Audit Charts Full

Audit Charts (CA Final)
May 2017
Dharmveer Singh Shekhawat

SA 200 (Revised) “Overall Objectives of the Independent Auditor & Conduct of audit in accordance with SAs
(a) To obtain reasonable assurance about whether the F. S. 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 F.S. are prepared, in all material respects, in accordance with an applicable FRF.
(b) To report on the F.S. and communicate as required by the SAs, in accordance with the auditor’s findings.
Aspects to be considered by Auditor while performing Audit

Ethical Professional Professional Judgement Sufficient Appropriate Conduct of Audit in Other Explanation
Requirements Skepticism audit Evidence accordance with SAs
 Comprise Code of Attitude that includes a  The application of  Sufficiency refers to  The auditor shall Scope of Audit
Ethics issued by questioning mind, relevant training, quantum and comply with All SAs  to examine whether the F.S. are
being alert to knowledge and Appropriateness relevant to the audit. prepared in accordance with FRF.
ICAI including
conditions which may experience,  Compliance with SA  The auditor’s opinion does not assure,
independence. refers to quality.
 within the context is to be specified in the future viability of the entity nor
indicate possible  Purpose: to reduce
 The fundamental provided by auditing, Audit report only in the efficiency or effectiveness with
misstatement due to audit risk to an which mngt. has conducted the affairs.
principles are: accounting and ethical case of actual
error or fraud, and a acceptably low level
1. Integrity standards, compliance. Preparation of F.S.
critical assessment of
2. Objectivity  in making informed and thereby enable  To achieve overall  is the duty of Mngt./TCWG.
audit evidence.
3. Professional decisions about the the auditor to draw objectives of audit,  Duty of management also includes to
Alertness is required courses of action reasonable use the objective
competence & make accounting estimates and
w.r.t.  that are appropriate in conclusions on which stated in Individual
due care selection and application of
1. Contradictory audit the circumstances of the SAs.
to base the auditor’s appropriate accounting policies.
4. Confidentiality, evidence. audit engagement.  In case Entire SA is
opinion.
& 2. Reliability of It is required w.r.t.: not relevant due to Inherent Limitations for an audit
documents.  Audit Risk: Risk that
5. Professional  Materiality & audit risk. non existence of (a) Nature of Financial reporting:
3. Conditions the auditor expresses prescribed
behavior  NTE of audit procedures. involves judgment by Mngt. based
indicating possible  Evaluating sufficiency & an inappropriate audit conditions, comply
 Independence on facts and circumstances.
frauds. appropriateness of audit opinion when the F.S. with relevant
comprises both (b) Nature of audit Procedures:
4. Circumstances procedures. are materially requirements.
directed towards obtaining
independence of requiring audit  In case of failure to
 Evaluating mngt misstated. reasonable assurance.
mind and procedures in judgment in applying achieve an objective
 Audit Risk is a (c) Balance between benefit and
independence of addition to those applicable FRF. determine the need
function of the RMM cost: user expectation to get AR
suggested in SAs.  Drawing conclusions of modified opinion
appearance. and detection risk. within a reasonable period and at
based on audit evidence. or withdrawal.
reasonable cost.
Compiled by: CA. Pankaj Garg Page 1

SA – 210 (Revised) – “Agreeing the Terms of Engagement”
Objective of Auditor: To accept or continue an audit engagement only when the basis upon which it is to be performed has been agreed with the client.
Agreeing the terms of audit Engagement
At the Beginning of Audit During the Course of Audit
Initial audit Engagement Recurring Audit Mngt. request for changes in terms
Limitations Imposed by mngt. No Limitations Imposed by Mngt. Determine its effect on Level of
Determine requirements w.r.t.:
Assurance & reasonable
(a) Revision of terms of Engagement; &
Do not accept unless required Ascertain existence of Justification
by law Preconditions* (b) Remind the entity of existing terms
Preconditions for an audit Exist Not Exist Required Not Required Auditor Satisfied Not Satisfied
1. Determine whether the FRF is
acceptable.
Accept Audit Discuss matter Send New No Further Duty Record New Do not
2. Obtain agreement of mngt that it Terms in
with mngt. Engagement Letter accept the
understands its responsibilities for: Engagement changes
(a) Preparation of F.S. Letter
(b) Exercising necessary Internal
Do not accept audit in case of: CIRCUMSTANCES REQUIRING REVISION IN TERMS Mngt. not
Controls to enable the
(a) Unacceptable FRF  Indications that the entity misunderstands the objective and permit the
preparation of F.S. that are free
scope of the audit. auditor to
from material misstatements. or continue
 Revised or special terms of engagement.
(c) To provide the auditor: (b) Mngt. does not agree with  Recent change of senior management.
 Access to all relevant info. responsibilities  Significant change in ownership.
 Additional info that auditor Withdraw &
 Significant change in nature or size of the entity’s business.
requests from mngt. Report to
 Change in legal or regulatory requirements.
Compiled by: CA. Pankaj Garg appropriate
 Unrestricted access to persons  Change in FRF adopted in the preparation of the F.S.
authority
within the entity.  A change in other reporting requirements.

SA – 220 (revised) “Quality Control for an audit of F.S.”
Objective: Implement QC Policies that provide Reasonable Assurance that audit complies with professional standards and audit report issued is appropriate
Leadership Ethical Independence Acceptance / Continuance Assignment of Engagement Performance Monitoring

Responsibilities
Requirements of Client relationship Engagement
Team
EP should EP to remain alert  Be satisfied that EP to be satisfied 1. Direction, Supervision and Obtain reasonable
performance:
emphasize the for evidence of Form a conclusion on appropriate procedures that ET & assurance that
compliance with Auditor’s Expert  EP shall take the responsibility for
ET the following: non-compliance regarding client acceptance directions, supervision & performance firm’s policies /
applicable independence not part of ET
 Compliance with relevant ethical
requirements
/ continuance have been of audit engagement in compliance with procedures relating
have appropriate standards & regulatory requirements, &.
with requirements by ET followed. to QC are relevant,
Obtain relevant competence &  to make an appropriate AR.
professional through:  Determine whether capabilities to: 2. Reviews: adequate, and
information from Firm
Standards and  Inquiry. conclusions reached are  Perform audit EP shall take the following responsibilities: operating
appropriate. engagement in a. Reviews are being performed in
legal  Observation. Identify & Evaluate effectively.
accordance with policies / procedures.
requirements. circumstances & accordance
b. Be Satisfied that SAAE has been obtained
If there is an with Consider:
 Compliance
Relationship that threatens If EP obtains information to support the conclusions reached and
indications of non- independence that would have caused firm professional AR to be issued through  Results of firm’s
with firm’s
compliance with to withdraw the engagement, standards and  Review of Audit Documentation. monitoring
Quality Evaluate information on communicate information regulatory or  Discussion with ET
relevant ethical process.
Control identified breaches. promptly to firm legal 3. Consultation:
requirements, EP EP shall undertake consultation  Whether
Policies. requirements,
should:  wherever required. deficiencies
 Issuance of Determine if these Examples of Information and  Ensure its implementation
 Consult others in threaten independence  Enable an AR noted may affect
appropriate 4. Engagement Quality Control Review:
the firm. 1. Integrity of Principal that is required in case of listed entities. the audit
audit report. Take appropriate action Owners, Mngt & TCWG
 Determine appropriate in Matters to be evaluated by EQCR engagement.
 Ability to raise to eliminate such threats 2. Competency of ET to
appropriate the
concerns perform engagement.  Discussion of significant matters with ET.
or circumstances.
action. 3. Availability of necessary
without fear.  Review of FS & proposed audit report.
Promptly report capabilities, including time &
 Quality is
inability to take resources.  Review of selected audit documentation
essential & appropriate action to 4. Compliance with relevant
indispensable ethical requirements. 5. Differences of Opinion: follow the firm’s
in engagement Compiled by: CA. Pankaj Garg 5. Significant matters that policies & procedures for dealing with and
arises during the current or resolving differences of opinion.
performance.
previous audit engagement.

SA – 230 (Revised) – Audit Documentation
General concepts Form, Content & Extent of Specific Documentation Retention Ownership
Documentation Period
 Documentation is the
Meaning: Record of: Auditor shall prepare audit documentation
property of the Auditor.
 Audit procedures performed that is sufficient to enable an experienced 7 Years from  May at his discretion
 Relevant audit evidence
auditor to understand: date of Audit make portions of or
obtained, &
(a) NTE of the audit procedures; Report extracts from
 Conclusions reached Compiled by: CA.
(b) Results of audit procedures performed, documentation available
Pankaj Garg
Purpose: includes the following: & audit evidence obtained; to client.
 Assist in Planning and
(c) Significant matters arising during the
performance of Audit.
audit and the conclusions reached Documentation of Documentation of Documentation of
 Direction, supervision &
Review of work. thereon, significant professional Discussion Departure from a matters arising after the
 To fix accountability. judgments made in the reaching those relevant requirement Date of Auditor’s Report
 Record for future reference. conclusions.
 Quality control review and Factors affecting form, content & extent  Significant  Reasons for the  Circumstance
inspections Matters departure. encountered.
1. The size and complexity of the entity.
 Conduct of external Discussed with  Alternative  New or additional
inspections. 2. The nature of the audit procedures to be
Mngt. And procedures procedures
performed. TCWG. performed. performed, audit
Nature documentation must 3. Identified RMM.  When and with evidence obtained,
provide for: 4. Significance of audit evidence obtained. whom the conclusions reached,
 Sufficient and appropriate 5. Nature & extent of exceptions identified. discussion took and their effect on the
record of the basis for place. auditor’s report.
6. Need to document a conclusion or the
auditor’s report.  How the auditor  When and by whom
basis for a conclusion not readily
 Evidence that the audit was address the the changes to audit
determinable from the documentation of
planned and performed in inconsistency (if documentation were
the work performed or audit evidence any detected made and reviewed.
accordance with SAs & other
obtained. during
regulatory requirements.
7. The audit methodology and tools used. discussion)

SA 240 (Revised) – The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements
Fraud Risk Factors / Management Duties Auditor’s Responsibilities

Meaning and Nature of Fraud
Characteristics of Fraud
Meaning: Intentional Act involving use of deception to  Incentive or pressure to Commit Fraud: Primary responsibility To obtain reasonable assurance
obtain an unjust or illegal advantage. Arises when mngt is under pressure to for prevention & that F.S. as a whole are free from
achieve an unrealistic target. detection of fraud rests material Misstatements.
Auditor is concerned with Fraud that causes  Perceived opportunity to do so: with Mngt and TCWG
Arises when an individual believes that Maintain an attitude of
Material Misstatement.
internal control can be overridden. To ensure prevention of Professional Skepticism
Misstatement may result from:  Rationalization to do so: fraud Mngt. must have an
A Fraudulent Financial Reporting Arises when an individual possess an commitment to create an Circumstances indicate existence of
1. Recording fictitious journal entries to attitude or character that allows them material Misstatement
culture of honesty and
manipulate operating results. knowingly and intentionally to commit a
Ethical behavior.
2. Inappropriate assumptions. dishonest act.
3. Changing judgements to estimate account Consider whether such a
balances. Risk associated for non detection of material misstatements misstatement is an indication of
4. Omitting, advancing or delaying recognition of Fraud. If Fraud identified
 Due to Inherent limitations there is always an unavoidable risk of material
events and transactions occurred during the misstatement in F.S. due to Fraud.
year.  Risk of non detecting a material misstatement resulting from fraud is Communicate to Mngt.
5. Concealing facts that affect the amount higher than the risk of non detecting one resulting from error. &TCWG (also to Regulatory &
recorded in F.S.
 Risk of Material Misstatements due to Management Fraud is higher than Enforcement authorities, if
6. Engaging in Complex Transactions that are
due to Employee Fraud. required by Law
structured to misrepresent the financial
position or financial performance.
Conditions or events which increases risk of fraud or error Auditor unable to complete the
7. Altering records relating to significant
1. Discrepancies in Accounting Records: arises due to improper recording, engagement.
transactions.
unauthorised transactions, last minute adjustments.
B Misappropriation of Assets
2. Conflicting or missing evidences: missing documents, altered Consider the Possibility of
1. Embezzling receipts. withdrawing.
documents, non availability of original documents, unexplained items etc.
2. Stealing physical assets.
3. Unusual relationship between auditor & mngt: undue time pressure,
3. Causing an entity to pay for goods and services
unusual delay in providing info, unwillingness to address weaknesses in IC. If withdraw:
not received.
4. Others: Mngt not allowing auditor to meet with TCWG, varied accounting  Discuss with Mngt & TCWG, &
4. Using entity assets for personal use.  Report to appropriate persons
policies, frequent changes in accounting estimates.

SA 250 (Revised) “Consideration of Laws and Regulations in an Audit of F.S.”
Management Responsibilities Auditor’s Responsibilities
Basic Responsibilities Specific Auditor Reporting responsibilities Indicators considered by

Responsibilities w.r.t. Auditor
Procedure in
Obtain general
case any Non-
understanding of L& R having Other L& R that do not To TCWG Auditor Report Regularity &
direct effect on affect amount and Compliance is Enforcement Authorities
 Legal & Regulatory
Framework applicable determination disclosures in F.S. but identified /
 Compliance by Entity of material compliance with which Suspected Material Unable to If required by Law
with that Framework. amount and may be fundamental to Effect on Conclude
due to  Investigations by regulatory
disclosures in operating aspects. F.S.
Limitation bodies.
Compliance of L & R is duty of F.S.
Mngt & TCWG and may be imposed by  Payment of fines or penalties.
performed through:  Payments for unspecified
Q/A
1. Monitoring legal requirements  Obtain services to consultants, related
& ensuring that operating parties etc.
obtain SAAE Perform limited understanding of
procedures are designed to Mngt. Circumstances  Excessive Sales commissions or
procedures: the Act.
meet these requirements. agent’s fees.
2. Instituting & operating
 Inquiring of Mngt; &
 Circumstances in  Purchasing at prices
appropriate systems of IC.  Inspecting Q/D Consider the significantly above or below
which it is
3. Developing, publicising and Correspondence with Effect market price.
to ensure occurred.
following a code of conduct. relevant Licensing /  Unusual payments in cash.
4. Ensuring employees are compliance Regulatory authority  Evaluate possible
 Unusual payments towards legal
properly trained & understand effects on F.S. and retainership fees.
the code of conduct.  Matters involving non-
 Discuss with  Payments without proper
5. Monitoring compliance with to identify instances of compliance.
Mngt. & TCWG exchange control
code of conduct & take actions non compliance.  If TCWG is involved, documentation.
to discipline employees who  Obtain legal communicate to Higher Level,  Existence of an information
fail to comply with it. advice wherever if any system which fails, to provide
6. Engaging legal advisors to
required  Otherwise, obtain Legal Advice an adequate audit trail or
assist in monitoring legal
Obtain Written Representation that all sufficient evidence.
requirements.
instances of non-compliance or  Unauthorised transactions or
7. Maintaining a register of Compiled by: CA. Pankaj Garg
suspected non-compliance have been improperly recorded
significant L & R with which the
transactions.
entity has to comply. disclosed to auditor.
 Adverse media comment.

SA 260 (Revised) – “Communication with TCWG”
Meaning of Auditor’s Responsibilities Communication Process Factors affecting Mode of

Management & Communication
TCWG
TCWG: Persons with Determine the Matters to be communicated  Communication may be  Size, operating structure,
responsibility for appropriate Oral /written control environment, & legal
overseeing the (a) Auditor’s responsibility in relate to F.S. Audit. Detail/Summarised structure of entity.
person to whom
(b) Planned scope & timing of audit Structured /Unstructured  In the case of an audit of special
strategic directions & communication
(c) Significant findings from audit w.r.t.  Should be in writing purpose F.S., whether the
obligations related to is to be made.
 Accounting Policies auditor also audits the entity’s
Accountability. when oral
 Accounting Estimates general purpose F. S.
Management : Person communication is not
 F. S. Disclosures  Requirements of respective law
with executive adequate. specifying written
 Significant difficulties encountered
responsibility for during the audit.  Communication should communication with TCWG in a
conduct of entity’s Examples of Significant difficulties be on timely basis prescribed form.
1. Significant delay in providing info  Expectations of TCWG,

operation
2. Unnecessarily brief time to complete including arrangements made
Evaluate adequacy of for periodic meetings or
the audit.
3. Extensive unexpected effort to obtain communication for the communications with the
SAAE. purpose of the audit. auditor.
 Determine the need to communicate with 4. Unavailability of Expected  The amount of ongoing contact
Governing body, if communicates with information. and dialogue the auditor has
If not adequate, evaluate
5. Restriction imposed by management. with TCWG.
subgroup. its effect, on the auditor’s
6. Scope limitation imposed by
 If all of TCWG are involved in managing the  Significant changes in the
management assessment of the risks of
membership of a governing
entity, and the matter has been material misstatement.
 Material weakness in I.C. body.
communicated with persons having
 Matters discuss with Mngt.
managerial responsibility, the matters need
 Other significant Matters.
not be communicated again to the same Compiled by: CA. Pankaj Garg
(d) Statement w.r.t. compliance of ethical
persons in their governing role. requirements regarding independence.

SA-265 “Communicating Deficiencies in Internal Control to TCWG & Management
Meaning of Auditor’s Responsibilities

deficiency in internal
control
(a) Inability of I.C to prevent Identification of deficiencies in Communication of deficiencies in Internal Control
detect & correct misstatement ; Internal Control
or
Mode of communication Content of communication
(b) Absence of control necessary
Determine whether on the basis of
to prevent, detect & correct
work done any deficiency in In writing
misstatements internal control is identified
Determine whether individually or To TCWG To Mngt. (a) Description of deficiencies

in combination they constitute (b) Explanation of their potential
significant deficiencies effect
(c) Sufficient information to explain
Indicators of Significant Deficiencies Significant Significant  that purpose of the audit is to
deficiencies deficiencies express an opinion
1. Evidence of ineffective aspects of control environment.
and other  I. C. is evaluated to design
2. Entity’s Risk assessment process – Absent/ineffective. deficiencies further audit procedures
3. Ineffective response to identified significant Risks.
4. Correction of prior period misstatements arising due to fraud/error.
5. Management inability to oversee F.S. Preparation.
Compiled by: CA. Pankaj Garg
6. Misstatements detected by the auditor’s procedures were not
prevented, or detected and corrected by the entity I.C.

SA 299 “Responsibility of Joint Auditors”
Division of work Co-ordination Responsibilities of Joint Auditors Reporting
By Mutual discussion If one auditor comes  Generally – a Single Report

Separate Joint & several
to know a matter
 If joint auditors disagree -
relevant for other, he
On basis of identifiable units should communicate Separate Report
or specified areas it immediately in  No one is bound by Majority.
writing to other joint For work  for work not divided
auditor before allocated  for joint decision w.r.t. N,
If not possible – with submission of report. T, E of audit procedure.
respect to followings:  for matters brought to
 Assets/Liabilities; or knowledge of all by any
 Income/Expense; or one of them and on which
 Period they all agree.
 Disclosure requirements
in F.S.
Work should not be
divided for Imp. areas  Compliance of audit
report with statutory
requirement
Work so divided should be
documented and
communicated to the
entity.

SA 300 (Revised) – Planning in an audit of Financial Statements
Importance of Planning Preliminary Engagement Activities Planning Activities
1. To devote appropriate attention to (a) Procedures required by SA -220 w.r.t. Establishment of Audit Strategy Development of
important areas. continuous of Client relationship. Audit Plan.
2. Identify and Resolve potential (b) Evaluate compliance with Ethical so as to set the scope, timing &
problems on timely basis. direction of the audit
Requirements (SA-220)  NTE of RAP (SA-
3. Properly organized & managed Audit. Factors to be considered
(c) Understanding of terms of 315)
4. Assists selection of ET members with  Characteristics of Engagement.
Engagement (SA-210)  NTE of furthers
requisite capabilities and competence.  Reporting Objectives.
5. Co-ordination of work done by  Significant factors to direct ET Audit Procedures
auditors of components and experts. Planning – A Continuous Process efforts. (SA-330)
6. Facilitating direction and supervision  Result of Preliminary  Other Planned
of Engagement team. Engagement Activities.
Audit Procedure.
 NTE of Procedures to be
performed.
Planning is not a discrete phase of an audit but rather a continuous process. It begins shortly
CHANGES TO PLANNING DECISIONS
after completion of previous audit & continues until completion of current audit engagement.
 Auditor shall update & change overall audit strategy and audit plan
It includes consideration of timing of certain activities & audit procedures that need to be
as necessary during the course of the audit.
completed prior to performance of further audit procedures. E.g., planning includes the need to  Audit Strategy and Audit Plan may need to be modified as a result
consider, prior to the auditor’s identification and assessment of the RMM, such matters as: of unexpected events, changes in conditions, or the audit evidence
1. The analytical procedures to be applied as risk assessment procedures. obtained from the results of audit procedures.
 Based on the revised consideration of assessed risks, auditor need
2. Obtaining a general understanding of the legal and regulatory framework.
to modify the NTE of further audit procedures. This may be the case
3. The determination of materiality.
Compiled by: when information comes to the auditor’s attention that differs
4. The involvement of experts. significantly from the information available when the auditor
CA. Pankaj Garg
5. The performance of other risk assessment procedures. planned the audit procedures.

SA 315 (Revised) – Identifying and Assessing the Risk of Material Misstatements through understanding the Entity and Its Environment .
Risk Assessment Understanding of Entity & its Environment Risk in CIS Environment
Procedures
Risk imposed by IT/CIS Areas to be examined
Auditor shall obtain understanding of:
 Program Development &
 Procedures to obtain an 1. Relevant Industry, Regulatory & other External  Reliance on programs that process
Maintenance.
understanding of entity Factors including FRF. inaccurate data or do inaccurate
 System Software Support.
& its environment 2. Nature of Entity including. processing.  Operations Including processing
including I.C.  Its Operations
 Unauthorized access to data that of data.
 To Identify and assess  Ownership & Governance structure
may result in destruction of data.  Physical CIS security.
 Types of investments
the RMM at F.S. and  Control over access to
 The way Entity is structured & how it is financed  Unauthorized changes to data in
Assertion Level. specialized CIS utility programs.
3. Selection & Application of Accounting Policies & Master files.
reasons for changes thereto.
It Includes  Unauthorized changes to systems. Components of Internal Control
4. Entity objectives & Strategies & those business
a. Inquiry of mngt.& others risks that may result in increase RMM.  Failure to make necessary changes.
1. Control Environment
b. Analytical Procedures 5. Measurement & review of Financial Performance.  Potential loss of data  Communication of Ethical values.
c. Observation & Inspection 6. Internal control relevant to audit. 2. Risk Assessment Process
 Inability to access data as required.
 Identify Business Risk
 Estimating significant Risks
Identification and Assessment of RMM  Assessing Likelihood of occurrence.
 Deciding response
a) F.S. Level: RMM that Assertions evaluated Steps in Risk Risk require special 3. Information System relevant to FR:
relate pervasively to Transaction  Occurrence consideration  Classes of transactions
Assessment
the F.S. as a whole and occurred  Completeness 1. Risk of fraud  Accounting procedures
Process:
potentially affect many during the  Accuracy 2. Risk related to recent  Accounting records
assertions. year  Cut-Off  Identify risks significant Economic,
 Classification  Financial Reporting Process.
b) Assertion level for  Assess & Evaluate Accounting & other
Account  Existence  Controls over journal entries
classes of the identified risks. Developments.
balances at  Rights & Obligations 4. Control Activities relevant to Audit
Transaction, Account 3. Complexity of Transactions.
period end  Completeness  Relate identified  Information processes
Balances &
 Valuation &
4. Transactions with Related
risk to what go  Segregation of duties.
disclosures: It helps Disclosure Parties
in determining the NTE wrong at assertion 5. Significant Unusual  Physical controls
Presentation  Occurrence
of further audit &  Completeness level. Transaction  Performance Reviews
procedures necessary Disclosures  Classification  Likelihood of 5. Monitoring of Controls
to obtain SAAE.  Accuracy & Valuation misstatement. Compiled by: CA. Pankaj Garg  Assess effectiveness of I.C. Performance.

SA 320 (Revised) “Materiality in Planning and Performing an Audit”
Concept of Materiality Performance Materiality Auditor’s Duties
Materiality is a subject of  The amount set by auditor at (a) Upon establishing the overall audit strategy, the auditor shall
professional judgment and  less than materiality for F.S as a whole determine the materiality for the F. S. as a whole.
discussion presented in FRF (b) Determine the materiality level for specific transactions for
 to reduce to an appropriately low level
which misstatements of lower amount be expected to influence
provides a reference to the auditor in  the probability that the aggregate of the
the economic decisions of users.
determining materiality. uncorrected & undetected misstatement (c) Determine the performance materiality for purpose of assessing
If FRF does not include a discussion,  exceeds materiality for F. S. as a whole the RMM and determining the NTE of further audit procedures.
following can be referred:
(a) Misstatements including
omissions expected to influence Revision of Materiality Use of benchmark in determining Materiality
the economic decision of users.

(b) Size or nature of misstatement &  In event of becoming aware of information A %age is often applied to a chosen benchmark as a starting
the surrounding circumstances. that would have caused auditor to have point in determining materiality for the F.S. as a whole.
(c) Common financial information determined a different amount initially, Factors affecting identification of appropriate benchmark
needs of the users as a group. auditor shall revise materiality for the F.S. as a 1. The elements of the financial statements;
whole & if required, for particular classes of 2. Items on which the attention of the users of the particular
transactions, account balances or disclosures. entity’s financial statements tends to be focused;
 If the auditor concludes that a lower 3. The nature of the entity, where the entity is at in its life
materiality than that initially determined is cycle, and the industry and economic environment in
Judgment of materiality provides a
appropriate, the auditor shall determine which the entity operates;
basis for:
whether it is necessary to revise performance 4. The entity’s ownership structure and the way it is
(a) Determination of NTE of RAP
materiality, and whether the NTE of the financed; and
(b) Identifying and assessing RMM.
further audit procedures remain appropriate. 5. The relative volatility of the benchmark.
(c) NTE of further audit procedures.

SA – 330 “Responses to Assessed Risks”
Objective: To obtain Sufficient and Appropriate Audit Evidence about Assessed Risk of Material Misstatement through design and implementing Appropriate Responses
Tests of Controls Substantive Procedures
Procedures designed to evaluate the operating effectiveness of controls in preventing, Procedures designed to detect material misstatements at assertion level.
detecting or correcting material misstatements at assertion level. It comprises of:
a) Test of details (of classes of transactions, Account Balances and
Obtain audit evidences w.r.t. (a) Application of controls (b) Consistency of application Disclosures); &
(c) By whom & by what means they applied Compiled by: CA. Pankaj Garg
b) Substantive Analytical Procedures
Evaluate the audit evidences

External Auditor shall consider whether EC procedures are to be
Material weaknesses identified Confirmation performed as substantive audit procedures.
(EC) Factors that may assist the auditor are:
Communicate to Mngt. & TCWG – on timely basis
procedures 1. Confirming party knowledge of Subject Matter.
Special Considerations Factors warranting re-test of as 2. Ability or Willingness of intended confirming part to
Using Audit Evidence obtained in Interim Period: controls substantive respond.
 Obtain audit Evidence for significant changes 1. Deficient control environment. procedures 3. Objectivity of Intending Party.
subsequent to Interim Period. 2. Deficient monitoring of
Closing  Reconciling F.S. with underlying A/cing Records
controls.
 Determine the additional Evidence to be obtain for Process
3. Significant manual element to  Examine Material Journal Entries & other adjustments
remaning period.
relevant controls. made during the course of preparing the F.S.
Using Audit Evidence obtained during previous
4. Personnel changes that Significant Procedures that are specifically responsive to that risk
audits: Establish Continuing relevance of that evidence significantly affect the
by determining significant changes subsequent to Risks needs to be applied
application of control.
previous audit 5. Changing circumstances that
 Changes occurs: Test the controls in current audit indicate the need for changes
 No Change Occurs: Test the controls once in three in the control. Timing: When Substantive procedures are applied for interim period, the
audits 6. Deficient general IT-controls. auditor shall cover remaining period by appropriate procedures

SA 402 (Revised) – Audit Considerations relating to an Entity Using a Service Organisation
Auditor’s Objective Obtaining understanding of services Auditor’s considerations

provided by service Organisation (S.O.)
 Obtain an The user auditor shall obtain an  User auditor shall evaluate the design and implementation of relevant controls of
understanding of understanding of how user entity uses the user entity that relate to the services provided by service organization.
nature & significance  User auditor shall determine whether a sufficient understanding of nature and
services of a service organization in the user
of service provided by significance of services provided by service organization and their effect on the
entity operation, including:
the S.O. and their user entity internal control relevant to the audit has been obtained.
(a) Nature of service provided by the S.O. and  If user auditor is unable to obtain a sufficient understanding from the user entity,
effect on the user’s
entity internal control significance of services to user entity. user auditor shall obtain that understanding from the following procedures:
relevant to the audit, (b) Nature and materiality of the transactions (a) Obtaining a Type 1 or Type 2 Report, if available.
(b) Contacting the service organization, through the user entity.
sufficient to identify processed or financial reporting processes
(c) Visiting the service organization.
and assess the RMM. affected by service organizations.
(d) Using another auditor to perform procedures that will provide the
 To design and (c) Degree of interaction between activities of necessary information about the relevant controls at the S.O.
perform audit
S.O. and those of the user entity.  If a S.O. uses subservice organisation, the service auditor’s report may either
procedures
(d) The nature of relationship between user include or exclude the subservice organisation’s relevant control objectives
responsive to those
& related controls in the service organisation’s description of its system & in
risks. entity and the service organization.
the scope of service auditor’s engagement. These two methods of reporting
are known as the inclusive method and the carve-out method, respectively.
User Auditor: An auditor who audits and Reports on the financial  If Type 1 or Type 2 report excludes the controls at a subservice
statements of a user entity. organisation, and the services provided by the subservice organisation are
relevant to the audit of the user entity’s financial statements, the user
User Entity: An Entity that uses a service organization and whose financial
auditor is required to apply the requirements of this SA in respect of the
statements are being audited. subservice organisation.
Type 1 Report: Report on the description and design of internal controls at  Nature and extent of work to be performed by the user auditor regarding
a service organization for a specified date. the services provided by a subservice organisation depend on the nature
and significance of those services to the user entity and the relevance of
Type 2 Report: Report on the description, design and operating
those services to the audit.
effectiveness of controls at a service organsation for a specified period.

SA 450 “Evaluation of Misstatements Identified during the Audit
Meaning and Causes of Auditor’s Procedures if Misstatements identified

Misstatements
Difference between Accumulate the misstatements other than those that clearly trivial
amounts, classification, presentation

or disclosure of a reported financial
Communicate to management & request them to correct. Determine whether any
statement item,
revision required in Audit
and
Strategy/Plan.
amount, classification, presentation or Management corrects Management refuses
disclosure that is required for the item

to be in accordance of FRF. Perform Additional Understand the reason for not making Audit Strategy and Audit
Causes of Misstatement Procedures to Plan require revision if
(a) Inaccuracy in gathering or determine whether
Re-assess the materiality
processing data from which the misstatements Nature of identified
F.S. are prepared; remain. misstatements and the
If material, communicate uncorrected
(b) Omission of an amount or circumstances of their
misstatement and their effect on his opinion to
disclosure; occurrence indicate that
TCWG with a request that uncorrected
(c) Incorrect accounting estimate other misstatements may
misstatements be corrected.
arising from overlooking, or clear exist that, could be material;
Compiled by:
misinterpretation of, facts; and or
Not corrected
(d) Unreasonable judgments of CA. PANKAJ GARG Aggregate of misstatements
management concerning accumulated during the
Obtain a written representation from
accounting estimates. audit approaches materiality
management/TCWG w.r.t their believing that
(e) Inappropriate selection & determined in accordance
effect of uncorrected misstatements are
application of accounting policies with SA 320 (Revised).
immaterial.

SA 500 “Audit Evidence”
Meaning and Nature of Auditor’s duties when an information to be used as audit evidence Audit Procedures & Methods
Audit Evidence (A.E.) for obtaining audit evidence
Meaning of A.E. Information prepared using Information Procedures to obtain A.E. Methods to obtain A.E.
Information used by auditor work of Management Expert Produced by entity (a) RAP 1. Inspection
(b) FAP (Responses): 2. Observation.
In arriving at the conclusion  Tests of Control (ToC), 3. External Confirmations
1 Evaluate Competence, Capability and Obtain A.E. about the
Objectivity of the Expert  Substantive 4. Recalculation
On which auditor’s opinion is Source of Information for evaluation: 1. Tests of Details (ToD) 5. Re-performance
Accuracy and
based.  Personal Experience with previous work. 2. Substantive Analytical 6. Analytical procedures
Completeness of info.
 Discussion with that expert.
Nature of A.E. Procedures (SAP) 7. Inquiry (Oral/Written)
 Discussion with others. Evaluate whether info
A.E. needs to be  Knowledge of expert’s qualification, is
memberships, other forms of recognitions.
 Published books or papers. Reliability of Audit Evidence
Sufficient Appropriate sufficiently precise
 Auditor’s expert.
Measure of Measure of and detailed for
2 Obtain an understating of expert work
quantity quality auditor’s purposes.
 Area of Specialty
Affected by Relevance &  Applicable professional standards.
 RMM & reliability in  Legal & Regulatory Requirements. (a) External Evidences are considered more reliable than internal evidences.
 Quality of providing  Assumptions and Methods used.
(b) The reliability of internal evidence is increased when the related controls, imposed
 Nature of Source Data used.
Audit support for by entity are effective.
3 Evaluate the appropriateness of Expert work
evidences conclusion. (c) Audit evidence obtained directly by the auditor is more reliable than audit
 Finding & Conclusion – Relevance,
Reasonableness & Consistency with other evidence obtained indirectly.
A.E. (d) Audit evidence in documentary form, is more reliable than evidence obtained
Compiled by:  Assumptions and Methods – Relevance
orally.
and Reasonableness.
CA. PANKAJ GARG (e) Audit evidence provided by original documents is more reliable than audit
 Source Data – Relevance, Completeness
and accuracy. evidence provided by photocopies.

SA 501 “Audit Evidence – Specific Considerations for Selected Items”
Inventory – Litigation & Claims – Completeness

Existence & Condition
Auditor is required to identify litigation and claims
by following procedures:
 Inquiry: of Mngt. & others within entity,
General Procedures Special Procedures including in house legal counsel.
 Review – minutes of meetings of TCWG,
When inventory is material to the F.S. 1 Inventory counting conducted at date other than communication between entity & external legal
B/S date counsel.
the auditor shall obtain SAAE Perform audit procedures to obtain audit evidence  Review – legal expenses account.
If management refuses to permit auditor to

about whether changes in inventory between the count
regarding existence & condition by communicate with legal counsel / external legal
date and the date of the F.S. are properly recorded. counsel refuses / auditor unable to collect SAAE
2 Auditor unable to attend Inventory Count by performing alternate procedures
(a) Attendance at physical inventory
Make or observe some physical counts on an alternative
counting, unless impracticable, to: Modify Opinion in accordance with SA 705
date,
 Evaluate mngt. instructions &
procedures for recording & and perform audit procedures on intervening Segment Reporting –
controlling the results of the entity’s transactions Presentation & Disclosures
physical inventory counting; 3 Attendance at inventory count is impracticable
 Observe the performance of Perform alternative audit procedures to obtain S.A.A.E. Obtain SAAE regarding presentation & disclosure of segment
regarding existence and condition of inventory. information in accordance with the applicable FRF by:
management’s count procedures;
(a) Obtaining an understanding of the methods used by
 Inspect the inventory; management in determining segment information, and
If it is not possible to do so, modify the opinion in the
 Perform test counts; auditor’s report in accordance with SA 705.  Evaluate whether such methods are likely to result in
(b) Performing audit procedures over the disclosure in accordance with the applicable FRF; and
4 Inventory under custody and control of Third Party
 Where appropriate, testing the application of such
entity’s final inventory records to Obtain S.A.A.E by performing the following: methods; and
determine whether they accurately (a) Request confirmation from third party. (b) Performing analytical procedures or other audit
reflect actual inventory count results. (b) Perform Inspection/other audit procedure. procedures appropriate in the circumstances.

SA – 505 “External Confirmation”
The objective of the auditor, when using external confirmation procedures, is to design and perform such procedures to obtain relevant and reliable audit
evidence.
Meaning & Type of E.C. External Confirmation Audit Procedures in Special Circumstances Limited use of –ve
Procedures Request
Mngt. refuses to allow the auditor to send request
Audit Evidence obtained as a direct written As it provides less
Determining the information to
response to auditor from 3rd Party in  Inquire the reasons persuasive evidence
be confirmed.
Paper/Electronic/Other form.  Evaluate the implications on RMM than the positive
Selecting the Appropriate Third  Perform Alternative Audit procedure. Confirmation request.
2 Types Party.  Refusal appears to  Communicate to
be unreasonable TCWG.
+ ve Request - ve request Designing the confirmation
Circumstances in
request.  Unable to collect  Determine its affect
Request that 3rd Party Request that 3rd Party
which negative
respond directly to respond directly to audit evidence on Opinion
Sending the request including request may be used
auditor auditor
follow up. Responses to E.C. request as sole substantive
indicating whether it only if it disagrees
agrees or disagrees  Creates Doubt Obtain Further procedure:
With the info in request with the information in Factors to be considered while Evidences
 Low RMM.
or the request designing E.C. request:  Not Reliable Consider its affect on
providing requested  Population consists
 Assertions being addressed. NTE of other procedures
info. of large no. of small,
 Specific identified RMM.  No Response Perform Alternative
homogenous
Areas where External Confirmation may be obtained:  Layout and presentation of procedure
(a) Bank balance & Other confirmation from account balances.
request.
 Unable to collect Determine its affect on
bankers  Expectation of low
 Prior Experience of audit.
(b) Account Receivable/Account Payable Balances evidence Opinion
 Method of Communication. exception rate.
(c) Stock Lying with Third Parties  Exception occurs Investigate to determine
 Management Authorization.  Auditor not aware
(d) Property Title Deed held by third parties
misstatement of circumstances
(e) Investments Purchased but delivery not taken.  Ability of confirming party to
(f) Loan from Lenders provide the requested that 3rd party
(g) Terms of agreement or Transaction with Third information Compiled by: CA. Pankaj Garg disregard request.
Parties

SA – 510 “Initial Audit Engagements – Opening Balances”
Meaning of Initial Audit Engagement: An Engagement in which financial statements for prior period are not audited or were audited by predecessor auditor.
Meaning of Opening balance – A/c balance that exist at beginning of period & also includes disclosures exists at beginning of period.
Audit Procedures Audit Conclusion & Reporting
Opening Balance Consistency of Modification in Opening Balance Consistency of Modification in

Accounting Predecessor Accounting Predecessor Auditor’s
Auditor’s Report
Policies Policies
Report
Balance
 Read most recent F.S. and auditor Obtain SAAE Evaluate the Unable to Contain material Inconsistency Modification remains
report thereon. effect of obtain SAAE misstatements not exists relevant & material for
 Obtain S.A. audit evidence w.r.t. modification properly or Current Period F.S.
existence of any material accounted / Changes not
misstatement by disclosed in properly
 Determining correct b/f of prior current year F. S. accounted or
period closing balance. disclosed
 Determining application of
appropriate accounting policies. w.r.t.
Modify Current Year
 If any misstatement detected consistent
Qualified / Audit Report
perform additional procedures to application
Disclaimer Qualified / Adverse Report accordingly
determine their effect on current or
Period financial statements. Proper
 If misstatement exists in Current accounting & in assessing Compiled by: CA. Pankaj Garg
Period F.S. communicate to Mngt & disclosure for RMM in Current
TCWG. changes. period F.S.

SA 520 “Analytical Procedures”
Meaning and Nature of Analytical Procedures Auditor’s Procedures
Evaluation of financial information 1 Determine the suitability of particular substantive analytical procedures (SAP)
Following factors requires consideration:
through analysis of relationships
1. SAPs more suitable to large volumes of transactions tending to be predictable over time.
2. But suitability of AP influenced by:
among both financial and non-financial data.
AND  Nature of assertion.
also encompass such investigation as is necessary of  Auditor’s assessment of APs effectiveness to identify material misstatement.
identified fluctuations or relationships that are 3. In some cases unsophisticated predictive models may be useful.
inconsistent with other relevant information or that 4. Different types of APs provide different levels of assurance.
differ from expected values by a significant amount. 5. Particular SAP may be considered suitable when ToD are performed on same assertion.
Analytical Procedures
2 Evaluate the reliability of data
Following factors affects the reliability:
Consideration of Consideration of
 Source of the information available.
Comparisons of relationships among
Financial Information  Comparability of the information available. Compiled by: CA. Pankaj Garg
with comparable Elements of financial  Nature and relevance of the information available, and
information for prior information  Controls over the preparation of the information
periods. or 3 Develop an expectation of recorded amounts or ratios and evaluate whether the expectation is
or Financial information sufficiently precise to identify material misstatement.
with anticipated results and relevant non-
4 Determine the amount of any difference of recorded amounts from expected values that is
of the entity financial information.
acceptable without further investigation.
or
Auditor’s expectations 5 Investigating Results of Analytical Procedures
or If auditor identified fluctuations or relationships that are inconsistent with other relevant information
Similar industry or differ from expected values by a significant amount, the auditor shall investigate such differences by:
information. (a) Inquiring of management; and
(b) Performing other audit procedures as necessary in the circumstances.

SA – 530 (Revised) “AUDIT SAMPLING”
Meaning & Types of Audit Sampling Sampling risk Auditor’s Duties
Application of audit procedures to < Risk that auditor’s conclusion based on a sample may be different from 1 Sample design, size and selection of items
100 % of items within a population. the conclusion if the entire population were subjected to same audit (i) While designing, consider the purpose of
procedure. the audit procedure and the
Types of Sampling
characteristics of the population.
(a) Statistical Sampling: An
(ii) Sample size should be sufficient to
approach to sampling that has the
reduce sampling risk to an acceptably
following characteristics: Test of Tests of details Compiled by: low level.
 Random selection of the controls CA. Pankaj Garg (iii) Selection should be in such a way that
sample items; and each sampling unit in the population has
a chance of selection.
 The use of probability
Controls are Material Affects audit 2 Perform audit procedures
theory to evaluate sample
more effective misstatements does effectiveness and is (i) Perform audit procedures, appropriate
results, including
to the purpose, on each item selected.
than they not exist when in more likely to lead to
measurement of sampling (ii) If the audit procedure is not applicable
actually are fact it does. an inappropriate
risk. to selected item, perform the procedure
audit opinion. on a replacement item.
(b) Non Statistical Sampling: A
sampling approach that does not (iii) If the auditor is unable to apply designed
audit procedures/alternative procedure
have characteristics of random Controls are Material Affects audit to a selected item, consider that item as
selection and use of probability
less effective misstatement exists efficiency as it would a deviation.
theory is considered non-
than they when in fact it does lead to additional 3 Evaluation of results of audit sampling
statistical sampling. To determine whether the use of audit
actually are not work to establish
that initial sampling has provided a reasonable basis
for conclusions about the population that
conclusions were
has been tested.
incorrect.

SA – 540 (Revised) “Auditing Accounting Estimates(AE), including Fair Value Accounting Estimates and Related Disclosures”
Objective of Auditor: To obtain SAAE whether (a) AE including Fair Value AE are reasonable; and (b) related disclosures in the F.S. are adequate.
Meaning & Nature of Auditor’s Duties

Accounting Estimates Compiled by: CA. Pankaj Garg
 Accounting estimate: Risk Assessment Procedures & Responses to Assessed Risks

“An approximation of a monetary Related Activities
amount in the absence of a Based on assessed RMM, auditor shall determine:
precise means of measurement”.  Whether management has appropriately applied the applicable FRF.
This term is used for an amount  Whether the methods are appropriate and have been applied consistently.
1. Obtain an understating of:
measured at fair value where
 Requirements of applicable FRF
there is estimation uncertainty.
 How management identifies
 Estimation Uncertainty: General Responses to Specific Responses to Significant Estimation
transactions, events and
The susceptibility of an Assessed RMM Uncertainties
conditions that give rise to need
accounting estimate & related 1. Determine whether events 1. Evaluate the following:
for accounting estimates.
disclosures to an inherent risk of occurring upto date of  How management has considered
 Estimation making process
precision in its measurement. auditor’s report provide alternative assumptions or outcomes,
adopted by mngt. and data on
 Examples of Accounting Estimates
which they are based. audit evidence regarding  How management has addressed
 Provision for Bad Debt,
Estimation making process AE. estimation uncertainty in making the
 Inventory loss,
 Methods/Model used in making 2. Test how management accounting estimate.
 Warranty Obligations,
Accounting estimates. made the accounting  Whether the significant assumptions
 Depreciation,
 Relevant Controls estimate and the data on used by management are reasonable.
 Provision against carrying
 Use of Management Expert. which it is based.  Management’s intent to carry out
amount of investments, etc.
 Changes in the methods from 3. Test the operating specific courses of action and its ability
 Examples of Fair Value A.E.
the prior period along with effectiveness of the to do so.
 Share Based Payments,
reasons. controls. 2. If in auditor’s judgement, management has
 Assets held for disposal,
 Assessment of effect of 4. Develop a point estimate not adequately addressed the effects of
 Financial Instruments,
estimation uncertainties. or a range to evaluate estimation uncertainty, the auditor shall
 Assets acquired in business develop a range with which to evaluate the
2. Review of outcome of accounting management’s point
combinations
estimates of prior period. estimate. reasonableness of the accounting estimates.

SA 550 “Related Parties” Compiled by: CA. Pankaj Garg
Meaning of Related Party Auditor’s Duties
EITHER Risk Assessment procedures Responses to Assessed Risks

Related party as defined in applicable FRF (AS
18).
OR 1 Understanding the Entity’s RP relationship and Transactions 1 Identification of unidentified /
Where applicable FRF establishes minimal or undisclosed RP or RP transaction.
a. Auditor to inquire management regarding:
no RP requirements:
• Identity of entity’s RP, changes from prior period.  Communicate to other members of ET.
a. A person/entity having control/ significant
influence, over reporting entity; • Nature of relationships between entity and RP.  Request Mngt to identify the transactions
b. Entity over which reporting entity has • Type & purpose of transactions with RP. with the newly identified RP.
control / significant influence, and b. Obtain understanding whether mngt has established controls to:  Inquire reasons for mngt failure to
c. Entity under common control with  Identify, account for & disclose RP relationships & transactions. identify RP or disclose RP relationship
reporting entity, through: and transactions.
 Authorise & approve significant transactions with RP.
• Common controlling ownership  Reconsider the risk that other
• Owners who are close family members  Authorise & approve significant transactions outside normal course of business.
unidentified RP or undisclosed RP
• Common key Mngt. 2 Maintaining Alertness for RP Information when Reviewing
transactions may exist.
Records/Documents
 If non disclosure appears intentional,
 Auditor to remain alert when inspecting records w.r.t. info indicating existence of RP
Auditor’s responsibilities in relation to RP relationships or transactions not previously identified or disclosed.
evaluate implications for audit.
 If auditor identifies significant transactions outside entity’s normal course of 2 Identified significant RP Transactions
Obtain an understanding of RP outside Entity’s Normal course of
business, inquire of mngt about (a) Nature of these transactions, and (b)
Relation and Transactions: Business.
a. To recognize Fraud Risk factors Whether RP could be involved.
 Inspect underlying contracts to evaluate
General
b. To conclude whether F.S. in so far Possible Sources for identification of RP Information:

business rationale.
as they are affected by those 1 Income Tax Returns 7 Shareholder’s Register
 Examine the terms on which transactions
relations and transactions achieve 2 Internal Audit Report 8 Life insurance Polcies
takes place.
• true and fair presentation and 3 Contracts with Mngt 9 Statement of conflict of interest
 Collect evidences w.r.t. approval and
• not misleading. 4 Contracts outside normal 10 Information supplied to authorisation of transaction.
 Perform audit procedures to course of business regulatory authorities  Collect evidences for appropriate
Identify, Assess & Respond to RMM. 5 Contracts re-negotiated 11 Specific Invoices from advisors accounting & disclosure in compliance of
Specific (FRF established
 Evaluate whether Identified RP

accounting & Disclosure
6 Register of Investments 12 FRF.

relationships & Transactions have 3 Assertions that RP Transactions were
3 Identifying Fraud risk factors
requirements)
been appropriately accounted for & conducted on arm Length price.

disclosed as per FRF. Domination of mgmt by a single person or small group without compensating
 Collect SAAE w.r.t. mngt assertion of
 Obtain WR from Mngt./TCWG w.r.t. controls is a fraud risk factor.
Arm’s length transaction.
 Disclosure to auditor the Indicators of dominant influence:
 Compare transaction prices with the
identity of RP of which they are  RP has vetoed significant business decisions taken by mgmt or TCWG.
prices for identical transactions
aware; and  Significant transactions are referred to RP for final approval. prevailing in ordinary course of business.
 Appropriate accounting &  No/ little debate among mgmt or TCWG regarding business proposal initiated by RP.
 Engage expert to determine market value.
disclosure as per FRF.  Transactions involving the RP are rarely independently reviewed / approved.

SA 560 “Subsequent Events”
Meaning – Events occurring between the date of F.S. and the date of Auditor’s Report AND Facts that become known to auditor after the date of Auditor’s report.
Auditor’s Duties Compiled by: CA. Pankaj Garg
Events occurring between the date of F.S. and the date of Auditor’s report Facts that become known to Auditor after date of Auditor’s report
(i) Perform procedures to obtain SAAE that all events which require adjustment / Before issue of F.S. After issue of F.S.
disclosure have been identified. 1. In general Auditor has no obligation. 1. In general Auditor has no obligation.
2. However, in case of significant 2. However, in case of significant
(ii) For the purpose of determining nature and timing of procedures, auditor may:
matter matter
(a) Obtain the understanding of procedures applied by mngt for identification of
 Discuss with Management  Discuss with Management
significant events.  Determine need to amend F.S.
 Determine need to amend F.S.
(b) Inquire the Management as to Occurrence of subsequent events which may  Inquire how mngt intends to
 Inquire how mngt intends to
affect the F.S. address the matter in F.S.
address the matter in F.S.
(c) Read the Minutes of Meetings that held after the B/S date. 3. If Mngt. amend the F.S. audior shall
3. If Mngt. amend the F.S. auditor shall
 Carry out procedures on
(d) Study the Interim Financial Statements, if any.  Extent procedures to date of new amended F.S.
(iii) If auditor identifies any event which require any adjustment/disclosure, he should report, and  Review the steps taken by mngt
ensure its appropriate treatment in F.S.  provide a new auditor report on to ensure that recipient of F.S.
(iv) Obtain a WR from the Mngt. that all known events have been appropriately amended F.S. are informed of the situation.
adjusted/disclosed, as the case may be. or  provide a new auditor report on
 Amend the audit report to amended F.S.
Specific Inquiries to be made from management include an additional date or
1. Whether new commitments, borrowings or guarantees have been entered into. restricted to that amendment  Amend the audit report to
and include an EOM/OMP. include an additional date
2. Whether sales or acquisitions of assets have occurred or are planned.
4. If mngt refuses to amend the F.S. restricted to that amendment
3. Whether there have been increases in capital or issuance of debt instruments.
 Modify the report if not yet and include an EOM/OMP.
4. Whether any assets have been appropriated by government or destroyed. 4. If mngt refuses to amend the F.S.
5. Whether there have been any developments regarding contingencies. provided to entity.
 Notify to mngt and TCWG, that
6. Whether any unusual accounting adjustments have been made.  If report already issued, notify to
the auditor will seek to prevent
7. Whether any events have occurred that will bring into question the appropriateness mngt and TCWG not to issue F.S. reliance on Auditor’s Report.
of accounting policies used in the F.S.. to third parties.  If mngt/TCWG does not take
8. Whether any events have occurred that are relevant to the measurement of  If mngt still issues F.S., take necessary steps, take appropriate
estimates or provisions made in the F.S. appropriate action to prevent action to prevent reliance on
9. Whether any events have occurred that are relevant to the recoverability of assets. reliance on auditor’s report. auditor’s report.

SA – 570 (Revised) “Going Concern”
Mngt. Responsibilities Auditor’s Duties. Conditions that may case doubt

about G.C. Assumption
Responsibilities
 Asses the entity’s ability To obtain SAAE about the For this purpose auditor is required to A Financial Conditions
to continue as a going appropriateness of mngt use of a) Cover the same period as that used by mngt. 1. Net Liability position.
concern. going concern assumption 2. Non renewal of borrowings.
b) Consider whether mngt has considered all
 General purpose F.S. are 3. Withdrawal of Financial
relevant information of which auditor is aware. Support.
prepared on a going Determine whether mngt has
4. Adverse Financial Ratios.
concern basis unless already performed a preliminary  Request mngt to make its assessment of entity’s 5. Inability to pay creditors.
management intends to assessment of entity ability to ability to continue as going concern. 6. Substantial Losses.
liquidate the entity or to continue as going concern.
 Evaluate management plans for future. 7. Inability to arrange finances.
cease operation. 8. Negative Operating cash flow.
 Consider the reliability of cash flow forecast.
 In case F.S. are not Auditor identifies events that cast 9. Deterioration in value of assets.
prepared on going significant doubt on entity ability  Considering availability of additional facts or
10. Discontinuation of dividend.
concern basis, the fact to continue as going concern. information since the date of mngt assessment. B Operating Conditions
would need to be  Requesting WR from Mngt. regarding their plans 1. Management intention to
appropriately disclosed. Perform additional procedures for future action and the feasibility of these plans liquidate the entity.
2. Loss of KMP.
3. Loss of a major market, key
Going concern Mngt. unwilling to make its assessment customer, franchise etc.
Assumption Appropriate Going Concern Assumption 4. Labour Difficulties.
but Material Uncertainty Inappropriate 5. Shortage of Important Supplies.
exists 6. Emergence of successful
competitor.
C Others
Determine whether F.S. Adverse Opinion Consider the implications on Auditor’s Report
1. Non compliance of Statutory
makes relevant disclosure Requirements.
2. Pending legal proceedings
Yes No against the entity.
Compiled by: CA. Pankaj Garg 3. Uninsured or underinsured
EOM Q/A assets.

SA 580 “Written Representation”
Meaning and Nature of WR Requirements of SA 580
A written statement by Matters for which WR may be obtained Auditor Responses in different Situations
Management
Management refuses to Reliability of WR is doubtful

provided to auditor
provide WR
(a) Preparation and
presentation of Financial
to confirm certain matters
Statements:  Discuss the matter with  In case of having concerns
Management responsibilities
or
In accordance with applicable management about competence and
to support other audit evidence. FRF.  Re-evaluate the reliability integrity of mngt, determine
 WR recognized as audit evidence (b) Information provided to and integrity of management. their effect in reliability of
as a response to inquiries. 1 Auditor:  Determine possible effect on WR and other audit
 WR do not provide SAAE as agreed in terms of the opinion. evidence in general.
 WR should be in the form of a engagement  Issue disclaimer of opinion.  IF WR inconsistent with
representation letter addressed (c) Description of management other evidences, perform
to Auditor. Responsibilities: additional procedures.
 WR shall be obtained for all In the manner as described in  If conclude that WR is not
Compiled by:
financial statements and terms of engagement reliable, determine possible
period(s) referred in Auditor’s As required by other SA CA. Pankaj Garg
effect on audit opinion.
Report. Or  In case of sufficient doubt
Others
 Date of WR shall be as near as 2 Where auditor determines that it over integrity of

practicable to the date of the is necessary to obtain one or more management, issue a
Auditor’s report. WR. disclaimer of opinion.

SA – 600 “Using the Work of Another Auditor”
Applicability: In situation where an auditor (principal auditor - PA), reporting on the financial information of an entity, uses the work of another auditor (other auditor - OA) w.r.t.
to the financial information of one/more components (Division, Branch subsidiary, J. V. etc.), included in the financial information of the entity.
Non applicability: (a) Joint auditors (b) Auditor’s relationship with a predecessor auditor.
Principal Auditor’s Procedures Documentation Coordination Reporting
1. Consider the professional competence of Other 1. Components whose FS are 1. Sufficient liaison/co- 1. Express a qualified /
Auditor, if Other Auditor is not a member of ICAI. audited by Other Auditor ordination between Principal disclaimer of opinion
2. Visit component and examine books of account, if and Other auditor. because of scope
and their significance to
limitation:
essential. the financial information
2. Principal auditor may require
 If Principal Auditor
3. Obtain sufficient appropriate evidence, that work of Other Auditor to answer a
of the entity as a whole. concludes that he
Other Auditor is adequate for Principal Auditor's detailed questionnaire.
2. Names of the other cannot use the work of
purposes. 3. Other Auditor should
auditors. Other Auditor;
4. Discuss audit procedures applied by Other Auditor. coordinate with Principal
3. Any conclusions reached  PA unable to perform
5. Review a written summary of Other Auditor’s Auditor:
sufficient additional
that individual  Adhering to time-table.
procedures and findings through
procedures regarding
questionnaires/checklist. components are not  Bringing to the attention of
FI of the component
6. Consider significant findings of Other Auditor: material. PA any significant finding.
audited by OA.
 Discuss audit findings with OA and Mgt. of 4. Procedures performed  Compliance with relevant
2. Report should state
component. regarding components. statutory requirements.
clearly division of
 Perform supplemental tests if necessary. 5. Conclusions reached.  Respond to detailed
responsibility
questionnaire.
7. In case Other Auditor is not a professionally qualified 6. Manner of dealing with between PA and OA.
auditor - for instance, where a component is situated in Modified Report of Other
foreign country: Auditor while finalising
 Procedures mentioned above assume added Compiled by: CA. Pankaj Garg
Principal Auditor’s Report.
importance.

SA 610 (Revised) “Using the Work of Internal Auditors”
Meaning & scope of Relationship External Auditor’s Procedures w.r.t. Evaluation of Internal Audit Documentatio
Internal Audit Function between Internal
Audit Function &  Conclusions regarding the
Meaning Determine evaluation & adequacy of
External Auditor
 An appraisal activity. work.
 Established/ provided.  Audit procedures performed

Adequacy of Internal Audit If Adequate, consider
 Role & objectives of on internal auditor work.
 As a service to entity. Work for External Auditor’s its effect on N, T, E of
internal audit function
Also include Purpose External auditor’s Using Specific Work
determined by Mngt/
 examining, Procedures.
TCWG. of Internal auditor
 evaluating & By evaluating the following
 Notwithstanding
 monitoring
Degree of autonomy /  Objec ti vi ty of the Evaluate the following:
adequacy / effectiveness of
objectivity, internal i nter na l a udi t f u nc ti on;  Specific work was performed by
Internal Control.
audit function is not  Tec hni c a l c ompete nc y Internal Auditors having adequate
independent of entity. of i nte rna l a udi t ors;  Nature of specific technical training & proficiency.
 External auditor has  Prof essi ona l c a re w i th work performed by  Work was properly supervised,
Scope of Internal Audit:
sole responsibility for w hi c h the i nte rna l Internal Auditor. reviewed & documented.
 Monitoring of I. C.
audit opinion, and a udi tors w orks; a nd  Assessed RMM.  Adequate audit evidence obtained
 Examination of financial
 that responsibility not  C ommuni c a ti on  Degree of subjectivity by Internal auditor.
& operating information.
reduced by use of betw ee n i nte rna l in evaluation of audit  Conclusions reached are
 Review of operating
work of internal a udi tors & e xte rna l evidence by internal appropriate & reports prepared by
activities.
auditors. a udi tor. auditor. internal auditors are consistent
 Review of compliance
with the results of work performed.
with laws & regulations.
 Exceptions / unusual matters
 Risk management. Compiled by: CA. Pankaj Garg disclosed by Internal Auditor are
 Governance.
properly resolved.

SA 620 “Using the Work of Auditor’s Expert”
Meaning of Auditor’s Expert Procedures to be followed while using the work of auditor’s expert
 An individual or organisation 1 Determining need for an Auditor’s Expert 4 Agreement with Auditor’s Expert
 possessing expertise in field An auditor’s expert may be needed to assist the auditor for the Need to be in writing and cover the followings:
followings:  Nature, scope and Objectives of Auditor’s Expert
other than accounting/auditing,
 Obtaining an understanding of entity & its environment, including IC. work.
 whose work is used by the  Identifying and assessing the risks of material misstatement.  Respective Role and Responsibilities of Auditor
auditor  Determining & implementing overall responses to assessed risks. and auditor’s Expert.
 to assist the auditor in obtaining  Designing and performing further audit procedures to respond to  NTE of Communication including form of report.
SAAE. assessed risks.  Confidentiality requirements to be observed by
 Evaluating the sufficiency and appropriateness of audit evidence
Auditor’s Expert.
obtained.
Areas where work of AE can be
2 Evaluate Competence, Capability and Objectivity of the Expert 5 Evaluate appropriateness of Expert work
used
Source of Information for evaluation:  Finding & Conclusion – Relevance,
 Personal Experience with previous work.
Reasonableness & Consistency with other A.E.
 Valuation of complex financial  Discussion with that expert.
 Discussion with other Auditors.
 Assumptions and Methods – Relevance and
instruments, L & B, P & M, jewelry,
 Knowledge of expert’s qualification, memberships, other forms of Reasonableness.
works of art, antiques, intangible
recognitions.  Source Data – Relevance, Completeness and
assets, assets acquired and  Published books or papers.
accuracy.
liabilities assumed in business  Auditor’s firm Q. C. Policies and Procedures.
combinations and assets that may 3 Obtain an understating of expert work 6 Expert work not adequate for audit purposes
have been impaired.  To enable the auditor to determine the nature, scope and  If Auditor concludes that work of auditor’s expert is
objectives of that expert’s work for auditor’s purposes. not adequate for the auditor’s purposes and
 Actuarial calculation of liabilities
 Evaluate the adequacy of that work for the auditor’s  auditor cannot resolve the matter through the
associated with insurance contracts
additional audit procedures,
or employee benefit plans. purposes.
 it may be necessary to express a modified opinion.
 Estimation of oil and gas reserves.
 Valuation of environmental
liabilities, and site clean-up costs. Reference to the Auditor’s Expert in the Auditor’s Report
 Interpretation of contracts, laws Compiled by:  No reference required in case of unmodified Audit Report unless required by L & R.
and regulations.  In case of modified reports, it may be appropriate to refer to the auditor’s expert, to
 Analysis of complex or unusual tax CA. PANKAJ GARG
explain the nature of the modification. In such case, auditor may need the permission of
compliance issues.
the auditor’s expert before making such a reference..

SA 800 – “Special Considerations – Audit of F.S. prepared in accordance with SPF”
Scope of SA 800: SA 800 deals with Special considerations in application of SAs in audit of F.S. (Complete set) prepared in accordance with SPF.
Objective of Auditor: to address appropriately special considerations w.r.t. (a) Engagement Acceptance (b) Planning & performance (c) Opinion & Reporting.
Meaning & Nature of Compiled by: Auditor’s Considerations

Special Purpose CA. Pankaj Garg
Framework (SPF)
Engagement Acceptance Planning & Performing an Audit Engagement Forming an Opinion &
Reporting
Acceptance
Meaning of SPF 1. Determine acceptability of FRF as per SA 210. 1. Determine whether application of SAs requires special
FRF designed to meet 2. Obtain understanding of: consideration in the circumstances of engagement. For example, in
Apply requirements of
financial information  Purpose for which FS are prepared. SA 320, judgments about matters that are material need to be based
SA 700 (Revised).
need of specific users.  Intended users on a consideration of financial information needs of intended users.
Auditor’s Report to
Nature of SPF  Steps taken by Mngt. to determine 2. Auditor is required to consider the following:
include:
acceptability of applicable FRF.  Requirement of SA 200 on applicability of SAs and absence of
It may be Fair
(a) Purpose for which
3. Consider financial information needs of users in conditions requiring applicability of an SA.
presentation or
F.S. are prepared &
determining acceptability of FRF.  Requirement of SA 315 regarding understanding of selection &
Compliance.
Intended users.
4. Applicable FRF may encompass financial application of accounting policies. In case accounts are prepared
Examples of SPF
on the basis of provisions of a contract, auditor is required to (b) Mngt.
reporting standards established by an
 Cash receipts and responsibility
organization that is authorized to promulgate obtain understanding of significant interpretations of contract.
disbursements basis w.r.t. F.S. and
standards for SPFS. 3. In the case of SPFS prepared in accordance with the requirements of
of accounting selection of FRF.
5. In case any conflict exists in between financial a contract, mngt. may agree with the intended users on a threshold
 Financial reporting below which misstatements identified during the audit will not be (c) EOM Para to alert
reporting standards and legislative
provisions established requirements, auditor need to take action as corrected. The existence of such a threshold does not relieve the users w.r.t.
by a regulator to meet prescribed in SA 210. auditor from the requirement to determine materiality in allocation of
the requirements of 6. In case FRF encompass financial reporting accordance with SA 320. Special purpose
that regulator. provisions of a contract, acceptability of FRF is 4. In the case of SPFS, TCWG may not have a responsibility of F.S. and as such
 Financial reporting determined by considering whether framework overseeing the preparation of F.S. prepared as per requirements of F.S. may not be
provisions of a exhibits attributes normally exhibited by SPF. In such cases, requirements of SA 260 may not be relevant to suitable for
contract. acceptable FRF as described in SA 210. the audit of the SPFS. another purpose.

SA 805 “Special Considerations – Audits of Single F.S. and Specific Elements, Accounts or Items of a F.S.”
Scope of SA 805: SA 805 deals with Special considerations in application of SAs in audit of Single F.S. or Single Element/Account or Item of F.S.
Objective of Auditor: to address appropriately special considerations w.r.t. (a) Engagement Acceptance (b) Planning & performance (c) Opinion & Reporting.
Compiled by: Auditor’s Considerations

Single Financial
Statement/ Element of CA. Pankaj Garg
Audited F.S.
Engagement Acceptance Planning & Performing an Audit Engagement Forming an Opinion & Reporting
Meaning of Element Acceptance
Element means an element,
Application of SA (a) Adapt all SAs as necessary in the audit of SFS:  Apply SA 700, as necessary.
account or item of a F.S.
 SA 200 requires compliance with all SAs relevant (b) Careful consideration of relevance of each SA is  If also engaged to report on full FS,
Single financial statement necessary. SAs such as SA 240, SA 550 and SA 570 are, issue separate reports.
to audit.
(for example, a CFS) or a in principle, relevant. This is because the element could  If audited SFS published with audited
 This applies to audit of Single F.S. even if the
specific element of a F.S. (for auditor also audits the complete F.S. be misstated as a result of fraud, the effect of related full FS, presentation of SFS should be
example, cash and bank differentiated from full FS.
 If auditor not also engaged to audit the complete party transactions, or the incorrect application of the
 Do not issue audit report on SFS
balances) includes the FS, consider the practicability of audit of Single going concern assumption under the applicable FRF.
until satisfied with differentiation.
related notes. F.S./Specific Element in accordance with SAs. (c) SAs are written in the context of an audit of F.S.; they
Acceptability of FRF are to be adapted as necessary in the circumstances Modified Opinion/EMP/OMP Para
Examples of Elements
when applied to the audit of a single F.S. or a specific on Full FS
1. Determine the acceptability of the FRF applied in
 Accounts receivable, (a) Determine effect on Single F.S.
the preparation of Single F.S. element. For example, WR from mngt. about the
 Allowance for doubtful (b) If appropriate, modify opinion on
2. Determine whether application of FRF will result complete set of F.S. would be replaced by WR about
accounts receivable, SFS/include EMP, OMP.
in presentation that provides adequate single F.S. or element in accordance with the applicable
 Inventory, (c) If necessary to issue adverse/
disclosures to enable users to understand FRF.
disclaimer opinion on full FS,
 Schedule of externally information conveyed in Single FS or element. (d) When auditing Single F.S. in conjunction with Full F.S.,
unmodified opinion on SFS cannot
managed assets Form of Opinion audit evidence obtained as part of audit of full F.S. may
be expressed.
 Schedule of net tangible  Expected form of opinion depends upon be useful but auditor needs to plan & perform audit of
(d) However for separate audit of
assets applicable FRF & applicable L&R. Single F.S. to obtain SAAE.
specific element, an unmodified
 SA 210 requires that agreed terms of engagement (e) Some items from Complete FS may be interrelated with
 Schedule of disbursement opinion can be expressed if:
include the expected form of report to be issued. element of F.S., auditor need to perform procedures on
in relation to a lease  Not prohibited by L& R;
 Consider whether expected form of opinion is interrelated items.
property,  AR on element is not published
appropriate in the circumstances. (f) Materialities determined for a Single F.S. or for a
 Schedule of profit together with AR on full FS; &
 Auditor’s decision as to the expected form of specific element may be lower that materiality for full
 Element does not constitute a
participation or employee opinion is a matter of professional judgment. F.S., this will affects NTE of audit procedures and the
major portion of full F.S.
bonuses. evaluation of uncorrected misstatements.

SA 810 “Engagements to Report on Summary Financial Statements (SFS)”
 Scope of SA 810: deals with auditor’s responsibilities, when engaged to report, on SFS, derived from FS audited in accordance with SA, by that same auditor.
 Objective of Auditor: to determine appropriateness of accepting the engagement & form opinion based on evaluation of Conclusions drawn from evidence obtained.
 Meaning of Summary Financial Statements (SFS): Historical financial info that is derived from FS, but contains less detail than FS, while still providing a structured
representation consistent with that provided by entity’s F.S.
Engagement Acceptance Nature of Procedures Form of Opinion
(a) Accept engagement only when also 1 EVALUATE Unmodified opinion shall be expressed on Summary F.S. if
engaged to audit, those F.S., from which SFS (a) Whether SFS adequately disclose
have been derived. their summarised nature & identify SFS are consistent, in all material respects, with audited FS, in accordance
(b) Before accepting Engagement, auditor audited FS. with applied criteria.
shall: (b) If SFS are not accompanied by
1. Determine acceptability of applied Special Considerations
audited FS, whether they clearly
criteria. Qualified 1. State that audit report on FS contains qualified
describe from whom or where
2. Obtain agreement of mngt that Opinion/EO opinion/EOM/OM para AND
audited FS are available;
acknowledges & understands its M/OM Para 2. Describe:
(c) Whether SFS adequately disclose
responsibilities: in Report on • Basis for qualified opinion on audited FS, and that
the applied criteria.
• For preparation of SFS in accordance Audited FS qualified opinion; or EOM/OM para; and
(d) Whether SFS are prepared in
with applied criteria; • Effect thereof on SFS, if any.
accordance with applied criteria.
• To make audited FS available to Adverse Report on SFS is required to include the following:
(e) Whether SFS contain necessary
intended users of SFS without undue Opinion/ 1. Statement that audit report contains
info & are appropriately
difficulty; and Disclaimer of adverse/disclaimer of opinion;
aggregated.
• To include auditor’s report on SFS in Opinion on 2. Description of basis of such opinion; and
(f) Whether audited F.S. are available
any document that contains SFS and Audited FS 3. Statement that as a result of adverse/disclaimer of
to intended users without undue
that indicates that auditor has opinion it is inappropriate to express an opinion on
difficulty.
reported on them.
2 COMPARE SFS.
(c) Agree with the management the form of
SFS with related information in Modified Express adverse opinion
opinion to be expressed on the SFS.
audited F.S. to determine whether SFS Opinion on
(d) Do not accept engagement if:
agree with or can be re-calculated SFS if SFS are not consistent in all material respects with or
• Criteria are not acceptable; or
from related information in audited are not a fair summary of audited FS in accordance with
• unable to obtain management
F.S. applied criteria.
agreement.

Chapter 2 - Audit Strategy, Planning and Programming
Audit Strategy Audit Planning Audit Programming
Meaning: Designing Audit Approaches to achieve necessary audit assurance  Developing an overall plan for the  Detailed plan of work
Meaning
Meaning
at the lowest cost. expected scope and conduct of the  comprises of techniques and
1. Obtaining knowledge of business: audit and procedures,
It provides a frame of reference within which the auditor exercises  Developing an audit programme
 may also contain objectives for
his professional judgement to assess risk, to plan audit, to evaluate showing NTE of Audit procedures
each audit step.
audit evidence and providing quality services.  Acquiring knowledge of client  Nature of business.
Aspects to be covered
2. Performing Analytical Procedures at Initial Stages: To assess accounting system, policies and  Overall Plan
Matters to be
the potential for material misstatement in the F.S. as a whole. internal control procedures.  System of internal control and
considered
3. Evaluating Inherent Risk:  Establishing the expected degree accounting procedures.
On the basis of prior audit experience, controls exercised by of reliance on internal control.  Size and structure of
management, significant changes since last assessment.  Determining the NTE of audit organization.
Steps involved in Audit Strategy
Factors to be evaluated to assess inherent risk procedures.  Information regarding the

At the level of F.S. At the level of A/c Balance  Coordinating the work to be organization.
 Integrity of Management.  Quality of Accounting System. performed.  Accounting policies followed.
 Management experience  Susceptibility to Misstatement  To devote attention to important areas  Draw a broad outline
 Changes in management / Misappropriation of assets.  Identify & resolve potential
First Time Audit

 Filled up the details on a
Importance of
Development of Audit programme

 Pressures on Management  Complexity of transactions. problems. consideration of
planning
 Nature of entity business.  Degree of judgement involved.  Organized and managed audit. deficiencies in internal
 Factors affecting industry.  Unusual transactions  Selection of suitable ET. control.
4. Evaluating Internal Control System:  Coordination of work done  Determine the special
By documenting the extent of computerization, preparing/updating  Direction and supervision of procedures needs to be
flowcharts to record the transactions. engagement team. applied.
5. Formulating Audit Strategy: Requires consideration of:  Terms of engagement Review earlier programme and
 Engagement objective  Nature & timing of reports modified on account of:
Factors to be
 Experience gained during the
Engagement
considered
 Legal or statutory requirements.
Subsequent
 Knowledge of clients business
 Accounting policies & changes therein. previous audit.
 Preliminary judgements as to materiality
 Effects of new accounting/auditing  Important changes in internal
 Identified inherent risks control system, accounting
pronouncements.
 Extent of compliance testing  Identification of significant audit areas. procedures etc.
 NTE of Substantive testing  Setting of materiality levels.  Evaluation of internal control
 Points relating to planning and controlling the audit.  Degree of reliance on internal control. for current year.
1. Employment of Qualitative Resources. Relationship - Audit Strategy & Audit Planning 1. Substantial increase in Volume of turnover.
Circumstances
2. Significant changes in accounting procedures.
Benefits
2. Allocation of appropriate quantity of resources.
requiring
changes
 Inter-related to each other because change in one would 3. Observation w.r.t. ineffective internal control.
3. Determining the timing of deployment of resources. result change in other. 4. Substantial increase in book debts or
4. Better management of resources in terms of direction, supervision, timing  Audit strategy is prepared before the audit plan and provides inventory.
of team meetings etc. the guidelines for developing the audit plan. 5. Suspicion as to misappropriation of assets.
Compiled by: Pankaj Garg Page 1

CHAPTER 3 – RISK ASSESSMENT & INTERNAL CONTROL
1. AUDIT RISK 2. INTERNAL CONTROL
Meaning Risk that the auditor gives an inappropriate audit opinion when the financial The process designed, implemented and maintained, by TCWG and Management, to provide
statements are materially misstated. reasonable assurance about the achievement of an entity’s objectives with regard to reliability
Definition
Consideration Audit Risk need to be considered at Overall Level as well as at the level of of financial reporting, effectiveness and efficiency of operations, safeguarding of assets, and
Individual account balance or classes of transactions compliance with applicable laws and regulations.
Meaning Factors to be considered Control 1. Whether all transactions are recorded;
Inherent
Susceptibility of an account balance or  Experience on prior audits. Objectives 2. Whether recorded transactions are real;
of
class of transaction to a material  Controls established by Mngt. Accounting
3. Whether all recorded transactions are properly valued;
misstatement, assuming that there are  Significant changes from last Control 4. Whether all transactions are recorded timely; properly posted;
no internal controls. assessment. System 5. Whether all transactions are properly classified & disclosed; properly summarized.
Meaning Steps in Assessment of Control Risk Narrative Complete and exhaustive Flow Chart
Records description of system as found in  Graphic presentation of I.C. of various sections
Components
Risk that material misstatements will 1. Preliminary assessment of control Methods of the operation by the auditor in form of a diagram full with lines & Symbols.
Control
not be prevented or detected and risk. Collecting Check List Series of instructions and/or  Provide most concise and comprehensive way
corrected on a timely basis by the 2. Documentation of understanding info to questions which a member of to review I.C.
internal control system. & assessment of control risk. review I.C. auditing staff must follow.  Provide a neat visual picture of various
3. Performing Tests of Controls IC Set of Questions designed to activities involving flow of documents through
Questionnaire provide a thorough view of state various stages, authorizations required, filing of
4. Final Assessment of Control Risk.
of I.C. documents, final disposal .
 Risk that the substantive procedures performed by auditor fails to detect  Useful method to determine whether errors Letter of weakness
Detection
material misstatements. Surprise exist and where they exist  SA 260 - Weaknesses in I.C. identified during the
check in  ICAI Recommendation – Surprise checks should audit should be communicated to mngt & TCWG.
 Some detection risk would always be present even if an auditor was to form part of normal audit.
examine 100% of the account balance or class of transactions. Internal  Helps TCWG to improve the systems.
 Surprise check should be made at least once in
Control the course of an audit.  Must indicate that evaluation of I.C. is done to
determine NTE of further audit procedures.
 IR and CR are highly interrelated as in many cases management reacts to IR by 3. INTERNAL CHECK
IR & CR
designing accounting and internal control systems to prevent or detect and Checks on day to day transactions, which operate continuously as a part of routine system, whereby w ork
Relationships
correct misstatements. Meaning of one person is proved independently to work of another, the object being prevention and earlier
 As a result, auditor needs to make a combined assessment of IR & CR as RMM. detection of error or fraud.
 Inverse relationship between RMM and DR.  To detect fraud and error with ease.
RMM & R
 When RMM is high, DR needs to be low to reduce audit risk to an acceptable  Avoid & minimize possibility of occurrence of fraud & error.
low level. Objectives  Increase efficiency of staff.
 When RMM is low, auditor can accept a higher DR.  Protect integrity of business.
 Mathematically AR = IR X CR X DR  Prevent misappropriation of cash & falsification of accounts.
Meaning Stages  No single person should have an Independent Control.
An audit Approach that 1. Understanding the auditee  Duties of staff members should be changed from time to time.
1. Analyses Audit Risks,  Every member should be encouraged to go on leave atleast once.
Risk operations.
2. Set materiality thresholds based on 2. Determination of residual Risk Considerat  Persons having physical custody of assets must not be allowed access to books of accounts.
Based
audit risk analysis and 3. Manage residual Risk. ions  Implement Budgetary control procedures.
Audit  Judicious distribution of financial and administrative powers.
3. develop audit programmes that 4. Reporting to Auditee.
allocates a larger portion of  Procedures should be laid down for physical verification.
resources to high risk areas.  Accounting procedures should be reviewed periodically.

Audit in CIS Environment - Basics
Types of Processing System Characteristics of CIS Environment
Batch Processing System Online Real Time Processing System
Meaning: Transactions are accumulated and processed in a group. Meaning: Transactions are processed as they occurred. 1. Lack of Transaction Trail
Steps: 4 steps Features: 2. Uniform Processing of Transaction
 Occurrence of transaction.  Validation Check. 3. Lack of Segregation of Functions.
 Recorded in transaction file  Online access of system to users. 4. Potential for Errors and Irregularities
 Updation of master file.  Non-existence of audit Trail. 5. Automatic execution of transactions.
 Generation of output.  Unrestricted access to programmers. 6. Dependence of other Controls over computer
Advantages: Simple, existence of Audit Trail, processing volume of Advantages: Immediate processing and continuous updation. processing.
transactions. Limitations: Non-existence of Audit Trail. 7. Potential for increased management supervision.
Limitations: Time gap in between occurrence and processing. 8. Potential for use of CAAT.
Audit in CIS Environment – Internal Controls – Management Perspective (Design and Exercise)
Controls to be designed and exercised Problems in implementation of Internal Control in CIS
General CIS Controls CIS application Controls Other Safeguards
Purpose: To establish framework of overall control Purpose: To establish specific control procedures 1. Offsite back up of data and 1. Separation of Duties.
over CIS Activities & provide reasonable over the accounting applications and computer programmes 2. Delegation of authority and Responsibility.
assurance that overall objectives of I.C. provide reasonable assurance that all 2. Recovery procedures in the event 3. Availability of competent and Trustworthy person.
are achieved. transactions are authorized, recorded of loss of data. 4. System of Authorisation due to inbuilt controls.
Types: 5 Types and processed on a timely basis. 3. Provision for offsite processing 5. Non-Existence of adequate Documents & Records.
1. Organisation Structure & Management Controls. Types: 3 Types 6. Physical Control over assets and records due to risk of
2. Application System Development and 1. Controls over Input loss and unauthorised access.
Maintenance Controls. 2. Controls over processing 7. Management Supervision over employees as work may
3. Computer Operations Controls. 3. Controls over Output. have to be carried out remotely.
4. System Software Controls 8. Difficult in detection of unauthorised modifications to
5. Data Entry and Program Controls programs or data files.
Audit in CIS Environment – Internal Controls – Auditor Perspective (Evaluation)
Controls to be Evaluated over Data Clauses of Controls to be evaluated Audit Plan to determine Factors to be considered to evaluate Reliability of
Reliability of Controls Accounting & Internal Control System
1. Organisation structure Control – Authority 1. Authenticity: to verify the identity of individuals 1. Existence and (i) Availability of authorized, correct & complete data.
and Responsibility involved. Effectiveness on Controls (ii) Timely detection and correction of errors
2. Documentation Control – Existence, Adequacy, 2. Accuracy: to ensure correctness of data desired. (iii) Existence of data recovery arrangement & back up
Authorisation for Changes 3. Completeness: to ensure that no data is missing. 2. Generality versus system.
3. Access Control – Unauthorised access 4. Privacy: to ensure protection of data. specialty of control. (iv) Adequate data security against fire & other
4. Input Control – Authorised and Validation 5. Audit Trail: to ensure traceability of all events. 3. Focus on: calamities, etc.
Check 6. Redundancy: to avoid data duplication.  Preventive Controls (v) Prevention of unauthorized amendments to the
5. Processing Control – Integrity of data, 7. Existence: to ensure ongoing availability of system  Detective Controls program.
validation check resources.  Corrective Controls (vi) Provision for Offsite processing in the event of
6. Recording Control – records to be kept free of 8. Asset Safeguarding: protection of resources from 4. Number of components disaster.
errors destruction. used to execute the (vii) Safe custody of source code of application software.
7. Storage Control – Back up and recover facilities 9. Effectiveness: to ensure that system achieves its goals. control. (viii) Accuracy and completeness of output.
8. Output Control – access to authorized person, 10. Efficiency: use of minimum resources to achieve goals. (ix) Prevention of loss of data due to processing failure.
audit trail

Audit in CIS Environment – Audit Techniques
Audit Trail CAAT – Computer Assisted Audit Techniques
Meaning, Need and Uses Commonly Used CAAT Considerations in Use of
CAAT
Meaning: Facility to trace individual Meaning: 1. Audit Software: Computer programs used by auditor to process data of 1. Availability of Sufficient IT
transactions from source to completion Those auditing Techniques that take assistance audit significance. 3 types knowledge and Expertise.
or vice versa. of computer for being applied to audit.  Package Programs: Generalized programs designed to perform 2. Incompatibility between CAAT
In CIS Environment, audit trail is often Need for CAAT: arises due to data processing. and Computer Facilities.
missing or sketchy. 1. Absence of Input Documents.  Purpose Written Programs: Programs designed to perform audit 3. Impracticability of manual
Reason for non-existence of Audit 2. System generated Transactions; task in specific circumstances. test.
Trail in CIS: 3. the lack of a visible audit trail; and  Utility Programs: Programs to perform common data processing 4. Impact of effectiveness and
1. Non-availability of source 4. the lack of visible output. functions. Not designed for audit purpose. efficiency in extracting a data
documents. Uses of CAAT: in performing various auditing 2. Test Data: A set of Hypothetical data entered into computer system of 5. Time Constraints.
2. Replacement of ledger summaries procedures: organisation and result obtained is compared with pre-determined
by Master Files. 1. Compliance Test of General CIS Controls: results.
3. Generation of reports on exception through Test Data It is used in an “Integrated Test Facility (ITF)” where a dummy unit is
only. 2. Compliance Test of CIS Application Controls: established and to which test transactions are posted during normal
Remedies for audit trail: through Test Data processing.
 Use of Computer Programs. 3. Test of details of transactions and balances: Under these circumstances, auditor is required to ensure that test
 Use of Test Packs (Test Data) by use of Audit Software transactions are subsequently eliminated.
4. Analytical Review: by use of Audit Software 3. Tagging and Tracing: It involves tagging the client’s input data in such
a way that relevant information is displayed at key points. It uses the
actual data and hence no need of reversal.
Control Procedures while using CAAT Essential features of Computer Audit Program Collection & Evaluation of Audit Evidence–Reasons for Changes
Audit Software Application: 1. Simplicity Reasons for Changes in Collection of Evidences:
1. Participating in design and testing. 2. Understandability 1. Existence of diverse and complex range of I.C. technology.
2. Checking the coding of the programme. 3. Adaptability 2. Rapid development in Hardware and Software
3. Ensure Compatibility of software with entity’s operating system. 4. Vendor Technical Support – technology.
4. Running the audit software on small test files before running on main data files. Installation, documentation, training, 3. Cryptographic Controls to protect the privacy of data.
5. Ensuring that the correct files were used. updations. 4. Non-possibility of collection of audit evidence by manual
6. Obtaining evidence that the audit software functioned as planned. 5. Capability of statistical Sampling – at means.
7. Establishing security measures to safeguard against manipulations of the entity’s data files. different confidence levels. Reasons for Changes in Evaluation of Evidences:
Test Data Application: 6. Acceptabilty – to both auditor and 1. Increasing complexity of computer system and control
1. Controlling the sequence of submissions of test data. computer centre in terms of technology.
2. Performing test runs containing small amounts of test data before submitting the main audit compatibility, interference etc. 2. Updation of Multiple data by a single input transaction.
test data. 7. Processing Capabilities - Multiple 3. Deterministic nature of errors.
3. Comparing results of the test data with pre-determined results. applications, extended data selection, 4. Speed at which errors are generated and the high cost and
4. Ensure Test data is processed over the answered version of programmes. stratification etc. effort to correct and rerun the program.
5. Ensure that the programmes used to process the test data were applied throughout the 8. Ability to prepare multiple reports.
applicable audit period.

Important provisions of Professional Ethics* Compiled by: CA. Pankaj Garg
Important Sections of Chartered Accountant Act, 1949

Sec. A member of the Institute shall be deemed “to be in practice” when individually or in partnership with Chartered
2(2)(iv) Accountants in practice, he, in consideration of remuneration received or to be received renders such other
services as, in the opinion of the Council, are or may be rendered by a Chartered Accountant in practice.
Pursuant to Section 2(2)(iv), the Council has passed a resolution permitting a CA in practice to render entire range of
“Management Consultancy and other Services”.
Accordingly “Management Consultancy and other Services” shall include the following:
 Personnel recruitment and selection.
 Acting as advisor or consultant to an issue, including such matters as Drafting of prospectus and listing agreement
and completing formalities with Stock Exchanges, ROC and SEBI, Preparation of publicity budget, Advice regarding
selection of various agencies connected with issue etc.
Explanation - For removal of doubts, it is hereby clarified that the activities of broking, underwriting and
portfolio management are not permitted.
Sec. 6  No member of the Institute shall be entitled to practice unless he has obtained from the Council a COP.
 Once a person becomes a member of ICAI, he is bound by the provisions of CA Act and its regulations.
 If he appears before the Income Tax Tribunal as an Income tax representative after becoming a member he could
appear so only in his capacity as a CA and a member of ICAI.
 A member of ICAI can have no other capacity in which he can take up such practice, separable from his capacity to
practice as a member of the Institute.
 A member not in practice cannot accept any engagement for services prescribed for a practicing CA. Therefore if a
CA has surrendered his certificate of practice due to misconduct he cannot in any other capacity take up any
practice separable from his capacity to practice as a member of the institute.
Sec. 7  Every member of the Institute in practice shall use the designation of a chartered accountant.
 No member using such designation shall use any other description, whether in addition thereto or in substitution.
 In case a member have more than one Certificate of practice, (subject to permission), for matters involving
practice as Chartered Accountant, they should use designation C.A.
Sec. 27 Office A Place where a name board is fixed or where such place is mentioned in the letterhead or any other
documents as a place of business.
Use of Name Name board can be put in place of residence of member provided it is a name board of individual
Board at member and not of firm.
residence
Requirement  If a CA in practice or a firm of CA has more than one office in India, each one of such offices should
of Separate be in the separate charge of a member of the institute, who may be either partner / employee.
In-charge
 The requirement of Section 27 in regard as to a member being in-charge of an office of a CA or a
firm of such CAs shall be satisfied only if the member is actively associated with such office.
 Such association shall be deemed to exist if the member resides in the place where the office is
situated for a period of not less than 182 days in a year or if he attends the said office for a period
of not less than 182 days in a year.
Exemption from Separate In-charge
Members subject to following conditions:
practicing in  Temporary office in plains may be opened for a period not exceeding 3 Months in
Hilly area winter season.
 Name board of firm to be displayed at temporary office only during these 3
months.
 Temporary office should not be mentioned as place of Business on office
documents,
 Regular office need not be closed and all correspondence may continue at
permanent office,
Before commencement of every winter and at the close of such temporary office, it
shall be obligatory on member to inform ICAI
Second office If it is situated in
 same premises in which first office is situated, or
 in the same city, or
 within 50 kms. from the municipal limits of city in which first office is situated

First Schedule to CA Act, 1949

Part – I A CA in Practice is deemed to be guilty of professional Misconduct if he
(Professional Clause 1 Allows any person to practice in his name as a Chartered Accountant, unless such person is also a
Misconduct - Chartered Accountant in practice, and is in partnership with, or employed by himself.
CA in Practice) Clause 2  Pays or allows or agrees to pay or allow, directly or indirectly,
 any share, commission or brokerage in fees or profits
 of his professional business to any person other than
 a member of the Institute, or
 partner / retired partner, or
 legal representative of deceased partner (If partnership deed provides), or
 member of any other professional bodies (ICSI, ICWAI, Bar Council of India, Indian
Institute of Architects, Institute of Actuaries of India) or
 with such other persons having prescribed qualifications (CS, CWA, Actuary, B.E.
Bachelor in Technology, Bachelor in Architecture, Bachelor in Law; MBA).
Sale of Goodwill: In case of sole proprietorship, the Council of ICAI has resolved that the sale /
transfer of goodwill shall be permitted in case of death of the proprietor provided:
 ICAI’s permission to practice in the deceased’s firm name is sought within a year of death. (In
such a case, name of the firm is kept in abeyance till one year from the date of death).
 In case there exist a dispute as to the legal heir, information as to the existence of the dispute is
received by the Institute within a year of the death. (In such a case, name of the firm is kept in
abeyance till one year from the date of settlement of dispute).
Note: In case of a partnership firm when all the partners die at the same time, the above
council decision would also be applicable.
Clause 3 Accepts or agrees to accept any part of the profits of the professional work of a person who is not
a member of Institute. However, such restriction does not apply in respect of following persons:
 member of any other professional bodies (as specified in Clause 2), or
 with such other persons having prescribed qualifications (as specified in Clause 2).
Clause 4 Enters into partnership in or outside India, with any person other than the following:
1. C.A. in practice, or
2. Member of any other professional body having prescribed qualifications, or
3. a person who but for his residence abroad would be entitled to be registered as member, or
4. a person whose qualifications are recognized by CG or Council for the purpose of permitting
such partnerships.
Persons Qualified in India for purpose of Membership (Regulation 53A): CS, CWA, Actuary,
B.E., B. Tech, B. Arch, LLB or MBA (from recognised Universities or Institutes) .
Permitted memberships for Partnership (Regulation 53B): Members of ICSI, ICWAI, Bar
Council of India, Institution of Engineers, Indian Institute of Architects, Institute of Actuaries of
India and professional Bodies outside India whose qualifications are recognised by the Council.
Clause 5 Secures any professional business through the services of a person who is not an employee or not
his partner or by means which are not open to a CA.
Clause 6  Solicits clients or professional work, either directly or indirectly,
 by circular, advertisement, personal communication or by any other means.
However, solicitation is relaxed in following cases:
 Securing professional work from another CA in practice.
 Responding to tenders or enquiries issued by various users of professional services.
Council Guidelines w.r.t. Permitted and Prohibited forms of Solicitation
Empanelment  In respect of organisations, where a panel of CA’s exists, a member is free
for allotment of to request to place his name on the panel.
audit /
 Roving enquiries for existence of such panel is not permitted.
professional
work
 It is permissible to quote fees on enquiries being received from such
organisations, which maintains such panel.
Scope of  Representation should not be used to secure needless publicity and
representation soliciting for his continuance as an auditor.
u/s 140(4) of
 Imay set out in a dignified manner how he has been acting independently
Companies Act
through his term of office and his willingness to continue as an auditor.
2013
Public  permitted subject to condition that it should not result in publicity.
Interviews

Guidelines for Posting the particulars on Website

 No standard format is prescribed and no restriction on use of colours.
 Website should run on ‘pull’ model not on ‘push’ model of technology.
 Mention of Website Address on professional stationery is permitted.
 Members are not allowed to use logo (other than prescribed by ICAI) on website.
 Photographs of any sort (other than passport size photo of member) is not permitted.
 Details should be so designed that it does not amount to soliciting client or advertisement of
professional attainments or services.
 Website may provide a link to the website of ICAI, its regional councils and branches and also
to the websites of Government/Government departments/Regulatory Authorities only.
 Address of the website may be different from the name of the firm.
 Name of clients and fees charged is not permitted to be given on website.
Clause 7  Advertises his professional attainments or services, or
 uses any designation or expressions other than CA
 on professional documents, visiting cards, letter heads or sign boards.
However, recognized degree of university or membership recognized institution may be used.
(a) Words like income-tax consultant, cost consultant or management consultant - not allowed.
(b) Persons eligible otherwise, subject to permission may practice as advocates but can’t use
designation “Chartered Accountant” and “Advocate” simultaneously.
(c) A member may appear on T.V. and films and etc. and describe themselves as CA, but no
reference, as to name/address/services of firm should be made.
(d) Name of CA acting as director in the company is permissible to appear in the prospectus of
the company, however descriptions regarding his expertise and knowledge is not permitted.
Clause 8  accept a position as Auditor, previously held by another chartered accountant,
 without first communicating with him, in writing.
(a) Professional reasons for not accepting Audit:
(i) Non-compliance of provisions of Sec. 139 & 140 of Companies Act 2013.
(ii) Non-payment of undisputed audit fee (except sick unit).
(iii) Issuance of a qualified Report.
In first two, acceptance of audit amounts to professional misconduct. In (iii), member may
accept audit if he thinks that attitude of retiring auditor wasn’t proper and justified.
(b) Mode of communication: Registered post acknowledgement due or by hand against an
acknowledgement in writing. Mere posting of a letter under certificate of posting is not
sufficient to establish communication.
(c) The requirement for communicating would apply to all types of audit i.e. statutory audit, tax
audit, internal audit, concurrent audit or any other kind of audit.
Clause 9  accepts an appointment as auditor of a company, without ascertaining
 whether requirements of Sec. 224 & 225 of Companies Act, 1956 (Sec. 139 & 140 of
Companies Act 2013), in respect of such appointment have been duly complied with.
Clause 10  Charges or offers to charge, accepts or offers to accept,
 in respect of any professional employment,
 fee which is based on a %age of profits or which are contingent upon findings, or results of
such employment, except as permitted under regulations.
Regulation In respect of below mentioned cases fees may be fixed as specified below:
192  In the case of receiver or liquidator: on the basis of %age of realisation or
(Restriction disbursement of assets.
on Fees)  In the case of co-operative society: on the basis of %age of paid up capital
or working capital or gross/net income or profits.
 In the case of valuer for purposes of direct taxes and duties: on the basis
of %age of value of property valued.
Clause 11  Engages in any Business or occupation, other than profession of C.A
 unless permitted by council so to engage.
Note: However, a member may become director (not being M.D. or Whole time director) in a
company provided he or any of his partner is not interested in such company as an auditor.
Clause 12  Allows a person not being a member of Institute in practice or a member not being his
partner, to sign on his behalf or on behalf of his firm,
 any Balance Sheet, P&L A/c, Report or Financial Statements

Part – II A CA in Service shall be deemed to be guilty of professional misconduct if he:

(Professional Clause 1 Pays or allows or agrees to pay directly or indirectly to any person any share in the emoluments
Misconduct - of the employment undertaken by him.
CA in Service) Clause 2 Accepts or agrees to accept any part of fees, profits or gains from a lawyer, a chartered accountant
or broker engaged by such company, firm or person or agent or customer of such company, firm
or person by way of commission or gratification.
Part – III A member of the Institute, whether in practice or not, shall be deemed to be guilty of other misconduct, if he
(Professional Clause 1 Not being a fellow of the Institute, but acts as a fellow of the Institute.
Misconduct - Clause 2 Does not supply the information called for, or does not comply with the requirements asked for
CA Generally) by the Institute, Council or any of its committees, Director (Discipline), Board of Discipline,
Disciplinary Committee, Quality Review Board or the appellate authority.
Clause 3 While inviting professional work from another chartered accountant or while responding to
tenders or enquiries or while advertising through a write up or anything as provided for in
clauses (6) and (7) of Part I of this schedule, gives information knowing it to be false.
Part – IV A member of the Institute, whether in practice or not, shall be deemed to be guilty of other misconduct, if he
(Other Clause 1 is held guilty of any civil or criminal court for an offence which is punishable with imprisonment
Misconduct – for a term not exceeding six months.
CA Generally) Clause 2 In the opinion of the Council brings disrepute to the profession or the Institute as a result of his
action whether or not related to his professional work.
Illustrative Cases of Other Misconduct:
1. Retaining of books of account and documents of the client without a reasonable cause.
2. Misappropriation by office-bearer of a Regional Council, of funds for his personal use.
3. Keeping assessment records of income tax department belonging to the client at home.
4. Adopting coercive methods on a bank for having a loan sanctioned to him.
Second Schedule to CA Act, 1949
Part – I A CA in Practice is deemed to be guilty of professional Misconduct if he
(Professional Clause 1  discloses the information, acquired in the course of his professional engagement
Misconduct -  to any person other than his client so engaging him
CA in Practice)  without the consent of his client or otherwise than as required by any law.
Clause 2  Certifies or submits in his name or in the name of his firm
 a report of an examination of financial statements
 unless the examination of such statements and the related records has been made by him or
by a partner or an employee in his firm or by another CA in practice.
Clause 3  Permits his name or the name of his firm,
 to be used in connection with an estimate of earnings
 contingent upon future transactions
in manner which may lead to the belief that he vouches for the accuracy of the forecast.
Participation in preparation of forecasts & their review: SAE 3400 “The Examination of
Prospective Financial Information” allows to a member to participate in the preparation of profit
or financial forecasts and can review them subject to following conditions:
(a) He indicates the source of information.
(b) He indicates the basis of forecasts.
(c) He gives in his report the major assumptions made in arriving at the forecasts.
(d) He does not vouch for the accuracy of the forecasts.
Clause 4  expresses his opinion, on financial statements of any business or enterprise
 in which he, his firm or a partner in his firm has a substantial interest
(1) Sec. 141 of Companies Act 2013 also prohibits a member from auditing the accounts of a
company in various situations.
(2) A member of the Institute can not express the opinion in the following cases:
(a) Where the member himself is owner/partner of concerned business.
(b) Where the partner/relative (within the meaning of AS 18) of CA has substantial interest
in concerned business.
(c) Where the member himself or his partner or relative is a director.
(3) Members are not permitted to write books of accounts of their auditee clients.
Clause 5  fails to disclose a material fact, known to him, which is not disclosed in a financial statement,
 but disclosure of which is necessary, in making such financial statement not misleading
 where he is concerned with that financial statement in a professional capacity.

Clause 6  fails to report a material misstatement. known to him, to appear in a financial statement
 with which he is concerned in a professional capacity.
Clause 7  Does not exercise due diligence, or is grossly negligent
 in the conduct of his professional duties.
Clause 8  Fails to obtain sufficient information, which is necessary for expression of an opinion or
 its exceptions are sufficiently material to negate the expression of an opinion.
Clause 9  Fails to invite attention to any material departure
 from the generally accepted procedure of audit applicable to the circumstances.
Clause 10  Fails to keep moneys of his client,
 other than fees or remuneration or money meant to be expended,
 in a separate banking account or
 to use such moneys for purposes for which they are intended within a reasonable time.
Part – II A member of the Institute will be held guilty of professional misconduct if he
(Professional Clause 1  Contravenes any of the provisions of this act or
Misconduct -  the regulations made there under or any guidelines issued by the council.
CA Generally) Clause 2  Being an employee of any company, firm or person,
 discloses confidential information acquired in the course of his employment
 except as and when required by any law or except as permitted by the employer.
Clause 3  Includes in any information, statement, return or form to be submitted to
 the Institute, Council or any of its committees, Director (Discipline), Board of Discipline,
Disciplinary Committee, Quality Review Board or the Appellate Authority,
 any particulars knowing them to be false.
Clause 4 Defalcates or embezzles money received in his professional capacity.
Part – III Clause 1  A member of the Institute, whether in practice or not,
(Other  shall be deemed to be guilty of other misconduct,
Misconduct –  if he is guilty by any civil or criminal court for an offence which is punishable for a term
CA Generally) exceeding 6 months.
Council General Guidelines, 2008

Heading Provision
Opinion on  A member of the Institute shall not express his opinion on financial statements of any business or
financial enterprise in which one or more persons who are his “relatives” within the meaning of AS 18 has/have,
statements either by themselves or in conjunction with such member, a substantial interest in the said business or
when there is enterprise.
substantial  Explanation: For this purpose and for the purpose of compliance of Clause (4) of Part I of the Second
interest Schedule to the Chartered Accountants Act, 1949, the expression “substantial interest” shall have the
same meaning as is assigned thereto under Appendix (9) to the Chartered Accountants Regulations,
1988.
Points to remember
Relative as per AS 18, in relation to an individual, means the spouse, son, daughter, brother, sister,
father and mother who may be expected to influence, or be influenced by, that individual in his/her
dealings with the reporting enterprise.
Maintenance of A member of the Institute in practice or the firm of CAs of which he is a partner, shall maintain and keep in
books of respect of his / its professional practice, proper books of account including the following:-
accounts (i) a Cash Book;
(ii) a Ledger.
Tax Audit  A member of the Institute in practice shall not accept, in a financial year, more than the “specified
assignments u/s number of tax audit assignments” u/s 44AB of the Income-tax Act, 1961.
Section 44 AB of  “The specified number of tax audit assignments” means -
the Income-tax (a) in the case of a CA in practice or a proprietary firm of CA, 60 tax audit assignments..
Act, 1961 (b) in the case of firm of CAs in practice, 60 tax audit assignments per partner in the firm.
Appointment of an  A member of the Institute in practice shall not accept the appointment as auditor of an entity in case the
Auditor in case of undisputed audit fee of another Chartered Accountant for carrying out the statutory audit under the
non-payment of Companies Act, 1956 or various other statutes has not been paid:
undisputed fees
 In the case of sick unit (Negative net worth), the above prohibition of acceptance shall not apply.

Specified  A member of the Institute in practice shall not hold at any time appointment of more than the “specified
number of audit number of audit assignments” of Companies u/s 139 of the Companies Act, 2013.
assignments  A Chartered Accountant in practice as well as firm of Chartered Accountants in practice shall maintain a
record of the audit assignments accepted by him or by the firm of Chartered Accountants, or by any of
the partners of the firm in his individual name or as a partner of any other firm, as far as possible, in the
following format:
S.No Name of Registration Date of Date of Date on which
the No. Appointment Acceptance Form ADT-1 Filed
Company with ROC
1 2 3 4 5 6
Appointment as  A member of the Institute in practice shall not accept the appointment as statutory auditor of PSU/
Statutory Government Company/Listed Company and other Public Company having turnover of Rs. 50 Cr. or more
auditor in a year where he accepts any other work or assignment or service in regard to the same Undertaking/
Company on a remuneration which in total exceeds the fee payable for carrying out the statutory audit of
the same Undertaking/company.
 For the above purpose, the term “other work” or “service” or “assignment” shall include Management
Consultancy and all other professional services permitted by the Council pursuant to Section 2(2)(iv) of
the Chartered Accountants Act, 1949.
Appointment of  A member of the Institute in practice or a partner of a firm in practice or a firm shall not accept
an auditor when appointment as auditor of a concern while indebted to the concern or given any guarantee or provided
he is indebted to any security in connection with the indebtedness of any third person to the concern, for limits fixed in
a concern the statute and in other cases for amount exceeding Rs. 10,000/-
KYC (Know Your Client) norms for a CA

Norms to be Entity General Information  Name of the Entity
observed by Information  Type of Entity
Member in  Business Description
Practice Corporate Structure  Name of ultimate parent company
 Name of Parent company
 Name of Affiliates
Regulatory Information  Company PAN No.
 Company Identification No.
 Directors’ Identification No.
 Directors’ Names & Addresses
 Name(s) and Addresses of Companies, in which above
person is director
Engagement Information  Type of Engagement
Other  Entities financial Information

Information  Name of the ultimate parent Auditor
 Any known violation of any Law/Regulations.
Importance of  The financial services industry globally is required to obtain information of their clients and comply
KYC Norms with KYC norms.
 Keeping in mind the highest standards of Chartered Accountancy profession in India, the Council of ICAI
recommended such norms to be observed by the members of the profession who are in practice.
 Considering the spirit underlying these measures, it is expected that every Chartered Accountant
carrying out attest function is encouraged to follow them and implementation of these measures would
go a long way in ensuring equitable flow of work among the members and would also further enhance
the prestige of the profession in the society.
 These Know Your Client (KYC) Norms are also important in order to ensure a healthy growth of the
profession and an equitable flow of professional work among the members.
--------------------------------------
(* For details - Refer Main Book)

Company Auditor – Section wise index Compiled by: CA. Pankaj Garg
SECTION – WISE INDEX of Chapter X of Companies Act, 2013 along with Corresponding rules
Chapter X of Companies Act, 2013 – AUDIT and AUDITORS Companies (Audit and Auditors) Rules, 2014
(Sec. 139 – 148)
Rule 3 Manner and Procedure of Selection and Appointment of Auditors
Sec. 139(1) Appointment of Subsequent Auditor of Non Government Company at AGM
Rule 4 Conditions for appointment and Notice to Registrar
Sec. 139(2) Rotation of Auditors Rule 5 Class of Companies
Sec. 139(3) Rotation of Auditing Partner and his team
Sec. 139(4) Power of C.G. to prescribe the manner of rotation. Rule 6 Manner of Rotation of Auditors by the companies on expiry of their
term.
Sec. 139(5) Appointment of Subsequent Auditor of Government Company
Sec. 139(6) Appointment of First Auditor of Non Government Company
Sec. 139(7) Appointment of First Auditor of Government Company
Sec. 139(8) Filling of Casual Vacancies
Sec. 139(9) Re-appointment of Retiring Auditor
Sec. 139 (10) No Auditor is appointed or reappointed at AGM
Sec. 139 (11) Considerations of recommendations of Audit Committee
Sec. 140(1) Removal of Auditor before expiry of his term Rule 7 Removal of Auditor before expiry of his term
Sec. 140(2) Filing of statement in case of Resignation Rule 8 Resignation of Auditor
Sec. 140(3) Penalty for non-compliance of Sec. 140(2)
Sec. 140(4) Removal of Auditor on expiry of tenure / Giving of Special Notice
Rule 9 Liability to devolve on concerned partners only.
Sec. 141(1) Eligibility for appointment as Auditor
Sec. 141(2) Authorised Partner to act and sign in case of audit firm and LLP
Sec. 141(3) Disqualifications to be appointed as auditor Rule 10 Disqualifications of Auditor
Sec. 141(4) Vacation of Office in case of Subsequent disqualifications

Company Auditor – Section wise index Compiled by: CA. Pankaj Garg
Sec. 142 Remuneration of Auditors

Sec. 143(1) Right of Access/Right to obtain Information/Inquiry into propriety
matters
Sec. 143(2) Reporting on Books and Accounts and Financial Statements
Sec. 143(3) Reporting on other Matters Rule 11 Other Matters to be included in Auditor’s Report
Sec. 143(4) Reasons for Adverse Remarks or Qualifications
Sec. 143(5) Directions by CAG to auditor of Government Company
Sec. 143(6) Order by CAG of Supplementary Audit of F.S. of Govt. Company.
Sec. 143(7) Order by CAG of Test audit of Accounts of Government Company
Sec. 143(8) Audit of accounts of Branch Office Rule 12 Duties and Powers of the company auditor’s with reference to audit of
the branch and the branch auditor
Sec. 143(9) Compliance with Standards of Auditing
Sec. 143(10) Powers of C.G., to prescribe the Standards of Auditing
Sec. 143(11) Powers of C.G. to issue order for specified companies to report on certain
matters. (CARO, 2015)
Sec. 143(12) Reporting on Fraud Rule 13 Reporting of Frauds by auditor
Sec. 143(13) No Breach of duty if reporting u/s 143(12) is done in good faith.
Sec. 143(14) Application of Sec. 143 over Cost Accountant and Company Secretary.
Sec. 143(15) Penalty for non-compliance of Sec. 143(12)
Sec. 144 Auditor not to render certain services
Sec. 145 Auditor to sign audit reports, etc.
Sec. 146 Auditor to attend General Meetings
Sec. 147 Punishment for contravention
Sec. 148 Central Government to specify audit of certain items of cost in respect of Rule 14 Remuneration of Cost Auditor.
certain companies
-----------------------------

APPOINTMENT OF AUDITOR
Appointment of Subsequent Auditor Appointment of First Auditor
Non Government Company – Sec. 139(1) Government, Govt. owned Non Government Company – Government, Govt. owned /
 Appointment will be at First AGM / controlled Companies – Sec. 139(6) controlled Companies – Sec.
Sec. 139(5) 139(7)
 Till conclusion of 6th AGM; and
 Thereafter till conclusion of every 6th AGM Appointment of Auditor First auditor shall be First Auditor shall be appointed
 In prescribed manner (Rule 3) appointed by
In respect of a Financial by CAG
1st  Company shall place the matter
year Board of Directors
Proviso  For ratification at every AGM.
Within 60 days
Rule 3  Ratification will be Of registration of company
through Ordinary will be made by
Within 30 days
Resolution. If CAG does not appoint the
 If not ratified, Board of CAG
Of registration of company auditor
Directors will appoint
auditor. Within a period of 180 Days BOD will appoint within next
If Board Fails, Board shall
2nd Before appointment company shall 30 days
Proviso obtain inform the members
From the commencement
(a) Written consent from auditor of financial year If Board fails Board shall inform
(b) Certificate from auditor (Rule 4) Members shall within 90 Days the members
3rd  Certificate shall indicate Who shall hold the office till
Proviso  Whether auditor has satisfied the the conclusion of next AGM Members shall within 60 days
At an EGM
criteria as provided u/s 141.
4th  Company shall inform the auditor At an EGM
Compiled by: appoint the first auditor
Proviso and ROC about the appointment of
auditor within 15 days of appoint the first auditor
CA. Pankaj Garg
appointment. Who hold office till conclusion
 Rule 4 – Intimation to ROC will be of first AGM who hold office till conclusion
in Form ADT-1 of first AGM

ROTATION OF AUDITOR
Sec. 139(2) Sec. 139(3) Sec. 139(4)
Listed companies and Other prescribed companies Rule 5 Unlisted Public Companies having paid Members may resolve Central Government
Shall not appoint up capital > 10Cr. the following:
Private Companies having paid up (a) Rotation of auditing May by Rules
An individual as an auditor for more than one term of capital > 20 Cr. partner & his team
five consecutive years. Companies not covered above if public at such interval as
Prescribe the manner of
borrowings from banks and FI/ public may be prescribed.
rotation for Sec. 139(2)
An audit Firm as an auditor for more than two terms of deposits > 50Cr. (b) That audit shall be
five consecutive years. conducted by more
(Rule 6 prescribes the
1st Proviso Individual Auditor Not eligible for reappointment for 5 years after completing of than one auditor
manner of rotation)
as auditor in same company tenure
Audit Firm Not eligible for reappointment for 5 years after completing of
as auditor in same company tenure Compiled by: CA. Pankaj Garg
2nd Audit Firm  Having a common partner with audit firm
Proviso  Whose tenure has just expired
 As on date of appointment
 Shall not be appointed as auditor of same company
 for a period of five years
3rd Proviso Every Company  Existing before commencement of this Act
 Shall comply with requirement of Sec. 139(2)
 Within 3 years from the date of commencement of this Act.
4th Proviso Sec. 139(2) shall not  Right of company to remove auditor
prejudice the  Right of auditor to resign.

OTHER PROVISIONS OF SEC. 139
Filling of Casual vacancies Reappointment of No auditor Appointed Recommendation of

Auditor at AGM Audit Committee
– Sec. 139(8) – Sec. 139(9) – Sec. 139(10) – Sec. 139(11)
A retiring auditor may be If no Auditor is Where a company is
appointed required to constitute an
Non Govt. Co. – Sec. 139(8)(i) Govt. Co./Govt. Owned/ Reappointed at AGM, if he audit committee (Sec.
controlled Co. - Sec. 139(8)(ii) is
at AGM 177)
Due to resignation Other Be filled by

Not disqualified under
Reasons Existing auditor will All appointments
law
Be filled by BOD Be filled by CAG continue including filling of casual
BOD vacancies
Within 30 days Not unwilling to continue,
Within 30 days or
If no special resolution Shall be made only after
Such appointment Within 30
days has been passed w.r.t. taking into account the
shall be If CAG does not fill the casual
recommendations of
vacancy
Approved in General audit committee.
(a) Appointing someone
meeting else as auditor
It will be filled by
(b) providing expressly Compiled by: CA. Pankaj Garg
Convened within 3 that retiring auditor
months Board of Directors shall not be
reappointed.
Of recommendations
Within next 30 days
of BOD

Sec. 140 – Removal, Resignation of Auditor and giving of Special Notice
Sec. 140(1) – Removal before expiry Sec. 140(2) & (3) – Filing of Statement in Sec. 140(4) – Special Notice
case of Resignation
Requires Auditor who has resigned Special notice shall be required at
Special resolution of Company to pass the Special resolution at AGM providing

Shall file
& that
Previous approval of CG in prescribed manner
Within 30 days of resignation
(Rule 7). (a) Retiring Auditor shall not be re-appointed.
or
Before taking any action, auditor concerned Statement in prescribed form
(b) To appoint as auditor any person other than
should be provided an opportunity of being (Rule 8 : ADT-3)
retiring auditor.
heard.
Rule 7 To Company & ROC Copy of notice to be sent immediately to concerned
Application to CG
(Also to CAG – in case of Govt. Companies) auditor.
should be made within 30 days

Indicating the reasons and other facts Auditor has a right of representation
relating to resignation. (reasonable length)
of passing of Board Resolution
Sec. 140(3): Fine for non-compliance,
in Form ADT-2. Copy of notice and representation needs to be sent
Ranging from Rs. 50,000 – Rs. 5,00,000
to every person to whom notice of AGM was given.
Within 60 days of approval by CG,
convene a general meeting Auditor may demand for reading the

representation in meeting.
to Pass Special Resolution. Representation need not be sent or read out
at meeting, if on application of company or
Opportunity Board Application General
Resolution to CG Meeting other person, Tribunal pass such order.

Sec. 141 – Eligibility, Qualifications and Disqualifications of Auditor
Sec. 141 (1) & 141 (2) – Sec. 141(3) - Persons not eligible for appointment Sec. 141(4) –
Eligibility to be appointed as Auditor Vacation of office
A person shall be eligible (a) Body Corporate other than LLP If after appointment
(b) Officer or Employee of the company
for appointment as an auditor (c) Partner/Employee of Officer/Employee of the company An auditor
(d) (i) person/ is holding any security * or Company /
only if he is a CA. relative/ interest in the subsidiary /
Incurs any disqualification
A Firm whereof Majority of Partners (ii) partner is indebted > 5 Lacs in the holding /
(iii) has given a guarantee in associate, or
Mentioned in Sec. 141(3)
Practicing in India connection with indebtedness subsidiary of same holding.
of 3rd person > 1 Lac in the
* no disqualification if relative holds any security in the company of face value He shall vacate the office
are Qualified
upto 1 Lac.
(e) Person or firm having business relationship with Company / Subsidiary / And such vacation shall be
may be appointed
Holding / Associate / Subsidiary of Such Holding or Associate Company treated as casual vacancy
(f) A Person whose relative is a director or is in employment of the company as a
by its firm name as auditor
Director or KMP.
A Firm including LLP Compiled by:
(g) A person who is in full time employment elsewhere
Or CA. Pankaj Garg
If appointed as Auditor
A person holding appointment as auditor or more than 20 companies other
than OPC, dormant companies, Small Companies and private companies
Only partners who are CA having paid up capital < 100Cr.
(h) A person who has been convicted of an offence involving fraud and a period of
Shall be authorized to 10 years has not elapsed.
(i) Any person whose Subsidiary or Associate or any other form of entity is
Act and sign on behalf of firm. rendering services specified u/s 144 to the same company.

POWERS / RIGHTS & DUTIESi OF COMPANY AUDITOR (Sec. 143)
RIGHTS OF AUDITOR – Sec. 143(1) DUTIES of AUDITOR
 at all times 1. Loans and advances are properly secured and terms are prejudicial .
2. Book entries are prejudicial.
Right of
Access
 to books of Account & Vouchers

Inquire into Propriety 3. Shares, debentures and other securities are sold at a price less than acquisition cost in case of non
 whether kept at Regd. Office or at any
banking and non investment company.
other place. Matters – Sec. 143(1) 4. Loans and advances made are shown as deposits.
5. Personal expenses charged to revenue account.
6. Cash has actually been received on shares allotted for cash, if not received, correct position shown
 From the officers of the company in books and balance sheet.
Right to
Obtain
 As considers necessary
Info.
Reporting over Accounts &

 For performance of his duties. Financial Statements That to the best of auditor information & knowledge, the accounts & financial statements give a true and fair
– Sec. 143(2) view of the state of the company affairs as at the end of its financial year & profit & loss and cash flow for the
year.
1. Obtained all necessary information for the audit.

Duties of Auditor Supplementary Test Audit Reasons for
2. Proper books of accounts have been maintained.
of Govt. Cos. – Sec. Audit – Sec. 143(7) 3. Branch audit report has been received and manner of dealing with it. reservations –
143(5) – Sec. 143(6) 4. Balance Sheet and P & L Account agree with the books of accounts. Sec. 143(4)
CAG – direct the Within 60 days of CAG may 5. Financial statements comply with AS. For every
auditor the manners days of receipt of If considers 6. Comments on financial transactions having any adverse effect on functioning of company.matter
7. Directors disqualified u/s 164(2). reported with a
in which accounts Audit Report necessary 8. Qualifications w.r.t. maintenance of accounts.
are to be audited. Reporting u/s 143(3) 9. Adequacy and operative effectiveness of internal financial controls.
qualification
Auditor report shall CAG have a Right by an order 10. Other matters as prescribed. (Rule 11)
include: Rule 11 Auditor shall
To order for cause test audit 1. Disclosure of impact of pending litigations on financial position. state the
 Directions issued
2. Provisions for Material Forseeable losses on long term contracts made.
by CAG. supplementary reasons thereof
3. Any delay in transferring amounts to IEPF.
 Action taken audit of F.S. of accounts of
thereon Govt. companies
 Its impact on Bu such persons as Compiled by: Fraud involving prescribed amount Rule 13
Fraud > 1Cr.
Accounts and F.S. authorized by him
CA. Pankaj Garg Committed by officers or employees
Reported to Audit Committee / BOD within 2 days
Should be report to CG in prescribed
Sec. 143(8) Audit of Branch Accounts (will be discussed manner (Rule 13) Seeking their reply within 45 days
separately)
Sec. 143(9) Every Auditor shall comply with Auditing If reply receive, forward his report, reply and comments on
Frauds below prescribed amount reply to CG within 15 days
Standards
Reporting u/s 143(12)
Sec. 143(10) CG may prescribe the SA in consultation Should be reported to Audit If reply not recd., forward his report to CG along with a
with NFRA Committee or BOD note that reply not recd.
Sec. 143(11) CG may direct that auditor’s report shall
include a statement on such matters as Details of Such Frauds need to be
disclosed in Board’s report. Nature of Fraud with description Approx. amount involved
specified in order issued by it. (CARO, 2016)
Parties involves remedial action taken

OTHER PROVISIONS (Sec. 142, 144, 145, 146 & 147)
Sec. 142 – Remuneration Sec. 144 – Auditor not to Sec. 145 – Signing of Sec. 146 – Sec. 147 – Punishment for
of Auditors render certain services Audit Reports Attending of Contravention
General meetings
Over the Company & Officer in
default – 147(1)
Authority to Fix Other Services that may be Shall be in accordance with
 Violation of Sec. 139-146
remuneration rendered Sec. 141(2)  Company – Fine from Rs. 25,000
 Shall be General meeting  As approved by the BOD to Rs. 5 Lacs.
or in such manner as or Audit Committee.  Officer in default–Imprisonment
may be determined  All Notice & other upto 1 year or fine from Rs.
therein. Services that cannot be rendered directly or indirectly to communication of 10,000 to Rs. 1 Lac or Both
 May be BOD in case of Co, Holding or Subsidiary general meetings

Over the Auditor – 147(2)
 Accounting & Book Keeping. shall be forwarded
first auditor if appointed  Violation of Sec. 139, 143, 144,
to Auditor.
by BOD  Internal Audit 145.
 Unless exempted
 Design & Implementation of Financial Information System.  Fine from Rs. 25,000 to Rs. 5
auditor shall
 Actuarial Services. Lacs.
Elements of remuneration attend either
 In case of Willful default –
 Investment advisory.
himself or through
 Shall include all Imprisonment upto 1 year and
 Investment Banking his authorized
expenses incurred in fine from Rs. 1 Lac to Rs. 25 Lacs
 Outsourced Financial representative any
connection with audit general meeting,
 Management Services
and any facility extended  Auditor shall have If auditor convicted u/s 147(2)
 Other Prescribed.
to auditor. right to be heard
he shall be liable to
 Does not include at such meeting on
remuneration paid for part of business Refund the remuneration

Compiled by: CA. Pankaj Garg and
any other service. which concerns
Pay for damages
him as auditor.

CARO 2016
Applicability of CARO 2016 Matters to be reported under CARO 2016 (Para 3)
CARO 2016 apply to all companies including foreign Para Reporting Area Reporting Requirements
companies except the following No.
3(i) Fixed Assets  Whether proper records maintained.
(a) Banking Company  Whether physical verification has been conducted at reasonable intervals by mngt.
(b) Insurance Company  Whether material discrepancies noticed and if so, whether dealt properly in books.
(c) Company licensed to operate u/s 8  Title deeds of immovable properties are held in name of Co., if not provide details.
3(ii) Inventories  Whether physical verification has been conducted at reasonable intervals by mngt.
(d) One Person Company
 Whether material discrepancies noticed and if so, whether dealt properly in books.
(e) Small Company
3(iii) Loans and Advances Whether loans have been granted to companies, firms, LLP covered u/s 189. If so,
(f) Private limited Company (not being a subsidiary or (a) T & C are not prejudicial to the company’s interest;
holding of public co) (b) Schedule of repayment of principal & payment of interest has been stipulated;
 Paid up capital + Reserves & Surplus < 1Cr. (c) State the total amount overdue for > 90 days.
(as on Balance Sheet Date) 3(iv) Compliance of Provisions  In respect of loans, investments, guarantees, and security
+ of Sec. 185 & 186  If not, provide the details thereof.
 Total borrowings from Bank & F.I. < 1Cr. 3(v) Public Deposits  Directives by RBI and Sec. 73 to 76 complied with. If not - nature of contravention.
(at any point of time during the FY)  Order passed by CLB/RBI/Court/Tribunal–Whether complied with or not.
+ 3(vi) Cost Records  Whether Specified u/s 148(1); whether accounts and records made and maintained.
 Total revenue as disclosed in Schedule III < 10 Cr. 3(vii) Statutory Dues  Whether undisputed PF, ESI, IT, ST, ST, Custom, Excise, VAT, cess & Other – paid
(for the FY) regularly. If Not outstanding >6 months as on Balance Sheet Date.
 W.r.t. disputed IT, ST, ST, Custom, Excise, VAT – State Amount involved & forum
Important Notes 3(viii) Repayment of Dues  Whether co. default in repayment of dues – F.I., Bank, Govt., Debenture holders.
1. CARO not apply over audit report on Consolidated  If Yes – Nature and Amount of Default.
F.S. 3(ix) Money raised by public  Whether money Raised by IPO/FPO/term Loans – applied for stated purpose.
2. Provisions of CARO are equally applicable in case issue & term loans  If Not – details along with delay and subsequent ratification be reported.
of branches. 3(x) Fraud  Whether any fraud by company or on company by its officers/employees–noticed or reported.
3. Paid up capital includes equity as well as  If Yes – Nature and amount to be stated.
Preference. 3(xi) Managerial remuneration  Whether managerial remuneration has been paid with requisite approvals u/s 197.
4. Reserves include all types of reserves & P & L  If Not, amount involved and steps taken for securing refund to be reported.
Balance. 3(xii) Nidhi Companies  Whether the net owned funds to deposits ratio 1:20.
5. All Loans (secured/unsecured, long term/short  Whether 10% unencumbered term deposits maintained..
term, etc.) are to be considered and in aggregate. 3(xiii) Transaction with  Whether transactions with related parties are in compliance with Sec. 177 & 188.
6. F.I. includes NBFC. Related Parties  Whether details disclosed in F.S. as required by applicable AS.
7. Total Revenue comprises of Revenue from 3(xiv) Preferential Allotment  Whether any preferential allotment of shares/FCD/PCD has been made.
Operations and Other Income.  If so, whether Sec. 42 complied with and amount raised used for stated purpose.
 If Not – provide details of amount involved and nature of non compliance.
3(xv) Non cash transactions  Whether co. has entered into non cash transactions with directors.
with Directors  If so. Whether Sec. 192 has been complied with.
3(xvi) Registration with RBI Whether regn. required u/s 45IA of RBI Act, 1934. If So- whether regn. obtained.

Chapter 12 – Audit of Dividend 1
SEC. 123 – DECLARATION OF DIVIDEND SEC. 124 – UNPAID DIVIDEND ACCOUNT SEC. 125 – IEPF
Sources of Dividend: Declaration of Dividend declared but not paid or claimed Amount to be credited to IEPF
 CY Profits after providing dep. dividend out of within 30 days from date of declaration, (a) Amount given by C.G. by way of grants;
124(1)
 Profits of previous FYs after providing shall be transferred to unpaid dividend (b) Donations given by C.G., S.G., companies
dep. account within 7 days from the expiry of 30 or any other institution;
Proviso to Sec. 123(1): (c) Amount in the Unpaid Dividend Account;
Sec. 123(1)
 Money provided by CG/SG. days.

 Dividend out of With 90 days from transfer of unpaid (d) Amount in the general revenue account
Transfer to Reserves:
of the C.G.;
Company may transfer appropriate %age reserves shall be made dividend to unpaid dividend account,
(e) Amount lying in the IEPF u/s 205C of the
of profits to reserves. (Optional) in accordance with company shall prepare a statement
124(2)
Companies Act, 1956;
Set off of Previous Losses: Rules. containing name, address and unpaid (f) the interest or other income received
Dividend cannot be declared unless carried  Dividend can be dividend and place it on website of the out of investments made from the Fund;
over losses & dep. not provided in earlier declared only out of company and on other website as approved (g) the amount received u/s 38(4);
years are set-off against profit of CY. free reserves. by CG in prescribed manner. (h) the application money received by
Dep. shall be provided in accordance with Rules 3 of Companies Any default in transferring the amount to companies and due for refund;
123(2)
(i) matured deposits with companies ;
124(2)
Sec. 123(2). Declaration and unpaid dividend account will attract
Payment of Dividend interest @12% p.a. to be paid to members (j) matured debentures with companies;
Rules, 2014 in proportion to amount remaining unpaid. (k) interest accrued on amounts referred to
 BOD may declare Interim dividend
in clauses (h) to (j);
Interim Dividend
during any FY out of Surplus in P & L Dividend out of reserves is

Any person entitled for money transferred (l) sale proceeds of fractional shares arising
124(4)
A/c or CY profits. subject to following out of issue of bonus shares, merger &
to unpaid dividend account may apply to
123(3) –
 It cannot be higher than avg dividend of conditions: amalgamation;

company for payment of money claimed.
preceding 3FYs, if company has 1. Rate of Dividend < (m) redemption amount of preference shares
Money transferred to unpaid dividend
124(5)
incurred losses in current FY upto the Average rate of remaining unpaid for 7 or more years; &
account remaining unclaimed for 7 years
end of quarter immediately preceding preceding 3 years. (n) such other amount as prescribed.
shall be transferred to IEPF.
the declaration of interim dividend. 2. Amount withdrawn Utilisation of IEPF
from reserves < 10% of  All shares in respect of which dividend (a) Refund in respect of unclaimed
Dividend including interim dividend shall
123(4)
PUC & free reserves. has not been paid for 7 consecutive dividends, matured deposits, matured
be deposited within 5 days of declaration
124(6)
3. Balance of Reserves years or more shall be transferred to debentures, the application money due
in a separate Bank Account.
after withdrawal > IEPF. for refund and interest thereon;
Dividend shall be paid in cash only and to  Claimant of shares shall be entitled to (b) promotion of investors’ education,
123(5)
15% of PUC.
the registered shareholder or his order or claim the transfer of shares from IEPF. awareness and protection;
4. Amount withdrawn
his banker. (c) distribution of any disgorged amount
from reserves shall be For non-compliance, company is
Company which fails to comply with Sec. 73 & among eligible applicants;
124(6)
punishable with fine ranging from Rs. 5

123(6)
74 shall not so long as failure continues declare first utilised to set off
(d) reimbursement of legal expenses
the losses of Current Lacs to Rs. 25 Lacs.
any dividend on its equity shares. incurred in class suits u/s 37 and 245;
FY. Officer in default – Rs. 1 Lac to Rs. 5 Lac.
(e) any other purpose incidental thereto.

Chapter 12 – Audit of Dividend
2
Steps for Verification Miscellaneous Provisions
1. Examine MOA & AOA to ascertain dividend rights of different classes of Penalty for failure to pay dividend within 30 days:
Sec. 127
shares.  Company – Simple Interest @18% p.a.
 Directors – Imprisonment upto 2 years and fine which shall not be
2. Confirm that the dividend is made out of distributable profits having regard
less than Rs. 1,000 per day of default.
to the provisions of Sec. 123.
Right of dividend to be kept in Abeyance
3. If the dividend is made out of reserves, examine the compliance of conditions Where any instrument of transfer has been delivered to the company, but
Sec. 126
as set out in the rules. transfer not yet registered, the company shall transfer the dividend in unpaid
4. Inspect the shareholders’ Minute Book to verify the amount of dividend dividend account unless the registered holder authorises the company to pay
such divided to transferee
declared.
5. Examine whether the amount of dividend payable has been deposited in a  Regulation 80 of Table F of Schedule I - Company in general meeting may
declare dividends, but it shall not exceed amount recommended by
Revocation of Dividend
separate bank account within five days of declaration of dividend.
Board.
6. Check the particulars of members as are entered in the Dividend List by
 Sec. 127 - dividend has to be paid within 30 days from date of declaration.
reference to the Register of Members.
 Dividend once declared, becomes a debt against the company and cannot
7. Check the amount of dividend paid with the dividend warrants surrendered. be revoked except in certain situations.
8. Verify whether dividend which is unclaimed or unpaid within 30 days of date Note: Final Dividend once declared in the AGM cannot be revoked by
of declaration has been transferred to “Unpaid Dividend Account” within 7 BOD. However before declaration of dividend in the AGM, dividend
recommended by BOD may be revoked for just and proper reasons.
days from the date of expiry of 30 days.
9. Verify whether unpaid dividend amount which remain unpaid or unclaimed  Schedule III - Amount of dividend proposed to be distributed to equity
for a period of 7 years from the date of such transfer transferred to IEPF. Disclosure requirements for and preference shareholders for the period and the related amount per
proposed dividend share to be disclosed separately. It also requires separate disclosure of
the arrears of fixed cumulative dividends on preference shares.
 AS-4, “Contingencies and Events Occurring after the Balance Sheet Date” -
if an enterprise declares dividends to shareholders after the balance
COMPILED BY:
sheet date, the enterprise should not recognise those dividends as a
PANKAJ GARG (CA, CS, CMA(I) – All India Topper & Gold Medalist)
liability at the balance sheet date unless a statute requires otherwise.
Such dividends should be disclosed in notes.

Chapter 13 – CORPORATE GOVERNANCE 1
System by which companies are directed and governed by the management in the best interests of the stakeholders and others ensuring better
management, greater transparency and timely financial reporting.
Audit Committee (A.C.) u/s 177 of Companies Act, 2013 SEBI (LODR) Regulations, 2015
Section Details (a) Board of Director including its

177(1) Companies required to constitute A.C.: Listed Companies & other prescribed (Public) companies: composition, independent director, non
(i) companies with a paid up capital of > 10 Cr.; executive director etc.;
(ii) companies having turnover > Rs. 100 Cr.;
(b) Provisions regarding composition and
(iii) companies, having in aggregate, outstanding loans or borrowings or debentures or deposits > 50 Cr.
177(2)  Composition-Minimum 3 directors; majority independent directors. functioning of Audit Committee
 Majority Members with Chairperson-ability to read & understand, F.S. (Regulation 18).
177(4) Functions of Audit Committee include: (c) Provisions regarding setting up and role
1. Recommendation-Appointment, Remuneration 5. Scrutiny of inter-corporate loans and of Nomination and Remuneration
& terms of auditors; investments; Committee.
2. Review & monitor auditor’s independence & 6. Valuation of undertakings/assets, wherever it is
(d) Provisions regarding setting up and role
audit effectiveness; necessary;
of Stakeholder Relationship Committee
3. Examination of F.S. & auditors’ report thereon; 7. Evaluation of IFC and risk management systems;
4. Approval/Modification of transactions with 8. Monitoring end use of funds raised through (e) Provisions regarding setting up and role
related parties; public offers. of Risk Management Committee
177(5) The Audit Committee may: (f) Vigil mechanism
 call for the comments of the auditors about IC systems, the scope of audit, including the observations, and (g) Related party Transaction
 review of F.S. before their submission to the Board and (h) Management of Subsidiaries
 may discuss any related issues-internal & statutory auditors.
(i) Obligations w.r.t. Independent Directors
177(6)  Investigate any matter specified u/s. 177(4) or referred to it by Board.
(j) Obligations w.r.t. directors and senior
 Power-to obtain professional advice from external sources & full access to info contained in the records of
the company. management
177(7) Auditors and KMP - right to be heard in meetings of A.C. when it considers auditor’s report but shall not have (k) Others as specified in Part E of schedule II
the right to vote. (Discretionary).
177(8)  Board’s report shall disclose the composition of A.C. and
 Where the Board had not accepted recommendation of A.C., it shall be disclosed in report along with the
reasons therefor. COMPILED BY: PANKAJ GARG
177(9) Vigil Mechanism
177(10)

Chapter 13 – CORPORATE GOVERNANCE (SEBI (LODR) Regulations, 2015) 2
AUDIT COMMITTEE (A.C.) MISCELLANEOUS
Requirements of Audit Committee Role of Audit Committee w.r.t. 1 Content of Management Discussion and Analysis
1. A.C. - Minimum 3 directors. 2/3 shall be independent review of financial statements 1. Industry structure and developments.
directors. Audit committee is required to 2. Opportunities and Threats.
2. All members shall be financially literate & at least one review with management the 3. Segment–wise or product-wise performance.
member shall have accounting/related financial management annual financial statements 4. Outlook
expertise. before submission to the Board, 5. Risks and concerns.
3. Chairman of the A.C. shall be an independent director. focusing primarily on: 6. Internal control systems and their adequacy.
4. Chairman of A.C. shall be present at AGM to answer (a) Matters required to be 7. Discussion on financial performance.
shareholder queries. included in the Director’s 8. Material developments in Human Resources/Industrial Relations front,
5. A.C. at its discretion shall invite finance director or head of Responsibility Statement to including number of people employed.
finance function, head of internal audit & representative of be included in the Board’s 2 CEO/CFO Certification to Board
statutory auditor & such other executives, to be present at report in terms of Sec. (a) They have reviewed F.S. & CFS and that to the best of their knowledge & belief:
meetings of A.C. 134(3)(c) of the Companies  These statements do not contain any materially untrue statement or omit
6. Company Secretary shall act as the secretary to the Act, 2013. any material fact or contain statements that might be misleading.
committee. (b) Changes, if any, in  These statements together present a true and fair view of the company’s
Meetings of Audit Committee: accounting policies and affairs & are in compliance with existing AS, applicable laws and regulations.
 At least 4 & gap between 2 meetings - not more than 4 months. practices and reasons for (b) There are no transactions entered that are fraudulent, illegal and violative of
 Quorum-Greater of 2 or 1/3 - minimum 2 independent the same the company’s code of conduct.
members. (c) Major accounting entries (c) They accept responsibility for establishing & maintaining IC w.r.t. financial
Powers of audit Committee: involving estimates based reporting.
on the exercise of judgment (d) They have indicated to the auditors & A.C.:
 To investigate any activity within its terms of reference.
by management  Significant changes in i.C.
 To seek information from any employee.
(d) Significant adjustments  Significant changes in accounting policies during the year.
 To obtain outside legal or other professional advice.
made in the financial  Instances of significant fraud.
 To secure attendance of outsiders with relevant expertise.
statements arising out of 3 Circumstances in which adverse or qualified statement can be issued on
Mandatory review Area:
audit findings Corporate Governance
 Management discussion & analysis of financial conditions and (e) Compliance with listing and 1. Number of non-executive directors is < 50% of the strength of BOD.
results of operations. other legal requirements 2. A qualified and independent audit committee is not set up.
 Statement of significant related party transactions. relating to financial 3. The chairman of the audit committee is not an independent director.
 Letters of IC weaknesses issued by the statutory auditors. statements 4. The audit committee does not meet four times a year.
 Internal audit reports to internal control weaknesses; and (f) Disclosure of any related 5. Necessary powers not been vested by Board in the audit committee.
 Appointment, removal & remuneration of the Chief Internal party transactions 6. Time gap between two Board meetings is more than four months.
Auditor. (g) Qualifications in draft audit 7. Director is a member of more than 10 committees.
 Statement of deviations on (a) quarterly statement of report 8. Information of quarterly results is neither put on the company’s website nor
deviation including report of monitoring agencies submitted to sent in a form so as to enable the Stock Exchange to put it on its own website.
stock exchange (b) annual statement of funds utilized for COMPILED BY: 9. The power of share transfer is not delegated to an officer or a committee or to
purposed other than those stated in offer document. CA. PANKAJ GARG the registrar and share transfer agents.

Chapter 14 – LIABILITIES OF AUDITOR 1
LIABILITIES UNDER COMPANIES ACT, 2013 LIABILITIES UNDER INCOME TAX ACT, 1961
CRIMINAL LIABILITIES CIVIL LIABILITIES Sec. Disability as to represent the assessee

288  A person who has been convicted of any
offence connected with any Income Tax
Sec. Criminal liability for mis-statements in Sec. Civil liability for mis-statements in proceeding or on whom a penalty has been
34 prospectus 35 prospectus imposed under the said Act is disqualified
Where any prospectus is issued or circulated or Where a person has subscribed for from representing an assessee.
distributed, which includes any statement which is securities of a company acting on any  CA found guilty of professional misconduct
untrue or misleading or where any inclusion or statement included, or the inclusion or by the Council of the ICAI, can not act as an
omission of any matter, in the representative for such time that the order
omission of any matter is likely to mislead, then
prospectus which is misleading and has of Council disqualifies him from practising.
every person who authorises the issue of such
sustained any loss or damage as a Sec. Any person who acts or induces, in any
prospectus shall be liable u/s 447 (fraud). consequence thereof, the company and 278 manner another person to make & deliver to
Sec. Criminal Liability for making false statement every person who— IT Authorities a false account, statement, or
448 If in any return, report, certificate, F.S., prospectus, (a) is a director of the company at the declaration, relating to any taxable income
statement or other document under this law, any time of the issue of the prospectus; which he knows to be false or does not believe
person makes a statement, (b) has authorised himself to be to be true is punishable with imprisonment
(a) which is false in any material particulars, named and is named in the from 3 months to 7 years & fine
knowing it to be false; or prospectus as a director of the Rule  A CA who as an authorised representative
(b) which omits any material fact, knowing it to company, or has agreed to become 12A has prepared the return filed by the
such director, either immediately assessee, has to furnish to the A.O., the
be material,
or after an interval of time; particulars of accounts, statements and
he shall be liable under section 447.
(c) is a promoter of the company; other documents supplied to him by the
Sec. Punishment for Fraud u/s 447 (d) has authorised the issue of the assessee for the preparation of the return.
447  any person who is found to be guilty of fraud, prospectus; and  Where the CA has conducted an
shall be punishable with imprisonment for a (e) is an expert, examination of such records, he has also to
term 6 months to 10 years and shall also be shall, be liable to pay compensation to submit a report on the scope and results of
liable to fine which shall not be less than the every person who has sustained such such examination.
amount involved in the fraud, but which may loss or damage.  If this report contains any information
extend to 3 times the amount involved in fraud. which is false and which the CA either
 Provided that where the fraud in question COMPILED BY: knows or believes to be false, he would be
involves public interest, the term of CA. PANKAJ GARG liable to rigorous imprisonment which
imprisonment shall not be less than 3 years. may extend to seven years and to a fine.

Cost Records and Cost Audit (Section 148 of Companies Act, 2013 & Companies (Cost Records and Audit), Rules, 2014
Cost Records Cost Audit
Sec. 148(1) Rule 3 of Companies (Cost Requirement Cost Auditor Cost Audit report
C.G. may by order Records & Audit) Rules, 2014
Companies including foreign Sec. 148(2) Rule 4 of Companies (Cost Sec. 148(3)
In respect of such Sec. 148(5) & 148(6)
companies Records & Audit) Rules, 2014 Cost Audit shall be conducted
companies C.G. may be order Cost Auditor shall submit
his report to
Cost Records are required to by Cost Accountant
Engaged in Engaged in direct for the be audited BOD
Appointed by BOD
production of production of goods Company shall
audit of cost If overall annual turnover
prescribed goods Or in prescribed manner
providing services records of within 30 days of date of
Or From all products and No person appointed u/s 139
providing prescribed as specified receipt of report
companies services
services As an auditor furnish such report to CG
Regulated Sector Non covered u/s
Regulated In immediate preceding
direct that 148(1) Shall be appointed as cost along with full information &
Sector Financial Year auditor
 Telecommunication  Steel explanation.
Electricity  Rubber Rule 6 of Companies (Cost Rule 6 of Companies
particulars relating to  having In case of
 Petroleum  Cement Records & Audit) Rules, (Cost Records & Audit)
prescribed net Regulated Non Regulated 2014
 Sugar  etc. Rules, 2014
Material  Drugs and Pharma worth or Sector Sector Cost Auditor shall be appointed Cost Auditor shall submit
turnover >50 Cr. >100 Cr.
Labour  Fertilisers within 180 days of commencement Cost Audit Report
or of every financial year.
Other items of cost Having turnover > 35 Cr. in a manner AND Company Shall inform the cost in Form CRA-3.
auditor of his appointment. Cost Auditor shall forward
Shall be included in During immediate preceding Turnover of Individual Company Shall file a notice with CG report to BOD
specified in that
financial year product or service in Form CRA-2 within 30 days of
order
the books of accounts Board meeting or within 180 days Within 180 days from
shall include cost records in of commencement of FY whichever closure of FY.
their books of accounts >25 Cr. >35 Cr.
is earlier. Report along with
Cost Auditor appointed as such information & explanation to
Requirement of Cost Audit shall not apply to a company shall continue till expiry of 180
Every Company under these Rules shall In respect of each of
Exemption –
days of closure of FY or till Shall be furnished to CG in

its Financial year
Rule 5
Rule 4(3)
Whose revenue from exports in foreign exchange submission of cost audit report. Form CRA-4.
exceeds 75% of its total revenue
Maintain Cost records in Form CRA - 1 or
which is operating from SEZ. Compiled by: CA. Pankaj Garg

Management Audit
Meaning, Scope. etc Steps in Management Audit Behavioural Aspects
Meaning Step – 1 “Develop Management Audit Program” Causes Solutions

Systematic, independent
appraisal activity within an 1. Staff/Line Conflict: 1. Demonstrate audit
organisation for a review of the due to – purpose as protective &
1. Devising a Statement of Policy Constructive.

management efficiency in its  Superiority complex
2. Demonstrate audit
decision making function. 2. Location of Audit Function of management
objective as managerial
auditor. tool for better decisions
3. Allocation of personnel
 Non-cooperation of 3. Ensure minimum
Objective Evaluation of mngt.
4. Staff Training line with staff. interference with regular
functions as to laying
down objectives & 5. Time and Other Aspects operations.
Scope 2. Control – fear that
policies. 4. Ensure active
Effective- of decisions of 6. Frequency of Audit action may be taken participation of
ness management based on the responsible persons.
Efficiency of mngt. decision to 5. Create atmosphere of
management audit
judge whether mngt. is Step – 2 “Conduct of Audit
report. trust.
doing correct things &
doing these things
correctly.
 Collection of fact through interview
Types of Reports
Mngt. Audit Op. Audit  Measuring performance through
Concerned Concerned with Management Audit Questionnaire
with quality of quality of
managing operations
Evaluation of Evaluation of EEE Step – 3 “Conclusion and Reporting”
decisions taken of operations Oral Required in case of emergency
Management
by top mngt.
Audit vs. Interim Required in case of matters
Mngt. & Op. Audit are two
Operational
identifiable exercises but due to 1. Pre Report Discussions Written requiring early considerations
Auditor
overlapping areas, it will be
2. Preparing Draft report Regular Formal report after completion
convenient to use the expression
Management & Operational Audit in 3. Supporting Information Written of work
which management audit includes
4. Writing & Issue Final Report Summary Summarizes individual reports
within its scope all elements of
operational auditing. 5. Follow Up of the Report Written on integrated approach

OPERATIONAL AUDIT
Meaning, Objectives & Need Operational Audit vs. Internal Audit Operational Audit vs. Financial Audit
Meaning
Financial Operational
Auditing Auditing
Review and Appraisal of Operational Auditing Internal Auditing
Operations conducted by Purpose Concerned with It emphasizes on
competent independent person It is concerned with the Concerned with the opinion that effectiveness and
whether the efficiency of
review and appraisal of determining whether historical operations for
Objectives and Scope operations. other controls are well information future
recorded is performance.
designed & in place correct or not.
1. Appraisal of Controls It is not a part of internal It is a part of internal Area Restricted to It covers all the
2. Evaluation of Performance control control system matters directly activities that are
affecting the related to
3. Appraisal of Objectives and Plans appropriateness efficiency and
It is an constructive It is an protective
4. Appraisal of Organisational of the presented effectiveness of
function i.e. to provide function i.e to safeguard F.S. business
Structure.
suggestions for the assets of the operations.
improvement enterprise. Reporting Financial audit Operational audit

Need
report is sent to report is primarily
It analyses all aspects of It is primarily concerned all stakeholders. for the
operations whether they with financial accounting management
 Management requirement for the information in
respect of areas beyond their direct supervision. are in tune with and internal control End Task Financial audit Operational audit
 Inadequacy of traditional sources of information to management policies, reports the is not limited to
provide complete information to mngt. findings to the reporting, but
objectives and Goals persons as its includes
 Operational Audit acts as an inexpensive, continuous
end objectives. suggestions for
and objective appraisal of activities, operations and It mainly deals with It focuses more on improvements
controls to inform the management about also.
qualitative aspects quantitative aspects
achievement of standards and the exceptions if any.

MIND MAP of PGBP (AY 2016-17)
Sec. 28  Business or Professional income
(Taxable  Compensations in the nature of Capital receipt due to Modifications . termination of agreements.
Incomes)  Income of Trade or Professional Association from specific services rendered to members.
 Export Incentives in the nature of profit on sale of import License, duty drawback, cash subsidy etc.
 Benefits arise of Business or profession.
 Salary, Interest, Bonus etc. Received by Partner from Partnership Firm.
 Sum Received under Keyman Insurance Policies.
 Amount received in restraint of Trade.
 Amount received on transfer of capital assets covered u/s 35AD.
Sec. 41 1. Recovery of any loss or expenditure or trading liability: if allowed as deduction in an earlier year;
(Deemed 2. Profits on sale of assets on which depreciation is claimed on straight line method
Profits) 3. Sale of assets used for scientific research without having been used for any purpose.
4. Recovery of bad debts: which were allowed as deduction in earlier years
5. Recovery after discontinuance of business or profession:
6. Use of special reserve: Amount transferred by financial institutions from special reserve if deduction on such
reserves was allowed earlier u/s 36(1)(viii).
Expenses Allowed as Deduction – Sec. 30 to 37
Sec. 30 Rent, Rates, Taxes, Repair (Current) & Insurance of Building used for the purpose of Business or Profession.
Sec. 31 Repair (Current) & Insurance of Plant, Machinery & Furniture used for the purpose of business of profession.
Sec. 32 Depreciation  Allowed in respect of capital assets owned by assessee & used for purpose of Business or
profession.
 Assets acquired and put to use during the PY for less than 180 days during that year, dep. shall be
limited to 50% of normal depreciation.
 Dep. is calculated on the W.D.V. of a block of assets at the prescribed rate of depreciation.
However, in case of undertaking engaged in power dep. may be calculated by SLM.
 Dep. Rates for Block: Building @ 10%, Furniture @ 10%, Computer @ 60%, P & M & Car @ 15%,
Books (annual publication) @ 100%, Intangible Assets @ 25%.
 WDV = Opening WDV + Additions – Money Receivable of Assets sold.
 WDV shall be Nil if entire assets in the block is sold or Sale amount exceeds opening WDV and
Additions, difference will be STCG (or STCL) .
 In case of reorganization, dep. will be allowed among predecessor & successor on the basis of no.
of days, assets used by them.
 In case of insufficiency of profits, unabsorbed dep. is allowed to set off against profit of other
business, other heads (except Salary), remaining amount to be carried forward for set off.
 C/f unabsorbed dep. will be allowed to be set off only after CY dep and c/f business losses.
 Additional dep. @ 20% is allowed in addition to normal dep. in respect of P & M acquired &
installed during the PY. However if such asset is acquired & put to use for less than 180 days in the
PY, then it is allowed @ 10%. Balance 10% will be allowed in succeeding PY (Applicable from AY
2016-17). Additional dep. is allowed to Manufacturing and power entities
 Additional Dep. will be provided @35%(or 17.5%) if assessee set up an undertaking in notified
backward area in A.P., Bihar, Telangana or West Bengal in respect of P & M acquired an installed
in between 01.04.2015 to 31.03.2020.
Sec. 32AC Investment Allowed to Manufacturing Company, investing > 25 Cr. in P & M in between 01.04.2014 to
Allowance 31.03.2017.
Reserve Deduction: 15% of cost of new assets acquired and installed
Sec. 32AD Investment  If assessee sets up an undertaking or enterprise for manufacture or production of any article or
Allowance thing on or after 01.04.2015 in any notified backward area in the State of A.P., Bihar, Telangana or
Reserve West Bengal and acquires and installs any new P & M in between 01.04.2015 – 31.03.2020,
deduction is allowed @ 15% of the Actual Cost of new P & M in the year of installation.
 In case of a company deduction u/s 32 AD is in addition to Sec. 32AC.

Sec. 33AB Tea Development  Allowed to those engaged in growing & mnfg. tea, coffee or rubber in India.
A/c  Deduction: Lower of - amount deposited with NABARD or 40% of profits
Sec. 33ABA Site Restoration  Allowed to entities engaged in prospection and extraction of petrol or natural gas.
Fund  Deduction: Lower of - amount deposited with SBI or 20% of profits
Sec. 35 Expenditure on  Revenue Expenditure by himself allowed @ 100%.
Scientific research  Pre-commencement expenses of last three years are also allowed as deduction.
 Sum Contributed to Approved Institutes for Scientific research @ 175%
 Sum Contributed to Indian Company @ 125%
 Sum Contributed to Approved Institutes for Research in Social Science/Statistics @ 125%.
 Capital Expenditure (Other than Building) is allowed @ 100%.
 Pre-commencement expenses of last three years are also allowed as deduction.
 Unabsorbed capital expenditure is treated in the manner as of unabsorbed dep.
 Sum paid to National Lab, IIT & Others for approved projects @ 200%.
 In-house Exp. (Other than Land and Bldg.) – Allowed to companies @ 200%
Sec. 35ABB Amortisation of  Deduction is allowed only for the amount which has been paid.
Telecom Licence  Deduction is equal to the appropriate fraction of the amount of eligible expenditure in equal
Fees installments over the relevant PYs.
Sec. 35AC Expenditure of Eligible Projects for Allowed @ 100% if project approved by National Committee.
promoting social and Economic Welfare
Sec. 35AD Capital  Capital Expenditure (except land, goodwill or fin. instrument) including pre commencement
Expenditure of expenses (if capitalized in books of account) allowed @ 100%* subject to conditions – New
Specified Business Business, New Plant & Machinery.
 150% is allowed in case of Cold Chain Facility, Warehousing for Agricultural produce,
Hospital with 100 beds, Affordable housing and Production of fertilizer.
 Other Specified Business: Gas Pipeline, Hotel, Bee keeping, storage of sugar, etc.
Sec. 35CCA Contributions for Rural Development Allowed @ 100%
Sec. 35CCC Expenses for Notified Agricultural Extension Allowed @ 150% of Expenditure
Project
Sec. 35CCD Expenditure of Notified Skill Development Project Allowed to company @ 150% (Exp. on Land and Bldg. Not allowed)
Sec. 35D Amortisation of Preliminary Expenses Allowed to Indian Company or Non corporate Residents in Five equal
annual Instalments.
Maximum Limit: 5% of Cost of Project (Higher of 5% of Cost of Project
or 5 % of Capital Employed in case of company
Sec. 35DD Amalgamation or Demerger Expenses Allowed to Indian Company in 5 Equal Annual Instalments
Sec. 35DDA Expenses on Voluntary Retirement of Allowed in Five equal Annual Instalments
Employees
Sec. 35E Expenses on Prospection and Development of Minerals
Sec. 36 Insurance Premium on Stock, life of Cattles, health of employees
Bonus and Commission to employees, if not payable otherwise as Dividend.
Interest on capital borrowed for the purpose of business
Proportionate Discount on ZCB issued by Infrastructure Capital Company, Public Sector Bank or Scheduled Bank
Employer’s Contribution to PF and Other Welfare Funds
Employer’s Contribution under Pension Scheme to the extent of 10% of salary of employee
Employee Contribution to PF if paid on or before the due date specified under EPF Law
Bad debt, if written off as recoverable.
Provision for Bad & Doubtful debts: Indian Banks–7.5% of GTI + 10% of aggregate average advances of rural branches.
Foreign Banks/PFI/SFC/SIIC – 5% of GTI
Transfer of Profits to Special Reserves in case of Financial Institutions to the extent of 20% of Profits.
Expenditure of Family Planning – Allowed to company only; Revenue @ 100%; Capital – 5 equal annual instalments.
Securities Transaction Tax
Commodities Transaction Tax
Sec. 37(1) General Expenses of revenue Nature, not covered by Sec. 30 – 36, incurred by assessee for purpose of business
Expenses or profession.

MIND MAP of PGBP – II (Expenses Disallowed & Presumptive Basis of Income Computation)
Sec. 37(2B) – Advt. Expenses Sec. 40 Sec. 40A Sec. 43B – Deductions on Actual Payment
 Expenditure incurred on advertisement in any souvenir, brochure, 1. Excessive Payments to Specified Persons: to the extent a. Any tax, duty, cess or fees;
considered unreasonable by the A.O. b. Employer contribution to PF, Superannuation
tract, pamphlet or the like published by a political party, shall not be
2. Payments Exceeding Rs. 20,000/35,000: to a person on same fund or gratuity fund or any other fund;
deductible. day by mode otherwise than through A/c Payee Cheque/Draft.
c. Bonus or commission to employees;
 It is immaterial that the expenditure is incurred wholly and Exceptions:
d. Interest on loan taken from financial
exclusively incurred for the purpose of the business.  Payment to RBI, SBI or other Banking Institutions.
 Payment to Govt. institutions;
 Payment through Banking System. e. Interest on term loans from a scheduled bank.
Sec. 40(a) – All Assessees Sec. 40(b) – Firm and LLP
 Payment through Book Adjustment. f. Sum payable in lieu of leave at credit of
1. Interest, royalty, fees etc. payable outside 1. Salary, bonus, or remuneration to a  Payment to a cultivator. employee.
India (to any person) or in India (to non- non-working partner;  Payment at a place where no banking system exists. If amount is paid on or before the due date for filing
resident/ foreign company) on which tax is 2. Remuneration to working partner or  Payment on bank holiday or bank strike.
the return of income, deduction is allowed.
deductible, but not deducted or if deducted, interest to any partner, not authorised  Payment made by authorised money changer.
In case the payment is made after the due date of
3. Provision of Gratuity: unless it becomes payable.
has not been paid on or before due date of by partnership deed; filing return of income, deduction can be claimed
4. Employer’s Contribution to Non statutory PF and Other
filing of ITR. 3. Remuneration or interest although Funds. only in the year of actual payment.
2. 30% of any sum payable to a resident on authorised by partnership deed but
which tax is deductible but not deducted or relates to a period prior to date of Presumptive Basis of income Computation
if deducted, has not been paid, on or before partnership deed; 44AD  Applicable to Individual, HUF, Firm (Other Than LLP).
the due date of filing return of income. 4. Interest authorised by partnership  Should be engaged in Business Activities (Other than those not eligible)
 Turnover or gross receipts do not exceed Rs. 1 Cr.
3. Tax on Profits and Gains. deed falling after date of such deed to
 The income will be estimated at a sum equal to 8% of the turnover or the gross receipts in the PY on
4. Wealth Tax. the extent it exceeds 12% p.a. account of such business or a higher amount as declared by the assessee.
5. Salaries payable outside India (to any 5. Remuneration to working partner, 44AE 1. Apply to persons owning not more that 10 trucks.
person) or in India (to a non-resident) on authorised by partnership deed and 2. The income of such business shall be the Rs. 7,500 p.m. or part of the month during which truck is owned
which tax has not been paid/deducted. falling after date of such deed in excess or an higher amount as declared by assessee.
44B 1. These provisions apply to non-resident assessees, engaged in the business of operation of ships.
6. Employer’s Contribution to PF or other of following limit:
2. The income from such business will be 71/2% of the aggregate of the following amounts:
welfare funds, unless arrangement of TDS On the first Rs. 3 Higher of Rs.  Amount paid or payable (whether in or out of India) for carriage of passengers, etc. shipped at any port in
has been made. lakh of book 1,50,000 or 90% India;
7. Tax on non monetary perquisites. profit or loss of book profit .  Amount received in India for carriage of passengers, etc. shipped at any port outside India.
On the balance @ 60% of Book 44BB 1. These provisions apply to non-resident assessees, engaged in the business of operation of ships.
A 2. The income from such business will be 5% of the aggregate of the following amounts:
of book profit Profit
 Amount paid or payable (whether in or out of India) for carriage of passengers, etc. from any place in
Sec. 40(ba) – AOP . BOI: India;
Interest, salary, bonus, commission or remuneration to a member of such association or body.  Amount received in India for carriage of passengers, etc. from any place outside India.

MIND MAP of PGBP – III (Accounts and Audit)
Sec. 44AA – Maintenance of Accounts Sec. 44AB – Audit of Accounts
Specified Professions Sec. 44AB provides that in the following cases, persons are required
Non-Specified Professions &
Businessmen to get their accounts audited before the specified date by an C.A.:
1. If total sales, turnover or gross receipts, in business exceeds Rs.
One Crore in any PY; or
Gross Receipts in all three  Total income > Rs. 1,20,000 or total 2. If gross receipts in profession exceed Rs. Twenty Five lakhs in
preceding years > 1,50,000 sales or gross receipts > Rs. 10,00,000
in any of the 3 years immediately
any PY, or
preceding the relevant PY, or 3. Where the assessee is covered u/s 44AE and claims that the
 In case of newly set up business or income is lower than the income so computed.
profession, income is likely to be > Rs.
1,20,000 or total sales or gross 4. Where the assessee is covered u/s 44AD and claims that the
Yes No
receipts are likely to be > Rs. income is lower than the income so computed and his income
10,00,000, during such PY, or
exceeds the maximum amount which is not chargeable to tax.
 Assesses covered u/s 44AE & claims
Required to Maintain that income is lower than the Income Note: If accounts are required to be audited under any other law, it will
Books Prescribed in so computed.
 Assesses covered u/s 44AD, & claims sufficient if accounts are audited under such law before the
Rule 6F
that income is lower than the Income
so computed and income > basic
specified date and assessee furnishes by that date the report of the
exemption limit. audit as required under such other law and a further report in the
form prescribed under this section.
YES No Forms requirement:
(i) Form 3CA and 3CD for person carrying on Business or profession
who is required under any other law to get his accounts audited;
Required to maintain the
Books (Not necessarily and
the prescribed ones) No Books Required (ii) Form 3CB and 3CD for others.
Specified Date: 30th Sep. of Assessment Year.

INVESTIGATION UNDER COMPANIES ACT 2013
Investigation into affairs of company – Investigation into affairs of Investigation into affairs in other Investigation into Ownership of
Sec. 210 company by SFIO – Sec. 212 cases – Sec. 213 company – Sec. 216
(Not notified yet)
CG may Order an investigation into CG may, by order assign investigation Tribunal may on application of CG may appoint one or more
affairs of the company into affairs of a company to Inspectors
Specified number of Any Other

On receipt of a report of SFIO To investigate and report
Members person
Registrar/Inspector u/s 208 (Serious Fraud Investigation Office)
>100 Members If satisfied that:
or Business of For purpose of determining the
Or
having Share
On receipt of a report of Members company is being true persons
On intimation of a Special
Company
Registrar/Inspector u/s 208 holding > conducted with
Capital
resolution passed by 1/10th of Total intent to defraud
Or Who are or have been financially
company in this regard Voting Power Or
On intimation of a Special resolution Promoters / Mngt. interested in the success or failure
Or passed by company in this regard being guilty of of the company
In public interest. Or fraud or Or
Company having no Share

misconduct
CG shall Order an investigation into In public interest 1/5th of Who are or have been able to
towards the
affairs of a company Or Total company control or materially influence the
On request from any Department of Members Or policy of the company.
CG/SG Members not
Where an order is passed by CG may define the scope of
being provided
Capital
a Court or Tribunal in this Director, may designate such with required
SFIO number of inspectors investigation wr.t. matters / period
regard information
/ particular shares or debentures
CG may Appoint one or more as he considers necessary
Powers of Inspector extended to
persons for investigation. After giving a reasonable opportunity
SFIO Shall conduct the investigation of any circumstances
of being heard to concerned parties
investigation suggesting the existence of any
as inspectors arrangement which is relevant for
In prescribed manner Order for the investigation into affairs investigation
who report to CG of the company
And submit its report to
CG within period Compiled by: CA. Pankaj Garg
in manner as directed by CG. specified in order By an inspector appointed by CG.

POWERS OF INSPECTORS & REPORT OF INSPECTOR ON INVESTIGATION UNDER COMPANIES ACT 2013
Procedures, Powers etc. of Investigation into affairs of related Seizure of documents Inspector’s Report
Inspectors - Sec. 217 companies - Sec. 219 - Sec. 220 - Sec. 223
 Officers, Employees and With the prior approval of CG, If Inspector has reasonable grounds Inspector
agents of the company
Production of documents
should produce all book and inspector may also investigate the May/shall shall
papers and provide That books & papers of company /
affairs of following: Submit Submit
necessary assistance. other body corporate/MD/Manager
Interim Report Final Report
 With the previous approval
 any body corporate which is/has at To CG To CG
of CG, inspector may require
relevant time been the subsidiary or are likely to destroyed
information of any other When On conclusion
holding or another subsidiary of
body corporate. required of
same holding of company under
 Inspector may detain the the inspector may investigation
investigation.
books for 180 days.
or
 Inspectors may examine
 Any body corporate which is/has at Report shall be in writing or
Examine on Oath
Officers, employees and enter into places where these books

relevant time been managed by any printed as CG may direct.
agents of company or related are kept with required assistance
person as MD or Manager who is the
companies on oath. And
MD or Manager of company under
 Previous approval is
investigation. Seize the books and papers after Report may be obtained by making
required to examine any
or allowing the company to take copies an application to CG
other person.
 Any body corporate whose BOD
 Discovery & production of of such books.
comprises nominees of company
books & other documents at The report shall be authenticated
Powers of Civil Court
under investigation.
such place & time as specified.
or Such books and papers may be kept
 Summoning and enforcing
 Managing Director, Manager or by inspector by seal of the company whose
attendance of person and
employee of company under
examine them on oath. affairs have been investigated
investigation.
 Inspection of any books, or
for such period not later than the
registers & other documents by certificate of a public officer
at any place. Compiled by: CA. Pankaj Garg conclusion of the investigation.

Audit of Banking Companies - BASICS
1
Principal Enactments Governing Bank Audit EVALUATION OF INTERNAL CONTROLS
 Banking Regulation Act, 1949; 1. Bills for Collection 2. Bills Purchased

 RBI Act, 1934; 1. Documents accompanying bill should be received & 1. Verify that all documents of title are properly
 Banking Companies (Acquisition & Transfer of Undertakings) Act, 1970; entered in the register by a proper officer. assigned to the bank.
 SBI Act, 1955; 2. Account of principal should be credited only after 2. Sufficient margin should be kept while
 SBI (Subsidiary Banks) Act, 1959; realisation of the bill. purchasing or discounting of a bill.
 Regional Rural Banks Act, 1976; 3. Ensure that bills sent by one branch to another for 3. Irregular outstanding accounts should be
 Companies Act, 2013;
collection are not included twice in balance sheet. periodically reported to the head office.
 Cooperative Societies Act, 1912;
3. Loans and Advances 4. Proportionate income should be recognised
 Information Technology Act, 2000;
 Evaluation of Customer creditworthiness. between the periods.
 Prevention of Money Laundering Act, 2002;
 SRFAESI Act, 2002;  Sanctioning by proper authority. 4. Credit Card Operation
 Credit Information Companies Regulation Act, 2005; and  Execution of Necessary Documents. 1. Effective screening of applications.
 Payment & Settlement systems Act, 2007  Keeping Sufficient Margin. 2. Strict control over storage and issue of cards.
 Safe custody of securities held. 3. Existence of a system to confirm status of
REQUIREMENTS OF RISK MANAGEMENT SYSTEM  Registration of charges in favour of bank. unutilised limit before accepting the settlement .
 Inspection of securities on regular basis. 4. Existence of system of prompt reporting by the
1 Involvement Risk Management policies should be approved by  Determination of market value of securities. merchants of all settlements accepted.
of TCWG TCWG having regard to bank’s business objectives  Adjustment in drawing power with decrease in 5. Reimbursement to merchants only after
& strategies, capital strength, mngt expertise, value of assets. verification of valid acceptance of cards.
6. Reimbursements should be immediately charged
regulatory requirements & types of risks.  Reporting of Irregular accounts to Head office
Review of accounts on timely basis. to the customer’s account.
2 Identification, Risks that may significantly affect the achievement 
Measurement 7. Existence of system to ensure that statements
of bank’s goals and objectives should be identified, 5. Telegraphic Transfers and Demand Drafts
& Monitoring are sent regularly and promptly to the customer.
measured and monitored. 1. Codes for TT should be known only to responsible
of Risks 8. Existence of a system to monitor and follow-up of
officers.
3 Control Banks must have controls including the following: customers’ payments.
2. Coding and Decoding should be done only by
Activities  effective segregation of duties, 9. Identifying the items overdue beyond a
authorised officers.
 verification and approval of transactions, reasonable period.
3. Signatures on documents used for TT and DD
 setting of limits, 10. Existence of a system for periodic review of
should be checked by an officer.
 reporting and approval of exception. credit card holders’ accounts.
4. All TT & DD sold by a branch should be immediately
4 Monitoring Risk mng models, methodologies and assumptions used
confirmed by advices to the branches concerned.
Activities to measure and manage risk need to be evaluated by
Independent risk management unit 5. If the paying branch does not advice from the Compiled by:
5 Reliable must exist so as to provide adequate financial, issuing branch or does not receive credit in its
Information operational and compliance information on a timely and account with that branch, it should take immediate CA. Pankaj Garg
System consistent basis to management and TCWG. steps to ascertain the reasons.

Audit of Banking Companies – VERIFICATION OF INVESTMENTS
2
AUDIT PROCEDURE SPECIAL PURPOSE CERTIFICATES NON PERFORMING INVESTMENTS
1 Internal To ensure they are in accordance with Central Auditors are required to issue Those investments where interest/principal
control RBI Guidelines. following certificates: is due and remains unpaid for >90 days and
evaluation Investment policy must confirm to 1. Certificate on reconciliation of includes:
RBI Guidelines. securities by the bank (both on its 1. Preference Shares where dividend is not
2 Separation of Own investment account need to be own investment account as well as paid.
Investment separated from PMS client accounts. PMS Client’s account). 2. Unquoted equity shares value @1.
Functions 2. Certificate on compliance by the 3. Securities issued by a person who has
3 Examination of Reconciliation bank in key areas of prudential and been given credit facility which is a NPA.
4 Examination To ensure that investments made are other guidelines relating to such 4. Equity, debentures etc. received as a
of Documents within authority and supported by transactions issued by RBI. result of conversion of NPA.
documentation.
5 Physical  Should be carried out on balance
verification Sheet date, CLASSIFICATION AS PER PRUDENTIAL INCOME RECOGNITION NORMS
 In exceptional case, carry out the NORMS
physical verification as near to 1 Performing Accrual basis provided interest
balance sheet date as possible. Investments rate is predetermined.
1 Held to Securities acquired by bank
 In case of scripless dealings, verify 2 NPI Realisation Basis
Maturity with the intention to hold till
the yearend confirmations of 3 Govt. Accrual basis, provided interest
(HTM) maturity.
depository. Guarantee is serviced regularly.
2 Held for Securities acquired by bank
6 Examination Method of accounting including 4 Dividend Accrual basis, if right to receive
Trading with the intention of trading,
of Valuation yearend valuation is appropriate. dividend is established.
(HFT) i.e. to be sold within 90 days.
If inappropriate, consider the effect of 5 Discount on Accrual basis over the remaining
3 Available Securities which do not
adoption of such policy on F.S. discounted period of maturity.
for Sale qualify for being classified as
7 Dealing in Income from such activities to be instruments
(AFS) HTM or HFT.
securities on recorded fairly. 6 Units of Cash Basis
behalf of Category of investment should be decided
Mutual Funds
Compiled by: CA. Pankaj Garg at the time of acquisition and recorded on
Others 7 Sale of Profit or loss to be shown in
8 Examination of Classification and Shifting investment proposal.
Investments Profit & Loss Account.

Audit of Banking Companies – VERIFICATION OF ADVANCES I
3
Exception to NPA Classification Norms VERIFICATION OF SECURITY AGAINST
NPA CLASSIFICATION
ADVANCES
1 Temporary  Like non submission of stock
Examination 1. Execution of documents.
An Advance will be classified as NPA if: Deficiencies statement, non renewal of limits.
Aspects 2. Limitation period.
(a) It ceases to generate income for a bank.  A/c will not be classified as NPA if 3. Evidences as to Market Value.
(b) Interest and/or installment of principal remained overdue or A/c has inherent strength. 4. Evidences as to ownership of
out of order for a specified period of time. 2 Natural Short term agricultural loan assets.
 Overdue: Amount not paid on the due date fixed by the Bank. Calamities converted short term loans will 5. Registration of charge with ROC.
be treated as current dues. 6. Regular submission of information
 Out of Order: outstanding balance remains continuously in by borrower.
excess of the sanctioned limit/drawing power. 3 Facilities Overdue A/c will be classified as Special To examine whether advance is
backed by CG NPA only when CG repudiates its
Or Considerations secured & extent to which it is
Guarantee guarantee. secured, determine the following:
No credits continuously for 90 days as on B/S date or credits
are not enough to cover interest debited during same period. (a) whether the security is legally
enforceable;
Classification in Special cases (b) whether the security is in the
INCOME RECOGNITION
Account regularized Classify as NPA if account has inherent effective control of the bank; &
near B/S date weaknesses. 1 General Rule Accrual basis if it is (c) to what extent the value of the
security, covers the loan.
Account classification All facilities granted to same borrower reasonable to expect its
Examples ECGC/DICGC Secured*
borrower wise will be treated as NPA ultimate collection. guarantee
Advances under Based on recovery of individual 2 NPAs Cash Basis Lower Margin Secured*
Consortium member bank. 3 Advanced against Accrual basis provided Cheques Unsecured
Moratorium Period A/c will not be treated as overdue with LIC/ KVP/NSC/FDs adequate margin is available. purchased
respect to date of debit of interest Fees/ commission Supply Bills Unsecured
4 Accrual basis over the period
during moratorium period. on rescheduled Verification  Inspect policies & ensure policies
covered by rescheduled
advances
of advances assigned in favour of bank.
Temporary Ensure - DP arrived on basis of stock extension of credit period. made against  Examine whether premium has
Deficiencies statement (not older than 3 months) 5 Govt. guaranteed If overdue, income to be LIC been paid and policy is in force.
NPA Classification w.r.t. Specified Advances advances realized on cash basis.  Obtain Certificate regarding
Term Loans Interest /Installment remain overdue surrender value (SV).
 If SV is subject to payment of
>90 days REVERSAL OF INCOME premium, such premium need to
CC/OD Account remained out of order >90 days. be deducted from SV.
1 First Time NPAs Interest credited but not
BP/BD Bills remained overdue>90days Verification 1. Examine Sanction letter & loan
realized should be reversed. of Advances documents.
Agricultural Advances Interest/Installment remain overdue
2 Commission/Other Recognized on accrual basis against Stock 2. Verify stock statement to ascertain
>2 crop seasons (shor duration crops)
Income in respect and not received yet, should be quantity and value.
>1 crop season (long duration crops) 3. Physically inspect the inventory.
of NPAs reversed
Credit Card Accounts Min. amount due not paid within 90 4. Review the stock audit report.
3 Finance Charge of Recognised as income on
days from next statement due. 5. Insurance policies assigned in
Leased Assets accrual basis, but not yet favour of bank.
Other Accounts Amount overdue >90 days.
realised should be reversed. 6. Inspect document of title of goods.

Audit of Banking Companies – VERIFICATION OF ADVANCES II
4
Verification of Provision for NPA Verification of Accounts falling under CDR Verification of Sale/Purchase of NPA
 Study the latest Master Circular of RBI to get (a) Review the present classification of the account under  A NPA in the books of a bank is eligible for sale to
familiarise with the norms prescribed by RBI IRAC norms adopted by the bank and corresponding other banks only if it has remained a NPA for at least
in relation to provisioning requirements for provision made in the books of accounts, if any. two years in the books of the selling bank.
NPA. (b) If the account is already treated as NPA, the same  NPA can be sold only on ‘without recourse’ basis.
 Provisioning norms as laid down in the cannot be upgraded only because of the CDR package.  Subsequent to sale of NPA, selling bank do not
master circular should be construed as the (c) Review the Debtor-Creditor Agreement (DCA) and assume operational, legal or any other type of risks
minimum provisioning requirements and Inter Creditor Agreement (ICA) with respect to relating to the financial assets sold.
wherever a higher provision is warranted in availability of such agreements.  NPAs can be sold to other banks only on cash basis.
the context of the threats to recovery, ensure (d) Ascertain the terms of rehabilitation along with the  Entire sale consideration should be received upfront.
that higher provision is made by the bank. sacrifices, if any, to verify whether such sacrifices  The sale price should not be lower than NPV of
 Examine whether the classification made by have been accounted in the books of accounts of the estimated cash flows associated with realisable value
the branch into Standard, Sub-standard, lender. of the available securities net of the cost of
doubtful and loss assets is appropriate. (e) Ascertain whether any additional financing / realisation.
 Examine whether the secured and the conversion of loan into equity have been envisaged in  Purchasing bank can further sold NPA only after 15
unsecured portions of advances have been the restructuring program. months.
segregated correctly and provisions have (f) Ascertain whether account has been referred to BIFR, Asset Classification Norms
been calculated properly. as such cases are not eligible for restructuring under  NPA purchased, may be classified as ‘standard’ in the
 As per the RBI guidelines, if an account has CDR system. Large value BIFR cases may be eligible books of purchasing bank for a period of 90 days
been regularised before the balance sheet for restructuring under CDR if specifically from the date of purchase. Thereafter, the asset
date by payment of overdue amount through recommended by CDR core group. classification shall be determined on the basis of
genuine sources, the account need not be (g) Ensure that accounts wherein recovery suits have recovery.
treated as NPA. been filed, the initiative to resolve under CDR system Provisioning Norms:
 Date of NPA is of significant importance to is taken by at least by 75% of the creditors by value  When a bank sells its nonperforming financial assets
determine the classification and hence specific and 60% in number. to other banks, the same will be removed from its
care be taken in this regard and ensure that books on transfer.
the classification is made as per the position  In the books of purchasing bank, the asset shall
as on date and hence classification of all Compiled by: CA. Pankaj Garg
attract provisioning requirement appropriate to its
standard accounts be reviewed as on balance
asset classification status.
sheet date.

Audit of Banking Companies – VERIFICATION OF Other Items
5
DRAFTS PAID WITHOUT ADVICE CONTINGENT LIABILITIES
(i) Examine the following: Disclosure (i) Claims against the bank not acknowledged as debts.
 System of verifying genuineness of draft by requirements (ii) Liability for partly paid investments.
reference to specimen signature of signing authority as per 3rd (iii) Liability on account of outstanding forward exchange contracts.
Schedule (iv) Guarantees given on behalf of constituents- In India & Outside India.
 System of co-relating drafts paid, with advices
(v) Acceptances, endorsements and other obligations.
subsequently received;
(vi) Other items for which the bank is contingently liable.
 System of sending reminders, if advices are not Verification (a) Ascertain existence of adequate internal controls to ensure that transactions giving
received within reasonable time and recording of Aspects rise to contingent liabilities are executed only by persons authorised to do so.
reasons for their non receipt. (b) Ascertain whether the accounting system of the bank provides for maintenance of
(ii) Verify composition of balances appearing in this adequate records in respect of such obligations.
account with reference to any long outstanding items. (c) Perform substantive audit tests to establish the completeness of the recorded
(iii) Verify whether items appearing in this a/c have been obligations.
subsequently cleared on receipt of relevant advices. (d) Review the reasonableness of the year end amount of contingent liabilities in the
light of previous experience and knowledge of the current year’s activities.
(iv) Verify that the bank maintain a record of names and
(e) Obtain representation from the management that all contingent liabilities have
addresses of the payees of such drafts.
been disclosed.
(f) Ensure Compliance of AS 29, “Provisions, contingent liabilities and contingent
Inter-office Adjustments (Branch Adj. Accounts)
assets”.
Claims against the bank not acknowledged as debt Acceptances, endorsements and other obligations
(a) Examine origin and validity of old outstanding unmatched  Examine relevant evidence like correspondence Letters of credit:
entries, particularly debit entries. with lawyers, claimants, workers/officers etc. 1. Evaluate adequacy of internal controls over LC
(b) Whether there are any reversal entries indicating the  Review the minutes of the meeting of the BOD, Forms e.g. custody, records, reconciliation etc.
possibilities of irregular payments or frauds. contracts, agreements, pending legal cases & 2. Verify the balance of LC from the Register
(c) Examine whether the balances include any items in nature maintained by the bank.
correspondence relating to taxes etc., to identify
of cash-in-transit, which remain pending for more than a 3. Examine the guarantees of the customers,
claims against the bank.
reasonable period. copies of the LC issued & security obtained.
 Ascertain from the management the status of Other acceptances and endorsements:
(d) Whether transactions, other than those relating to inter- claims outstanding as at the end of previous year.  Examine arrangements made by bank with
branch have been included in inter-branch accounts.  Review subsequent events to obtain evidence customers.
(e) The auditor may also seek explanations from the about completeness and valuation of claims.  Test check amounts of bills with the register.
management for old outstanding unmatched entries and
Compiled by: CA. Pankaj Garg  Verify whether bills are marked off in register
transactions other than inter branch transactions. on payment at maturity.

Audit of Banking Companies – MISCELLANEOUS
6
STATUTORY LIQUIDITY RATIO CAPITAL ADEQUACY RATIO CONCURRENT AUDIT
Central statutory auditors are required to verify Meaning: Measurement of adequacy of capital Meaning Examination which is contemporaneous with the occurrence of
the compliance of SLR on 12 odd dates in different resources of bank in relation to risks associated transactions. It attempts to shorten the interval between a
with its operation. transaction and its examination by an independent person not
months not having Fridays. To verify compliance
Requirement: Public Sector: 9%; Private Sector: involved in its documentation.
with SLR requirements, the statutory auditor has
10% Emphasise substantive checking rather than test checking.
to examine two aspects:
Computation: Capital Funds Coverage Concurrent audit should cover the following:
(a) Correctness of the figure of DTL at the close of Risk Adjusted Assets & Off Balance Sheet (a) Branches whose total credit aggregate to not less than 50%
business on the reporting Friday relevant to Items of the total credit of the bank; and
the dates selected by the auditor, and Components of Capital Funds (b) Branches whose aggregate deposits cover not less than 50%
(b) Maintenance of prescribed percentage of  Capital Funds are classified in two categories: of the aggregate deposits of the Bank.
liquid assets on the selected date. Tier I and tier II. In addition, bank should ensure the coverage of following:
 Tier I Fund includes Paid Up capital, Statutory (a) Exceptionally large, very large and large branches;
STEPS OF VERIFICATION
Reserves, Free Reserves as reduced by equity (b) Special branches handling foreign exchange business;
1. Examine the composition of items of DTL as investments in subsidiaries, intangible assets & (c) Branches rated as poor/very poor;
per circulars/instructions of RBI. current b/f losses. (d) Head Office department dealing with treasury/funds
2. Verification of trial balance and cash balance  Tier II Fund includes undisclosed reserves, management and handling investment portfolio.
for 12 selected dates by Branch auditors. general provision and loss reserves, hybrid debt Scope 1. Daily cash transactions with reference to abnormal receipts
capital instruments and subordinated assets. and payments.
3. Inclusion of demand and time liabilities in
 Tier II Capital cannot exceed 100% of Tier I 2. Verification of procedure and documentation to open new
Consolidated Statement based on the returns
Capital. current, savings, term deposit accounts, etc.
received from the unaudited branches. 3. Verification of advances, OD, CC, term loans, bills purchase, LC
4. Examine whether Net credit balance in Branch etc. Procedure for sanction and documentation to be verified.
LONG FORM AUDIT REPORT (LFAR)
Adjustment Account has been included in 4. Verification of Foreign exchange transactions.
liabilities. 5. Verification of ledgers, inter branch reconciliation &
 LFAR has to be furnished by the auditor of a bank
verification of interest, discount, commission.
5. In computation of liquid assets, deposits in addition to the audit report as per the statutory
6. Revenue leakage.
maintained with RBI, cash balance with itself or requirement. 7. Verification of high value transactions.
RBI, excess balance maintained with RBI, net
 The matters which the banks require their auditor 8. Procedure for safe custody of security forms with the branch.
balance in current account are all treated as 9. Ensure adequacy of procedures for tax deduction at source.
to deal with in the form of Long Form Audit Report
cash. 10. Verification of returns, statements, calculation of capital
have been specified by the RBI.
6. Price of gold taken does not exceed market adequacy ratio and compliance with RBI Guidelines.
price. 11. Study of RBI and Internal Inspection reports, statutory
7. Specify number of unaudited branches. Compiled by: CA. Pankaj Garg auditor’s report and compliance thereto.

Audit of General Insurance Companies
1
LEGAL REGULATORY REQUIREMENTS OF INSURANCE ACT 1938
FRAMEWORK SOLVENCY MARGIN RESERVE FOR UNEXPIRED
RISKS
1. Insurance Act, 1938  Requirement of solvency margin: Every insurer and re-insurer shall at all times maintain an excess of value of assets IRDA (General insurance-Claim
2. IRDA Act, 1999 over the amount of liabilities of, not less than 50% of the amount of minimum capital. Reserving) Regulations, 2013 requires
3. IRDA Regulations  Non-compliance of solvency margin: Insurer or re-insurer, who does not comply with requirement of solvency margin creation of a minimum amount of
4. Companies Act, 2013 shall be deemed to be insolvent & may be wound-up by court on application made by IRDA. unexpired risks reserve at a specified
5. GIC (Nationalisation) Act,  Power of authority to prescribe level of solvency: The Authority shall by way of regulation made for the purpose, percentage of net premium as under:
1972 specify a level of solvency margin known as control level of solvency on the breach of which the Authority shall act.  For marine hull insurance – 100% of
 Submission of Financial Plan: If, at any time, insurer or re-insurer does not maintain required control level of solvency net premium
margin, he shall, in accordance with directions issued by IRDA, submit a financial plan, indicating a plan of action to  For fire, marine cargo and
Compiled by: correct the deficiency within a specified period not exceeding 6 months. miscellaneous business – 50% of net
 Modifications to Financial Plan: If the authority considers the financial plan inadequate, it shall propose modifications premium.
Note: Sec. 64V of Insurance Act, 1938
CA. Pankaj Garg to the plan and shall give directions, including direction in regard to transacting any new business, or, appointment of an
also specifies these percentages.
administrator or both.
Subsequent to Amendment Act of
 Non submission of financial plan: An insurer or re-insurer who does not submit financial plan shall be deemed to have
2015, these percentages are no more
made default in complying with the requirements of this section.
specified in amended Section 64V.
Audit of GIC – Revenue Items

Premium Income Claims Paid Commission Receipt & Payment A/c
1. Review of Internal Control: 1. Review of Internal Control: 1. Vouching of Sec. 11 of Insurance Act, 1938
 Issue of proper cover notes  Payment of only bonafide claims. disbursement – F.S. to include Receipt and
 Serial no. of cover notes  Sanctioned by appropriate authority. Payment Account (R & P ).
 Collection of information from branches. entries.
 Internal check on stamps, stationary etc. Auditor Duties:
2. Claims Paid: 2. Proper Authoristaion
2. Accounting:  report whether the R & P
 Coinsurance: Proper booking
 Recognition of premium income for all of disbursements. account of the insurer is in
 Settlement Amount: must include all incidental expenses
risks incepted.  Claims communicated after year end: accounting for provisions 3. Calculation of agreement with the books
 Proper recording for Fire, Marine, Motor &  Accounting for Salvage and letter of subrogation: in accordance with procedure. of account and returns;
commission.
Other Ins.  Amount deposits with Court: not treated as claim till final decision.  express an opinion as to
 Unqualified Discharge Note: in case of final settlement. 4. Examination of whether the R & P account
 Accounting for premium received in
advance & premium outstanding. 3. Claims Outstanding at year end: agent’s ledger. has been prepared in
 Provision for all unsettled Claims. accordance with the
 Recording at gross figure without 5. Examine accounting
 Provision for legally enforceable claims. provisions of the relevant
providing for reserve. of commission paid.
 Provisions should not be made in excess.
3. Inception of Risk: Sec. 64VA statutes; and
 Application of Average Clause.
 Issue of Policy Documents  express an opinion
 Consideration of salvage value.
 No risk w.r.t. premiums received in 4. Claims Register: whether the R & P account
advance and outstanding. Claims Intimation Register Claims Paid Register Salvage Register give a true and fair view of
4. Co-Insurance: Claim Dockets Report of Quality Claims the receipts and payments
Proper booking of share of premium. Assurance Team Disbursement Book of the insurer.

Audit of GIC – Balance Sheet Items 2
Investments Outstanding Premium Contingent Liabilities –
Disclosure Requirements
1. Physically verify the securities on the balance sheet date or a date as near as possible. 1. Scrutinize and review control account debit balances 1. Partly paid up investments.
Prepare a reconciliation statement where verification is carried out on date other than BS and their nature should be enquired into. 2. Underwriting Commitments
date. 2. Examine in-operative balances and treatment given for outstanding.
2. Obtain separate lists of securities held physically and those held in demat form. old balances with reference to company rules. 3. Claims, other than those under
3. Examine the records for investments held at branches and request the respective branch 3. Enquire into the reasons for retaining the old balances. policies, not acknowledged as debts.
auditors to issue a certificate to this effect. 4. Verify old debit balances which may require provision 4. Guarantees given by or on behalf of
4. Examine in detail investments on which income has not been received for a long period and or adjustment. Notes of explanation may be obtained the Company.
those which have not been redeemed even after redemption date. from the management in this regard. 5. Statutory demands / Liabilities in
5. Where certificates are held by other persons such as nominees, share transfer agents etc. 5. Check age-wise, sector-wise analysis of outstanding dispute, not provided for.
the auditor should obtain written certificates from such person. premium. 6. Reinsurance obligations to the
6. Examine that norms relating to valuation and disclosure in F.S. have been complied with. 6. Verify whether outstanding premiums have since been extent not provided for in the
7. Examine whether income from investments is property accounted for collected. accounts.
8. Ensure that certificates of TDS are properly maintained. 7. Check the availability of adequate bank guarantee or 7. Others (to be specified).
9. Ensure compliance of Sections 27, 27A and 27B of the Insurance Act, 1938 as well as the premium deposit for outstanding premium.
guidelines issued from time to time by the Ministry of Finance through GIC.
Audit of GIC - Miscellaneous

Co-Insurance Trade Credit Insurance
Meaning & Concept: Trade Credit insurance provides protection to suppliers against the
Sharing of Business between more than one insurer at agreed percentages is known as co-insurance. The risk of non-payment of goods or services by their buyers who may be
Lead Insurer issues documents, collects premium and settles claims. Statement of accounts is rendered by situated in the same country (domestic risk) or in another country
the Lead insurer to the other co-insurers. (export risk) against non -payment as a result of insolvency of the
Incoming Co-Insurance buyer or non-payment after an agreed number of months after due
1. Ensure that the Premium Account is credited on the basis of statements received from the Lead insurer. date. Trade credit insurance product is offered subject to following
2. In case, the statement is not received, the premium is accounted for on the basis of advices to ensure requirements:
that all premium in respect of risks assumed in any year is booked in the same year. 1. Policyholder's loss arises due to non-receipt of trade receivable..
3. For this purpose, the auditor may examine the communication in the post-audit period and obtain a 2. Policyholder is a supplier of goods or services for a consideration.
written confirmation to the effect that all incoming advices have been accounted for.
3. Buyer is liable to pay a trade receivable to the policyholder in
4. The auditor should also verify claims provisions and claims paid with reference to advice received from
return for the goods and services received by him from the
the Lead insurer.
policyholder.
Outgoing Co-Insurance
4. Premium for the entire Policy Period has been paid.
1. The auditor should scrutinise the transactions relating to the outgoing business, i.e. where the company
is the Lead Insurer. 5. Other requirement that may be specified by the Authority from
2. These should be checked with reference to the relevant risks assumed under policies and time to time.
correspondingly for debits arising to the co-insurer on account of their share of claims.

Audit of GIC - Reinsurance 3
Verification of reinsurance inward Verification of reinsurance outward Facultative and Treat Reinsurance
1. Evaluate internal control system in the 1. Evaluate internal control system in the area of Facultative Reinsurance whereby contract relates to one particular risk and is
area of reinsurance accepted to ensure reinsurance ceded to ensure determination of expressed in the reinsurance policy. Each transaction has to be
determination of correct amount for correct amount for reinsurance ceded, proper negotiated individually. The Insurance is used when:
reinsurance accepted, proper valuation of valuation of assets and liabilities arising out of  Automatic cover has exhausted.
assets and liabilities arising out of reinsurance transaction and adherence to legal
 Risk is excluded from treaties
provisions and regulations.
reinsurance transaction and adherence to  Reinsurance treaties have not to be over burdened.
2. Ascertain whether adequate guidelines and
legal provisions and regulations.  Insurer has no automatic cover.
procedures are established with respect to
2. Ascertain whether adequate guidelines and obtaining reinsurance.  Technical guidance is required at each stage of acceptance of risk.
procedures are established with respect to 3. Reconcile reinsurance underwriting returns Treaty A treaty type of coverage is in effect for a specified period of time,
granting reinsurance. received from various units with the figures of rather than on a per risk, or contract basis. For the duration of the
3. Reconcile reinsurance underwriting premium, claims paid and outstanding claims contract, the reinsurer agrees to cover all or a portion of the risks that
returns received from various units with for the company as a whole. may be incurred by the insurance company being covered.
the figures of premium, claims paid and 4. Examine whether commission on reinsurance
Proportional  The reinsurer will receive a prorated share of the
outstanding claims for the company as a ceded is as per the terms of the agreement with
Treaty premiums of all the policies sold by the insurance
whole. the re-insurers.
5. Examine the computation of profit commission company being covered. Consequently, when
4. Examine whether premium received and claims are made, the reinsurer will also bear a
for automatic treaty arrangements in the light
commission paid on reinsurance accepted
of the periodic accounts rendered and in portion of the losses. The proportion of the
is as per the terms of the agreement with
relation to outstanding loss pertaining to the premiums and losses that will be shared by the
the Principal Insurer.
treaty. reinsurer will be based on an agreed percentage.
5. Examine whether claims paid have been 6. Examine whether loss recoveries have been  In a proportional coverage, the reinsurance
accounted on a regular basis. claimed and accounted on a regular basis. company will also reimburse the insurance
6. Examine whether remittances from foreign 7. Examine whether outstanding losses company for all processing, business acquisition
Principal Insurer are as per foreign recoverable have been confirmed by re-
and writing costs.
exchange regulations. insurers.
Non  The reinsurer will only get involved if the
7. Examine whether confirmations have been 8. Examine whether remittances to foreign re-
insurers are as per foreign exchange Proportional insurance company’s losses exceed a specified
obtained regarding balances with Principal
regulations. Treaty amount, which is referred to as priority or
Insurer.
9. Examine whether confirmations have been retention limit. Hence, the reinsurer does not
8. Review individual accounts of Principal have a proportional share in the premiums and
obtained regarding balances with re-insurers.
Insurers. 10. Review individual accounts of re-insurers to losses of the insurance provider.
evaluate whether any provision/write off or  The priority or retention limit may be based on a
write back is required.
Compiled by: CA. Pankaj Garg single type of risk or an entire business category.

Audit of NBFC – Basics 1
TYPES OF NBFC ASPECTS OF AUDIT PROCEDURE
(a) Asset Finance Company: Ascertain the Study the following:

 Hire Purchase Finance Company business of  MOA & AOA
 Equipment Leasing Finance Companies. NBFC  Business Policies
(b) Investment company.  Minutes of Board / Committee meetings
(c) Loan Company.
Evaluation of  To examine whether I.C. exist, effective and continued.
(d) Infrastructure Finance Company.
I.C. System  Review the effectiveness of system of recovery and periodical review of advances.
(e) Core Investment Company.
(f) Infrastructure debt Fund-NBFC. Regn. with RBI Obtain a copy of certificate of registration granted by the RBI
(g) NBFC-Micro Finance Institution. Public deposit 1. Credit Rating: Obtain a copy of credit rating assigned to NBFC.
INFRASTRUCTURE FINANCE COMPANIES Directions 2. Interest and Brokerage payments: to ensure that it is not paid in excess.
Non deposit taking NBFC that fulfills criteria mentioned below: 3. Written application: ensure that deposits has accepted with written application.
(i) Min. 75% of total assets deployed in infrastructure loans; 4. Deposit register: Examine that correct particulars entered in the register.
(ii) Net owned funds of Rs. 300 crore or above; 5. Repayment of deposits: Examine - regular repayment of deposits on due date.
(iii) Min. credit rating 'A' or equivalent of CRISIL, FITCH, CARE, 6. Custody of investments: Obtain certificate that investments are kept in safe custody.
ICRA or equivalent rating; 7. Submission of accounts: Audited accounts, F.S. & Auditor’s report submitted on time.
(iv) Capital to Risk Asset Ratio (CRAR) of 15%.
8. Filing of annual return: Annual Return is filed in specified time.
CORE INVESTMENT COMPANIES
9. Board Resolution in case of non-acceptance of deposits.
NBFC carrying on the business of acquisition of shares and
Prudential 1. Verification of compliance of prudential norms w.r.t.
securities which satisfies the following conditions:
(a) Min. 90% of total assets is in form of investment in equity Norms  Income recognition
shares, preference shares, debt or loans in group  Income from investments Compiled by:
companies;  Asset classification
(b) Investments in equity shares in group companies  Capital Adequacy norms CA. Pankaj Garg
constitutes not less than 60% of its total assets;  Granting loan against own shares
(c) No trading in shares, debt or loans in group companies
 Norms for concentration of credit
except through block sale for disinvestment;
2. Policy for granting Demand loans: has been framed by BOD.
(d) It does not carry on any other financial activity except
3. Classification of advances: has been made in accordance with the directions.
investment in bank deposits, money market instruments,
4. Income from NPA: Ensure that income from NPA has not been recognized.
govt securities, loans & investments in debt issuances of
group companies. 5. Recovery from NPA: Check the recovery made in the NPAs account.

Audit of NBFC - Check List 2
Equipment Leasing Finance Co. Hire Purchase Company Loan Company Investment Company
(i) Credit appraisal System: Ascertain (i) Credit Appraisal System: Ascertain (i) Sanctioning: Examine whether (i) Physical Verification: of all the
whether the NBFC has an adequate existence of an adequate appraisal loan or advance has been shares and securities held by a NBFC.
system for hire-purchase finance. properly sanctioned. (ii) Compliance with Prudential Norms:
appraisal system for extending
(ii) Verifications of Payments: Verify (ii) Security: Verify the security NBFC Prudential Norms are:
equipment leasing finance. obtained and the agreements  Lending: < 15% of its owned funds
that payments for assets are made
(ii) Physical verification: Verify existence entered into, if any. to any single borrower and < 25%
directly to vendor and assets are
of adequate system to ensure (iii) Balance Confirmations: Obtain to any single group of borrower.
property charged in name of NBFC.
balance confirmations from the  Investment: < 15% of owned funds
installation of assets and their periodic (iii) Physical Verification: Ascertain the
concerned parties. in a single entity and < 25% of
physical verification. adequacy of system in place to (iv) Maintenance of Records in case owned funds in a single group of
(iii) Maintenance of assets: Ascertain ensure installation of the asset and of bills discounting: Verify that entities.
their periodic physical verification. proper records have been  Lending and Investment: < 25%
whether the NBFC has an adequate
(iv) Verification of Endorsement: If the maintained. of owned funds in a single entity &
system for monitoring whether the
finance is against vehicles, the (v) Ceiling Limits: Ensure that NBFC < 40% of owned funds in a single
assets have been adequately insured registration certificate should contain has not lent in excess of the group.
against and regular maintenance of the an endorsement in favor of the NBFC. specified limits. (iii) Income from Investments: NBFC
prudential norm requires dividend on
leased assets is being carried out by (v) Regularity of HP Installments: (vi) Loans against own shares:
Ensure NBFC has not advanced shares of companies & units of mutual
the lessee. Check whether installments are
any loans against the security of funds to be recognised on cash basis.
(iv) Verification of Lease Agreement: received regularly. In case of any
its own shares. (iv) Classification of investments: into
overdue, examine whether adequate current or long term investments.
Verify the lease agreement entered (vii) Monitoring and follow up:
provision has been made. (v) Valuation of Investments: in
into with the lessee to ascertain the Verify existence an adequate
(vi) Insurance of Asset: The auditor system of appraisal and follow up accordance with NBFC Prudential
terms & conditions. should verify that hire purchase Norms. Ensure compliance of AS 13
of loans and advances.
(v) Compliance of AS–19: Verify whether assets are adequately insured. (viii) Compliance of prudential (to the extent they are not
the AS 19 issued by the ICAI in respect (vii) Valuation aspects: Ensure that norms: Ensure classification of inconsistent with the directions).
goods sold on hire purchase & goods loans and advances into Standard, (vi) Investment in group companies:
of “Leases” has been complied with.
Sub-Standard, doubtful and loss Obtain a list of subsidiary/group
repossessed valued properly.
companies from the management and
(viii) Recognition of finance charges: assets and the provision for bad
Compiled by: verify.
Examine the method of accounting and doubtful debts are being
(vii) Obtain a confirmation from third
CA. Pankaj Garg followed for appropriation of finance made as per NBFC Prudential
parties where the investments are
Norms Directions.
charges over the period of contract. kept deposited with them.

Audit of NBFC – NBFC Auditor’s Report (Reserve Bank) Directions, 2008 3
1. Whether the companies engaged in business of non-banking financial institution has obtained a Certificate of Registration (CoR) from the Bank (RBI).
All NBFC
2. Whether company is entitled to continue to hold CoR in terms of its asset/income pattern.
1. Whether public deposits accepted by the company are within the limits as per NBFC Acceptance of Public Deposits (Reserve Bank) Directions, 1998;
2. Whether the public deposits held in excess of permissible amount are regularised.
3. Whether an Asset Finance Company having Capital to Risk Assets Ratio (CRAR) less than 15%.
4. Whether the NBFC is accepting "public deposit” without credit rating from approved agency;
5. In respect of Asset Finance Company, whether the credit rating, for each of the fixed deposits schemes that has been assigned by Credit Rating Agencies (a) is in
force; and (b) whether the aggregate amount of deposits outstanding as at any point during the year has exceeded the limit specified by Credit Rating Agency;
6. In case of NBFCs having Net Owned Funds of Rs. 25 lakh and above but less than Rs. 200 lakhs, whether the public deposit held by the companies is in excess of
the quantum of such deposit permissible.
NBFC accepting 7. Whether the company has defaulted in paying to its depositors the interest and /or principal amount of the deposits after such interest and/or principal
Public Deposits became due;
8. Whether the company has complied with the prudential norms on income recognition, asset classification, provisioning for bad and doubtful debts, and
Para 3
concentration of credit/investments.
9. Whether the capital adequacy ratio as disclosed in the return submitted to the Bank has been correctly determined.
10. Whether the company has complied with the liquid assets requirement as prescribed.
11. Whether the company has furnished to the Bank within the stipulated period the return on deposits.
12. Whether the company has furnished to the Bank within the stipulated period the half-yearly return on prudential norms.
13. Whether, in the case of opening of new branches or offices to collect deposits or in the case of closure of existing branches/offices or in the case of appointment
of agent, the company has complied with the requirements.
1. Whether the BOD has passed a resolution for non- acceptance of any public deposits.
2. Whether the company has accepted any public deposits during the relevant period/year;
NBFC not accepting 3. Whether the company has complied with the prudential norms relating to income recognition, asset classification and provisioning for bad and doubtful debts.
public deposits 4. In respect of Systemically Important Non-deposit taking NBFCs:
(a) whether the capital adequacy ratio as disclosed in the return submitted to the Bank, has been correctly arrived at; and
(b) whether the company has furnished to the Bank the annual statement of capital funds, risk asset ratio within the stipulated period.
 Where, in the auditor’s report, the statement regarding any of the items referred to in paragraph 3 above is unfavourable or qualified, the auditor’s report shall
Reasons to be stated
also state the reasons for such unfavourable or qualified statement, as the case may be.
Para 4 for unfavorable or
qualified statements
 Where the auditor is unable to express any opinion on any of the items referred to in paragraph 3 above, his report shall indicate such fact together with
reasons therefore.
Where, in the case of a NBFC, the statement regarding any of the items referred to in Para 3, is unfavourable or qualified, or in the opinion of the auditor the
company has not complied with:
(a) the provisions of Chapter III B of Reserve Bank of India Act, 1934; or Compiled by: CA. Pankaj Garg
(b) the NBFC Acceptance of Public Deposits (Reserve Bank) Directions, 1998; or
Para 5 Exception Report
(c) Non-Banking Financial (Deposit Accepting or Holding) Companies Prudential Norms (RBI) Directions, 2007; or
(d) Non-Banking Financial (Non-Deposit Accepting or Holding) Companies Prudential Norms (RBI) Directions, 2007;
it shall be the obligation of auditor to make a report containing details of such unfavourable/qualified statements and non-compliance in respect of the company to
the concerned Regional Office of the Department of Non-Banking Supervision of the Bank under whose jurisdiction the registered office of the company is located.

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Audit Charts Full

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Audit Charts (CA Final)

Dharmveer Singh Shekhawat

Aspects to be considered by Auditor while performing Audit

Compiled by: CA. Pankaj Garg Page 1

Agreeing the terms of audit Engagement

At the Beginning of Audit During the Course of Audit

Compiled by: CA. Pankaj Garg Page 2

Leadership Ethical Independence Acceptance / Continuance Assignment of Engagement Performance Monitoring

Compiled by: CA. Pankaj Garg Page 3

Compiled by: CA. Pankaj Garg Page 4

Fraud Risk Factors / Management Duties Auditor’s Responsibilities

Compiled by: CA. Pankaj Garg Page 5

Basic Responsibilities Specific Auditor Reporting responsibilities Indicators considered by

Compiled by: CA. Pankaj Garg Page 6

Meaning of Auditor’s Responsibilities Communication Process Factors affecting Mode of

1. Significant delay in providing info  Expectations of TCWG,

Compiled by: CA. Pankaj Garg Page 7

Meaning of Auditor’s Responsibilities

Determine whether individually or To TCWG To Mngt. (a) Description of deficiencies

Compiled by: CA. Pankaj Garg Page 8

Division of work Co-ordination Responsibilities of Joint Auditors Reporting

By Mutual discussion If one auditor comes  Generally – a Single Report

Compiled by: CA. Pankaj Garg

Compiled by: CA. Pankaj Garg Page 9

Importance of Planning Preliminary Engagement Activities Planning Activities

Compiled by: CA. Pankaj Garg Page 1

Compiled by: CA. Pankaj Garg Page 2

Concept of Materiality Performance Materiality Auditor’s Duties

the economic decision of users.

Compiled by: CA. Pankaj Garg Page 3

Tests of Controls Substantive Procedures

Evaluate the audit evidences

Compiled by: CA. Pankaj Garg Page 4

Auditor’s Objective Obtaining understanding of services Auditor’s considerations

Compiled by: CA. Pankaj Garg Page 5

Meaning and Causes of Auditor’s Procedures if Misstatements identified

amounts, classification, presentation

disclosure that is required for the item

Compiled by: CA. Pankaj Garg Page 6

Compiled by: CA. Pankaj Garg Page 1

Inventory – Litigation & Claims – Completeness

If management refuses to permit auditor to

Compiled by: CA. Pankaj Garg Page 2

Compiled by: CA. Pankaj Garg Page 3

Audit Procedures Audit Conclusion & Reporting

Opening Balance Consistency of Modification in Opening Balance Consistency of Modification in

misstatement by disclosed in properly

 Determining correct b/f of prior current year F. S. accounted or

period closing balance. disclosed

Compiled by: CA. Pankaj Garg Page 4

Meaning and Nature of Analytical Procedures Auditor’s Procedures

Compiled by: CA. Pankaj Garg Page 5

Meaning & Types of Audit Sampling Sampling risk Auditor’s Duties

Compiled by: CA. Pankaj Garg Page 6

Meaning & Nature of Auditor’s Duties

 Accounting estimate: Risk Assessment Procedures & Responses to Assessed Risks

Compiled by: CA. Pankaj Garg Page 7

Meaning of Related Party Auditor’s Duties

EITHER Risk Assessment procedures Responses to Assessed Risks

b. To conclude whether F.S. in so far Possible Sources for identification of RP Information:

 Evaluate whether Identified RP

6 Register of Investments 12 FRF.

been appropriately accounted for & conducted on arm Length price.

Compiled by: CA. Pankaj Garg Page 8