Nature, objective and Scope of

Auditing
Unit – One
CS Neha Laddha
KYT

• CS , MBA, M.Com
• 15 years of teaching experience
• Authored 5 books
• Visiting lecturer in many colleges
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Meaning of Audit
• An audit is an independent examination of financial information of any entity, whether profit oriented or not,
and irrespective of its size or legal form, when such an examination is conducted with a view to expressing
an opinion thereon.”
• Analysis of the Definition
1. Audit is Independent examination of Financial information.
2. of any entity – that entity may be profit oriented or not and irrespective of its size or legal form.
For example – Profit oriented – Audit of Listed company engaged in business. On the other hand,
Audit of NGO – not profit oriented.
3. The objective of the audit is to express an opinion on the financial statements.
• The person conducting this task should take care to ensure that financial statements would not mislead
anybody.
 OBJECTIVES OF AUDIT
As per SA-200 “Overall Objectives of the Independent Auditor”, in conducting an audit of financial statements, the
overall objectives of the auditor are:
(a) To obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due
to fraud or error, thereby enabling the auditor to express an opinion on whether the financial statements are prepared, in all material
respects, in accordance with an applicable financial reporting framework; and

(a) To report on the financial statements, and communicate as required by the SAs, in accordance with the auditor’s findings.

• Example
• While auditing the books of accounts of Different and Capable Limited for the financial year 2020-21, Mr. Z the auditor of the
above mentioned company explained to a new audit team members about the objectives for which Audit of a company is
conducted. While going through the financial statements of the company, audit team observed that there were many errors in the
heads of expenses which were material and also requirements of Companies Act, 2013 were not complied with. When audit team
discussed the matters with Mr. Z with regard to Different and Capable Limited , he came to the conclusion that the auditors did
not obtain reasonable assurance and were unable to express an opinion on the financial statements of the company.
Source :ICAI
SCOPEOF AUDIT
• The following points merit consideration in regard to scope of audit:
1. The audit should be organized to cover adequately all aspects of the
enterprise relevant to the financial statements being audited.
2. To form an opinion on the financial statements, the auditor should be
reasonably satisfied as to whether the information contained in the
underlying accounting records and other source data is reliable and
sufficient as the basis for the preparation of the financial statements.
3. In forming his opinion, the auditor should also decide whether the
relevant information is properly disclosed in the financial statements
subject to statutory requirements, where applicable.
4. The auditor assesses the reliability and sufficiency of the information contained in the underlying accounting
records and other source data by:
(a) making a study and evaluation of accounting systems and internal controls and
(b) carrying out such other tests, enquiries and other verification procedures of accounting transactions and
account balances as he considers appropriate in the particular circumstances.

(c) 5. The auditor determines whether the relevant information is properly disclosed in the
financial statements by:
• comparing the financial statements with the underlying accounting records and other source data to see whether they properly summarize the
transactions and events recorded therein;
• considering the judgments that management has made in preparing the financial statements accordingly, the
auditor assesses the selection and consistent application of accounting policies, the manner in which the information
has been classified, and the adequacyof disclosure.
6. The auditor is not expected to perform duties which fall outside the scope of his competence. For example,
the professional skill required of an auditor does not include that of a technical expert for determining physical
condition of certain assets.
7. Constraints on the scope of the audit of financial statements that impair the auditor’s ability to express an unqualified
opinion on such financial statement should be set out in his report, and a qualified opinion or disclaimer of opinion should be
expressed as appropriate
 STANDARD SETTING PROCESS

• Role of International Auditing and Assurance Standards Board

• In 1977, the International Federation of Accountants (IFAC) was set up with a viewto bringing harmony in
the profession of accountancy on an international scale. In pursuing this mission, the IFAC Board has
established the International Auditingand Assurance Standards Board (IAASB) to develop and issue, in the
public interest and under its own authority, high quality auditing standards for use around the world

• The IAASB functions as an independent standard-setting body under the auspicesof IFAC
Objectives
The IAASB achieves this objective by:
¨ Establishing high quality auditing standards and guidance for financial statement audits that are
generally accepted and recognized by investors, auditors, governments, banking regulators,
securities regulators and other key stakeholders across the world;
¨ Establishing high quality standards and guidance for other types of assurance services on both financial
and non-financial matters;
¨ Establishing high quality standards and guidance for other related services;
• Establishing high quality standards for quality control covering the scope of services addressed by the
IAASB; and
• Publishing other pronouncements on auditing and assurance matters, thereby advancing public
understanding of the roles and responsibility of professional auditors and assurance service providers.
Auditing and Assurance Standards Board

• ICAI is a member of the IFAC and is committed to work towards the implementation of the guidelines
issued by theIFAC. ICAI constituted the AASB (erstwhile Auditing Practices Committee) to review the
existing auditing practices in India and to develop Engagement and Quality Control Standards (erstwhile,
Statements on Standard Auditing Practices) so that these may be issued by the Council of the Institute.
Process
Auditing and Assurance Standards Board (AASB) of the Institute formulates the auditing standards. Broadly, the
following procedure is adopted for the formulation of Standards on Auditing (SAs):
• The Auditing and Assurance Standards Board identifies the areas where auditing standards need to be
formulated and the priority in regard to their selection.
• In the preparation of Auditing Standards, AASB is assisted by study groups/task force constitute to consider
specific project. Study group comprising of a cross section of members of the Institute.
• The study group/task force is responsible for preparing the primarily draft of Standards.
• Based on the work of the study groups, an exposure draft of the proposed Standards is prepared by the
Committee and issued for comments by members of the ICAI.
• After taking the comments into consideration, AASB finalize the draft and submit to the Council of the
Institute.
• The Council on its review of the draft, makes suitable modifications in consultations with the AASB and then
Standards/Statements is issued under the authority of the Council.
Ethical Requirements Relating to an Audit of Financial
Statements
(a) Integrity: Integrity requires auditor to be straight forward and honest in all professional and business
relationships. It implies fair dealing and truthfulness.
(b) Objectivity: The principle of objectivity requires an auditor not to compromise professional judgment
because of bias, conflict of interest or undue influence of others.
(c) Professional competence and due care: It requires that auditor attains and maintains professional
knowledge and skill at the level required to render competent professional service based on current technical
and professional standards and legislation and also to act diligently and in accordance with technical and
professional standards.
(d) Confidentiality: Confidentiality principle requires an auditor to respect the confidentiality of information
acquired as a result of professional or business relationships.
(e) Professional behaviour : It requires an auditor to comply with relevant laws and regulations and avoid any
conduct that he knows or should know might discredit the profession
INHERENT LIMITATIONS OF AUDIT
• The auditor is not expected to, and cannot, reduce audit risk to zero and cannot therefore obtain
absolute assurance that the financial statements are free from material misstatement due to fraud or
error. This is because there are inherent limitations of an audit. The inherent limitations of an audit
arise from:
• The Nature of Financial Reporting
• The Nature of Audit Procedures
• Timeliness of Financial Reporting and the Balance between Benefit and Cost
PRECONDITIONS FOR AN AUDIT
In order to establish whether the preconditions for an audit are present, the auditorshall:
(a) Determine whether the financial reporting framework is acceptable; and
(b) Obtain the agreement of management that it acknowledges and understandsits responsibility:
(a) For the preparation of the financial statements in accordance with theapplicable financial reporting framework
(b) For the internal control as management considers necessary; and
(c) To provide the auditor with:
Ø Access to all information such as records, documentation andother matters;

Ø Additional information that the auditor may request frommanagement for the purpose of
the audit; and
Ø Unrestricted access to persons within the entity from whom theauditor determines it
necessary to obtain audit evidence.
AGREEMENT ON AUDIT ENGAGEMENT TERMS

• Legal requirement to get the accounts audited so far extends only to companies,
registered societies etc. In these cases the respective law governs the appointment
of auditors and their duties. In all other cases, it is a matter of contract. It is,
therefore, important, both for the auditor and client, that each party should
be clear about the nature of the engagement. It must be reduced to writing
and should exactly specify the scope of the work. The audit engagement letter is
sent by the auditor to his client. The ICAI has issued SA 210 “Agreeing the Terms
of Audit Engagements” on the subject. It is in the interest of both the auditor and
the client to issue an engagement letter so that the possibility of
misunderstanding is reduced to a great extent.
 The agreed terms of the audit engagement shall be recorded in an audit engagement letter or
other suitable form of written agreement and shall include:
(a) The objective and scope of the audit of the financial statements;
(b) The responsibilities of the auditor;
(c) The responsibilities of management;
(d) Identification of the applicable financial reporting framework for the preparation of the financial
statements; and
(e) Reference to the expected form and content of any reports to be issued by the auditor and a
statement that there may be circumstances in which a report may differ from its expected form
and content.
Acceptance and Continuance of Client Relationships and Audit
Engagements

• SQC 1 requires the firm to obtain information before accepting an engagement.

Information such as the following assists the engagement partner in determining whether
the decisions regarding the acceptance and continuance of audit engagements are
appropriate:
¨ The integrity of the principal owners, key management and those charged with
governance of the entity;
¨ Whether the engagement team is competent to perform the audit engagement and has
the necessary capabilities, including time and resources;
¨ Whether the firm and the engagement team can comply with relevant ethical
requirements; and
¨ Significant matters that have arisen during the current or previous audit engagement,
and their implications for continuing the relationship.
Code of Ethics and Conduct
Unit – 2
Prof Neha Laddha
 Meaning of Independence
The auditor should be independent of the entity subject to the audit. The Code describes
independence as comprising both-

Independence of Mind and

Independence in Appearance.
• There are two interlinked perspectives of independence of auditors, one,
independence of mind; and two, independence in appearance. The Code of Ethics
for Professional Accountants issued by International Federation of Accountants
(IFAC) defines the term ‘Independence’ as follows:
• “Independence is: (a) 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
•(b) 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.
• The objective of an audit of financial statements is to enable an
auditor to express an opinion on such financial statements. The
auditor’s opinion helps determination of the true and fair view of the
financial position and operating results of an enterprise. The user
should not assume that the auditor’s opinion is an assurance as to
the future viability of the enterprise or the efficiency or
effectiveness with which management has conducted the affairs of
the enterprise.
Threats to Independence
• The Code of Ethics prepared by IFAC identifies 5 types of treats to independence

Self Interest Self Review Advocacy

Threat Threat Threat

Familiarity Intimidation
Threats Threat
Self-Interest Threats
• It occurs when an auditing firm, or its partner or associate could
benefit from financial interest in an audit client.
• Examples include
(i) direct financial interest or materially significant indirect financial interest in a client,
(ii) loan or guarantee to or from the concerned client,
(iii) undue dependence on a client's fees and, hence, concerns about losing the engagement,
(iv) close business relationship with an audit client,
(v) potential employment with the client, and (vi) contingent fees for the audit engagement.
Self-Review Threats
Self-review threats, which occur when during a review of any judgement or conclusion
reached in a previous audit or non-audit engagement, or when a member of the audit team
was previously a director or senior employee of the client. Instances where such threats come
into play are :
(i) when an auditor having recently been a director or senior officer of the company, and
(ii) when auditors perform services that are themselves subject matters of audit.
Advocacy Threats
• Advocacy threats, which occur when the auditor promotes, or is perceived to promote, a client's
opinion to a point where people may believe that objectivity is getting compromised, e.g. when an
auditor deals with shares or securities of the audited company, or becomes the client's advocate in
litigation and third party disputes.
Familiarity Threats
• Familiarity threats are self-evident, and occur when auditors form relationships with the client
where they end up being too sympathetic to the client's interests. This can occur in many ways: (i)
close relative of the audit team working in a senior position in the client company, (ii) former partner
of the audit firm being a director or senior employee of the client, (iii) long association between
specific auditors and their specific client counterparts, and (iv) acceptance of significant gifts or
hospitality from the client company, its directors or employees.
Intimidation Threats
Intimidation threats, which occur when auditors are deterred from acting objectively with an
adequate degree of professional skepticism. Basically, these could happen because of threat of
replacement over disagreements with the application of accounting principles, or pressure to
disproportionately reduce work in response to reduced audit fees.
SAFEGUARDS TO INDEPENDENCE
• The Chartered Accountant has a responsibility to remain independent by taking into account the
context in which they practice, the threats to independence and the safeguards available to eliminate
the threats.
• To address the issue, Members are advised to apply the following guiding principles: -

▪ For the public to have confidence in the quality of audit, it is essential that
auditors should always be and appears to be independent of the entities that they
areauditing.

▪ In the case of audit, the key fundamental principles are integrity, objectivity and
professional skepticism, whichnecessarily require the auditor to be independent.
▪ Before taking on any work, an auditor must conscientiously consider whether it
involves threats to his independence.

▪ When such threats exist, the auditor should either desist from the task or, at the
very least, put in place safeguards that eliminate them. All such safeguards
measure needs to be recorded in a form that can serve as evidence of compliance
with due process.

▪ If the auditor is unable to fully implement credible and adequate safeguards, then
he must not accept thework.
Example

• Mr. S and Mr. W are partners in SW and Associates, a Partnership Firm of Chartered Accountants. During
the financial year 2020-21, SW and Associates were appointed as auditors of Capable and Composed
Limited. The brother of Mr. W was involved in the management of Capable and Composed Limited. Mr. S
being aware of the whole situation, on behalf of SW and Associates did not accept the appointment as
auditors of Capable and Composed Limited as it would act as a threat (familiarity threat) and affect
independence of auditors.
Provisions contained under the Companies Act, 2013

(a) a body corporate other than a limited liability partnership registered under
the Limited Liability Partnership Act, 2008;
(b) an officer or employee of the company;
(c) a person who is a partner, or who is in the employment, of an officer or
employee of the company;
(d) a person who, or his relative or partner—
(i) 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:
Provided that the relative may hold security or interest in the company of face
value not exceeding one thousand rupees or such sum as may be
prescribed;
(ii) is indebted to the company, or its subsidiary, or its holding or associate
company or a subsidiary of such holding company, in excess of such amount
as may be prescribed; or
f) a person whose relative is a director or is in the employment of the company as a director or key
managerial personnel;
(g) a person who is in full time employment elsewhere or a person or a partner of a firm holding
appointment as its auditor, if such persons or partner is at the date of such appointment or
reappointment holding appointment as auditor of more than twenty companies other than one person
companies ,dormant companies, small companies and private companies having paid-up share capital
less than one hundred crore rupees.
(h)a person who has been convicted by a court of an offence involving fraud and a period of ten years
has not elapsed from the date of such conviction;
(i) any person whose subsidiary or associate company or any other form of entity, is engaged as on
the date of appointment in consulting and specialised services as provided in section 144.
Audit Strategy, Audit Plan and
Audit Program
Unit – 3
CS Neha Laddha
Planning an Audit
• Planning an audit involves:
(a) Establishing the overall audit strategy
(b) Developing an audit plan

• Plans should be made to cover, among other things:

(a) acquiring knowledge of the client’s accounting systems, policies and internal control
procedures;
(b) establishing the expected degree of reliance to be placed on internal control;
(c) determining and programming the nature, timing, and extent of the audit procedures
to be performed; and
(d) coordinating the work to be performed
Audit Strategy
• The auditor shall establish an overall audit strategy that sets the scope, timing and
direction of the audit, and that guides the development of the audit plan.
• The process of establishing the overall audit strategy assists the auditor to
determine, subject to the completion of the auditor’s risk assessment procedures,
such matters as:
1. The resources to deploy for specific audit areas, such as the use of appropriately
experienced team members for high risk areas or the involvement of experts on complex
matters;
2. The amount of resources to allocate to specific audit areas, such as the number of team
members assigned to observe the inventory count at material locations, the extent of
review of other auditors’ work in the case of group audits, or the audit budget in hours to
allocate to high risk areas;
3. When these resources are to be deployed, such as whether at an interim audit stage or at
key cut-off dates; and
4. 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.
Audit Plan
• The auditor shall develop an audit plan that shall include a description of
(a) The nature, timing and extent of planned risk assessment procedures, as determined
under SA 315 “Identifying and Assessing the Risks of Material Misstatement through
Understanding the Entity and Its Environment”.
(b) The nature, timing and extent of planned further audit procedures at the assertion level,
as determined under SA 330 “The Auditor’s Responses to Assessed Risks”.
(c) Other planned audit procedures that are required to be carried out so that the
engagement complies with SAs.
•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.
 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:
1. The size and complexity of the entity.
2. The area of the audit.
3. The assessed risks of material misstatement
4. The capabilities and competence of the individual team members performing the audit work
Audit Program
• It is desirable that in respect of each audit and more particularly for bigger audits an audit
programme should be drawn up. Audit programme is a list of examination and verification steps to
be applied and set out in such a way that the inter- relationship of one step to another is clearly
shown and designed, keeping in view the assertions discernible in the statements of account
produced for audit or on the basis of an appraisal of the accounting records of the client
• In other words, an audit programme is a detailed plan of applying the audit procedures in the given
circumstances with instructions for the appropriate techniques to be adopted for accomplishing the
audit objectives
Construction of Audit Program
For the purpose of programme construction, the following points should be kept in
mind:
(1) Stay within the scope and limitation of the assignment.
(2) Prepare a written audit programme setting forth the procedures that are needed to
implement the audit plan.
(3) Determine the evidence reasonably available and identify the best evidence for
deriving the necessary satisfaction.
(4) Apply only those steps and procedures which are useful in accomplishing
• the verification purpose in the specific situation.
(1) 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.
(2) Consider all possibilities of error.
(3) Co-ordinate the procedures to be applied to related items.
 Quality Control for Audit Program
The objective of the auditor is to implement quality control procedures at the engagement level that
provides the auditor with reasonable assurance that:

• An audit is a complex task involving number of people at different levels. As we observed in the
preparation and development of audit programme, the auditor would naturally have to depend
upon number of technical experts as well. During the course of his work, the auditor is also likely to
use the work performed by other auditors also
Audit Planning and Materiality
• Financial statements should disclose all ‘material items, i.e. the items the knowledge of which
might influence the decisions of the user of the financial statement. Materiality is not always
a matter of relative size. For example a small amount lost by fraudulent practices of certain
employees can indicate a serious flaw in the enterprise’s internal control system requiring
immediate attention to avoid greater losses in future. In certain cases quantitative limits of
materiality is specified.
Examples
• A company should disclose by way of notes additional information regarding any item of
income or expenditure which exceeds 1% of the revenue from operations or `1,00,000
whichever is higher (Refer general Instructions for preparation of Statement of Profit and
Loss in Schedule III to the Companies Act, 2013)
• A company should disclose in Notes to Accounts, shares in the company held by each
shareholder holding more than 5 per cent shares specifying the number of shares held.
Defining Materiality
1. Misstatements are material if expected to influence the economic decisions of users taken
on the basis of the financial statements:
• 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;
2. Judgments about materiality are affected by the size or nature of a
misstatement :
• Judgments about materiality are made in the light of surrounding
circumstances, and are affected by the size or nature of a misstatement, or a
combination of both; and
3. Judgments about matters that are material are based on a consideration of the
common financial information needs of users as a group :
• 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.
 Performance Materiality
• Performance Materiality defined : Performance materiality means the amount or amounts set by the auditor at less than materiality for
the financial statements as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and
undetected misstatements exceeds materiality for the financial statements as a whole. If applicable, performance materiality also refers to the
amount or amounts set by the auditor at less than the materiality level or levels for particular classes of transactions, account balances or
disclosures.
Revision of Materiality level
• Materiality for the financial statements as a whole (and, if applicable, the
materiality level or levels for particular classes of transactions, account
balances or disclosures) may need to be revised as a result of a change in
circumstances that occurred during the audit (for example, a decision to
dispose of a major part of the entity’s business), new information, or a
change in the auditor’s understanding of the entity and its operations as a
result of performing further audit procedures.
Documenting the Materiality
• The audit documentation shall include the following amounts and the factors
considered in their determination:
(a) Materiality for the financial statements as a whole;
(b) If applicable, the materiality level or levels for particular classes of transactions, account
balances or disclosures ;
(c) Performance materiality ; and
(d) Any revision of (a)-(c) as the audit progressed
Audit Documentation and
Audit Evidence
Unit – 4
Name: CS Neha Laddha
Meaning of Audit Documentation
• SA 230 on “Audit Documentation”, deals with the auditor’s responsibility to prepare
audit documentation for an audit of financial statements. It is to be adapted as
necessary in the circumstances when applied to audits of other historical financial
information. The specific documentation requirements of other SAs do not limit the
application of this SA. Laws or regulations may establish additional documentation
requirements.
Meaning
• Audit Documentation refers to the record of audit procedures performed,
relevant audit evidence obtained, and conclusions the auditor reached.
(terms such as “working papers” or “work papers” are also sometimes used.)
• Objective of the Auditor:
• The objective of the auditor is to prepare documentation that
provides:
(a) A sufficient and appropriate record of the basis for the auditor’s report; and
(b) Evidence that the audit was planned and performed in accordance with SAs
and applicable legal and regulatory requirements
Nature of Audit Documentation
• Audit documentation provides:
(a) evidence of the auditor’s basis for a conclusion about the
achievement of the overall objectives of the auditor; and
(b) evidence that the audit was planned and performed in
accordance with SAs and applicable legal and regulatory
requirements
Purpose of Audit Documentation

• The following are the purpose of Audit documentation:

1. Assisting the engagement team to plan and perform the audit.
2. Assisting members of the engagement team to direct and supervise the
auditwork, and to discharge their review responsibilities.
3. Enabling the engagement team to be accountable for its work.
4. Retaining a record of matters of continuing significance to future audits.
5. Enabling the conduct of quality control reviews and inspections in
accordancewith SQC 1.
6. Enabling the conduct of external inspections in accordance with
applicablelegal, regulatory or other requirements
Form, Content and Extent of Audit Documentation
The form, content and extent of audit documentation
depend onfactors such as:
1. The size and complexity of the entity.
2. The nature of the audit procedures to be performed.
3. The identified risks of material misstatement.
4. The significance of the audit evidence obtained.
5. The nature and extent of exceptions identified
Ownership of Audit Documentation

¨ Standard on Quality Control (SQC) 1 provides that, unless otherwise

specified by law or regulation, audit documentation is the property of the
auditor.
¨ He may at his discretion, make portions of, or extracts from, audit
documentation available to clients, provided such disclosure does
not undermine the validity of the work performed, or, in the case
of assurance engagements, the independence of the auditor or of
his personnel.
Types of Evidence
• Physical evidence
• Third-party representations
• Documentary evidence
• Computations
• Data Interrelationships
• Client representations
• Accounting records
Types of Evidence- Physical Evidence

Evidence that can actually be seen by auditors.

• This type of evidence is generally effective for supporting testing existence and
condition of the asset. Example –inspection of a fixed asset.
Types of Evidence- Third Party Representations
• Confirmations
• Lawyers’ Letters
• Reports of Specialists
Types of Evidence- Documentary Evidence
Four basic types (helps determine reliability):
• Created by outside parties and transmitted directly to auditor
• Created by outside parties and held by client
• Created and held by client
• Electronic documents
Types of Evidence- Computations
Computations are:
• Performed independently by auditor
• Used to verify mathematical accuracy of client’s analyses and records
Types of Evidence -Analytical
Data interrelationships (i.e., analytical procedures) rely on plausible
relationships among financial and non-financial data.
• Effective for testing “reasonableness” of certain account balances
• Can be used as primary or corroborating evidence, depending on the nature of
account
Types of Evidence
Oral and Written Client Representations
• Responses to questions and inquiries to clients
during an audit constitute audit evidence.
• Oral representations are generally not sufficient as
primary evidence, but may provide corroboration for
other evidence.
• Written representations (representation letter) are
required, but should not be used as a substitute for
other audit procedures.
Confirmations
The receipt of a written or oral response from an
independent third party.
• Customers – confirm A/C receivable balances
• Suppliers – confirm A/C payable balances
• Banks – confirm account/loan balances
• Lawyers – confirm contingent liabilities
Types of Evidence- Accounting Records
Clients’ accounting records (e.g. ledgers and journals) may provide
worthwhile evidence in themselves.
• Depends on the effectiveness of internal controls
Relevance and reliability of Audit evidence
• Relevance
• Relevance deals with the logical connection with, or bearing upon, the
purpose of the audit procedure and, where appropriate, the assertion under
consideration. The relevance of information to be used as audit evidence may
be affected by the direction of testing
 • 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. Therefore,
generalisations about the reliability of various kinds of audit evidence are
subject to important exceptions. Even when information to be used as
audit evidence is obtained from sources external to the entity,
circumstances may exist that could affect its reliability.
• For example, information obtained from an independent external
source may not be reliable if the source is not knowledgeable, or a
management’s expert may lack objectivity. 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.
¨ The reliability of audit evidence that is generated internally is
increased when the related controls, including those over its
preparation and maintenance, imposed by the entity are effective.
¨ Audit evidence obtained directly by the auditor (for example,
observation of the application of a control) is more reliable than audit
evidence obtained indirectly or by inference (for example, inquiry
about the application of a control).
¨ Audit evidence in documentary form, whether paper, electronic, or other medium, is
more reliable than evidence obtained orally
¨ 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
Written Representations as Audit Evidence

• Written representations may be defined as a written statement by

management provided to the auditor to confirm certain matters
or to support other audit evidence.
•Audit evidence is all the information used by the auditor in
arriving at the conclusions on which the audit opinion is
based. Written representations are necessary information
that the auditor requires in connection with the audit of the
entity’s financial statements. Accordingly, similar to
responses to inquiries, written representations are audit
evidence.
• Written representations are requested from those responsible for
the preparation and presentation of the financial statements
Risk Assessment and
Internal Control
Unit – 5
Name: CS Neha Laddha
Audit Risk
• ‘The risk that the auditor expresses an inappropriate audit opinion
when the financial statements are materially misstated. Audit risk
is a function of material misstatement and detection risk.’
Audit Risk Types

• The two components of audit risk are the risk of material misstatement and
risk identification. For example, a large sporting goods store needs an audit,
and a CPA firm is evaluating the risk of auditing the store's inventory.
• Risk of Material Misstatement
• The risk of material misstatement is the possibility of the financial results
being significantly inaccurate before the audit. The "money" in this case
refers to a sum that is significant enough to alter a reader's view on a financial
statement, and the percentage or sum is subjective.
• Considering the example above, if a stakeholder of the store identifies that
the inventory balance of Rs.10,00,000 has an error of Rs.1,00,000, it can be
considered to be a significant amount.
• Risk Identification
• Risk identification is the danger that a material misstatement is not
identified by the auditor's procedures. For example, an auditor must
perform a physical inventory count and compare the results to
the accounting records.
• Continuing the example, an auditor must perform an actual count of
the inventory and compare the results with the books of accounts.
The count proves the existence of an inventory. If the test sample for
the inventory count is insufficient to extrapolate the entire inventory,
the degree of risk identification is higher
Risk of material misstatement

The risk that thevfinancial statements are materially misstated

prior to audit. This consists of two components, described as
follows at the assertion level:
• Inherent risk is defined as the risk that in the absence of preventive
internal accounting controls, a material error will occur in the
accounting process.
• Control risk—The risk that a misstatement that could occur in an assertion
about a class of transaction, account balance or disclosure and that could
be material, either individually or when aggregated with other
misstatements, will not be prevented, or detected and corrected, on a timely
basis by the entity’s internal control. Control Risk is a risk that internal
control existing and operating in an entity would not be efficient enough to
stop from happening, or find and then rectify in an appropriate time, any
material misstatement relating to a transaction, balance of an account or
disclosure required to be made in the financial statements of that entity. So
in a way it can be said that there exists an inverse relation between Control
Risk and Efficiency of Internal Control of an Entity.
Lets revise
Identifying and Assessing the risk of Material Mistatement
(i) The auditor shall identify and assess the risks
of material misstatement at:
(a)the financial statement level
(b)the assertion level for classes of
transactions, account balances, and
disclosures
For the purpose of Identifying and assessing the risks of material misstatement, the
auditor shall:
(a) 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;
(b) Assess the identified risks, and evaluate whether they relate more pervasively to
the financial statements as a whole and potentially affect many assertions;
(c) 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
• Consider the likelihood of misstatement, including the possibility of multiple misstatements, and
whether the potential misstatement is ofa magnitude that could result in a material
misstatement
Risk Assessment Procedure
Risk assessment procedure - a basis for the identification
and assessment of risks of material misstatement at the
financial statement and assertion levels
• The auditor shall perform risk assessment procedures to provide a basis
for the identification and assessment of risks of material misstatement at
the financial statement and assertion levels.
• Information obtained by performing risk assessment procedures - Used
as audit evidence
• The risks to be assessed include both those due to error and those
due to fraud
• The risk assessment procedures shall include the following
• Inquiries of Management and Others Within the Entity: Much of the
information obtained by the auditor’s inquiries is obtained from management
and those responsible for financial reporting.
• Analytical Procedures: 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.
• Observation and Inspection: Observation and inspection may support inquiries
of management and others, and may also provide information about the entity
and its environment.
Understanding the entity and its enviornment
• 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:
(i) its operations;

(ii) its ownership and governance structures;

(iii) the types of investments that the entity is making and plans to make,including
investments in special-purpose entities; and
(iv) the way that the entity is structured and how it is financed;
• to enable the auditor to understand the classes of transactions, account
balances, and disclosures to be expected in the financial statements.
• 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.
Internal Control
Meaning of Internal Control
• The process designed, implemented and maintained by those charged with
governance, management and other personnel to provide reasonable
assurance about the achievement of an entity’s objectives with regard to
reliability of financial reporting, effectiveness and efficiency of operations,
safeguarding of assets, and compliance with applicable laws and regulations.
The term “controls” refers to any aspects of one or more of the components
of internal control.”
EVALUATION OF INTERNAL CONTROL BYTHEAUDITOR
• The review of internal controls will enable the auditor to know:
(i) whether errors and frauds are likely to be located in the ordinary
course of operations of the business;
(ii) whether an adequate internal control system is in use and operating
as planned by the management;
(iii) whether an effective internal auditing department is operating;
(iv) 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);
(v) whether the controls adequately safeguard the assets;
• how far and how adequately the management is
discharging its function in so far as correct recording of
transactions is concerned;
• how reliable the reports, records and the certificates to
the management can be;
• the extent and the depth of the examination that he
needs to carry out in the different areas of accounting;
• what would be appropriate audit technique and the
audit procedure in the given circumstances;
• what are the areas where control is weak and where it
is excessive; and
TESTING OF INTERNAL CONTROL
•IT includes
•Inspection of documents supporting transactions and other events to gain
audit evidence that internal controls have operated properly, for example,
verifying that a transaction has been authorised.
•Inquiries about, and observation of, internal controls which leave no audit trail,
for example, determining who actually performs each function and not merely
who is supposed to perform it.
•Re-performance involves the auditor’s independent execution of procedures or
controls that were originally performed as part of the entity’s internal control, for
example, reconciliation of bank accounts, to ensure they were correctly
performed by the entity.
•Testing of internal control operating on specific computerised applications or
over the overall information technology function, for example, access or program
change controls.
Internal Control and IT Environment
(i) Generally, IT benefits an entity’s internal control by enabling an
entity to:
• Consistently apply predefined business rules and perform complex
• calculations in processing large volumes of transactions or data;
• Enhance the timeliness, availability, and accuracy of information;
• Facilitate the additional analysis of information;
• Enhance the ability to monitor the performance of the entity’s
activities and its policies and procedures;
• Reduce the risk that controls will be circumvented; and
• Enhance the ability to achieve effective segregation of duties by
implementing security controls in applications, databases, and
operating systems.
(i) IT also poses specific risks to an entity’s internal control,
including, for example:
• Reliance on systems or programs that are inaccurately
processing data, processing inaccurate data, or both.
• Unauthorised access to data that may result in destruction of data
or improper changes to data, including the recording of
unauthorised or non- existent transactions, or inaccurate
recording of transactions. Particular risks may arise where multiple
users access a common database.
• The possibility of IT personnel gaining access privileges beyond those necessary to
perform their assigned duties thereby breaking down segregation of duties.
• Unauthorised changes to data in master files.
• Unauthorised changes to systems or programs.
• Failure to make necessary changes to systems or programs.
• Inappropriate manual intervention.
• Potential loss of data or inability to access data as required.
(i) Suitability: Manual elements in internal control may be more suitable where
judgment and discretion are required.
(ii) Reliability: Manual elements in internal control may be less reliable than automated
elements because they can be more easily bypassed, ignored, or overridden and they
are also more prone to simple errors and mistakes. Consistency of application of a
manual control element cannot therefore be assumed.
(iii) Nature of Entity’s Information System: The extent and nature of the risks to
internal control vary depending on the nature and characteristics of the entity’s
information system. The entity responds to the risks arising from the use of IT or
from use of manual elements in internal control by establishing effective controls in
light of the characteristics of the entity’s information system.
Frauds and Responsibility of
auditor in this regard
Unit – 6
Name: CS Neha Laddha
Meaning of Fraud
• The Standard on Auditing (SA) 240 “The Auditor’s Responsibilities Relating
to Fraud in an Audit of Financial Statements” defines the term ‘fraud’ as-
• “an intentional act by one or more individuals among management, those
charged with governance, employees, or third parties, involving the use of
deception to obtain an unjust or illegal advantage”.
• 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.
DETECTION OF FRAUD AND ERROR–DUTYOF AN
AUDITOR
• As per SA 240 “The Auditor’s Responsibilities Relating to Fraud in an Audit of
Financial Statements”, the primary responsibility for the prevention and
detection of fraud rests with both those charged with governance of the
entity and management
• Broadly, the general principles laid down in the SA may be noted as under
• 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. As described in SA200,
“Overall Objectives of the Independent Auditor and the Conduct of an Audit
in Accordance with Standards on Auditing,” 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.
• 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.
• 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.

• 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.
FRAUD RISK FACTORS
• SA 240, further, explains by way of examples, certain risk factors and
circumstances relating to possibility of fraud as may be considered by the
auditor
• 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.
• Examples of Fraud Risk Factors: 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.,
(A) fraudulent financial reporting, and
(B) misappropriation of assets.
Risk Factors Relating to Misstatements Arising from Fraudulent Financial Reporting

(A) The following are examples of risk factors relating to misstatements arising from
fraudulent financial reporting-
• Incentives/Pressures: Financial stability or profitability is threatened by economic,
industry, or entity operating conditions, such as (or as indicated by):
1. High degree of competition or market saturation, accompanied by decliningmargins.
2. High vulnerability to rapid changes, such as changes in technology, product
obsolescence, or interest rates.
3. Significant declines in customer demand and increasing business failures ineither the
industry or overall economy.
4. Operating losses making the threat of bankruptcy, foreclosure, or hostiletakeover
imminent.
5. Recurring negative cash flows from operations or an inability to generate cash
flows from operations while reporting earnings and earnings growth.
6. New accounting, statutory, or regulatory requirements.
• Opportunities: The nature of the industry or the entity’s operations provides
opportunities to engage in fraudulent financial reporting that can arise from the
following:
1. Significant related-party transactions not in the ordinary course of business
or with related entities not audited or audited by another firm.
2. A strong financial presence or ability to dominate a certain industry sector
that allows the entity to dictate terms or conditions to suppliers or customers
that may result in inappropriate or non-arm’s-length transactions.
3. Assets, liabilities, revenues, or expenses based on significant estimates that
involve subjective judgments or uncertainties that are difficult to corroborate.
4. Significant, unusual, or highly complex transactions, especially those close to
period end that pose difficult “substance over form” questions
• Attitudes/Rationalizations: Communication, implementation, support, or enforcement of the entity’s values or ethical
standards by management, or thecommunication of inappropriate values or ethical standards, that are not effective.
1. Known history of violations of securities laws or other laws and regulations.
2. Excessive interest by management in maintaining or increasing the entity’sinventory price or earnings trend.
3. Management failing to remedy known significant deficiencies in internal control on a timely basis.
4. An interest by management in employing inappropriate means to minimizereported earnings for tax-motivated
reasons.
5. The owner-manager makes no distinction between personal and businesstransactions.
6. The relationship between management and the current or predecessorauditor is strained, as exhibited by the
following:
• Frequent disputes with the current or predecessor auditor on accounting, auditing, or reporting matters.
• Unreasonable demands on the auditor, such as unrealistic time constraints regarding the completion of the audit
or the issuance of the auditor’s report.
• Restrictions on the auditor that inappropriately limit access to people or information or the ability to
communicate effectively with those charged with governance.
• Domineering management behavior in dealing with the auditor, especially involving attempts to influence the
scope of the auditor’s work or the selection or continuance of personnel assigned to or consulted on the audit
engagement
FRAUD REPORTING

• To the Central Government

• As per sub-section (12) of section 143 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 of fraud involving such amount
or amounts as may be prescribed, is being or has been committed in the
company by its officers or employees, the auditor shall report the matter to
the Central Government within such time and in such manner as may be
prescribed.
• The manner of reporting the matter to the Central Government is as follows:
(a) the auditor shall report the matter to the Board or the Audit Committee, as the case may be, immediately but not
later than 2 days of his knowledge ofthe fraud, seeking their reply or observations within 45 days;
(b) on receipt of such reply or observations, the auditor shall forward his report and the reply or observations of the
Board or the Audit Committee along with his comments (on such reply or observations of the Board or the Audit
Committee) to the Central Government within 15 days from the date of receipt of such reply or observations;
(c) in case the auditor fails to get any reply or observations from the Board or the Audit Committee within the stipulated
period of 45 days, he shall forward his report to the Central Government along with a note containing the details of his
report that was earlier forwarded to the Board or the Audit Committee for which he has not received any reply or
observations;
(d) the report shall be sent to the Secretary, Ministry of Corporate Affairs in a sealed cover by Registered Post with
Acknowledgement Due or by Speed Post followed by an e-mail in confirmation of the same;
(e) the report shall be on the letter-head of the auditor containing postal address, e-mail address and contact telephone
number or mobile number and be signed by the auditor with his seal and shall indicate his Membership Number; and
(f) the report shall be in the form of a statement as specified in Form ADT-4.
 Reporting to the Audit Committee or Board: Sub-section (12) of section 143 of the
Companies Act, 2013 further prescribes that in case of a fraud involving lesser than the
specified amount [i.e. less than ` 1 crore], the auditor shall report the matter to the audit
committee constituted under section 177 or to the Board in other cases within such time
and in such manner as may be prescribed.
• In this regard, sub-rule (3) of Rule 13 of the Companies (Audit and Auditors) Rules, 2014
states that in case of a fraud involving lesser than the amount specified in sub- rule (1)
[i.e. less than ` 1 crore], the auditor shall report the matter to Audit Committee
constituted under section 177 or to the Board immediately but not later than 2 days of his
knowledge of the fraud and he shall report the matter specifying the following:
(a) Nature of Fraud with description;
(b) Approximate amount involved; and
(c) Parties involved.
• Disclosure in the Board’s Report: Sub-section (12) of section 143 of the Companies Act,
2013 furthermore prescribes that the companies, whose auditors have reported frauds under
this sub-section (12) to the audit committee or the Board, but not reported to the Central
Government, shall disclose the details about such frauds in the Board’s report in such manner as
may be prescribed.
•In this regard, sub-rule (4) of Rule 13 of the Companies (Audit and Auditors) Rules, 2014 states
that the auditor is also required to disclose in the Board’s Report the following details of each of
the fraud reported to the Audit Committee or the Board under sub- rule (3) during the year:
(a) Nature of Fraud with description;
(b) Approximate Amount involved;
(c) Parties involved, if remedial action not taken; and
(d) Remedial actions taken.
Auditing Sample and
Analytical Procedures
Unit – 7
Name: Prof Neha Laddha
Audit Sampling
● SA 530 talks about sampling
● Applying audit procedure to < 100% of the population

● Based on objective of the Audit

O sufficient understanding of internal control structure to plan the

audit & determine nature, timing & extent of tests to be
performed

O Standards on Auditing 530 applies when auditor decides to use

audit sampling in performing audit procedures

O Deals with auditor’s use of statistical & non statistical sampling in

designing & selecting the audit sample.
 Selection of audit sample

● Consider the objectives of the audit procedure.

● Characteristics of the population.

● Assist in effective & efficient design of sample,

stratification maybe appropriate.
O Stratification - Process of dividing a population into sub-
populations
 Analysing Audit Sample

● Investigate nature & cause of any deviation or

misstatements identified & their possible effects.

● To conclude that a misstatement or deviation is an

anomaly.

● Auditor to obtain a high level of certainty that misstatement

or deviation is not representative of the population.
Types of Sampling
Audit sampling can be applied using:
¨ non-statistical or
¨ statistical sampling approaches.
• Statistical sampling is an approach to sampling that has the random
selection of the sample units; and the use of probability theory to evaluate
sample results, including measurement of sampling risk characteristics
• Sample is chosen by applying certain mathematical and statistical methods
Non- Statistical approach
• Under this approach, the sample size and its composition
are determined on the basis of the personal experience
and knowledge of the auditor.
• This approach has been in common application for many
years because of its simplicity in operation. Traditionally, the
auditor on the basis of his personal experience will
determine the size of the sample and express it in terms
that number of pages or personal accounts in the purchases
or sales ledger to be checked. For example, March, June
and September may be selected in year one and different
months would be selected in the next year, On basis of value
of items, top 10 highest value.Etc.
Sample size
• 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
 Key points - Audit Sampling

When determining sample size, auditor should consider-

Sampling risk Tolerable error Expected error

• Risk is an • Tolerable Error is • Determining

uncertainty, threat the maximum error expected error
or vulnerability in the population consider matters as-
derailing the that the auditor • the size & frequency
achievement of an would be willing to of errors identified
objective accept. in previous audit,
• Risk is a function of • changes in Entity’s
probability & procedures &
demand evidence available
from other
procedures.
If error is
expected to be
present in the
population, a
larger sample
need to be
examined.

Auditor should
select sample
items in such a
way that the
sample can be
expected to be Risk that the results from the sample
representative of selected m a y not be representative of the
the population.
entire population.
Method of selecting sample
• Sample should be selected in such a manner that it is representative of the
population from which the sample is being selected. It will necessitate that
each item in the population has an equal chance of being included in the
sample
● Random Sampling - selecting items from the
population so that each item has an equal chance of
being selected.

● Systematic Sampling - selecting every nth item

from the population after a random start.
● Haphazard Sampling - selecting items from the
population without consideration to known
characteristics of the items in the population (i.e. any
conscious bias in the selection of population items).

● Block Sampling - selecting items from the population

in contiguous groups (or blocks).

● Directed Sampling - selecting items from the

population using some pre specified criteria (i.e.,
selecting accounts receivable for confirmation based on
amount of outstanding)
MEANING OF ANALYTICAL PROCEDURES

• 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.?
• Meaning of Analytical Procedures. As per the Standard on Auditing (SA)
520 “Analytical Procedures”, the term “analytical procedures” means
evaluations of financial information through analysis of plausible
relationships among both financial and non-financial data. 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.
Scope
• SA 520 deals with the auditor’s use of analytical procedures
as substantive procedures (“substantive analytical
procedures”), and as procedures near the end of the audit
that assist the auditor when forming an overall conclusion
on the financial statements.
• The use of analytical procedures as risk assessment procedures is dealt
with in SA 315.
• SA 330 includes requirements and guidance regarding the nature, timing
and extent of audit procedures in response to assessed risks; these audit
procedures may include substantive analytical procedures
Objective
• The objectives of the auditor are:
(a) To obtain relevant and reliable audit evidence when using
substantive analytical procedures; and
(b) To design and perform analytical procedures near the end of the
audit that assist the auditor when forming an overall conclusion as
to whether the financial statements are consistent with the
auditor’s understanding of the entity.
Purpose
• Analytical procedures use comparisons and relationships to
assess whether account balances or other data appear
reasonable.
• For instance, establishing the relationship that exists between certain
balances included in the Balance Sheet and the Statement of Profit and Loss
and comparing them with those that existed between the same set of
balances in the previous year,
Timing of Analytical Procedures

Timing of Analytical
Procedures

Planning Testing Completion

Phase Phase Phase
INVESTIGATING RESULTS OF ANALYTICAL PROCEDURES

• If analytical procedures performed in accordance with SA 520 identify

fluctuations or relationships that are inconsistent with other relevant
information or that differ from expected values by a significant amount, the
auditor shall investigate such differences by:
(i) Inquiring of management and obtaining appropriate audit
evidence relevant to management’s responses
(ii) Performing other audit procedures as necessary in the
circumstances:
Audit Report
Unit – 8
Name: Prof Neha Laddha
FORMING AN OPINION AND REPORTING ONTHE FINANCIAL STATEMENTS

• SA 700 (Revised)- “Forming an Opinion and Reporting on Financial

Statements”, deals with the auditor’s responsibility to form an opinion on the
financial statements. It also deals with the form and content of the auditor’s
report issued as a result of an audit of financial statements
• The objectives of the auditor as per SA 700 (Revised) are:
To form an opinion on the financial statements based on an evaluation

To express clearly that opinion through a written report.

• The auditor shall form an opinion on whether the financial statements are
prepared, in all material respects, in accordance with the applicable financial
reporting framework.
• 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
wholeare free from material misstatement, whether due to fraud or error.
• That conclusion shall take into account:
(a) Whether sufficient appropriate audit evidence has been obtained;

(b) Whether uncorrected misstatements are material, individually or in

aggregate;
(c) The evaluations.
Audit Reports
• The auditor’s report shall be in writing. This SA- 700 requires the use of specific headings,
which are intended to assist in making auditor’s report more recognizable, where audit is
conducted in accordance with the relevant Standards on Auditing
• Basic Elements of an Audit Report are given below:
1 Title: The auditor’s report shall have a title that clearly indicates that it is the report of an
independent auditor. For example, “Independent Auditor’s Report,” distinguishes the
independent auditor’s report from reports issued by others.
2. Addressee: The auditor’s report shall be addressed, as appropriate, based on the
circumstances of the engagement. Law, regulation or the terms of the engagement may
specify to whom the auditor’s report is to be addressed. The auditor’s report is normally
addressed to those for whom the report is prepared, often either to the shareholders or to
those charged with governance of the entity whose financial statements are being audited.
In case of a company, the report is addressed to the shareholders of the company.
Brain Teaser
• M/s Smart & Associates are the statutory auditors
of Hotmeals Ltd. for the FY 2020- 21. How will the
auditor address the audit report issued on the
financial statements for the FY 2020-21? Also give
a title to the report
3. Auditor’s Opinion: The first section of the auditor’s report shall include
the auditor’s opinion, and shall have the heading “Opinion.”

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.
3. Basis for Opinion: The auditor’s report shall include a section, directly
following the Opinion section, with the heading “Basis for Opinion”, that:
1. States that the audit was conducted in accordance with Standards on
Auditing;
2. Refers to the section of the auditor’s report that describes the auditor’s
responsibilities under the SAs;
3. Includes a statement that the auditor is independent of the entity in
accordance with the relevant ethical requirements relating to the audit and
has fulfilled the auditor’s other ethical responsibilities in accordance with
these requirements.
4. States whether the auditor believes that the audit evidence the auditor
has obtained is sufficient and appropriate to provide a basis for the auditor’s
opinion.
Thus, the Basis for opinion section provides important context about the
auditor’s opinion.
Going Concern: Where applicable, the auditor shall report in accordance with SA 570
(Revised).
¨ 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 intends to liquidate the entity or
to cease operations, 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 auditor shall evaluate whether sufficient appropriate audit evidence has been
obtained regarding, and shall conclude on, the appropriateness of management’s use of
the going concern basis of accounting in thepreparation of the financial statements.
• Based on the audit evidence obtained, the auditor shall conclude whether, in the auditor’s
judgement, a material uncertainty exists related to events orconditions that, individually or
collectively, may cast significant doubt on the entity’s ability to continue as a going concern
Key Audit Matters: For audits of complete sets of general purpose financial
statements of listed entities, the auditor shall communicate key audit matters
in the auditor’s report in accordance with SA 701. When the auditor is
otherwise required by law or regulation or decides to communicate key audit
matters in the auditor’s report, the auditor shall do so in accordance with SA
701. Law or regulation may require communication of key audit matters for
audits of entities other than listed entities
• Responsibilities for the Financial Statements: The auditor’s report shall
include a section with a heading “Responsibilities of Management for the
Financial Statements.”
• This section of the auditor’s report shall describe management’s responsibility
for :
• Preparing the financial statements
• Assessing the entity’s ability to continue as a going concern
• Auditor’s Responsibilities for the Audit of the Financial Statements: The
auditor’s report shall include a section with the heading “Auditor’s
Responsibilities for the Audit of the Financial Statements.”

Objectives of the auditor

Auditors responsibility section That reasonable level of assurance is

to state high level of assurance and not
gaurantee

That misstatements can arise from

fraud and error
• Other Reporting Responsibilities
• Report on Other Legal and Regulatory Requirements” or otherwise as
appropriate to the content of the section, unless these other reporting
responsibilities address the same topics as those presented under the
reporting responsibilities required by the SAs in which case the other
reporting responsibilities may be presented in the same section as the
related report elements required by the SAs
Signature of the Auditor: The auditor’s report shall be signed. The report is
signed by the auditor (i.e. the engagement partner) in his personal name.
Where the firm is appointed as the auditor, the report is signed in the personal
name of the auditor and in the name of the audit firm.
• The partner/proprietor signing the audit report also needs to mention the
membership number assigned by the Institute of Chartered Accountants of
India. They also include the registration number of the firm, wherever applicable,
as allotted by ICAI, in the audit reports signed by them.
• Place of Signature: The auditor’s report shall name specific location, which is
ordinarily the city where the audit report is signed.
• Date of the Auditor’s Report: The auditor’s report shall be dated no earlier
than the date on which the auditor has obtained sufficient appropriate audit
evidence on which to base the auditor’s opinion on the financial statements,
including evidence that:
• Accordingly, an auditor is required to mention the UDIN with respect to each
audit report being signed by him, along with his membership number
Types of opinion

Unmodified Opinion: The auditor shall express an unmodified opinion when

the auditor concludes that the financial statements are prepared, in all material
respects, in accordance with the applicable financial reporting framework.

Modified Opinion: If the auditor:

the auditor shall modify the opinion in the auditor’s report in accordance with
SA 705.
 Circumstances When a Modification to the Auditor’ Opinion Is Required

• The auditor shall modify the opinion in the auditor’s report in the following
circumstances:

• The auditor concludes that, based on the audit evidence obtained, the
financial statements as a whole are not free from material misstatement;
or
• The auditor is unable to obtain sufficient appropriate audit evidence to
conclude that the financial statements as a whole are free from material
misstatement.
Types of Modified opinion
Emphasis on matter paragraph and other matter paragraph
• As per SA 706 (Revised) on “Emphasis of Matter Paragraphs and Other
Matter Paragraphs In The Independent Auditor’s Report”, the objective
of the auditor, having formed an opinion on the financial statements, is to
draw users’ attention, when in the auditor’s judgement it is necessary to do
so, by way of clear additional communication in the auditor’s report, to:
(a) A matter, although appropriately presented or disclosed in the financial
statements, that is of such importance that it is fundamental to users’
understanding of the financial statements; or
(b) As appropriate, any other matter that is relevant to users’
understanding of the audit, the auditor’s responsibilities or the auditor’s
report.
Meaning of matter paragraph and other matter paragraph
• Emphasis of Matter paragraph – A paragraph included in the auditor’s report
that refers to a matter appropriately presented or disclosed in the financial
statements that, in the auditor’s judgment, is of such importance that it is
fundamental to users’ understanding of the financial statements.
• Other Matter paragraph – A paragraph included in the auditor’s report that
refers to a matter other than those presented or disclosed in the financial
statements that, in the auditor’s judgment, is relevant to users’ understanding
of the audit, the auditor’s responsibilities or the auditor’s report.
STANDARD ON AUDITING-710, “COMPARATIVEINFORMATION-CORRESPONDING FIGURES
ANDCOMPARATIVE FINANCIAL STATEMENTS
• Meaning of comparative figures : The amounts and disclosures includedin the financial
statements in respect of one or more prior periodsin accordance with the applicable financial
reporting framework.

¨ If the auditor becomes aware of a possible material misstatement in the comparative

information while performing the current period audit, the auditor shall perform such
additional audit procedures as are necessary in the circumstances to obtain sufficient
appropriate audit evidence to determine whether a material misstatement exists. If the
auditor had audited the prior period’s financial statements, the auditor shall also follow
the relevant requirements of SA 560.
¨ As required by SA 580, the auditor shall request written representations forall periods
referred to in the auditor’s opinion. The auditor shall also obtain a specific written
representation regarding any prior period item that is separately disclosed in the
current year’s statement of profit and loss.
• Meaning of Corresponding figure
• Comparative information where amounts and other disclosures for the prior
period are included as an integral part of the current period financial statements
and are intended to be read only in relation to the amounts and other disclosures
relating to the current period (referred to as “current period figures”). The level
of detail presented in the corresponding amounts and disclosures is dictated
primarily by its relevance to the current period figures

• For corresponding figures, the auditor’s opinion on the financial

statements refers to the current period only
• When corresponding figures are presented, the auditor’s opinion shall
not refer to the corresponding figures except in the following
circumstances:
• If the auditor’s report on the prior period, as previously issued,
included a qualified opinion, a disclaimer of opinion, or an adverse
opinion and the matter which gave rise to the modification is unresolved,
the auditor shall modify the auditor’s opinion on the current period’s
financial statements.
• If the auditor obtains audit evidence that a material misstatement
exists in the prior period financial statements
• Prior Period Financial Statements Not Audited
Internal Audit, Management
and operational Audit
Unit – 9
Name: Cs Neha Laddha
Meaning of Internal Audit
• As defined in Framework Governing Internal Audits, “Internal Audit provides
independent assurance on the effectiveness of internal controls and risk
management processes to enhance governance and achieve organisational
objectives.”
• The objectives and scope of Internal Audit Function as per SA 610, “Using the
Work of an Internal Auditor” may include:
• Monitoring of internal controls;
• Examination of financial and operating information
• Review of operating activities
• Review of compliance with laws and regulations
• Risk management
• Governance
Applicability of Provisions of Internal Audit
As per section 138 of the Companies Act, 2013, following class of companies
(prescribed in rule 13 of Companies (Accounts) Rules,2014) shall be
required to appoint an internal auditor which may be either an individual or a
partnership firm or a body corporate, namely
 (a) every listed company;
(b) every unlisted public company having-
(i) paid up share capital of fifty crore rupees or more during the preceding financial
year; or
(ii) turnover of two hundred crore rupees or more during the preceding financial year;
or
(iii) outstanding loans or borrowings from banks or public financial institutions
exceeding one hundred crore rupees or more at any point of time during the
preceding financial year; or
(iv) outstanding deposits of twenty five crore rupees or more at any point of time
during the preceding financial year; and

(c) every private company having-

(i) turnover of two hundred crore rupees or more during the preceding financial year;
or
(ii) outstanding loans or borrowings from banks or public financial institutions
exceeding one hundred crore rupees or more at any point of time during the
preceding financial year.
Example
• CASE STUDY 1
• JKT Pvt. Ltd. having ` 40 lacs paid-up capital, `9.50 crores reserves and turnover of last three consecutive financial years,
immediately preceding the financial year under audit, being
• ` 49 crores, ` 145 crores and ` 260 crores, but does not have any internal audit system. In view of the management, the
internal audit system is not mandatory. Comment.
• Applicability of Provisions of Internal Audit: As per section 138 of the Companies Act, 2013, read with rule 13 of
Companies (Audit and Auditors) Rules, 2014, every private company shall be required to appoint an internal auditor or a firm
of internal auditors, having-
(i) turnover of two hundred crore rupees or more during the preceding financial year; or
(ii) outstanding loans or borrowings from banks or public financial institutions exceeding one hundred crore rupees or more at
any point of time during the preceding financial year.
• Conclusion: In the instant case, JKT Pvt. Ltd. is having a turnover of ` 260 crores during the preceding financial year which
is more than two hundred crore rupees. Hence, the company hasthe statutory requirement to appoint an Internal Auditor
and mandatorily conduct an internal audit.
Who can be Appointed as an Internal Auditor?

• As per section 138, the internal auditor shall either be a chartered

accountant or a cost accountant (whether engaged in the practice or not),
or such other professional as may be decided by the Board to conduct an
internal audit of the functions and activities of the company.
• The internal auditor may or may not be an employee of the company.
Main Responsibility of Internal Auditor
• to maintain an adequate system of internal control by a continuous examination of accounting
procedures, receipts and disbursements, and to provide adequate safeguards against
misappropriation of assets.
• to operate independently of the accounting staff and must not in any way divest with any of the
responsibilities placed upon him.
• Not to involve in the performance of executive functions in order that the objective outlook does not
get obscured by the creation of the vested interest
• to observe facts and situations and bring them to notice of authorities who would otherwise never
know them; also, critically appraise various policies of the management and draw its attention to
any deficiencies, wherever these require to be corrected.
• to associate closely with management and keep knowledge up to date by being informed about all
important occurrences and events affecting the business, as well as the changes that are made in
business policies
• At all times, the internal auditor must enjoy an independent status
Scope of Internal Auditor
Scope of Internal Control System & Procedures
Internal
Auditor's Work Custodianship & Safeguarding of Assets
include review
of- Compliance with Policies, Plans, Procedures & Regulations

Relevance & Reliability of Information

Organisational Structure

Utilisation of Resources

Accomplishment of Goals & Objectives

Relationship between internal auditor and external auditor
• The scope and objective of internal audit are dependent upon the size and structure of the entity and the
requirements of its management. As stated earlier the internal auditor operates in various areas such as review of
the accounting system and internal control; examination of financial and operating information for the benefit of
management, the examination of the economy, efficiency and effectiveness of operations including non- financial
controls of various tangible assets of the entity. While operating in these areas, there is a lot of overlap between
the work of internal auditors and external auditors.

• The work done by the internal auditor has an important bearing on the work performed by the statutory auditor as
evaluation done by the internal auditor in respect of internal controls, reliability of financial information,
verification of assets, etc. is also required to be done by the external auditor. The function of an internal
auditor is an integral part of the system of internal control.

• It is a statutory requirement too as per section 138 of the Companies Act, 2013 where the Audit Committee of
the company or the Board shall, in consultation with the Internal Auditor, formulate the scope, functioning,
periodicity and methodology for conducting the internal audit.
• However, it is obligatory for a statutory auditor to examine the scope and effectiveness of the
work carried out by the internal auditor. For the purpose, he should examine the Internal Audit
Department of the organisation, the strength of the internal audit staff, their qualification and their
powers.
• The extent of independence exhibited by the internal auditor in the discharge of his duties and
his status in the organisation are important factors for determining the effectiveness of his audit.
But so far, the practice of audit being conducted jointly by the internal auditors is of great assistance
to statutory auditors.
• The external auditor should, as part of his audit, evaluate the internal audit function to the extent
he considers that it will be relevant in determining the nature, timing and extent of his compliance
and substantive procedures. Depending upon such evaluation, the external auditor may be able to
adopt less extensive procedures than would otherwise be required.
Difference Between Internal & External Auditors
BASIS FOR COMPARISON INTERNAL AUDIT EXTERNAL AUDIT

1. Meaning It refers to an ongoing audit function performed It is an audit function performed by the
within an organization by a separate internal independent body which is not a part of the
auditing department. organization.

2. Examination The Internal auditor examines the The External auditor examines the
Operational efficiency of the organisation. Accuracy and Validity of FinancialStatements.

3. Appointment The Internal auditor is appointed bythe The External auditor is appointed bythe Members.
Management.
4. Users of Report The user of internal audit report isManagement. The user of external audit report isStakeholders.
5. Period Internal audit is a ContinuousProcess throughout An External audit is done once in ayear.
the year.
6. Opinion The opinion is provided on the The opinion is provided on the
effectiveness of the operationalactivities of the truthfulness and fairness of thefinancial statement
organization. of the company.
7. Status of Auditor The Internal auditor could be anemployee of the The External auditor is mandatorilynot an
company. employee of the company.
• The internal auditor should carefully review and assess the conclusions
drawn from the audit evidence obtained, as the basis for his findings
contained in his report and suggest remedial action. However, in case the
internal auditor comes across any actual or suspected fraud or any other
misappropriation of assets, it would be more appropriate for him to bring the
same immediately to the attention of the management.
As per Standard on Internal Audit (SIA) 370 Reporting Results, reporting of
internal audit results is generally undertaken in two stages:

At the end of a particular audit assignment, an “Internal Audit

Report” covering a specific area, function or part of the entity is
prepared by the Internal Auditor highlighting key observations
arising from those assignments. This report is generally issued
with details of the manner in which the assignment was
conducted and the key findings from the audit procedures
undertaken. This report is issued to the auditee, with copies
shared with local and executive management, as agreed during
the planning phase.

On a periodic basis, at the close of a plan period, a

comprehensive report of all the internal audit activities covering
the entity and the plan period is prepared by the Chief Internal
Auditor (or the Engagement Partner, in case of external service
provider). Such reporting is normally done on a quarterly basis
and submitted to the highest governing authority responsible
for internal audits, generally the Audit Committee. Some part of
the aforementioned Internal Audit Reports may form part of the
periodic (e.g. Quarterly) report shared with the Audit
Committee.
• On the basis of the internal audit work completed, the Internal Auditor shall
issue a clear, well documented Internal Audit Report which includes the
following key elements:
An overview of the objectives, scope and approach
of theaudit assignments;

The fact that an internal audit has been conducted

inaccordance the Standards of Internal Audit;

An executive summary of key observations covering all

important aspects, and specific to the scope of the assignment;

A summary of the corrective actions required (or

agreed bymanagement) for each observation; and

Nature of assurance, if any, which can be derived

from theobservations.
Management Audit
• Management audit means the examination, review of various
policies and action of the management on the basis of certain
specified objectives.
• The management audit is conducted to critically evaluate the
activities and efficiency of the management. It is an independent
appraisal activity.
• A careful analysis of the above definitions of experts enables to ascertain
that management audit covers the following areas:
• 1. Examination of organisation structure in full or part thereof.
• 2. Checking the operations of management and its effectiveness.
• 3. A critical appraisal of activities of management executives.
• 4. Examination is to be carried on independently by experts.
• 5. Evaluation of the functioning of the management board.
• 6. Analysing goals, plans, policies and activities of the management.
• 7. Evaluation of the earning capacity of the management.
• 8. Identification of management weaknesses and suggesting suitable measures for
rectification.
Operational Audit
• An operational audit refers to a method of examining how an
organization conducts business. It requires analyzing the
processes, procedures and systems used within the company.
This type of audit looks beyond the organization's financial
circumstances and examines its management practices. An
operational audit aims to find areas in need of improvement
to make the organization's operations more efficient,
productive and effective.
Audit Committee and
Corporate Governance
Unit – 10
Name: Prof Neha Laddha
AUDIT COMMITTEE UNDER LODR REGULATIONS

1. Qualified and Independent Audit Committee [Regulation 18(1)]

• Every listed entity shall constitute a qualified and independent audit committee in accordance with the terms of reference,
subject to the following:
1. The Audit Committee shall have minimum three directors as members. Two-thirds of the members of audit committee
shall be independent directors, however, in case of a listed entity having outstanding SR (Superior Rights) equity
shares, the audit committee shall only comprise of independent directors.
2. All members of Audit Committee shall be financially literate and at least one member shall have accounting or related
financial management expertise.
• Explanation (i): The term “financially literate” means the ability to read and understand basic financial statements
i.e. balance sheet, profit and loss account, and statement of cash flows.
1. The Chairperson of the Audit Committee shall be an independent
director and he/she shall be present at Annual General Meeting to
answer shareholder queries.
2. The Company Secretary shall act as the secretary to the committee.
3. The Audit Committee at its discretion shall invite the finance director or
the head of the finance function, head of internal audit and a
representative of the statutory auditor and any other such executives to
be present at the meetings of the committee, provided that occasionally,
the Audit Committee may meet without the presence of any executives of
the listed entity.
 Meeting of Audit Committee [Regulation 18(2)]
• The Audit Committee shall meet at least four times in a year and not more than one hundred and twenty days shall lapse
between two meetings. The quorum shall be either two members or one third of the members of the Audit Committee,
whichever is greater, but there should be a minimum of two independent directors present.

Powers of Audit Committee [Regulation 18(2)]

To investigate any activity within its terms of reference.

To seek information from any employee.
To obtain outside legal or other professional advice.
To secure attendance of outsiders with relevant expertise, if
itconsiders necessary.
AUDIT COMMITTEE UNDER SECTION 177 OF THECOMPANIES ACT, 2013

• As per section 177 read with Rule 6 of the Companies (Meetings of Board
and its Powers) Rules, 2014, every listed public company and the following
classes of companies shall constitute an Audit Committee
(a) all public companies with a paid-up However, following class of unlisted
capital of ten crore rupees or more; public companies shall not be covered:

(b) all public companies having turnover 1) a joint venture;

of one hundred crore rupees or 2) wholly owned subsidiary; and
more;
3) a dormant company as covered u/s
(c) all public companies, having in 455.
aggregate, outstanding loans,
debentures anddeposits, exceeding
fifty crore rupees.
ROLE OF AUDITOR IN AUDIT COMMITTEE AND CERTIFICATION OF COMPLIANCE OF
CONDITIONS OFCORPORATE GOVERNANCE

• Regulation 18(1)(f) stipulates that a representative of the statutory auditor, when required, shall be
invited to the meetings of the Audit Committee. Similarly, Section 177 of the Companies Act, 2013
provides the auditors of a company and the key managerial personnel the right to be heard in the
meetings of the Audit Committee when it considers the auditor’s report but they shall not have the
right to vote
• The auditor must ensure that he communicates frequently and openly with the Audit Committee on
key accounting or auditing issues that, in the auditor’s judgment, give rise to a greater risk of
material misstatement of the financial statements, and also ensure that he addresses any
questions or concerns voiced by the Audit Committee.
• He can contribute significantly in assisting and advising the Audit Committee on improving
corporate governance, oversight of financial reporting process, implementation of accounting
policies and practices, compliance with accounting standards, strengthening of the internal control
systems in regard to financial reporting and reporting processes.
• The auditor must devote substantial professional time in assisting the management and the Audit
Committee to enable them to discharge their functions effectively and in certification of the
requirements of corporate governance
Compliance of SA 250, “Consideration of Laws and Regulations inan Audit of Financial
Statements”

• The auditor shall obtain sufficient appropriate audit evidence regarding compliance with
the provisions of those laws and regulations generally recognised to have a direct effect
on the determination of material amounts and disclosures in the financial statements.
• The auditor shall inquire of the management and, where appropriate, those charged with
governance, as to whether the entity is in compliance with other laws and regulations that
may have an effect on the financial statements and inspect correspondence, if any, with
the relevant licensing or regulatory authorities.
• The auditor should obtain written representations that management has disclosed to the
auditor all known actual or possible non-compliance with laws and regulations whose
effects should be considered when preparing financial statements.
DISCLOSURES-MANAGEMENT DISCUSSION AND ANALYSIS [SCHEDULE V]
• Industry structure and developments
• Opportunities and Threats
• Segment–wise or product-wise performance
• Outlook
• Risks and concerns.
• Internal control systems and their adequacy
• Discussion on financial performancewith respect to operationalperformance.
• Material developments in Human Resources / Industrial Relations front, including number of
people employed
• details of significant changes (i.e. change of 25% or more as compared to the immediately
previous financial year) in key financial ratios,
• details of any change in Return on Net Worth as compared to the immediately previous
financial year along with adetailed explanation thereof
OTHER DISCLOSURES

• Disclosure and Transparency

• Disclosure of events or information
• Related Party Disclosure
• Disclosure of Accounting Treatment
• Disclosures in relation to the Sexual Harassment of Women at
Workplace (Prevention, Prohibition and Redressal) Act, 2013(Schedule
V).
•
REPORT ON CORPORATE GOVERNANCE

• The listed entity shall submit a quarterly compliance report on corporate

governance in the format as specified by the Board from time to time to the
recognised stock exchange(s) within 21 days from the end of each quarter.
The report shall be signed either by the Compliance Officer or the Chief
Executive Officer of the listed entity.
• The auditor should ascertain whether the Board of Directors have included in
the Annual Report of the listed entity, a separate section on corporate
governance with a detailed compliance report on corporate governance.
• Any data in the report on corporate governance should not be inconsistent with
that contained in the financial statements
AUDITORS’ CERTIFICATE

• As per Schedule V, a listed entity shall obtain a compliance certificate from

either the auditors or practicing company secretaries regarding compliance
of conditions of corporate governance and shall annex it to the Directors’
Report
Audit of Limited Companies
Unit – 11
Name: Prof Neha Laddha
 • SECTIONS COVERED IN THIS CHAPTER
•
• Appointment of auditors.
• Removal, resignation of auditor and giving of special notice.
• Eligibility, qualifications and disqualifications of auditors.
• Remuneration of auditors.
• Powers and duties of auditors and auditing standards.
• Auditor not to render certain services.
• Auditors to sign audit reports, etc.
• Auditors to attend general meeting.
• Punishment for contravention.
• Central Government to specify audit of items of cost in respect of certaincompanies.
Qualification of an auditor
• The provisions relating to eligibility, qualifications and
disqualifications of an auditor are governed by section 141 of
the Companies Act, 2013 (hereinafter referred as the Act). The
main provisions are stated below:
(1) A person shall be eligible for appointment as an auditor of a
company only if he is a chartered accountant.
(2) It may be noted that a firm whereof majority of partners
practising in India are qualified for appointment as aforesaid may
be appointed by its firm name to be auditor of a company
(3) Where a firm including a limited liability partnership is appointed
as an auditor of a company, only the partners who are chartered
accountants shall be authorised to act and sign on behalf of the
firm.
Disqualification
(a) a body corporate other than a limited liability partnership registered under the Limited Liability
Partnership Act, 2008;
(b) an officer or employee of the company;
(c) a person who is a partner, or who is in the employment, of an officer or employee of the company;
(d) a person who, or his relative or partner -
(i) 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;
It may be noted that the relative may hold security or interest inthe company of face value not
exceeding ` 1,00,000.
• It may also be noted that the condition of ` 1,00,000 shall, wherever relevant, be also applicable in the case of a company
not having share capital or other securities.
• 1: Mr. A, a practicing Chartered Accountant, is holding
securities of XYZ Ltd. having face value of ` 900. Whether Mr.
A is qualified for appointment as an auditor of XYZ Ltd.?
• As per section 141(3)(d)(i), an auditor is disqualified to be
appointed as an auditor if he, or his relative or partner
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.
• In the present case, Mr. A is holding security of ` 900 in XYZ
Ltd. Therefore, he is not eligible for appointment as an auditor
of XYZ Ltd.
Disqualification contd….
• is indebted to the company, or its subsidiary, or its holding or associate
company or a subsidiary of such holding company, in excess of ` 5,00,000; or
• has given a guarantee or provided any security in connection with the
indebtedness of any third person to the Company or its Subsidiary, or its
Holding or Associate Company or a Subsidiary of such Holding Company, in
excess of ` 1,00,000.
• a person or a firm who, whether directly or indirectly has business
relationship with the Company, or its Subsidiary, or its Holding or Associate
Company or Subsidiary of such holding company or associate company, of
such nature as may be prescribed;
(a) a person whose relative is a Director or is in the employment of the
Companyas a director or key Managerial Personnel.
(b) a person who is in full time employment elsewhere or a person or a
partnerof a firm holding appointment as its auditor, if such person or
partner is atthe date of such appointment or reappointment holding
appointment as auditor of more than twenty companies other than one
person companies, dormant companies, small companies and private
companies having paid-up share capital less than ` 100 crore.
(c) a person who has been convicted by a Court of an offence involving
fraud and a period of ten years has not elapsed from the date of such
conviction.
(d) a person who, directly or indirectly, renders any service referred to in
section 144 to the company or its holding company or its subsidiary
company.
Services that cannot be rendered by the auditor
• Section 144 of the Companies Act, 2013 prescribes certain services not to be rendered by the auditor. An auditor appointed
under this Act shall provide to the company only such other services as are approved by the Board of Directors or the audit
committee, as the case may be, but which shall not include any of the following services (whether such services are rendered
directly or indirectly to the company or its holding company or subsidiary company), namely:

• accounting and book keeping services

• internal audit;
• Design and implementation of any financial information system;
• actuarial services;
• investment advisory services
• investment banking services;
• rendering of outsourced financial services;
• management services; and
• any other kind of services as may be prescribed
• CA. Poshin is providing the services of investment banking to C Ltd. Later on, he was also offered to be appointed as an auditor
of the company for the current financialyear. Advise.
• Section 141(3)(i) of the Companies Act, 2013 disqualifies a person for appointment as an auditor of a company who, directly or
indirectly, renders any service referred to in section 144 to the company or its holding company or its subsidiary company. Section
144 of the Companies Act, 2013 prescribes certain services not to be rendered by the auditor which includes investment banking
services.
• Therefore, CA. Poshin is advised not to accept the assignment of auditing as the investment banking service is specifically notified
in the list of services not to be rendered by him as per section 141(3)(i) read with section 144 of the Companies Act, 2013.
APPOINTMENT OF AUDITOR

• Section 139 of the Companies Act, 2013 contains

provisions regarding Appointment of Auditors. Discussion
on appointment of auditors may be grouped under two
broad headings-
(I) Appointment of First Auditors.
(II) Appointment of Subsequent Auditors.
 Appointment of
Auditor (Section

First Subsequent

Other than Other than

Government Goverment Company Goverment
definedu/s 2(45) Government
Company Company Company definedu/s
2(45)

Appointment by
Appointment by C&AG within 60 daysfrom
BOD the DOR Appointme Appointment by
nt by Members C& AG within 180
in days from the
in case of failure commencement
in case of
failure:

in case of Hold the

roofm
fice1st AGM 6th
failure AGM subject
to Hold the
Hold the ffice till
office till the fulfillmentof
conclusionof
conclusionof the
the first Hold the
office till the
conclusionof
the first
Filling of a Casual Vacancy
 1. Casual Vacancy by Resignation:
• As per section 140(2) of the Act, the auditor who has resigned from the company
shall file within a period of 30 days from the date of resignation, a statement in the
prescribed Form ADT–3 (as per Rule 8 of CAAR) with the company and the Registrar.
• In case of the companies referred to in section 139(5) i.e. Government company,
the auditor shall also file such statement with the CAG along with the company and
the Registrar.
• The auditor shall indicate the reasons and other facts as may be relevant with
regard to his resignation.
• In case of failure, the auditor shall be liable to a penalty of fifty thousand rupees or
the remuneration of the auditor, whichever is less, and in case of continuing failure,
with further penalty of five hundred rupees for each day after the first during which
such failure continues, subject to a maximum of five lakh rupees as per section
140(3).
ROTATION OF AUDITOR

• All listed companies and 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
Rotation
• 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 -
(i) an individual auditor who has completed his term under clause (a) shall not be eligible for re-
appointment as auditor in the same company for five years from the completion of his term;
• an audit firm which has completed its term under clause (b), shall not be eligible for re-appointment as auditor in the same
company for five years from the completion of such term
AUDITOR’S REMUNERATION

• As per section 142 of the Act, the remuneration of the auditor

of a company shall be fixed in its general meeting or in such
manner as may be determined therein. However, board may fix
remuneration of the first auditor appointed by it.
• Further, the remuneration, in addition to the fee payable to an
auditor, include the expenses, if any, incurred by the auditor in
connection with the audit of the company and any facility
extended to him but does not include any remuneration paid to
him for any other service rendered by him at the request of the
company. Therefore, it has been clarified that the remuneration
to Auditor shall also include any facility provided to him.
REMOVAL OF AUDITORS

• According to Section 140(1), the auditor appointed under section 139 may be
removed from his office before the expiry of his term only by a special resolution of
the company, after obtaining the previous approval of the CentralGovernment in
that behalf
CEILING ON NUMBER OF AUDITS

• auditor of more than twenty companies other than one

person companies, dormant companies, small companies
and private companies having paid-up share capital less
than ` 100 crore, shall not be eligible for appointment as
an Auditor of a Company.
• 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.
• This 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
POWERS/RIGHTS OF AUDITORS

• Right of access to books, etc. – Section 143(1) of the Act provides that the auditor of a
company, at all times, shall have a right of access to the books of account and vouchers of
the company, whether kept at the registered office of the company or at any other place and
he is entitled to require from the officers of the company such information and explanation
as he may consider necessary for the performance of his duties as auditor.
• Right to obtain information and explanation from officers - This 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 auditoris a wide and important power.
• Right to receive notices and to attend general meeting – The auditorsof a company
are entitled to attend any general meeting of the company (the rightis not restricted to
those at which the accounts audited by them are to be discussed); also to receive all the
notices and other communications relating to the general meetings, which members are
entitled to receive and to be heard at any general meeting in any part of the business of
the meeting which concerns themas auditors.
• Right to report to the members of the company on the accounts examined by him – 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,
(a) Right to Lien – In terms of the general principles of law, any person having the lawful
possession of somebody else’s property, on which he has worked, may retain the property
for non-payment of his dues on account of the work done on the property. On this
premise, auditor can exercise lien on books and documents placed at his possession by the
client for non payment of fees, for work done on the books and documents. The Institute
of Chartered Accountants in England and Wales has expressed a similar view on the
following conditions:
(i) Documents retained must belong to the client who owes the money.
(ii) Documents must have come into possession of the auditor on the authority of the client.
They must not have been received through irregular or illegal means. In case of a company
client, they must be received on the authorityof the Board of Directors.
(iii) The auditor can retain the documents only if he has done work on the documents assigned
to him.
(iv) Such of the documents can be retained which are connected with the work on which fees
have not been paid.
DUTIES OF AUDITORS

• Duty of Auditor to Inquire on certain matters

• Duty to Sign the Audit Report:
• Duty to comply with Auditing Standards
• Duty to report
• Duty to report on frauds
• Duty to report on any other matter specified by Central Government
Branch Audit
• As per section 128(1) of the Companies Act, 2013, every company shall
prepare and keep at its registered office books of account and other relevant
books and papers and financial statement for every financial year which give
a true and fair view of the state of the affairs of the company, including
that of its branch office or offices, if any, and explain the transactions
effected both at the registered office and its branches and such books shall
be kept on accrual basis and according to the double entry system of
accounting.
• 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
Audit of Public Sector
undertaking
Unit – 12
Name: Prof Neha Laddha
 For example,
Departmentally managed Indi stal
undertakings which form partand an Railways, Po
parcel of government activities Servi
ces, Security Printi ng
Press, Canteen Stores
Department, etc.

Categories for Government companies and

organisation of deemed government companies
PSUs set up under the Companies
Act, 2013

Corporations set up underthe For example,

specific Acts of the legislature Life Insurance Corporation,
Unit Trust of India, etc.
 Government Company
[section 2(45)]

Includes subsidiary
≥ 51% of the paid-up
share capital held by company of a
Gov ernment compa ny

Any State Government Partly by the Central Government and

Central Government or Governments partly by one or more State Governments
• In India, audit of the above government companies is performed by an
independent constitutional authority, i.e. Comptroller and Auditor General of
India (C&AG), through the Indian Audit and Accounts Department. The
Constitution of India gives a special status to the C&AG and contains
provisions to safeguard his independence.
 Appointment of C&AG by the President.
Special procedure for removal of C&AG, only on the ground of provenmisbehaviors or incapacity.
Article
148 Salary and other conditions of service to be determined by the Parliament.

Perform such duties and exercise such powers in relation to the accounts of the Union and States and of any
other authority or body as may be pre- scribed by or under any law made by the Parliament.
Article The C&AG’s (Duties, Powers and Conditions of Service) Act, 1971 defines these functions and powers in
149 detail.

Article • On the advice of the C&AG, President to prescribe such form in whichaccounts of the Union and
150 States shall be kept.

• Audit reports of the C&AG relating to the accounts of the Central/ State Government should be
Article submitted to the President/Governor of the State who shall cause them to be laid before
151 Parliament/State Legislative Assemblies.
• The Comptroller and Auditor General’s (Duties, Power and Conditions of
Services) Act, 1971, prescribes that the C&AG shall hold office for a term of
six years or upto the age of 65 years, whichever is earlier. He can resign at
any time through a resignation letter addressed to the President. The Act
also assigns the duties regarding the audit to be followed by C&AG
C&AG's Role
• The Comptroller & Auditor General of India plays a key role in the functioning of the financial committees of Parliament and
the State Legislatures. He has come to be recognised as a 'friend, philosopher and guide' of the Committees.
(i) His Reports generally form the basis of the Committees' working, although they are not precluded from examining issues
not brought out in his Reports;
(ii) He scrutinises the notes which the Ministries submit to the Committees and helps the Committees to check the
correctness of submissions to the Committees and facts and figures in their draft reports;
(iv) The Financial Committees present their Report to the Parliament/ State Legislature with their observations and
recommendations.
• The various Ministries / Department of the Government are required to inform the Committees of the action taken by
them on the recommendations of the Committees (which are generally accepted) and the Committees present Action
Taken Reports to Parliament / Legislature;
(iv) In respect of those Audit Reports, which could not be discussed in detail by the Committees, written answers are
obtained from the Department / Ministry concerned and are sometimes incorporated in the Reports presented to the
Parliament / State Legislature.
• This ensures that the Audit Reports are not taken lightly by the Government, even if the entire report is not deliberated upon by
the Committee
Elements of PSU Audits

Basic
Elements of
PSU Audits

Subject matter,
criteria and Types of
Three parties subject matter engagement
information

Direct
Responsible Attestation
Auditor party Intended users Engagements eportin g
R
En gagement
 Attestation Engagements:
In attestation engagements, the responsible party measures the subject matter
against the criteria and presents the subject matter information, on which the
auditor then gathers sufficient and appropriate audit evidence to provide a
reasonable basis for expressing a conclusion.

Direct Reporting Engagement:

In direct reporting engagements, it is the auditor who measures or evaluates

the subject matter against the criteria.
Principles of PSU Audits

General Principles

Profession Audit
Ethics al QualityControl Team Documen-
& Judgement Manage- Audit Risk Commun
Indepe , due care Materialityment & -tation ication
n- and Skill
dence skepticism

Principles related to the Audit Process

Planning the Audit Conducting the Audit Reporting & Follow-up

• Establish the terms of the

audit. • Prepare a report
• obtain understanding • Perfom the planned audit procedures to obtain audit
evidence. based onthe
of theentity. conclusions
• Conduct Risk • Evaluate audit evidence and drawconclusions.
reached.
assessment ofproblem • Follow-up on
analysis. reportedmatters
• Identify risks of fraud. as relevant.
• Develop an audit plan.
(a) Appointment of Auditors under Section 139(5) and 139(7) read with section 143(5) of the
Companies Act, 2013 - Statutory auditors of Government Companies are appointed or re- appointed
by the C&AG. There is thus, a departure from the practice in vogue in the case of private sector
companies where appointment or re-appointment of the auditors and their remuneration are decided by
the members at the annual general meetings. In the case of government companies, though the
appointment of statutory auditors is done by the C&AG, the remuneration is left to the individual
companies to decide based on certain guidelines given by the C&AG in this regard.
• The C&AG may direct the appointed auditor on the manner in which the accounts of the
Government company are required to be audited and the auditor so appointed has to submit a
copy of the audit report to the Comptroller and Auditor-General of India. The report, among
other things, includes the directions, if any, issued by the C&AG, the action taken thereon and its
impact on the accounts and financial statement of the company.
• The report under section 143(5) is in addition to the reports issued by the Statutory Auditors under
various other clauses of section 143.
 Audit of Government
Companies

Section
143(5) Section
143(6) Section
↓
Appointment of auditor by C&AG as per section ↓ 143(7)
139(5) or139(7) C&AG's right to- ↓
+ Conduct C&AG may,
Directions by C&AG, the manner in which supplementary by an order,
accounts shall beaudited audit cause test
audit
+ Comment upon or
Submission of Auditor's Report to C&AG supplement such
including- auditreport
Directions issued, if any
Action taken thereon
Impact on Accounts
PERFORMANCE AUDIT

• A performance audit is an objective and systematic examination of

evidence for the purpose of providing an independent assessment of
the performance of a government organization, program, activity, or
function in order to provide information to improve public
accountability and facilitate decision-making by parties with
responsibility to oversee or initiate corrective action.
• According to the guidelines issued by the C&AG, Performance Audits
usually address the issues of

Economy

Effectiveness Efficiency
Performance audit
 Understanding the entity/programme

Defining the objectives and the scope of

auditDetermining audit criteria

Deciding audit approach
Planning for
Developing audit questions
Performance Audit
Assessing audit team skills and whether
outside expertise required

Preparing Audit Design Matrix

Establishing time table and resources

Intimation of Audit programme to

auditentities
COMPREHENSIVE AUDIT

• The Comptroller and Auditor General assists the legislature in reviewing the performance
of public undertakings. He conducts an efficiency-cum-performance audit other than the
field which has already been covered either by the internal audit of the individual concerns
or by the professional auditors. He locates the area of weakness and extravagance for
managements’ information.
• The areas covered in comprehensive audit naturally vary from enterprise to enterprise
depending on the nature of the enterprise, its objectives and operations. However, in
general, the covered areas are those of investment decisions, project formulation,
organisational effectiveness, capacity utilisation, management of equipment, plant and
machinery, production performance, use of materials, productivity of labour, idle capacity,
costs and prices, materials management, sales and credit control, budgetary and internal
control systems, etc.
• Some of the issues examined in comprehensive audit are:
(a) How does the overall capital cost of the project compare with the approved planned costs? Were there any substantial
increases and, if so, what are these and whether there is evidence of extravagance or unnecessary expenditure?
(b) Have the planned production or operational outputs been achieved? Has there been under- utilisation of installed
capacity or shortfall in performance and, if so, what has caused it?
(c) Has the planned rate of return been achieved?
(d) Are the systems of project formulation and execution sound? Are there inadequacies? What has been the effect on the
gestation period and capital cost?
(e) Are cost control measures adequate and are there inefficiencies, wastages in raw materials consumption, etc.?
(f) Are the purchase policies adequate? Or have they led to piling up of inventory resulting in redundancy in stores and
spares?
(g) Does the enterprise have research and development programmes? What has been the performance in adopting new
processes, technologies, improving profits and in reducing costs through technological progress?
(h) If the enterprise has an adequate system of repairs and maintenance?
(i) Are procedures effective and economical?
(j) Is there any poor or insufficient or inefficient project planning?
PROPRIETY AUDIT

• Propriety audit stands for verification of transactions on the tests of public

interest, commonly accepted customs and standards of conduct.
• In ‘propriety audit’, the auditors try to bring out cases of improper, avoidable,
or infructuous expenditure even though the expenditure has been incurred in
conformity with the existing rules and regulations. A transaction may satisfy
all the requirements of regularity audit insofar as the various formalities
regarding rules and regulations are concerned, but may still be highly
wasteful
• Propriety requires the transactions, and more particularly expenditure, to conform
to certain general principles. These principles are:
(i) that the expenditure is not prima facie more than the occasion demands and that every
official exercises the same degree of vigilance in respect of expenditure as a person of
ordinary prudence would exercise in respect of his own money;
(ii) that the authority exercises its power of sanctioning expenditure to pass an order which
will not directly or indirectly accrue to its own advantage;
(iii) that funds are not utilised for the benefit of a particular person or group of persons and

• that, apart from the agreed remuneration or reward, no other avenue is kept open to
indirectly benefit the management personnel, employees and others
Audit of Different types of
Entities
Unit – 13
Name: Prof Neha
Government Audit
• 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.
 • Powers of C&AG
• The C&AG Act gives the following powers to the C&AG in connection with the performance of his
duties-
(a) To inspect any office of accounts under the control of the Union or a State Government including office
responsible for the creation of the initial or subsidiaryaccounts.
(b) To require that any accounts, books, papers and other documents which deal withor are otherwise relevant
to the transactions under audit, be sent to specified places.
(c) To put such questions or make such observations as he may consider necessary to the person in charge
of the office and to call for such information as he may require for the preparation of any account or
report which is his duty to prepare.
AUDIT OF LOCAL BODIES

• Municipal government in India covers five distinct types of urban local

authorities, viz., the municipal corporations, the municipal councils, the
notified area committees, the town area committees and the cantonment
committees. The taxation powers of the corporations are confined to a few
items and are of a generally compulsive nature; on the other hand, the tax
powers of other types of urban local authorities cover a wider range,
optional in nature and subject to a procedure for their imposition
requiring the final sanction of the state governments. Municipal authorities
are endowed with specific local functions covering (a) regulatory, (b)
maintenance and (c) development activities.
• Expenditure incurred by the municipalities and corporations can be broadly
classified under the following heads: (a) general administration and revenue
collection, (b) public health, (c) public safety, (d) education, (e) public works,
and (f) others such as interest payments, etc.
 1. Audit Programme for Local Bodies
(i) The Local Fund Audit Wing of the State Govt. is generally in-charge of the audit of municipal accounts.
Sometimes bigger municipal corporations e.g. Delhi, Mumbai etc have power to appoint their own auditors
for regular external audit.So the auditor should ensure his appointment.
(ii) The auditor while auditing the local bodies should report on the fairness of the contents and presentation of
financial statements, the strengths and weaknessesof system of financial control, the adherence to legal
and/or administrative requirements; whether value is being fully received on money spent. His objective
should be to detect errors and fraud and misuse of resources.
(iii) The auditor should ensure that the expenditure incurred conforms to the relevantprovisions of the law and is
in accordance with the financial rules and regulationsframed by the competent authority.
(iv) He should ensure that all types of sanctions, either special or general, accorded by the competent authority.
(v) He should ensure that there is a provision of funds and the expenditure is incurredfrom the provision and the
same has been authorized by the competent authority.
(vi) The auditor should check that the different schemes, programmes and projects, where large financial
expenditure has been incurred, are running economically and getting the expected results.
AUDIT OF NON-GOVERNMENTALORGANISATIONS (NGO’S)

• NGO would include religious organisations, voluntary health and welfare

agencies, charitable organisations, hospitals, old age homes, research
foundations etc. The scope of services rendered by NGOs is extremely
wide and as such cannot be covered in a small definition. Some examples of
NGOs operating in India include Child Relief and You (CRY), NORAD, UNICEF,
Godhuli, Vidya, Concern India Foundation., etc.
• While planning the audit, the auditor may concentrate on the following:
(i) Knowledge of the NGO’s work, its mission and vision, areas of operations and environment in which it
operate.
(ii) Updating knowledge of relevant statutes especially with regard to recent amendments, circulars, judicial
decisions viz. Foreign Contribution (Regulation) Act 1976, Societies Registration Act, 1860, Income Tax Act
1961 etc. and the Rulesrelated to the statutes.
(iii) Reviewing the legal form of the Organisation and its Memorandum of Association, Articles of Association, Rules
and Regulations.
(iv) Reviewing the NGO’s Organisation chart, then Financial and Administrative Manuals, Project and Programme
Guidelines, Funding Agencies Requirements and formats, budgetary policies if any.
(v) Examination of minutes of the Board/Managing Committee/Governing Body/ Management and Committees
thereof to ascertain the impact of any decisions on the financial records.
(vi) Study the accounting system, procedures, internal controls and internal checksexisting for the NGO and
verify their applicability.
(vii) Setting of materiality levels for audit purposes.
(viii)The nature and timing of reports or other communications.
(ix) The involvement of experts and their reports.
(x) Review the previous year’s Audit Report.
Sole Proprietary
• A sole trader is under no legal obligation to have his accounts audited.
However, many such individuals get their financial statement audited due to
regulatory requirements, such as inventory brokers or on a specific
instructions of the bank for approval of loans, etc.

• Appointment of Auditor: Auditors of sole- proprietary concern shall be

appointed by the sole proprietor himself. In case of change of auditor, it
would be duty of incoming auditor to communicate with the previous
auditor. As such, sole proprietor can determine the scope of the audit as well
as the conditions under which it will be carried out
Audit of Firm
• Appointment of Auditors : The auditor to a firm is usually appointed by
the partners either on the basis of a decision taken by them or to comply
with a condition in the partnership agreement. His remuneration is also
fixed by the partners. It is important that the letter of appointment should
clearly state the nature and scope of audit which is to be carried out and
particulars of limitations, if any, under which he would have to function. In
case of change of auditor, it would be duty of incoming auditor to
communicate with the previous auditor.
• The auditor may, particularly, ensure application of accounting standards
prescribed by the Institute. In case the firm is required to get its accounts
audited under the requirements of any statute, the auditor will have to
qualify the report in case of non-compliance with the accounting standards.
Alternatively, only disclosure of non- compliance with the accounting
standards, would be sufficient without making it a subject matter of
qualification.
• Matters to be considered before starting audit : Also, before starting the audit, he
should examine the partnership agreement and note the provisions therein as regards
the following matters
• The name and style under which the business shall be conducted.
• The duration of the partnership, if any, that has been agreed upon.
• The amount of capital that shall be contributed by each partner—whether it will be fixed
or could be varied from year to year
• The period at the end of which the accounts of the partnership will be closed
periodically and the proportions in which the profit shall be divided among the partners
or losses shall have to be contributed by them; whether the losses shall be borne by the
partners or whether any of the partners will not be required to do so.
• The provisions as regards maintenance of books of account and the matters which must
be taken into account for determining the profits of the firm available for division among
the partners e.g., creation of reserves, provision for depreciation, etc. also the period
within which accounts can be reopened for correcting amanifest error.
 • Advantages of Audit of a Partnership Firm - On broad considerations, the advantages of audit of
accounts of a partnership could be stated as follows:
(1) 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.
(2) 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.
(3) Audited statement of accounts are 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.
(4) 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.
• An audit is an effective safeguard against any undue advantage being taken by aworking partner or partners especially in the
case of those partners who are notactively associated with the working of the firm
LLP
• An LLP shall be under obligation to maintain annual accounts
reflecting true and fair view of its state of affairs. A “Statement
of Accounts and Solvency” in prescribed form shall be filed by
every LLP with the Registrar every year.
• The accounts of every LLP shall be audited in accordance with
Rule 24 of LLP, Rules 2009. Such rules, inter-alia, provides that
any LLP, whose turnover does not exceed, in any financial year,
forty lakh rupees, or whose contribution does not exceed
twenty five lakh rupees, is not required to get its accounts
audited. However, if the partners of such limited liability
partnership decide to get the accounts of such LLP audited, the
accounts shall be audited only in accordance with such rule.
 • Appointment of Auditor: The auditor may be appointed by the designated partnersof
the LLP –
1. At any time for the first financial year but before the end of first financial year,
2. At least thirty days prior to the end of each financial year(other than the firstfinancial year),
3. To fill the causal vacancy in the office of auditor,
4. To fill the casual vacancy caused by removal of auditor.
• The partners may appoint the auditors if the designated partners have failed to appoint
them.
• LLP’s are required to maintain books of accounts which shall contain-
1. Particulars of all sums of money received and expended by the LLP and thematters in
respect of which the receipt and expenditure takes place,
2. A record of the assets and liabilities of the LLP,
3. Statements of costs of goods purchased, inventories, work-in-progress, finishedgoods and costs
of goods sold,
4. Any other particulars which the partners may decide.
Audit Of Charitable Institution
• In the case of audit of a charitable institution, attention should be paid to thefollowing matters-
(1) General
(i) Studying the constitution under which the charitable institution has been setup.
(ii) Verifying whether the institution is being managed in the mannercontemplated by the law under which it has been set up.
(iii) Examining the system of internal check, especially as regards accounting ofamounts collected.
(iv) Verifying in detail the income and confirming that the amounts receivedhave been deposited in the bank regularly and promptly.
(2) Subscriptions and donations
(i) Ascertaining, if any, the changes made in amount of annual or life membershipsubscription during the year.
(ii) Whether official receipts are issued;
(a) confirming that adequate control is imposed over unused receipt books;
(b) obtaining all receipt books covering the period under review;
(c) test checking the counterfoils with the cash book; any cancelled receipts being specially looked into;
(d) obtaining the printed list of subscriptions and donations and agreeing themwith the total collections shown in the accounts;
(e) examining the system of internal check regarding moneys received from box collections, flag days, etc. and checking the amount received from
representatives, with the correspondence and the official receipts issued; paying special attention to the system of control exercised over
collections and the steps taken to ensure that all collections made have been accountedfor; and
(f) verifying the total subscriptions and donations received with any figures published in reports, etc. issued by the charity.
Legacies - Verifying the amounts received by reference to correspondence withany figures and other available
information.
Grants
(i) Vouching the amount received with the relevant correspondence, receipts and minute books.
(ii) Obtaining a certificate from a responsible official showing the amount of grants received
Investments Income
(i) Vouching the amounts received with the dividend and interest counterfoils.
(ii) Checking the calculations of interest received on securities bearing fixed rates of interest.
(iii) Checking that the appropriate dividend has been received where any investment has been sold ex-
dividend or purchased cum-dividend.
(iv) Comparing the amounts of dividend received with schedule of investments making special enquiries into
any investments held for which no dividend has been received.
AUDIT OF EDUCATIONAL INSTITUTIONS(SCHOOL, COLLEGE OR UNIVERSITY

• The special steps involved in their audit are the following-

(1) Examine the Trust Deed or Regulations, in the case of school or college and note all the
provisions affecting accounts.
(2) Read through the minutes of the meetings
(3) Check names entered in the Students Fee Register for each month or term,
with the respective Class Registers, showing names of students on rolls and test
amount of fees charged; and verify that there operates a system of internal check
which ensures that demands against the students are properly raised.
(4) Check fees received by comparing counterfoils of receipts granted with entries in
the Cash Book and tracing the collections in the Fee Register to confirm that the
revenue from this source has been duly accounted for.
(5) Total up the various columns of the Fees Register for each month or term to
ascertain that fees paid in advance have been carried forward and that the arrears
that are irrecoverable have been written off under the sanction of an appropriate
authority.
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.
(1) See that free studentship and concessions have been granted by a
person authorised to do so, having regard to the Rules prepared by the
Managing Committee.
(2) Confirm that fines for late payment or absence, etc. have been either
collected or remitted under proper authority.
(3) Confirm that hostel dues were recovered before student’s accounts were
closed and their deposits of caution money refunded.
(4) Verify rental income from landed property with the rent rolls, etc.
AUDIT OF HOSPITAL

• Register of Patients
• Collection of Cash
• Income from Investments, Rent etc:
• Legacies and Donations
• Reconciliation of Subscriptions
• Authorisation and Sanctions
• Grants and TDS
• Budgets
• Internal Check
• Depreciation:
• Inventories:
• Management Representation and Certificate
AUDIT OF CLUB

(1) Vouch the receipt on account of entrance fees with members’ applications,
counterfoils issued to them, as well as on a reference to minutes of the
ManagingCommittee.
(2) Vouch members’ subscriptions with the counterfoils of receipt issued to them,
trace receipts for a selected period to the Register of Members; also reconcile
the amount of total subscriptions due with the amount collected and that
outstanding.
(3) Ensure that arrears of subscriptions for the previous year have been correctly
brought over and arrears for the year under audit and subscriptions received in
advance have been correctly adjusted.
(4) Check totals of various columns of the Register of members and tally them across.
• See the Register of Members to ascertain the Member’s dues which are in arrearand enquire
whether necessary steps have been taken for their recovery; the amount considered
irrecoverable should be mentioned in the Audit Report
AUDIT OF HOTELS

• Internal Controls
• Room Sales
• Inventories
• Fixed Assets
• Casual Labour
AUDIT OF CO-OPERATIVE SOCIETIES

1. Qualifications of Auditors - Apart from a chartered accountant

within themeaning of the Chartered Accountants Act, 1949, some of
the State Co-operative Acts have permitted persons holding a
government diploma in co-operative accounts or inco-operation and
accountancy and also a person who has served as an auditor in theco-
operative department of a government to act as an auditor.
2. Appointment of the Auditor - An auditor of a co-operative society is
appointedby the Registrar of Co-operative Societies and the auditor so
appointed conducts theaudit on behalf of the Registrar and submits
his report to him as also to the society. The audit fees are paid by the
society on the basis of statutory scale of fees prescribedby the
Registrar, according to the category of the society audited.
 Audit as per Section 17 of the Co-Operative Societies Act, 1912
(1) The Registrar shall audit or cause to be audited by some person authorised by him by general or special order in
writing in this behalf the accounts of every registered society once at least in every year.
(2) The audit under sub-section (1) shall include an examination of overdue debts, ifany, and a valuation of the
assets and liabilities of the society.
(3) The Registrar, the Collector or any person authorised by general or special orderin writing in this behalf by the
Registrar shall at all times have access to all the books, accounts, papers and securities of a society, and every
officer of the societyshall furnish such information in regard to the transactions and working of the society as the
person making such inspection may require.
Due Diligence, Investigation
and Forensic Audit
Unit – 14
Name: CS Neha Laddha
Due Diligence
• Due diligence is a process of investigation, performed by investors, into the
details of a potential investment such as an examination of operations and
management and the verification of material facts. It entails conducting inquiries
for the purpose of timely, sufficient and accurate disclosure of all material
statements/information or documents, which may influence the outcome of the
transaction. Due diligence involves a careful study of the financial as well as non-
financial possibilities for successful implementation of restructuring plans.
• Due diligence involves an analysis carried out before acquiring a controlling
interest in a company to determine that the conditions of the business conform
with what has been presented about the target business. Also, due diligence can
apply to recommendation for an investment or advancing a loan/credit
CLASSIFICATION OF DUE-DILIGENCE

Commercial
or
Operational

Personnel
Financial

Due
Diligence
Environmental Tax

Information
Legal Systems
Process
Investigation
• The term investigation implies a systematic and in- depth examination or
inquiry to establish a fact or to evaluate a specific situation. In other words,
investigation means inquiry into facts". Professional accountants are often
required to investigate the accounts or the related matters and records of the
enterprise
AUDIT VERSUS INVESTIGATION

• Objective
• Scope
• Periodicity
• Nature
• Inherent Limitation
• Evidences
• Observance of accounting policy
• Appointing agency
• Reporting
STEPS IN INVESTIGATION

• 1. Determination of objectives and establishment of scope of

investigation.
• Step 2: Formulation of the investigation programme
• Step 3: Collection of Evidence
• Step 4: Analysis and Interpretation of Findings
• Step 5: Reporting of findings
TYPES OF INVESTIGATION

• Statutory
• Non- Statutory
• Investigation on behalf of an incoming partner
• Investigation for valuation of shares in private companies
• Investigation on behalf of a bank proposing to advance loan to a
company
• Investigation of frauds
• Investigation on behalf of an individual or a firm proposing to buy a
business
• Investigation in connection with review of profit/financial forecast
PROCEDURE, POWERS ETC. OF INSPECTORS

• 1. Duty of officers and employees of the company towards inspector —

(a) to preserve and to produce to an inspector or any person authorised by
him in this behalf all books and papers of, or relating to, the company or, as
the case may be, relating to the other body corporate or the person, which
are in their custody or power; and (b) otherwise to give to the inspector all
assistance in connection with the investigation which they are reasonably
able to give
2. Inspector may ask information from any body corporate: The inspector
may require any body corporate, other than a body corporate referred to in
point (1), to furnish such information to, or produce such books and papers
before him or any person authorised by him in this behalf as he may consider
necessary
• Not to keep Books and Papers in custody for more than 180 days: The
inspector shall not keep in his custody any books and papers produced
under sub-section (1) or sub-section (2), for more than 180 days and return
the same to the company, body corporate, firm or individual by whom, or on
whose behalf the books and papers were produced
• Examine on oath: The inspector may examine on oath any of the persons
referred in (1) above; and with the prior approval of the Central
Government, any other person in relation to the affairs of the company, or
other body corporate or person, as the case may be and for that purpose, may
require any of the persons to appear before him personally
• Inspector to possess all the Powers of Civil Court: The inspector, being an
officer of the Central Government, making an investigation shall have all the
powers as are vested in a civil court under the Code of Civil Procedure, while
trying a suit in respect of specified matters
• Assistance by Officers of Government to Inspector: The officers of the
Central Government, State Government, police or statutory authority shall
provide necessary assistance to the inspector for the purpose of inspection,
investigation etc
• Evidence from place outside India: If in the course of an investigation into
the affairs of the company, an application is made to the competent court in India
by the inspector stating that evidence may be available in a country or place
outside India, such court may issue a letter of request to a court or an authority in
such country or place for seeking such evidence
• Punishment for non-compliance of order of Inspector: If any director or
officer disobeys the direction issued by the inspector, or any officer fails
without any reasonable cause or refuses to furnish any information or,
appear before the inspector personally; the director or the officer shall be
punishable with imprisonment and with fine.
Types of Fraud
1. Fraud for Personal Gains
• Bribery: Money, gift or other favours offered to procure (often illegal or dishonest)
action or decision in favour of the giver. These are also relatable to contract fraud or
procurement fraud and are, generally, out of books transactions. The auditor normally
conducts a propriety audit over the veracity of the transactions and review of any
undue favours to vendors.
2. Corporate Frauds/ Irregularities
• Advance Billing: Advance billing is a situation where the company officials indulge in
booking fictitious sales in anticipation of actual sales. This results in misrepresentation of
revenue in the books thereby misleading financers and stakeholders. When the
management treats borrowings from money lenders as customer advances in the books
against sale orders or for adjusting bills receivables, the fraudulent act gets unnoticed for an
extended period. This situation results in a death knell fo r the corporation as the company
is dragged into an irredeemable debt trap
(i) Shell/ Dummy Company Schemes: Generally, represents a fictitious company or a ‘paper company’ to
transfer profits or funds from the main company. This could also involve fictitious bills (mostly for
services rendered or consultancy charges that cannot be corroborated) which are used in the name of
dummy companies diverting the funds taken from banks and financial institutions.
• The books could be falsified by wrong classification of expenses, inflating the expense claims, fictitious
expenses or multiple reimbursements. A review of controls, normally, leads to the uncovering of
expense booking that are prima facie not incurred.
(i) Money-Laundering Activities: As per the Prevention of Money-Laundering Act, 2002, “whosoever
directly or indirectly attempts to indulge or knowingly assists or knowingly is a party or is actually
involved in any process or activity connected with the proceeds of crime and projecting it as untainted
property shall be guilty of offence of money-laundering
1. Fraud at Operational Level Employees
(i) Tampering of Cheques/Drafts/On-line payments/receipts: Tampering of cheques, payee name being
altered, or preparation of cheques without the same being issued to payee, etc., are methods that may
also lead to falsification of accounts.
• Off Book Frauds: In off book frauds, the fraud perpetrator misappropriates the cash before these are recorded in
the books or before the sale is recorded in the books. These frauds are difficult to unearth as the cash or collection
is taken off before the accounting entries are made in the books
• Cash Misappropriation: Cash is misappropriated after the accounting entries are already passed in the books.
These are identified through surprise checks and through shortages in cash balances
 (i) Teeming and Lading: This is also achieved through cash deposits or cheques collected from customers being
overlapped with the collections from subsequent customers and the amount collected is diverted to personal
account. Reconciliation of customer accounts at a single point of time and confirmation from customers for
amounts outstanding in their accounts helps in identifying any leakage in collections.
(ii) Fraudulent Disbursements: Fraudulent disbursements or reimbursements take place either by issuing or
submission of false bills, or personal expense bills being converted into official expenses bills. The other method
that is resorted to by the perpetrator of fraud is to inflate the refunds due to a customer and skim the excess
refunds.
(iii) Expense Reimbursement Schemes: These fraudulent schemes involve employees resorting to treating their
personal expenses as incurred for business purpose and claiming reimbursement. In some cases, employees may
get reimbursed by third parties (such as distributors) as well as by claiming these expenses from the company.
Multiple expense claims based on duplicate bills or photostat copies.
• Payroll Fraud: The payroll fraud could include payment to non-existent employees or in a contractual arrangement inflating
of the manpower resources than those actually deployed while billing the client. It may also include showing higher pay than
actual disbursement to employees/ workers, etc.
• Commission Schemes: The salesman exaggerates the sales through
fictitious billings to earn higher commission or alter the sales prices of the
products sold from those stipulated by the company or share the sales
volumes achieved with other employees to share higher commission.
Indicators of Fraud

i. Discrepancies in Accounting Records including non-recording or partial recording orincorrect recording or delayed recording of amounts,
misclassifications, etc.
ii. Conflicting or missing evidence including missing documents, altered documents,
significant unexplained items in reconciliations, discrepancies between entity’s records
and confirmations received etc.

iii. Unacceptable management responses such as – denial of access to records/facilities/employees, undue time pressure to resolve complex
issues, unusualdelays in providing requested information, denial for use of Computer Assisted Audit
Techniques, unwillingness to address identified deficiencies in internal control etc.

iv. Other indications such as – Accounting Policies in variance with Industry Norms, Frequentchanges in accounting estimates etc.
Forensic Audit
• Forensic” means “suitable for use in the court of law”. Bologna said
that it is the application of financial skills and investigative mentality to
unresolved issues, conducted within the context of the rules of
evidence. As an emerging discipline, it encompasses financial
expertise, fraud knowledge and a sound knowledge and understanding
of business reality and the working of legal system. Forensic Auditing
includes the use of accounting, auditing and investigative skills to assist in
legal matters.
Statutory audit and forensic audit
Sr. No. Particulars Other Audits Forensic Audit
1. Objectives Express an opinion as to Whether fraud has actuallytaken place in
‘True & Fair’ presentation books

2. Techniques Substantive & Compliance.Sample based Investigative, substantive orin-depth

checking
3. Period Normally for a particularsaccounting period. No such limitations

4.
Verification of stock,Estimation Relies on the management Independent/verification of
realisable value ofassets, certificate/Management Representation suspected/selected items where
provisions, misappropriation insuspected
liability etc.

5.
Off balance sheetitems (like Used to vouch the arithmeticaccuracy & Regulatory & propriety ofthese
contracts compliance with transactions/contracts
etc.) procedures. are examined.
6.
Adverse findings ifany Negative opinion or qualified opinion Legal determination of fraud impact and
expressed with/without identification of perpetrators depending
quantification on
scope.
FORENSIC AUDIT TECHNIQUES
• Some of the techniques that a forensic auditor may use are listed below:
(I) General Audit Techniques:
• Testing defenses: A good initial forensic audit technique is to attempt to circumvent these defenses yourself. The
weaknesses you find within the organizations control will most probably guide you down the sea path taken by suspected
perpetrators. This technique requires you to attempt to put yourself in the shoes and think like your suspect.
(II) Statistical & Mathematical Techniques:
• Trend Analysis: Businesses have cycles and seasons much akin to nature itself. An expense or event within a business that
would be analogous to a snowy day in the middle of summer is worth investigating. Careful review of your subject
organization's historical norms is necessary in order for you to be able to discern the outlier event should it arise within your
investigation.
• Ratio Analysis: Another useful fraud detection technique is the calculation of data analysis ratios for key numeric fields. Like
financial ratios that give indications of the financial health of a company, data analysis ratios report on the fraud health by
identifying possible symptoms of fraud.
• Technology based /Digital Forensics Techniques: Every transaction leaves a digital footprint in today's computer-driven society.
Close scrutiny of relevant emails, accounting records, phone logs and target company hard drives is a requisite facet of any modern
forensic audit. Before taking steps such as obtaining data from email etc. the forensic auditor should take appropriate legal advice so that it
doesn’t amount to invasion of privacy
FORENSIC AUDIT REPORT

Clear thinking: ü To whom the report is directed

ü Purpose and aim of investigation
ü Cool and calm thinking to have logical and
coherentpresentation
ü Pattern of presentation

Keep the reader uppermost ü Translate technical matters to layman's language

inmind ü To visualize the reader's viewpoint
Unbiased approach ü To mention the view point of the auditee
Money Laundering
Unit – 15
Name: Prof Neha Laddha
What is Money Laundering ?
• Activity connected with the proceeds of crime &
projecting it as untainted property
• Involves disguising the true origin of illegitimate
funds
• Converts illegally obtained income into other
forms to appear it as a legitimate income
• Mode to insert dirty money in the financial
system.
 Activities generating illegal money
Drug Trafficking Corruption Forgery

Kidnapping
Smuggling
Criminal /
Illegal
Activity
Tax Evasion

Gambling

Extortion

Fraud
Stages of Money Laundering
• Placement : Initial stage in which cash proceeds
from criminal activities is placed in financial
institutions.
Stages of Money Laundering
• Layering : Process of conducting a complex series
of financial transactions, with the purpose of
hiding the origin of the money from the criminal
activities
Stages of Money Laundering
• Integration : Final stage in the re-injection of the
laundered proceeds back into the economy in such
a way that they re-enter the financial system as
normal business funds
What is Money Laundering?
Prevention of Money Laundering
Act, 2002
• PMLA came into force with effect July 01, 2005
• PMLA defines money laundering offence and
provides for the freezing, seizure and confiscation
of the proceeds of crime
• Financial Intelligence Unit–India(FIU-IND)
established in 2004
• Financial Action Task Force (FATF) membership
granted to India in 2010
Regulatory Requirements

• Obligations under the Circular:

ü Written AML Policy & Procedures
ü Customer Due Diligence
ü Risk categorization of clients
ü Record Keeping
ü Suspicious Transaction Monitoring & Reporting
ü Freezing of funds
ü Employee Training
ü Investor Education
üReporting of Designated Director / Principal officer to FIU