-- (N19R/M21R/N22R/M22E)

BA.11 Bhaskar CNO - BA.320
Advances generally constitute the major part of the assets of the bank. There are large number of borrowers
to whom variety of advances are granted. The audit of advances requires the major attention from the
auditors. In carrying out audit of advances, the auditor is primarily concerned with obtaining evidence
about, among other points, the amounts included in balance sheet in respect of advances are outstanding
at the date of the balance sheet. Explain
OR
In carrying out audit of advances, the auditor is primarily concerned with obtaining evidence about
amounts included in balance sheet in respect of advances which are outstanding. Explain stating clearly
all the considerations in this context.
Answer ➢ Advances generally constitute the major part of the assets of the bank. There are large number of
borrowers to whom variety of advances are granted. The audit of advances requires the major
attention from the auditors. In carrying out audit of advances, the auditor is primarily concerned
with obtaining evidence about the following:
• Amounts due to the bank are appropriately supported by Loan documents and other
documents as applicable to the nature of advances.
(Partnership Deed, NOC of all partners, project report, income tax returns, application
forms etc.)

• There are no unrecorded advances.

(Like finance lease, of balance sheet financing or shown as investments)
• Advances represent amount due to the bank.
(In consortium, take out finance, restructuring, rescheduling etc.)
• Amounts included in balance sheet in respect of advances are outstanding at the date of the
balance sheet.
(Match balance in balance sheet to advance schedule, which is matched to subsidiary
ledgers and control accounts, loan should not be time barred)
• The advances are disclosed, classified and described in accordance with recognized
accounting policies and practices and relevant statutory and regulatory requirements.
(Secured, Unsecured etc.)
• Appropriate provisions towards advances have been made as per the RBI norms,
Accounting Standards and generally accepted accounting practices. The stated basis of

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 valuation of advances is appropriate and properly applied, and that the recoverability of
advances is recognized in their valuation.

Alternate Answer

➢ Audit Procedure in Audit of Advances in case of Bank Audit: The auditor can obtain sufficient
appropriate audit evidence about advances by study and evaluation of internal controls relating to
advances, and by:
• examining the validity of the recorded amounts;
• examining loan documentation.
• reviewing the operation of the accounts;
• examining the existence, enforceability and valuation of the security;
• checking compliance with RBI norms including appropriate classification & provisioning; and
• carrying out appropriate analytical procedures.

QNO Audit of Advances- Evaluation of Internal Control New Course--

BA.13 Bhaskar CNO - BA.320 (N19R/M22M)
The auditor can obtain sufficient appropriate audit evidence about advances by study and evaluation of
internal controls relating to advances. Explain in the context of Audit of Banks.
Answer ➢ Obtain sufficient appropriate audit evidence
The auditor can obtain sufficient appropriate audit evidence about advances by study and evaluation
of internal controls relating to advances, and by:
• examining loan documentation;
• examining the validity of the recorded amounts;
(Subsidiary ledgers / Controls Accounts / Confirmations)
• reviewing the operation of the accounts;
• examining the existence, enforceability and valuation of the security;
• checking compliance with RBI norms including appropriate classification and provisioning;
and
• carrying out appropriate analytical procedures.
➢ Examine all large advances other may be on sampling basis, sampling extent depend on I.C
assessment
• In carrying out his substantive procedures, the auditor should examine all large advances
while other advances may be examined on a sampling basis.
• The extent of sample checking would also depend on the auditor’s assessment of efficacy of
internal controls.
➢ Problem accounts in detail unless amount insignificant
The accounts identified to be problem accounts however need to be examined in detail unless the
amount involved is insignificant.
➢ Advances sanctioned during the year or adversely commented
Advances which are sanctioned during the year or which are adversely commented by RBI
inspection team, concurrent auditors, bank’s internal inspection, etc. should generally be included
in the auditor’s review.

QNO Advances (Internal Control) New Course--

BA.17 Bhaskar CNO - BA.300 (N18E/M19M/M19R/S20M/S21M)
The auditor should examine the efficacy of various internal controls over advances in case of Banks to
determine the nature, timing and extent of his substantive procedures. Explain what is included in the
internal controls over advances.
Answer ➢ 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:

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 • 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.
The sanction for an advance should specify, among other things, the limit of borrowing,
nature of security, margin to be kept, interest, terms of repayment etc. It also needs to be
ensured that the loans sanctioned are as per the Loan Policy of the bank and adhere to the
regulatory (RBI) norms unless a specific exemption is taken in this regard.
• All the necessary documents
• (e.g., agreements, demand promissory notes, letters of hypothecation, etc.) should
be executed by the parties before advances are made.
• 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.
• The compliance with the terms of sanction and end use of funds should be ensured.
• (Maintenance of Stock, Regular Reporting, Permission for new loan)
• 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.
• 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.
• 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 god owns should be frequently inspected by responsible
officers of the branch concerned, in addition to the inspectors of the bank.
• Surprise checks should be made in respect of hypothecated goods not in the physical
possession of the bank.
• As soon as any increase or decrease takes place in the securities or their value, proper
entries should be made in the Drawing Power Book and Daily Balance Book. These entries
should be checked by an officer.
• The accounts should be kept within both the drawing power and the sanctioned limit.
•

• 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.
• 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.

QNO Audit of Income (RBI Directions, Materiality, New Course-- (M22M)

BA. Revenue Certainty)
17.50 #Unique
In carrying out audit of income, the auditor is primarily concerned with obtaining reasonable assurance that
the recorded income arose from transactions, which took place during the relevant period and pertained to
the bank, there is no unrecorded income and the income is recorded at appropriate amount. Explain the
Audit Approach and Procedures regarding following points in the above context :
(i) RBI’s Directions
(ii) Materiality
(iii) Revenue Certainty
(iv) Revenue Uncertainty
Answer Audit Approach and Procedures
• Auditor’s Concern: In carrying out audit of income, the auditor is primarily concerned with obtaining
reasonable assurance that the recorded income arose from transactions, which took place during the
relevant period and pertained to the bank, there is no unrecorded income and the income is recorded at
appropriate amount.
• RBI’s Directions: 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 Accounting Standard 9.

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 • Materiality: 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 their report in that situation.
• Revenue Certainty: 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.
• Revenue Uncertainty: 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. 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

Audit of interest expense - Audit approach and New Course-- (M20R/N21R)

QNO
procedure
BA.18
Bhaskar CNO - BA.380
In carrying out an audit of interest expense, the auditor is primarily concerned with assessing the overall
reasonableness of the amount of interest expense. Analyse and explain stating the audit approach and
procedure in regard to interest expense.
Answer ➢ Reasonableness of Interest Expense Perform Analytical Procedures
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. In
modern day banking, the entries for interest expended are automatically generated through a batch
process in the CBS system. (Core Banking System)
• Compare Actual Average Interest Expense with Previous Year
The auditor should also compare the average rate of interest paid on the relevant deposits with the
corresponding figures for the previous years and analyse any material differences.

• Month on Month Interest Cost Analysis

The auditor should obtain general ledger break-up for the interest expense incurred on deposits
(savings and term deposits) and borrowing each month/quarter. The auditor should analyses month
on month (or quarter) cost analysis and document the reasons for the variances as per the
benchmark stated. He should examine whether the interest expense considered in the cost analysis
agrees with the general ledger.
• Compare Quarterly Weighted Average with Actual Average Interest Rate
The auditor should obtain from the bank an analysis of various types of deposits outstanding at the
end of each quarter. From such information, the auditor may work out a weighted average interest
rate. The auditor may then compare this rate with the actual average rate of interest paid on the
relevant deposits as per the annual accounts and enquire into the difference, if material.
• Check process on sample basis
The auditor should understand the process of computation of the average balance and re-compute
the same on sample basis.
➢ Test of Details on Sampling Basis
The auditor should, on a test check basis, verify the calculation of interest and satisfy himself that:
• Interest has been provided on all deposits up to the date of the balance sheet; and verify whether
there is any excess or short credit of material amount.
• Interest rates are in accordance with the bank’s internal regulations, of the RBI directives, and
agreements with the respective depositors;
• 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.
• Interest on Savings Account should be checked on a test check basis in accordance with the rules
framed by the bank in this behalf.
• Interest on inter–branch balances has been provided at the rates prescribed by the head office.
• Interest on overdue/ matured term deposits should be estimated and provided for.
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 The auditor should ascertain whether there are any changes in interest rate on saving deposits and term
deposits during the period. The auditor should obtain the interest rate card for various types of term
deposits and analyses the interest cost for the period. The auditor should examine the completeness that
there has been interest accrued on the entire borrowing portfolio by obtaining the detailed break up the
money market borrowing portfolio and the interest accrued and the same should agree with the GL code
wise break up. The auditor should re- compute the interest accrual on sample basis i.e., by referring to
the parameters like frequency of payment of interest amount, rate of interest, period elapsed till the
date of balance sheet, etc. from the term sheet, deal ticket, agreements, etc.

QNO Security (Nature of Securities) New Course-- (M18E/N20R/M21M)

BA.19 Bhaskar CNO - BA.200
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.
Answer ➢ 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.
Collateral security is an additional security. Security can be in s i.e. tangible or intangible asset,
movable or immovable asset.
➢ Examples of most common types of securities accepted by banks are the following.
• Immovable Property (FA)
• Stock Exchange Securities and Other Instruments (INV)
• Gold Ornaments and Bullion (INV)
• Life Insurance Policies (INV)
• Goods/Stocks/Debtors /Trade Receivables (CA)
• Plantations (For Agricultural Advances) (CA)
• Personal Security of Guarantor (Notes)
• Third Party Guarantees (Notes)
• Banker’s General Lien (All)

Security (Different forms of Security/Mode of New Course-- (N20R/M22M)

QNO.
creation of security)
BA.19.50
Bhaskar CNO - BA.220
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. Explain with specific reference to Audit of Banks.
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.
➢ Mortgage: Mortgage are of several kinds but the most important are the Registered Mortgage and
the Equitable Mortgage.
• 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.
➢ 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.
➢ 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. The borrower periodically
submits statements regarding quantity and value of hypothecated assets (stocks, debtors, etc.) to
the lending banker on the basis of which the drawing power of the borrower is fixed.

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 ➢ Assignment: Assignment represents a transfer of an existing or future debt, right or property
belonging to a person in favour of another person. Only actionable claims (i.e., claim to any debt
other than a debt secured by a mortgage of immovable property or by hypothecation or pledge of
moveable property) such as 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.
➢ 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 same right (i.e., the capacity of the
account holder in both the accounts should be the same). For the purpose of set-off, all the branches
of a bank are treated as one single entity. The right of set-off can be exercised in respect of time-
barred debts also.
➢ 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.

QNO Audit of operating expenses New Course-- (S20M/S21M/M22R/N22M)

BA.20 Bhaskar CNO - BA.400
Explain the audit approach you would follow to check the Operating Expenses of a Bank.
➢ Auditing the Operating Expenses of a Bank:-
• Internal Controls:
The auditor should study and evaluate the system of internal control relating to expenses,
including authorization procedures in order to determine the nature, timing and extent of his
other audit procedures.
• Divergent Trends:
The auditor should examine whether there are any divergent trends in respect of major items
of expenses.

• Substantive analytical Procedures:

The auditor should perform substantive analytical procedures in respect of these expenses. eg.
assess the reasonableness of expenses by working out their ratio to total operating expenses
and comparing it with the corresponding figures for previous years.
• Vouching & Verification:
The auditor should also verify expenses with reference to supporting documents and check the
calculations wherever required.

Additional Reports apart from report on financial New Course-- (M21R)

QNO
statements
BA.24
#Unique
Your firm of auditors, SRG & Co., has been appointed as Statutory Central Auditors of Reliable Bank. Explain
the reporting requirements of the Statutory Central Auditors (SCAs) in addition to their main audit report.
Answer Presently, the Statutory Central Auditors (SCAs) have to furnish the following reports in addition to
their main audit report:
(a) Report on adequacy and operating effectiveness of Internal Controls over Financial Reporting in
case of banks which are registered as companies under the Companies Act in terms of Section 143(3)(i)
of the Companies Act, 2013 which is normally to be given as an Annexure to the main audit report as
per the Guidance Note on Audit of Internal Financial Controls over Financial Reporting issued by the
ICAI.
(b) Long Form Audit Report. (LFAR)
(c) Report on compliance with SLR requirements.
(d) Report on whether the treasury operations of the bank have been conducted in accordance with
the instructions issued by the RBI from time to time.

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 (e) Report on whether the income recognition, asset classification and provisioning have been made
as per the guidelines issued by the RBI from time to time.
(f) Report on whether any serious irregularity was noticed in the working of the bank which requires
immediate attention.
(g) Report on status of the compliance by the bank with regard to the implementation of
recommendations of the Ghosh Committee relating to frauds and malpractices and of the
recommendations of Jilani Committee on internal control and inspection/credit system.
(h) Report on instances of adverse credit-deposit ratio in the rural areas.

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 CHAPTER AUDIT OF DIFFERENT TYPES OF ENTITIES
13

Part 1 – Audit of Co-operative Society

QNO Sec-72 Qualification & Disqualification of New Course-- (N18M/N18E/M21M)

AOC.05 Auditor(Multi-State Co-operative Society) -
Bhaskar CNO - AOC.100
Briefly explain the provisions for qualification and appointment of Auditors under the Multi-State Co-
operative Societies Act, 2002.
OR
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. Explain stating also the persons who are not eligible for appointment as auditors of a
Multi-State co-operative society.
Answer ➢ 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.
➢ Disqualification
However, the following persons are not eligible for appointment as auditors of a multi-State
cooperative society-
A body corporate.
A person who is a member.
An officer or employee of the multi-State co-operative society.
A person who is in the employment, or an officer or employee of the Multistate co-operative
society.
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.

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QNO Powers and Duties of auditors- New Course-- (M20R)
AOC.07 Bhaskar CNO - AOC.100
Explain the powers and duties of auditors under the Multi -State Co-operative Societies Act, 2002.
Answer ➢ Section 73 of the Multi-State Co-operative Societies Act, 2002 discusses the powers and
duties of auditors.
Powers of the auditor
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,
whether kept at the head office of the Multi - State co-operative society or elsewhere, and shall
be entitled to require from the officers or other employees of the Multi- State co-operative
society such information and explanation as the auditor may think necessary for the
performance of his duties as an auditor.
Duties of the auditor
As per section 73(2), the auditor shall make following inquiries:
• 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 co-operative
society or its members,
• 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,
• Whether personal expenses have been charged to revenue account, and
• 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.

QNO Audit Report- New Course-- (M20R)

AOC.09 Bhaskar CNO - AOC.100
"As per Multi-state Co-operative Societies Act, 2002, the auditor shall make a report to the members of the
Multi-State co-operative society on the accounts examined by him and on every balance-sheet and profit
and loss account and on every other document required to be part of or annexed to the balance-sheet or
profit and loss account. Explain"
Answer
➢ As per sub-section (3) & (4) of section 73 of Multi- state Co-operative Societies Act, 2002, the auditor
shall make a report to the members of the Multi -State co-operative society on the accounts examined
by him and on every balance-sheet and profit and loss account and on every other document required
to be part of or annexed to the balance-sheet or profit and loss account, which are laid before the Multi
-State cooperative society in general meeting during his tenure of office, and the report shall state
whether, in his opinion and to the best of his information and according to the explanation given to him,
the said account give the information required by this act in the manner so required, and give a true and
fair view:
In the case of the balance-sheet, of the state of the Multi-State co-operative society’s affairs as
at the end of its financial year; and
In the case of the profit and loss account, of the profit or loss for its financial year. The auditor’s
report shall also state:
• Whether he has obtained all the information and explanation which to the best of his
knowledge and belief were necessary for the purpose of his audit.
• Whether, in his opinion, proper books of account have been kept by the Multi- State
co-operative society so far as appears from his examination of these books and proper
returns adequate for the purpose of his audit have been received from branches or
offices of the Multi -State co-operative society not visited by him.

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 • Whether the report on the accounts of any branch office audited by a person other
than the Multi-State co-operative society’s auditor has been forwarded to him and
how he has dealt with the same in preparing the auditor’s report.
• Whether the Multi-State co-operative society’s balance sheet and profit and loss
account dealt with by the report are in agreement with the books of account and
return.
Where any of the matters referred to in sub-section (3) or (4) is answered in the negative or with
a qualification, the auditor’s report shall state the reason for the answer.

QNO Co-operative Society- Special Audit - Section 77- New Course-- (M19E/S20M/S21M)
AOC.11 Bhaskar CNO - AOC.100
Central Govt. hold 55% of the paid-up share Capital in Kisan Credit Co-operative Society, which is incurring
huge losses. Advise when the Central Government can direct Special Audit under Section 77 of the Multi State
Co-operative Society Act.
Answer ➢ Shareholding required for order of special Audit:
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.
➢ When order of special audit is given:
Under section 77 of the Multi-State Cooperative Societies Act, 2002, where the Central Government is of
the opinion:
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; or
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; or
that the financial position of any Multi-State co-operative society is such as to endanger its
solvency.
➢ Conclusion
Thus, in the given case since Central Govt is holding 55% shares and financial position of Kisan Credit co-
operative society is in danger, Central government can direct for special audit.

QNO Inspection under Sec 79 New Course – (M22R)

AOC.15 #Unique
No inspection under Section 79 of Multi-State Co-operative Societies Act, 2002 shall be made unless a notice
has been given to the multi-state co-operative society. Explain stating clearly when and how such inspection
can be made. Also state the powers available with the Central Registrar in this regard along with provisions
relating to communication of the inspection report under the said section
Answer Inspection of Multi-State Co-operative societies under Section 79
1. When: The Central Registrar may, on a request from
(i) federal co-operative to which a Multi-State Co-operative society is affiliated or a creditor or
(ii) not less than one-third of the members of the board or
(iii) not less than one-fifth of the total number of members of a Multi-State co-operative society
2. How: By general or special order in writing in this behalf inspect or direct any person authorized by him by
order in writing in this behalf to make an inspection into the constitution, working and financial condition of
a Multi-State co-operative society.
3. Opportunity of Being heard: No inspection shall be made unless a notice of not less than fifteen days has
been given to the multi-state co-operative society.
4. Powers available: The Central Registrar or the person authorized by him shall have the following powers:
(a) He shall at all times have access to all books, accounts, papers, vouchers, securities, stock and other
property of that society and may, in the event of serious irregularities discovered during inspection, take
them into custody and shall have power to verify the cash balance of the society and subject to the general
or special order of the central registrar to call a meeting of the society where such general meeting is, in
his opinion necessary.
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 (b) Every officer or member of a Multi-State Co-operative society shall furnish such information with regard
to the working of the society as the central registrar or the person making such inspection may require.
5. Inspection Report: A copy of the report of inspection under this section shall be communicated to the Multi-
State Co-operative society within a period of three months from the date of completion of such inspection.

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 Part 2 – Government Audit

Government Audit & its objectives Old Course-- (M21R)

QNO
#Unique New Course—
GA.00
(S20M/S21M/M21R/M21E/M22M/N22M)
Define Government Audit & explain its objective’s
➢ Government Audit is the objective, systematic, professional and independent examination of
financial, administrative and other operations of a public entity ,made subsequently to their
execution for the purpose of evaluating and verifying them, presenting a report containing
explanatory comments on audit findings together with conclusions and recommendations for future
action by the responsible officials and in the case of examination of financial statements, expressing
the appropriate professional opinion regarding the fairness of the presentation.
➢ OBJECTIVES:-
Accounting for Public Funds:- It serves as a mechanism or process for public accounting of
government funds.
Appraisal of Govt. Policies: -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.
Corrective Actions: - 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.
Administrative Accountability:- The main objective of audit is a combination of ensuring
accountability of administration to legislature and functioning as an aid to administration

QNO Government audit is not investigative activity Old Course-- (M21R)

GA.00.50 #Unique New Course—(M21R)
Government audit is neither equipped nor intended to function as an investigating agency, to pursue every
irregularity or misdemeanour to its logical end. Explain
Answer Government audit is neither equipped nor intended to function as an investigating agency, to pursue
every irregularity or misdemeanour to its logical end. The main objective of audit is a combination of
ensuring accountability of administration to legislature and functioning as an aid to administration. 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.
Audit is a necessary function to ensure accountability of the executive to Parliament, and within the
executives of the spending agencies to the sanctioning or controlling authorities. The purpose or
objectives of audit need to be tested at the touchstone of public accountability. The 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.

QNO Duties of C&AG Old Course-- (P16M/S17M/M17R/N17M/M18R/N19R)

GA.01 Bhaskar CNO - GA.040 New Course—(S17M/M19R/N19R/S20M/S21M)
Explain in detail the duties of Comptroller and Auditor General of India
Answer ➢ To compile and submit Accounts:
The C & AG shall compile the accounts relating to the annual receipts and disbursements of the
Union / State / Union Territory. He shall submit those accounts to the President / Governor /
Administrator.
➢ To Audit and report:
The C&AG shall audit and report on-
All expenditure from consolidated fund of India /state /union territory.
All transactions of the Union / State relating to Contingency Funds and Public Accounts;
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 All trading, manufacturing, Profit and Loss Accounts and Balance Sheets and other
subsidiary accounts kept in any department of the Union / State.
➢ To audit Receipts and Expenditure:
The C&AG shall audit and report on all receipts and expenditure of anybody or authority, which has
been substantially financed from the Consolidated Fund of India / State / Union Territory.
Note; For this purpose, a body or authority shall be treated as substantially financed if the amount of
grant or loan in a year is - (a) greater than Rs.25 Lakhs and (b) such amount is greater than 75% of
the total expenditure of that body or authority.
➢ To audit Grants or Loans:
He shall audit specific purpose loan or grant given to anybody other than a foreign state or
international organization, out of the consolidated fund of India /state /union territory.
➢ To audit Receipts of Union or States:
The C&AG shall audit all receipts payable into the Consolidated Fund of India / State / Union Territory.
He shall satisfy himself that the rules and procedures are designed to secure an effective check on
the assessment, collection and proper allocation of revenue and are being duly observed.
➢ To audit Accounts of Stores and Stock:
The C&AG shall have the authority to audit and report on the accounts of stores and stock kept in
any office or department of the Union / State.
➢ To audit accounts of Government Companies and Corporations:
C&AG shall exercise such powers and observe such duties as per the provisions of the Companies
Act, 1956, in relation to Government Companies and Corporations.
Author’s Note:
The shortcut the duties of C&AG
SAG2AR2

QNO Responsibility of CAG to compile accounts Old Course-- (N20M)

GA.03 Bhaskar CNO - GA.040 New Course—(N20M)
The Comptroller and Auditor General 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 under his
control by treasuries, offices or departments responsible for the keeping of such account. Explain.
➢ Compile and submit Accounts of Union and States - The Comptroller and Auditor General 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 under his control by treasuries, offices or
departments responsible for the keeping of such account. The Comptroller and Auditor General shall,
from the accounts compiled by him or [by the Government or any other person responsible in that
behalf] prepare in each accounts (including, in the case of accounts compiled by him, appropriation
accounts) showing under the respective heads the annual receipts and disbursements for the purpose
of the Union, of each State and of each Union Territory having a Legislative Assembly, and shall submit
those accounts to the President or the Governor of a State or Administrator of the Union Territory
having a Legislative Assembly, as the case may be, on or before such dates as he may, with the
concurrence of the Government concerned, determine.
➢ The C&AG Act of 1971 has provisions for relieving him of this responsibility to give information and
render assistance to the Union and States: The Comptroller and Auditor General shall, in so far as the
accounts, for the compilation or keeping of which he is responsible, enable him so to do, give to the
Union Government, to the State Government or to the Governments of Union Territories having
Legislative Assemblies, as the case may be, such information as they may, from time to time, require
and render such assistance in the preparation of the annual financial statements as they may
reasonably ask for.

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 Audit of Expenditure-All Old Course--
QNO Bhaskar CNO - GA.060 (P16M/M16R/N16M/M17M/M17R/N17M/M18R/N18M/
GA.05 M19E/N19R/N19E/M20R/M21M)
New Course—(N19R/M21M/M22M)
An audit of Expenditure is one of the major components of Government Audit. In the context of
‘Governmen1Mt Expenditure Audit’, write in brief, what do you understand by:
(i) Audit against Rules and Orders
(ii) Audit of Sanctions
(iii) Audit against Provision of Funds
(iv) Propriety Audit
(v) Performance Audit.
OR
Audit of government expenditure is one of the major components of government audit conducted by the
office of C&AG. The basic standards set for audit of expenditure are to ensure that there is provision of funds
authorised by competent authority fixing the limits within which expenditure can be incurred. Explain those
standards.
OR
The audit of Government expenditure is one of the major components of Government audit. Briefly explain
the basic standards set in relation to audit of Government expenditure.
Answer ➢ Audit of Government Expenditure
It is one of the major components of government audit conducted by the office of C&AG. The basic
standards set for audit of expenditure are to ensure that there is provision of funds authorized by
competent authority fixing the limits within which expenditure can be incurred. Briefly, these
standards are explained below:

Audit against Rules & Orders:

The auditor has to see that the expenditure incurred conforms to the relevant provisions of
the statutory enactment and is in accordance with the financial rules and regulations framed
by the competent authority.
Audit of Sanctions:
The auditor has to ensure that each item of expenditure is covered by a sanction, either
general or special, accorded by the competent authority, authorizing such expenditure.
Audit against Provision of Funds: Audit against provision of funds is aimed at ascertaining
whether the monies shown in the accounts as having been disbursed, were legally available
for and applicable to the service or purpose to which they have been applied or charged.
Propriety Audit:
It is required to be seen that the expenditure is incurred with due regard to broad and general
principles of financial propriety. The auditor aims 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. Audit aims to secure a reasonably high standard of public
financial morality by looking into the wisdom, faithfulness and economy of transactions.
Performance Audit:
This involves 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. Efficiency-cum performance audit, wherever used, is an objective examination of the
financial and operational performance of an organization, programme, authority or function
and is oriented towards identifying opportunities for greater economy, and effectiveness.

QNO Audit against Rules & Orders Old Course-- (P16M)

GA.10 Bhaskar CNO - GA.080 New Course-- (N20R/N20E/N21M/M22M/N22M)
Audit against rules and orders aims to ensure that the expenditure conforms to the relevant provisions of
the Constitution and of the laws and rules made thereunder. The job of audit is to see that these rules,

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 regulations and orders are applied properly by the subordinate authorities. It is, however, not the function
of audit to prescribe what such rules, regulations and orders shall be. Analyse and Explain
OR
Write a short note on Audit against Rules and Orders.

Answer ➢ Aim
Audit against rules and orders aims to ensure that the expenditure conforms to the relevant
provisions of the Constitution and of the laws and rules made thereunder. It also seeks to satisfy that
the expenditure is in accordance with the financial rules, regulations and orders issued by a
competent authority.
➢ Breakup of Audit
These rules, regulations and orders against which regularity audit is conducted mainly fall under the
following categories:
• Which fund can be used?
Rules and orders regulating the powers to incur and sanction expenditure from the Consolidated Fund
of India or of a State (and the Contingency Fund of India or of a State);
(E.g., National Highway --- Consolidated Funds of India,
Roads sponsored by world bank loan--- Public Accounts Fund of India
State Highways--- Consolidated Funds of State)
• Procedure for withdrawing from funds.
Rules and orders dealing with the mode of presentation of claims against government, withdrawing
moneys from the Consolidated Fund, Contingency Fund and Public Accounts of the Government of
the India and of the States, and in general the financial rules prescribing the detailed procedure to be
followed by government servants in dealing with government transactions; and
(E.g., Procedure for withdrawing money from consolidated funds of India
• Money Bill—Passed only in Lok Sabha no need to pass in Rajya Sabha only sent for
any suggestions to be returned within 14 days, only for specified items
• Finance Bill--- Passed both in Lok Sabha & Rajya Sabha)
• Government Employee Remuneration
Rules and orders regulating the conditions of service, pay and allowances, and pensions of
government servants.
(E.g., Pay Commission is set up intermittently by Government of India and gives its
recommendations regarding changes in salary structure of its employees. Since India's
Independence, seven pay commissions have been set up on a regular basis to review and
make recommendations on the work and pay structure of all civil and military divisions of
the Government of India. Headquartered in Delhi, the Commission is given 18 months from date of its
constitution to make its recommendations.)
➢ CAG doesn’t frame rules & regulation, but he examines rules & regulation
It is the function of the executive government to frame rules, regulations and orders, which are to be
observed by its subordinate authorities. The job of audit is to see that these rules, regulations and
orders are applied properly by the subordinate authorities. It is, however, not the function of audit to
prescribe what such rules, regulations and orders shall be. But it is the function of audit to carry out
examination of the various rules, regulations and orders issued by the executive authorities to see
that:
• they are not inconsistent with any provisions of the Constitution or any laws made
thereunder; 1
• they do not come in conflict with the orders of, or rules made by, any higher authority; and
2
• in case they have not been separately approved by competent authority, the issuing
authority possesses the necessary rule-making power. 3
• they are consistent with the essential requirements of audit and accounts as determined by
the C&AG; 4
Audit of expenditure against regularity is of a quasi-judicial type of work performed by the audit authorities.
It involves interpretation of the Constitution, statutes, rules, regulations and orders. The final power of
interpretation of these, however, does not vest with the C&AG. Work is like courts where they conclude
whether activities are as per law or not.

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QNO Audit of Sanctions New Course-- (N20R)
GA.13 Bhaskar CNO - GA.100
The auditor of a Govt Company has to ensure that each item of expenditure is covered by a sanction, either
general or special, of the competent authority. Explain
Answer Audit of sanctions –
The auditor has to ensure that each item of expenditure is covered by a sanction, either general or special, of
the competent authority. The audit of sanctions is directed both in respect of ensuring that the expenditure is
properly covered by a sanction, and also to satisfy that the authority sanctioning it is competent for the
purpose by virtue of the powers vested in it by the provisions of the Constitution and of the law, rules or orders
made thereunder, or by the rules of delegation of financial powers made by an authority competent to do so.

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 Part 3 – Audit of Other Entities

IMPORTANT NOTE
➢ In this chapter there are institutions on which question is asked:
• Hospital, Education, Cinema, Club, Hotel, NGO’s
➢ You can remember this by visualizing Life cycle of a person:
1. A person is born – Hospital
2. As a kid goes to school – Educational Institute
3. As an adult more inclined towards movies, parties, food – Cinema hall, Clubs, Hotels
4. As one grows old more inclined towards charity – Charitable Institute, NGO’s.
➢ We have made a master answer for each of the above entities and have divided each master answer
into 5 major points
• Law & Internal Control
• Major Income
• Major Expense
• Major Asset
• Others
➢ You can go through the master answer and can write the relevant aspect of the master answer as
per what the question is asking.

Audit of Hospital- Income and Expenditure- Old Course -- (P16M/N16R/N20R)

QNO
Bhaskar CNO - ADE.020 New Course –(N19E) – Relevant, Concept Covered in New
ADE.10
Course SM
Mention any ten special points to be examined by you in the audit of Income and Expenditure of a
Charitable Institution running a hospital.
Answer
Refer CNO ADE.01- Major Income & Major Expenditure

Audit of Educational Institute -Special Point- Old Course-- (P16M/M16M/M17R/M18M/

QNO Bhaskar CNO - ADE.040 M18R/M19M/N19R)
ADE.15 New Course-
(S19M/N19R/S20M/S21M/M22M/N22M)
Explain and also state the role of auditor with respect to the following in case of a school:
(i) The fees from the students.
(ii) Other Receipts/Grants & Donations
OR
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 Rs 500 per month
from a student for his lodging/boarding.
Answer ➢ Law & Internal Control System – Act, Regulation / Minutes
• Act / Regulations / Deed
In the case of a university, refer to the Act of Legislature and the Regulation framed
thereunder. Examine the Trust Deed or Regulations, in the case of school or college and note
all the provisions affecting accounts.
• Minutes
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.
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 ➢ Major Income – Student Fees / Hostel Dues / Concession / Donation / Rental Income
• Students Fees
• 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.
(Class Register → Student Fees Register → Demand of Fees to all Students)

• 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.
(Collection → Receipt Issued → Carbon Copy / Counterfoil → Cash Book → Fee
Register)
• 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.
• Hostel Dues / Admission Fees / Fine
• Confirm that hostel dues were recovered before student’s accounts were closed
and their deposits of caution money refunded.
• 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.
• Confirm that fines for late payment or absence, etc. have been either collected or
remitted under proper authority.
• Studentship & Concessions / Arrears
• See that free studentship and concessions have been granted by a person
authorized to do so, having regard to the Rules prepared by the Managing
Committee.
• Report any old heavy arrears on account of fees, dormitory rents, etc. to the
Managing Committee.
• Endowments / Legacies / Donations / Grant
• Vouch income from endowments and legacies, as well as interest and dividends
from investment; also inspect the securities in respect of investments held.
• 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.
• 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.
• Rental Income
• Verify rental income from landed property with the rent rolls, etc.
➢ Major Expense – Capex / Salary / Stores / Establishment
• Capital Expenditure
• Vouch, all capital expenditure in the usual way and verify the same with the sanction
for the Committee as contained in the minute book.
• Salaries
• See that increase in the salaries of the staff have been sanctioned and minutes by the
Committee.
• Stores
• Ascertain that the system ordering inspection on receipt and issue of provisions,
foodstuffs, clothing and other equipment is efficient and all bills are duly authorised

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 and passed before payment.
• Establishment Expenses
• Vouch, in the usual manner, all establishment expenses and enquire into any unduly
heavy expenditure under any head. If there was any annual budget prepared, see
that any excess under any head over the budgeted amount was duly sanctioned by
the Managing Committee. If not, bring it to the Committee’s notice in your report.
➢ Major Asset – Investments / Inventories
• Investments of Endowment Funds / Provident Fund
• See that the investments representing endowment funds for prizes are kept
separate and any income in excess of the prizes has been accumulated and invested
along with the corpus.
• Verify that the Provident Fund money of the staff has been invested in appropriate
securities.
• Inventories
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.
➢ Other Points – Caution Money / Refund of Tax / Annual Statement
• 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.
• Confirm that the refund of taxes deducted from the income from investment (interest on
securities etc.) has been claimed and recovered since the institutions are generally exempted
from the payment of income-tax.
• Finally, verify the annual statements of account and, while doing so see that separate
statements of account have been prepared as regards Poor Boys Fund, Games Fund, Hostel
and Provident Fund of staff, etc
Author’s Note
• Text in ITALICS are examples by author for better understanding of answer.
• This is a master answer you can write the relevant aspect of the master answer as per what
the question is asking.

QNO Audit of Hotel- Old Course-- (P16M/N17R)

ADE.30 Bhaskar CNO - ADE.060 New Course—(S20M/S21M/M22R/N22M)
What special steps will you take into consideration in auditing the accounts of a hotel?
OR
As an auditor, what would be your areas of consideration while auditing the element of ROOM SALES
during the audit of a 5-Star Hotel.

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Answer ➢ Law& Internal Control System–Internal Control
• Internal Controls –
Pilferage is Problem – ICS Important – Responsibility of Management – Success if Regular
preparation of trading & detailed investigation – if weak controls then use gross margin – if
discrepancy unexplained qualify
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 minimize the leakage as far as possible. Evidence of their success is provided by the
preparation of regular perhaps weekly, trading accounts for each sales point and a detailed
scrutiny of the resulting profit percentages, with any deviation from the anticipated form
being investigated. The auditor should obtain these regular trading accounts for the period
under review, examine them and obtain explanations for any apparent deviations.
If the internal control in a hotel is weak or perhaps breaks down, then a very serious problem
exists for the auditor. As a result of the transient nature of many of his clients’ records, the
auditor must rely to a very large extent on the gross margin shown by the accounts. As a
result, the scope of his audit tests will necessarily be increased and, in the event of a
material margin discrepancy being unexplained, he will have to consider qualifying his audit
report.
➢ Major Income – Room Sales/Occupancy in Progress/Hall Booking / KOTs
• Room Sales –
Room Sales Guest Register – Guest Bills – Corroborative Evidence from Housekeeper Daily Room
Report
• 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.
• In many hotels, the housekeeper prepares a daily report of the rooms which were
occupied the previous night and the number of beds kept in each room. This report
tends not to be permanently retained and the auditor should ensure that a sufficient
number of reports are available for him to test both with the guest register and with the
individual guest’s bill.
• Occupancy in Progress
The auditor should ensure that proper valuation of occupancy-in-progress at the balance
sheet date is made and included in the accounts.
• Hall Booking
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.
• KOTs
The auditor should verify a few restaurants 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.
➢ Major Expense–Casual Labour/Repairs
• 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.
• Repairs –
The auditor should see that costs of repairs and minor renovation and redecoration are treated as
revenue expenditure, whereas costs of major alterations and additions to the hotel building and
facilities capitalised.

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 ➢ Major Assets–Fixed Asset / Inventory / Cash
• Fixed Assets –
The accounting policies for fixed assets of individual hotels are likely to differ. 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.
• 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 store’s areas and sales point. The auditor should carry out tests to ensure that all such
documentation is accurately processed.
Areas where large quantities of inventory are held should be kept locked, the key being retained
by the departmental manager. The key should be released only to trusted personnel and
unauthorized persons should not be permitted in the store’s areas except under constant
supervision. In particular, any movement of goods in or out of the stores should be checked.
Many hotels use specialized professional valuers to take and value the inventories on a
continuous basis throughout the year. Such a valuation is then almost invariably used as the basis
of the balance sheet inventory figure at the year end. Although such valuers are independent of
the audit client, it is important that the auditor satisfies himself that the amounts included for
such inventories are reasonable. In order to satisfy himself of this, the auditor should consider
attending the physical inventory taking and carrying out certain pricing and calculation tests.
The extent of such tests could well be limited since the figures will have been prepared
independently of the hotel.
• Cash –
• There are many problems involved in any hotel audit, some of which are peculiar to the
hotel industry such as control of cash assumes greater proportions.
• Almost all sales points in a hotel make both cash and credit sales. The auditor should
reconcile the total sales reported with the total of the bills issued by the sales point;
this total may take the form of a bill roll or a series of numerically controlled bills. This
numerical control must be checked to ensure that all bills are included in the total. The
cash element of the sales must then be checked to the cash records and the credit sales in
total and detail to the guest’s bills.
➢ Other Points–Travel Agents / Taxes
• 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 is recovered from
the travel agents or booking agencies as per the terms of credit allowed.
Commission, if any, paid to travel agents or booking agents should be checked by reference to the
agreement on that behalf.
• The auditor should satisfy himself that all taxes collected from occupants on food and occupation
have been paid over to the proper authorities.
Author’s Note
• Text in ITALICS are examples by author for better understanding of answer.
• This is a master answer you can write the relevant aspect of the master answer as per
what the question is asking.

QNO Audit of Hotel- Inventories Old Course -- (N20E)

ADE.33 Bhaskar CNO - ADE.060 New Course – (N22R/N22M)
You have been appointed as an auditor of ABC Hotel, a three-star hotel, for Financial Year 2019-20. As an
auditor what are the special points that need to be considered in verifying the Inventories in the nature of
food and beverages?

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Answer Verification of inventories in the nature of food and beverages: 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. Therefore, following may
be noted in this regard:
(a) All movement and transfer of inventories must be properly documented.
(b) Areas where inventories are kept must be kept locked and the key retained by the departmental
manager.
(c) The key should be released only to trusted personnel and unauthorized persons should not be
permitted in the stores area.
(d) Many hotels use specialized professional valuers to count and value the inventories on a continuous
basis throughout the year.
(e) The auditor should ensure that all inventories are valued at the year end and that he should himself
be present at the year-end physical verification, to the extent
practicable, having regard to materiality consideration and nature and location of inventories.

QNO Audit of Cinema Hall- Old Course-- (P16M/M16M/M19E/M20M/M21M)

ADE.35 Bhaskar CNO - ADE.080 New Course—(N18M/M20M/N22R)
BPL Ltd. is running a “RAGHU PALACE CINEMA.” Your firm of Chartered Accountants has been appointed
to get its accounts audited. Assistant appointed on the job to conduct audit asks the audit in charge as to
how to go about conducting an audit and seeks your guidance on it. Keeping in view the above you are
required to explain to the assistant special steps (any five) involved in the Audit of Cinema.
OR
What special steps are involved in audit of a Cinema Hall?
OR
Cinescreen Multiplex Ltd. is operating cinemas in different locations in Mumbai and has appointed you as
an internal auditor. What are the areas that need to be verified in relation to receipts from sale of Tickets
?
Answer
➢ Law & Internal Control System – Internal Control – Ticket Sale
Verify the internal control mechanism-
• that entrance to the cinema-hall during show is only through printed tickets;
• that they are serially numbered and bound into books;
• 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;
• that for advance booking a separate series of tickets is issued; and
• that the inventory of tickets is kept in the custody of a responsible official.
➢ Major Income – Ticket Sale / Advertisement/ Restaurant Income
• Ticket Sales
• Confirm that at the end of show, a statement of tickets sold is prepared and cash
collected is agreed with it.
• Verify that a record is kept of the ‘free passes’ and that these are issued under
proper authority.
• Reconcile the amount of GST collected with the total number of tickets issued for
each class and vouch and verify the entertainment tax returns filed each month.
• 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.
• Advertisement Income
• 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.

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 • Restaurant Income
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 foodstuffs, purchase of foodstuffs, cold drink, etc. as in the
case of club.
➢ Major Expense – Distributor Payment / Advertisement / Repairs / Depreciation
• Vouch payments on account of film hire with bills of distributors and in the process, the
agreements concerned should be referred to.
• Vouch the expenditure incurred on advertisement, repairs and maintenance. No part of
such expenditure should be capitalized.
• Confirm that depreciation on machinery and furniture has been charged at an appropriate
rate.
➢ Major Assets – Advance to Distributor
Examine unadjusted balance out of advance paid to the distributors against film hire contracts to
see that they are good and recoverable. If any film 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.
Author’s Note
This is a master answer you can write the relevant aspect of the master answer as per what the
question is asking.

QNO Audit of Cinema Halls (Payment to distributor) New Course— (S20M/S21M)

ADE.38 Bhaskar CNO - ADE.080
You are auditing the Books of accounts of Karla Multiplex which runs 15 Film shows every day. One of the
major issues which are of concern to you as an auditor is the Agreement entered into the Multiplex owners
with the Film Distributors. State what points would you check as an auditor in this respect.
➢ Agreement with the Distributors:-
• Vouch payments on account of film hire with bills of distributors and in the process, the
agreements concerned should be referred to.
• Examine unadjusted balance out of advance paid to the distributors against film hire contracts
to see that they are good and recoverable. If any film 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.

QNO Audit of Partnership Firm- Old Course--(P16M/M16E/N17M/N18R/M19M)

ADE.55 Bhaskar CNO - ADE.160 New Course—(N19E/M19R)
Discuss the matters which should be specially considered in the audit of accounts of a partnership.
OR
There are certain points which are required to consider specially in the audit of accounts of a partnership.
Discuss any three points briefly.
Answer Matters which should be specially considered in the audit of accounts of a partnership:
➢ Confirming that the letter of appointment, signed by a partner, duly authorized, clearly states
the nature and scope of audit contemplated by the partners, specially the limitation, if any,
under which the auditor shall have to function.
➢ Verifying that the business in which the partnership is engaged is authorized by the partnership
agreement; or by any extension or modification thereof agreed to subsequently.
➢ Studying the minute book, if any, maintained to record the policy decision taken by partners
specially the minutes relating to authorization of extraordinary and capital expenditure, raising
of loans; purchase of assets, extraordinary contracts entered into and other such matters as are
not of a routine nature.

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 ➢ Verifying generally that the interest of no partner has suffered prejudicially by an activity
engaged in by the partnership which, it was not authorized to do under the partnership deed
or by any violation of a provision in the partnership agreements.
➢ Examining whether books of account appear to be reasonable and are considered adequate in
relation to the nature of the business of the partnership.
➢ Confirming that a provision for the firm’s tax payable by the partnership has been made in the
accounts before arriving at the amount of profit divisible among the partners.
➢ Verifying that the profits and losses have been divided among the partners in their agreed
profit-sharing ratio.
From the foregoing steps involved in the audit of a partnership it would be observed that like the audit of every
other commercial undertaking, it culminates in the verification of the Balance Sheet and the Statement of
Profit and Loss to ensure that these exhibit a true and fair state of affairs of the firm.
The object of examining the partnership agreement, which is an important feature of such an audit,
is that the auditor may be able to report to the partners if the interest of any partner has been
prejudicially affected, on account of the firm having engaged itself in an activity which it was not
authorized to do or violation of any provision of the partnership agreement.
Author’s Note
Flow of the answer
• Letter of appointment ---Business authorized by the partnership agreement--- minute book--
- Interest of partner--- Books of account--- Provision for the firm’s tax--- Profits and losses
division
Audit of Partnership Firm (Advantages) - Old Course—(N21R)
QNO
Bhaskar CNO - ADE.160 New Course— (M19M)
ADE.60

State six important advantages of audit of accounts of a Partnership firm.

Answer ➢ Advantages of Audit of a Partnership Firm –
On broad considerations, the advantages of audit of accounts of a partnership could be stated as
follows:
• Audited statement of accounts is relied upon by the banks when advancing loans, as well
as by prospective purchasers of the business, as evidence of the profitability of the concern
and its financial position
• An audit is an effective safeguard against any undue advantage being taken by a working
partner or partners especially in the case of those partners who are not actively
associated with the working of the firm.
• Audited accounts provide a convenient and reliable means of settling accounts between
the partners and, thereby, the possibility of occurrence of a dispute among them is
mitigated. On this consideration, it is usually provided in and accepted by the partners, shall
be binding upon them, unless some manifest error is brought to light within a specified
period subsequent to the accounts having been signed.
• Audited statements of account can be helpful in the negotiations to admit a person as a
partner, especially when they are available for a number of past years.
• On the retirement or death of a partner, audited accounts, which have been accepted by
the partners, constitute a reliable evidence for computing the amounts due to the retiring
partner or to the representative of the deceased partner in respect of his share of capital,
profits and goodwill.
Author’s Note:
Following questions have the same answer, so it is advisable to remember only one answer as given in
CNO-COA.05 and reproduce it everywhere.
• Advantages of independent audit
• Advantages of audit of partnership firm.
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 • Advantages of Sole trader

QNO Audit of an NGO (Receipts & Remittances to Others) Old Course-- (P16M/N17R/N18E/N18R/M21M)
ADE.75 #Unique New Course--(S17M/M18M/N18M/M19M/S20M/S21M)

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 two 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.
OR
"An NGO operating in Mumbai has collected large scale donations for Kerala flood victims. This NGO has
appointed you to audit its accounts for the specific period in which it collected donations. Draft audit
programme, mentioning six points peculiar to the situation, which you would like to incorporate in your
audit programme."
Answer ➢ Receipt of Donations

• Internal Control System: Existence of

internal control system particularly with
reference to division of responsibilities
in respect of authorized collection of
donations, custody of receipt books and
safe custody of money.
• 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.
• 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.
• 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.
• 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.
• Foreign Contributions, if any, to receive special attention to compliance with applicable laws
and regulations.
➢ Remittance of Donations to Different NGOs:
• System of NGOs’ Selection: System for selecting NGO to whom donations have been sent.
• Mode of Sending Remittance: All remittances are through account payee cheques.
• Remittances through Demand Draft would also need to be scrutinized thoroughly with
reference to recipient.
• Confirming Receipt of Remittance: All remittances are supported by receipts and
acknowledgements.
• Identity: Recipient NGO is a genuine entity. Verify address, 80G Registration Number, etc.
• Direct Confirmation Procedure: Send confirmation letters to entities to whom donations
have been paid.
• Donation Utilization: Utilization of donations for providing relief to Tsunami victims and not
for any other purpose.
Author’s Note
• Flow chart is for Receipt of Donations and can be referred for immediate recollection of
points.
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 • Flow has been created for Remittance of Donations to Different NGOs.Students are adviced to
study in this flow only

QNO Assets on HP Old Course -- (P16M/M17R/M17M/M18R/N19R)

ADE.85 Bhaskar CNO - ADE.240 New Course – Relevant, Concept Covered in
New Course SM
Machinery acquired under Hire-purchase system.
Answer ➢ Machinery Acquired Under Hire-Purchase System:
• Examine Approval
• Examine the Board’s Minute Book approving the purchase on hire-purchase terms.
• Examine hire-purchase agreement
• Examine the hire-purchase agreement carefully and note the description of the
machinery, cost of the machinery, hire purchase charges, and terms of payment and
rate of purchase.

• Value to record & Accounting Treatment

• Assets acquired under Hire Purchase System should be recorded at the full cash
value with corresponding liability of the same amount. In case cash value is not
readily available, it should be calculated presuming an appropriate rate of interest.
• Treatment of Interest
• The interest payable along with each installment, whether separately or included
therein should be debited to the interest account and not to the asset account.
• Presentation in Balance sheet
• Hire purchased assets are shown in the balance sheet with an appropriate narration
to indicate that the enterprise does not have full ownership thereof.

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 Miscellaneous
QNO Contingent Liability Disclosure Old Course -- (N19E/M21M)
Misc.06 New Course -- (M21M)
From the auditing point of view, the auditor should verify that a proper disclosure about contingent liabilities
is made in financial statements as required by AS 29. What type of disclosures should be made for each class
of contingent liability as at the balance sheet date?
Answer Disclosure for each class of Contingent Liability: From the auditing point of view, the auditor should
verify that a proper disclosure about contingent liabilities is made in financial statement as required
by AS 29. As per, AS 29 an enterprise should disclose for each class of contingent liability at the balance
sheet date.
(i) A brief description of the nature of the contingent liability and where practicable.
(ii) An estimate of the amount as per measurement principle as prescribed for provision in AS 29.
(iii) Indication of the uncertainty relating to outflow.
(iv) The possibility of any reimbursement.
Where any of the information as required above is not disclosed because it is not practicable to do so,
that fact should be stated.

QNO AS-1 (Matters Leading to Qualifying Audit Report) New Course – (M22M)
Misc.09
What are the circumstances in which auditors are required to qualify their reports of companies for mattes
related to AS-I ‘Disclosure of Accounting Policies’?
Answer While discharging their attest function, the members of the Institute may keep the following in mind
with regard to mandatory Accounting Standards. As per AS 1 - Disclosure of Accounting Policies, in
the case of a company, members should qualify their audit reports in case:
(i) accounting policies required to be disclosed under Schedule III or any other provisions of the
Companies Act, 2013, have not been disclosed, or
(ii) accounts have not been prepared on accrual basis, or
(iii) the fundamental accounting assumption of going concern has not been followed and this fact has
not been disclosed in the financial statements, or
(iv) proper disclosures regarding changes in the accounting policies have not been made.

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