Preface to this edition:

‘Fun is just another word for Learning’- Raphael Koster (Creative Director Star Wars Galaxies)

There are so many topics, What to study & What to leave?

What if I’m unable to cover the syllabus in last 1.5 days?
Everyone says learning Key Words is important, but how to identify them?

As a CA Student I was always bogged down by all such dilemmas, then I thought how magical it’d be if someone
could make the notes for me which would make the revision a cakewalk in last 1.5 days.

But as Gandhi Ji says, “Be the change you want to see”, so I decided that I myself should sit down with the
Material & finally the journey of these notes began. It was fun in bringing down a chapter from 60 pages to 6
pages, but trust me it’s all the hard work I did during my CA Final Preparation which paved way for this Smart
Work.

I never thought that such bulky material could be summarised in such concise manner but as they say,
“Where there’s a Will, there’s a Way”.

It’s my gratitude to Almighty for showering their blessings which helped me clear CA Exams with All India
Rank 8 & secure 71 Marks in Audit.

Having secured an Exemption at both levels in this paper, I knew that the game is all about Key Words, so why
not share the Cheat Code with everyone!

I’m sure that this book coupled with the Right study strategy can easily help you get an Exemption in this paper
& turn your Fear into Love for Audit.

This book is dedicated to every student who’s working hard day night with full Willpower & Josh to become a
Chartered Accountant.

This is a colour-coded book for easy understanding

• Black- Headings
• Blue- Main Concept
• Red- Important Points
• Green- Amendments

Thankful to my parents, CA Gobind Ram Keswani & Mrs. Rekha Keswani & my sister, Dakksha Keswani for their
continuous support.

Thanks to makemydelivery.com for publishing this book. I would also like to thank Bhanwar Borana Sir for
believing in my skill & will to make ‘Audit a Fun Learning Experience for Students’.

Wishing you all the best for your career ahead.

Happy Learning!

Regards,
CA Shubham Keswani
AIR 8 CA Final & AIR 29 CA IPCC
B.Com(H), Shri Ram College of Commerce

For any concerns, feel free to reach out to me at [email protected].

 Topic wise weightage in Previous 4 Attempts
Topic Name July’21 Jan’21 Nov’20 Nov’19

Standards on Auditing 25 24 34 18

Audit planning 5

Risk Assessment & Internal Control 5 5 5

Automated Environment 5 4 4

Company Audit + CARO + Schedule III 10 9 10

Audit Committee & Corporate Governance 5 5 5

Consolidated Financial Statements 5 5

Bank Audit 5 5 5 5

NBFC 5 5

Insurance Audit 4 4

PSU Audit 5 5

Liabilities of Auditor

Internal, Management & Operational Audit 5 5

DD, Investigation & Forensic Audit 9 5 4 4

Peer & Quality Review 5

Audit under Fiscal Laws

Direct Tax Audit 4 4 4

GST Audit (Excluded) 4 4

Professional Ethics 12 17 12 14

Total (Inclusive of Optional Ques.) 88 88 88 84

 Last Day Revision Planner
Hooray! You are already half way through in Group 1, now only 2 papers left J

Just take some rest, freshen up, drink water & eat some fresh fruits/snacks to get the energy for kickstart
your preparation for Audit.

Start sharp at 7 with Professional Ethics complete it by 9:30 have your Dinner & resume at 10 again.

Now you just need to complete revision of 3 topics Peer/Quality Review, PSU Audit & Ch-2 Audit Planning.

Sleep around 12 & wake up by 6 am. Freshen up, stretch your body, drink lots of water, have fresh fruits &
start your studies.

Now we’ll cover 3 Fun Topics:

• PSU Audit (30 Mins)
• Internal, Mgt & Operational Audit with SA 610 (1 hr)
• DD, Investigation & Forensic Audit (1.5 hrs)

Time should be around 10 am, take bath, have your Breakfast & resume at 11 sharp.

Now is the time to do financial Audits:

• Bank Audit (1.5 hrs)
• NBFC Audit (30 Mins)
• Insurance Audit (30 Mins)

Time should be around 2 pm, stretch your body, have water & enjoy your Lunch. Do go for a walk after the
Lunch and freshen up your mind.

Start afresh around 3 pm

Now we just need to cover the easiest & scoring topics of the lot:
• Company Audit + CARO (1.5 hrs)
• SA 700 Series (1.5 hrs)
• Consolidated Financial Statements (30 Mins)

Time should be around 7pm, take a break now to have some healthy snacks, chai & whatever you like. Take a 10
min walk outdoors & get back to resume at 7:30.

Now you just need to cover SAs before you sleep, I used to follow the below order, with 15-20 mins break
between each series:

• SA 500 Series (2 hrs)

• SA 600 Series (45 mins)
• SA 400 Series (30 Mins)
• SA 200 Series

Sleep around 12 & wake up next day at 6 sharp. Congo it’s the exam day i.e. Show time, follow the morning
routine I discussed & start with following topics:
• SEBI LODR
• Automated Environment
• Ch-3 with SA 315 & 330
Go through the latest MTPs & RTPs before you leave for exam hall.

On the way to exam hall just glance through the provisions of tax audit. All the Best! J
 Index
S No. Topics- Content Page No.
1 Standards on Auditing 1-88
SQC-1 1
SA 200 6
SA 210 11
SA 220 13
SA 230 14
SA 240 16
SA 250 20
SA 260 22
SA 265 24
SA 299 27
SA 300 (Covered with Ch-2) -
SA 315 29
SA 330 33
SA 320 35
SA 402 36
SA 450 38
SA 500 40
SA 501 43
SA 505 46
SA 510 49
SA 520 51
SA 530 53
SA 540 56
SA 550 61
SA 560 64
SA 570 66
SA 580 70
SA 600 72
SA 620 74
SA 700 78
SA 701 83
SA 705 84
SA 706 86
SA 710 87
SA 720 89
2 Audit Planning, Strategy & Execution 92-96
3 Risk Assessment & Internal Control 97-104
4 Audit in Automated Environment 105-109
5 Company Audit 110-126
6 CARO 2020 127-131
7 Schedule III 132-145
8 Audit Committee & Corporate Governance 146-153
S No. Topics-Content Page No.
9 Consolidated Financial Statements 154-158
10 Bank Audit 159-172
11 NBFC Audit 173-178
12 Insurance Audit 179-187
13 PSU Audit 188-193
14 Liabilities of Auditor 194-195
15 Internal Audit 196-199
16 SA 610 200-201
17 Management Audit 202-205
18 Operational Audit 206-208
19 Due Diligence 209-210
20 Investigation 211-219
21 Forensic Audit 220-224
22 Peer Review 225-229
23 Quality Review 230-234
24 Direct Tax Audit 235-245
25 Reports vs Certificates 246
26 Professional Ethics 247-283
Fundamental Principles 247
Types of Threats 248
Membership provisions 250
Branch Office 253
KYC Norms 233
First Schedule
Part I 255
Part II, III, IV 267-268
Second Schedule
Part I 268
Part II & III 272
Council General Guidelines 273
Recommendatory Self-Regulatory Measures 277
Disciplinary Proceedings 278
NOCLAR 279
List of All Clauses 281
 SQC 1 “Quality Control for Firms that perform Audits & Reviews of Historical
Financial Information, and Other Assurance & Related Services Engagements”

All firms to have system of quality control that provides reasonable assurance that:
(a) Firm & personnel comply with professional standards, regulatory & legal requirements, &
(b) Reports issued by firm or partners are appropriate in circumstances.

Definitions:-
• Engagement partner –partner or other person in the firm who is member of ICAI and is in full
time practice and responsible for engagement and its performance, and for report that is issued
on behalf of firm, and who has appropriate authority from professional, legal or regulatory body.

• Engagement quality control review –process designed to provide objective evaluation, before
report is issued, of significant judgments that engagement team made and conclusions they
reached in formulating the report.

• Engagement quality control reviewer –partner, person in firm, qualified external person, or team
of individuals, with experience and authority to objectively evaluate, before report is issued,
significant judgments the engagement team made and conclusions they reached in formulating
report. However, in case the review is done by a team of individuals, such team should be headed
by a member of ICAI.

Elements of a System of Quality Control

a) Leadership responsibilities for quality within firm
b) Ethical requirements
c) Acceptance and continuance of client relationships and specific engagements
d) Human resources
e) Engagement performance
f) Monitoring

Leadership Responsibilities for Quality within Firm

The actions of EP and appropriate msgs to the other members of engagement team, in taking
responsibility for overall quality on each audit engagement, emphasise:
(a) The importance to audit quality of:
(i) Performing work that complies with Professional stds and Regulatory and Legal requirements;
(ii) Complying with the firm’s quality control policies and procedures as applicable;
(iii) Issuing auditor’s reports that are appropriate in the circumstances; and
(iv) The engagement team’s ability to raise concerns without fear of reprisals; and
(b) The fact that quality is essential in performing audit engagements.

Independence
Policies & procedures should enable firm to:
● Communicate independence requirements to personnel & others.
● Identify & evaluate circumstances creating threat to independence.
● Take appropriate action to eliminate threats/withdrawal from engagement.

CA SHUBHAM KESWANI 1
 Policies & Procedures in case of breach of Independence requirements
The policies and procedures should include requirements for:
(a) All who are subject to independence requirements to promptly notify firm of independence
breaches;
(b) Firm to promptly communicate identified breaches to:
(i) Engagement partner who, with the firm, needs to address the breach; and
(ii) Other relevant personnel in firm and those subject to independence requirements who need to
take appropriate action; and
(c) Prompt communication to the firm, if necessary, by engagement partner and other individuals of
actions taken to resolve the matter, so that firm can determine whether it should take further action.

Notes:
● At least annually, firm should obtain written confirmation of compliance with policies and
procedures on independence from all firm personnel in terms of requirements of Code.
● The familiarity threat is particularly relevant in context of F.S. audits of listed entities. For
these audits, engagement partner should be rotated after a pre-defined period, normally not
more than 7 years.

Evaluating the Integrity of Client

With regard to integrity of a client, matters that firm considers include, for example:
• The identity and business reputation of client’s principal owners, key mgt, related parties and
TCWG.
• The nature of client’s operations, including business practices.
• Info concerning attitude of client’s principal owners, key mgt and TCWG towards such matters
as aggressive interpretation of A/C stds and internal control environment.
• Whether client is aggressively concerned with maintaining firm’s fees as low as possible.
• Indications of inappropriate limitation in scope of work.
• Indications that client might be involved in money laundering or other criminal activities.
• Reasons for proposed appointment of firm and non-reappointment of previous firm.

Information on integrity of client that the firm obtains may come from, for example:
• Communications with existing or previous providers of professional accountancy services to client
in accordance with the Code, and discussions with other third parties.
• Inquiry of other firm personnel or third parties such as bankers, legal counsel and industry
peers.
• Background searches of relevant databases.

Matters to be considered in determining if firm has capabilities, competence, time and resources to
undertake new engagement:
• Firm personnel have knowledge of relevant industries or subject matters;
• Firm personnel have experience with regulatory or reporting requirements, or ability to gain
necessary skills and knowledge effectively;
• The firm has sufficient personnel with the necessary capabilities and competence;
• Experts are available, if needed;
• Individuals meeting criteria and eligibility requirements to perform EQCR are available and
• The firm be able to complete engagement within reporting deadline.

CA SHUBHAM KESWANI 2
 Withdrawal from Engagement
Policies and procedures on withdrawal from engagement include following:
• Discussing with client’s mgt and TCWG regarding action that firm might take based on
relevant facts and circumstances.
• If firm determines that it is appropriate to withdraw, discussing with appropriate level of
client’s mgt and TCWG withdrawal and reasons for the withdrawal from engagement.
• Considering professional, regulatory or legal requirement for firm to remain in place, or for
firm to report withdrawal, together with reasons for withdrawal, to regulatory authorities.
• Documenting significant issues, consultations, conclusions and basis for conclusions.

Human Resources
Establish policies/procedures to reasonable assure that:
• Firm has sufficient personnel with capabilities, competence & commitment (CCC) to ethical
principles; &
• Engg partner to issue appropriate report.
The firm’s performance evaluation, compensation and promotion procedures give due recognition and
reward to development and maintenance of competence and commitment to ethical principles.

In particular, the firm:

• Makes personnel aware of firm’s expectations regarding performance and ethical principles;
• Provides personnel with evaluation, and counseling on, performance, progress and career
development;&
• Helps personnel understand promotion depends on performance quality and adherence to
ethical principles, and failure to comply with firm’s policies and procedures may result in
disciplinary action.

Assignment of Engagement Teams

The firm establishes procedures to assess its staff’s capabilities and competence.

Capabilities and competence considered when assigning engagement teams, and determining level of
supervision reqd, include following:
• Understanding, and practical experience with, engagements of similar nature and
complexity through appropriate training and participation.
• An understanding of professional stds and regulatory and legal requirements.
• Appropriate technical knowledge, including knowledge of relevant information technology.
• Knowledge of relevant industries in which clients operate.
• Ability to apply professional judgment.
• Understanding of firm’s quality control policies and procedures.

Engagement Performance
Review responsibilities are determined on basis that more experienced engagement team members,
including engagement partner, review work performed by less experienced team members.

Reviewers consider whether:

a) Work has been performed in accordance with professional stds and regulatory and legal
requirements;
b) Significant matters have been raised for further consideration;
c) Appropriate consultations have taken place and resulting conclusions have been documented
and implemented;
d) There is a need to revise the nature, timing and extent of work performed;

CA SHUBHAM KESWANI 3
 e) The work performed supports conclusions reached and is appropriately documented;
f) The evidence obtained sufficient and appropriate to support report; and
g) The objectives of engagement procedures have been achieved.

Supervision includes following:

● Tracking progress of engagement
● Considering capabilities and competence of individual members of engg team, whether they have
sufficient time to carry out work, understand their instructions and work is being carried out
in accordance with planned approach to engagement.
● Addressing significant issues arising during engagement, considering their significance and
appropriately modifying planned approach appropriately.
● Identifying matters for consultation or consideration by more experienced engagement team
members.

Consultation
The firm should establish policies and procedures designed to provide it with reasonable assurance
that:
a) Appropriate consultation takes place on difficult or contentious matters;
b) Sufficient resources are available to enable appropriate consultation to take place;
c) The nature and scope of such consultations are documented; and
d) Conclusions resulting from consultations are documented and implemented.

Engagement Quality Control Review (EQCR)

Review Responsibility:
EP shall take responsibility for reviews being performed in accordance with firm’s review policies and
procedures.
For audits of F.S. of listed entities, engagement partner shall:
• Determine that an engagement quality control reviewer (EQCR) has been appointed;
• Discuss significant matters arising during audit engagement, with EQCR; and
• Not date auditor’s report until the completion of EQCR i.e. EQCR should be completed before
Audit Report is issued.

An EQCR for audits of F.S. of listed entities includes considering the following:
• Engagement team’s evaluation of firm’s independence in relation to specific engagement.
• Significant risks identified during the engagement and the responses to those risks.
• Judgments made, particularly with respect to materiality and significant risks.
• Whether appropriate consultation has taken place on matters involving differences of opinion or
other difficult or contentious matters, and conclusions arising from them.
• The significance and disposition of corrected and uncorrected misstatements identified during
the engagement.
• The matters to be communicated to management and TCWG and regulatory bodies. (SA 260)
• Whether working papers selected for review reflect the work performed in relation to the
significant judgments and support the conclusions reached.
• The appropriateness of report to be issued.

The firm’s policies and procedures are designed to maintain objectivity of EQCR.
For example, engagement quality control reviewer:
a) Is not selected by engagement partner;
b) Does not participate in engagement during period of review;
c) Does not make decisions for engagement team; and

CA SHUBHAM KESWANI 4
 d) Is not subject to other considerations that would threaten reviewer’s objectivity.

Can EP consult EQCR during engagement? Yes as long as it doesn’t affect quality of engagement.
Reviewer’s objectivity should be maintained.

Engagement Documentation (ED)

Assembly of final engagement files on a timely basis. In the case of audit, such a time limit is
ordinarily not more than 60 days after date of auditor’s report.
Retention period ordinarily is no shorter than 7 years from date of the auditor’s report, or, if later,
the date of the group auditor’s report.

Ownership of Engagement Documentation (ED)

ED is property of firm. Firm may, at its discretion, make portions of, or extracts from ED available
to clients, provided such disclosure does not undermine validity of work performed, or, in case of
assurance engagements, independence of the firm or its personnel.

Complaints and Allegations

(i) Firm should establish policies and procedures designed to provide it with reasonable assurance
that it deals appropriately with: (types of complaints)
a) Complaints and allegations that work performed by firm fails to comply with professional
standards and regulatory & legal requirements; and
b) Allegations of non-compliance with the firm’s system of quality control.

(ii) Complaints and allegations may originate from within or outside the firm. They may be made by
firm personnel, clients or other 3rd parties. (within or outside?)

(iii) Firm establishes clearly defined channels for firm personnel to raise any concerns in manner that
enables them to come forward without fear of reprisals. (how we receive them?)

(iv) Firm investigates such complaints and allegations in accordance with established policies and
procedures. Investigation is supervised by partner with sufficient authority & experience within firm
but not involved in engagement, and includes involving legal counsel as necessary. Small firms and sole
practitioners may use qualified external person or another firm to carry out investigation. Complaints,
allegations and responses to them are documented. (Investigate & document)

(v) Where results of investigations indicate deficiencies in design or operation of the firm’s quality
control policies and procedures, or non-compliance with firm’s SQC by individual or individuals, firm
takes appropriate action. (Action)

CA SHUBHAM KESWANI 5
SA 200 Overall Objectives of Independent Auditor and Conduct of an Audit in
Accordance with Standards on Auditing

In conducting an audit of F.S., overall objectives of the auditor are:

(a) To obtain reasonable assurance about whether F.S. as a whole are free from material misstatement,
whether due to fraud or error, thereby enabling auditor to express an opinion on whether F.S. are
prepared, in all material respects, in accordance with applicable FRF; &
(b) To report on F.S., and communicate as required by SAs, in accordance with auditor’s findings.

In all cases when reasonable assurance cannot be obtained and qualified opinion is insufficient for
purposes of reporting to intended users of F.S., SAs require that auditor disclaim an opinion or
withdraw from engagement, where withdrawal is legally permitted.

Definitions
● Applicable financial reporting framework (FRF) – The financial reporting framework adopted by
mgt and, where appropriate, TCWG in preparation and presentation of F.S. that is acceptable in
view of nature of entity and objective of F.S., or that is required by law or regulation.

“fair presentation framework” refer to FRF that requires compliance with requirements of
framework and:
(i) Acknowledges, to achieve fair presentation of F.S., it may be necessary for mgt to provide
disclosures beyond those specifically required by the framework; or
(ii) Acknowledges explicitly that it may be necessary for mgt to depart from a requirement of
framework to achieve fair presentation of F.S. Such departures are expected to be necessary only in
extremely rare circumstances.

The term “compliance framework” is used to refer to a FRF that requires compliance with
requirements of framework, but does not contain acknowledgements in (i) or (ii) above.

● Financial statements – A structured representation of historical financial information, including

related notes, intended to communicate an entity’s economic resources or obligations at a point in
time or the changes therein for a period of time in accordance with a financial reporting
framework.

● Misstatement – A difference between the amount, classification, presentation, or

disclosure(a/c/p/d) of a reported financial statement item & the amount, classification,
presentation, or disclosure(a/c/p/d) that is required for the item to be in accordance with the
applicable FRF. Misstatements can arise from error or fraud.

● Those charged with governance – The person(s) or organisation(s) (e.g., a corporate trustee) with
responsibility for overseeing the strategic direction of the entity and obligations related to the
accountability of the entity. (Executive Members-CEO/CFO/MD)

Ethical Requirements Relating to Audit of Financial Statements

• The auditor shall comply with relevant ethical requirements, including those pertaining to
independence.
• Independence comprises both independence of mind and independence of appearance.
• Independence enhances auditor’s ability to act with integrity, be objective and maintain
attitude of professional skepticism.

CA SHUBHAM KESWANI 6
 Professional Skepticism
An attitude that includes a questioning mind (?), being alert to conditions (!) which may indicate
possible misstatement due to error or fraud, and a critical assessment of audit evidence.

Professional skepticism includes being alert to, for example:

• Audit evidence that contradicts other audit evidence obtained. (Bank Statement vs
Confirmation)
• Information that brings into question reliability of documents and responses to inquiries to be
used as audit evidence. (Got to know management is unethical)
• Conditions that may indicate possible fraud. (Internal control weak)
• Circumstances that suggest need for audit procedures in addition to those required by SAs.

Maintaining professional skepticism throughout audit is necessary if auditor wants to reduce risks of:
• Overlooking unusual circumstances.
• Over generalising when drawing conclusions from audit observations.
• Using inappropriate assumptions in determining the nature, timing, and extent(NTE) of the
audit procedures and evaluating the results thereof.

Professional judgment
• The application of relevant training, knowledge and experience,
• within the context provided by auditing, accounting and ethical standards,
• in making informed decisions about the courses of action
• that are appropriate in circumstances of audit engagement.

Professional judgment is necessary in particular regarding decisions about:

• Materiality and audit risk.
• The nature, timing, and extent(NTE) of audit procedures used to meet the requirements
of SAs and gather audit evidence.
• Evaluating whether sufficient appropriate audit evidence (SAAE) has been obtained, and
whether more needs to be done to achieve objectives of SAs and thereby, overall objectives
of auditor.
• The evaluation of management’s judgments in applying entity’s applicable FRF.
• The drawing of conclusions based on audit evidence obtained, for eg, assessing
reasonableness of estimates made by management in preparing F.S.

Sufficient & Appropriate Audit Evidence (SAAE)

To obtain reasonable assurance, auditor shall obtain SAAE to reduce audit risk to an acceptably low
level and draw reasonable conclusions on which to base auditor’s opinion
● Reasonable assurance – In context of audit of F.S, a high, but not absolute, level of assurance.
● Audit evidence – Info. used by auditor in arriving at conclusions on which auditor’s opinion is
based.
(i) Sufficiency is measure of quantity of audit evidence. Quantity is affected by auditor’s
assessment of risks of material misstatement (ROMM) and also by quality of such audit
evidence.
(ii) Appropriateness is measure of quality of audit evidence; that is, its relevance and its
reliability in providing support for conclusions on which auditor’s opinion is based.

CA SHUBHAM KESWANI 7
 Audit Risk
The risk that auditor expresses inappropriate audit opinion when F.S. are materially misstated. Audit
risk is function of the risks of material misstatement and detection risk.

Risk of material misstatement (ROMM) - The risk that F.S. are materially misstated prior to audit.
This consists of two components, described as follows at assertion level:

Inherent Risk Control Risk

The susceptibility of an assertion about a class The risk that a misstatement that could occur in
of transaction, account balance or disclosure to an assertion about a class of transaction,
a misstatement that could be material, either account balance or disclosure and that could be
individually or when aggregated with other material, either individually or when aggregated
misstatements, before consideration of any with other misstatements, will not be prevented,
related controls. or detected and corrected, on a timely basis by
entity’s internal control.

The ROMM may exist at two levels:

The overall F.S. level i.e. relate to F.S. as a whole The assertion level for classes of transactions,
potentially affecting many assertions account balances, and disclosures.

ROMM at assertion level are assessed in order to determine NTE of further audit procedures
necessary to obtain SAAE. This evidence enables auditor to express an opinion on F.S. at an acceptably
low level of audit risk.

Detection risk – The risk that procedures performed by auditor to reduce audit risk to acceptably low
level will not detect a misstatement that exists and that could be material, either individually or when
aggregated with other misstatements i.e. Risk of not detecting a material misstatement.

Scope of Audit
The auditor’s opinion on F.S. deals with whether the F.S. are prepared, in all material respects, in
accordance with the applicable FRF.
• Such an opinion is common to all audits of F.S.
• The auditor’s opinion therefore does not assure, future viability of entity nor the efficiency or
effectiveness with which mgt has conducted affairs of entity.
• In some cases, however, applicable laws and regulations may require auditors to provide opinions
on other specific matters, such as effectiveness of internal control, or consistency of a separate
management report with the F.S.
• While SAs include requirements and guidance in relation to such matters to the extent they are
relevant to forming an opinion on F.S., auditor would be required to undertake further work if
auditor had additional responsibilities to provide such opinions.

The Premise (Responsibilities of Mgt & TCWG)

(i) For preparation and presentation of financial statements (PPFS) in accordance with applicable FRF;
this includes design, implementation and maintenance(DIM) of internal control(IC) relevant to
preparation and presentation of financial statements(PPFS) that are free from material misstatement,
whether due to fraud or error; &
(ii) To provide the auditor with:
(a) All information, such as records and documentation, and other matters that are relevant to
PPFS;
(b) Any additional info that auditor may request from mgt and, where appropriate, TCWG; and

CA SHUBHAM KESWANI 8
 (c) Unrestricted access to those within entity from whom auditor determines necessary to obtain
audit evidence.

As part of their responsibility for PPFS, mgt and, TCWG are responsible for:
• The identification of applicable FRF , in context of any relevant laws or regulations.
• The PPFS (Preparation & Presentation of F.S.) in accordance with that framework.
• An adequate description of that framework in F.S.

The preparation of F.S. requires mgt to exercise judgment in making accounting estimates that are
reasonable in circumstances, as well as to select and apply appropriate accounting policies. These
judgments are made in the context of applicable FRF.

The F.S. may be prepared in accordance with a FRF designed to meet:

• The common financial information needs of a wide range of users (i.e., “general purpose F.S.”); or
• The financial information needs of specific users (i.e., “special purpose F.S.”).

Inherent Limitations of Audit

The auditor is not expected to, and can’t, reduce audit risk to zero and cannot therefore obtain
absolute assurance that F.S. are free from material misstatement due to fraud or error.
This is because there are inherent limitations of an audit, which result in most of audit evidence on
which auditor draws conclusions and bases auditor’s opinion being persuasive rather than conclusive.

(1) The nature of financial reporting:

The preparation of F.S. involves judgment by mgt in applying requirements of applicable FRF to facts
and circumstances of entity. For eg: Accounting estimates

(2) The nature of audit procedures:

• Possibility that Management & others do not provide complete info relevant to Preparation &
Presentation of Financial Statements (PPFS)
• Fraud may involve sophisticated and carefully organised schemes designed to conceal it.
• Audit is not an official investigation into alleged wrongdoings. He doesn’t have spl legal powers eg.
search.

(3) Timeliness of Reporting & Balance between Benefit and Cost:

Relevance of information, and thereby its value, tends to diminish over time, and there is a balance to
be struck between the reliability of information and its cost.
Because of inherent limitations of audit, there is unavoidable risk that some material misstatements
of F.S. may not be detected, even though audit is properly planned and performed in accordance with
SAs.

(4) In case of certain assertions or subject matters, potential effects of inherent limitations on
auditor’s ability to detect material misstatements are particularly significant. Such assertions or
subject matters include:
• Fraud, particularly fraud involving senior management or collusion.
• The existence and completeness of related party relationships and transactions.
• The occurrence of non-compliance with laws and regulations.
• Future events or conditions that may cause an entity to cease to continue as a going
concern.

CA SHUBHAM KESWANI 9
 Conduct of an Audit in accordance with SAs

• Complying with SAs Relevant to the Audit:

Ø The auditor shall comply with all SAs relevant to the audit.
Ø An SA is relevant to the audit when the SA is in effect and the circumstances
addressed by the SA exist.
Ø The auditor shall have an understanding of the entire text of an SA including
application
Ø The auditor shall not represent compliance with SAs in auditor’s report unless auditor
has complied with requirements of this SA and all other SAs relevant to the audit.

• Objectives Stated in Individual SAs:

Ø Achieve overall objective à using objectives of relevant SAs
Ø Having regard to interrelationships among SAs:
• Determine if any audit procedure in addition to that required by SAs is
necessary.
• Evaluate whether SAAE has been obtained

• Complying with Relevant Requirements

Ø The auditor shall comply with each requirement of an SA unless, in circumstances of
audit:
a. An SA is not relevant;(Eg. SA 610 not applicable if not internal audit fn) or
b. There’s conditional requirement & condition doesn’t exist.
Ø In exceptional circumstances, auditor may depart from relevant requirement in SA. In
such circumstances, auditor shall perform alternative audit procedures to achieve the
aim of that requirement. The need for auditor to depart from relevant requirement is
expected to arise only where requirement is for specific procedure to be performed and,
in specific circumstances of audit, that procedure would be ineffective in achieving aim
of requirement.

• Failure to achieve an Objective

Ø Evaluate if it prevents auditor from achieving overall objective &
Ø Requires to modify opinion or withdraw from engagement
Ø It’s a significant matter requiring documentation as per SA 230

CA SHUBHAM KESWANI 10
 SA 210: Agreeing the terms of Audit Engagement

Objective
Objective of auditor is to accept or continue audit engagement only when basis upon which it is to be performed
has been agreed, through:

(a) Establishing whether preconditions for audit are present; and

(b) Confirming that there is common understanding b/w auditor and mgt and, where appropriate, TCWG of terms
of audit engagement.
Preconditions of Audit
The auditor shall:-
(a) determine whether FRF is acceptable

(b) Obtain agreement of mgt that it acknowledges and understands its responsibility:
(i) For preparation of F.S. in accordance with applicable FRF
(ii) For such Internal Control (IC) as mgt determines necessary to enable preparation of F/S free
from material misstatement, whether due to fraud or error; and
(iii) To provide the auditor with: (AAU)
a. Access to all information of which management is aware that is relevant to preparation of F/S
such as records, documentation and other matters;
b. Additional information that auditor may request from mgt for purpose of audit; and
c. Unrestricted access to persons within entity from whom auditor determines necessary to obtain
audit evidence.

If preconditions not present, auditor shall discuss matter with management:

Unless required by law or regulation to do so, auditor shall not accept proposed audit engagement:
(a) If auditor has determined that FRF to be applied in preparation of F/S is unacceptable; or
(b) If agreement has not been obtained.

Limitation on Scope Prior to Audit Engagement Acceptance

If mgt or TCWG impose limitation on scope of auditor’s work in terms of a proposed audit engagement such
that auditor believes à result in auditor disclaiming an opinion on F/S , shall not accept such audit engagement,
unless required by law or regulation.

Contents of Agreement on terms of Audit engagement

Agreed terms of audit engagement shall be recorded in audit engagement letter or other written agreement
and shall include:
(a) The objective and scope of the audit of the financial statements;
(b) The responsibilities of the auditor;
(c) The responsibilities of management;
(d) Identification of applicable FRF for preparation of F.S.; and
(e) Reference to expected form and content of any reports to be issued by auditor and a statement that there
may be circumstances in which a report may differ from its expected form and content.

Recurring Audits: New engagement letter each time?

The auditor may decide not to send new audit engagement letter or other written agreement each period.

However, following factors make it appropriate to revise terms of audit engagement or to remind entity of
existing terms:

● Any indication that entity misunderstands objective and scope of audit.

CA SHUBHAM KESWANI 11
● Any revised or special terms of audit engagement.
● A recent change of senior management.
● A significant change in ownership.
● A significant change in nature or size of the entity’s business.
● A change in legal or regulatory requirements.
● A change in the FRF adopted in the preparation of F.S.
● A change in other reporting requirements.

Acceptance of a Change in Terms of Audit Engagement

The auditor shall not agree to change in terms of audit engagement where there is no reasonable justification
for doing so. If, prior to completing audit engagement, auditor is requested to change audit engagement to an
engagement that conveys lower level of assurance, determine whether there is reasonable justification for
doing so.

If terms are changed, auditor and management agree on and record new terms of engagement in engagement
letter or other suitable form of written agreement.

If auditor unable to agree to change of terms and not permitted by mgt to continue, the auditor shall:
(a) Withdraw from audit engagement where possible under law or regulation; and
(b) Determine whether there is obligation, either contractual or otherwise, to report circumstances to other
parties, such as TCWG, owners or regulators

FRF Prescribed by Law or Regulation—Other Matters Affecting Acceptance

If auditor has determined à FRF prescribed by law or regulation would be unacceptable but for the fact that
it is prescribed by law or regulation, auditor shall accept the audit engagement only if following conditions are
present:
(a) Management agrees to provide additional disclosures in F.S. and

(b) It is recognised in terms of audit engagement that:

(i) The auditor’s report on F/S will incorporate an Emphasis of Matter paragraph, drawing users’ attention to
the additional disclosures, in accordance with SA 706 &
(ii) Unless auditor is required by law or regulation to express auditor’s opinion on the F/S by using the
phrases “present fairly, in all material respects”, or “give a true and fair view” in accordance with applicable
FRF , auditor’s opinion on F.S. will not include such phrases.

If above conditions not present and auditor required by law or regulation to undertake audit engagement, he
shall:
(a) Evaluate effect of misleading nature of F.S. on auditor’s report; and
(b) Include appropriate reference to this matter in terms of audit engagement.

Factors that are relevant to auditor’s determination of acceptability of financial reporting framework to be
applied in preparation of financial statements include:
• The nature of entity (for example, whether it is a business enterprise, or a not for profit organization);
• The purpose of F.S. (for example, whether they are prepared to meet the common financial information
needs of a wide range of users or the financial information needs of specific users);
• The nature of F.S. (for example, whether the financial statements are a complete set of financial
statements or a single financial statement); and
• Whether law or regulation prescribes applicable FRF.

CA SHUBHAM KESWANI 12
 Audit of Components
When auditor of parent entity also auditor of component, factors that may influence decision whether to send
separate audit engagement letter to the component include the following:

• Who appoints component auditor;

• Whether a separate auditor’s report is to be issued on the component;
• Legal requirements in relation to audit appointments;
• Degree of ownership by parent; and
• Degree of independence of the component management from the parent entity.

SA 220 Quality Control for an Audit of F.S.

(The points covered here are in addition to SQC-1)

SCQ related to quality control measures that apply on Firm level & SA 220 is limited to Audit
engagement level.

What info is required by EP to determine, whether to accept & continue Client Engagement?
Following info assists engagement partner in determining whether conclusions reached regarding
acceptance and continuance of client relationships and audit engagements are appropriate:

• The integrity of principal owners, key management and TCWG of entity;

• Whether engagement team is competent to perform audit engagement and has necessary
capabilities, including time and resources;

• Whether firm and engagement team can comply with relevant ethical requirements; and

• Significant matters that have arisen during current or previous audit engagement, and their
implications for continuing relationship.

Differences of Opinion:
It may arise:
• Within the Engagement Team,
• With those consulted, or
• Between the EP and EQC Reviewer.

Engagement Team shall follow the firm’s policies and procedures for dealing with and resolving
differences of opinion.

CA SHUBHAM KESWANI 13
 SA 230 “Audit Documentation”

Record of
• audit procedures(AP) performed,
• relevant audit evidence obtained, and
• conclusions the auditor reached” (commonly known as working papers).

Purposes of Audit Documentation

1. Assisting engagement team to plan and perform the audit.
2. Assisting members of the engagement team responsible for supervision to direct and supervise
the audit, and to discharge their review responsibilities.
3. Enabling engagement team to be accountable for its work.
4. Retaining record of matters of continuing significance to future audits.
5. Enabling conduct of quality control reviews and inspections.
6. Enabling conduct of external inspections.

Form, Content and Extent of Audit Documentation

The auditor shall prepare audit documentation that is sufficient to enable an experienced auditor to
understand:
(a) The nature, timing, and extent of audit procedures;
(b) The results of audit procedures performed, and audit evidence obtained; and
(c) Significant matters arising during audit and conclusions reached thereon, significant professional
judgments made in reaching those conclusions.

In documenting nature, timing and extent of audit procedures performed, auditor shall record:
(i) The identifying characteristics of the specific items or matters tested
(ii) Who performed audit work and date such work was completed; and
(iii) Who reviewed audit work performed and date and extent of such review

Factors effecting Form, content and extent of audit documentation

1. The size and complexity of entity.

2. The nature of the audit procedures to be performed.

3. The identified risks of material misstatement.

4. The significance of the audit evidence obtained.

5. The nature and extent of exceptions identified.

6. The need to document a conclusion or the basis for a conclusion not readily determinable from
documentation of work performed or audit evidence obtained.

7. The audit methodology and tools used.

8. Timely preparation of Audit Documentation.

Departure from a Relevant Requirement

If, in exceptional circumstances, auditor judges it necessary to depart from relevant requirement in
SA, auditor shall document
• reasons for departure and
• alternative procedures performed.

CA SHUBHAM KESWANI 14
 Documentation of Matters Arising after Date of the Auditor’s Report
If, in exceptional circumstances, auditor performs new or additional audit procedures or draws new
conclusions after date of auditor’s report, auditor shall document:
1. The circumstances encountered;
2. The new or additional audit procedures performed, audit evidence obtained, and conclusions
reached, and their effect on the auditor’s report; and
3. When and by whom the changes to audit documentation were made and reviewed.

Assembly of Final Audit File

After assembly of final audit file has been completed, auditor shall not delete or discard audit
documentation of any nature before end of its retention period i.e. 7 Years.

The auditor shall assemble audit documentation in audit file and complete administrative process of
assembling file on timely basis after date of auditor’s report i.e. after 60 days.

In circumstances where auditor finds necessary to modify existing audit documentation or add new
audit documentation after assembly of final audit file completed, auditor shall, regardless of nature
of modifications or additions, document:
(a) The specific reasons for making them; and
(b) When and by whom they were made and reviewed.

CA SHUBHAM KESWANI 15
 SA 240 (Revised): Auditor’s Responsibilities relating to
Fraud in an Audit of Financial Statements

Responsibility for Prevention and Detection of Fraud

• The primary responsibility à TCWG and management.
• Management, with TCWG, place strong emphasis on fraud prevention, and fraud
deterrence
• This involves commitment to creating culture of honesty and ethical behaviour.

Objectives of Auditor
a) To identify and assess the ROMM in F.S. due to fraud;
b) To obtain SAAE about assessed ROMM due to fraud, through designing and implementing
appropriate responses; and
c) To respond appropriately to identified or suspected fraud.

Techniques: Fraudulent Financial Reporting (FFR), Management Override of Controls &

Misappropriation of Assets

Fraudulent financial reporting may be accomplished by following:

i. Manipulation, falsification (including forgery), or alteration of a/c records or supporting
documentation from which F.S. are prepared.
ii. Misrepresentation in or intentional omission from, F.S. of events, transactions or other significant
info.
iii. Intentional misapplication of a/c principles relating to amts, classification, manner of
presentation, or disclosure.

It often involves management override of controls, misappropriation of assets etc that otherwise
may appear to be operating effectively.

Fraud can be committed by management overriding controls using such techniques as:
(i) Recording fictitious journal entries, close to end of accounting period, to manipulate
operating results or achieve other objectives.
(ii) Inappropriately adjusting assumptions and changing judgments used to estimate account
balances.
(iii) Omitting, advancing or delaying recognition in F.S. of events and transactions that have
occurred during reporting period.
(iv) Concealing, or not disclosing, facts that could affect amounts recorded in F.S.
(v) Engaging in complex transactions structured to misrepresent financial position or financial
performance of entity.
(vi) Altering records and terms related to significant and unusual transactions.
(vii) Embezzling receipts (misappropriating collections from debtors)
(viii) Stealing physical assets or intellectual property
(ix) Causing entity to pay for goods and services not received (for eg, payments to fictitious
vendors, payments to fictitious employees).
(x) Using entity’s assets for personal use (for example, using the entity’s assets as collateral
for a personal loan or a loan to a related party).

CA SHUBHAM KESWANI 16
 Risk Factors Relating to Misstatements Arising from Misappropriation of Assets:

1. Incentives/Pressures: Personal financial obligations may create pressure on mgt or employees with
access to cash or other assets susceptible to theft to misappropriate those assets.
Adverse relationships between entity and employees with access to cash or other assets susceptible
to theft may motivate employees to misappropriate those assets.

For eg, adverse relationships may be created by following:

Ø Known or anticipated future employee layoffs.
Ø Recent or anticipated changes to employee compensation or benefit plans.
Ø Promotions, compensation or other rewards inconsistent with expectations.

2. Opportunities: Certain circumstances increase susceptibility of assets to misappropriation.

For example, opportunities to misappropriate assets increase in case of following:

Ø Inventory items that are small in size, of high value, or in high demand.
Ø Fixed assets which are small in size, marketable, or lacking observable identification of
ownership.
Ø Inadequate internal control over assets may increase susceptibility of misappropriation of
assets.
Ø Inadequate segregation of duties or independent checks.

3. Attitudes/Rationalizations
Ø Disregard for need for monitoring or reducing risks related to misappropriations of assets.
Ø Disregard for internal control over misappropriation of assets by overriding existing controls
or failing to take remedial action on known deficiencies.
Ø Behavior indicating displeasure or dissatisfaction with entity or its treatment of employee.
Ø Changes in behavior or lifestyle that may indicate assets have been misappropriated.

Responsibilities of the Auditor

Auditor is responsible for obtaining reasonable assurance that F.S. taken as a whole are free from
material misstatement, whether caused by fraud or error.
• Owing to inherent limitations of audit as per SA 200à unavoidable risk some material
misstatements of F.S may not be detected, even though audit is planned and performed as per
SAs.
• Risk of not detecting material misstatement resulting from fraud > error. Because fraud may
involve sophisticated and carefully organized schemes designed to conceal it, such as forgery,
deliberate failure to record transactions, or intentional misrepresentations being made to
auditor.
• The risk of auditor not detecting material misstatement resulting from management fraud >
employee fraud as mgt is in position to directly or indirectly manipulate a/c records or present
fraudulent financial information.

Auditor’s duties for prevention and detection of fraud

• Auditor is responsible for maintaining attitude of professional scepticism throughout audit.
• Auditor should recognize possibility that a material misstatement due to fraud could exist,
notwithstanding his past experience of honesty and integrity of entity’s mgt and TCWG
• Unless doubtful situations present, auditor may accept records and documents as genuine.
• If conditions cause auditor to believe that document may not be authentic or terms have been
modified, he shall investigate further.

CA SHUBHAM KESWANI 17
 • Where responses to inquiries of mgt or TCWG are inconsistent, he shall investigate
inconsistencies.

Considering Whether an Identified Misstatement may be Indicative of Fraud

If there is indication à consider implications of misstatement in relation to other aspects of audit,
particularly reliability of management representations (SA 580).

Communication
• If auditor identified a fraud or has indication of fraud, communicate à mgt, TCWG &,
• In some circumstances, if required by laws and regulations à regulatory and enforcement
authorities also.

Auditor Unable to Complete Engagement

If auditor concludes à not possible to continue performing audit as result of misstatement resulting
from fraud or suspected fraud, auditor should:

i. consider professional and legal responsibilities, including requirement for to report to person(s)
who made audit appointment or regulatory authorities;

ii. consider possibility of withdrawing from engagement; and

iii. If auditor withdraws:

• discuss with mgt and TCWG, withdrawal from engagement and reasons; &
• consider professional or legal requirement to report to person(s) who made audit
appointment or regulatory authorities, withdrawal and reasons for withdrawal.

Management Representation
1. Acknowledges responsibility for design, implementation and maintenance(DIM) of internal control
to prevent and detect fraud.
2. Have disclosed results of mgt’s fraud risk assessment w.r.t. F.S.
3. Have disclosed knowledge of fraud or suspected fraud affecting entity involving:
• Management;
• Employees who have significant roles in internal control; or
• Others where fraud could have a material effect on the FS.
4. Have disclosed knowledge of any allegations of fraud, or suspected fraud, affecting entity’s FS.

Documentation
• Understanding of Entity and environment as per SA 315.
• Responses to Assessed Risks.
• Communications with mgt. and TCWG.
• Reasons for non-applicability of presumption of ROMM relating to revenue recognition.

Enquiring about Management Assessment of Fraud Risk

The auditor shall make inquiries of management regarding:

(a) Management’s assessment of ROMM due to fraud;
(b) Management’s process for identifying & responding to risks of fraud in entity
(c) Management’s communication to TCWG; and
(d) Management’s communication to employees regarding its views on business practices and ethical
behaviour.
(e) For entities having internal audit function, make inquiries of internal auditor.

CA SHUBHAM KESWANI 18
Appropriateness of making inquiries of management

Ø Mgt is responsible for entity’s internal control and preparation of F.S. à appropriate for auditor
to make inquiries of management regarding management’s own assessment of risk of fraud and
controls in place to prevent and detect it.

Ø The nature, extent and frequency of mgt’s assessment are relevant to auditor’s understanding of
entity’s control environment. For example, fact management has not made assessment of risk of
fraud may be indicative of lack of importance that mgt places on internal control.

Identification and Assessment of Risks of Material Misstatement Due to Fraud

• In accordance with SA 315, auditor shall identify and assess ROMM due to fraud at F.S. level, and
at assertion level for classes of transactions, account balances and disclosures.
• Auditor based on presumption that there are risks of fraud in revenue recognition, evaluate which
types of revenue, revenue transactions or assertions give rise to such risks.
• Auditor shall obtain understanding of entity’s related controls, including control activities, relevant
to such risks.

Audit Procedures Responsive to Risks Related to Management Override of Controls

Mgt is in unique position to perpetrate fraud because of its ability to manipulate A/c records and
prepare fraudulent F.S. by overriding controls that otherwise appear to be operating effectively. Due
to unpredictable way in which such override could occur, it is a ROMM due to fraud and thus a
significant risk.

Irrespective of auditor’s assessment of risks of management override of controls, auditor shall design
and perform audit procedures to:

(a) Test appropriateness of journal entries recorded in general ledger and other adjustments in F.S.
In designing and performing audit procedures for such tests, auditor shall:
(i) Make inquiries of individuals involved in financial reporting process about inappropriate
or unusual activity relating to processing of journal entries and other adjustments;
(ii) Select journal entries and other adjustments made at end of a reporting period; and
(iii) Consider need to test journal entries and other adjustments throughout period.

(b) Review accounting estimates for biases and evaluate whether circumstances producing bias
represent ROMM due to fraud.
In performing this review, auditor shall:
(i) Evaluate whether judgments and decisions made by mgt in making accounting estimates
included in F.S, indicate possible bias on part of entity’s mgt that may represent a ROMM
due to fraud. If so, auditor shall re-evaluate a/c estimates taken as a whole; and
(ii) Perform retrospective review of mgt judgments and assumptions related to significant
a/c estimates reflected in F.S. of prior year.

(c) For significant transactions o/s normal course of business or appear to be unusual given auditor’s
understanding of entity and its environment, evaluate whether business rationale (or lack thereof) of
transactions suggests they have been entered to engage in fraudulent financial reporting or conceal
misappropriation of assets.

CA SHUBHAM KESWANI 19
 SA 250 (Revised) “Consideration of Laws and Regulations in an
Audit of Financial Statements”

Management Responsibility for compliance with laws and regulation

The following are procedures entity implement to assist in prevention and detection of non-
compliance with laws and regulations:

a) Monitoring legal requirements and ensuring that operating procedures are designed to meet
these requirements.
b) Instituting and operating appropriate systems of internal control.
c) Developing, publicising and following a code of conduct.
d) Ensuring employees are properly trained and understand code of conduct.
e) Monitoring compliance with code of conduct and acting appropriately to discipline employees
who fail to comply with it.
f) Engaging legal advisors to assist in monitoring legal requirements.
g) Maintaining register of significant laws and regulations with which entity has to comply within
its particular industry and a record of complaints

Auditor’s responsibility in relation to Compliance with Laws & Regulations (L&Rs)

This SA distinguishes auditor’s responsibilities in relation to compliance with 2 different categories
of laws and regulations as follows:

(a) Provisions of those L&R having a direct effect on determination of material amounts and
disclosures in F.S. such as tax and labour laws; and

(b) Other laws and regulations that don’t have direct effect on determination of amounts and
disclosures in F.S., but compliance with which may be fundamental to operating aspects of business.

• For 1st category referred, auditor’s responsibility is to obtain SAAE about compliance with Laws
& Regulations.
• For second category, auditor’s responsibility is limited to undertake specified audit procedures
to help identify non-compliance with those L&Rs that may have material effect on F.S.

Auditor’s Consideration of Compliance with Laws and Regulations

Understanding SAAE Non-Compliance Remain Alert WR

1. The auditor shall obtain a general understanding of:

(a) legal and regulatory framework applicable to entity and industry in which entity operates; and
(b) How entity is complying with that framework.

2. The auditor shall obtain SAAE regarding compliance with those laws and regulations generally
recognized to have a direct effect on determination of material amounts and disclosures in F.S.

3.The auditor shall perform following audit procedures to identify instances of noncompliance with
other laws and regulations that may have a material effect on the F.S:
(a) Inquiring of management; and
(b) Inspecting correspondence, if any, with relevant licensing or regulatory authorities.

4. During audit, auditor shall remain alert to possibility that other audit procedures applied may bring
instances of non-compliance or suspected non-compliance with laws and regulations to auditor’s
attention.

CA SHUBHAM KESWANI 20
5. Obtain written representation that known instances of non-compliance with L&Rs have been
disclosed to auditor

Audit Procedures When Non-compliance is Identified or Suspected

If auditor becomes aware of info concerning instance of non-compliance with L&Rs, auditor shall
obtain:
(a) Understanding of nature of act & circumstances in which it has occurred; and

(b) Further information to evaluate possible effect on F.S.

• If auditor suspects there may be non-compliance, auditor shall discuss matter with mgt
and TCWG.
• If management or TCWG don’t provide sufficient info. auditor shall consider need to
obtain legal advice.
• If sufficient info about suspected non-compliance cannot be obtained, auditor shall
evaluate effect of lack of SAAE on auditor’s opinion.

Reporting of Identified or Suspected Non-Compliance

Reporting Non Compliance to TCWG:
• If, non-compliance is intentional and material, communicate matter to TCWG as soon as practicable.

• If auditor suspects mgt or TCWG involved in noncompliance, communicate matter to next higher
level of authority at entity, such as audit committee or supervisory board. Where no higher authority
exists, or if auditor believes communication may not be acted upon, obtain legal advice.

Reporting Non-Compliance in the Auditor’s Report on Financial Statements

• If auditor concludes that non-compliance has a material effect on F.S. and has not been adequately
reflected in F.S. , auditor shall, express a qualified or adverse opinion on F.S.

• If auditor is precluded by MGT or TCWG from obtaining SAAE, auditor shall express a qualified
opinion or disclaim an opinion.

• If auditor is unable to determine whether non-compliance has occurred because of limitations

imposed by circumstances rather than by mgt or TCWG, auditor shall evaluate effect on auditor’s
opinion.

Reporting Non-Compliance to Regulatory and Enforcement Authorities

If auditor has identified or suspects non-compliance with L&Rs, auditor shall determine whether he
has a responsibility to report identified or suspected non-compliance to parties outside the entity.

Indicators of Non-Compliance with laws and regulations

• Investigation by regulatory organisations, Govt deptt or payment of fines, additional taxes or
penalties.
• Payments for unspecified services or Loans to consultants, RPs, employees or govt employees.
• Sales commission or Agent’s fees that appear excessive in relation to ordinarily paid by entity
• Purchases at Prices Significantly above or below market price.
• Unusual Payments in Cash, purchases in form of cashiers’ cheques payable to bearer or transfers
to numbered bank accounts.
• Unusual payments towards legal and retainerShip fees.
• Unusual transactions with companies registered in Tax Haven.
• Adverse Media comment

CA SHUBHAM KESWANI 21
 SA 260 (Revised) “Communication with Those Charged With Governance”

Scope of SA
• SA 260 deals with auditor’s responsibility to communicate with TCWG in audit of F.S.
• Nothing in this SA preclude auditor from communicating any other matters to TCWG.

Role of communication
Effective two-way communication is important in assisting:
a) Auditor and TCWG in understanding matters related to audit in context, and in developing a
constructive working relationship.
b) Auditor in obtaining from TCWG info relevant to audit. For eg, TCWG may assist auditor in
understanding entity and its environment, in identifying appropriate sources of audit evidence,
and providing info about specific transactions or events; and
c) TCWG in fulfilling their responsibility to oversee financial reporting process, thereby
reducing ROMM of F.S
Auditor’s Objective
• To communicate clearly with TCWG responsibilities of auditor and planned scope and timing of
audit.
• To obtain from TCWG info relevant to audit.
• To provide TCWG with timely observations significant and relevant in overseeing final reporting
process.
• To promote effective two-way communication between auditor and TCWG

When All of TCWG are involved in Managing the Entity

• In some cases, all of TCWG are involved in managing entity, for eg, small business where single
owner manages entity and no one else has governance role.
• In these cases, matters already communicated need not be communicated again with those same
person(s) in their governance role.

Matters to be communicated
• The Auditor’s responsibilities in relation to F.S. Audit
(a) The auditor is responsible for forming and expressing an opinion on F.S.; and
(b) The audit of F.S. does not relieve mgt or TCWG of their responsibilities

• Planned Scope & Timing of Audit

It may include:
(a)How auditor plans to address the significant ROMM, whether due to fraud or error.
(b)How auditor plans to address areas of higher assessed ROMM.
(c)Auditor’s approach to internal control.
(d)Application of concept of materiality

• Significant Findings from the Audit : The auditor shall communicate with TCWG:
(a) The auditor’s views about significant qualitative aspects of entity’s a/c practices, including
a/c policies, a/c estimates and F.S. disclosures.
(b) Significant difficulties, if any, encountered during the audit;

CA SHUBHAM KESWANI 22
Examples of Significant difficulties:
• Significant delays by mgt to provide required info
• An unnecessarily brief time to complete audit
• Extensive unexpected effort required to obtain SAAE
• Unavailability of expected info
• Restrictions imposed on auditor by mgt
• Mgt’s unwillingness to make or extend assessment of entity’s ability to continue as going
concern when requested.

(c) Unless all of TCWG are involved in managing the entity:

• Significant matters, arising from audit that were discussed, or subject to correspondence
with mgt; &
• Written representations auditor is requesting; and

(d) Circumstances that affect form and content of auditor’s report, if any (Audit Report)

(e) Any other significant matters that in the auditor’s professional judgment, are significant
to the oversight of the financial reporting process

Auditor Independence
In case of listed entities, the auditor shall communicate with TCWG:

(a) A statement that engagement team and others in firm has complied with relevant ethical
requirements regarding independence; and
(b) All relationships and other matters between firm, network firms, and entity that bear on
independence.; and

(c) Related safeguards applied to eliminate identified threats to independence or reduce them to
acceptable level.

Factors affecting mode of communication

• Whether discussion of the matter will be included in auditor’s report, e,g, KAM.
• Whether the matter has been satisfactorily resolved.
• Whether mgt has previously communicated the matter.
• In case of an audit of special purpose F.S, whether auditor also audits entity’s general purpose
F.S.
• Legal requirements.
• Expectations of TCWG, including arrangements made for periodic meetings or communications
with auditor.

CA SHUBHAM KESWANI 23
 SA 265 “Communicating Deficiencies in Internal Control to
Those Charged With Governance & Management”

Scope of SA
• Communicate deficiencies in Internal control (IC) which significant
• Auditor is required to obtain understanding of internal control relevant to audit when
identifying and assessing ROMM.

In making those risk assessments, auditor considers internal control in order to design audit
procedures, but not for purpose of expressing an opinion on effectiveness of IC.

Auditor may identify deficiencies in IC not only during risk assessment process(RAP) but also at
other stages.

This SA specifies which identified deficiencies auditor is required to communicate to TCWG & mgt.

Auditor’s Objective
To communicate appropriately to TCWG and mgt, deficiencies in internal control that auditor has
identified during audit and in auditor’s professional judgment are of sufficient importance to merit
their respective attentions.

Requirements
• Auditor shall determine whether, on basis of audit work performed, he has identified one or
more deficiencies in IC.

• If identified one or more deficiencies in IC, determine, on basis of work performed, whether,
individually or in combination, they constitute significant deficiencies.

• The auditor shall communicate in writing significant deficiencies in IC identified during audit
to TCWG on a timely basis.

• The auditor shall also communicate to mgt at an appropriate level of responsibility on a timely
basis:
a. In writing, significant deficiencies in IC that auditor has communicated or intends to
communicate to TCWG, unless it would be inappropriate to communicate directly to mgt in
circumstances; and
b. Other deficiencies in internal control identified during audit that have not been
communicated to mgt by other parties and that, in auditor’s professional judgment, are of
sufficient importance to merit mgt’s attention.

• Written communication to TCWG

Auditor shall include in written communication of significant deficiencies in internal control:

(a) A description of deficiencies and an explanation of their potential effects; and

(b) Sufficient information to enable TCWG and mgt to understand context of communication.

In particular, auditor shall explain that:

(i) Purpose of audit was to express an opinion on F.S;

(ii) Audit included consideration of IC relevant to preparation of F.S. in order to design audit
procedures that are appropriate in circumstances, but not for purpose of expressing opinion
on effectiveness of IC; &

(iii) Matters reported are limited to deficiencies that auditor identified during audit and has
concluded are of sufficient importance to merit being reported to TCWG.

CA SHUBHAM KESWANI 24
 How to decide if Deficiency is Significant or Not?

Examples of matters that auditor may consider in determining whether a deficiency or combination
of deficiencies in internal control constitutes a significant deficiency include:

• The likelihood of deficiencies leading to MM in F.S. in future.

• The susceptibility to loss or fraud of related asset or liability.

• The F.S. amounts exposed to deficiencies.

• The volume of activity that has occurred or could occur in account balance or class of
transactions exposed to deficiency or deficiencies.

• The importance of controls to financial reporting process; for example:

Ø General monitoring controls (such as oversight of management).
Ø Controls over the prevention and detection of fraud.
Ø Controls over the selection and application of significant accounting policies.
Ø Controls over significant transactions with related parties.
Ø Controls over significant transactions o/s entity’s normal course of business.
Ø Controls over the period-end financial reporting process (such as controls over non-
recurring journal entries).

• The interaction of deficiency with other deficiencies in internal control.

How to determine if there are significant deficiencies in Internal Control?

Indicators of significant deficiencies in internal control include, for eg:

Ø Evidence of ineffective aspects of control environment, such as:

a) Identification of mgt fraud, whether or not material, not prevented by entity’s IC.
b) Management’s failure to implement appropriate remedial action on significant deficiencies
previously communicated.
c) Absence of a risk assessment process (RAP) within entity where such process would
ordinarily be expected to have been established.

Ø Evidence of ineffective entity risk assessment process (RAP), such as management’s failure to
identify a ROMM that auditor would expect entity’s risk assessment process to have
identified.

Ø Evidence of ineffective response to identified significant risks (e.g., absence of controls over
such a risk).

Ø Misstatements detected by auditor’s procedures that were not prevented, or detected and
corrected(P/D/C), by entity’s IC.

Ø Disclosure of material misstatement due to error or fraud as prior period items in current
year’s P&L.

Ø Evidence of mgt’s inability to oversee the preparation of F.S.

CA SHUBHAM KESWANI 25
 How Detailed should be our Communication of Significant Deficiencies?

The level of detail at which to communicate significant deficiencies is matter of auditor’s professional
judgment in circumstances.

Factors that the auditor may consider in determining an appropriate level of detail for the
communication include, for eg:

• The nature of entity. For instance, the communication required for a public interest entity may be
different from that for a non-public interest entity.

• The size and complexity of the entity. For instance, the communication required for a complex
entity may be different from that for an entity operating a simple business.

• The nature of significant deficiencies that the auditor has identified.

• The entity’s governance composition. For instance, more detail may be needed if TCWG include
members who do not have significant experience in the entity’s industry or in the affected areas.

• Legal or regulatory requirements regarding the communication of specific types of deficiency in

internal control.

When to communicate?
• Listed Entities: Before date of approval of F.S.
• Other Entities: Before assembly of audit file (60 days from date of audit report)

Notes:
● If previously communicated significant deficiency remains, current year’s communication may
repeat description from previous communication, or simply reference previous communication.
● May communicate orally before writing.

CA SHUBHAM KESWANI 26
 SA 299 (Revised) “Joint Audit of Financial Statements”
‘Joint Audit’ and ‘Joint Auditors’
A joint audit is audit of F.S. of entity by 2 or more auditors appointed with objective of issuing audit
report. Such auditors are described as joint auditors.

Audit Planning, Risk Assessment and Allocation of Work

• The EP and other key members of team from each of joint auditors involved in planning.
• The joint auditors jointly establish overall audit strategy that sets scope, timing and direction
(STD) of audit, and guides development of audit plan.
• Prior to commencement of audit, joint auditors shall discuss and develop a joint audit plan.

In developing joint audit plan, joint auditors shall:

a. Identify division of audit areas and common audit areas amongst joint auditors that define scope
of work of each joint auditor;
b. Ascertain reporting objectives of engagement to plan timing of audit and nature of
communications reqd;
c. Communicate among all joint auditors factors significant in directing engagement team’s efforts;
d. Consider results of preliminary engagement activities and, knowledge gained on other
engagements performed earlier by respective EP(s) for relevant entity(s).
e. Ascertain NTE of resources necessary to perform engagement.

• At this stage, RoMM need to be considered and assessed by each of joint auditors and
communicated to other joint auditors, and documented, whether pertaining to overall F.S.
level or to area of allocation among other joint auditors.
• Joint auditors discuss and document NTE of audit procedures for common and specific
allotted areas of audit to be performed by each of them and communicate to TCWG.
• Joint auditors shall obtain common Engg Letter (EL) and common mgt representation letter
(WR).
• After identification and allocation of work among joint auditors, work allocation document
shall be signed by all joint auditors and communicated to TCWG.

Responsibility and Co-ordination among Joint Auditors

• In respect of audit work divided, each joint auditor shall be responsible only for work
allocated.

• All the joint auditors shall be jointly and severally responsible for:

a. audit work not divided among joint auditors and is carried out by all joint auditors;

b. decisions taken by all joint auditors under audit planning

c. in respect of common audit areas concerning the NTE of audit procedures to be performed
by each of them.

d. matters which are brought to notice of joint auditors by any one of them and on which there
is agreement among them;

e. examining that F.S. of entity comply with requirements of relevant statutes;

f. presentation and disclosure of F.S. as required by applicable FRF;

g. ensuring that A/R complies with requirements of relevant statutes, SAs and pronouncements
issued by ICAI.

CA SHUBHAM KESWANI 27
 • Where a joint auditor comes across matters relevant to areas of responsibility of others and
deserve their attention, or require disclosure or discussion with, or application of judgment by
other joint auditors, he shall communicate same to all other joint auditors in writing prior to
completion of audit.

• It shall be responsibility of each joint auditor to determine NTE of audit procedures to be

applied in relation to areas of work allocated to said joint auditor. It is individual
responsibility of each joint auditor to study and evaluate system of internal control and
assessment of risk relating to areas of work allocated to said joint auditor.

Audit Conclusion and Reporting

The joint auditors are required to issue common audit report, however, where joint auditors are in
disagreement with regard to opinion or any matters to be covered by audit report, they shall express
their opinion in a separate audit report.

A joint auditor is not bound by the views of majority of joint auditors regarding opinion or matters
to be covered in audit report and shall express opinion formed by the said joint auditor in separate
audit report in case of disagreement.

In such circumstances, audit report(s) issued by joint auditor(s) shall make a reference to separate
audit report(s) issued by other joint auditor(s).

Further, separate audit report shall also make reference to audit report issued by other joint
auditors.

Such reference shall be made under heading “Other Matter Paragraph” as per Revised SA 706,
“Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report”.

Each joint auditor is entitled to assume that:

a. Other joint auditors have carried out their part of audit work in accordance with SAs. It is not
necessary for joint auditor to review work performed by other joint auditors or perform any tests in
order to ascertain whether work has actually been performed in such a manner.

b. The other joint auditors have brought to said joint auditor’s notice any departure from applicable
FRF or significant observations noticed in course of audit.

Where F.S. of a division/branch are audited by one of joint auditors, other joint auditors are
entitled to proceed on basis that such F.S. comply with all legal and regulatory requirements and
present a true and fair view of state of affairs and of results of operations of division/branch
concerned.

Before finalizing their audit report, joint auditors shall discuss and communicate with each other
their respective conclusions that would form the content of the audit report.

Communication with TCWG

When the joint auditors expect to modify opinion, communicate with TCWG circumstances that led
modification and proposed wording of modification to ensure compliance with Revised SA 705,
“Modifications to the Opinion in the Independent Auditor’s Report”.

If JAs expect to include an EOM or OM para, communicate with TCWG to ensure compliance with
Revised SA 706, “Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent
Auditor’s Report”.

CA SHUBHAM KESWANI 28
SA 315: Identifying and Assessing the Risk of Material Misstatement (ROMM)
through understanding the Entity and its Environment

Objective of Auditor is to:

● identify and assess RMM, whether due to fraud or error,
● at F.S. and assertion levels,
● through understanding entity and its environment, including entity’s internal control,
● thereby providing basis for designing and implementing responses to assessed ROMM.

This will help auditor to reduce ROMM to an acceptably low level.

Meanings:
Assertions – Representations by mgt, embodied in F.S, used by auditor to consider different types of
potential misstatements that may occur.

Assertions about classes of transactions and events for the period under audit: (OCACC)
(i) Occurrence—transactions and events recorded have occurred and pertain to entity.
(ii) Completeness—all transactions and events that should have been recorded à recorded.
(iii) Accuracy—amounts and recorded transactions and events à recorded appropriately.
(iv) Cut-off—transactions and events recorded à correct accounting period.
(v) Classification—transactions and events recorded à proper accounts

(b) Assertions about account balances at the period end: (ERCV)

(i) Existence—assets, liabilities, and equity interests exist.
(ii) Rights and obligations—rights to assets, and liabilities are obligations of the entity.
(iii) Completeness—all assets, liabilities and equity interests that should have been recorded have
been recorded.
(iv) Valuation and allocation—assets, liabilities, and equity interests are included in F.S. at
appropriate amounts and any resulting valuation appropriately recorded.

(c) Assertions about presentation and disclosure: (OCCA)

(i) Occurrence and rights and obligations—disclosed events, transactions, and other matters have
occurred and pertain to entity.
(ii) Completeness—all disclosures that should have been included in F.S. have been included.
(iii) Classification and understandability—financial information is appropriately presented and
described, and disclosures are clearly expressed.
(iv) Accuracy and valuation—financial and other information are disclosed fairly and at appropriate
amounts.

Internal control –
The process designed, implemented and maintained (DIM) by TCWG, management and other
personnel to provide reasonable assurance about achievement of an entity’s objectives with regard to
● reliability of financial reporting (FR),
● effectiveness and efficiency of operations,
● safeguarding of assets, and
● compliance with applicable laws and regulations

CA SHUBHAM KESWANI 29
 What methods included in Auditor’s Risk assessment procedures (RAP)
The audit procedures performed to obtain understanding of entity and its environment, including
internal control, to identify and assess ROMM, whether due to fraud or error, at F.S. and assertion
levels.
The risk assessment procedures shall include following:
(a) Inquiries of mgt and others within entity who in auditor’s judgment may have info that is likely to
assist in identifying ROMM due to fraud or error.
(b) Analytical procedures.
(c) Observation and inspection.

The auditor shall obtain an understanding of following:

(a) Relevant industry, regulatory, and other external factors including applicable FRF.

(b) The nature of entity, including:

(i) its operations;
(ii) its ownership and governance structures;
(iii) types of investments that entity is making and plans to make, investments in special-
purpose entities; and
(iv) way that entity is structured and how it is financed; to enable auditor to understand classes
of transactions (COT), account balances(AB) , and disclosures (D) to be expected in F.S.

(c) The entity’s selection and application of accounting policies, including reasons for changes
thereto.

(d) The entity’s objectives and strategies, and those related business risks that may result in ROMM.

(e) The measurement and review of entity’s financial performance.

Auditor is required to obtain an understanding of Entity’s Risk Assessment Process (RAP)

a) Identifying business risks relevant to financial reporting objectives;
b) Estimating significance of risks;
c) Assessing likelihood of their occurrence; and
d) Deciding about actions to address those risks.

Auditor’s Process of Assessing the Risk of Material Misstatement:

(a) Identify risks throughout process of obtaining understanding of entity and its environment,
including controls that relate to risks, and considering classes of transactions, account balances, and
disclosures in F.S;

(b) Assess identified risks, and evaluate whether they relate more pervasively to the financial
statements as a whole and potentially affect many assertions;

(c) Relate identified risks to what can go wrong at assertion level, taking account of relevant controls
that auditor intends to test; and

(d) Consider likelihood of misstatement, including possibility of multiple misstatements, and whether
potential misstatement is of magnitude that could result in material misstatement.

CA SHUBHAM KESWANI 30
 Understanding of Entity’s Info System Relevant to Financial Reporting
The auditor shall obtain an understanding of information system, including related business
processes, relevant to financial reporting, including following areas:

(a) SCoTs: The classes of transactions in entity’s operations that are significant to financial
statements;

(b)Procedures: The procedures, within both information technology (IT) and manual systems, by
which those transactions are initiated, recorded, processed, corrected as necessary, trfd to general
ledger and reported in financial statements;

(c)Records: The related accounting records, supporting information and specific accounts in the
financial statements that are used to initiate, record, process and report transactions; this includes
correction of incorrect information and how information is trfd to the general ledger. The records
may be in either manual or electronic form;

(d) Info system: How information system captures events and conditions, other than transactions,
that are significant to F.S.;

(e) FRP: The financial reporting process used to prepare the entity’s financial statements, including
significant accounting estimates and disclosures;

(f)Unusual Transactions: Controls surrounding journal entries, including non-standard JEs used to
record non-recurring, unusual transactions or adjustments.

IT Benefits

IT benefits an entity’s internal control by enabling an entity to:

• Consistently apply predefined business rules and perform complex calculations in processing
large volumes of transactions or data;

• Enhance timeliness, availability, and accuracy of information;

• Facilitate the additional analysis of information;

• Enhance ability to monitor performance of the entity’s activities and its policies and
procedures;

• Reduce risk that controls will be circumvented; and

IT Risks
Specific Risks related to IT an entity’s internal control, including, for example:
• Reliance on systems or programs that are inaccurately processing data, processing inaccurate
data, or both.

• Unauthorised access to data that may result in destruction of data or improper changes to
data

• The possibility of IT personnel gaining access privileges beyond those necessary to perform
their assigned duties thereby breaking down segregation of duties.

• Unauthorised changes to data in master files.

• Unauthorised changes to systems or programs.

CA SHUBHAM KESWANI 31
 • Failure to make necessary changes to systems or programs.

• Inappropriate manual intervention.

• Potential loss of data or inability to access data as required.

Significant Risks
An identified and assessed RMM that, in auditor’s judgment, requires special audit consideration.

Examples of Significant Risk?

a. Whether the risk is a risk of fraud;

b. Whether the risk is related to recent significant economic, accounting, or other developments
like changes in regulatory environment, etc., and, therefore, requires specific attention;

c. The complexity of transactions;

d. Whether the risk involves significant transactions with related parties;

e. The degree of subjectivity in the measurement of financial information related to the risk,
especially those measurements involving a wide range of measurement uncertainty; and

f. Whether the risk involves significant transactions that are outside normal course of business
for the entity, or that otherwise appear to be unusual.

CA SHUBHAM KESWANI 32
 SA 330: The Auditor’s Responses to Assessed Risks

Substantive procedure –Audit procedure designed to detect material misstatements at assertion

level.
Substantive procedures comprise:
(i) Tests of details (of classes of transactions, account balances, and disclosures), and
(ii) Substantive analytical procedures.

Test of controls – Audit procedure designed to evaluate operating effectiveness of controls in

preventing, or detecting and correcting (P/D/C), material misstatements at assertion level.

Further Audit Procedures in Response to assessed ROMM at assertion level

In designing further audit procedures to be performed, the auditor shall:
(a) Consider reasons for assessment given to RMM at assertion level for each class of transactions,
account balance, and disclosure, including:
(i) The likelihood of material misstatement due to particular characteristics of relevant class of
transactions, account balance, or disclosure (i.e., the inherent risk); and
(ii) Whether risk assessment takes into account relevant controls (i.e., the control risk), thereby
requiring auditor to obtain audit evidence to determine whether controls are operating effectively
(i.e., the auditor intends to rely on operating effectiveness of controls in determining nature, timing
and extent of substantive procedures); and
(b) Obtain more persuasive audit evidence higher auditor’s assessment of risk.

Should we test controls every time we do Audit?

Factors that warrant retest of controls:

• A deficient control environment.

• Deficient monitoring of controls.
• A significant manual element to the relevant controls.
• Personnel changes that significantly affect the application of the control.
• Changing circumstances that indicate the need for changes in the control.
• Deficient general IT-controls.

What will auditor consider while determining whether evidence of previous audits can be used for
Test of Controls?

a. The effectiveness of other elements of internal control, including the control environment, the
entity’s monitoring of controls, and the entity’s risk assessment process;
b. The risks arising from characteristics of control, including whether it is manual or automated;
c. The effectiveness of general IT-controls;
d. The effectiveness of control and its application by entity, including nature and extent of
deviations in application of control noted in previous audits, and whether there have been
personnel changes that significantly affect application of control;
e. Whether lack of a change in a particular control poses a risk due to changing circumstances; and
f. The ROMM and extent of reliance on the control.

CA SHUBHAM KESWANI 33
If auditor plans to use audit evidence from previous audit, establish continuing relevance by obtaining
audit evidence about whether significant changes in controls have occurred subsequent to previous
audit.

Obtain this evidence by performing inquiry combined with observation or inspection, confirm
understanding of those specific controls, and:

(a) If there have been changes that affect continuing relevance of audit evidence from previous
audit, shall test controls in current audit.

(b) If there have not been such changes, auditor shall test controls at least once in every third audit.
Controls over Significant Risks to be tested in current period.

How to know, how much testing is to be done?

Matters auditor may consider in determining extent of tests of controls include following:
• The frequency of performance of control by entity during period.
• The length of time during the audit period that the auditor is relying on the operating
effectiveness of the control.
• The expected rate of deviation from a control.
• The relevance and reliability of the audit evidence to be obtained regarding the operating
effectiveness of the control at the assertion level.
• The extent to which audit evidence is obtained from tests of other controls related to the
assertion.
Using audit evidence obtained during an interim period
When auditor obtains audit evidence about operating effectiveness of controls during interim period,
auditor shall:
(a) Obtain audit evidence about significant changes to those controls subsequent to interim period;
and
(b) Determine the additional audit evidence to be obtained for the remaining period.

Relevant factors in determining what additional audit evidence to obtain about controls that were
operating during period remaining after Interim period, include:
• The significance of assessed ROMM at assertion level.
• The specific controls that were tested during interim period, and significant changes to them.
• The degree to which audit evidence about operating effectiveness of controls was obtained.
• The length of remaining period.
• The extent to which auditor intends to reduce further substantive procedures based on reliance
of controls.
• The control environment.

CA SHUBHAM KESWANI 34
 SA 320: Materiality in Planning & Performing an Audit

Performance Materiality (PM) means

● amount or amounts set by auditor
● at less than materiality for F.S. as whole
● to reduce to appropriately low level probability that
● aggregate of uncorrected and undetected misstatements
● exceeds materiality for F.S. as a whole.
If applicable, PM also refers to amt or amounts set by auditor at less than materiality level or levels
for particular classes of transactions, account balances or disclosures.

Determining Materiality & Performance Materiality when planning Audit

When establishing overall audit strategy, auditor shall determine materiality for F.S. as whole.

If, there is one or more particular classes of transactions, account balances or disclosures for which
misstatements of lesser amounts than materiality for FS as a whole could reasonably be expected to
influence economic decisions of users taken on the basis of F.S., auditor shall also determine
materiality level or levels to be applied to those particular classes of transactions, account balances
or disclosures.

The auditor shall determine performance materiality for purposes of assessing ROMM and
determining nature, timing and extent of further audit procedures.

Revision of Materiality
The auditor shall revise materiality for F.S. as a whole (& if applicable, materiality level for
particular classes of transactions, account balances or disclosures) in event of becoming aware of
info during audit that would have caused auditor to have determined different amount initially.

If auditor concludes lower materiality for F.S. as a whole (and, if applicable, materiality level or
levels for particular classes of transactions, account balances or disclosures) than initially
determined, auditor shall determine whether it is necessary to revise PM, and whether NTE of
further audit procedures remain appropriate.

Benchmark
Determining materiality involves exercise of professional judgment. A percentage is often applied to
a chosen benchmark as starting point in determining materiality for F.S. as a whole.

Factors that affect identification of an appropriate benchmark include following:

• The elements of F.S. (for eg, assets, liabilities, equity, revenue, expenses);
• Whether there are items on which attention of users of particular entity’s F.S. tends to be
focused (for eg, for purpose of evaluating financial performance users may tend to focus on
profit, revenue or net assets);
• The nature of entity, where entity is in its life cycle, and industry and economic environment in
which entity operates;
• The entity’s ownership structure and way it is financed (for eg, if entity is financed solely by debt
rather than equity, users may put more emphasis on assets, and claims on them, than on entity’s
earnings); &
• The relative volatility of benchmark.

CA SHUBHAM KESWANI 35
 SA 402: Audit Considerations relating to an Entity Using a
Service Organisation
Ø Deals with user auditor’s responsibility to obtain SAAE when user entity uses services of one or
more service organisations.
Ø Many entities outsource aspects of business to organisations that provide services ranging from
performing a specific task under direction of entity to replacing entity’s entire business units or
functions, such as tax compliance function.
Ø Many of services provided by such organisations are integral to entity’s business operations;
however, not all those services are relevant to the audit.
Ø Services provided by service organisation are relevant to audit of a user entity’s F.S. when those
services, and controls over them, are part of user entity’s information system, including related
business processes, relevant to financial reporting.

How to know if SO’s services are relevant to user entity’s Financial Reporting?
A service organisation’s services are part of user entity’s information system, including related
business processes, relevant to financial reporting if these services affect any of the following:
a. The classes of transactions in the user entity’s operations that are significant to the user
entity’s financial statements;
b. The procedures, within both information technology (IT) and manual systems, by which the user
entity’s transactions are initiated, recorded, processed, corrected as necessary, transferred to
the general ledger and reported in the financial statements;
c. The related accounting records, either in electronic or manual form, supporting information and
specific accounts in the user entity’s financial statements that are used to initiate, record,
process and report the user entity’s transactions; this includes the correction of incorrect
information and how information is transferred to the general ledger;
d. How the user entity’s information system captures events and conditions, other than
transactions, that are significant to the financial statements;
e. The financial reporting process used to prepare the user entity’s financial statements, including
significant accounting estimates and disclosures; and
f. Controls surrounding journal entries, including non-standard journal entries used to record
nonrecurring, unusual transactions or adjustments. [Already studied in SA 315]

Auditor’s Objective
(a) To obtain understanding of nature and significance of services provided by service organisation
and effect on user entity’s internal control relevant to audit, sufficient to identify and assess
ROMM; and

(b) To design and perform audit procedures responsive to those risks.

Types of Reports
Type 1 Report: Description & design of Internal control
Type 2 Report: Description, design & Operating effectiveness of Internal Controls

Obtaining understanding of services provided by Service Organisation

a. Nature of services provided by service organisation and significance of those services to user
entity, including effect thereof on user entity’s internal control;

CA SHUBHAM KESWANI 36
 b. Nature and materiality of transactions processed or accounts or financial reporting processes
affected by service organisation;
c. Degree of interaction between activities of service organisation and those of user entity; and
d. Nature of relationship between user entity and service organisation, including relevant
contractual terms for activities undertaken by service organisation.

Auditor’s Considerations
User auditor shall evaluate design and implementation of controls at user entity that relate to services
provided by service organisation.

User auditor shall determine whether sufficient understanding of nature and significance of services
provided by service organisation and their effect on user entity’s internal control relevant to audit has
been obtained to provide basis for identification and assessment of ROMM.

If user auditor is unable to obtain sufficient understanding from user entity, perform following
procedures:
(a) Obtaining a Type 1 or Type 2 report, if available;
(b) Contacting service organisation, through user entity, to obtain specific info;
(c) Visiting service organisation and performing procedures that will provide info about controls at
service org;
(d) Using another auditor to perform procedures that will provide necessary info about controls at
service org.

Information w.r.t controls at Sub-Service Organisation (SSO)

If service organisation uses SSO, service auditor’s report may either include or exclude SSO’s relevant
control objectives and related controls in service organisation’s description of its system and in scope
of service auditor’s engagement.

These 2 methods of reporting are known as inclusive method and carve-out method, respectively.

If Type 1 or Type 2 report excludes controls at SSO, and services are relevant to audit of user entity’s
F.S., apply this SA in respect of SSO. (i.e. Type 1/2 report or visit or another auditor or contact SSO)

Nature and extent of work to be performed by user auditor regarding services provided by SSO
depend on nature and significance of those services to user entity and relevance of those services to
audit.

Reporting by User Auditor

• The user auditor shall modify opinion in user auditor’s report in accordance with SA 705 if user
auditor is unable to obtain SAAE regarding services provided by service organisation relevant to
audit of user entity’s F.S.

• The user auditor shall not refer to work of service auditor in user auditor’s report containing
unmodified opinion unless required by law or regulation. If such reference required by law or
regulation, indicate reference does not diminish user auditor’s responsibility for audit opinion.

• If reference to work of service auditor relevant to understand modification of opinion, user

auditor’s report shall indicate that such reference does not diminish user auditor’s responsibility
for that opinion.

CA SHUBHAM KESWANI 37
 SA 450: Evaluation of Misstatements Identified during the Audit

Objective
The objective of the auditor is to evaluate:
a. Effect of identified misstatements on audit; and
b. Effect of uncorrected misstatements, if any, on F.S.

Uncorrected misstatements – Misstatements that auditor has accumulated during audit and not
corrected.

Sources of Misstatements
a. An inaccuracy in gathering or processing data from which F.S. are prepared;

b. An omission of amount or disclosure;

c. An incorrect accounting estimate arising from overlooking, or clear misinterpretation of facts; and

d. Judgments of management concerning accounting estimates that the auditor considers

unreasonable or the selection and application of accounting policies that the auditor considers
inappropriate.

Consideration of Identified Misstatements as Audit Progresses

The auditor shall determine whether overall audit strategy and audit plan need to be revised if:

a. The nature of identified misstatements and circumstances of their occurrence indicate that other
misstatements may exist that, when aggregated with accumulated ones, could be material; or

b. The aggregate of misstatements accumulated approaches materiality determined as per SA 320.

If, at auditor’s request, mgt has examined and corrected misstatements that were detected, auditor
shall perform additional audit procedures to determine whether misstatements remain.

Communication and Correction of Misstatements

• The auditor shall communicate all misstatements accumulated during audit with appropriate
level of mgt.
• Request mgt to correct those misstatements.
• If mgt refuses, obtain understanding of reasons for not making corrections and evaluate
whether F.S. as whole are free from material misstatement.

CA SHUBHAM KESWANI 38
Discuss impact of uncorrected misstatements identified during audit and auditor's response to same

Prior to evaluating effect of uncorrected misstatements, auditor shall reassess materiality determined
in accordance with SA 320, to confirm whether it remains appropriate in context of entity’s actual
financial results.

In accordance with SA 450 “Evaluation of Misstatements identified during Audit”, auditor shall
determine whether uncorrected misstatements are material, individually or in aggregate. In making
this determination, the auditor shall consider- (size & effect)

(i) The size and nature of misstatements, both in relation to particular classes of transactions, account
balances or disclosures and F.S. as whole, and particular circumstances of their occurrence; &

(ii) The effect of uncorrected misstatements related to prior periods on relevant classes of
transactions, account balances or disclosures, and F.S. as a whole.

The auditor shall communicate with TCWG uncorrected misstatements and effect on opinion in
auditor’s report, unless prohibited by law or regulation.

Auditor’s communication shall identify material uncorrected misstatements individually. Auditor shall
request that uncorrected misstatements be corrected.

As per mgt, if effect is immaterial then auditor shall request for WR from mgt and TCWG that they
believe effects are immaterial to F.S. as a whole. A summary of such items shall be included in or
attached to the written representation.

If management refuses to adjust financial info and results of extended audit procedures do not enable
auditor to conclude that aggregate of uncorrected misstatements is not material, auditor should report
accordingly.

CA SHUBHAM KESWANI 39
 SA 500: Audit Evidence

Objective
The objective of auditor is to design and perform audit procedures in a way as to enable him to
obtain sufficient appropriate audit evidence(SAAE) to be able to draw reasonable conclusions on
which to base auditor’s opinion.

Management’s expert –Individual or organisation possessing expertise in a field other than

accounting or auditing, whose work in that field is used by entity to assist entity in preparing F.S.

Information to Be Used as Audit Evidence

Auditor shall consider relevance and reliability of information to be used as audit evidence.

Auditor’s responsibility when relying on Audit evidence prepared using Mgt Expert’s work:
(a) Evaluate competence, capabilities and objectivity of that expert;

Information regarding the competence, capabilities and objectivity of a management’s expert may
come from a variety of sources, such as:

• Personal experience with previous work of expert.

• Discussions with expert.

• Discussions with others who are familiar with expert’s work.

• Knowledge of expert’s qualifications, membership of professional body or industry association,

license to practice, or other forms of external recognition.

• Published papers or books written by that expert.

• Auditor’s expert, if any, who assists auditor in obtaining SAAE wrt info produced by mgt’s
expert.

(b) Obtain understanding of work of expert; and

Aspects of mgt’s expert’s field relevant to auditor’s understanding may include:

• Whether that expert’s field has areas of specialty within it that are relevant to audit.

• Whether any professional or other standards, and regulatory or legal requirements apply.

• What assumptions and methods are used by the management’s expert, and whether they are
generally accepted within that expert’s field and appropriate for financial reporting purposes.

• The nature of internal and external data or information the auditor’s expert uses.

(c) Evaluate appropriateness of that expert’s work as audit evidence for relevant assertion.

Considerations when evaluating the appropriateness of the management’s expert’s work as audit
evidence for the relevant assertion may include:

• The relevance and reasonableness of expert’s findings or conclusions, their consistency with
other audit evidence, and whether they have been appropriately reflected in F.S;

CA SHUBHAM KESWANI 40
• If expert’s work involves use of significant assumptions and methods, relevance and
reasonableness of those assumptions and methods; and

• If expert’s work involves significant use of source data, relevance, completeness, and accuracy
of that source data.

Matters affecting NTE of Audit Procedures in case of info. produced using work of mgt expert
• The nature and complexity of matter to which mgt’s expert relates.
• The ROMM in the matter.
• The availability of alternative sources of audit evidence.
• The nature, scope and objectives of mgt’s expert’s work.
• Whether mgt’s expert is employed by entity, or is party engaged by it to provide relevant
services.
• The extent to which management can exercise control or influence over work of mgt’s
expert.
• Whether mgt’s expert is subject to technical performance standards or other
professional or industry requirements.
• The nature and extent of controls within entity over mgt’s expert’s work.
• The auditor’s knowledge and experience of mgt’s expert’s field of expertise.
• The auditor’s previous experience of work of that expert.

Audit Procedures for Obtaining Audit Evidence

a. Risk assessment procedures; and
b. Further audit procedures, which comprise:
i) Tests of controls, when required by the SAs or when the auditor has chosen to do so; and
ii) Substantive procedures, including tests of details and substantive analytical procedures

Methods of obtaining Audit Evidence

• Observation: Looking at a process or procedure being performed by others, for example, the
auditor’s observation of inventory counting by the entity’s personnel, or of the performance of
control activities.

• Inspection: Examining records or documents, whether internal or external, in paper form,

electronic form, or other media, or a physical examination of an asset.

• External Confirmation: Audit evidence obtained by the auditor as a direct written response to
the auditor from a third party (the confirming party), in paper form, or by electronic or other
medium.

• Recalculation: Checking the mathematical accuracy of documents or records. Recalculation may

be performed manually or electronically.

• Reperformance: auditor’s independent execution of procedures or controls that were originally

performed as part of the entity’s internal control.

• Analytical Procedures: evaluations of financial information made by a study of plausible

relationships among both financial and non-financial data.

CA SHUBHAM KESWANI 41
• Inquiry:
o Inquiry consists of seeking information of knowledgeable persons, both financial and non-
financial, within the entity or outside the entity.
o Inquiry is used extensively throughout the audit in addition to other audit procedures.
o Inquiries may range from formal written inquiries to informal oral inquiries.
o Evaluating responses to inquiries is an integral part of the inquiry process
o Responses to inquiries may provide the auditor with information not previously possessed or
with corroborative audit evidence. Alternatively, responses might provide information that
differs significantly from other information that the auditor has obtained, for example,
information regarding the possibility of management override of controls.
o In some cases, responses to inquiries provide a basis for the auditor to modify or perform
additional audit procedures.

Factors indicating Reliability of Audit Evidence

• Reliability of audit evidence increased when obtained from independent sources outside entity.

• Reliability of audit evidence generated internally increased when related controls are effective.

• Audit evidence obtained directly by auditor (for example, observation of application of control)
more reliable than audit evidence obtained indirectly or by inference (for example, inquiry about
application of control).

• Audit evidence in documentary form more reliable than obtained orally

• Audit evidence provided by original documents more reliable than audit evidence provided by
photocopies or facsimiles, or documents filmed, digitised or otherwise transformed into electronic
form

CA SHUBHAM KESWANI 42
 SA 501: Audit Evidence—Specific Considerations for Selected Items

The objective of auditor is to obtain SAAE regarding:

a. Existence and condition of inventory;
b. Completeness of litigation and claims involving entity; and
c. Presentation and disclosure of segment information in accordance with applicable FRF.

Inventory
When inventory is material to F.S, auditor shall obtain SAAE regarding existence and condition of
inventory by:

(a) Attendance at physical inventory counting, unless impracticable, to:

i) Evaluate mgt’s instructions and procedures for recording results of entity’s physical inventory
counting;

ii) Observe performance of mgt’s count procedures;

iii) Inspect the inventory; and

iv) Perform test counts; and

(b) Performing audit procedures over entity’s final inventory records to determine whether they
accurately reflect actual inventory count results.

Procedures in Special Circumstances

Physical inventory count at date other than date of F.S:

• Yes, it can be done for practical reasons.

• Mgt can determine inventory qty by annual physical inventory counting or maintains perpetual
inventory system.
• In either case, effectiveness of controls over changes in inventory determines whether conduct
of physical inventory counting at date other than date of F.S. is appropriate for audit purposes.
• Auditor shall perform audit procedures to obtain audit evidence about whether changes in
inventory between count date and date of F.S. are properly recorded.

Matters that Auditor shall consider when designing audit procedures to obtain audit evidence about
whether changes in inventory amounts are properly recorded include:
1. Whether perpetual inventory records are properly adjusted.
2. Reliability of entity’s perpetual inventory records.
3. Reasons for significant differences between info obtained during physical count and perpetual
records.

Auditor unable to attend inventory count:

• If auditor is unable to attend physical inventory counting due to unforeseen circumstances,
auditor shall make or observe some physical counts on an alternative date.

• Perform audit procedures to assess whether changes in inventory between date of physical count
and period end date are correctly recorded.

• The auditor would also verify procedure adopted, treatment given for discrepancies noticed
during the physical count.

CA SHUBHAM KESWANI 43
 • The auditor would also ensure that appropriate cut off procedures were followed by mgt.

• He should also get management’s written representation on

a. completeness of info provided regarding inventory, and
b. assurance with regard to adherence to laid down procedures for physical inventory
count.

If attendance is impracticable:

• This may be due to location & nature of inventory. Eg. Location pose threat to Auditor
• As per SA 200 à matter of difficulty, time, or cost involved is not a valid basis for auditor to
omit an audit procedure or settle for less than persuasive Audit Evidence.
• Perform alternative audit procedures to obtain SAAE regarding existence and condition of
inventory.
• For eg, inspection of documentation of subsequent sale of specific inventory items acquired or
purchased prior to inventory counting, may provide SAAE
• If not possible, modify opinion in auditor’s report in accordance with SA 705.

Inventory in custody of 3rd Party:

When inventory under custody of 3rd party is material to F.S, obtain SAAE regarding existence and
condition of inventory by performing one or both of following:

(a) Request confirmation from 3rd party as to quantities and condition of inventory held on behalf
of entity.

(b) Perform inspection or other audit procedures appropriate in circumstances.

If doubt over integrity & objectivity of 3rd party:

• Attending, or arranging another auditor to attend, 3rd party’s physical counting of inventory, if
practicable.

• Obtaining another auditor’s report, or service auditor’s report, on adequacy of 3rd party’s internal
control that inventory is properly counted and adequately safeguarded.

• Inspecting documentation regarding inventory held by 3rd parties, for eg, warehouse receipts.

• Requesting confirmation from other parties when inventory has been pledged as collateral.

How to Evaluate Management Instructions & Procedure?

Matters relevant in evaluating management’s instructions and procedures for recording and
controlling physical inventory counting include whether they address, for eg:

• Application of appropriate control activities, for example, collection of used physical inventory
count records, accounting for unused physical inventory count records, and count and re-count
procedures.
• Accurate identification of stage of completion of WIP, of slow moving, obsolete or damaged
items and of inventory owned by a third party, for example, on consignment.
• Procedures used to estimate physical quantities.
• Control over movement of inventory between areas and shipping and receipt of inventory before
and after cut-off date.

CA SHUBHAM KESWANI 44
 Litigation & Claims

The auditor shall identify litigation and claims through following procedures:
(a) Inquiry of mgt and, where applicable, others within entity, including in-house legal counsel;
(b) Reviewing minutes of meetings of TCWG and correspondence between entity and external legal
counsel; and
(c) Reviewing legal expense accounts.

Direct Communication with Entity’s external legal counsel

If auditor assesses
Ø ROMM regarding litigation or claims identified, or
Ø audit procedures performed indicate other material litigation or claims may exist à seek
direct communication with entity’s external legal counsel.

The auditor shall do so through letter of inquiry, prepared by mgt and sent by auditor, requesting
entity’s external legal counsel to communicate directly with auditor. If law, regulation or respective
legal professional body prohibits entity’s external legal counsel from communicating directly with
auditor, perform alternative audit procedures.

If: (a) Mgt refuses to give permission to communicate with entity’s external legal counsel, or legal
counsel refuses to respond appropriately to letter of inquiry, or is prohibited from responding; and

(b) auditor is unable to obtain SAAE by performing alternative audit procedures, auditor shall modify
opinion in auditor’s report in accordance with SA 705.

Written Representation from mgt & TCWG that all litigation and claims whose effects should be
considered when preparing the financial statements
• have been disclosed to auditor and
• appropriately accounted for and disclosed in accordance with the applicable financial reporting
framework

Segment Information

Auditor shall obtain SAAE regarding presentation and disclosure of segment information in accordance
with applicable FRF by:

(a) Obtaining understanding of methods used by Mgt in determining segment information, and:
i) Evaluating whether such methods are likely to result in disclosure as per applicable FRF; and
ii) Where appropriate, testing application of such methods; and

(b) Performing analytical procedures or other audit procedures appropriate in circumstances.

‘Example of matters’ relevant when obtaining understanding of methods used by mgt in determining
segment information include:

i) Sales, transfers and charges between segments, and elimination of inter-segment amounts.
ii) Comparisons with budgets and other expected results, for eg, operating profits as a % of sales.
iii) Allocation of assets and costs among segments.
iv) Consistency with prior periods, and adequacy of disclosures w.r.t inconsistencies.

CA SHUBHAM KESWANI 45
 SA 505: External Confirmations

External confirmation – Audit evidence obtained as a direct written response to auditor from a 3rd
party (the confirming party), in paper form, or by electronic or other medium.

Exception – A response that indicates a difference between information requested to be confirmed,

or contained in the entity’s records, and information provided by the confirming party.

External Confirmation Procedures

When using external confirmation procedures, auditor shall maintain control over external
confirmation requests, including:
a. Determining information to be confirmed or requested;
b. Selecting appropriate confirming party;
c. Designing confirmation requests, including determining that requests are properly
addressed and contain return information for responses to be sent directly to auditor; and
d. Sending the requests, including follow-up requests when applicable, to the confirming party.

Factors to consider when designing confirmation requests include:

• The assertions being addressed.

• Specific identified ROMM, including fraud risks.

• The layout and presentation of the confirmation request.

• Prior experience on the audit or similar engagements.

• The method of communication (for example, in paper form, or by electronic or other medium).

• Management’s authorisation or encouragement to the confirming parties to respond to the auditor.

Confirming parties may only be willing to respond to a confirmation request containing
management’s authorisation.

• The ability of intended confirming party to confirm or provide the requested information (for
example, individual invoice amount versus total balance)

Management’s Refusal to Allow the Auditor to Send a Confirmation Request

If management refuses to allow auditor to send a confirmation request, auditor shall:

a. Inquire mgt’s reasons for refusal, and seek audit evidence of their validity and reasonableness;

b. Evaluate implications of mgt’s refusal on auditor’s assessment of ROMM, including risk of fraud,
and on NTE of other audit procedures; and

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

If auditor concludes that mgt’s refusal is unreasonable, or unable to obtain relevant and reliable
audit evidence from alternative audit procedures, communicate with TCWG in accordance with SA
260.

The auditor shall determine implications for audit and auditor’s opinion as per SA 705.

CA SHUBHAM KESWANI 46
 Positive Confirmation Requests
• A positive external confirmation request asks confirming party to reply in all cases, either by
indicating agreement with given info, or providing information.

• A response to positive confirmation request is expected to provide reliable audit evidence.

• There is risk that confirming party may reply without verifying if information is correct.

• The auditor may reduce this risk by not stating amt (or other info) on confirmation request, and
ask confirming party to fill amount or furnish other info.

• On other hand, use of this type of “blank” confirmation request may result in lower response rates
because additional effort is required by confirming parties.

Negative Confirmations
Negative confirmation request – A request that confirming party respond directly to auditor only if
confirming party disagrees with the information provided in the request.

Negative confirmations provide less persuasive audit evidence than positive confirmations.

Accordingly, auditor shall not use negative confirmation requests as sole substantive audit procedure
to address assessed ROMM at assertion level unless all of following are present:

(a) The auditor has assessed ROMM as low and obtained SAAE regarding operating effectiveness of
controls;

(b) Population comprises large number of small, homogeneous, account balances, transactions or
conditions;

(c) A very low exception rate is expected; and

(d) Auditor is not aware of circumstances that would cause recipients to disregard such requests.

No response in case of Negative confirmation:

• The failure to receive response does not indicate receipt by intended confirming party of
confirmation request or verification of accuracy of info contained in request.

• Accordingly, failure of confirming party to respond provides significantly less persuasive audit
evidence than positive confirmation request.

• Confirming parties also may be more likely to respond indicating their disagreement with
confirmation request when information in requested is not in their favour, and less likely to
respond otherwise.

Alternate Audit Procedures: Non-Responses

Examples of alternative audit procedures auditor may perform include:

• For accounts receivable balances – examining specific subsequent cash receipts, shipping
documentation, and sales near the period-end.
• For accounts payable balances – examining subsequent cash disbursements or correspondence
from third parties, and other records, such as goods received notes.

CA SHUBHAM KESWANI 47
 Topics related to External Confirmation given in SA 330

Areas where external confirmation procedures may be used:

• Bank balances and other information relevant to banking relationships.
• Accounts receivable balances and terms.
• Inventories held by third parties at bonded warehouses for processing or on consignment.
• Property title deeds held by lawyers or financiers for safe custody or as security.
• Investments held for safekeeping by third parties, or purchased from stockbrokers but not
delivered at the balance sheet date.
• Amounts due to lenders, including relevant terms of repayment and restrictive covenants.
• Accounts payable balances and terms.

How to know if we can use External Confirmations as Audit Procedures?

Factors that may assist auditor in determining whether external confirmation procedures are to be
performed as substantive audit procedures include:

• The confirming party’s knowledge of subject matter

• The ability or willingness of the intended confirming party to respond – for example, the confirming
party:
Ø May not accept responsibility for responding to confirmation request;
Ø May consider responding too costly or time consuming;
Ø May have concerns about the potential legal liability resulting from responding;
Ø May account for transactions in different currencies; or
Ø May operate in environment where responding to confirmation requests is not a significant
aspect of day-to-day operations.

• The objectivity of intended confirming party – if confirming party is related party of entity,
responses to confirmation requests may be less reliable.

CA SHUBHAM KESWANI 48
 SA 510: Initial Audit Engagements—Opening Balances

Initial audit engagement – An engagement in which either:

i) The F.S. for prior period à not audited; or
ii) The F.S. for prior period audited by a predecessor auditor.

Objective
In conducting initial audit engagement, objective of auditor with respect to opening balances is to
obtain SAAE about whether:

a) Opening balances contain misstatements that materially affect the current period’s F.S;

b) Appropriate accounting policies reflected in opening balances have been consistently applied in
current period’s F.S, or changes properly accounted for and adequately presented and disclosed
in accordance with FRF.

Opening balances –
• Those account balances that exist at beginning of period.
• Opening balances are based upon closing balances of prior period and reflect effects of
transactions and events of prior periods and accounting policies applied in the prior period.
• Opening balances also include matters requiring disclosure that existed at beginning of
period, such as contingencies and commitments.

Audit Procedures: Opening Balances

The auditor shall read most recent financial statements (MRFS), if any, and predecessor auditor’s
report thereon, if any, for info. relevant to opening balances, including disclosures.

The auditor shall obtain SAAE about whether opening balances contain misstatements that materially
affect current period’s F.S. by:
a) Determining whether prior period’s closing balances correctly brought forward to current period
or, when appropriate, any adjustments have been disclosed as prior period items in current year’s
P&L

b) Determining whether opening balances reflect application of appropriate accounting policies; and

c) Performing one or more of following:

i) Where prior year FS were audited, perusing copies of audited FS including other relevant
documents relating to prior period F.S;
ii) Evaluating whether audit procedures performed in current period provide evidence relevant to
opening balances; or
iii) Performing specific audit procedures to obtain evidence regarding opening balances.

If auditor obtains audit evidence that opening balances contain misstatements that could materially
affect current period’s F.S. à perform additional audit procedures appropriate in circumstances to
determine effect on current period’s F.S.

If auditor concludes that misstatements exist in current period’s FS, communicate misstatements with
mgt and TCWG in accordance with SA 450.

CA SHUBHAM KESWANI 49
 Consistency of Accounting Policies
Auditor shall obtain SAAE that:
• Accounting policies have been consistently applied in current period F.S. &
• whether any changes have been properly accounted for & adequately presented & disclosed as
per FRF.

Conclusion & Reporting

• Unable to obtain SAAE regarding opening balances à Qualify/Disclaimer of opinion as per SA

705
• Opening balance contain misstatement à materially affects current period FS & not properly
accounted for & disclosed à Qualified/Adverse Opinion as per SA 705
• A/c policy not applied consistently or change not properly accounted à Qualified /Adverse
opinion as per SA 705

CA SHUBHAM KESWANI 50
 SA 520: Analytical Procedures

Objectives of Auditor
a) Obtaining relevant and reliable audit evidence when using substantive analytical procedures; and

b) To design and perform analytical procedures near end of audit that assist auditor when forming
an overall conclusion as to whether FS are consistent with auditor’s understanding of entity.

Substantive Analytical Procedures (SAP)

When designing and performing SAP, either alone or in combination with TOD auditor shall:

a) Determine suitability of particular SAP for given assertions, taking account of assessed
ROMM and tests of details for these assertions;

b) Evaluate reliability of data from which auditor’s expectation of recorded amounts or ratios is
developed, taking account of source, comparability, and nature and relevance of information
available, and controls over preparation;

c) Develop expectation of recorded amounts or ratios and evaluate whether expectation is

sufficiently precise to identify misstatement that may cause F.S. to be materially misstated;
and

d) Determine amount of difference of recorded amounts from expected values that is

acceptable without further investigation.

Suitability of Particular Analytical Procedures for Given Assertions

1. Substantive analytical procedures are generally more applicable to large volumes of transactions
that tend to be predictable over time.

2. In some cases, even unsophisticated predictive model may be effective as analytical procedure.
For eg, where entity has known number of employees at fixed rates of pay throughout period, it may
be possible for auditor to use this data to estimate total payroll costs for period with high degree of
accuracy, providing audit evidence for significant item in F.S. and reducing need to perform TOD on
payroll.

3. Different types of analytical procedures provide different levels of assurance.

For eg, prediction of total rental income on building divided into apartments, taking rental rates, no.
of apartments and vacancy rates into consideration, provide persuasive evidence and eliminate need
for further verification. In contrast, calculation and comparison of gross margin percentages as means
of confirming revenue figure may provide less persuasive evidence, but may provide useful
corroboration if used in combination with other audit procedures.

4. The determination of suitability of particular SAP is influenced by nature of assertion and

auditor’s assessment of RMM.
For example, if controls over sales order processing are weak, the auditor may place more reliance on
tests of details rather than on substantive analytical procedures for assertions related to receivables.

CA SHUBHAM KESWANI 51
5. Particular SAP may be considered suitable when TOD are performed on same assertion.

For eg, when obtaining audit evidence regarding valuation assertion for accounts receivable balances,
auditor may apply analytical procedures to aging of customers’ accounts in addition to performing TOD
on subsequent cash receipts to determine collectability of receivables.

Analytical Procedures that Assist When Forming an Overall Conclusion

The auditor shall design and perform analytical procedures near end of audit that assist in forming
an overall conclusion as to whether FS are consistent with auditor’s understanding of entity.

Investigating Results of Analytical Procedures

If auditor identifies fluctuations or relationships that are inconsistent with other relevant info or
that differ from expected values by significant amt, auditor shall investigate such differences by:

(a) Inquiring of management and obtaining appropriate audit evidence relevant to mgt’s responses;
and

(b) Performing other audit procedures as necessary in circumstances.

• Audit evidence relevant to mgt’s responses may be obtained by evaluating responses taking into
account auditor’s understanding of entity and environment, and with other audit evidence obtained
during course of audit.
• The need to perform other audit procedures may arise when, mgt is unable to provide expln, or
expln, together with audit evidence obtained, is not considered adequate.

Techniques for Analytical Procedures

Trends: Analysing account fluctuations by comparing current year to prior year information and, also,
to information derived over several years.

Reasonableness: Tests are made by reviewing relationship of certain account balances to other
balances for reasonableness of amounts. Examples of accounts that may be reasonably tested are:
• Interest expense against interest bearing obligations
• Raw Material Consumption to Production (quantity)
• Wastage & Scrap % against production & raw material consumption (quantity)
• Work-in-Progress based on issued of materials & Sales (quantity)
• Sales discounts and commissions against sales volume
• Rental revenues based on occupancy of premises

Ratios: Analysis by computation of ratios includes study of relationships between FS amounts.

Commonly used ratios include:
• Elements of income or loss as a percentage of sales
• Gross profit turnover
• Accounts receivable turnover
• Inventory turnover
• Profitability, leverage, and liquidity

Structural Modelling: Modelling tool constructs a statistical model from financial and/or non-
financial data of prior-accounting periods to predict current account balances (e.g. linear regression).

CA SHUBHAM KESWANI 52
 SA 530: Audit Sampling

Objective:
The objective is to provide reasonable basis for auditor to draw conclusions about population from
which sample is selected.

Audit sampling (sampling) – The application of audit procedures to less than 100% of items within a
population such that all sampling units have a chance of selection in order to provide auditor with a
reasonable basis on which to draw conclusions about entire population.

Sampling risk – The risk that auditor’s conclusion based on sample may be different from conclusion
if entire population were subjected to same audit procedure.

Types of Sampling Risks?

Sampling risk can lead to 2 types of erroneous conclusions:

(i) In case of TOCs à controls are more effective than they actually are, or in case of TODs à
material misstatement does not exist when in fact it does.

The auditor is primarily concerned with this type of erroneous conclusion because it affects audit
effectiveness and is more likely to lead to an inappropriate audit opinion.

(ii) In case of TOCs à controls are less effective than they actually are, or in case of TODs, that
material misstatement exists when in fact it does not.

This type of erroneous conclusion affects audit efficiency as it would usually lead to additional work
to establish that initial conclusions were incorrect.

Statistical sampling – An approach to sampling that has following characteristics:

(i) Random selection of sample items; and
(ii) The use of probability theory to evaluate sample results, including measurement of sampling risk.
Sampling approach that doesn’t have characteristics (i) & (ii) is considered non-statistical sampling.

Tolerable misstatement
• A monetary amount set by auditor in respect of which auditor seeks to obtain appropriate level of
assurance that the amount set by auditor isn’t exceeded by actual misstatement in population.
• Further, while designing a sample, auditor determines tolerable misstatement in order to address
risk that aggregate of individually immaterial misstatements may cause F.S. to be materially
misstated and provide a margin for possible undetected misstatements.

• Tolerable misstatement is application of performance materiality, to a sampling procedure.

Tolerable misstatement may be same amount or amount lower than performance materiality.

For eg:
I’ve set materiality as 5% of NP (100 Cr), Materiality = 5 Cr, let’s say PM = 1 Cr (less than materiality
for F.S. as whole). Now, Tolerable Misstatement can be equal to lower than PM, let’s say TM = 50 L,
now I’ll not check any amount in population which is less than 50 L as this is something I can tolerate.

CA SHUBHAM KESWANI 53
 Sample Design, Size and Selection of Items for Testing
i) When designing audit sample, consider purpose of audit and characteristics of population from which
sample will be drawn.
ii) The auditor shall determine sample size sufficient to reduce sampling risk to acceptably low level.
iii) The auditor shall select items for sample in a way that each sampling unit in population has chance
of selection.
Performing audit procedures
• The auditor shall perform audit procedures, appropriate to purpose, on each item selected.
• If audit procedure is not applicable to selected item, auditor shall perform procedure on
replacement item.
• If auditor is unable to apply designed audit procedures, or alternative procedures, to selected
item, auditor shall treat that item as deviation from prescribed control, in case of TOCs, or
misstatement, in case of TODs.

Nature and Cause of Deviations and Misstatements

• The auditor shall investigate nature and cause of any deviations or misstatements identified, and
evaluate possible effect on audit procedures and other areas of audit.

• In extremely rare circumstances when auditor considers a misstatement or deviation to be an

anomaly, auditor shall obtain high degree of certainty that such misstatement or deviation is not
representative of population. The auditor shall obtain this degree of certainty by performing
additional audit procedures to obtain SAAE that misstatement or deviation does not affect
remainder of population.

Sample Selection Methods

There are many methods of selecting samples. The principal methods are as follows:

(a) Random selection (applied through random number generators, for example, random number tables).
• Simple Random Sampling: Whole population has equal chance of selection
• Stratified Sampling: Dividing the population in few separate groups called strata & taking
samples from each of them.

(b) Systematic selection, in which the number of sampling units in the population is divided by the
sample size to give a sampling interval.

For eg, there are 5000 items & I want 100 samples, interval=5000/100= 50, and having determined a
starting point within first 50, each 50th sampling unit thereafter is selected.

Although the starting point may be determined haphazardly, the sample is more likely to be truly
random if it is determined by use of a computerised random number generator or random number
tables.

(c) Monetary Unit Sampling is a type of value-weighted selection in which sample size, selection and
evaluation results in a conclusion in monetary amounts.

(d) Haphazard selection, in which auditor selects the sample without following a structured technique.
Although no structured technique is used, the auditor would nonetheless avoid any conscious bias or
predictability (for example, avoiding difficult to locate items, or always choosing or avoiding the first
or last entries on a page) and thus attempt to ensure that all items in the population have a chance of
selection. Haphazard selection is not appropriate when using statistical sampling.

CA SHUBHAM KESWANI 54
(e) Block selection involves selection of a block(s) of contiguous items from within the population. Block
selection cannot ordinarily be used in audit sampling because most populations are structured such that
items in a sequence can be expected to have similar characteristics to each other, but different
characteristics from items elsewhere in the population.

Factors affecting sample size

TOCs
1. An increase in extent to which auditor’s risk assessment takes into account relevant controls:
Increase
2. An increase in tolerable rate of deviation: Decrease
3. An increase in expected rate of deviation of population to be tested: Increase
4. Increase in auditor’s desired level of assurance that tolerable rate of deviation is not exceeded by
actual rate of deviation in population: Increase
5. An increase in number of sampling units in population: Negligible effect

TODs
1. An increase in auditor’s assessment of risk of material misstatement: Increase
2. An increase in use of other substantive procedures directed at same assertion: Decrease
3. An increase in auditor’s desired level of assurance that tolerable misstatement is not exceeded by
actual misstatement in population: Increase
4. An increase in tolerable misstatement: Decrease
5. An increase in amount of misstatement the auditor expects to find in the population: Increase
6. Stratification of the population when appropriate: Decrease

Factors determining extent of checking on a Sampling Plan

(i) Size of organisation
(ii) State of Internal Control
(iii) Adequacy & reliability of books & records
(iv) Tolerable error range
(v) Degree of desired Confidence

CA SHUBHAM KESWANI 55
 SA 540: Auditing Accounting Estimates,
including Fair Value Accounting Estimates & Related Disclosures

Nature of Accounting Estimates: Some F.S. items cannot be measured precisely, can only be
estimated. For purposes of this SA, such items referred to as accounting estimates.

Information available to mgt à accounting estimate varies widely à affects degree of estimation
uncertainty.
Degree of estimation uncertainty affects à ROMM of accounting estimates.

Some A/C estimates involve relatively low estimation uncertainty and give rise to lower ROMM:
• Accounting estimates arising in entities that engage in business activities that are not complex.

• Accounting estimates that are frequently made and updated because they relate to routine
transactions.

• Accounting estimates derived from data that is readily available, such as published interest rate
data or exchange-traded prices of securities. Such data may be referred to as “observable” in
context of fair value accounting estimate.

• Fair value (FV) accounting estimates where method of measurement prescribed by FRF is simple
and applied easily to asset or liability requiring measurement at fair value.

• FV accounting estimates where model used is well-known or generally accepted, provided that
assumptions or inputs to model are observable.

Accounting estimates with relatively high estimation uncertainty, based on significant assumptions,
for eg:
• Accounting estimates relating to outcome of litigation.

• FV accounting estimates for derivative financial instruments not publicly traded.

• FV accounting estimates for which a highly specialised entity-developed model is used or for
which, there are assumptions or inputs that cannot be observed in marketplace. Accounting
estimates in cases of Wage Revision Agreements wherein negotiations with Trade Unions is on
the way or Government’s sanction is awaited leading to uncertainty.

Examples of situations where accounting estimates, other than fair value accounting estimates, may
be required include:
• Allowance for doubtful accounts.
• Inventory obsolescence.
• Warranty obligations.
• Depreciation method or asset useful life.
• Provision against the carrying amount of an investment where there is uncertainty regarding its
recoverability.
• Outcome of long term contracts.
• Financial Obligations / Costs arising from litigation settlements and judgments.

Examples of situations where fair value accounting estimates may be required include:
• Complex financial instruments, which are not traded in an active and open market.
• Share-based payments.
• Property or equipment held for disposal.

CA SHUBHAM KESWANI 56
• Certain assets or liabilities acquired in a business combination, including goodwill and intangible
assets.
• Transactions involving the exchange of assets or liabilities between independent parties without
monetary consideration, for eg. non-monetary exchange of plant facilities in different lines of
business.

Risk Assessment Procedures & Related Activities

How auditor minimizes Risk of Material Misstatement?
• Obtain understanding of
Ø requirements of FRF
Ø How mgt identifies those transactions, events or conditions that may give rise to
accounting estimates by making inquiries

• The estimation making process of mgt:

i. The method used in making accounting estimate;
ii. Relevant controls;
iii. Whether mgt has used an expert;
iv. The assumptions underlying accounting estimates;
v. Whether there has been change from prior period in methods for making accounting
estimates, and if so, why; and
vi. Whether and, if so, how mgt has assessed effect of estimation uncertainty.

Inquiries from Management

• Inquiries of management about changes in circumstances may include, for example, inquiries
about whether:
• The entity has engaged in new types of transactions that may give rise to accounting
estimates.
• Terms of transactions that gave rise to accounting estimates that have changed.
• Accounting policies relating to accounting estimates have changed, as a result of changes
to the requirements of applicable FRF or otherwise.
• Regulatory or other changes outside control of management occurred that may require
management to revise, or make new, accounting estimates.
• New conditions or events have occurred that give rise to need for new or revised
accounting estimates.

During audit, auditor may identify transactions, events and conditions that give rise to need for
accounting estimates that mgt failed to identify. SA 315 deals with circumstances where auditor
identifies RMM that mgt failed to identify, including determining whether there is significant
deficiency in internal control with regard to entity’s RAP.

Evaluation of Accounting Estimate with Significant Risk

For accounting estimates that give rise to significant risks, in addition to other substantive procedures
performed to meet requirements of SA 330, auditor shall evaluate following:

(i) How mgt has considered alternative assumptions or outcomes, and why rejected them, or how mgt
otherwise addressed estimation uncertainty in making accounting estimate.

(ii) Whether significant assumptions used by management are reasonable.

CA SHUBHAM KESWANI 57
(iii) Where relevant to reasonableness of significant assumptions used by mgt or appropriate
application of applicable financial reporting framework, management’s intent to carry out specific
courses of action and ability to do so.

(iv) If, in auditor’s judgment, mgt has not adequately addressed effects of estimation uncertainty on
accounting estimates that give rise to significant risks, auditor shall develop a range to evaluate
reasonableness of accounting estimate.

What factors influence degree of Estimation Uncertainty?

But what is Estimation Uncertainty?
The susceptibility of accounting estimate and related disclosures to an inherent lack of precision in
its measurement.

The degree of estimation uncertainty associated with accounting estimate may be influenced by
factors such as:
• The extent to which accounting estimate depends on judgment.
• The sensitivity of accounting estimate to changes in assumptions.
• The existence of recognised measurement techniques that may mitigate estimation
uncertainty.
• The length of forecast period, and relevance of data drawn from past events to forecast
future events.
• The availability of reliable data from external sources.
• The extent to which accounting estimate is based on observable or unobservable inputs.

Review of Outcome of Accounting Estimates

Ø Auditor shall review outcome of accounting estimates included in prior period F.S., or, their
subsequent re-estimation for purpose of current period.
Ø Nature and extent of auditor’s review takes account of
• nature of accounting estimates, and
• whether info obtained from review would be relevant to identifying and assessing
ROMM of accounting estimates made in current period F.S.

Ø However, review is not intended to question judgments made in prior periods that were based
on info available at that time.

Ø The outcome of accounting estimate will often differ from accounting estimate recognised in
prior period F.S.

By performing RAP to identify and understand reasons for such differences, auditor may
obtain:

• Info regarding effectiveness of mgt’s prior period estimation process, from which auditor
can judge effectiveness of mgt’s current process.

• Audit evidence that is pertinent to re-estimation, in current period, of prior period

accounting estimates.

• Audit evidence of matters, such as estimation uncertainty, that may be required to be

disclosed in F.S.

Ø It may assist auditor, in current period, in identifying circumstances or conditions that

increase susceptibility of accounting estimates to possible management bias.

Ø Auditor’s professional scepticism assists in identifying such circumstances and determining

NTE of further audit procedures.

CA SHUBHAM KESWANI 58
 Identifying & Assessing ROMM
(a) In identifying and assessing ROMM as required by SA 315, auditor shall evaluate degree of
estimation uncertainty.
(b) Auditor shall determine whether any of those accounting estimate that have been identified as
having high estimation uncertainty give rise to significant risk.

Responses to Assessed Risks of Material Misstatement

(a) Based on assessed ROMM auditor, shall determine:
• Whether mgt has appropriately applied FRF relevant to accounting estimate; and
• Whether methods for making accounting estimates are appropriate and have been applied
consistently
• If changes in accounting estimates or in method from prior period, are those appropriate
in present circumstances.

(b) In response to assessed RMM, auditor shall undertake one or more of following:
• Determine whether events occurring up to date of auditor’s report provide sufficient audit
evidence regarding accounting estimate.

• Test check data used by mgt for making accounting estimate.

• The auditor shall also evaluate whether method used for measurement is appropriate and
assumptions made are reasonable in light of measurement objective of FRF.
This can be achieved by
Ø Testing extent to which data is accurate, complete and relevant and whether accounting
estimate has been properly determined using such data and management assumptions.
Ø Considering source, relevance and reliability of external data.
Ø Recalculating accounting estimate and reviewing information about accounting estimate
for internal consistency.
Ø Test checks effectiveness of controls over estimates used by management with
appropriate substantive procedure.

(c) While determining matters identified or responding to assessed RMM, auditor shall consider
whether specialized skills or knowledge in relation to one or more aspects of accounting estimates are
required in order to obtain SAAE.

Understanding of Assumptions
Matters that the auditor may consider in obtaining an understanding of assumptions underlying the
accounting estimates include, for example:
• The nature of assumptions, including which of the assumptions are likely to be significant
assumptions.

• How management assesses whether assumptions are relevant and complete (that is, that all
relevant variables have been taken into account).

• Where applicable, how management determines that assumptions used are internally consistent.

• Whether assumptions relate to matters within control of management (for eg, assumptions about
maintenance programs that may affect estimation of asset’s useful life), and how they conform
to entity’s business plans and external environment, or to matters that are outside its control
(for eg, assumptions about interest rates, mortality rates, potential judicial or regulatory actions,
or variability and the timing of future cash flows).

• The nature and extent of documentation, if any, supporting the assumptions.

CA SHUBHAM KESWANI 59
 Disclosures Related to Accounting Estimates
Auditor shall obtain SAAE about whether disclosures in FS related to accounting estimates are in
accordance with FRF. For accounting estimates that give rise to significant risks, evaluate adequacy
of disclosure of their estimation uncertainty in F.S. in context of applicable FRF

(a) The presentation of FS in accordance with applicable FRF includes adequate disclosure of material
matters.
These disclosures may include,
• The assumptions used.
• The method of estimation used, including any applicable model.
• The basis for selection of estimation.
• Any changes in method of estimation from prior period and its subsequent effect.
• The sources and implication of estimation uncertainty.

(b) In relation to accounting estimate having significant risk, even where disclosures are in accordance
with the applicable FRF, the auditor may conclude that the disclosure of estimation uncertainty is
inadequate in light of the circumstances and facts involved.

Written Representations (WR)

SA 580 discusses use of WR. Depending on nature, materiality and extent of estimation uncertainty,
WR about accounting estimates recognised or disclosed in F.S. may include representations:

• About appropriateness of measurement processes, including related assumptions and models,

used by mgt in determining accounting estimates in context of applicable FRF, and consistency in
application of processes.
• That assumptions appropriately reflect management’s intent and ability to carry out specific
courses of action on behalf of entity, where relevant to accounting estimates and disclosures.
• That disclosure related to a/c estimates are complete and appropriate under applicable FRF.
• That no subsequent event requires adjustment to a/c estimates and disclosures included in F.S.

CA SHUBHAM KESWANI 60
 SA 550: Related Parties (RP)

Responsibilities of auditor
• FRF establish a/c & disclosure requiremets à RP relationships, transactions & balances then
Auditor must perform Audit procedures to reduce RMM that entity doesn’t account & disclose RP
relationships, transn & balances as per FRF

• Even if FRF has no such requirement à Auditor shall obtain understanding of RP relationships &
transn to conclude FS give true & fair view & are not misleading

Objectives of Auditor
(a) Obtain understanding of RP relationships and transactions sufficient to be able:

(i) To recognise fraud risk factors, arising from RP relationships and transn relevant to
identification and assessment of ROMM due to fraud; and

(ii) To conclude whether FS:

a) Achieve true and fair presentation (for fair presentation frameworks); or
b) Are not misleading (for compliance frameworks); and

(b) In addition, where FRF establishes RP requirements, to obtain SAAE about whether RP
relationships and transn have been appropriately identified, accounted and disclosed in F.S. in
accordance with FRF

Related party – A party that is either:

(i) RP as defined in FRF; or

(ii) Where FRF establishes minimal or no related party requirements:

a. A person or other entity that has control or significant influence, over reporting entity;
b. Another entity over which reporting entity has control or significant influence, or
c. Another entity that is under common control with reporting entity through having:
i. Common controlling ownership;
ii. Owners who are close family members; or
iii. Common key management.

However, entities that are under common control by a state (i.e., a national, regional or local
government) are not considered related unless they engage in significant transactions or share
resources to significant extent with one another.

Understanding Entity’s Related Party Relationships and Transactions

The engagement team discussion shall include specific consideration of susceptibility of FS to material
misstatement that could result from entity’s RP relationships and transactions.

The auditor shall inquire of management regarding:

(a) The identity of entity’s RP, including changes from prior period;
(b) The nature of relationships between entity and these RP; and
(c) Whether entity entered into transactions with these RP during the period and, if so, type and
purpose of transactions.

The auditor shall inquire of management and others within entity, to obtain understanding of controls
that management has established to:
(a) Identify, account for, and disclose RP relationships and transactions in accordance with FRF;

CA SHUBHAM KESWANI 61
(b) Authorise and approve significant transactions and arrangements with RP; and
(c) Authorise and approve significant transactions and arrangements o/s normal course of business.

Maintain alertness for RP information when reviewing Records/Documents

Auditor shall remain alert, when inspecting records or documents, for arrangements or other info that
may indicate existence of RP relationships or transactions that mgt has not previously identified or
disclosed to the auditor.

Documents to be inspected for identifying RP

Auditor shall inspect following for indications of existence of RP relationships or transactions that
mgt has not previously identified or disclosed to auditor:

(a) Bank, legal and 3rd party confirmations obtained as part of auditor’s procedures;

(b) Minutes of meetings of shareholders and of TCWG; and

(c) Such other records or documents as auditor considers necessary in circumstances of entity.

During the audit, the auditor may inspect records or documents that may provide information about
related party relationships and transactions, for eg:

• Entity income tax returns.

• Internal auditors’ reports.

• Information supplied by the entity to regulatory authorities.

• Documents associated with the entity’s filings with a securities regulator (e.g, prospectuses).

• Shareholder registers to identify the entity’s principal shareholders.

• Records of the entity’s investments and those of its pension plans.

• Statements of conflicts of interest from mgt & TCWG.

• Contracts and agreements with key mgt or TCWG.

• Significant contracts re-negotiated by the entity during the period.

• Significant contracts and agreements not in the entity’s ordinary course of business.

If auditor identifies significant transactions o/s entity’s normal course of business when performing
audit procedures , he shall inquire of management about:
(a) The nature of transactions; and
(b) Whether RP could be involved.

Fraud Risk Factors Associated with a Related Party with Dominant Influence
Domination of mgt by single person or small group of persons without compensating controls is a
fraud risk factor.

Indicators of dominant influence exerted by a related party include:

• The related party has vetoed significant business decisions taken by mgt or TCWG.
• Significant transactions are referred to RP for final approval.
• There is little or no debate among mgt and TCWG regarding business proposals initiated by RP.
• Transactions involving RP are rarely independently reviewed and approved.

CA SHUBHAM KESWANI 62
 Identification of Previously Unidentified/Undisclosed RP or Significant RP Transactions
a) Promptly communicate to other members of engg team

b) Where FRF establishes RP requirements:

• Request mgt to identify all transn with newly identified RP
• Inquire as to why entity’s IC failed to identify or disclose RP relationship/transaction

c) Perform Substantive procedures relating to newly identified RP relationship/transaction

d) If non-disclosure appears intentional, evaluate implications for audit.

Examples of arrangements that indicate existence of RP relationships or transactions that

management has not previously identified or disclosed to auditor include:

• Participation in unincorporated partnerships with other parties.

• Agreements for provision of services to certain parties under terms and conditions that are o/s
entity’s normal course of business.

• Guarantees and guarantor relationships.

What if Identified Significant RP Transactions o/s Entity’s Normal Course of Business?

a) Inspect underlying contract/agreement & evaluate:

• Business rationale (or lack thereof) suggest transaction entered to engage in fraudlent
financial reporting or conceal misappropriation of assets
• Terms of transactions are consistent with mgt explaination &
• Transn accounted & disclosed as per FRF

b) Obtain Audit evidence that transn authorised & approved.

Examples of transactions outside entity’s normal course of business may include:

• Complex equity transactions, such as corporate restructurings or acquisitions.

• Transactions with offshore entities in jurisdictions with weak corporate laws.

• The leasing of premises or rendering of mgt services by entity to another party if no consideration
is exchanged.

• Sales transactions with unusually large discounts or returns.

• Transactions with circular arrangements, for example, sales with a commitment to repurchase.

• Transactions under contracts whose terms are changed before expiry.

CA SHUBHAM KESWANI 63
 SA 560: Subsequent Events

• Events occurring b/w date of FS & date of auditor’s report &

• Facts that become known to auditor after date of auditor’s report

Events occurring b/w date of Facts that become known to Facts which become known to
FS & date of Audit Report auditor after date of Audit auditor after FS are issued
report but before F.S. are
issued
a) Auditor shall obtain SAAE to a) Auditor has no obligation to a) After FS have been issued
ensure the events which perform any procedure auditor has no obligation.
require adjustment or regarding FS after issue of AR.
disclosure in FS have been b) However if any fact becomes
identified. b) However, if a fact becomes known to auditor, had it been
known to auditor that had been know at date of AR, he may
b) In determining NTE of Audit known before issue of AR, it have amended the AR, he shall:
procedures, he shall: may have amended the AR, he • Discuss with mgt &
• Obtain understanding of shall: TCWG
mgt procedures of • Discuss matter with mgt & • Determine if FS need
identifying subsequent TCWG amendment & if so,
events • Determine if FS need • Inquire how mgt intends
• Inquiring of mgt as to amendment & if so to address the matter
occurrence of subs. Events • Inquire how mgt intends to
which affect FS address the matter in FS c) If mgt amends the FS,
• Read minutes mgt meetings auditor shall:
held after date of FS c) If mgt amends FS, he shall, • Carry out audit procedures
• Read latest subsequent • Carry our audit procedures necessary in circumstances
interim FS, if any on amendment of amendment
• If auditor identifies events • Extend these procedures to • Review steps taken by mgt
which require adjustment or date of new AR that everyone in receipt of
disclosure in FS, then • Provide a new AR on amended previously issued FS with
determine if it is FS dated not earlier than AR has been informed of
appropriately adjusted or date of approval of amended the situation
disclosed in FS FS • Extend audit procures to
• Written Representation date of new AR, dated no
from mgt that all events d) If law or reg. or FRF doesn’t earlier than date of approval
occurring subsequent to prohibit mgt from restricting of amended FS
date of FS & that require amendment of FS to • Provide a new AR on
adj or discl have been subsequent event, auditor is amended FS
adjusted or disclosed. permitted to restrict audit • In New or amended AR
procedures to that amendment. include EOM/OM para
Auditor shall either: referring to note in FS
• Amend AR to include an discussing reasons for
additional date restricted to amendment in FS & AR
amendment in FS.
d) If mgt doesn’t amend FS &
• Provide a new or amended AR inform users about the
that includes EOM/OM para situation à auditor shall notify
that conveys audit mgt & TCWG that auditor seek
procedures on subsequent

CA SHUBHAM KESWANI 64
 events restricted to to prevent future reliance on
amendments in FS. AR

e) If mgt doesn’t amend FS If despite such notification,

when auditor requires: mgt & TCWG don’t take steps,
auditor shall take action to
• If AR not provided to entity,
prevent reliance on AR (obtain
modiy opinion as per SA 705 &
legal advice)
provide AR

• If AR provided, then notify

mgt & TCWG to not issue FS
to 3rd parties. If mgt still
issues FS, auditor shall take
action to prevent reliance on
AR (obtain legal advice)

Specific inquiries to be made from mgt:

• Whether new commitments, borrowings or guarantees have been entered into.

• Whether sales or acquisitions of assets have occurred or are planned.
• Whether any assets have been appropriated by govt or destroyed, for eg, by fire or flood.
• Whether any events have occurred that are relevant to recoverability of assets.
• Whether there have been increases in capital or issuance of debt instruments, such as issue of
new shares or debentures, or an agreement to merge or liquidate has been made or is planned.
• Whether there have been any developments regarding contingencies.
• Whether any unusual accounting adjustments have been made or are contemplated.
• Whether any events have occurred or are likely to occur that will bring into Question (?)
appropriateness of accounting policies used in F.S, for eg, if such events call into question
validity of going concern assumption.
• Whether any events have occurred that relevant to measurement of estimates or provisions
made in F.S.

CA SHUBHAM KESWANI 65
 SA 570: Going Concern

Going Concern Basis of Accounting

• FS are prepared on assumption that entity will continue operations for foreseeable future.
• General purpose FS are prepared using going concern basis of accounting, unless mgt either intends
to liquidate entity or to cease operations, or has no realistic alternative but to do so.
• Special purpose F.S. may or may not be prepared in accordance with FRF for which going concern
basis of accounting is relevant.
• When use of going concern basis of accounting is appropriate, assets and liabilities are recorded on
basis that entity will be able to realize its assets and discharge liabilities in normal course of
business.

Responsibility for Assessment of the Entity’s Ability to Continue as a Going Concern

a) It is mgt responsibility à assess entity’s ability to continue as going concern even if FRF does not
include explicit requirement.

b) Mgt’s assessment of entity’s ability to continue as going concern involves making judgment, at
particular point in time, about inherently uncertain future outcomes of events or conditions.

c) The following factors are relevant to that judgment:

• The degree of uncertainty associated with outcome of an event or condition.
• The size and complexity of entity, nature and condition of business and degree to which it is
affected by external factors.
• Any judgment about future is based on information available at the time at which judgment is
made. Subsequent events may result in outcomes that are inconsistent with judgments that
were reasonable at time they were made.

Auditor’s Responsibilities
• Auditor’s responsibilities are to obtain SAAE and conclude on, appropriateness of mgt’s use of
going concern basis of accounting in preparation of FS
• To conclude, based on audit evidence obtained, whether a material uncertainty exists about the
entity’s ability to continue as a going concern.
• These responsibilities exist even if FRF used in preparation of FS does not include explicit
requirement for mgt to make specific assessment of entity’s ability to continue as a going concern.
• The absence of reference to material uncertainty about entity’s ability to continue as going concern
in auditor’s report cannot be viewed as a guarantee as to entity’s ability to continue as a going
concern.

Requirements of SA 570

When performing RAP as per SA 315, auditor shall consider whether events or conditions exist that
may cast significant doubt on entity’s ability to continue as a going concern.

In doing so, determine whether mgt has already performed a preliminary assessment of entity’s ability
to continue as a going concern, &
a) If assessment performed à discuss the assessment with mgt and determine whether mgt has
identified events or conditions that, individually or collectively, cast significant doubt on entity’s
ability to continue as going concern and, if so, mgt’s plans to address them; or
b) If assessment not performed à discuss with mgt basis for use of going concern basis of
accounting, and inquire whether events or conditions exist that, individually or collectively, may
cast significant doubt on entity’s ability to continue as going concern.

CA SHUBHAM KESWANI 66
The auditor shall remain alert throughout audit for audit evidence of events or conditions that cast
significant doubt over entity’s ability to continue as going concern.

Evaluating mgt assessment of Going Concern

• Auditor shall evaluate management’s assessment of entity’s ability to continue as going concern.
• Auditor shall cover same period as used by mgt to make its assessment as required by applicable
FRF, or by law or regulation if it specifies longer period.
• If mgt’s assessment of entity’s ability to continue as going concern covers less than 12 months
from date of FS, request mgt to extend assessment period to at least 12 months.
• In evaluating mgt’s assessment, consider whether it includes all relevant info of which auditor is
aware as result of audit.

Additional Audit Procedures When Events or Conditions Are Identified

a) Where mgt has not yet performed assessment of entity’s ability to continue as going concern,
requesting mgt to make its assessment.

b) Evaluating mgt’s plans for future actions, whether outcome of these plans likely to improve situation
and whether management’s plans are feasible in the circumstances.

c) Where entity has prepared cash flow forecast, and analysis of forecast is a significant factor in
considering future outcome of events or conditions:
i. Evaluating reliability of underlying data generated to prepare forecast; and
ii. Determining whether there is adequate support for assumptions underlying forecast.

d) Considering whether any additional facts or info become available since date on which mgt made
its assessment.

e) Requesting written representations from mgt and TCWG , regarding their plans for future
actions and feasibility of these plans.

Mgt Written
Plans Cash flow forecast Add. Facts/info
Assessment Representations

Additional procedures:
• Analysing and discussing cash flow, profit and other relevant forecasts with mgt.
• Analysing and discussing entity’s latest available interim financial statements.
• Reading terms of debentures and loan agreements and determining whether any have been
breached.
• Reading minutes of meetings of shareholders, TCWG and committees for reference to
financing difficulties.
• Inquiring of entity’s legal counsel regarding existence of litigation and claims and
reasonableness of mgt’s assessments of their outcome and estimate of financial implications.
• Confirming existence, legality and enforceability of arrangements to provide or maintain
financial support with related and third parties and assessing financial ability of such parties
to provide additional funds.
• Evaluating entity’s plans to deal with unfilled customer orders.
• Performing audit procedures regarding subsequent events to identify those that either mitigate
or otherwise affect entity’s ability to continue as a going concern.
• Confirming existence, terms and adequacy of borrowing facilities.
• Obtaining and reviewing reports of regulatory actions.
• Determining adequacy of support for any planned disposals of assets.

CA SHUBHAM KESWANI 67
 Auditor’s Conclusion
• The auditor shall evaluate whether SAAE has been obtained & conclude on, appropriateness of
mgt’s use of going concern basis of accounting in preparation of FS.
• Based on audit evidence obtained, conclude whether material uncertainty exists related to events
or conditions that, individually or collectively, may cast significant doubt on entity’s ability to
continue as a going concern.
• A material uncertainty exists when magnitude of impact and likelihood of occurrence is such that,
appropriate disclosure of nature and implications of uncertainty is necessary for:
a) In case of a fair presentation FRF à fair presentation of FS,or
b) In case of compliance framework, FS not to be misleading.

Adequacy of Disclosures When Events or Conditions Have Been Identified and a Material Uncertainty
Exists
If auditor concludes that mgt’s use of going concern basis of accounting is appropriate in
circumstances but material uncertainty exists, auditor shall determine whether FS:

a) Adequately disclose principal events or conditions that may cast significant doubt on the entity’s
ability to continue as a going concern and mgt’s plans to deal with these events or conditions;
and
b) Disclose clearly that there is material uncertainty related to events or conditions that may cast
significant doubt on the entity’s ability to continue as a going concern and, therefore, that it
may be unable to realize its assets and discharge its liabilities in the normal course of business.

Adequacy of Disclosures When Events or Conditions Have Been Identified but No Material
Uncertainty Exists
If events or conditions identified that may cast significant doubt on entity’s ability to continue as
going concern but, based on audit evidence obtained, auditor concludes that no material uncertainty
exists, auditor shall evaluate whether, in view of the requirements of FRF, F.S. provide adequate
disclosures about these events or conditions.

Implications for Reporting

Use of Going Concern Basis of Accounting Is Inappropriate

If FS have been prepared using going concern basis of accounting but, in auditor’s judgment, mgt’s use
of the going concern basis of accounting in the preparation of FS is inappropriate, auditor shall express
an adverse opinion.

Use of Going Concern Basis of Accounting Is Appropriate but a Material Uncertainty Exists

Adequate Disclosure of a Material Uncertainty Is Made in Financial Statements à Auditor shall

express an unmodified opinion and report shall include separate section under the heading “Material
Uncertainty Related to Going Concern” to:

(a) Draw attention to note in F.S. that discloses the matters; and

(b) State that these events or conditions indicate that a material uncertainty exists that may cast
significant doubt on the entity’s ability to continue as a going concern and that the auditor’s opinion is
not modified in respect of the matter.

Adequate Disclosure of a Material Uncertainty Is Not Made in F.S. à If adequate disclosure about
material uncertainty is not made in financial statements, auditor shall:

CA SHUBHAM KESWANI 68
(a) Express a qualified opinion or adverse opinion, as appropriate, in accordance with SA 705
(Revised); and

(b) In Basis for Qualified (Adverse) Opinion section of auditor’s report, state that a material
uncertainty exists that may cast significant doubt on the entity’s ability to continue as a going concern
and that the financial statements do not adequately disclose this matter.

Management Unwilling to Make or Extend Its Assessment à Auditor shall consider the implications
for auditor’s report.
Communication with TCWG
a) Whether events or conditions constitute a material uncertainty;
b) Whether mgt’s use of going concern basis of accounting is appropriate in preparation of F.S.;
c) The adequacy of related disclosures in F.S.; and
d) Where applicable, implications for auditor’s report.

Significant Delay in Approval of Financial Statements

Inquire reasons for delay. If delay could be related to events or conditions relating to going concern
assess. perform additional audit procedures & consider effect on auditor’s conclusion regarding
existence of a material uncertainty.

Events or Conditions That May Cast Significant Doubt on the Entity’s Ability to Continue as a Going
Concern

Financial
• Net liability or net current liability position.
• Fixed-term borrowings approaching maturity without realistic prospects of renewal or
repayment; or excessive reliance on short-term borrowings to finance long-term assets.
• Inability to pay creditors on due dates.
• Indications of withdrawal of financial support by creditors.
• Substantial operating losses or significant deterioration in value of assets used to generate
cash flows.
• Arrears or discontinuance of dividends.
• Negative operating cash flows indicated by historical or prospective financial statements.
• Adverse key financial ratios.
• Change from credit to cash-on-delivery transactions with suppliers.

Operating
• Management intentions to liquidate the entity or to cease operations.
• Loss of key mgt without replacement.
• Loss of a major market, key customer(s), franchise, license, or principal supplier(s).
• Labor difficulties.
• Shortages of important supplies.
• Emergence of a highly successful competitor.

Other
• Non-compliance with capital or statutory or regulatory requirements
• Pending legal or regulatory proceedings against entity that may result in claims that entity is
unlikely to satisfy.
• Changes in law or regulation or government policy expected to adversely affect entity.
• Uninsured or underinsured catastrophes when they occur.

CA SHUBHAM KESWANI 69
 SA 580: Written Representations (WR)

• A written statement by mgt provided to auditor to confirm certain matters or to support other
audit evidence.
• Written representations in this context do not include F.S., assertions therein, or supporting
books and records.
• WR provide necessary audit evidence, they don’t provide SAAE on their own about any of
matters with which they deal.

Objectives of Auditor

a) To obtain WR from mgt that they believes they have fulfilled their responsibility for
preparation of F.S and for completeness of information provided to auditor;
b) To support other audit evidence relevant to F.S. or specific assertions in F.S by means of WR,
if determined necessary by auditor or required by other SAs; and
c) To respond appropriately to WR provided by management or if management do not provide the
written representations requested by the auditor.

Date & Period covered by WR

As per SA 580, “Written Representations”, as written representations are necessary audit evidence,
auditor’s opinion cannot be expressed, and auditor’s report cannot be dated, before the date of written
representations.

Furthermore, because auditor is concerned with events occurring up to date of auditor’s report that
may require adjustment to or disclosure in F.S, WR are dated as near as practicable to, but not after,
date of auditor’s report on F.S.

In some circumstances it may be appropriate for auditor to obtain a WR about a specific assertion in
F.S. during the course of audit. Where this is the case, it may be necessary to request an updated
written representation.

The written representations are for all periods referred in auditor’s report because mgt needs to
reaffirm that WR it previously made wrt prior periods remain appropriate. Auditor and mgt may agree
to a form of WR that updates WRs relating to prior periods by addressing whether there are any
changes to such written representations and, if so, what they are.

Situations may arise where current mgt were not present during all periods referred to in auditor’s
report. Such persons may assert that they are not in position to provide some or all of WRs because
they were not in place during prior period.

This fact, however, does not diminish such persons’ responsibilities for F.S. as a whole. Accordingly,
requirement for auditor to request written representations that cover whole of relevant period(s) still
applies.

CA SHUBHAM KESWANI 70
 Doubt as to the Reliability of Written Representations

If auditor has concerns about competence, integrity, ethical values or diligence (DICE) of mgt, auditor
shall determine effect that such concerns may have on reliability of representations (oral or written)
and audit evidence in general.

In particular, if WR are inconsistent with other audit evidence, auditor shall perform audit procedures
to attempt to resolve the matter. If matter remains unresolved, reconsider assessment of
competence, integrity, ethical values or diligence (DICE) of mgt and determine effect on reliability of
representations (oral or written) and audit evidence in general.

If auditor concludes that WR are not reliable, take appropriate actions, including determining possible
effect on opinion in auditor’s report in accordance with SA 705.

Requested Written Representations Not Provided

If mgt does not provide one or more of requested written representations, auditor shall:

a) Discuss matter with mgt;

b) Re-evaluate integrity of mgt and evaluate effect on reliability of representations (oral or
written) and audit evidence in general; and
c) Take appropriate actions, including determining possible effect on the opinion in auditor’s report
in accordance with SA 705,.

The auditor shall disclaim an opinion in accordance with SA 705 if:

a) The auditor concludes that there is sufficient doubt about integrity of management such that
WR are not reliable; or
b) Management does not provide WR required.

CA SHUBHAM KESWANI 71
 SA 600: Using the work of Other Auditor

Principal Auditor

• Auditor who uses work performed by other auditors is Principal auditor.

• Auditor with responsibility for reporting on financial information of an entity
• when that financial information includes financial information of one or more components
audited by another auditor.

Acceptance as principal Auditor

The auditor should consider following before accepting his position as principal auditor:

a) materiality of portion of financial information which principal auditor audits;

b) principal auditor's degree of knowledge regarding business of components;

c) risk of material misstatements in financial information of components audited by other auditor;

and

d) performance of additional procedures as set out in this SA regarding components audited by

other auditor resulting in principal auditor having significant participation in such audit.

Principal Auditor’s Procedures

1. Right to visit component & examine books of accounts & records, if necessary.

2. If planning to use work of other auditor evaluate his competence if he’s not member of ICAI

3. Perform procedures to obtain SAAE that work of other auditor is adequate for principal auditor’s
purpose.
• Advise other auditor of use of his work & co-ordinate at planning stage.
• Inform auditor about areas requiring spl. consideration, procedures for identifying inter-
component transaction, & time table for audit completion.
• Advise other auditor about significant accounting, auditing & reporting requirements & obtain
representation as to compliance with them.

4. Principal Auditor might discuss with other auditor procedures applied or review written summary
of his audit procedures in form of questionnaire or checklist. May also plan to visit other auditor.
NTE of audit procedures would depend on his knowledge of professional competence of other
auditor that can be enhanced from review of his previous audit work.

Role of Principal & Other Auditor (Coordination b/w Auditors)

As per SA 600 “Using the Work of Another Auditor”, there should be sufficient liaison between
principal auditor and other auditor

Role of Principal Auditor:

i. It is necessary to issue written communication(s) as principal auditor to other auditor.

ii. The principal auditor should advise other auditor of any matters that come to his attention
that may have important bearing on other auditor’s work.

CA SHUBHAM KESWANI 72
 iii. When considered necessary by him, principal auditor may require other auditor to answer a
detailed questionnaire regarding matters on which principal auditor requires information for
discharging his duties.

Role of Other Auditor:

i. The other auditor, knowing context in which his work is to be used by principal auditor, should
co-ordinate with principal auditor. For example, by bringing to principal auditor’s immediate
attention any significant findings requiring to be dealt with at entity level, adhering to time-
table for audit of component, etc.
ii. He should ensure compliance with relevant statutory requirements.
iii. The other auditor should respond to questionnaire sent by Principal Auditor on a timely basis.

Reporting Considerations

When principal auditor concludes, that work of other auditor can’t be used and he has not been able
to perform sufficient additional procedures regarding financial information of component audited by
other auditor, express a qualified or disclaimer of opinion because there is limitation on scope of audit.

In all circumstances, if other auditor issues, or intends to issue, modified auditor's report, principal
auditor should consider whether subject of modification is of such nature and significance, in relation
to financial information of entity that it requires modification of principal auditor's report.

Division of Responsibility

The principal auditor would not be responsible in respect of work entrusted to other auditors, except
in circumstances which should have aroused his suspicion about reliability of work performed by other
auditors.

When principal auditor has to base his opinion on FS of entity as a whole relying upon statements and
reports of other auditors, report should state clearly division of responsibility for financial
information of entity by indicating extent to which financial information of components audited by
other auditors included in financial information of entity, e.g., number of
divisions/branches/subsidiaries or other components audited by other auditors.

CA SHUBHAM KESWANI 73
 SA 620: Using the work of Auditor’s Expert

SA 620 deals with auditor’s responsibilities regarding use of work in a field of expertise other than
accounting or auditing when that work is used to assist the auditor in obtaining SAAE.

Types of report or opinions Auditor can obtain from Auditor’s expert?

• The valuation of complex financial instruments, land and buildings, plant and machinery,
jewellery, works of art, antiques, intangible assets, assets acquired and liabilities assumed in
business combinations and assets that may have been impaired.

• The actuarial calculation of liabilities associated with insurance contracts or employee benefit
plans.

• The estimation of oil and gas reserves.

• The valuation of environmental liabilities, and site clean-up costs.

• The interpretation of contracts, laws and regulations.

• The analysis of complex or unusual tax compliance issues.

Objectives of Auditor
(a) To determine whether to use work of an auditor’s expert; and
(b) If using work of an auditor’s expert à determine whether that work is adequate for auditor’s
purposes.

Areas where Auditor’s expert can assist the auditor

• Obtaining an understanding of entity and its environment, including its internal control. (SA 315)
• Identifying and assessing ROMM. (SA 315)
• Determining and implementing overall responses to assessed risks at F.S. level. (SA 330)
• Designing and performing further audit procedures to respond to assessed risks at assertion level,
comprising tests of controls or substantive procedures. (SA 330)
• Evaluating sufficiency and appropriateness of audit evidence obtained in forming an opinion on F.S.
(SA 500)

Considerations when deciding to use the work of Auditor’s Expert

• Whether management has used a management’s expert in preparing F.S.

• The nature and significance of matter, including its complexity.

• The ROMM in matter.

• The expected nature of procedures to respond to identified risks, including auditor’s knowledge
of and experience with work of experts in relation to such matters; and availability of alternative
sources of audit evidence.

When management has used a management’s expert

When mgt has used management’s expert in preparing F.S, auditor’s decision on whether to use an
auditor’s expert may also be influenced by such factors as: [Same as SA 500]

• The nature, scope and objectives(NSO) of the management’s expert’s work.

• Whether mgt’s expert is employed by entity, or is a party engaged by it to provide relevant
services.

CA SHUBHAM KESWANI 74
 • The extent to which mgt can exercise control or influence over the work of the management’s
expert.
• The management’s expert’s competence and capabilities.
• Whether mgt’s expert is subject to technical performance standards or other professional or
industry requirements.
• Any controls within entity over management’s expert’s work.

Nature, Timing & Extent of Audit Procedures when using work of Auditor’s Expert
The NTE of auditor’s procedures will vary depending on circumstances. The auditor shall consider
matters including:

a) The nature of matter to which that expert’s work relates;

b) The risks of material misstatement in the matter to which that expert’s work relates;
c) The significance of that expert’s work in the context of the audit;
d) The auditor’s knowledge of and experience with previous work performed by that expert; and
e) Whether that expert is subject to the auditor’s firm’s quality control policies and procedures.

The following factors may suggest the need for different or more extensive procedures than would
otherwise be the case:

• The work of auditor’s expert relates to significant matter that involves subjective and complex
judgments.

• The auditor has not previously used work of auditor’s expert, and has no prior knowledge of expert’s
competence, capabilities and objectivity.

• The auditor’s expert is performing procedures integral to audit, rather than being consulted to
provide advice on individual matter.

• The expert is auditor’s external expert and not subject to firm’s quality control policies and
procedures.

Competence, Capability & Objectivity of Auditor’s Expert

Information regarding competence, capabilities and objectivity of auditor’s expert may come from a
variety of sources: [Similar to SA 500]
• Personal experience with previous work of that expert.
• Discussions with that expert.
• Discussions with other auditors or others who are familiar with that expert’s work.
• Knowledge of that expert’s qualifications, membership of a professional body or industry
association, license to practice, or other forms of external recognition.
• Published papers or books written by that expert.
• The auditor’s firm’s quality control policies and procedures.

Evaluating the objectivity of an auditor’s external expert

When evaluating objectivity of auditor’s external expert, it may be relevant to:

a) Inquire entity about any known interests or relationships that it has with auditor’s external
expert.

b) Discuss with that expert any applicable safeguards, including professional requirements that
apply to him; and evaluate adequacy of safeguards to reduce threats to acceptable level.

CA SHUBHAM KESWANI 75
Interests and relationships that may be relevant to discuss with the auditor’s expert include:
• Financial interests.
• Business and personal relationships.
• Provision of other services by expert
• In some cases, it may also be appropriate for auditor to obtain written representation from
auditor’s external expert about interests or relationships with entity of which that expert is
aware.

Agreement with the Auditor’s Expert

The auditor shall agree, in writing when appropriate, on following matters with the auditor’s expert:

a) The nature, scope and objectives of that expert’s work;

b) The respective roles and responsibilities of auditor and expert;

c) The nature, timing and extent of communication between auditor and expert, including form of
report to be provided by expert; and

d) The need for auditor’s expert to observe confidentiality requirements.

The following factors suggest need for more detailed agreement or written agreement:

• The auditor’s expert will have access to sensitive or confidential entity information.
• The respective roles or responsibilities of auditor and auditor’s expert are different from
those normally expected.

• Multi-jurisdictional legal or regulatory requirements apply.

• The matter to which auditor’s expert’s work relates is highly complex.

• The auditor has not previously used work performed by that expert.

• The greater the extent of auditor’s expert’s work, and its significance in context of audit.

Evaluating Adequacy of Auditor’s Expert Work

Specific procedures to evaluate adequacy of auditor’s expert’s work for auditor’s purposes may include:

• Inquiries of auditor’s expert.

• Reviewing auditor’s expert’s working papers and reports.

• Corroborative procedures, such as:

o Observing the auditor’s expert’s work
o Examining published data, such as statistical reports from reputable, authoritative
sources;
o Confirming relevant matters with third parties
o Performing detailed analytical procedures; and
o Re-performing calculations.

• Discussion with another expert with relevant expertise when, for example, the findings or
conclusions of the auditor’s expert are not consistent with other audit evidence.

• Discussing the auditor’s expert’s report with management.

CA SHUBHAM KESWANI 76
 Use of Significant assumptions & methods (Relevance & Reasonableness)
Factors relevant to the auditor’s evaluation of those assumptions and methods include whether they
are:
• Generally accepted within auditor’s expert’s field;
• Consistent with requirements of applicable FRF;
• Consistent with those of management, and if not, reason for, and effects of, differences.
• Dependent on use of specialised models;

Source Data (Relevance, Completeness & Accuracy)

• Verifying origin of data, including obtaining understanding of, and where applicable testing,
internal controls over the data and, where relevant, its transmission to expert.

• Reviewing the data for completeness and internal consistency

Inadequate work
If the auditor determines that work not adequate for auditor’s purposes, auditor shall:

a) Agree with that expert on nature and extent of further work to be performed by expert; or
b) Perform further audit procedures appropriate to circumstances.

Reporting: If work is not adequate for auditor’s purposes + cannot resolve matter through additional
audit procedures à express modified opinion as per SA 705 because not obtained SAAE.

Reference to Auditor’s Expert in Auditor’s Report

• The auditor shall not refer to work of auditor’s expert in auditor’s report containing unmodified
opinion unless required by law or regulation to do so. If such reference required by law or regulation,
auditor shall indicate in report that reference does not reduce auditor’s responsibility for audit
opinion.

• In some cases, law or regulation may require reference to work of an auditor’s expert, for purposes
of transparency in public sector.

• If auditor makes reference to work of auditor’s expert in auditor’s report because such reference
is relevant to understanding of modification to auditor’s opinion, indicate in auditor’s report that
such reference does not reduce auditor’s responsibility for that opinion.

CA SHUBHAM KESWANI 77
 SA 700: Forming an Opinion & Reporting on the Financial Statements

Objective:

a) To form an opinion on F.S. based on evaluation of conclusions drawn from audit evidence obtained;
and
b) To express clearly that opinion through a written report.

Specific Evaluations by the Auditor

In particular, the auditor shall evaluate whether:

(a) The F.S. adequately disclose significant accounting policies selected and applied;

(b) The a/c policies selected and applied are consistent with applicable FRF and are appropriate;

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

(d) The information presented in F.S. is relevant, reliable, comparable, and understandable;

(e) The F.S. provide adequate disclosures to enable intended users to understand effect of material
transactions and events on information conveyed in F.S.; and

(f) The terminology used in F.S., including the title of each financial statement, is appropriate.

Forming an opinion on the Financial Statements

The auditor shall form opinion on whether F.S. are prepared, in all material respects, in accordance
with applicable FRF.

In order to form opinion, obtain reasonable assurance about whether F.S. as whole are free from
material misstatement whether due to fraud or error.

Further, when F.S. are prepared in accordance with fair presentation framework, also evaluate
whether F.S. achieve fair presentation by considering:

1. The overall presentation, structure and content(PCS) of F.S.; and

2. Whether F.S., including related notes, represent underlying transactions and events in a manner
that achieves fair presentation.

In other words, auditor shall express an unmodified opinion when auditor concludes F.S. are
prepared, in all material respects, in accordance with applicable FRF.

Basic Elements of Audit Report

1. Title: Auditor’s report shall have title that clearly indicates that it is report of independent
auditor. “Independent Auditor’s Report,” distinguishes independent auditor’s report from reports
issued by others.

2. Addressee: The auditor’s report shall be addressed as required by circumstances of engagement.

Report could be addressed to Members of Company in case of general purpose (statutory) F.S. and to
Board of Directors in case of special purpose F.S.

3. Auditor’s Opinion: The first section of auditor’s report shall include auditor’s opinion, and shall
have heading “Opinion.” Opinion section of auditor’s report shall also:

CA SHUBHAM KESWANI 78
 a) Identify entity whose F.S. have been audited;
b) State that F.S. have been audited;
c) Identify title of each statement comprising F.S.;
d) Refer to notes, including summary of significant accounting policies; and
e) Specify date of, or period covered by, each financial statement comprising the F.S.

4.Basis for Opinion: The auditor’s report shall include a section, directly following the Opinion
section, with the heading “Basis for Opinion”, that:

a) States that audit was conducted in accordance with Standards on Auditing;

b) Refers to the section of auditor’s report that describes auditor’s responsibilities under SAs;
c) Includes statement that auditor is independent of entity in accordance with relevant ethical
requirements relating to audit, and has fulfilled other ethical responsibilities. The statement shall
refer to Code of Ethics issued by ICAI
d) States whether auditor believes that audit evidence obtained is sufficient and appropriate to
provide basis for auditor’s opinion.

5. Going Concern: Where applicable, auditor shall report in accordance with SA 570, Auditor’s
responsibilities are to obtain SAAE and conclude on, appropriateness of mgt’s use of going concern
basis of accounting in preparation of F.S, and conclude whether material uncertainty exists about
entity’s ability to continue as going concern.

Implications on Auditor’s Report

Use of Going Concern Use of Going Concern Basis of Management unwilling to

Basis of Accounting is Accounting is Appropriate make or extend its
Inappropriate But Material Uncertainty Exists & assessment

Adverse Opinion Consider

Adequate disclosure of Adequate disclosure of implications on
material uncertainty is material uncertainty is Audit Report
made in F.S. NOT made in F.S.

Unmodified Opinion & Qualified/Adverse opinion

separate section “Material & mention in the basis of
Uncertainty related to opinion para
going concern”

6. Key Audit Matters: For audits of F.S. of listed entities à communicate KAM in auditor’s report in
accordance with SA 701.
When auditor is otherwise required by law or regulation or decides to communicate key audit matters
in auditor’s report, auditor shall do in accordance with SA 701.

7. Responsibilities for Financial Statements

The auditor’s report shall include a section with heading “Responsibilities of Management for
Financial Statements.” In some entities, appropriate reference may be to TCWG.

This section of the auditor’s report shall describe mgt’s responsibility for:

CA SHUBHAM KESWANI 79
a) Preparing F.S. as per applicable FRF, and for such internal control as mgt determines necessary to
enable preparation of F.S. free from material misstatement, whether due to fraud or error; &

b) Assessing entity’s ability to continue as going concern and whether use of GC basis of accounting
is appropriate as well as disclosing matters relating to GC. The expln of mgt’s responsibility for
this assessment shall include description of when use of GC basis of accounting is appropriate.

This section of auditor’s report shall also identify those responsible for oversight of financial reporting
process. In this case, heading of this section shall also refer to “Those Charged with Governance”.

When F.S. prepared in accordance with fair presentation framework, description of responsibilities
for F.S. in auditor’s report shall refer to “preparation and fair presentation of these financial
statements” or “preparation of financial statements that give a true and fair view,” as appropriate.

8. Auditor’s Responsibilities for Audit of F.S:

(I) This section of auditor’s report shall:

a) State that objectives of auditor are to:

i. Obtain reasonable assurance about whether F.S. as a whole are free from material
misstatement, whether due to fraud or error; and
ii. Issue an auditor’s report that includes auditor’s opinion.

b) State that reasonable assurance is high level of assurance, but not a guarantee that audit
conducted in accordance with SAs will always detect a material misstatement when it exists; and

c) State that misstatements can arise from fraud or error, and either:
i. Describe that they are considered material if, individually or in aggregate, they could
reasonably be expected to influence economic decisions of users taken on basis of these F.S;
or
ii. Provide a definition or description of materiality in accordance with applicable FRF.

(II) The Auditor’s Responsibilities for the Audit of F.S. section of the auditor’s report shall further:

To exercises professional judgment and maintains professional

skepticism throughout the audit as per SAs;

To identify and assess the risks of

Auditor’s Responsibilities in Audit of FS

material misstatement of the FS

To obtain an understanding of internal

control relevant for audit to design a/c policies used
audit procedures
To describe an audit by
stating that the Reasonableness
auditor’s To evaluate the appropriateness of:
of accounting
responsibilities are: estimates
To conclude on the appropriateness of
mgt use of going concern assumption Related
disclosures
made by mgt
To describe the To evaluate overall
auditor’s presentation,content & structure of
responsibilities in a F.S.
group audit
engagement as per SA
600.

CA SHUBHAM KESWANI 80
(III) The Auditor’s Responsibilities for Audit of Financial Statements section of auditor’s report
also shall:

(a) State that auditor communicates with TCWG regarding, among other matters: planned scope and
timing of audit and significant audit findings, including any significant deficiencies in internal control
that auditor identifies during audit;

(b) State that auditor provides TCWG with a statement that auditor has complied with relevant
ethical requirements regarding independence and communicate with them all relationships and other
matters that may reasonably be thought to bear on auditor’s independence, and where applicable,
related safeguards; and

(c) For audits of F.S. of all such entities for which KAM are communicated in accordance with SA
701, state that, from matters communicated with TCWG, auditor determines those matters that
were of most significance in audit of F.S. of current period and are therefore key audit matters.

KAM to be presented in Audit Report:

As per SA 701, auditor describes these matters in auditor’s report unless law or regulation precludes
public disclosure about the matter or in extremely rare circumstances, auditor determines that a
matter should not be communicated in auditor’s report because adverse consequences of doing so
would reasonably be expected to outweigh the public interest benefits of such communication.

9. Location of description of auditor’s responsibilities: The description of auditor’s responsibilities

for audit of F.S. required by this SA shall be included:

a) Within body of b) Within an appendix to c) By specific reference within

Audit Report auditor’s report in that case auditor’s report to location of such
auditor shall include reference description on website of
to location of appendix appropriate authority, where law,
regulation or auditing stds permit.

10. Other reporting responsibilities

11. Signature of auditor: Audit report shall be signed by Auditor in personal name & audit firm.
Partner signing needs to mention membership no. + Registration no. of firm + UDIN

12. Date of Audit Report: Not earlier than date when auditor has obtain SAAE

Audit reports for audit as per both SAs & International Stds on Audit
Auditor may be required to conduct audit in accordance with, in addition to Standards on Auditing
issued by ICAI, International Standards on Auditing or auditing stds of any other jurisdiction. If this
is the case, auditor’s report may refer to SA in addition to ISA or auditing standards of such other
jurisdiction, but auditor shall do so only if:

(a) There is no conflict between requirements in ISAs or such auditing standards of other
jurisdiction and those in SAs that would lead auditor

i. to form a different opinion, or

ii. not to include an Emphasis of Matter or Other Matter para that, in particular
circumstances, is required by SAs; and

CA SHUBHAM KESWANI 81
(b) The auditor’s report includes, at a minimum, each of the elements required by SA. The auditor’s
report shall thereby identify such Standards on Auditing.

When auditor’s report refers to both the ISAs or auditing standards of a specific jurisdiction and
SA issued by ICAI, auditor’s report shall clearly identify the same including jurisdiction of origin of
other auditing stds.

Supplementary Information Presented with Financial Statements

If supplementary info that is not required by applicable FRF is presented with audited F.S., auditor
shall evaluate whether it is integral part of F.S. due to its nature or how its presented. When it is
integral part of F.S, it shall be covered by auditor’s opinion.

If supplementary info that is not required by applicable FRF is not considered an integral part of
audited F.S, evaluate whether it is presented in a way that sufficiently and clearly differentiates it
from audited F.S. If not, then auditor shall ask mgt to change its presentation. If mgt refuses ,
auditor shall identify unaudited supplementary info and explain in auditor’s report that such
supplementary info has not been audited.

Examples:

1) When notes to F.S. include expln or reconciliation to the extent to which F.S. comply with another
FRF. Auditor’s opinion will consider such this as supplementary info that can’t be differentiated from
F.S. His opinion will cover such notes or schedules cross referenced from F.S.

2) When additional p&l that discloses specific items of expenditure as separate schedule included as
appendix to F.S. à Auditor shall consider it as supplementary info that can be differentiated from
financial info.

CA SHUBHAM KESWANI 82
 SA 701: Communicating Key Audit Matters in the
Independent Auditor’s Report
• Key Audit matter are matters that in auditor’s professional judgment, were of most significance
in audit of F.S. of current period.
• KAM are selected from matters communicated with TCWG.

Objective
• To enhance communicative value of auditor’s report by providing greater transparency about
audit that was performed.
• To assist user in understanding those matters that, in auditor’s professional judgment, were
of most significance in audit of F.S. of current period.

Communicating KAM is not:

a) A substitute for disclosures in F.S as per applicable FRF

b) A substitute for auditor expressing a modified opinion as per SA 705 (Revised);
c) A substitute for reporting in accordance with SA 570 (Revised) when a material uncertainty
exists relating to events or conditions that may cast significant doubt on an entity’s ability to
continue as a going concern; or
d) A separate opinion on individual matters.

Factors à Determining Key Audit Matters

a) Areas of higher assessed RMM, or significant risks identified in accordance with SA 315
b) Significant auditor judgments relating to areas in F.S. that involved significant mgt judgment,
including accounting estimates that have been identified as having high estimation
uncertainty.
c) The effect on audit of significant events or transactions that occurred during the period.

Examples of Key Audit Matters

Assessment of Impairment, Provision for losses and contingencies, Valuation of financial instruments,
Matters relating to Revenue recognition, Taxation matters (multiple tax jurisdictions, uncertain tax
position, deferred tax assets)

Communicating Key Audit Matters

The introductory language in this section of auditor’s report shall state that:

a) Key audit matters are those matters that, in auditor’s professional judgment, were of most
significance in audit of F.S. [of current period]; and
b) These matters were addressed in context of audit of F.S. as a whole, and in forming auditor’s
opinion thereon, and auditor does not provide separate opinion on these matters.

If no KAM Identified? :The following illustrates presentation in auditor’s report if auditor has
determined there are no KAM to communicate:

Key Audit Matters: [Except for the matter described in Basis for Qualified (Adverse) Opinion
section or Material Uncertainty Related to Going Concern section,] We have determined that there
are no [other] key audit matters to communicate in our report.]

CA SHUBHAM KESWANI 83
 SA 705, “Modifications to the Opinion in the Independent Auditor’s Report”

Objective: The objective of auditor is to express clearly an appropriately modified opinion on F.S.
that is necessary when:

a) The auditor concludes, based on audit evidence obtained, that F.S. as a whole are not free
from material misstatement; or
b) The auditor is unable to obtain SAAE to conclude that F.S. as a whole are free from material
misstatement.

Qualified Opinion: The auditor shall express qualified opinion when:

(a) Obtained SAAE à concludes that misstatements, individually or in aggregate, are material, but not
pervasive, to F.S.; or

(b) Unable to obtain SAAE to base the opinion, but concludes that possible effects on F.S. of
undetected misstatements, if any, could be material but not pervasive.
(Material but not pervasive)

Spl. Considerations: When the auditor expresses qualified opinion due to material misstatement in F.S,
auditor shall state that, in auditor’s opinion, except for effects of matter(s) described in Basis for
Qualified Opinion section:

(1) When reporting in accordance with fair presentation framework, accompanying F.S. present fairly,
in all material respects (or give a true and fair view of) […] in accordance with [applicable FRF]; or

(2) When reporting in accordance with compliance framework, accompanying F.S. have been prepared,
in all material respects, in accordance with [applicable FRF]. When modification arises from inability
to obtain SAAE, auditor shall use corresponding phrase “except for possible effects of matter(s) ...”
for modified opinion.

Adverse Opinion: Obtained SAAE, concludes misstatements, individually or in the aggregate, both
material and pervasive to financial statements.

Spl. Considerations: When auditor expresses an adverse opinion, auditor shall state that, in auditor’s
opinion, because of significance of matter(s) described in Basis for Adverse Opinion section:

(1) When reporting in accordance with a fair presentation framework, accompanying F.S. do not present
fairly (or give a true and fair view of) […] in accordance with [applicable FRF]; or

(2) When reporting in accordance with compliance framework, accompanying F.S. have not been
prepared, in all material respects, in accordance with [applicable FRF].

Disclaimer of Opinion: Unable to obtain SAAE to base the opinion, and concludes that possible effects
on F.S. of undetected misstatements, if any, could be both material and pervasive.
Note: Unless required by law or regulation, when auditor disclaims an opinion on F.S., auditor’s report
shall not include Key Audit Matters section in accordance with SA 701.

Spl considerations: When auditor disclaims an opinion due to inability to obtain SAAE, auditor shall:

CA SHUBHAM KESWANI 84
 1. State that auditor does not express opinion on accompanying F.S;
2. State that, because of significance of matter(s) described in Basis for Disclaimer of Opinion
section, auditor has not been able to obtain SAAE to provide basis for audit opinion on F.S; and
3. Amend the statement required in SA 700 (Revised), which indicates that F.S. have been
audited, to state that auditor was engaged to audit the F.S.

Mgt imposed limitation after acceptance of Audit Engagement à Unable to obtain SAAE

Ø After accepting Audit , mgt impose limitation on scope à likely to result in Qualified or
Disclaim of opinion à auditor request mgt to remove limitation

Ø Mgt refuse to remove limitation à Auditor communicate with TCWG & determine if alternate
procedures can be performed to obtain SAAE

Ø If auditor unable to obtain SAAE, determine implications as below:

(a) If auditor concludes that possible effects on F.S.of undetected misstatements, if any, could
be material but not pervasive, auditor shall qualify the opinion; or

(b) If auditor concludes that possible effects on F.S. of undetected misstatements, if any,
could be both material and pervasive so that qualification of opinion would be inadequate to
communicate gravity of situation, the auditor shall:
(i) Withdraw from audit, where practicable and possible under applicable law or regulation;
or
(ii) If withdrawal from audit before issuing auditor’s report not practicable, disclaim an
opinion on F.S.
Ø If decides to withdraw à communicate with TCWG à matters regarding misstatement à rise
to modification of opinion

Note: If Auditor expresses Adverse or Disclaimer of Opinion then audit report shall not contain
unmodified opinion w.r.t any element of F.S.

The auditor’s inability to obtain SAAE (also referred to as limitation on scope of audit)
may arise from:
(a) Circumstances beyond the control of entity;
• The entity’s accounting records have been destroyed.
• The accounting records of a significant component have been seized indefinitely by
governmental authorities.

(b) Circumstances relating to nature or timing of auditor’s work; or

• The entity is required to use equity method of accounting for associated entity, and auditor is
unable to obtain SAAE about latter’s financial information to evaluate whether equity method
has been appropriately applied.
• The timing of auditor’s appointment is such that auditor is unable to observe counting of
physical inventories.
• The auditor determines that performing substantive procedures alone is not sufficient, but
entity’s controls are not effective.

(c) Limitations imposed by management.

• Management prevents the auditor from observing the counting of the physical inventory.
• Management prevents the auditor from requesting external confirmation of specific account
balances.

CA SHUBHAM KESWANI 85
 SA 706: Emphasis of Matter Paragraphs and Other Matter
Paragraphs in the Independent Auditor’s Report

Emphasis of matter para

• Para included in Auditor’s Report
• Refers to matter appropriately presented or disclosed in F.S.
• that in, Auditor’s judgment is of
• importance to user’s fundamental understanding of F.S.

SAs that contain specific requirements for auditor to include Emphasis of Matter paragraphs in
auditor’s report in certain circumstances. These circumstances include:

• When a FRF prescribed by law or regulation would be unacceptable but for the fact that it is
prescribed by law or regulation. (SA 210)

• To alert users that F.S. are prepared in accordance with a special purpose framework.

• When facts become known to auditor after date of auditor’s report and auditor provides a new or
amended auditor’s report (i.e., subsequent events). (SA 560)

Examples of circumstances where auditor may consider it necessary to include an Emphasis of

Matter paragraph are:

• An uncertainty relating to future outcome of exceptional litigation or regulatory action.

• A significant subsequent event that occurs between date of F.S and date of auditor’s report.

• Early application (where permitted) of new a/c std that has material effect on F.S.

• A major catastrophe that has had, or continues to have, significant effect on entity’s financial
position.

When the auditor includes EOM para in auditor’s report, auditor shall:

(a) Include the paragraph within separate section of auditor’s report with appropriate heading that
includes the term “Emphasis of Matter”;
(b) Include in the paragraph clear reference to matter being emphasized and to where relevant
disclosures that fully describe the matter can be found in F.S. The para shall refer only to info
presented or disclosed in F.S; and

(c) Indicate that auditor’s opinion is not modified in respect of matter emphasized.

Note: EOM para is not substitute for KAM, if matter determined as KAM à represent as KAM

Other Matter Para

• Para included in Auditor’s report

• Refers to a matter other than those Presented/Disclosed in F.S.
• Relevant to user’s understanding of
• Audit, auditor’s responsibilities or Audit report

The auditor shall include an Other Matter paragraph in the auditor’s report, provided:
a) Not prohibited by law or regulation; and
b) When SA 701 applies, matter has not been determined to be KAM

CA SHUBHAM KESWANI 86
 SA 710: Comparative Information—Corresponding Figures
and Comparative Financial Statements

Corresponding figures –
• Comparative info where amounts and disclosures for prior period included as integral part of
current period F.S, and intended to be read only in relation to amounts and other disclosures
relating to current period
• The level of detail presented in corresponding amounts and disclosures is dictated primarily by
its relevance to current period figures.

Comparative financial statements –

• Comparative information where amounts and disclosures for prior period included for
comparison with F.S. of current period but, if audited, are referred to in auditor’s opinion.
• The level of info included in comparative F.S. is comparable with that of F.S. of current period.

Audit Procedures for Comparative Information:

(a) Perform Specific audit Procedure: For determining that F.S. contains appropriately classified
comparative information, auditor should:
• Ensure that comparative info agrees with amount and other disclosure presented in prior period.
• The accounting policies applied are consistent with those applied in current period.
• If there have been any changes in application of accounting policies than they are properly disclosed
and presented.

(b) Evaluating the impact on F.S: If auditor becomes aware of any possible misstatement in comparative
information, then:
• He should perform the necessary audit procedures to obtain sufficient audit evidence.
• If auditor had audited prior period’s F.S. than he should follow the relevant requirements of SA
560.

(c) Written Representation: As required by SA 580, auditor should also request written
representation. He should also obtain a specific written representation regarding any prior period item
that is disclosed in current year’s F.S.

Audit Reporting
Reporting for Corresponding Figures:

Auditor’s opinion shall not refer to corresponding figures except in following circumstances:
• If auditor’s report of previous period contains other than unqualified opinion.
• If auditor has sufficient evidence that material misstatement exists in F.S. of prior period, which
was not addressed earlier.

If prior period F.S. not audited, than obtain sufficient audit evidence that opening balance don’t
contain any material misstatement.

If auditor’s report on prior period, included qualified, disclaimer of opinion, or adverse opinion and
matter which gave rise to modification is unresolved, auditor shall modify auditor’s opinion on current
period’s F.S.

In Basis for Modification paragraph in auditor’s report, auditor shall either:

CA SHUBHAM KESWANI 87
(a) Refer to both, the current period’s figures and the corresponding figures in description of matter
giving rise to modification when the effects or possible effects of matter on current period’s figures
are material; or

(b) In other cases, explain that the audit opinion has been modified because of effects or possible
effects of unresolved matter on comparability of current period’s figures and corresponding figures.

Reporting for Comparative Financial Statement:

• The auditor’s opinion shall refer to each period for which the F.S. are presented.

• When reporting on current period’s audit, if auditor’s opinion on such prior period F.S. differs from
opinion previously issued on such F.S, auditor shall disclose substantive reason for different opinion in
OM para in his report.

• If auditor concludes that material misstatement is present in previously audited figures of F.S, he
should report it to mgt and request that predecessor auditor be informed.

If then prior years statements are amended with new report by predecessor auditor, then auditor
shall report only on current period.

Reporting treatment common to both (for corresponding figures and comparative information)

(i) If F.S. of prior period were audited by predecessor auditor, auditor (is permitted by law or
regulation to refer to the predecessor audit report – on case of corresponding figures and decides to
do so) shall state in his audit report:
• That F.S. of the prior period were audited by a predecessor auditor;
• The type of opinion expressed by the predecessor auditor;
• The date of that audit report.

(ii) If prior period F.S. were not audited than he shall report the same in OM Para in his audit report
that corresponding/comparative figures are unaudited.

However, disclosure does not relieve him from his responsibility of obtaining SAAE that opening
balances do not contain misstatements that materially affect current period’s F.S.

CA SHUBHAM KESWANI 88
 SA 720: The Auditor’s Responsibility in Relation to Other Information

Scope
• SA 720 deals with Auditor’s responsibilities relating to other info, financial or non-financial
contained in Annual Report.
• Auditor’s opinion on FS doesn’t cover other information (Annual Report)
• He’s just reqd to read & consider other info for any materially inconsistent info from F.S.
that may indicate material misstatement in either F.S. or Annual Report
• Auditor’s responsibility apply whether other info is recd prior to or after auditor’s report

Obtaining the Other Information

The auditor shall:

a) Determine, through discussion with mgt, which document(s) comprises the annual report, and
entity’s planned manner and timing of issuance of such document(s);

b) Make appropriate arrangements with mgt to obtain in timely manner and, if possible, prior to
date of auditor’s report, final version of document(s) comprising annual report; and

c) When some or all of document(s) determined in (a) will not be available until after the date of
auditor’s report, request mgt to provide a WR that final version of document(s) will be provided
to auditor when available, and prior to its issuance by entity, auditor can complete the
procedures required by this SA.

Reading and Considering the Other Information

The auditor shall read the other info and, in doing so shall:

Consider whether there is material inconsistency between

• other information and F.S. and
• other information and auditor’s knowledge obtained in audit, in context of audit evidence
obtained and conclusions reached in the audit.

While reading other info, remain alert for indications that other info may be materially misstated.

When other info is materially misstated

If auditor concludes that a material misstatement of the other information exists, request mgt to
correct the other info. If mgt:

a) Agrees to make correction, auditor shall determine that correction has been made; or
b) Refuses to make correction à communicate the matter with TCWG and request that
correction be made.

If auditor concludes that material misstatement exists in other information obtained prior to date of
auditor’s report, and other information is not corrected after communicating with TCWG, auditor shall
take appropriate action, including:

(a) Considering the implications for auditor’s report and communicating with TCWG about how
auditor plans to address the material misstatement in auditor’s report or

(b) Withdrawing from engagement, where withdrawal is possible under applicable law or regulation.
When F.S. are materially misstated or Auditor’s understanding needs to be updated à respond as
per other SAs.

CA SHUBHAM KESWANI 89
 Reporting
The auditor’s report shall include separate section with a heading “Other Information”, or other
appropriate heading, when, at date of auditor’s report:

(a) For an audit of F.S. of listed entity, auditor has obtained, or expects to obtain, other info; or

(b) For an audit of F.S of an unlisted corporate entity, auditor has obtained some or all of the other
info.

When auditor’s report is required to include an Other Information section, it shall include:

(a) A statement that management is responsible for the other information;

(b) An identification of:

i. Other information obtained by auditor prior to date of the auditor’s report; and
ii. For an audit of F.S. of listed entity, other information, if any, expected to be obtained after
date of auditor’s report;

(c) A statement that auditor’s opinion does not cover other information and, accordingly, auditor
does not express (or will not express) audit opinion or any form of assurance conclusion thereon;

(d) A description of auditor’s responsibilities relating to reading, considering and reporting on other
information as required by this SA; and

(e) When other information has been obtained prior to date of auditor’s report, either:
i. A statement that auditor has nothing to report; or
ii. If auditor has concluded that there is uncorrected material misstatement of other
information, statement that describes the uncorrected material misstatement of other
information.

CA SHUBHAM KESWANI 90
 Examples of Amounts or Other Items that May Be Included in Other Information
The following are eg of amounts and other items that may be included in other info. This list is not
intended to be exhaustive.

Amounts
• Items in a summary of key financial results, such as net income, earnings per share, dividends,
sales and other operating revenues, and purchases and operating expenses.
• Selected operating data, such as income from continuing operations by major operating area,
or sales by geographical segment or product line.
• Special items, such as asset dispositions, litigation provisions, asset impairments, tax
adjustments, environmental remediation provisions, and restructuring and reorganization
expenses.
• Liquidity and capital resource information, such as cash, cash equivalents and marketable
securities; dividends; and debt, capital lease and minority interest obligations.
• Capital expenditures by segment or division.
• Amounts involved in, and related financial effects of, off-balance sheet arrangements.
• Amounts involved in guarantees, contractual obligations, legal or environmental claims, and
other contingencies.
• Financial measures or ratios, such as gross margin, return on average capital employed, return
on average shareholders’ equity, current ratio, interest coverage ratio and debt ratio.

Other Items
• Explanations of critical accounting estimates and related assumptions.
• Identification of related parties and descriptions of transactions with them.
• Descriptions of the nature of off-balance sheet arrangements.
• Descriptions of guarantees, indemnifications, contractual obligations, litigation or
environmental liability cases, and other contingencies, including management’s qualitative
assessments of the entity’s related exposures.
• Descriptions of changes in legal or regulatory requirements, such as new tax or environmental
regulations.
• General descriptions of the business environment and outlook.
• Overview of strategy.

“Work hard in Silence, let your Success be your Noise”

CA SHUBHAM KESWANI 91
 Audit Planning, Strategy & Execution

Benefits of Planning an Audit

i) Attention to Important areas
ii) Timely resolution of Potential Problems
iii) Proper Organisation and Management of Audit Engagement
iv) Proper Selection of Engagement Team
v) Direction and Supervision of Engagement Team
vi) Easy Coordination in work done by auditors of components and experts

Nature & Extent of Planning

i. Size & complexity of the auditee
ii. Past experience & expertise
iii. Change in circumstances

Planning - A Continuous Process

Planning is not discrete phase of audit but rather continual and iterative process. It begins shortly
after completion of previous audit and continues until completion of current audit engagement. It
includes consideration of timing of certain activities and audit procedures. It also involves Audit
Programming.

Planning includes the need to consider such matters as:

• The analytical procedures to be applied as risk assessment procedures.
• Obtaining a general understanding of legal and regulatory framework applicable to entity and
how entity is complying with that framework.
• The determination of materiality.
• The involvement of experts.
• The performance of other risk assessment procedures.

Acceptance and Continuance of Client Relationships and Audit Engagements

i. Perform procedures as per SA 220 + SQC 1
Ø Integrity of principal owners, key mgt & TCWG of entity
Ø Competence of engg team to perform engagement & necessary capabilities,
expertise including time & resources
Ø Whether firm & team can comply with relevant ethical requirements
Ø Significant matters arisen during current/ previous audit engg. & implications for
continuing the relationship
ii. Evaluating compliance with ethical requirements, including independence as reqd by SA 220
iii. Establishing understanding of terms of audit engagement as reqd by SA 210

Contents of Audit Plan

i. NTE of Risk Assessment Procedures(RAP) under SA 315
ii. NTE of Further Audit Procedures(FAP) under SA 330
iii. Other planned audit procedures to comply with SAs
• The audit plan is more detailed than overall strategy includes NTE of audit procedures. Planning
for procedures takes place over audit as plan for engg develops.
• Planning of auditor's risk assessment procedures (RAP) occurs early in audit process.
• However, planning nature, timing and extent of specific further audit procedures (FAP)
depends on outcome of those risk assessment procedures (RAP).

CA SHUBHAM KESWANI 92
 • In addition, auditor may begin execution of further audit procedures (FAP) for some classes of
transactions (COTs), account balances and disclosures before planning all remaining further
audit procedures (FAPs).

Reasons for à Changes to planning decisions

i) Result of ii) Changes in ii) Audit evidence obtained from

unexpected events Conditions results of audit procedures

Overall audit strategy

a. Identify characteristics of engagement that define its scope;
b. Ascertain reporting objectives of engagement to plan timing of audit and nature of
communications required;
c. Consider factors that, in auditor’s professional judgment, are significant in directing
engagement team’s efforts;
d. Consider results of preliminary engagement activities and, whether knowledge gained on other
engagements performed by engagement partner for entity is relevant; and
e. Ascertain nature, timing and extent (NTE) of resources necessary to perform engagement.

Benefits of overall audit strategy

i. Employment of qualitative resources: Use of experienced team personnel for high risk
areas & involvement of experts on complex matters
ii. Allocation of quantity of resources: Amount of resources allocated for each area
iii. Timing of deployment of resources: When these resources are to be deployed, such as
whether at an interim audit stage or at key cut-off dates
iv. Mgt of resources: how resources are managed, directed & supervised

Considerations in Establishing Overall Audit Strategy

Examples of matters that auditor may consider:

a. Characteristics of the engagement

Ø FRF (Financial Reporting Framework)
Ø Industry specific reporting requirements
Ø Expected audit coverage (no. & locations of components)
Ø Nature of control relationships b/w parent & components
Ø Extent to which components audited by other auditors
Ø Entity’s use of service organisation
Ø Expected use of audit evidence of previous audits

b. Reporting Objectives, Timing of the Audit, and Nature of Communications

(i) The entity's timetable for reporting.
(ii) Organization of meetings with mgt regarding audit work (Nature, timing and extent).
(iii) Discussion with mgt regarding type and timing of reports to be issued.
(iv) Discussion with mgt regarding communications on status of audit work.
(v) Communication with auditors of components regarding types and timing of reports to be
issued.
(vi) Nature and timing of communications among engg team members.

CA SHUBHAM KESWANI 93
 c. Significant factors , Preliminary engagement acts & knowledge gained on other audits
Ø Determine materiality SA 320
Ø Areas with high RMM
Ø Impact of assessed RMM at FS level on D/S/R (direction, supervision & review)
Ø Evidence of mgt commitment to design, implementation & maintenance (DIM) of IC
Ø Volume of transn determine reliance on IC
Ø Imp. Attached to IC
Ø Significant business developments
Ø Significant industry developments
Ø Other significant relevant developments

Documenting the audit plan

The auditor shall document:
a. Record of key decisions (Audit strategy to plan audit & communicate significant matters to engg
team)
b. Record of NTE of Risk assess. procedures & additional audit procedures at assertion level in
response to assessed risk (Audit plan)
c. Record of reasons of change in audit plans & audit strategy, explaining reasons for change.

Relationship between the Overall Audit Strategy and the Audit Plan
• The audit strategy is prepared before audit plan.
• The audit plan is more detailed than overall audit strategy.
• Audit strategy and audit plan are inter-related because change in one would result into change
in other.
• Audit strategy provides guidelines for developing audit plan.
• It establishes scope and conduct of audit procedures and thereby, works as basis for
developing a detailed audit plan.
• Detailed audit plan would include nature, timing and extent of audit procedures so as to obtain
SAAE.

Audit Programme (Allocate work to team members)

Important matters that need to be considered are:
a. Nature of business in which org. is engaged : Draw up audit programme after considering
technical, financial and accounting set-up of the company.
b. Overall plan: The framework provided under the overall plan should be strictly adhered to.
c. System of Internal controls & accounting procedures: Study and evaluation of internal control
helps auditor to establish reliance he can place on internal controls in determining NTE of
substantive auditing procedures.
d. Size of organisation & mgt structure: An increase in the size of the organisation enhances the
complexity of the examination of its accounting records.
e. Accounting & management policies: Check F.S. of PY to see of a/c policies have been followed
consistently.

Circumstances requiring alteration of Audit Program (A/P)

Ø Audit procedures designed for certain level of turnover & volume increased substantially.
Significant changes in accounting organisation, procedures & personnel (OPP)
Ø Internal Control not as effective as assumed when A/P framed
Ø Extraordinary increase in book debts or stock compared to PY
Ø Suspicion aroused in course of audit or info recd àAssets misappropriated

CA SHUBHAM KESWANI 94
 Key Phases in Audit execution
• Execution Planning : The auditors need to plan work to carry out audit in effective, efficient
and timely manner.
• Risk & Control Evaluation: For each segment of audit, conduct a detailed risk and control
assessment i.e. list risks that must be reviewed, capture for each risk controls that exist or
and show for each control, work steps required to test effectiveness of controls.
• Testing: Test effectiveness of controls to determine whether controls are operating as
designed.
• Reporting: Report as per SA 700. The auditor should review and assess conclusions drawn
from audit evidence obtained as basis for expression of opinion on F.S.

Examples of Audit Programs

Movie Theatre Complex

(i) Peruse the MOA and AOA of the entity.
(ii) Ensure object clause permits entity to engage in this type of business.
(iii) In case of income from sale of tickets:
1. Verify control system as to how it is ensured that collections on sale of tickets of various
shows are properly accounted.
2. Verify system of online booking of various shows and the system of realization of money.
3. Check that there is overall system of reconciliation of collections with no. of seats available
for different shows on a day.
(iv) Verify internal control system and its effectiveness relating to income from café, shops, pubs,
game zone etc., located within the multiplex.
(v) Verify system of control exercised relating to income receivable from advertisements exhibited
within premises and inside the hall such as hoarding, banners, slides, short films etc.
(vi) Verify the system of collection from parking areas in respect of vehicles parked by customers.
(vii) Verify payment of salaries and other benefits to employees and compliance with statutory
requirements.
(viii) Verify payments effected in respect of maintenance of building and ensure same is in order.
(ix) Verify insurance premium paid and ensure it covers entire assets.

Identification & Verification of Plant & Machinery, tools & dies to check Obsolescence
(i) Internal Control Aspects: The following may be incorporated in audit programme to check internal
control aspects-
a. Maintaining separate register for hired assets, leased asset and jointly owned assets.
b. Maintaining register of fixed asset and reconciling to physical inspection of fixed asset and to
nominal ledger.
c. All movements of assets are accurately recorded.
d. Authorisation be obtained for –
i. a declaring a fixed asset scrapped.
ii. selling a fixed asset.
e. Check whether additions to fixed asset register are verified and checked by authorised
person.
f. Proper recording of all additions and disposal.

(ii) Assets Register: To review registers and records of plant, machinery, etc. showing clearly date of
purchase of assets, cost price, location, depreciation charged, etc.

(iii) Cost Report and Journal Register: To review the cost relating to each plant and machinery and to
verify items which have been capitalised.

CA SHUBHAM KESWANI 95
(iv) Code Register: To see that each item of plant and machinery has been given a distinct code
number to facilitate identification and verify the maintenance of Code Register.

(v) Physical Verification: To see physical verification has been conducted at frequent intervals.

(vi) Movement Register: To verify

a. whether Movement Register for movable equipments and
b. log books in case of vehicles, etc. are being maintained properly.

(vii) Assets Disposal Register: To review whether assets have been disposed off after proper
technical and financial advice and sales/disposal/retirement, etc. of these assets are governed by
authorisation, sales memos or other appropriate documents.

(viii) Spare Parts Register: To examine the maintenance of a separate register of tools, spare parts
for each plant and machinery.

(ix) Review of Maintenance: To scrutinise the programme for an actual periodical servicing and
overhauling of machines and to examine extent of utilisation of maintenance deptt services.

(x) Review of Obsolescence: To scrutinise whether expert’s opinion have been obtained from time to
time to ensure purchase of technically most useful efficient and advanced machinery after a
thorough study.
(xi) Review of R&D: To review R&D activity and its relevance to operations of organisation,
maintenance of machinery efficiency and prevention of early obsolescence.

Audit Plan to locate wastage of Raw Material

i. Procure list of raw materials, showing names and detailed characteristics of each raw material.
ii. Obtain standard consumption figures, and ascertain the basis according to which normal wastage
figures have been worked out. Examine break-up of a normal wastage into that in process,
storage and handling stages. Also obtain control reports, if any, in respect of manufacturing
costs with reference to predetermined standards.
iii. Examine various records maintained for recording separately various lots purchased and
identification of each lot with actual material consumption and for ascertaining actual wastage
figures therein.
iv. Obtain reports of Preventive Maintenance Programme of machinery to ensure that quality of
goods manufactured is not of sub-standard nature or leads to high scrappage work.
v. Assess whether personnel employed are properly trained and working efficiently.
vi. See whether quality control techniques have been consistent or have undergone any change.
vii. Examine inventory plans and procedures in report of transportation storage efficiency,
deterioration, pilferage and whether the same are audited regularly.
viii. Examine whether basis adopted for calculating wastage for the month is same as was adopted
for earlier months.
ix. Obtain a statement showing break up of wastage figures in storage, handling and process for
months under reference and compare results of analysis for each of the months.

“If you can Dream it, you can Do it”

CA SHUBHAM KESWANI 96
 Risk Assessment & Internal Control

Audit risk components

1. Inherent Risk
Susceptibility of assertion to misstatement that could be material, assuming there are no related
controls.
Inherent risk is addressed at both F.S. level and assertion level.
For eg, technological developments making product obsolete, causing inventory susceptible to
overstatement.
Arise from entity’s size, operations, complexity, objectives & regulatory environment.

Risks of particular concern to auditor might include:

• Complex calculations which could be misstated;
• High value inventory;
• Accounting estimates subject to significant measurement uncertainty;
• Lack of sufficient working capital to continue operations;
• A declining or volatile industry with many business failures;

2. Control Risk (Do internal controls in place mitigate inherent risk)

• Risk that the entity’s IC system will not prevent, or detect and correct (P/D/C) on a timely basis,
a misstatement that could be material, individually or when aggregated with other
misstatements.
• Some control risk will always exist because of the inherent limitations of any IC system.
• The auditor is required to understand the entity’s IC and perform procedures to assess the
RMM at the assertion level.

3. Detection Risk
• Risk that auditor will not detect a misstatement that exists in an assertion that could be material,
either individually or when aggregated with other misstatements.
• The acceptable level of detection risk for a given level of audit risk bears inverse relationship to
ROMM at assertion level.

Audit Risk = RMM * Detection Risk

RMM = Risk that MM may exist in FS before start of audit i.e Inherent Risk * Control risk

Steps for Risk Identification

1. Assess significance of assessed risk, impact of occurrence, & revise materiality for specific
a/c bal
2. Likelihood of occurrence and impact on audit procedures
3. Document assertions affected
4. Impact of risk on each of assertions Completeness, Existence, Accuracy, Valuation, Validity,
Presentation relevant to a/c balance, COT & disclosure
5. Enquire & document mgt response
6. Consider Internal Control in place & effectiveness in mitigating risk involved.
7. Consider any unique characteristic of the risk
8. Consider any particular characteristic (inherent risk) in COT/ a/c balance/ disclosure needs
addressed in designing FAP.

CA SHUBHAM KESWANI 97
 Indicators of Possible Potential Misstatements
• Completeness
Ø Transaction not identified
Ø Source doc not prepared/captured/represented
• Existence
Ø Fictitious or unauthorised transactions entered
Ø Source document à duplicate or overstated
Ø Transactions duplicated
• Recording
Ø Inaccurate
o Capturing of source document
o Processing of transactions
o Adjustments in subsy ledger
• Cut-off Procedures
Transactions that occur in a period are recorded in another period.

Audit Procedures in case Purchases are made without POs

During the process of extracting exception reports, auditors noted numerous purchase entries
without valid purchase orders.

Analysis: In terms of percentage, about 40% of purchases were made without valid POs and also few
POs were validated after actual purchase. Also there was no reconciliation between goods received
and goods ordered.

Assertions: Validity of purchases

Pervasive/Account Balance Level: Account Balance level

Account Balance(s) affected : (i) Purchases, (ii) Account Payable

Audit Procedures:
The following procedures may address the validity of the account balance:
• Make a selection of purchases, review correspondence with vendors, purchase requisitions
(internal document) and reconciliations of their accounts.
• Review Vendor listing along with ageing details. Follow up the material amounts paid before
normal credit period and analyse reasons for exceptions.
• Meet with company's Purchase officer and obtain responses to our inquiries regarding
purchases made without POs.
• Discuss summary of such issues with client.

Steps in Conduct of Risk based Audit (3 key steps)

1. Assessing ROMM in the F.S.
2. Designing & performing FAP that respond to assessed risk & reduce it to acceptably low level
3. Issuing Audit report based on audit findings.

Explanation:
1. Risk Assessment: Assessing ROMM in F.S.
Ø Performing client acceptance or continuance procedures; [SA 210 & 220]
Ø Planning the overall engagement; [SA 300]

CA SHUBHAM KESWANI 98
 Ø Performing risk assessment procedures (RAP) to understand the business and identify
inherent and control risks; [SA 315]
Ø Identifying relevant internal control procedures and assessing their design and
implementation (those controls that would prevent material misstatements from
occurring or detect and correct misstatements after they have occurred); [SA 315]
Ø Assessing the RMM in the F/S; [SA 315]
Ø Identifying significant risks that require spl consideration
Ø Communicating material weakness in Design & Implementation of IC à TCWG + Mgt

2. Risk response: Designing and performing further audit procedures (FAP) that respond to
assessed risks and reduce the RMM in the F/S to an acceptably low level;

Some of the matters auditor should consider when planning the audit procedures include:
Ø Assertions that cannot be addressed by substantive procedures alone. Eg. highly automated
processing of transactions with little or no manual intervention. [Substantive not enough]
Ø Existence of internal control that, if tested, could reduce need/scope for other substantive
procedures. [Reduce substantive]
Ø The potential for substantive analytical procedures that would reduce the need/scope for
other types of procedures. [Analytics]
Ø The need to incorporate an element of unpredictability in procedures performed. [Surprise
checks]
Ø The need to perform further audit procedures to address potential for management
override of controls or other fraud scenarios. [FAPs]
Ø The need to perform specific procedures to address “significant risks” that have been
identified.

3. Reporting: Issuing an appropriate audit report based on the audit findings

Internal Control
The objectives of internal controls relating to accounting system are:
i) Transactions are executed through general or specific management authorization.
ii) All transactions are promptly recorded in an appropriate manner to permit the preparation of
financial information and to maintain accountability of assets.
iii) Assets and records are safeguarded from unauthorized access, use or disposition.
iv) Assets are verified at reasonable intervals and appropriate action is taken with regard to the
discrepancies.

Basic Accounting Control Objectives: The basic accounting control objectives which are sought to be
achieved by any accounting control system are –
i) Whether all transactions are recorded;
ii) Whether recorded transactions are real;
iii) Whether all recorded transactions are properly valued;
iv) Whether all transactions are recorded timely;
v) Whether all transactions are properly posted;
vi) Whether all transactions are properly classified and disclosed;
vii) Whether all transactions are properly summarized.

CA SHUBHAM KESWANI 99
 Limitations of Internal Control
Ø Mgt expect cost not exceed benefit
Ø Most IC not directed at transn. of unusual nature. Also, there’s potential of human error.
Ø Possibility of circumvention of IC through collusion with employees or 3rd parties
Ø Person responsible for exercising IC abuse responsibility e.g. mgt override of IC
Ø Manipulation by mgt wrt transactions/estimates & judgements in preparation of F.S.

Structure of Internal Control

1. Segregation of Duties: Following functions are segregated:
a. Authorisation
b. Execution
c. Physical custody
d. Maintenance of records & documents
Periodic rotation of duties is also desirable.

2. Authorisation of transactions: Establish procedures which provide assurance that

authorizations are issued by persons acting within scope of their authority, and that the
transactions confirm to the terms of authorizations.

3. Adequacy of records & documents (same points as objective of IC)

4. Accountability & safeguarding of assets

Ø Assets like cash, inventories, investment scrips require frequent physical verification
with book records
Ø Assets which are considered sensitive & susceptible to error need to be reconciled more
frequently than others
Ø Only authorised personnel should be given access to asset
Ø Essential to have effective controls over physical custody of cash, inventories,
investments & other fixed assets

5. Independent checks by external auditor

Components of Internal control

1 Control Environment
2 Risk Assessment
3 Control Activities
4 Information Systems
5 Monitoring

1. Control Environment
Elements: (Pairing)
a. Communication & enforcement of integrity & ethical values
b. Commitment to competence
c. Participation by TCWG
d. Mgt philosophy & operating style
e. Org structure
f. Assignment of authority & responsibility

2. Entity’s Risk Assessment Procedures

CA SHUBHAM KESWANI 100

 i) Define business objectives & goals
ii) Identify events that may affect achievement of business objectives
iii) Assess likelihood & impact
iv) Respond & mitigate risk
v) Assess residual risk

Risk can arise or change due to certain circumstances:

a. Changes in operating environment: can result in changes in competitive pressures and
significantly different risks.
b. New personnel: New personnel may have a different focus on or understanding of internal
control.
c. New or revamped info. Systems: Significant and rapid changes in information systems can
change the risk relating to internal control.
d. Rapid growth: Significant and rapid expansion of operations can strain controls and increase the
risk of a breakdown in controls.
e. New technology: Incorporating new technologies into production processes or information
systems may change the risk associated with internal control.
f. Corporate restructurings: Restructurings may be accompanied by staff reductions and changes
in supervision and segregation of duties that may change the risk associated with internal
control.
g. New a/c pronouncements: Adoption of new accounting principles or changing accounting
principles may affect risks in preparing financial statements.

Control Activities
a. Performance Reviews: Actual vs budgeted results
b. Info. Processing: Application & General IT Controls
c. Physical Controls:
Ø Physical security of assets
Ø Authorisation for access to computer prog. & data files
Ø Periodic counting and comparison with amounts shown on control records. For eg.
Comparing results of cash, inventory & security counts with a/c records)
d. Segregation of duties (discussed above)

Internal Check System

The following are objectives of internal check system:

i) To detect error and frauds with ease.
ii) To avoid and minimize possibility of commission of errors and fraud by any staff.
iii) To locate responsibility area or stages where actual fraud and error occurs.
iv) To increase efficiency of the staff working within the organization.
v) To protect integrity of business by ensuring accounts are always subject to proper scrutiny
and check.
vi) To prevent and avoid misappropriation or embezzlement of cash and falsification of accounts.

Effectiveness of Internal Check depends on following considerations:

i) Clarity of responsibility: Resp of different ppl properly defined
ii) Division of work: Segregation of work to ensure free flow & job rotation
iii) Standardisation: Process of accounting should be standardised
iv) Appraisal: Periodic review of chain of operations & work flow.

CA SHUBHAM KESWANI 101

Eg. BSF Limited is engaged in business of trading leather goods. You are internal auditor of company
for year 2019-20. In order to review internal controls of the Sales Department of company, you
visited and noticed work division as follows:
(1) An officer was handling the sales ledger and cash receipts.
(2) Another official was handling dispatch of goods and issuance of Delivery challans.
(3) One more officer was there to handle customer/ debtor accounts and issue of receipts.

As an internal auditor, you are required to briefly discuss the general condition pertaining to the
internal check prevalent in internal control system. Do you think that there was proper division of
work in BSF Limited? If not, why?

The general condition pertaining to the internal check system may be summarized as under:
i) No complete control: no single person should have complete control over any important
aspect of the business operation. Every employee’s action should come under the review of
another person.
ii) Job rotation: Staff duties should be rotated from time to time so that members do not
perform the same function for a considerable length of time.
iii) Leave once in a year: Every member of the staff should be encouraged to go on leave at
least once a year.
iv) Person with physical custody no access to books
v) A/c control for each class of asset: There should exist an accounting control in respect of
each class of assets, in addition, there should be periodical inspection so as to establish
their physical condition.
vi) Budgetary controls: Budgetary control should be exercised and wide deviations observed
should be reconciled.
vii) Mechanical devices to prevent misappropriation of cash
viii) Inventory counts, activities stopped & involve staff from different sections : For
inventory taking, at close of the year, trading activities should, if possible be suspended,
and it should be done by staff belonging to several sections of organization.

In given scenario, Co. has not done proper division of work as:
(i) receipts of cash should not be handled by official handling sales ledger and
(ii) delivery challans should be verified by authorised official other than officer handling despatch of
goods.

Manual elements in internal control may be more suitable where judgment and discretion are required
such as for following circumstances:
Ø Large, unusual or non-recurring transactions.
Ø Circumstances where errors are difficult to define, anticipate or predict.
Ø In changing circumstances that require a control response outside the scope of an existing
automated control.
Ø In monitoring the effectiveness of automated controls.

Standard Operating Procedures (SOPs)

1. Enterprise Risk Mgt: Org should have robust process to identify & mitigate risks
2. Segregation of Job Responsibilities: No 2 commercial activities be conducted by 1 person.
3. Job rotation in sensitive areas: A job carried by person for long may lead to complacency &
misuse
4. Delegation of financial powers document: Document the delegation of powers to allow controls
to operate

CA SHUBHAM KESWANI 102

 5. IT based controls: Embed controls within system instead of being dependent on humans.

Basic Assumptions about a Good Internal Control Questionnaire

In the use of standardized internal control questionnaire, certain basic assumptions about
elements of good control are taken into account. These are –
i) Certain procedures in general used by most business concerns are essential in achieving
reliable internal control. Eg daily banking of receipts or balancing of cash book or periodic
reconciliations
ii) Division of duties & responsibilities
iii) Employees with custodian function not assigned a/c function
iv) No single person thrust of completing a transaction all by himself
v) Work performed by one reviewed by another
vi) Proper documentation & recording of transactions

Flow chart depiction of flow of documents:

(i) at what point a document is raised internally or received from external sources;
(ii) the number of copies in which a document is raised or received;
(iii) the intermediate stages set sequentially through which the document and the activity pass;
(iv) distribution of the documents to various sections, department or operations;
(v) checking authorisation and matching at relevant stages;
(vi) filing of the documents; and
(vii) final disposal by sending out or destruction.

Material Weakness
Material weaknesses are defined as absence of adequate controls on flow of transactions that
increases the possibility of errors and frauds in the financial statements of the entity.

Important points with regard to such a letter are as follows:

(a) The letter lists down the areas of weaknesses in the system and offers suggestions for
improvement.
(b) It should clearly indicate that it discusses only weaknesses which have come to the attention of
the auditor as a result of his audit and that his examination has not been designed to determine the
adequacy of internal control for management.
(c) This letter serves as a valuable reference document for management for the purpose of revising
the system and insisting on its strict implementation.
(d) The letter may also serve to minimize legal liability in the event of a major defalcation or other
loss resulting from a weakness in internal control.

Case Study on Internal Control: Entertainment Centres

Y Co. Ltd. has five entertainment centres to provide recreational facilities for public especially for
children and youngsters at 5 different locations in the peripheral of 200 km. Collections are made in
cash. Specify the adequate system towards collection of money.

In order to achieve proper internal control over sale of tickets and collection by Y Co. Ltd., following
system should be adopted -
(i) Printing of tickets: Serially numbered pre-printed tickets should be used and designed in such a
way that any type of ticket used cannot be duplicated by others in order to avoid forgery.
(ii) Ticket sales: The sale of tickets should take place from the Central ticket office at each of the 5
centres, preferably through machines. There should be proper control over the keys of the machines.

CA SHUBHAM KESWANI 103

(iii) Daily cash reconciliation: Cash collection at each office and machine should be reconciled with
the number of tickets sold.
(iv) Daily banking: Each day’s collection should be deposited in the bank on next working day of the
bank.Cash should be in custody of properly authorized person preferably in joint custody.
(v) Entrance ticket: Entrance tickets should be cancelled at the entrance gate when public enters the
centre.
(vi) Advance booking: If advance booking of facility is made available, the system should ensure that
all advance booked tickets are paid for.
(vii) Discounts and free pass: The discount policy such that the concessional rates, say, for group
booking should be properly authorized and signed forms for such authorization should be preserved.
(viii) Surprise checks: Internal audit system should carry out periodic surprise checks for cash
counts, daily banking, reconciliation and stock of unsold tickets etc

International Internal Control Frameworks

COSO Framework:
Components of Internal Control: Control Environment, Risk Assessment, Control
Activities,Information & Communication, Monitoring

3 categories of objectives:
Ø Operating objectives: effectiveness & efficiency of operations
Ø Reporting objectives: internal & external financial & non-financial reporting to stakeholders
Ø Compliance objectives: compliance with laws & regulations

CoCo Framework (Issued by Canadian Institute of Chartered Accountants)

The CoCo framework outlines criteria for effective control in the following 4 areas:
1.Purpose 2. Commitment 3. Capability 4.Monitoring and Learning

COBIT Framework
Ø COBIT stands for Control Objectives for Information and Related Technology.
Ø COBIT has 34 high-level processes that cover 210 control objectives
Ø Today, COBIT is used globally by all managers who are responsible for the IT business
processes.
Ø Overall, COBIT ensures quality, control and reliability (QCR) of information systems in
organization, which is also the most important aspect of every modern business.
Ø This framework guides an organization on how to use IT resources.
Ø Well-governed IT practices can assist businesses in complying with laws, regulations, and
contractual arrangements.

Sarbanes Oxley Section 404

The SEC rules and PCAOB standard require that:
• Management perform a formal assessment of its controls over financial reporting including
tests that confirm the design and operating effectiveness of the controls.
• Management include in its annual report an assessment of ICFR.
• The external auditors provide two opinions as part of a single integrated audit of the
company:
Ø An independent opinion on the effectiveness of the system of ICFR.
Ø The traditional opinion on the financial statements.

“It’s going to be hard, but Not impossible”

CA SHUBHAM KESWANI 104

 Special Aspects of Auditing in an Automated Environment

Category of Business Applications & Category

• Packaged Software (off the shelf application) used by micro & small business. Eg. Tally &
Quickbooks
• Small ERPs in small to medium business. Eg Tally ERP, SAP Business One, Focus ERP
• ERP- Med to large Cos à Eg. SAP ECC, Oracle Enterprise Business Suite

Layers of Automated Environment

• Applications (discussed above)
• Databases: Oracle 19C, MS-SQL Server
• Operating systems: Windows, Linux
• Hardware & storage devices: Server, disks
• Network devices: Switches, routers
• Network: LAN, WAN
Real Time Environment
Transactions initiated, processed & recorded immediately as they happen without delay.

Real Time Environment: IT Components

Applications Middleware Networks Hardware

For eg: ERP Applications For eg: For eg: Wide Area For eg: Servers,
SAP, Oracle E Business Webservers like Networks, Local Data centers,
suite, Core Banking Apache, Oracle, Area Networks Backup & storage
Applications Fusion, IIS devices

Understanding & Documenting Automated Environment

Understanding of Automated Environment as per SA 315. The auditor’s understanding should include:
• Applications used by Co
• Details of IT Infrastructure components for each application
• The org structure & governance
• The policies, processes & procedures followed.
• IT Risks & controls

Document the understanding as per SA 230.

Consideration of Automated Environment at each phase of audit cycle

• during risk assessment, the auditor should consider risk arising from the use of IT systems at
the company;
• when obtaining an understanding of the business process and performing walkthroughs the use
of IT systems and applications should be considered;
• while assessing entity level controls (ELCs) the aspects related to IT governance need to be
understood and reviewed;
• pervasive controls including segregation of duties (SOD), general IT controls (GIT) and
applications should be considered and reviewed;
• during testing phase, the results of general IT controls would impact the nature, timing and
extent of testing;

CA SHUBHAM KESWANI 105

 • when testing of reports and information produced by the entity (IPE) generated through IT
systems and applications;
• at completion stage, evaluation of control deficiencies may require using data analytics and
CAATs.

In a controls-based audit, audit approach can be classified into 3 broad phases comprising of planning,
execution, and completion. In this approach, considerations of automated environment will be relevant
at every phase as given below:

I. Risk Assessment Process

• Identify significant accounts and disclosures.
• Qualitative and Quantitative considerations.
• Relevant Financial Statement Assertions (FSA).
• Identify likely sources of misstatement.
• Consider risk arising from use of IT systems.
II. Understand and Evaluate
• Document understanding of business processes using Flowcharts / Narratives.
• Prepare Risk and Control Matrices (RCM).
• Understand design of controls by performing walkthrough of end-to-end process.
• Process wide considerations for Entity Level Controls, Segregation of Duties.
• IT General Controls, Application Controls.
III. Test for Operating Effectiveness
• Assess Nature, Timing and Extent (NTE) of controls testing.
• Assess reliability of source data; completeness of population.
• Testing of key reports and spreadsheets.
• Sample testing.
• Consider competence and independence of staff /team performing controls testing.
IV. Reporting
• Evaluate Control Deficiencies.
• Significant deficiencies, Material weaknesses.
• Remediation of control weaknesses.
• Internal Controls Memo (ICM) or Management Letter.
• Auditor's report.

Enterprise Risk Mgt (ERM)

Risks which business have to face & manage?
Businesses today operate in a dynamic environment. The volatility, unpredictability and pace of changes
that exist in the business environment today is far greater than in the past.
Some of the reasons for this dynamic environment include globalisation, use of technology, new
regulatory requirements, etc. Because of this dynamic environment the associated risks to business
have also increased and companies have a need to continuously manage risks.

Examples of risks include:

• Market Risks;
• Regulatory & Compliance Risks;
• Technology & Security Risks;
• Financial Reporting Risks;
• Operational Risks;
• Credit Risk;
• Business Partner Risk;
• Product or Project Risk;

CA SHUBHAM KESWANI 106

• Environmental Risks.
Risk Assessment Process (RAP)
One of critical component of ERM is RAP. It involves consideration for:
• Risk identification
• Assessment criteria including qualitative & quantitative factors
• Defn of key performance & risk indicators
• Risk appetite
• Risk scores, scales & maps
• Assess risks
• Use of data & metrics
• Prioritise risk
• Benchmarking

Typical risk assessment process would be given below:

Identify events
Define business that affect Assess Assess
Respond &
objectives & achievement of likelihood & residual
mitigate risk
goals business impact risk
objectives

Types of Controls:
• General Controls: Policies & procedures relate to many applications & support effective
functioning of application controls. They apply to mainframe, miniframe, and end user
environment. The GIT controls that maintain integrity of info & security of data commonly
include controls over following:
Ø Data center & network operations
Ø System of software acquisition, change & maintenance
Ø Program change
Ø Access security
Ø Application system acquisition, development & maintenance

• Application Controls: They include both automated or manual controls that operate at business
process level. Application controls can be preventive as well as detective in nature and designed
to ensure integrity of accounting records. Automated Application controls are embedded into
IT applications viz., ERPs and help in ensuring completeness, accuracy and integrity of data in
those systems.
Examples of automated applications include :
Ø edit checks and validation of input data,
Ø sequence number check,
Ø limit check,
Ø format check,
Ø range check,
Ø reasonableness check,
Ø mandatory data fields,
Ø existence check etc.

Entity Level Risks & Controls (ELCs)

Characteristics of ELCs
• Entity Level controls are known as pervasive controls since they operate across all organisation levels.

CA SHUBHAM KESWANI 107

• ELCs are part of company’s overall internal control framework and relate to internal control
components other than control activities.
• Entity level controls are subjective by nature and hence require application of more professional
judgement in their evaluation and testing.

Types:
1. Direct ELCs: operate at a level higher than business activity or transaction level such as a
business process or sub-process level, account balance level, at a sufficient level of precision,
to prevent, detect or correct a misstatement in a timely manner.
Eg. Business performance reviews, Internal Audit
2. Indirect ELCs: do not relate to any specific business process, transaction or account balance
and hence, cannot prevent or detect misstatements. However, they contribute indirectly to the
effective operation of direct ELC and other control activities.
Eg. Co code of conduct and ethics policies, HR Policies, Employee job roles & responsibilities

Whistle Blower Policy

How auditor obtains understanding & evaluates whistle blower policy of Co?
• Does Co. have a whistle blower policy?
• Is this policy documented & approved?
• Has whistle-blower policy been communicated to all employees?
• Are employees aware of this policy & understand its purpose & their obligations?
• Has Co. taken measures viz. training, to make employees understand contents & purpose of
policy?
• Does Co. monitor effectiveness of policy time to time?
• How does Co. deal with deviations & non-compliance?

Computer Assisted Audit Techniques (CAATs)

Generating and preparing meaningful information from raw system data using processes, tools, and
techniques is known as Data Analytics. The data analytics methods used in an audit are known as
Computer Assisted Auditing Techniques or CAATs.

When auditing in an automated environment, auditors can apply concepts of data analytics for several
aspects of an audit including following:
• preliminary analytics;
• risk assessment;
• control testing;
• non-standard journal analysis;
• evaluation of deficiencies;
• fraud risk assessment.

Steps to be followed to achieve success with CAATs & supporting tools. A suggested approach to
benefit from use of CAATs:
Understanding Define the Identify source & Extract Data
business objectives & format of data
Environment criteria
including IT

Verify Apply criteria on

completeness & Validate & Report& Document
data obtained confirm results Results & Conclusions
accuracy of data

CA SHUBHAM KESWANI 108

 Standards, Guidelines & Procedures- Using Relevant Frameworks & Best Practices
• Standards on Auditing issued by ICAI, are required to be followed for an audit of financial
statements.

• Section 143 of Companies Act 2013 requires statutory auditors to provide an Independent
Opinion on the Design and Operating Effectiveness of Internal Financial Controls Over Financial
Reporting (IFC-FR) of the company as at Balance Sheet date. For this purpose, the Guidance
Note on Audit of Internal Financial Controls Over Financial Reporting issued by ICAI, provides
the framework, guidelines and procedures for an audit of financial statements.

• Sarbanes Oxley Act of 2002, commonly known as SOX, is a requirement in America. Section 404
of this act requires public listed companies to implement, assess and ensure effectiveness of
internal controls over financial reporting and auditors independent opinion on the design and
operating effectiveness of internal controls over financial reporting (ICFR) – which is similar to
the requirements of IFC-FR for Indian companies.

• ISO 27001:2013 is the Information Security Management System (ISMS) standard issued by
the International Organization for Standardization (ISO). This standard provides the
framework, guidelines and procedures for implementing information security and related controls
in a company. For eg, this std covers password security, application security, physical security,
backup and recovery.

• ITIL (Information Technology Infrastructure Library) and ISO 20000 provide a set of best
practice processes and procedures for IT service management in a company. For example, change
management, incident management, problem management, IT operations, IT asset management
are some of the areas that could be relevant to audit.

• The Payment Card Industry – Data Security Standard or PCI-DSS, is the most widely adopted
information security standard for the payment cards industry. Any company that is involved in
the storage, retrieval, transmission or handling of credit card/debit card are required to
implement the security controls in accordance with this standard.

• The American Institute of Certified Public Accountants has published a framework under the
Statements on Standards for Attest Engagements (SSAE) No.16 for reporting on controls at
service organisation that include
❖ SOC 1 for reporting on controls at a service organization relevant to user entities’ ICFR.
❖ SOC 2 and SOC 3 for reporting on controls at a service organization relevant to security,
availability, processing integrity, confidentiality or privacy i.e., controls other than ICFR.
❖ While SOC 1 and SOC 2 are restricted use reports, SOC 3 is general use report.

• The Cybersecurity Framework (CSF) published by the National Institute of Standards and
Technology is one of the most popular framework for improving critical infrastructure
cybersecurity. This framework provides a set of standards and best practices for companies to
manage cybersecurity risks.

“The secret of your future is hidden in your daily routine”

CA SHUBHAM KESWANI 109

 Company Audit
139. Appointment of auditors.
140. Removal, resignation of auditor and giving of special notice.
141. Eligibility, qualifications and disqualifications of auditors.
142. Remuneration of auditors.
143. Powers and duties of auditors and auditing standards.
144. Auditor not to render certain services.
145. Auditors to sign audit reports, etc.
146. Auditors to attend general meeting.
147. Punishment for contravention.
148. Central Government to specify audit of items of cost in respect of certain companies

Sec 139: Appointment of Auditors

Appointment of First Appointment of Subsequent

Auditor Auditor

Goverment Company Goverment

Other Than a Govt Co Other Than a Govt Co Company defined
defined u/s 2 (45) [Sec 139(1)]
[Sec 139(6)] u/s 2 (45) [Section
[Section 139(7)]
139(7)]

Appointment by Appointment by
Appointment by C&AG within 60 days Appointment by C&AG within 180
BOD within 30 days from from DOR Members in AGM days from
DOR (Note 1) commencement of
the year

In case of failure:
BOD within 30 days Hold office from 1st AGM Hold office till
In case of failure: till 6th AGM subject to conclusion of AGM
Members in EGM within conditions
90 days

In case of failure:
Hold office till conclusion Members in EGM within
of 1st AGM 60 days

Hold office till conclusion

of 1st AGM

Notes:
• Written consent of auditor & certificate that appointment is as per prescribed conditions to
be obtained by Co.
• Certificate should indicate that auditor satisfies criteria u/s 141
• Co. inform auditor of appointment & file notice of appointment with ROC within 15 days of
AGM

CA SHUBHAM KESWANI 110

1. MD of PQR Ltd. himself wants to appoint Shri Ganpati, a practicing CA, as first auditor of
company. Comment on proposed action of MD.
Section 139(6) of Companies Act, 2013 à “first auditor or auditors of company shall be appointed by
BOD within 30 days from DOR of company”. In instant case, proposed appointment of Shri Ganpati,
practicing CA as first auditors by MD of PQR Ltd is violation of Section 139(6) of Companies Act,
2013, which requires BOD to appoint first auditor of Co.
Conclusion: In view of above, MD of PQR Ltd can’t appoint first auditor of Co.

2. First auditor of Healthy Wealthy Ltd., Government Co., appointed by BOD.

In case of Govt Company, appointment of first auditor is governed by provisions of Section 139(7) of
Companies Act, 2013 which states that in case of Govt co, first auditor shall be appointed by C&AG
within 60 days from DOR of co. Hence, in case of Healthy Wealthy Ltd., being a govt co, first
auditors shall be appointed by C&AG.
Conclusion: Thus, appointment of first auditors made by BOD of Healthy Wealthy Ltd. is null and
void.

Filling of Casual Vacancy [Sec 139(8)]

i) In case of non govt Co. by BOD within 30 days

If due to resignation by auditor then Board Approval + shareholder’s approval at GM within
3 months of recommendation of Board
Auditor shall hold office upto next AGM

ii) In case of Govt Co. by CG within 30 days

Otherwise BOD within next 30 days

Retiring auditor maybe reappointed at AGM if,

a) Not disqualified
b) Not given notice of unwillingness of reappointment
c) SR hasn’t been passed to appoint some other auditor or expressly provide that he shall not be
reappointed

Sec 139(10) à Where at any AGM, no auditor appointed or re-appointed, existing auditor shall
continue to be auditor of company.

Sec 141: Eligibility, Qualification & Disqualification

• Person shall be eligible to be Auditor only if he’s a CA
• Firm(including LLP) where majority partners practicing in India à appointed by Firm name
• Partners who are CA can act & sign on behalf of firm

Disqualifications of Auditor [Sec 141(3) read with Rule 10 of Cos.(Audit & Auditor) Rules 2014]
a) Body Corporate (BC) other than LLP
b) Officer or employee of Co.
(Officer includes Director, Mgr, KMP, Shadow Directors)

Examples:
• G, CAiP is director in A Ltd à CA G would be disqualified to be appointed as auditor of A Ltd.
• G, CAiP is director in Zed Ltd., holding company of RST Ltd. à CA. G would be disqualified to
be appointed as auditor of Zed Ltd. but would not be disqualified in case of RST Ltd.
Note: But as per Ethical Std Board public conscience should be preferred over legal provisions, so
G can’t also be auditor of RST Ltd (Discussed in Professional Ethics)

CA SHUBHAM KESWANI 111

 c) Person who is partner or employment of officer or employee of Company (4 cases
PO/PE/EO/EE)

Example:
Mr. Ajay, a CA appointed as auditor of Bharat Ltd. in the AGM of Co. held in September, 2019, which
assignment he accepted. Subsequently in Feb, 2020, he joined Mr. Bajaj, another CA, who is Manager
Finance of Bharat Ltd., as partner.

Section 141(3)(c) of the Companies Act, 2013 prescribes that any person who is a partner or in
employment of an officer or employee of the company will be disqualified to act as an auditor of a
company. Section 141(4) provides that an auditor who after his appointment, disqualified u/s Section
141(3), he shall be deemed to have vacated his office as an auditor.
In present case, Mr. Ajay, auditor of Bharat Ltd., joined as partner with Mr. Bajaj, who is Manager
Finance of Bharat Ltd. The given situation has attracted Section 141(3)(c) and he shall be deemed to
have vacated office of auditor of Bharat Ltd.

d) Person/relative/partner (PRP)-
i.Is holding security or interest in CASSH (Co/Associate/Suby/Holding/Subsy of such holding i.e.
CASSH)
• Relative may hold security in the Co. of Face value 1 Lakh
• If relative (not auditor or partner) acquires interest > 1 lakh è then corrective action to
maintain limit within 60 Days of acquisition

Definition of Relative: Members of HUF + Husband wife + Father (including step- father),
Mother (including step- mother), Son (including stepson), Son’s wife, Daughter, Daughter’s
husband, Brother (including step- brother), Sister (including step- sister)

Examples:

1. “Mr. Avi”, practicing CA, holding securities of “XYZ Ltd.” face value of ` 990/-. Whether Mr. Avi is
qualified for appointment as Auditor of “XYZ Ltd.”?
Mr. Avi. is not eligible for appointment as auditor of “XYZ Ltd”.

2. “Mr. PK” a practicing CA and “Mr. Qurashi”, relative of “Mr. PK”, is holding securities of “ABC Ltd.”
having face value of ` 99,000/-.
Mr. Qurashi (relative of Mr. PK), is having securities of ` 99,000 face Value in ABC Ltd., which is as
per requirements of proviso to section 141(3)(d)(i). Mr. PK will not be disqualified to be appointed as
auditor of ABC Ltd.

3. “M/s Bhavin & Co.” is Audit Firm having partners “Mr. Bala” and “Mr. Chandu”. “Mr. A” relative of
“Mr. Chandu”, is holding securities of “AMD Ltd.” having face value of ` 1,00,100/-. Whether “M/s
Bhavin & Co.” is qualified for being appointed as an auditor of “AMD Ltd.”?
M/s Bhavin & Co, will be disqualified for appointment as auditor of AMD Ltd as relative of Mr.
Chandu (i.e. partner of M/s Bhavin & Co.), is holding securities in AMD Ltd exceeding limit mentioned.

4. M/s Rajamohan & Co. is audit firm having partners CA. Raja and CA. Mohan. Firm has been offered
appointment as auditor of Inn Ltd. for FY 2019-20. Mr. Bee, relative of CA. Raja, is holding 8,000
shares (face value of ` 10 each) in Inn Ltd. having mkt value of ` 1,60,000. Whether M/s Rajamohan
& Co. is disqualified to be appointed as auditors of Inn Ltd.?

CA SHUBHAM KESWANI 112

Mr. Bee is a relative of CA. Raja and he is holding shares of Inn Ltd. of face value of ` 80,000 only
(8,000 shares x 10 per share). M/s Rajamohan & Co. is not disqualified for appointment as auditors of
Inn Ltd. as relative of CA. Raja (i.e. partner of M/s Rajamohan & Co.) is holding the securities in Inn
Ltd. which is within the limit

ii) PRP indebted to CASSH > 5L

iii) PRP given guarantee or security for indebtedness of 3rd person to CASSH > 1L

e) Person or firm has business relation with CASSH or associate Co.

(Business relation excludes services permitted under CA Act 1949 by auditor & commercial
transactions by Company at Arm’s length price)

f) Person whose relative is Director or employed by Co. as Director or KMP

g) Full time employed OR person or partner of firm auditing > 20 companies excluding
OPC/Dormant/Small Cos./Pvt Cos. with paid up capital < 100 Cr (with no default in filing F.S. or
Annual Return)
Notes:
Ø No. of partners on the date of acceptance of audit assignment shall be taken into account
Ø CA in full time employment elsewhere shall not be taken into account

Example:
“PQRST & Co.” is Audit Firm having partners “Mr. P”, “Mr. Q”, “Mr. R”, “Mr. S” and “Mr. T”, Chartered
Accountants. “Mr. P”, “Mr. Q”, “Mr. R”, “Mr. S” and “Mr. T” are holding appointment as an Auditor in 4,
5, 6, 10 and 15 Companies respectively.
(i) Provide the maximum number of Audits remaining in the name of “PQRST & Co.”
(ii) Provide the maximum number of Audits remaining in the name of individual partner i.e. “Mr. P”, “Mr.
Q”, Mr. R, Mr. S and Mr. T.
(iii) Can PQRST & Co. accept the appointment as an auditor in 80 private companies having paid-up
share capital less than ` 100 crore which has not committed default in filing its financial statements
under section 137 or annual return under section 92 of the Companies Act with the Registrar, 2 small
companies and 1 dormant company?
(iv) Would your answer be different, if out of those 80 private companies, 65 companies are having
paid-up share capital of ` 115 crore each?

(i) PQRST & Co. can hold appointment as an auditor of 60 more companies:
Total Number of Audits available to Firm = 20*5 = 100
Number of Audits already taken by all the partners in their individual capacity = 4+5+6+10+15 = 40
Remaining number of Audits available to the Firm = 60 (100-40)
(ii) (1) Mr. P can hold: 20 - 4 = 16 more audits. (2) Mr. Q can hold: 20 - 5 = 15 more audits. (3) Mr. R
can hold: 20 - 6 = 14 more audits. (4) Mr. S can hold 20-10 = 10 more audits and (5) Mr. T can hold 20-
15 = 5 more audits.
(iii) PQRST & Co. can hold appointment as auditor in all 80 private companies having paid-up share
capital less than ` 100 crore , 2 small companies and 1 dormant company as these are excluded from
ceiling limit.
(iv) PQRST & Co. is already having 40 co. audits and accept only 60 more audits.They can also conduct
audit of one person companies, small companies, dormant companies and private companies having paid
up share capital less than ` 100 crores. In given case, out of 80 private companies PQRST & Co. is being
offered, 65 cos. have paid-up share capital of `115 crore each.

CA SHUBHAM KESWANI 113

Therefore, PQRST & Co. can accept appointment as auditor for 2 small companies, 1 dormant company,
15 private companies having paid-up share capital less than ` 100 crore & 60 pvt companies having paid-
up share capital of ` 115 crore each in addition to above 40 company audits already held.

h) Convicted for Fraud & period of 10 years not elapsed from date of conviction
i) Renders service under Sec 144 to Co. or its holding.

Sec 144: Services not to be rendered by Auditor

(i) accounting and book- keeping services;
(ii) internal audit;
(iii) design and implementation of any financial information system;
(iv) actuarial services;
(v) investment advisory services;
(vi) investment banking services;
(vii) rendering of outsourced financial services;
(viii) management services; and
(ix) any other kind of services as may be prescribed.

Example:

1. CA. P is providing services of Design and implementation of financial information system to C Ltd.
Later on, he was also offered to be appointed as auditor of Co. for current FY. Advise.

Section 141(3)(i) of Companies Act, 2013 disqualifies person for appointment as auditor of a Co. who is
engaged as on date of appointment in consulting and specialized services as provided in section 144.
Section 144 of Companies Act, 2013 prescribes certain services not to be rendered by auditor which
includes Design and implementation of financial information system.

Therefore, CA. P is advised not to accept assignment of auditing as service he is rendering is

specifically notified in list of services not to be rendered as per sec 141(3)(i) read with sec 144 of
Companies Act, 2013.

Where auditor incurs any of disqualifications after appointment, he shall vacate office and such
vacation shall be deemed to be casual vacancy u/s 139(8).

Rotation of Auditors: Sec 139(2)

Applicability:
• Listed Cos.
• Exclude OPC & Small Cos
[Defn of small co. à other than public Co. (Paid up cap <= 50L & Turnover <= 2Cr)]
• Public Cos :PSC >= 10 Cr
• Pvt ltd: PSC >= 50 Cr
• Cos. with borrowings from Financial institutions, banks or public deposits >= 50 Cr
Example:
Mishra Ltd. is a pvt ltd Co, having paid up share capital of INR 48 cr but having public borrowing
from nationalized banks and financial institutions of INR 42 cr, manner of rotation of auditor will not
be applicable.

Cos. for which Rotation provision are applicable, shall not appoint or re-appoint-

(a) an individual as auditor for more than one term of five consecutive years; and
(b) an audit firm as auditor for more than two terms of five consecutive years.

CA SHUBHAM KESWANI 114

Example:
PRTK Ltd. is listed Co. engaged in business of textiles. Co. appointed Rahul & Co. as statutory auditor
in AGM dated 29th Sep, 2018. Rahul & Co. will hold office of auditor from conclusion of this meeting
upto conclusion of sixth AGM i.e. AGM to be held in year 2023. Also, Rahul & Co. shall not be re-
appointed as auditor in PRTK Ltd. for further term of five years i.e. he cannot be appointed as
auditor upto year 2028. (Cooling Period)

Cooling period (5 years)

i. individual auditor à not be eligible for re-appointment as auditor in same Co. for 5 years from
completion of his term;
ii. audit firm à shall not be eligible for re-appointment as auditor in the same Co. for 5 years
from completion of such term.

Examples:
1. Meet Ltd., listed Co. appointed M/s Preet & Co., CA firm, as statutory auditor in its AGM held at
end of Sep, 2019 for 11 years. Here, appointment of M/s Preet & Co. is not valid as appointment can
be made only for one term of 5 consecutive years and then another one more term of 5 consecutive
years. It cannot be appointed for two terms in one AGM only. Further, cooling period of five years
from completion of term is reqd i.e. firm cannot be re-appointed for further 5 years after
completion of two terms of 5 consecutive years.

2. M/s PQR & Co., an audit firm having partner Mrs. P, Mr. Q and Mr. R, whose tenure has expired in
Co. in immediately preceding FY, M/s APJ & Co., is another audit firm in which Mr. P is common
partner, will also be disqualified for same Co. along with M/S PQR & Co. for period of 5 years.

Notes:
• Right of Co. to remove auditor or right of auditor to resign from such office of Co. shall not
be prejudiced.
• Members of a company may resolve to provide that-
(a) in audit firm appointed by it, auditing partner and his team shall be rotated at such
intervals as may be resolved by members; (Internal Rotation) or
(b) audit shall be conducted by more than one auditor. (Joint Audit)

Manner of Rotation
• Audit committee(AC) shall recommend Board name of auditor
• If no AC, then Board forward own recommendations for appointment at AGM by members
• If a partner, who is in charge of audit firm and also certifies F.S. of the Co., retires from said
firm and joins another firm of CAs, such other firm shall also be ineligible to be appointed for
a period of 5 yrs.
• a break in term for a continuous period of 5 yrs shall be considered as fulfilling requirement
of rotation

Sec 177 Audit Committee(AC)

Applicability:
• Listed cos
• Public Cos
Ø Paidup Share Capital (PSC)>= 10 Cr or
Ø Turnover (T/o) >= 100 Cr or
Ø L/D/D(Loans/Debenture/Deposits) > 50 Cr

CA SHUBHAM KESWANI 115

Radheshyam Ltd., a public Co. having PSC of 7 cr but T/o of 130 cr, reqd to constitute Audit
Committee under Sec 177 because requirement for constitution of AC arises if company falls into any
of condn.

Manner & procedure for selection of Auditor

• AC or Board shall consider Qualification & Experience along with pending proceedings relating
to professional conduct
• AC shall recommend name to Board
• If board agrees à forward to AGM
• If board disagress à refer back to AC citing reasons
• If AC doesn’t reconsider, board will record reasons of disagreement & forward own
recommendation to AGM
• Auditor will hold office till conclusion of 6th AGM

Sec 142: Auditor’s Remuneration fixed in AGM where appointed. Board may fix remuneration of 1st
auditor.
Remuneration includes fees + expense reimbursed + facility extended to him

Removal of Auditors before expiry of term [Sec 140(1)]

(BR à CG Approval 30 days à SR 60 Days)

(1) The application to the Central Government for removal of auditor shall be made in Form ADT-2
and shall be accompanied with fees as provided for this purpose under the Companies (Registration
Offices and Fees) Rules, 2014.

(2) The application shall be made to the Central Government within 30 days of the resolution.

(3) The company shall hold the general meeting within 60 days of receipt of approval of the Central
Government for passing the special resolution.

It is important to note that before taking any action for removal before expiry of terms, auditor
shall be given reasonable opportunity of being heard.

Resignation by Auditor [Sec 140(2)]

Ø Auditor shall within 30 days from DOR(Date of Resignation) file ADT-3 (Ab main ho gaya
free) with Co. & ROC + C&AG (for Govt Co.)

Ø Indicated Reasons + other relevant facts

Ø Penalty for non-compliance

§ 50k/Remuneration↓+ 500 per day max. 2L

Removal direction by Tribunal if Auditor acted in fraudulent manner [Sec 140(5)]

Ø Tribunal either suo moto or on application by CG or any person concerned
Ø Satisfied that Auditor has acted in fraudulent manner or abetted or colluded in fraud
Ø By or in relation to Co./Directors/officers
Ø It may, by order direct Co. to change its auditors
Ø If application by CG & tribunal satisfied change in auditor reqd
Ø It shall within 15 days of receipt of application
Ø Make order that he shall not function as Auditor & CG may appoint other auditor

CA SHUBHAM KESWANI 116

 Ø Auditor against whom order passed à ineligible to be appointed as auditor of any Co. for 5
years from date of order + Liable for action u/s 447

Appointment of Auditor other than retiring Auditor who was removed (Sec 140)

• Spl notice reqd for resolution at AGM for appointing auditor

o Person other than retiring auditor or
o Providing expressly that retiring auditor will not be reappointed (except where
rotation timeline completed)
• On receipt of notice à Co. shall forward to retiring auditor
• On receipt of notice if retiring auditor makes representation to Co. in writing & request
notification to members, then Co. shall
Ø In notice of meeting to members state fact that representation has been made &
Ø Send copy of representation to every member to whom notice is sent
Ø If copy of representation couldn’t be sent à then Auditor may require it to be read out at
meeting + copy to be filed with ROC
Ø If tribunal satisfied on application by Co. or any aggrieved person à then representation need
not be sent or read out at the meeting

Right of access to books etc.

Sec 143(1) of Act provides auditor, at all times, have right of access to books of account and vouchers
of Co, whether kept at regd office or any other place and is entitled to require from officers such
info & explanation as he consider necessary for performance of duties as auditor.
Auditor of holding co. will have right to access records of all its subsys & associates related to
Consolidation.

Eg. While conducting audit of limited co. for year ended 31st Mar,2020, auditor wanted to refer to
Minute Books. BOD refused to show Minute Books to auditor.

Section 143 of Companies Act, 2013 grants powers to auditor that every auditor has right of access,
at all times, to books and account including all statutory records such as minute books, fixed assets
register, etc. of Co. for conducting audit. In order to verify actions of Co. and to vouch and verify
some of transactions of Co , it is necessary for auditor to refer to decisions of shareholders and/or
directors.
Therefore, essential for auditor to refer to Minute Books. In absence of Minute Books, auditor may
not be able to vouch/verify certain transactions of Co.
Conclusion: In case directors have refused to produce Minute Books, auditor may consider extending
audit procedure and also consider modifying/ qualifying his report in appropriate manner.

Sec 146 – Right & duty to attend AGM

Ø All notices & other communication of GMs to be forwarded to auditor
Ø Auditor shall attend (unless exempted) by himself or authorised representative (qualified to
be auditor)
Ø Shall have right to be heard at such meet on any part of business which concerns him as
auditor

Question of Lien?
Auditor may exercise right of lien in cases of cos BUT it is mostly impracticable for legal and
practicable constraints. His working papers being his own property, question of lien does not arise.

CA SHUBHAM KESWANI 117

 Sec 143(1) Duty to enquire on Certain Matters

a) Loans & advances made on security have been properly secured & whether terms prejudicial to
interest of Co. or its members
b) Transactions merely represented by book entries prejudicial to intt of Co.

c) Where Co. not being Investment/ Banking Co. whether its assets consisting of shares,
debentures & other securities sold at price < purchase price

d) Whether Loans & Advances shown as Deposits

e) Whether personal expenses charged to Revenue a/c

f) Where shares of Co. have been allotted For cash, whether cash received & if no cash recd,
position as per books & balance sheet, correct, regular & non misleading

Notes:
Ø Auditor not reqd to report on above matters unless spl. comments to make
Ø Auditor should report only when ans. to any of matters is in adverse

Sec 143(3) Duty to Report

Auditor’s report shall state:

(a) whether he has sought and obtained all the information and explanations which to the best of his
knowledge and belief were necessary for the purpose of his audit and if not, the details thereof and
the effect of such information on the financial statements;

(b) whether, in his opinion, proper books of account as reqd by law have been kept by the Co. so far as
appears from his examination of those books and proper returns adequate for the purposes of his audit
have been received from branches not visited by him;
(c) whether the report on accounts of branch office of the Co. audited u/s 143(8) by a person other
than the company’s auditors has been sent to him and the manner he has dealt with it in preparing
report;

(d) whether the company’s balance sheet and profit and loss account dealt with in the report are in
agreement with the books of account and returns;

(e) whether, in his opinion, the financial statements comply with the accounting standards;

(f) the observations or comments of the auditors on financial transactions or matters which have any
adverse effect on the functioning of the company;

(g) whether any director is disqualified from being appointed as a director u/s 164(2)

(h) any qualification, reservation or adverse remark relating to the maintenance of accounts and other
matters connected therewith;

(i) whether the company has adequate internal financial controls with reference to financial statements
in place and the operating effectiveness of such controls;

(j) such other matters as may be prescribed.

Rule 11 of Cos. (Audit and Auditors) Rules, 2014 other matters to be included in auditor’s report
namely:-

a) whether Co. has disclosed impact, of pending litigations on its financial position in its financial
statement;

CA SHUBHAM KESWANI 118

 b) whether Co. has made provision, as required under any law or accounting standards, for material
foreseeable losses, if any, on long term contracts including derivative contracts;
c) whether there has been delay in transferring amt, to Investor Education and Protection Fund by
Co.
d) Omitted
e) i) Whether mgt has represented to best of knowledge & belief, other than disclosed in notes, no
funds advanced, loaned or invested by Co. in any person or entity including foreign entity with
understanding that Intermediary will lend or invest in another entity or provide guarantee or
security on behalf of Co. (Ultimate Beneficiary)
ii) Whether mgt has represented to best of knowledge & belief, other than disclosed in notes, no
funds received by Co. from any person or entity including foreign entity(Funding Parties) with
understanding that Co. will lend or invest in another entity or provide guarantee or security on
behalf of Funding Party (Ultimate Beneficiary)
iii) Auditor has found no material misstatement in above representations
f) Whether Dividend declared & paid as per Sec 123
g) In respect of FY commencing after 1.4.22 à Co. used a/c software to maintain books of a/c
having audit trail & same operated throughout year & audit trail hasn’t been tampered &
preserved by Co. for retention.

Note: Auditors of public cos. Required to report remuneration to directors within limits u/s 197
under the Section Report on Other Legal and Regulatory Requirements.

Sec143(3) àDuty to state reason for qualification or negative report

Sec 143(9) à Auditor’s duty to comply with SAs

Sec 145 Duty to sign Audit Report

Ø Qualifications, observations or comments on financial transactions which have adverse effect
on functioning of Co.
Ø Read before in GM & open for inspection by members of Co.

Report on Frauds [Sec 143(12)]

• If auditor has reason to believe offence of fraud involving amount of 1 Cr or above committed in
Co. by its officers or employees
• Auditor shall report to CG within such time & manner as prescribed

Manner of reporting
• Report to Board or AC within 2 days seeking their reply within 45 days (ACà Audit Committee)
• On receipt of reply forward
Ø His Report
Ø Reply or observation of board or AC
Ø With his comments
• to CG within 15 days of receipt of reply
• If no reply recd. then shall forward only his report
• Send to Secretary, MCA in sealed cover by Regd post with acknowledgment due (RPAD) or by
Speed post followed by e-mail
• Report format à ADT 4
• On letter head of auditor with post address, e-mail, mobile no., & signed by auditor with Seal +
Membership no.

CA SHUBHAM KESWANI 119

If fraud < 1 Cr à report to AC or Board within 2 days specifying following:
a) Nature of fraud
b) Amount involved
c) Parties involved

Disclosure on Board Report: Nature of fraud, amount, parties involved (if remedial action not taken)
or remedial action taken (fraud < 1 Cr)
143(13) safeguards auditor from fraud reported out of Good Faith.

The provisions of reporting on Fraud also apply to Cost & Secretarial Auditor.

Penalty for non-compliance:

Listed Co: 5L
Any other Co: 1L

The auditor is also required to report under clause (xi) of para 3 of CARO, 2020 on whether any
fraud by company or any fraud on Company has been noticed or reported during year. If yes, nature
and amount involved is to be indicated.

Example: Senior Mgr on instruction of CEO entered fake invoices of credit purchases in books of a/c
aggregating to 95 L and cleared all payments to such bogus creditor.
Here, auditor is required to report fraudulent activity to Board or Audit Committee (as the case may
be) within 2 days of knowledge of fraud. Further, Co. also required to disclose in Board’s Report.
Auditor need not report to CG as amount of fraud is less than 1 cr, however, reporting under CARO,
2020 is required.

Audit of Branch Office Accounts

• Sec 128(1) à Every Co. shall keep at Regd office books of a/c & FS that give true & fair view
& as per accrual basis + double entry system of accounting
• If kept at any other place inform ROC within 7 days
• If Co. has branch office, it can keep books of Branch at that office & proper summarised
returns sent to Regd office periodically
• Sec 143(8) à Powers & duties of Co. Auditor in relation to branch & branch auditor
• Branch a/c can be audited by Co. auditor or any other qualified person
• Branch auditor (if different) shall share his report with Co. Auditor
• SA 600 shall apply in such case
• Right of principal auditor to visit component & examine books & records, if necessary
• Obtain SAAE that other auditor’s work adequate for him
• Ordinary procedures:
Ø Advise other auditor of use of his work
Ø Coordinate at planning stage
Ø Inform about areas requiring spl considerations
Ø Procedures for identifying inter-component transactions that require disclosure
Ø Time-table for audit completion
Ø Advise about significant a/c, auditing & reporting requirements
Ø Obtain representation as to compliance with them
• Might discuss audit procedures applied or obtain written summary of other auditor’s
procedures
• In form of Questionnaire/checklist

CA SHUBHAM KESWANI 120

 • NTE of procedures will depend on circumstances of engagement & knowledge about
competence of other auditor
• Knowledge can be enhanced through review of previous audit work

Cost Audit (Sec 148)

Sec 148 of Companies Act 2013 read with Companies (Cost Records & Audit) Rules 2014

Rule 3 – Applicability of maintenance of Cost Records => t/o of products & services >= 35 cr

Rule 4 – Cost Audit applicability

i) Regulated sectors : T/o overall >= 50 Cr & individual product/service >= 25 Cr
ii) Non regulated sectors : t/o overall >= 100 Cr & individual product/service >= 35 Cr

Non-Applicability
• Revenue from exports in forex > 75% of total revenue or
• Operating from SEZ
• Engaged in generation of electricity for captive consumption through captive generating plant

Rule 5 à every Co. covered by Rule 3 maintain cost records in Form CRA-1

Who can be a Cost Auditor? Cost Accountant appointed by Board + Cos’ auditor can’t be cost auditor

CARO Clause: As per Clause (vi) to Para 3 of CARO 2020, auditor has to report whether maintenance
of cost records has been specified by the CG under section 148(1) of the Companies Act, 2013 and
whether such accounts and records have been so made and maintained.

Rule 6 à Appoint auditor within 180 days of commencement of FY

Ø File notice of appointment with CG in form CRA-2 with fees within 30 days of BM or 180 days
of commencement of FY, earlier
Ø Cost auditor shall continue till expiry of 180 days from closure of FY or till submission of
Audit report
Ø Audit report to be submitted in form CRA-3 within `180 days of closure of FY & forward to
BOD
Ø Co. within 30 days of receipt of copy of report furnish to CG in Form CRA-4 in XBRL format +
explanation to every qualification or reservation
Ø In case of any default of these rules è Penalty u/s 147 for Co., officers & Cost auditor

Sec 147: Penalty

• Default u/s 139-146 [Company & Officer]
Ø Co: 25k – 5 Lakh
Ø Officer: 10k – 1 Lakh

• Default u/s 139, 144 & 145 [Auditor]

Ø Auditor: 25k – 5L or 4 times remuneration ↓
Ø If wilful default & intention to deceive then punishable with
v Fine 50k – 25 Lakh or 8 times remuneration ↓ + imprisonment up to 1 year
v Liable to refund remuneration
v Pay for damages to Co./stat bodies/authorities/members/creditors of Co. for
their losses
Ø If auditor is firm + proved that partner(s) involved in fraud à liability of concerned
partners & firm (joint & several)

CA SHUBHAM KESWANI 121

 Ø For criminal liability in respect of liability other than fine à partners who are involved
in fraud only liable

Final Accounts Preparation & Presentation

Sec 129 à Requirements to be satisfied by F/s

• True & fair view
• Comply with a/c standards notified u/s 133 & as per Schedule III
Notes:
• CG has exempted Cos. in defence production from AS of Segment Reporting
• Provision of DTA/DTL not apply for Public Financial institution which is NBFC in business of
Infrastructure finance leasing >= 75 % of revenue from business with Govt Cos.
• Board to lay before every AGM F/S for the FY

Sec-130: Re-opening of Accounts on Court’s or Tribunal’s orders

• Co. shall not reopen or recast f/s unless application by CG/Income Tax Authorities/SEBI/
Regulatory body &
• An order by tribunal to effect that –
Ø Earlier a/c prepared in fraudlent manner or
Ø Affairs of Co. mismanaged, casting doubt on reliability of F/S
• Such order for reopening can’t be made beyond 8 years immediately preceding current FY

Section 131: Voluntary Revision of F/S or Board’s report

If it appears to directors of Co. that F/S or Board Report, don’t comply with Sec 129/134, they may
prepare revised f/s or Board Report of any 3 preceding FY after obtaining Tribunal’s approval & copy
of Tribunal’s order filed with ROC

National Financial Reporting Authority (NFRA)

NFRA shall:
a) Shall make recommendation to CG on formulation & laying down of a/c & auditing policies &
standards
b) Monitor & enforce the compliance with a/c & auditing stds
c) Oversee quality of service of professions ensuring compliance with standards & suggest
measures for improving quality of service
d) Perform such other functions as may be prescribed

Applicability to Companies:
a) Listed Companies
b) Unlisted public companies
Ø Paid up capital >= 500 Cr or
Ø T/o >= 1000 Cr or
Ø Loans/Deposits/Debentures >= 500 Cr
as on 31st March of preceding FY
c) Insurance, banking companies, cos. engaged in generating electricity,
d) Any BC or Co. or person referred to NFRA by CG in public interest
e) A BC incorporated or regd o/s India which is subsy/associate of Companies referred in (a) to
(d), if Income/NW > Consol Income/NW of such Co.
Above companies will be governed by NFRA rules for 3 years after it ceases to fulfil above conditions
*Co. not governed by NFRA rules will inform NFRA about Auditor’s appointment within 15 days form
NFRA-1

CA SHUBHAM KESWANI 122

Every auditor referred to in Rule 3 shall file return with the NFRA on or before 30th November every
year in Form NFRA-2

Punishment for Non compliance

Co./officer/auditor à Sec 450 of Cos Act 2013 (upto 10k + 1000/day)
In case of professional/other misconduct:
A. Impose penalty of:
1 L extend to 5 times fees recd (Individuals)
5 L extend to 10 times fees recd (firms)
B. Debar member or firm from:
Ø Being appointed as auditor or Internal auditor
Ø Performing valuation u/s 247
For min 6 months to max 10 years

To check True & Fair, auditor has to see:

i. that the assets are neither undervalued or overvalued, according to the applicable accounting
principles,
ii. no material asset is omitted;
iii. the charge, if any, on assets are disclosed;
iv. material liabilities should not be omitted;
v. statement of profit and loss discloses all the matters required to be disclosed by Part II of
Schedule III
vi. balance sheet has been prepared in accordance with Part I of Schedule III;
vii. accounting policies have been followed consistently; and
viii. all unusual, exceptional or non-recurring items have been disclosed separately.

Audit of Dividend
• Dividend out of profits after providing for depreciation under Schedule II
• Transfer to reserves optional: Co. may transfer such percentage of profits it considers
appropriate to reserves irrespective of size of declared dividend
• Out of Past profits: If current profits inadequate, it may declare out of past profits
• Dividend only from free reserves
• Dividend includes Interim dividend which can be out of profits of that FY
• If loss during FY upto last qtr à Rate of dividend <= average of preceding 3 FY
• It should be deposited within 5 days in separate a/c in scheduled bank from date of declaration
• It must be paid within 30 days from date of declaration
• If not paid within 30 days, interest @18% p.a. applicable + defaulting director (upto 2 yrs +
1000/day)
• No offence on part of Co. if:
Ø non-payment due to operation of any law
Ø shareholder given directions & those directions can’t be complied & this told to
Shareholder
Ø dispute regarding right to receive dividend
Ø dividend adjusted lawfully against sum due from shareholder
Ø any other reason, not due to fault of Co.
• If authorised by articles may pay in proportion of paid up amount of share
• Board may deduct amount receivable by Co. on account of calls while paying dividend
• If dividends are declared after the bal. sheet date but before F.S. are approved for issue,
check that dividends have not been recognised as a liability as per AS 4 and Ind AS 10- Events
after the Reporting Period, but disclosure of the same has been made in the notes.

CA SHUBHAM KESWANI 123

 • Unpaid Dividend Account (Sec 124)
Ø Dividend unpaid/unclaimed for 30 days
Ø Transfer to this A/C within 7 days of expiry of 30 days
Ø If default, interest @ 12% p.a.
Ø Statement showing names, address & amount on website of Co. within 90 days of transfer
Ø If it remains unpaid for 7 years à transfer to Investor Education & Protection Fund
(IEPF)

• Penalty for non-comp

Co: 1L + 500/Day à Max 10 L
Officer: 25k + 100/day à 2L

The Investor Education & Protection Fund shall be utilised for the following purposes in accordance
with such rules as may be prescribed-
(a) refund in respect of unclaimed dividends, matured deposits, matured debentures, the application
money due for refund and interest thereon;
(b) promotion of investors’ education, awareness and protection;
(c) distribution of any disgorged amount among eligible and identifiable applicants for shares or
debentures, shareholders, debenture-holders or depositors who suffered losses due to wrong actions
by any person, in accordance with orders made by Court which had ordered disgorgement;
(d) reimbursement of legal expenses incurred in pursuing class action suits under sections 37 and 245
by members, debenture-holders or depositors as may be sanctioned by the Tribunal; and
(e) any other purpose incidental thereto.

Right to dividend, rights shares and bonus shares to be held in abeyance pending registration of
transfer of shares (Sec 126)
Payment of dividend and allotment of bonus and right shares to transferee to be held in abeyance till
title to shares is decided. Where any instrument of transfer of shares has been delivered to Co. for
registration and transfer of such shares has not been regd., it shall transfer dividend in relation to
such shares to spl. account referred to in section 124 i.e. Unpaid Dividend Account unless Co. is
authorised by regd. holder of such shares in writing to pay such dividend to transferee specified in
such instrument of transfer. Further, Co. shall also keep in abeyance in relation to such shares, any
offer of right shares and any issue of fully paid up bonus shares.

Power to close register of members or debenture-holders or other security holders (Sec 91)

Co. may close register of members or debenture-holders or other security holders for any period not
exceeding aggregate 45 days in each year, but not exceeding 30 days at any one time, subject to giving
of previous notice of at least 7 days or such lesser period as may be specified by SEBI for listed cos.
or cos. which intend to get securities listed.

Notes:
Ø residual value of asset shall not be more than 5% of original cost of asset
Ø Useful life of asset shall not ordinarily be different from useful life specified in Part ‘C’ to
Schedule II
Ø If asset is used for double shift, depreciation will increase by 50% for that period and in case
of triple shift depreciation shall be calculated on the basis of 100% for that period.

CA SHUBHAM KESWANI 124

 Non-provision of tax in the accounts

The Council of ICAI has taken note of the fact that there is a practice prevalent whereby companies
do not make provision for tax even when such a liability is anticipated. It has expressed view that on
an overall consideration of relevant provisions of law, non-provision for tax (where a liability is
anticipated) would amount to contravention of provisions of Sec 128 and 129 of the Companies Act,
2013.

Accordingly, it is necessary for the auditor to qualify his report and such qualification should bring out
the manner in which the accounts don’t disclose a “true and fair” view of state of affairs of Co. and
the profit or loss of the company.

An example of manner in which report on balance sheet and Statement of Profit and Loss may be
qualified in this respect is given below:
“The company has not provided for taxation in respect of its profits and the estimated aggregate
amount of taxation not so provided for is ` ............ including ` ............. for the Year ended on ..............To
the extent of such non-provision for the year, profits of Company for FY under report have been
overstated and to extent of such aggregate non provision, reserves of company appearing in said
balance sheet have been over-stated and current liabilities and provisions appearing in said balance
sheet have been understated”.

Limited Liability Partnership (LLP) Audit

Ø Applicability of Audit: If T/o <= 40 L or Contribution <= 25 L à No Audit
Ø Annual return in Form 11 with ROC within 60 days of F.Y.
Ø Statement of Account & solvency in Form 8 within 30 days from end of 6 months of F.Y.

Appointment of Auditor: The auditor may be appointed by designated partners (DPs) of LLP –
1. At any time for 1st FY but before the end of first financial year,
2. At least 30 days prior to the end of each financial year (other than the first financial year),
3. To fill the causal vacancy in the office of auditor,
4. To fill the casual vacancy caused by removal of auditor.

Note: The partners may appoint the auditors if DPs have failed to appoint them.

LLP’s are required to maintain books of accounts which shall contain:

1. Particulars of all sums of money received and expended by the LLP and the matters in respect of
which the receipt and expenditure takes place,
2. A record of the assets and liabilities of the LLP,
3. Statements of costs of goods purchased, inventories, work-in-progress, finished goods and COGS,
4. Any other particulars which the partners may decide.

Advantages / Purpose / Need of Audit:

1. Auditing the accounts of LLP helps in detecting errors & frauds & verification of financial
statements.
2. Disputes, if any between any partners in the matter of accounts can be settled
3. Banks & financial institutions lend money to the firms only on the basis of audited accounts.
4. Periodical visits & suggestions by the auditor will be helpful in improving the management of the LLP.
5. For settling accounts between partners at the time of admission, death, retirement, insolvency,
insanity, etc., audited accounts are accepted by those concerned who have dealings with the LLP.

CA SHUBHAM KESWANI 125

 Auditor’s Duty Regarding Audit of LLP
1. The auditor should get definite instructions in writing as to the work to be performed by him.

2. The auditor should mention:

a) Whether the records of the firm appear to be correct & reliable.
b) Whether he was able to obtain all information & explanation necessary for his work.
c) Whether any restriction was imposed upon him.

3.The auditor should read the LLP agreement & note the following provisions:
a) Nature of the business of the LLP.
b) Amount of capital contributed by each partner.
c) Interest – in respect of additional capital contributed.
d) Duration of partnership.
e) Drawings allowed to the partners.
f) Salaries, commission etc., payable to partners.
g) Borrowing powers of the LLP.
h) Rights & duties of partners.
i) Method of settlement of accounts between partners at the time of admission, retirement,
admission etc.
j) Any loans advanced by the partners.
k) Profit sharing ratio.

4. If partners maintain minute book he shall refer it for any resolution passed regarding the
accounts.

Miscellaneous Topic:

AS 1 - Disclosure of Accounting Policies -In case of a Co, members should qualify their audit reports
in case:
(a) a/c policies required to be disclosed under Schedule III or any other provisions of Companies
Act, 2013, have not been disclosed, or
(b) accounts have not been prepared on accrual basis, or
(c) fundamental a/c assumption of going concern not followed and fact not disclosed in F.S., or
(d) proper disclosures regarding changes in accounting policies have not been made.

CA SHUBHAM KESWANI 126

 Companies Auditor’s Report Order, 2020 (CARO 2020)

Applicability:
To every Co. including foreign Co. except:
• Banking Co.
• Insurance Co.
• Sec 8 Co. (NGO)
• One Person Co. (OPC) & Small Co.
• Pvt ltd Co. (not holding/subsy of Public Co.)
Paid up Share Cap + Reserves & Surplus <= 1 Cr (B.S. Date) &
Borrowings (Bank or FI) <= 1 Cr (Any time during year) &
Revenue (including revenue from discontinued operations) <= 10 Cr as per F/S
*CARO not applicable to Consolidated financial statements

Para 3: Clauses (i) to (xxi)

(i) (Proper records of PPE/Intangibles + Physical verification + Title deeds + Revaluation + Benami)

(a) (A) whether Co. is maintaining proper records showing full particulars, including quantitative
details and situation of Property, Plant and Equipment;
(B) whether company is maintaining proper records showing full particulars of intangible assets;
(b) whether these PPE have been physically verified by management at reasonable intervals;
whether any material discrepancies were noticed on such verification and if so, whether same
have been properly dealt in books of a/c;

(c) whether title deeds of all immovable properties (other than properties where company is
lessee and lease agreements are duly executed in favour of lessee) disclosed in F.S. are held in
name of company, if not, provide details thereof in format below:-
Description Gross Held in Whether Period held- Reason for
of property carrying name of promoter,director indicate not being
value or their relative range,where held in name
or employee appropriate of Co.

(d) whether company has revalued its PPE (including Right of Use assets) or intangible assets or
both during the year and, if so, whether revaluation is based on valuation by Registered Valuer;
specify amount of change, if change is 10% or more in aggregate of net carrying value of each
class of PPE or intangible assets;

(e) whether any proceedings initiated or pending against company for holding any benami
property under Benami Transactions (Prohibition) Act, 1988 and rules made thereunder, if so,
whether Co. has appropriately disclosed details in its F.S.;

(ii) [Inventory à Physical verification + Working capital loans]

(a) whether physical verification of inventory has been conducted at reasonable intervals by mgt and
whether, in opinion of auditor, coverage and procedure of verification by mgt is appropriate; whether
any discrepancies of 10% or more in aggregate for each class of inventory were noticed and if so,
whether they have been properly dealt with in books of a/c;

CA SHUBHAM KESWANI 127

(b) whether during any point of time of year, company has been sanctioned working capital limits in
excess of 5 cr, in aggregate, from banks or financial institutions on basis of security of current
assets; whether quarterly returns or statements filed by company with such banks or financial
institutions are in agreement with books of a/c of Company, if not, give details;

Loans, Investments, Guarantee & Securities (LIGS)

(iii) whether during year Co. has made investments in, provided any guarantee or security or granted
any loans or advances in nature of loans, secured or unsecured, companies, firms, LLPs or any other
parties, if so,-

(a) whether during year Co. has provided loans or provided advances in nature of loans, or stood
guarantee, or provided security to any other entity [not applicable to companies whose principal
business is to give loans], if so, indicate-

(A) aggregate amt during year, and balance o/s at BS date w.r.t. such loans or advances and
guarantees or security (LAGS) to subsidiaries, joint ventures and associates;
(B) Agg. amt during year, and balance outstanding at BS date w.r.t such LAGS to parties other
than subsidiaries, joint ventures and associates;
(b) whether investments made, guarantees provided, security given and T&Cs of grant of all loans and
advances in nature of loans and guarantees provided are not prejudicial to the company’s interest;

(c) in respect of loans and advances in nature of loans, whether schedule of repayment of principal and
payment of interest has been stipulated and whether repayments or receipts are regular;

(d) if amount is overdue, state total amount overdue for more than 90 days, and whether reasonable
steps have been taken by company for recovery of principal and interest;

(e) whether any loan or advance in the nature of loan granted which has fallen due during the year, has
been renewed or extended or fresh loans granted to settle the overdues of existing loans given to the
same parties, if so, specify the aggregate amount of such dues renewed or extended or settled by
fresh loans and percentage of aggregate to total loans or advances in the nature of loans granted
during year [not applicable to companies whose principal business is to give loans];

(f) whether company has granted any loans or advances in the nature of loans either repayable on
demand or without specifying any terms or period of repayment, if so, specify the aggregate amount,
percentage thereof to the total loans granted, aggregate amount of loans granted to Promoters,
related parties as defined in clause (76) of section 2 of the Companies Act, 2013;

Sec 185 & 186

(iv) in respect of loans, investments, guarantees, and security (LIGS), whether provisions of sections
185 and 186 of the Companies Act have been complied with, if not, provide the details thereof;

Deposits
(v) in respect of deposits accepted by the company or amounts which are deemed to be deposits,
whether directives issued by RBI and provisions of Sec 73 to 76 or any other relevant provisions of
Companies Act and the rules made thereunder, where applicable, have been complied with, if not, the
nature of such contraventions be stated; if an order has been passed by Company Law Board or NCLT
or RBI or any court or any other tribunal, whether the same has been complied with or not;

Cost records
(vi) whether maintenance of cost records has been specified by CG under section 148(1) of Companies
Act and whether such accounts and records have been so made and maintained;

CA SHUBHAM KESWANI 128

Statutory dues
(vii) (a) whether company is regular in depositing undisputed statutory dues including GST, PF, ESI,
income-tax, sales-tax, service tax, customs duty, excise duty, VAT, cess and any other statutory dues
to appropriate authorities and if not, extent of arrears of o/s statutory dues as on last day of the
financial year concerned for a period of more than 6 months from date they became payable, shall be
indicated;

(b) where statutory dues referred to in sub-clause (a) have not been deposited on account of any
dispute, then amounts involved and forum where dispute is pending shall be mentioned (a mere
representation to the concerned Department shall not be treated as a dispute);

Income Disclosure
(viii) whether any transactions not recorded in the books of account have been surrendered or
disclosed as income during year in the tax assessments under Income Tax Act, 1961, if so, whether
the previously unrecorded income has been properly recorded in the books of account during the year;

Repayment of loans
(ix) (a) whether Co. has defaulted in repayment of loans or other borrowings or in payment of interest
thereon to any lender, if yes, the period and the amount of default to be reported as per the format
below:-
Nature of Name of Amt not paid Whether No. of days Remarks,
borrowing, lender on due date principal or delay or if any
including debt interest unpaid
securities

*lender wise details in case of default to Bank, financial institutions & Govt
(b) whether company is a declared wilful defaulter by any bank or financial institution or other lender;

(c) whether term loans were applied for purpose for which loans were obtained; if not, amount of loan
so diverted and purpose for which it is used may be reported;

(d) whether funds raised on short term basis have been utilised for long term purposes, if yes, nature
and amount to be indicated;

(e) whether Co. has taken any funds from any entity or person on account of or to meet obligations of
its subsidiaries, associates or joint ventures, if so, details thereof with nature of such transactions
and the amount in each case;

(f) whether company has raised loans during the year on the pledge of securities held in its subsidiaries,
joint ventures or associate companies, if so, give details thereof and also report if company has
defaulted in repayment of such loans raised;

IPO/ FPO Reporting:

(x) (a) whether moneys raised by way of initial public offer or further public offer(including debt
instruments) during the year were applied for purposes for which those are raised, if not, the details
together with delays or default and subsequent rectification, if any, as may be applicable, be reported;

Preferential Allotment/Private placement

(b) whether Co. has made any preferential allotment or private placement of shares or convertible
debentures (fully, partially or optionally convertible) during year and if so, whether the requirements
of section 42 and section 62 of the Companies Act, 2013 have been complied with and funds raised
have been used for purposes for which the funds were raised, if not, provide details in respect of
amount involved and nature of non-compliance;

CA SHUBHAM KESWANI 129

Fraud
(xi) (a) whether any fraud by the company or any fraud on the company has been noticed or reported
during the year, if yes, nature and amount involved is to be indicated;

(b) whether any report under 143(12) of Companies Act has been filed by the auditors in Form ADT-4
as prescribed under rule 13 of Companies (Audit and Auditors) Rules, 2014 with the Central
Government;

(c) whether the auditor has considered whistle-blower complaints, if any, received during the year by
company;

Nidhi Company
(xii) (a) whether Nidhi Company has complied with the Net Owned Funds to Deposits in ratio of 1:20
to meet out liability;

(b) whether the Nidhi Company is maintaining 10% unencumbered term deposits to meet out the
liability;

(c) whether there has been any default in payment of interest on deposits or repayment thereof for
any period and if so, the details thereof;

Related Parties
(xiii) whether all transactions with related parties are in compliance with sections 177 and 188 of
Companies Act where applicable and the details have been disclosed in the financial statements, etc.,
as required by the applicable accounting standards;

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

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

Non cash transactions

(xv) whether the company has entered into any non-cash transactions with directors or persons
connected with him and if so, whether provisions of Sec 192 of Companies Act have been complied
with;

RBI
(xvi) (a) whether company is required to be registered under section 45-IA of Reserve Bank of India
Act, 1934 (2 of 1934) and if so, whether the registration has been obtained;

(b) whether company has conducted any Non-Banking Financial or Housing Finance activities without a
valid Certificate of Registration (CoR) from the Reserve Bank of India as per the Reserve Bank of
India Act, 1934;

(c) whether company is a Core Investment Company (CIC) as defined in the regulations made by the
Reserve Bank of India, if so, whether it continues to fulfil the criteria of a CIC, and in case the company
is exempted or unregistered CIC, whether it continues to fulfil such criteria;

(d) whether the Group has more than one CIC as part of the Group, if yes,indicate the number of CICs
which are part of Group;

CA SHUBHAM KESWANI 130

Cash Losses
(xvii) whether company has incurred cash losses in financial year and in immediately preceding financial
year, if so, state the amount of cash losses;

Resignation by Statutory Auditors

(xviii) whether there has been any resignation of statutory auditors during year, if so, whether auditor
has taken into consideration the issues, objections or concerns raised by the outgoing auditors;

Going Concern
(xix) on basis of financial ratios, ageing and expected dates of realisation of financial assets and
payment of financial liabilities, other information accompanying the financial statements, auditor’s
knowledge of Board of Directors and management plans, whether the auditor is of the opinion that no
material uncertainty exists as on date of the audit report that company is capable of meeting its
liabilities existing at date of balance sheet as and when they fall due within a period of 1 year from BS
Date;

CSR Reporting
(xx) (a) whether, in respect of other than ongoing projects, company has transferred unspent amount
to a Fund specified in Schedule VII to the Companies Act within a period of six months of the expiry
of financial year in compliance with second proviso to section 135(5) of the said Act;

(b) whether any amount remaining unspent under section 135(5) of the Companies Act, pursuant to any
ongoing project, has been transferred to special account in compliance with section 135(6) of the said
Act;

Qualifications in CFS
(xxi) whether there have been any qualifications or adverse remarks by respective auditors in the
Companies (Auditor's Report) Order (CARO) reports of the companies included in the consolidated
financial statements, if yes, indicate details of companies and paragraph numbers of CARO report
containing qualifications or adverse remarks.

CA SHUBHAM KESWANI 131

 Schedule III (Division II i.e. Ind AS)

Current Asset
Asset shall be classified as current when it satisfies any of following criteria:
(a) expected to be realized, or consumed in, company’s normal operating cycle;
(b) held primarily for purpose of trading;
(c) expected to realize within 12 months after reporting period; or
(d) cash or cash equivalent unless restricted from being exchanged or used to settle a liability for at
least 12 months after reporting period.
All other assets shall be classified as non-current.

Operating Cycle
An operating cycle is time b/w acquisition of assets and their realization in cash or cash equivalents.
Where normal operating cycle can’t be identified, it is assumed to have a duration of 12 months.

Current Liability
Liability shall be classified as current when it satisfies any of following criteria:
(a) expected to be settled in Co’s normal operating cycle;
(b) held primarily for purpose of trading;
(c) it is due to be settled within 12 months after reporting period; or
(d) Co. doesn’t have an unconditional right to defer settlement of liability for at least 12 months after
reporting date. Terms of a liability that could, at option of counterparty, result in its settlement by
issue of equity instruments do not affect its classification.

All other liabilities shall be classified as non-current.

Balance Sheet

Non-Current Assets

l. Property. Plant and Equipment :

(i) Classification shall be given as:
(a) Land
(b) Buildings
(c) Plant and Equipment
(d) Furniture and Fixtures
(e) Vehicles
(f) Office equipment
(g) Bearer Plants
(h) Others (specify nature)
(ii) Assets under lease shall be separately specified under each class of assets
(iii) A reconciliation of gross and net carrying amts of each class of assets at beginning and end of
reporting period showing additions, disposals, acquisitions through business combinations, amt of
change due to revaluation (if cha nge is 10% or more of Net Value of each class of PPE) and other
adjustments and related depreciation and impairment losses or reversals shall be disclosed separately.

Investment Property:
Reconciliation similar to PPE.

CA SHUBHAM KESWANI 132

Goodwill:
A reco. of gross and net carrying amt of goodwill at beginning and end of reporting period showing
additions, impairments, disposals and other adjustments.

Other Intangible assets

(i) Classification shall be given as:
(a) Brands or trademarks
(b) Computer software
(c) Mastheads and publishing titles
(d) Mining rights
(e) Copyright, patents, other intellectual property rights, services and operating rights
(f) Recipes, formulae, models, designs and prototypes
(g) Licenses and franchises
(h) Others (specify nature)
(ii) Reco. similar to PPE.

Biological Assets other than bearer plants:

A reco. of carrying amts of each class of assets at beginning and. end of reporting period showing
additions, disposals, acquisitions through business combinations and other adjustments shall be
disclosed separately.

Investment
(i) Investments shall be classified as:
(a) Investments in Equity Instruments;
(b) Investments in Preference Shares;
(c) Investments in Government or trust securities;
(d) Investments in debentures or bonds;
(e) Investments in Mutual Funds;
(f) Investments in partnership firms; or
(g) Other investments (specify nature)
Under each classification, details shall be given of names of bodies corporate that are-
(i) subsidiaries,
(ii) associates,
(iii) joint ventures, or
(iv) structured entities,
in whom investments made and nature and extent of investment made in each body corporate (partly-
paid investments shown separately). lnvestment in partnership firms alongwith names of firms, their
partners, total capital and shares of each partner disclosed separately.
(ii) The following shall also be disclosed:
(a) Aggregate amt of quoted investment and market value thereof:
(b) Aggregate amt of unquoted investment: and
(c) Aggregate amt of impairment in value of investment.

Trade Receivables:
(i) Trade receivables shall be sub-classified as;
(a) Trade Receivables considered good - Secured;
(b) Trade Receivables considered good - Unsecured;
(c) Trade Receivables which have significant increase in Credit Risk; and
(d) Trade Receivables - credit impaired
(ii) Allowance for bad and doubtful debts shall be disclosed under the relevant heads separately.

CA SHUBHAM KESWANI 133

(iii) Debts due by directors or other officers of co. or any of them either severally or jointly with any
other person or by firms or pvt companies respectively in which any director is a partner or a director
or a member should be separately stated.

Trade Receivables Ageing Schedule

Outstanding for following periods from due date of

payment#
Particulars <6 6m-1 year 1-2 2-3 > 3 years Total
months years years
i) Undisputed Trade receivables –
considered good
ii) Undisputed Trade Receivables
– which have significant increase
in credit risk
iii) Undisputed Trade Receivables
– credit impaired
(iv) Disputed Trade Receivables–
considered good
(v) Disputed Trade Receivables –
which have significant increase in
credit risk
(vi) Disputed Trade Receivables
– credit impaired
# similar info. shall be given where no due date of payment is specified in that case disclosure shall
be from date of the transaction

Loans;
(i) Loans shall be classified as-
(a) omitted
(b) Loans to related parties (giving details thereof); &
(c) Other loans (specify nature).
(ii) Loans Receivables shall be sub-classified as:
(a) Loans Receivables considered good - Secured;
(b) Loans Receivables considered good - Unsecured;
(c) Loans Receivables which have significant increase in Credit Risk; and
(d) Loans Receivables - credit impaired;
The above shall also be separately sub-classified as-
(a) Secured, considered good;
(b) Unsecured, considered good; and
(c) Doubtful. Allowance for bad and doubtful loans shall be disclosed under the relevant heads
separately.
(iv) Loans due by directors or other officers ….(same as Trade Receivables)

Other Financial Assets

(i) Security Deposits
(ii) Bank deposits with more than 12 months maturity
(iii) others(to be specified);

CA SHUBHAM KESWANI 134

Other non-current asset: Other non-current assets shall be classified as-
(i) Capital Advances; and
(ii) Advances other than capital advances;

(1) Advances other than capital advances shall be classified as:

(a) Security Deposits;
(b) Advances to related parties (giving details thereof; and
(c) Other advances (specify nature).
(2) Advances to directors or other officers of Co. or any of them either severally or jointly with any
other persons or advances to firms or private companies respectively in which any director is a partner
or a director or a member should be separately stated, ln case advances are of nature of financial
asset as per relevant Ind AS, these are to be disclosed under other financial assets separately.
(iii) Others (specify nature).

Current Assets

Inventories:
(i) Inventories shall be classified as-
(a) Raw materials;
(b) Work in-progress;
(c) Finished goods;
(d) Stock-in-trade (in respect of goods acquired for trading);
(e) stores and spares;
(f) Loose tools; and
(g) Others (specify nature).
(ii) Goods-in-transit shall be disclosed under the relevant sub-head of inventories.
(iii) Mode of valuation shall be stated.

Investment;
Similar to non-current

Trade Receivables
Similar to non-current

Cash and cash equivalents:

Cash and cash equivalents shall be classified as:-
a. Balances with Banks (of the nature of cash and cash equivalents);
b. Cheques, drafts on hand;
c. Cash on hand; and
d. Others (specify nature).

Loans:
Similar to non-current

Other current assets (specify nature): This is an all-inclusive heading, which incorporates current
assets that do not fit into any other asset categories. Other current assets shall be classified as-
(i) Advances other than capital advances
(1) Advances other than capital advances shall be classified as:
(a) Security Deposits;
(b) Advances to related parties (giving details thereof);

CA SHUBHAM KESWANI 135

 (c) Other advances (specify nature)
(2) Advances to directors or other officers of Co. or any of them either severally or jointly with
any other persons or advances to firms or pvt cos. respectively in which any director is a partner or
a director or a member should be separately stated.
(a) Earmarked balances with banks (for example for unpaid dividend) shall be separately stated.
(b) Balances with banks to the extent held as margin money or security against borrowings,
guarantees, other commitments shall be disclosed separately.
(c) Repatriation restrictions in respect of cash and bank balances shall be separately stated.

Contingent Liabilities and Commitments: (to the extent not provided for)
(i) Contingent Liabilities shall be classified as-
(a) claims against the company not acknowledged as debt;
(b) guarantees excluding financial guarantees; and
(c) other money for which the company is contingently liable.
(ii) Commitments shall be classified as-
(a) estimated amt of contracts remaining to be executed on capital account and not provided for;
(b) uncalled liability on shares and other investments partly paid; and
(c) other commitments (specify nature).

Equity

Equity Share Capital: For each class of equity share capital:

(a) no. and amt of shares authorised;
(b) no. of shares issued, subscribed and fully paid, and subscribed but not fully paid;
(c) par value per Share;
(d) reconciliation of no. of shares outstanding at beginning and end of period;
(e) rights, preferences and restrictions attaching to each class of shares including restrictions on
distribution of dividends and repayment of capital;
(f) shares in respect of each class in the company held by its holding or ultimate holding co. including
shares held by subsidiaries or associates of holding or ultimate holding co. in aggregate;
(g) shares in company held by each shareholder holding more than 5% shares specifying no. of shares
held;
(h) shares reserved for issue under options and contracts or commitments for sale of shares or
disinvestment, including terms and amounts;
(i) for period of 5 years immediately preceding the date at which Balance Sheet is prepared
• aggregate no. and class of shares allotted as fully paid up pursuant to contract without received in
cash;
• aggregate no. and class of shares allotted as fully paid up by way of bonus shares; and
• aggregate no. and class of shares bought back;
(j) terms of any securities convertible into equity shares issued along with earliest date of
conversion in descending order starting from farthest such date;
(k) calls unpaid (showing aggregate value of calls unpaid by directors and officers);
(l) forfeited shares (amount originally paid up)
(m) Disclosure of Promoter Shareholding

Shares held by promoter at end of Year % change during

year
S No. Promoter Name No of shares* % of total
shares

CA SHUBHAM KESWANI 136

*details to be given for each class of share

Other Equity:
(i) Other Reserves' shall be classified in the notes as-
(a) Capital Redemption Reserve;
(b) Debenture Redemption Reserve;
(c) Share Options Outstanding Account; and
(d) others- (specify the nature and purpose of each reserve and the amount in respect thereof);
(Additions and deductions since last balance sheet to be shown under each of the specified heads)
(ii) Retained Earnings represents surplus i.e. balance of relevant column in Statement of Changes in
Equity;
(iii) A reserve specifically represented by earmarked investments shall disclose the fact that it is so
represented;
(iv) Debit balance of Statement of P&L à shown as a negative figure under the head 'retained
earnings'. Similarly, balance of 'Other Equity', after adjusting negative balance of retained earnings,
if any, shall be shown under the head 'Other Equity' even if the resulting figure is in the negative;
and
(v) Under the sub-head 'Other Equity', disclosure shall be made for the nature and amount of each
item.

Non-Current Liabilities
Borrowings:
(i) borrowings shall be classified as-
(a) Bonds or debentures
(b) Term loans
(I) from banks
(II) from other Parties
(c) Deferred payment liabilities
(d) Deposits.
(e) Loans from related parties
(f) omitted
(g) Liability component of compound financial instruments
(h) Other loans (specify nature);
(ii) borrowings shall further be sub-classified as secured and unsecured. Nature of security shall be
specified separately in each case.
(iii) where loans have been guaranteed by directors or others, aggregate amount of such loans under
each head shall be disclosed;
(iv) bonds or debentures (along with rate of intt, and particulars of redemption or conversion) shall be
stated in descending order of maturity or conversion, starting from farthest redemption or conversion
date where bonds/debentures are redeemable by instalments, the date of maturity for this purpose
must be reckoned as date on which first instalment becomes due;
(v) particulars of any redeemed bonds or debentures which company has power to reissue shall be
disclosed;
(vi) terms of repayment of term loans and other loans shall be stated; and
(vii) period and amt of default as on balance sheet date in repayment of borrowings and intt shall be
specified.

Provisions: The amounts shall be classified as-

(a) Provision for employee benefits; and
(b) Others (specify nature).

CA SHUBHAM KESWANI 137

Other non-current liabilities;
(a) Advances; and
(b) Others (specify nature).

Current Liabilities

Borrowings:
(i) Borrowings shall be classified as-
(a) Loans repayable on demand
(I) from banks
(II) from other parties
(b) Loans from related parties
(c) Deposits
(d) Other loans (specify nature);
(ii) borrowings further sub-classified as secured and unsecured. Nature of security shall be specified
separately in each case;
(iii) where loans have been guaranteed by directors or others, agg. amt of loans under each head shall
be disclosed;
(iv) period and amt of default as on B.S. date in repayment of borrowings and intt, specified
separately in each case.
(v) Current maturities of long term debt shall be disclosed separately

Other Financial Liabilities: OFL shall be classified as-

(a) omitted
(b) omitted
(c) Interest accrued;
(d) Unpaid dividends;
(e) Application money received for allotment of securities to the extent refundable and intt accrued
thereon;
(f) Unpaid matured deposits and interest accrued thereon;
(g) Unpaid matured debentures and interest accrued thereon; and
(h) Others (specify nature).

'Long term debt is a borrowing having a period of more than twelve months at time of origination

Other current liabilities:

The amounts shall be classified as-
(a) revenue received in advance;
(b) other advances (specify nature); and
(c) others (specify nature);

Provisions: The amounts shall be classified as-

(i) provision for employee benefits; and
(ii) others (specify nature)

Trade Payables
The following details relating to Micro, Small and Medium Enterprises(MSME) shall be disclosed in
notes:

CA SHUBHAM KESWANI 138

(a) principal amt and interest due thereon (to be shown separately) remaining unpaid to any supplier
at end of each accounting year;
(b) amt of interest paid by buyer in terms of sec 16 of MSME Development Act, 2006, along with
payment made to supplier beyond appointed day during each accounting year;
(c) amt of interest due and payable for period of delay in making payment (which have been paid but
beyond the appointed day during year) but without adding interest specified under MSME
Development Act, 2006;
(d) amt of interest accrued and remaining unpaid at end of each accounting year; and
(e) amt of further interest remaining due and payable even in succeeding years, until such date when
interest dues above are actually paid to small enterprise, for purpose of disallowance of a deductible
expenditure under sec 23 of MSME Development Act, 2006.

Trade Payables Ageing Schedule

Particulars Outstanding for following periods from due date of Total
payment
i) MSME < 1 year 1-2 years 2-3 years > 3 years
ii) Others
iii) Disputed dues-
MSME
iv) Disputed dues-
others

The presentation of liabilities associated with group of assets classified as held for sale and non-
current assets classified as held for sale shall be in accordance with the relevant Ind AS.

Dividends
The amount of dividends proposed to be distributed to equity and preference shareholders for the
period and related amount per share shall be disclosed separately. Arrears of fixed cumulative
dividends on preference shares shall also be disclosed separately.

Utilisation of Amounts Raised

Where issue of securities made for specific purpose, whole or part of amt hasn’t been used for
specific purpose at balance sheet date, indicate by way of note how such unutilized amts have been
used or invested.

Where the company has not used borrowings from banks and financial institutions for specific
purpose for which it was taken at balance sheet date, company shall disclose details of where they
have been used.

Additional Regulatory Info

i) Title deeds of Immovable Properties not held in name of the Company

The company shall provide details of all immovable properties other than on lease whose title deeds
are not held in name of Co. in a format and where such immovable property is jointly held with
others, details are required to be given to the extent of Co‘s share.

(ii) The Co. shall disclose as to whether the fair value of investment property is based on valuation by
a regd valuer as defined under rule 2 of Companies (Registered Valuers and Valuation) Rules, 2017.

CA SHUBHAM KESWANI 139

(iii) Where Co. has revalued its PPE (including Right-of-Use Assets), disclose as to whether
revaluation is based on valuation by a regd valuer.

(iv) Where Co. has revalued its intangible assets, disclose as to whether revaluation is based on
valuation by a regd valuer.

(v) The following disclosures shall be made where Loans or Advances in nature of loans are granted to
promoters, directors, KMPs and related parties (as defined under Companies Act, 2013), either
severally or jointly with any other person, that are:
(a) repayable on demand; or
(b) without specifying any terms or period of repayment,

Type of borrower Amt of loan Percentage of total loans

Promoters
Directors
KMPs
Related Parties

(vi) Capital Work in Progress

Aging Schedule
CWIP <1 1-2 years 2-3 years > 3 years Total
Year
Projects in Progress
Projects temporarily suspended

For CWIP, whose completion is overdue or exceeded its cost compared to original plan, following
CWIP completion schedule shall be given:

To be completed in: Total

< 1 year 1-2 years 2-3 years > 3 years
Project 1
Project 2
(Details of projects where activity has been suspended to be given separately)

(vii) Similar schedules to be given for Intangible Assets under Development

(viii) Details of Benami Property held

Where any proceeding has been initiated or pending against the company for holding any benami
property under Benami Transactions (Prohibition) Act, 1988 and rules made thereunder, disclose the
following:-
(a) Details of such property,
(b) Amount thereof,
(c) Details of Beneficiaries,
(d) If property is in the books, then reference to the item in the Balance Sheet,
(e) If property is not in the books, then the fact shall be stated with reasons,
(f) Where there are proceedings against Co. under this law as an abetter of the transaction or as
the transferor then the details shall be provided,
(g) Nature of proceedings, status of same and company‘s view on same.

CA SHUBHAM KESWANI 140

(ix) where Co. has borrowings from banks or financial institutions on basis of security of current
assets, it shall disclose following:-
(a) whether quarterly returns or statements of current assets filed by Co. with banks or financial
institutions are in agreement with books of accounts;
(b) if not, summary of reconciliation and reasons of material discrepancies, if any to be adequately
disclosed.

(x) Wilful Defaulter

Where a Co. is declared wilful defaulter by any bank or financial Institution or other lender,
following details shall be given:
(a) Date of declaration as willful defaulter,
(b) Details of defaults (amount and nature of defaults)

(xi) Relation with struck off Cos. to be disclosed.

xii) Registration of charges or satisfaction with Registrar of Companies (ROC)

Where any charges or satisfaction yet to be registered with ROC beyond the statutory period,
details and reasons thereof shall be disclosed.

(xiii) Compliance with number of layers of companies

Where Co. has not complied with number of layers prescribed under Sec2(87) of Cos. Act read with
the Companies (Restriction on number of Layers) Rules, 2017, name and CIN of companies beyond
specified layers and relationship or extent of holding of company in such downstream companies shall
be disclosed.

(xiv) Following Ratios to be disclosed:-

(a) Current Ratio,
(b) Debt-Equity Ratio,
(c) Debt Service Coverage Ratio,
(d) Return on Equity Ratio,
(e) Inventory turnover ratio,
(f) Trade Receivables turnover ratio,
(g) Trade payables turnover ratio,
(h) Net capital turnover ratio,
(i) Net profit ratio,
(j) Return on Capital employed,
(k) Return on investment.
The company shall explain items included in numerator and denominator for computing above ratios.
Further explanation shall be provided for any change in the ratio by more than 25% as compared to
the preceding year.

(xv) Compliance with approved Scheme(s) of Arrangements

Where Scheme of Arrangements has been approved by Competent Authority in terms of Sec 230 to
237 of Companies Act, 2013, disclose that the effect of such Scheme of Arrangements have been
accounted for in books of account in accordance with the Scheme‘ and in accordance with accounting
standards‘ and any deviation shall be explained.

CA SHUBHAM KESWANI 141

(xvi) Utilisation of Borrowed funds and share premium:

(A) Where company has advanced or loaned or invested funds (either borrowed funds or share
premium or any other sources or kind of funds) to any other person(s) or entity(ies), including
foreign entities (Intermediaries) with the understanding (whether recorded in writing or otherwise)
that the Intermediary shall

(i) directly or indirectly lend or invest in other persons or entities identified in any manner
whatsoever by or on behalf of the company (Ultimate Beneficiaries) or

(ii) provide any guarantee, security or the like to or on behalf of the Ultimate Beneficiaries;
the company shall disclose the following:-

(I) date and amount of fund advanced or loaned or invested in Intermediaries with complete
details of each Intermediary.
(II) date and amount of fund further advanced or loaned or invested by such Intermediaries to
other intermediaries or Ultimate Beneficiaries along with complete details of ultimate
beneficiaries.
(III) date and amount of guarantee, security or the like provided to or on behalf of the Ultimate
Beneficiaries
(IV) declaration that relevant provisions of Foreign Exchange Management Act, 1999 and
Companies Act has been complied with for such transactions and transactions are not violative of
Prevention of Money-Laundering act, 2002.

(B) Where a company has received any fund from any person(s) or entity(ies), including foreign
entities (Funding Party) with understanding (whether recorded in writing or otherwise) that Co.shall

(i) directly or indirectly lend or invest in other persons or entities identified in any manner
whatsoever by or on behalf of the Funding Party (Ultimate Beneficiaries) or
(ii) provide any guarantee, security or the like on behalf of Ultimate Beneficiaries, disclose the
following:-
(I) date and amount of fund received from Funding parties with complete details of each Funding
party.
(II) date and amount of fund further advanced or loaned or invested other intermediaries or
Ultimate Beneficiaries alongwith complete details of the other intermediaries‘ or ultimate
beneficiaries.
(III) date and amount of guarantee, security or the like provided to or on behalf of the Ultimate
Beneficiaries
(IV) declaration that relevant provisions of the FEMA,1999 and Companies Act has been
complied with for such transactions and transactions are not violative of PMLA, 2002

Additional Balance Sheet

When a Co. applies a/c policy retrospectively or makes restatement of items or when it reclassifies
items in F.S., it shall attach to B.S., a "Balance Sheet" as at beginning of earliest comparative period
presented.

Share Application Money

Share application money pending allotment shall be classified into equity or liability in accordance
with relevant Ind AS. share application money to the extent not refundable shall be shown under the

CA SHUBHAM KESWANI 142

head Equity and to the extent refundable shall be separately shown under 'Other financial
liabilities'.

Preference Shares
Pref. shares including premium recd on issue, shall be classified and presented as 'Equity' or 'Liability'
in accordance with relevant Ind AS. Disclosure and presentation applicable to relevant class of equity
or liability shall be applicable mutatis mutandis to the pref. shares. For eg, plain vanilla redeemable
pref. shares shall be classified and presented under 'non-current liabilities' as 'borrowings' and
disclosure requirements in this regard applicable to such borrowings shall be applicable mutatis
mutandis to redeemable pref. shares.

Compound Financial Instruments such as convertible debentures, where split into equity and liability
components, as per requirements of relevant Ind AS, shall be classified and presented under relevant
heads in 'Equity' and 'Liabilities'

Regulatory Deferral Account Balances shall be presented in the Balance Sheet in accordance with the
relevant Indian Accounting Standards.

Doubt regarding Valuation of Assets

If, in opinion of Board, any of assets other than PPE and non-current investments don’t have a value on
realization in ordinary course of business at least equal to amt at which they are stated, fact that
Board is of that opinion, shall be stated.

Statement of Profit & Loss

The provisions of this Part shall apply to income and expenditure account, in like manner as they apply
to a Statement of Profit and Loss,

The Statement of Profit and Loss shall include:

(1) Profit or loss for the Period;
(2) Other Comprehensive Income for the period
The sum of (1) and (2) above is “Total Comprehensive Income"

Revenue from operations shall disclose separately in notes

(a) sale of products (including Excise Duty);
(b) sale of services;
(ba) grants or donations received in case of Sec 8 Co. only and
(c) other operating revenues.

Finance Costs: Finance costs shall be classified as-

(a) interest;
(b) dividend on redeemable preference shares;
(c) exchange differences regarded as an adjustment to borrowing costs; and
(d) other borrowing costs (specify nature).

Other income: other income shall be classified as-

(a) interest Income;
(b) dividend Income; and
(c) other non-operating income (net of expenses directly attributable to such income)

CA SHUBHAM KESWANI 143

Other Comprehensive Income(OCI) shall be classified into-

(A) Items that will not be reclassified to profit or loss

(i) Changes in revaluation surplus;
(ii) Re-measurements of defined benefit plans;
(iii) Equity Instruments through OCI;
(iv) Fair value changes relating to own credit risk of financial liabilities designated at fair value through
P&L;
(v) Share of OCI in Associates and JVs, to the extent not to be classified into profit or loss; and
(vi) Others (specify nature).

(B) Items that will be reclassified to profit or loss;

(i) Exchange differences in translating F.S. of a foreign operation;
(ii) Debt instruments through OCI;
(iii) The effective portion of gains and loss on hedging instruments in a cash flow hedge;
(iv) Share of OCI in Associates and Joint Ventures, to the extent to be classified into profit or loss;
and
(v) Others (specify nature)

Additional Information:
Disclose via notes, additional info regarding aggregate expenditure and income on following items:
(a) employee Benefits expense (showing separately (i) salaries and wages, (ii) contribution to PF and
other funds, (iii) share based payments to employees, (iv) staff welfare expenses).
(b) depreciation and amortisation expense;
(c) any item of income or expenditure which exceeds 1 % of revenue from operations or 10L whichever
is higher, in addition to consideration of 'materiality ‘;
(d) interest Income;
(e) interest Expense
(f) dividend income;
(g) net gain or loss on sale of investments;
(h) net gain or loss on foreign currency transaction and translation (other than considered as finance
cost);
(i) payments to the auditor as (a) auditor, (b) for taxation matters, (c) for company law matters, (d)
for other services, (e) for reimbursement of expenses;
(j) in case of companies covered under section 135, amount of expenditure incurred on CSR activities;
and
(k) details of items of exceptional nature;

(l) Undisclosed income

The Company shall give details of any transaction not recorded in books of accounts that has been
surrendered or disclosed as income during the year in tax assessments under Income Tax Act, 1961
(such as, search or survey or any other relevant provisions of Income Tax Act, 1961), unless there is
immunity for disclosure under any scheme and shall also state whether the previously unrecorded
income and related assets have been properly recorded in the books of account during the year.

CA SHUBHAM KESWANI 144

 (m) Corporate Social Responsibility (CSR)

Where the company covered under section 135 of Companies Act, following shall be disclosed with
regard to CSR activities:-

(i) amount required to be spent by the company during the year,

(ii) amount of expenditure incurred,

(iii) shortfall at the end of the year,

(iv) total of previous years shortfall,

(v) reason for shortfall,

(vi) nature of CSR activities,

(vii) details of related party transactions, e.g.,contribution to a trust controlled by the company in
relation to CSR expenditure as per relevant Accounting Standard,

(viii) where a provision is made with respect to a liability incurred by entering into a contractual
obligation, the movements in the provision during the year shall be shown separately.

(n) details of Crypto Currency or Virtual Currency

Where the Company has traded or invested in Crypto currency or Virtual Currency during the financial
year, the following shall be disclosed:-

(i) profit or loss on transactions involving Crypto currency or Virtual Currency,

(ii) amount of currency held as at the reporting date,

(iii) deposits or advances from any person for purpose of trading or investing in Crypto Currency or
virtual currency.

For Consolidated Financial Statements

• All subsidiaries, associates and JV (whether Indian or Foreign) will be covered under CFS.
• An entity shall disclose list of subsidiaries or associates or JV which have been consolidated in CFS
along with reason of not consolidating.

“Good things take time”

CA SHUBHAM KESWANI 145

 Audit Committee & Corporate Governance

Issues addressed in LODR Regulations regarding corporate governance are:

i. Responsibilities and key functions of Board, it’s composition, compensation and disclosures;
ii. Code of Conduct and vigil mechanism;
iii. Composition, meetings, powers, role and responsibilities of Audit Committee which is an
important pillar of corporate governance;
iv. Management of subsidiary companies;
v. Procedures related to risk management;
vi. Disclosures on important issues regarding related party transactions, accounting treatment,
etc.;
vii. Content of management discussion and analysis;
viii. Information to shareholders;
ix. Compliance Certificate by CEO and CFO;
x. Compliance Certificate from either auditors or practising CS regarding compliance of
conditions on corporate governance.

The provisions of these regulations which become applicable to listed entities on basis of market
capitalisation criteria shall continue to apply to such entities even if they fall below such thresholds.

Audit Committee(AC)

Qualified & Independent Audit Committee (AC) [Regulation 18(1)]

• Min 3 directors + 2/3rd ID (Independent Director) [ Listed Entity with Superior Right(SR)
Equity shares à only Independent Director(ID)]
• All financially literate + at least 1 member accounting or Financial Management expertise
• Chairperson à ID + present at AGM to answer shareholder queries
• CS à secretary to the committee
• Discretion to invite finance director/ head of finance/internal audit/ representative of stat
auditor

Meeting of Audit Committee [ Regulation 18(2)]

● At least 4 times in a year & not more than 120 days lapse b/w 2 meetings
● Quorum à2 or 1/3rd (greater) but min 2 ID present

Powers of Audit Committee

• Seek info from any employee
• Secure attendance of outsiders with relevant expertise
• Obtain legal/professional advice
• Investigate any activity within terms of reference

Notes regarding Terms of Reference:

• Audit committee shall review utilisation of loans/advances/investments by holding co. to subsy
co. > 100 Cr or 10% of asset size of Subsy ↓
• Reviewing, with mgt, annual F.S. and auditor's report before submission to Board for approval,
with particular reference to:
(a) Matters required to be included in the Director’s Responsibility Statement to be included
in the Board’s report
(b) Changes, if any, in accounting policies and practices and reasons for the same;

CA SHUBHAM KESWANI 146

 (c) Major accounting entries involving estimates based on the exercise of judgment by
management;
(d) Significant adjustments made in the financial statements arising out of audit findings;
(e) Compliance with listing and other legal requirements relating to financial statements;
(f) Disclosure of any related party transactions;
(g) Modified opinion(s) in the draft audit report
• Consider and comment on rationale, cost-benefits and impact of schemes involving merger,
demerger, amalgamation etc., on listed entity and its shareholders.

Resignation by auditor from listed entities & material subsidiaries

A. All listed entities/material subsidiaries while appointing/reappointing an

auditor shall ensure compliance with:

If auditor resigns within 45 days If auditor resigns after 45 If auditor has signed LR/AR
from end of Qtr of a FY, then days from end of Qtr of a FY, of 1st 3 Qtrs then before
auditor shall, before resignation, then auditor shall, before such resignation auditor
issue limited review/ audit resignation, issue limited shall issue LR/AR for last qtr
report for such Qtr. review/ audit report for such as well as AR for such FY
Qtr as well as next Qtr

Reporting to Stock Exchange:

Detailed reasons to be disclosed by listed entities to stock ex. in case of resignation of auditor of
listed entity as soon as possible but not later than 24 hours of receipt of such reasons from auditor.

Other Conditions:
• Concern with mgt such as non-availability of info/ non-cooperation by mgt àauditor approach
Chairman of Audit committee(AC) & AC shall receive concern directly not wait for Qtr
meeting
• If auditor propose to resign à all concerns brought to notice of AC
If due to non-receipt of info/expln à inform AC details info/expln sought & not provided by
mgt
• Deliberation by AC à Communicate views to mgt & auditor
The practicing CS shall certify compliance by listed entity on above in annual secretarial compliance
report

Obligations by listed entity & material subsidiary

Format of info. to be obtained from stat. auditor upon resignation + Cooperation by Listed Entity &
Mat. Subsy + Disclosure of Audit Comm. views to stock exchange.

Mandatory Review of info by Audit Committee

• MDA (Management Discussion & Analysis) of financial conditions & results of operation
• Statement of significant Related Party Transactions (RPTs) submitted by mgt
• Mgt letters/ letter of IC weakness issued by stat. auditor
• Internal audit reports relating to Internal Control weakness
• Appointment, removal & terms of remuneration of Chief Internal Auditor (CIA)
• Statement of Deviations (SOD)
o Qtr SOD including report of monitoring agency
o Annual statement of funds utilised for purpose other than stated in offer
doc/prospectus/notice

CA SHUBHAM KESWANI 147

Audit shall check:
• Minutes book & agenda papers
• Director’s report or MDA forms part of annual report
• Segment wise break up as per AS 17/Ind AS 108

Nomination & Remuneration Committee (NRC) (Reg. 19)

Composition:
• At least 3 directors, all NED & atleast 50% ID (SR Eq shares à 2/3rd ID)
• Chairperson = ID
• Quorum à 2 or 1/3rd (higher) at least 1 ID
• Meet at least once a year
• Chairperson maybe present at AGM to answer Shareholder queries
Role of NRC:
i. Formulation of criteria for determining qualifications, positive attributes & independence of a
director and recommend policy to BOD, relating to remuneration of directors, KMP & other
employees;
ii. Formulation of criteria for evaluation of performance of independent directors & BOD;
iii. whether to extend or continue the term of independent director, on basis of their performance
evaluation report.
iv. Devising a policy on Board diversity;
v. Identifying persons qualified to be directors and can be appointed in sr. mgt as per criteria, &
recommend their appointment & removal to Board;
vi. recommend to board, all remuneration, in whatever form, payable to sr. mgt.

Stakeholders Relationship Committee (Reg 20)

• Chairperson => Non-Executive Director & present at AGM to answer queries of security
holders
• At least 3 directors, 1 ID (SR Eq. shares à2/3rd ID)
• Meet once a year
• Role of the committee –
(1) Resolving the grievances of the security holders of the listed entity including complaints
related to transfer/transmission of shares, non-receipt of annual report, non-receipt of
declared dividends, issue of new/duplicate certificates, general meetings etc.
(2) Review of measures taken for effective exercise of voting rights by shareholders.
(3) Review of adherence to the service standards adopted by the listed entity in respect of
various services being rendered by the Registrar & Share Transfer Agent.
(4) Review of the various measures and initiatives taken by the listed entity for reducing the
quantum of unclaimed dividends and ensuring timely receipt of dividend warrants/annual
reports/statutory notices by the shareholders of the company.

Risk Mgt Committee (Reg 21)

• Min. 3 Members majority being BOD
• Atleast 1 ID
• SR Eq shares à 2/3rd ID
• Chairperson è Member of BOD
• Meet at least twice a year
• Not more than 180 days shall lapse between 2 meetings
• Quorum
2 or 1/3rd (higher) with atleast 1 BOD

CA SHUBHAM KESWANI 148

 • Applicable to top 1000 listed entities & high value debt listed entity
• Role and responsibilities of Risk Mgt Committee shall mandatorily include performance of
functions specified in Part D of Schedule II.
• It shall have powers to seek info from any employee, obtain outside legal or other professional
advice and secure attendance of outsiders with relevant expertise, if it considers necessary.

Composition of Board [Regulation 17 and 17A] (All upper round off)

● At least 1 Woman Director
● >= 50% BOD à Non exec directors
● Top 1000 listed entities at least 1 Independent Woman Director
● No NED who’s 75 yrs old shall continue unless SR is passed with explanatory statement
● No. of directorships
o Only in 7 listed entities (Even for ID)
o WTD/MD in any Listed Co. è ID <= 3 listed entities
● Chairperson(CP) à Non exec director(NED) à 1/3rd ID
If, CP not NED or is promoter or related to promoter à ½ of BOD à ID
● Top 2000 entities not less than 6 directors
● W.ef. 1.4.22.Top 500 entities CP à NED + not related to MD/CEO
● SR equity shares à ½ ID
o Limited Review of all Entities whose accounts are to be consolidated with Listed Entity

Remuneration of Directors [PART C OF SCHEDULE V]

Disclosure requirements
• Pecuniary transn b/w NED & listed entity disclosed Annual Report
• Criteria for making payment to NED
• Following disclosures in add. to reqd by Cos. Act 2013
o All elements of remuneration package of individual directors summarized under major
groups, such as salary, benefits, bonuses, stock options, pension etc.
o Details of fixed component and performance linked incentives, along with the
performance criteria.
o Service contracts, notice period, severance fees.
o Stock option details, if any – and whether issued at a discount as well as the period
over which accrued and over which exercisable.

Approval of remuneration of directors [Reg 17(6)]

• All fees/compensation à NED (incl. ID) à BR + OR (SH specify limit for ESOP p.a. for NED)
• SR every year if, remuneration to a NED > 50% of total rem. of all NEDs.
• ID not entitled to stock option
• No approval for sitting fees as per 197(5)
• SR for ED (promoters or part of promoter group) if,
o Single ED : Rem of ED > 5 cr or 2.5% of NP of entity (higher)
o >1 ED: Rem > 5% of NP of entity

Audit Procedures:
1. Ascertain from minutes of BOD’s, shareholders’ meetings, relevant agenda papers, notices,
explanatory statements etc., whether remuneration of NEDs has been decided by BOD after
receiving prior approval of shareholders in GM;

CA SHUBHAM KESWANI 149

2. The approval of shareholders by SR shall be obtained every year, in case annual remuneration
payable to a single non-executive director exceeds 50% of total annual remuneration payable to all
non-executive directors, giving details of the remuneration thereof.
3. The auditor should refer to Articles of Association of the Co., wherever applicable;
4. The auditor is required to examine Report of BOD on corporate governance to be included in
annual report of Co. and ascertain whether the same contains disclosures w.r.t remuneration of
directors and compensation to NED. The auditor should correlate this data with F.S.

Board Meetings
• Meet at least 4 times in a year max gap 120 days
• Quorum: Top 2000 listed entities à 1/3rd or 3 (higher) include 1 ID [VC & Audio visual means
counted]
• Director member 10 Committees or Chairperson of 5 committees of public ltd cos.
(Committee= Audit & stakeholder relationship comm.)
• ID hold at least 1 meeting in a FY w/o non IDs
• ID resigned replaced by next BM or 3 months (later)

Note:
1. IFSC public and private company, it shall hold first BM within 60 days of its incorporation and
thereafter hold at least one Board meeting in each half of a calendar year.
2. A ‘high value debt listed entity’ shall undertake Directors and Officers insurance (D and O
insurance) for all its independent directors for such sum assured and for such risks as may be
determined by its BOD.

Code of Conduct
(i) The Board shall lay down code of conduct for Board members and senior mgt of listed
entity.
(ii) All Board members and senior mgt personnel shall affirm compliance with code on annual
basis.
(iii) The Annual Report of co. shall contain declaration to this effect signed by CEO.
(iv) The code of conduct shall be posted on website of company.
(v) The Code of Conduct shall suitably incorporate duties of Independent Directors laid down
in Companies Act, 2013.

Auditor should check if such code is there & obtain copy of same & verify all board member + sr. mgt
have gven confirmation + its posted on website

Vigil Mechanism/Whistle Blower Policy

• For directors or employees to report genuine concerns
• Provide for adequate safeguards against victimisation of directors/employees & provide for
direct access to Chairperson of AC in exceptional cases
• Details to be disclosed on website & board report

Material Subsidiary
• Reg. 16(c) MSà Income/Net Worth >10% of consolidated Income/Net Worth
• Reg 24(1) At least 1 ID on BOD of listed entity àDirector of Unlisted material subsy.
(incorp India or not)
[Mat subsyàincome/NW >20% Consol income/NW of listed entity + all subsidiaries]
• AC review F/S in particular investments by unlisted mat. subsy (w/o reference to materiality)
• Minutes of BM of unlisted subsy laid b4 BM of listed entity

CA SHUBHAM KESWANI 150

 • Mgt of unlisted subsy bring to notice of BOD of listed entity statement of significant
transactions/arrangement entered.
(Significant means > 10% of total Revenue/expense/assets/liabilities)
• LE not dispose shares of Mat subsy. Resulting in <=50% Shareholding or loss of control w/o
passing SR except under arrangement.
No need of SR:
If transn, Approved by court/tribunal or RP u/s 31 of IBC & disclosed to stock exchange
(RSE) within 1 day of RP approval
• Sell, dispose or lease of assets >20% of total assets of Subsy àSR (Same conditions for no
need of SR)
• Policy for determining material subsy disclose in Annual Report

Secretarial Audit & Secretarial Compliance Report

• Every listed entity and its material unlisted subsidiaries incorporated in India shall undertake
secretarial audit and annex with its annual report, a secretarial audit report, given by a CS in
practice.
• To be submitted within 60 days from end of FY.

Information to Shareholders (Reg 36)

Listed Entity shall send Audit Report not less than 21 days before AGM to Shareholders.

Appointment or Re-appointment of director (Info to be sent to Shareholders)

• A brief resume of the director;
• Nature of his expertise in specific functional areas;
• Disclosure of relationships between directors inter-se;
• Names of listed entities in which the person also holds directorship and membership of
Committees of Board;
• Shareholding of non-exec. Directors in the listed entity including shareholding as beneficial
owner

Transfer or Transmission of Securities [Reg. 40]

The BOD of listed entity shall delegate power of transfer of securities to
• a committee or
• to compliance officer or
• to registrar to an issue and/or
• share transfer agents.
The auditor should also verify from records maintained to ascertain whether delegated authority has
attended to share transfer formalities at least once in a fortnight.

Management Discussion & Analysis [SCHEDULE V]

(a) Industry structure and developments.
(b) Opportunities and Threats.
(c) Segment–wise or product-wise performance.
(d) Outlook
(e) Risks and concerns.
(f) Internal control systems and their adequacy.
(g) Discussion on financial performance with respect to operational performance.
(h) Material developments in Human Resources / Industrial Relations front, including number of
people employed.

CA SHUBHAM KESWANI 151

 (i) Details of significant changes (i.e. change of 25% or more as compared to the immediately
previous financial year) in key financial ratios, along with detailed explanations therefor, including:
(i) Debtors Turnover (ii) Inventory Turnover (iii) Interest Coverage Ratio (iv) Current Ratio (v) Debt
Equity Ratio (vi) Operating Profit Margin (%) (vii) Net Profit Margin (%) or sector-specific equivalent
ratios, as applicable.
(j) details of any change in Return on Net Worth as compared to the immediately previous financial
year along with a detailed explanation thereof.

Auditor is just required to check disclosure requirements not reqd to verify facts of non-financial
info in MDA.

Disclosure of material events or information

• Every listed entity shall make disclosures of material events or information.
• BOD à authorise 1 or more KMPs to determine materiality, their contact details will be on
website.
• Such disclosures shall be hosted on website for minimum period of 5 years and thereafter as
per archival policy of listed entity, as disclosed on its website.

RPT Disclosures
• Qtr compliance report on Corporate Governance to RSE 21 days from end of Qtr
• The report shall be signed either by the Compliance Officer or Chief Executive Officer.
• Policy to be disclosed on website & weblink provided in annual report
• Disclose transn with promoter having 10% or more shareholding.
• Submit within 30 days from SFS & CFS half year results, disclosure of RPTs on consolidated
basis to RSE (format as per a/c std) & publish on website

Disclosure: Sexual Harassment of Women at Workplace

a. number of complaints filed during the financial year
b. number of complaints disposed of during the financial year
c. number of complaints pending as on end of the financial year

Disclosure of Accounting Treatment [Schedule V]

If in preparation of f/s à treatment different from a/c std followed,
Fact shall be disclosed + mgt explaination why it believes alternative treatment shall give true & fair
view of transaction.
Statement of Deviation(s) or Variation(s) [Reg. 32]

(1) The listed entity shall submit to stock ex. following statement(s) on a quarterly basis for public
issue, rights issue, preferential issue etc:
a. indicating deviation in use of proceeds
b. Indicating category-wise variation (capital exp, sales and marketing, working capital etc.) b/w
projected utilisation of funds made in its offer document or explanatory statement to the notice
for general meeting, and actual utilisation of funds.
(2) The statement(s) shall be continued to be given till proceeds have been fully utilised or purpose
has been achieved.
(3) Where entity has raised funds through preferential allotment or qualified institutions placement,
listed entity shall disclose every year, utilization of such funds during that year in its Annual Report
until such funds are fully utilized.
The audit committee shall mandatorily review:

CA SHUBHAM KESWANI 152

(a) Quarterly statement of deviation(s) including report of monitoring agency, if applicable, submitted
to stock exchange(s) in terms of Regulation 32(1).
(b) Annual statement of funds utilized for purposes other than those stated in the offer document/
prospectus/ notice in terms of Regulation 32(7).

Compliance Certificate

The CEO and CFO shall certify to Board that:

(a) They have reviewed f/s and CFS for year and that to best of their knowledge and belief:
i. These statements do not contain any materially untrue statement or omit any material fact or
contain statements that might be misleading;
ii. These statements together present true and fair view of listed entity’s affairs and are in
compliance with existing accounting standards, applicable laws and regulations.
(b) There are, to best of their knowledge and belief, no transactions entered into by listed entity
during year which are fraudulent, illegal or violative of listed entity’s code of conduct.

(c) They accept responsibility for establishing and maintaining internal controls for financial
reporting and that they have evaluated effectiveness of internal control systems of listed entity
pertaining to financial reporting and have disclosed to auditors and Audit Committee, deficiencies in
design or operation of internal controls, if any, of which they are aware and steps taken to rectify
deficiencies.

(d) They have indicated to auditors and Audit Committee:

i. Significant changes in internal control over financial reporting during year;
ii. Significant changes in accounting policies during year and same have been disclosed in notes to
F.S; &
iii. Instances of significant fraud of which they have become aware and involvement therein, of
mgt or an employee having significant role in listed entity’s internal control system over
financial reporting.

Auditor should ensure that:

• Mgt has intituted Internal Control framework wrt Financial reporting controls
• Examine whether assessment process followed by mgt has identified significant deficiencies &
whether it has been communicated to Audit committee(AC) & auditors
• Examine process that significant changes to a/c policies & Internal control communicated to
AC & Auditors
• Examine adequacy of process followed to issue Compliance Certificate & for this refer
minutes of AC meeting
• Where negative/adverse comments in Compliance certificate, take cognizance of same in
Audit Report.

“Today is an Opportunity to build the tomorrow you Want”

CA SHUBHAM KESWANI 153

 Consolidated Financial Statements (CFS)

Mandatory under Companies Act,2013

• Sec 129(3) à where Co. has one or more subsys, including JVs & associates, its shall in
addition to own F.S. prepare CFS of Co. & all its subsys
• Sec 129(4) à Provisions relating to preparation, adoption & audit (PAA) of F.S. of Holding Co.
shall apply mutatis mutandis to CFS
• CFS shall be made as per Sched III & A/c stds
• A co. which isn’t reqd to prepare CFS, it shall be sufficient if it complies with provisions of
CFS under Sched III

Requirement to prepare CFS doesn’t apply if following conditions met:

• WOS (Wholly owned subsy) or partially owned subsy & all its other members have been
intimated in writing & for which POD is with us & they don’t object to Co. not presenting CFS
• Co. whose securities aren’t listed or not in process of listing in any stock ex (in or o/s India)
• Ultimate or intermediary holding Co. files CFS with Registrar in compliance with A/c stds

Note: An investment entity need not present CFS if it measures subsys at FVTPL (Fair value through
P&L)

Investment Entity is an entity that:

a) obtains funds from one or more investors for purpose of providing those investor(s) with investment
management services;
(b) commits to its investor(s) that business purpose is to invest funds solely for returns from capital
appreciation, investment income, or both; and
(c) measures and evaluates performance of substantially all of investments on fair value basis.
Parent of Investment entity shall prepare CFS unless it’s also an Investment entity.

Example: Parent Ltd acquired 51% shares of Child Ltd during the year ended 31-3-2019. During the
financial year 2019-20, 20% shares of Child Ltd were sold by Parent Ltd. Parent Ltd while preparing
the financial statements for the year ended 31-3-2019 and 31-3-2020 did not consider the financial
statements of Child Ltd for consolidation. As a statutory auditor how would you deal with it?

AS 21 “Consolidated Financial Statements”, states that subsidiary should be excluded from

consolidation when control is intended to be temporary because shares are acquired and held
exclusively with view to its subsequent disposal in near future.

Where enterprise owns majority of voting power by virtue of ownership of shares of another
enterprise and all shares are acquired and held exclusively with view to subsequent disposal in near
future, control by first mentioned enterprise would be considered temporary and investments in such
subsidiaries should be accounted in accordance with AS 13 “Accounting for Investments”.

In case of entity which is excluded from consolidation on ground that relationship of parent with other
entity as subsidiary is temporary, auditor should verify that intention of parent, to dispose subsidiary,
in near future, existed at the time of acquisition of subsidiary. The auditor should also verify the
reasons for exclusion are given in CFS.

As per Ind AS 110, there is no such exemption for ‘temporary control’, or “for operation under severe
long-term funds transfer restrictions” and consolidation is mandatory for Ind AS compliant F.S.

CA SHUBHAM KESWANI 154

However, as per sec 129(3) of Companies Act, 2013 where a Co. having subsidiary, which is not required
to prepare CFS under applicable AS, it shall be sufficient if company complies with provisions of CFS
provided in Schedule III to the Act.

Conclusion: In given case, Parent Ltd acquired 51% shares of Child Ltd during the year ended
31.03.2019 and sold 20% shares during the year ended 31.03.2020. Parent Ltd did not consolidate F.S.
of Child Ltd for year ended 31.03.2019 and 31.03.2020.

The intention of Parent Ltd is quite clear that control in Child Ltd is temporary as it disposed off
acquired shares in next year of its purchase. Therefore, Parent Ltd is not required to prepare CFS as
per AS 21, however, for compliance of provisions related to consolidation of financial statements given
under section 129(3) of Companies Act, 2013, Parent Ltd is required to make disclosures in F/S as per
provisions contained in Schedule III to Companies Act 2013.

However, if Parent Ltd is required to prepare its F/S under Ind AS, it shall have to prepare CFS in
accordance with Ind AS 110 as exemption for ‘temporary control’, or “for operation under severe long-
term funds transfer restrictions” is not available under Ind AS 110. It states that “Consolidation of
an investee shall begin from the date the investor obtains control of the investee and cease when the
investor loses control of the investee”.

Responsibility of Parent
(a) identifying components, and including financial information of components to be included in the CFS;
(b) where appropriate, identifying reportable segments for segmental reporting;
(c) identifying related parties and related party transactions for reporting;
(d) obtaining accurate and complete financial information from components;
(e) making appropriate consolidation adjustments;
(f) harmonization of accounting policies and accounting framework; &
(g) GAAP conversion, where applicable.

Auditor's objectives in audit of consolidated financial statements are:

(a) to satisfy that CFS have been prepared in accordance with requirements of applicable FRF;
(b) to enable himself to express opinion on true and fair view presented by CFS;
(c) to enquire into matters specified in section 143(1) of Companies Act, 2013; and.
(d) to report on matters given in clauses (a) to (i) of section 143(3) of Companies Act, 2013 for other
matters under section 143(3)(j) read with rule 11 of the Companies (Audit and Auditors) Rules, 2014,
to comment on the matters specified in sub-rule (a),(b) and (c) to extent applicable;
(e) The auditor should also validate requirement of preparation of CFS for company as per applicable
FRF.

Auditor’s considerations about Materiality in Audit of CFS

• The auditor is required to compute materiality for group as a whole. This materiality should
be used to assess appropriateness of consolidation adjustments (i.e. permanent consolidation
adjustments and current period consolidation adjustments) that are made by management in
preparation of CFS.
• The parent auditor can also use materiality computed on group level to determine whether
component's FS are material to group to determine whether they should scope in additional
components, and consider using work of other auditors as applicable.
• The principal auditor also computes materiality for each component and communicates to
component auditor, if he believes is required for true and fair view on CFS.

CA SHUBHAM KESWANI 155

 • The principal auditor also obtains certain confirmations from component auditor like
independence, code of ethics, certain info required for consolidation and disclosure
requirements etc.

While considering observations of component auditor in his report on SFS, concept of materiality will
be considered.

Planning Audit of CFS

(a) Understanding of group structure and group-wide controls including assessment of IT system and
related general and applications IT related controls (manual and automated) for consolidation process;
(b) understanding of accounting policies of parent and its components as well as of consolidation
process including process of translation of F.S. of foreign components;
(c) determining and programming NTE of audit procedures to be performed based on assessment of
ROMM in consolidation process;
(d) determining extent of use of other auditor’s work in audit; and
(e) coordinating work to be performed.

How Auditor ensures completeness of Components included in CFS?

(a) review his working papers for prior years for known components;
(b) review parent’s procedures for identification of various components;
(c) make inquiries of management to identify any new components or any component which goes out of
consolidated financial statements;
(d) review investments of parent as well as its components to determine shareholding in other
entities;
(e) review joint ventures and joint arrangements as applicable; (JVs)
(f) review other arrangements entered by parent that have not been included in CFS
(g) Identify changes in shareholding that might have taken place during reporting period.

Permanent Consolidation Adjustments

• These adjustments are made on first occasion, or subsequently when there’s change
shareholding of entity which is consolidated
• These are:
o Determination of Goodwill or capital reserve as per AS
o Determining equity attributable to Minority /Non-Controlling intt
• Auditor should verify above calculations
o Particular attention to determine pre-acquisition reserves of components. Date of
investment is imp. in this regard.
o Also check pre-acquisition reserves properly allocated between parent & minority/NCI
o Also verify changes in permanent consolidation adj on account of subsequent acquisition
or disposal of shares in components

It may happen, in case of one subsy, its goodwill & in case of other Capital Reserve, parent may net
off both & show single amt in B/Sheet as per FRF. Auditor should verify if gross amt of g/w &
capital reserve shown in notes to CFS.

CA SHUBHAM KESWANI 156

 Current Period Consolidation Adjustment
These adjustments made in accounting period for which consolidation of F.S. is to be done.
These primarily relate to intra group transactions & a/c balances including:
i. Intra-group intt paid or recd
ii. Unrealized intra group profit on assets acquired/ trfd from /to other subsys
iii. Record deferred tax on unrealized inter Co. profits elimination
iv. Intra-group indebtness
v. Adj. to harmonizing different accounting policies being followed by Parent & its components
vi. Adjustments to recognize subsequent events or transactions that occur between balance
sheet date & date of auditor’s report
vii. Adj. for effects of significant transactions or events b/w date of component’s b/sheet (not
already recognized) & auditor’s report on Group’s CFS
viii. Foreign component, adjustments to convert from Component’s local GAAP to GAAP under
which CFS are prepared
Note:
In any case, difference between reporting dates of component f/s & date of CFS should not be more
than six months in case of FS under AS and three months in case of financial statements under Ind
AS.

Following information is also required to be disclosed in CFS separately for parent and each of its
components (including foreign component) which has been consolidated:
(i) amount of net assets and net assets as a percentage of consolidated net assets;
(ii) amount of share in profit or loss(P&L) and percentage share in P&L as percentage of consolidated
P&L;
(iii) amount in other comprehensive income (OCI) and percentage of OCI as a percentage of
Consolidated OCI

Examples of info. which is given in SFS of parent or subsy, need not be given in CFS
i. Source from which bonus shares are issued eg. Capitalization of profits or reserves or sec
prem a/c
ii. Disclosure of unutilized monies out of issue indicating form in which they have been invested
iii. Disclosure under MSME Development Act 2006
iv. Value of imports on CIF basis by Co. during FY in respect of:
a) Raw material
b) Components & spare parts
c) Capital Goods
v. Expenditure in forex during FY on account of Royalty, know how etc
vi. Value of imported Raw material, spare parts & components consumed & value of indigenous RM,
SP & C consumed & percentage of each to total consumption.

Management Representations regarding CFS:

(a) Completeness of components included in the CFS;
(b) Identification of reportable segments for segmental reporting;
(c) Identification of related parties and related party transactions for reporting;
(d) Appropriateness and completeness of permanent and current period consolidation
adjustments, including elimination of intra-group transactions.

CA SHUBHAM KESWANI 157

 Reporting
1. When Parent’s Auditor is also Auditor of all its Components

• Auditor should report whether principles and procedures for preparation and presentation of
CFS as laid down AS have been followed.
In case of any departure or deviation, auditor should consider requirements given in SA 705 in
audit report so that users are aware of such deviation.
• Auditor should issue an audit report expressing opinion whether CFS give true and fair view of
state of affairs of Group as on balance sheet date and whether consolidated P&L statement
gives true and fair view of results of consolidated P&L of Group for period under audit.
• Where CFS also include cash flow statement, auditor should also give his opinion on true and
fair view of cash flows presented by consolidated cash flow statements.

2. When the Parent’s Auditor is not the Auditor of all its Components

• Auditor should consider requirement of SA 600.

• As per SA 706, if auditor makes reference to work of other auditor in his audit report on
CFS, disclose clearly magnitude of portion of FS audited by other auditor.
• This may be done by stating aggregate amts, or percentage of total assets, revenues & cash
flows included in CFS not audited by parent’s auditor.
• Total assets, revenues and cash flows not audited by the parent’s auditor should be presented
before giving effect to permanent and current period consolidation adjustments.
• Reference in the report of auditor on CFS to fact that part of the audit of the group was
made by other auditor(s) is not to be construed as a qualification of the opinion but rather as
an indication of divided responsibility between auditors of parent and its subsidiaries.

3. When the Component(s) Auditor Reports on Financial Statements under an Accounting

Framework Different than that of the Parent

• Parent’s mgt performs conversion from component’s audited FS from FRF in which its
prepared to FRF for CFS.
• The conversion adjustments are audited by Principal Auditor.
• The component auditor might prepare FS as per parent’s accounting polices based on Group
Accounting Manual (GAM)
• Parent auditor shall check if GAM comply with GAAP applicable to Parent

4. Components not audited

• Generally, FS of all components included in CFS should be audited or subjected to audit

procedures in context of a multi-location group audit. Such audits and audit procedures can be
performed by the auditor reporting on the consolidated financial statements or by the
components’ auditor.
• Where FS of one or more components remain unaudited, auditor reporting on CFS should
consider unaudited components in evaluating a possible modification to his report on CFS. The
evaluation is necessary because the auditor has not been able to obtain SAAE in relation to
such consolidated amounts/balances.
• In such cases, auditor should evaluate both qualitative and quantitative factors on possible
effect of such amounts remaining unaudited when reporting on CFS using guidance provided in
SA 705, “Modifications to Opinion in Independent Auditor’s Report”.

“Push harder than Yesterday, if you want a Better Tomorrow”

CA SHUBHAM KESWANI 158

 Bank Audit

Special Audit Consideration-Bank Audit

Special audit considerations arise in audit of banks because of:

• Particular nature of risks associated with the transactions undertaken;
• scale of banking operations and resultant significant exposures which can arise within short
period of time;
• extensive dependence on IT to process transactions;
• effect of the statutory and regulatory requirements;
• continuing development of new products and services and banking practices which may not be
matched by the concurrent development of accounting principles and auditing practices.
• Evolution of technology and providing services through Net Banking and Mobiles has exposed
banks to huge operational and financial risk.

Legal Framework

Principal enactments governing functioning of bank are:

• Companies Act,2013
• Banking Regulation Act, 1955
• Prevention of Money Laundering Act, 2002
• RBI Act 1934
• SBI Act 1955
• Information Technology Act, 2000 etc..

Contents of Appointment Letter

Most banks appoint 4 or more CA firms as Statutory Central Auditors. Appointment letter contains
following:
• Period of appointment.
• Particulars of other central auditors.
• Particulars of previous auditors.
• Procedural requirements to be complied with in accepting the assignment
• A statement of division of work and review and reporting responsibilities amongst joint auditors
in case of nationalised banks
• Scope of assignment which included spl certificates or reports to be given by CSAs
• Basis of computation of audit fee and scale of travel and related allowances and conveyance
charges and other expense reimbursement entitlements, if any.

Authority appointing the auditor:

• Banking Co. à Appointed at the AGM of the shareholders
• Nationalised bank à appointed by concerned bank acting through its BOD
• In either case, approval of RBI is required before appointment is made
• SBI à appointed by C&AG in consultation with CG
• Regional rural banks are to be appointed by concerned bank with approval of CG

CA SHUBHAM KESWANI 159

 Conduct of Audit

1. Initial Considerations
• Acceptance & Continuance: Assessing engagement risk prior to acceptance.
• Declaration of Indebtness: Written confirmation that credit facilities obtained by auditors
& their family members have not become NPAs.
• Internal Assignments in Banks by Statutory Auditors: Not take stat audit assignment if
associated with internal audit assignment
• Terms of Audit Engagements: As per SA 210, agree terms of engg before beginning
fieldwork
• Communication with Previous Auditor: As per Clause 8 of Part I of First Schedule of CA Act
1949
• Planning: Documenting NTE of audit procedures & flexible to make changes
• Establish Engagement Team: Qualified & experienced professionals to manage engg risk

2. Understanding
• Understanding the Bank and Its Environment including Internal Control
• Understand Bank’s Accounting Process
• Understanding Risk Management Process
Ø Oversight by TCWG: They should approve risk mgt policies consistent with bank’s
objectives, strategies, regulatory requirement etc
Ø Identification, Measurement and Monitoring of Risks: Risks should be identified,
measured & monitored against pre-approved criteria
Ø Control Activities: Segregation of duties, verification & approval of transactions,
physical security
Ø Monitoring Activities: Conducted by independent risk mgt unit
Ø Reliable information systems: That provide adequate compliance, financial & operational
info

3. Risk Assessment
• Identifying and assessing ROMM: As per SA 315, Identifying & assessing ROMM at F.S.
level & assertion level for Class of transn, a/c balance & disclosures
• Assess the risk of fraud including Money Laundering: As per SA 240, assess risk due to
fraud
• Assess specific risk: ROMM at F level relating to banking industry & use of IT
• Risk of outsourcing activities: Used for reducing costs as well as making use of services of
an expert not available internally but risk associated with it.

4. Execution: Engagement team discussion, Response to assessed risks, Establishing Audit

strategy, Determining audit materiality, Consider Going concern
5. Reporting (discussed later in this chap)

Special considerations in IT Environment

Considering the importance of IT systems in preparation and presentation of financial statements, it

is imperative that bank should share detailed information with auditors like: -
• Overall IT policy, structure and environment of Bank’s IT system
• Data processing and data interface under various systems
• Data integrity and data security
• Business Continuity plans and disaster control plans
• Accounting manual and critical a/c entries, their processes and involvement of IT systems

CA SHUBHAM KESWANI 160

 • Controls over key aspects, use of various a/c heads,expense booking,overdue identification etc.
• Controls on recording of various e-banking and internet banking products and channels
• MIS reports being generated and their periodicity
• Major exception reports and process of generation including embedded logic
Note:
• Overall review of IT environment and computerized a/c system has to be taken at HO level.
• Branch auditors don’t have access to IT policy and processes implemented by bank.

Hence, based upon guidance and info received from SCAs, branch auditors need to ensure that data
review and analysis through CBS is carried out and TOCs and substantive checking of sample
transactions is carried out at branch level and results are shared with SCAs.

Key control aspects that an auditor needs to address while undertaking audit in a Computerised bank.

Ø Ensure authorised , accurate and complete data available for processing

Ø Ensure in case of power failure à system restarts without affecting completion of
entries/records
Ø Ensure system prevents unauthorised amendments to programme
Ø Verify segregation of duties ensured while granting system access to users
Ø Verify balance in general ledger tallies with subsidiary book
Ø Verify backup media stored in fireproof cabinet with lock & key. offsite backup for emergency.
Ø Verify latest anti-virus software installed.
Ø Verify access to computer system only to authorised persons.

Stress Testing: These are designed to understand whether bank has enough capital to survive plausible
adverse economic conditions and to maintain enough buffer to stay afloat under extreme scenarios.

BASEL III framework :Basel III norms relate to Capital Adequacy requirement compliance which the
Bank has to achieve as contained in BASEL III accord.

Basel capital adequacy norms are meant for protection of depositors and shareholders by prescriptive
rules for measuring capital adequacy, thereby evolving methods of determining regulatory capital and
ensuring efficient use of capital.

Aim:
a) improving the banking sector's ability to absorb shocks arising from financial and economic
stress
b) improving risk management and governance practices
c) strengthening banks' transparency and disclosure standards.

Risk-based Internal audit is conducted based upon risk assessment of business and control risks of
branches.

The risk assessment process includes: -

• Identification of inherent business risks in various activities undertaken by branches (Business
risk)
• Assessment of effectiveness of control systems for monitoring inherent risks of business
activities of branch (Control risk)
• Making an assessment of level and direction of various risk areas and assess level and direction of
overall business risk and control risk
• Drawing up of risk matrix taking into account factors viz. Risk of branch

CA SHUBHAM KESWANI 161

 Internal Controls

General:
• The staff of bank shifted from one position to another frequently and without prior notice.
• Work of one person should always be checked by another person (Internal check)
• The arithmetical accuracy of books should be proved independently every day.
• All bank forms (e.g. Cheque books, demand draft/pay order books, travelers’ cheques, foreign
currency cards etc.) should be kept in possession of an officer, and another officer should verify
issuance and stock of such stationery.
• Mail should be opened by a responsible officer. Signatures on all letters and advices received
from other branches of bank or its correspondence should be checked by officer with the
signature book.
• Signature and telegraphic code book kept with responsible officers and access should be allowed
only to authorised officers.
• The bank should take out insurance policies against loss due to all the risks such as fire, natural
calamities, theft and employees’ infidelity.
• Surprise inspection of HO & Branches by Internal Audit Dept

Cash:
• Cash should be kept in joint custody of 2 responsible officers.
• Test-checked daily and counted in full occasionally by a responsible officer other than those
handling the cash.
• The cashier should have no access to customer’s ledger accounts and the Day Book.
• Payments should be made only after vouchers (e.g. cheques, demand drafts etc.) have been
passed for payment
• High value cash receipts and payments should be verified by a higher officer/ branch manager

Clearings
• Under Cheque Truncation System (CTS) implemented by RBI, electronic image of cheque is
transmitted to paying branch through clearing house, along with relevant info. like data on
MICR band, date of presentation, presenting bank, etc. This effectively eliminates associated
cost of movement of physical cheques, reduces time reqd for their collection.
• As per RBI guidelines, branch is required to either call customer or email him for any cheque
recd for amt of 5L & above in respect of inward clearings. Auditor may verify compliance on
test check basis.
• Auditor is to check whether sign of drawer of cheque is being verified by staff or not as else
there will be liability of paying bank under all circumstances.
• The unpaid cheques received in outward clearing should be either sent to customers at their
recorded address or customers be informed to collect the same from bank branch.

Bill for collection

• Docs recd & entered in register by responsible officer
• Accounts credited only after bill collected or advice recd from bank branch or agent to which
they were sent for collection
• Ensure à Bill sent by 1 branch to another not taken in bills for collection twice in
amalgamated B.S. of Bank. So, receiving branch needs to reverse the entries at end of year
for closing purpose.

Bills Purchased
• All documents of title should be assigned to bank
• Sufficient margin à cover decline in value of security

CA SHUBHAM KESWANI 162

 • Unable to collect on due date à immediate steps to recover amt.
• Irregular a/c report to H.O.

Loans & Advances

• Creditworthiness of borrower & sanction of authority
• Necessary documents executed before advance made
• Sufficent margin à cover against decline in security value & comply with RBI Directives
• Securities recd and return by responsible officer only + in joint custody
• Securities registered in name of bank only
• A/c kept within drawing power(DP) & sanctioned limit as per norms. Addn temporary limit max
20% of existing limit & 90 days max tenure.
• Irregular a/c report to H.O.

Demand Drafts
• Check signature with signature book
• DD sold/ issued confirmed by advice to paying branch
• Paying branch not receive confirmation or credit in account à steps to ascertain reasons

Credit Card Operations

• There should be effective screening of applications with reasonably good credit assessments.
• There should be strict control over storage and issue of cards.
• There should be a system of prompt reporting by merchants of all settlements accepted by
them through credit cards.
• Reimbursement to merchants should be made only after verification of validity of merchant’s
acceptance of cards.
• All reimbursement (gross of commission) should be immediately charged to customer’s account.
• There should be a system to ensure that statements are sent regularly and promptly to
customer.
• There should be a system to monitor and follow-up customers’ payments.

SLR/CRR Requirements

Cash Reserve Ratio: min. fraction of deposits in cash/ deposits with RBI. Check master circular of
RBI to check compliance.

Statutory Liquidity Ratio: Required to maintain gold/cash/govt approved securities/other liquid

assets. Report submitted to top mgt & RBI.

Correctness of compilation of DTL Maintenance of liquid Assets

• Verify compliance on 12 odd dates, not being Fridays

• Report to management and RBI, covering
Ø Correctness of compilation of DTL position
Ø Maintenance of liquid assets u/s 24 of Banking Regulation Act

• Audit procedure:
Ø Understand circular/direction of RBI
Ø Request branch auditor à weekly trial balance on Friday-consolidation at H.O. Also on
dates selected by auditor. Specific request examine cash balance on selected dates.
Ø Test basis examine consolidation Demand Time Liability position with reference to branch
returns

CA SHUBHAM KESWANI 163

 Ø Exclusions from liabilities:
o Paid up capital, reserve, any cr. balance in P&L a/c of bank, amt of loan taken from RBI
and amt of refinance taken from EXIM bank, NHB, SIDBI and NABARD
o Part amounts of recoveries from borrowers in respect of debts considered bad and
doubtful.
o Amounts recd in Indian currency against import bills and held in sundry deposits
pending receipts of final rates.
o Un-adjusted deposits/balances lying in link branches for agency business like dividend,
interest warrants etc. to the extent of payment by other branches but not adjusted by
link branched
o Margins held & kept in sundry deposits for funded facilities

Ø Inclusions in liabilities:
o Net credit balance in branch adjustment accounts including relating to foreign
branches.
o Borrowings from abroad by banks in India considered as ‘liability to other’ taken at
gross level can’t be netted off (Adverse balance in Nostro Mirror A/C)
o interest accrued but not accounted for in books

Verification of Assets
Balance with RBI
• Verify ledger balance w.r.t confirmation certificates and reconciliations.
• Review recos. with spl. attention to:
Ø Cash transn unresponded
Ø Revenue items requiring adjustment/write off
Ø Other cr. and debit entries originated in Statement provided by RBI remaining responded
for more than 15 days.
• WR from mgt. for reasons of old outstanding bal. in BRS unadjusted for 1 year.

Money at call/short notice

Ø Examine-proper system of authorization + compliance with HO instructions
Ø Verify call loans wrt to certificates of borrowers & call loan receipts held by bank
Ø Examine-balance in registers tally with control a/c as per GL
Ø Examine subsequent repayments-verify balance at year end. Call loans made can’t net off with
loans recd.
Ø Verify-interest accrued & accounted year end

Spl purpose certificates relating to investments

Ø Examine-bank maintain separate accounts for investments
• Own a/c
• PMS clients
• Other constituents (including brokers)
Ø RBI Guidelines-separate audit of investments under PMS-external auditor

Note: There should be half yearly reviews of Investment portfolios (30th Sept & 31st Mar)

Advances: Substantive Audit Procedures

• Verify correctness of master data of loan a/cs updated in CBS. Check parameters like
instalments, EMI, rate of intt, tenure of loans etc.

CA SHUBHAM KESWANI 164

 • Verify that each customer of bank is tagged under single customer id in respect of all it’s a/cs
including those in which cr. facilities are granted.
• Examine a/cs identified to be problem a/cs but which have not yet slipped into NPA category.
This can be done by obtaining list of SMA1 and SMA2 borrowers from bank and same can be
considered for selection of problematic accounts.
• Examine those a/cs à adversely commented upon by concurrent auditors/bank’s internal
inspection/RBI inspection team.
• Examine list of restructured a/cs to ensure that restructure is as per RBI guidelines.
Remember restructured a/c portfolio requires additional provisioning.
• Examine quick/early mortality accounts. Any advance slippage to NPA within 12 months of its
sanction is called as quick/early mortality case.
• Examine all large advances & others on sample basis
• Completeness & accuracy of interest charged
• Carry out appropriate analytical procedures

• Recoverability of advances
Ø Review periodic statements submitted by borrower
Ø Latest financial statements of borrower
Ø Reports on inspection of security
Ø Review audit report à borrower enjoying cr limit >=10 Lakh for working capital

Provisioning of NPA
Classification & Provision
• Verify whether bank has a system of ongoing identification and classification of advances
through CBS without manual intervention and its accuracy in crystallising date of NPA.
• Examine classification appropriate à particularly those advances with threat to recovery
• Examine-secured & unsecured portion segregated correctly and calculation of provision
• Review and compare date of NPA of loan a/cs mentioned in current year statements with that
of PY. Reasons for any change should be ascertained.
• A/c regularised before b/s date à payment from genuine sources à need not be classified as
NPA
• If subsequently, branch lends funds to borrower à auditor assess genuineness of source of
payment
• Inherent weakness in a/c à deemed NPA
• Classification as per position as on date and review of all std accounts on balance sheet date
• Recognition on basis of Past Due/Overdue Concept & not based on balance sheet date.

Drawing power calculation (DP)

• Ensure calculation as per extant guidelines i.e. credit policy of bank formulated by Board &
agreed by stat auditors reflected in respective sanction letters
• Spl consideration should be given to proper reporting of sundry creditors and stocks covered
under LCs/guarantees for purposes of calculating drawing power.
• Stock audit for a/c funded exposure > stipulated limits. Review report of stock auditor with
spl. focus to comments
• Calculated carefully à working capital advances to Cos. in construction business. Valuation of
WIP proper & consistent manner. Mobilisation advance reduced to calculate DP.

CA SHUBHAM KESWANI 165

Accounts with temporary deficiencies
• Banks shouldn’t classify an advance a/c as NPA merely due to existence of some deficiencies which
are temporary in nature such as non-availability of drawing power (DP) based on latest available
stock statement, balance o/s exceeding the limit temporarily and non-renewal of limits on due date.
• However, stock statements relied upon by banks for determining DP should not be older than 3
months.
• The o/s in the account based on DP calculated from stock statements older than 3 months are
considered as irregular. Ensure adherence to these guidelines.

Limits not reviewed

Where ad hoc/ regular limit not reviewed within 180 days from due date, consider as NPA. Also
ensure review not done on repetitive basis.

Asset classification à Borrower wise & not facility wise

It is to be ensured that all facilities granted by a bank to borrower will have to be treated as NPA
and not particular facility which has become irregular. Further, if debits arising out of devolvement
of LC or invoked guarantees are kept in separate a/c, outstanding balance should be treated as part
of borrower’s principal a/c for purpose of application of prudential norms on asset classification,
income recognition and provisioning.

Govt Guaranteed Advances

• If it becomes NPA, income recognition on realisation basis
• Asset classification
• CG guarantee: treat NPA if CG repudiates guarantee when invoked
• SG: no such exception, i.e. NPA if overdue > 90 days
• If CG guarantee not invoked for long à report in LFAR

Agricultural Advance
• Ensure NPA norms applied in accordance with crop season determined by State Level Bankers’
Committee in each State. Depending upon the duration of crops – short term/ long term - raised by
an agriculturist, NPA norms would also be made applicable to agricultural term loans availed of by
them.
Also ensure that these norms are made applicable to all direct agricultural advances listed in Master
Circular on lending to priority sector.
• In respect of agricultural loans, other than those specified in circular, ensure that identification of
NPAs has been done on the same basis as non-agricultural advances.

Restructured Advance
Restructuring is an act in which a lender, for economic or legal reasons relating to borrower’s financial
difficulty, grants concessions to borrower.
It may involve modification of terms of advances including alteration of amount of
instalments/alteration of repayment period/rate of interest/sanction of additional credit facilities
etc. to help in curing of default.

• The auditor should verify compliance with requirements of circular issued in this regard.
• Banks may restructure a/cs classified under std, substandard or doubtful categories. Banks
can’t restructure a/cs with retrospective effect.
• Once bank receives an application/proposal in respect of an a/c for restructuring, it implies
that account is intrinsically weak. Accordingly, during the time account remains pending for

CA SHUBHAM KESWANI 166

 restructuring, auditors need to take a view whether provision needs to be made in respect of
such a/cs, pending approval for restructuring.
• On restructuring, account will be downgraded from Standard to substandard. NPAs will remain
in same category.

Upgradation of Account
• Examine all accounts upgraded from NPA to std. category during the year, to ensure that
upgrading of each account is strictly in terms of RBI guidelines.
• There can be a possibility of incorrect upgradation of a/c on basis of partial recoveries made in
the a/c and overdue portion might not have wiped out completely. There can also be a possibility
of recoveries being made in account after cut-off date and a/c being upgraded as on date of
balance sheet.

Sale/ Purchase of NPAs

General points to examine:

• Policy of BOD relating to procedures, delegation of power and valuation
• Only such NPA can be sold àremained in books atleast 2 years
• Sale/purchase without recourse only
• Subsequent to sale bank doesn’t assume ‘any risk’
• NPA sold at cash basis only
• Bank don’t purchase NPA already sold

Spl. Points for Sale of NPA

• Removed from books after sale
• Shortfall on sale charge to p&l i.e. Sale below Net Book Value
• Sale > Net book value, excess retained to meet loss on sale of other NPA (don’t recognize
profits)

Spl points for purchase of NPA

• Provision as per classification status in books of purchaser
• Any recovery first adjust against acquisition cost, & excess as profit
• Capital adequacy – 100% risk weight to NPAs purchased from other banks

Stationery & Stamps

• Ensure that item “Stationery and Stamps” includes only exceptional items of expenditure on
stationery like bulk purchase of security paper which is to be written off over period of time.
Such items should be valued at cost. Normal expenditure on stationery is charged to p&l a/c.
Therefore, this item may not appear at branch level as considerable part of stationery is
supplied to branches by head office.
• Check Internal Controls
• Physical verification at year end
• Check cost charged to p&l

Non-Banking assets acquired in satisfaction of claims

• Ensure that the heading includes those immovable properties/tangible assets which bank has
acquired in satisfaction of debts due or its other claims and these are being held with
intention of being disposed off.
• Verify with ref. to documentary evidence, eg. order of court, or award of arbitration

CA SHUBHAM KESWANI 167

 • Check ownership legally vested with bank. If dispute, check if recording as asset appropriate?
If dispute arise later on, check if provision reqd as per AS 29.
• Ensure compliance with Sec 9 of Banking Regulation Act
[Prohibits banking Co. from holding any immovable property, howsoever acquired, for period
exceeding 7 years from date of acquisition, except required for own use]
• Ensure that as at date of acquisition, assets should be recorded at lower of net book value of
advance or NRV of asset acquired.

Verification of capital & liabilities:

• Capital Risk Adequacy Ratio = (Eligible total capital funds/Risk weighted assets & off balance
sheet items ) * 100
• RBI requires banks to maintain minimum 9% CRAR.

Verification of Liabilities
Deposits
• Verify balance on sample basis
• Examine bal. of subsy ledger tallies with general ledger
• Check calculation of interest on test check basis.
• Examine if periodic confirmations obtained, check on sample basis
• Conversion of foreign currency deposits at rates notified by H.O.
• Resultant increase/decrease taken to P&L
• Intt on deposits on basis of 360 days in year
• Intt accrued but no due shown under ‘other liab & provisions’

Borrowings
• Obtain & verify confirmation certificates & other docs
• SA 505, “External Confirmation” –audit evidence to respond to significant risks
• Examine- clear distinction b/w rediscount and refinance, as rediscount doesn’t appear in this
head
• Examine borrowing at call & short notice-authorised

Bills payable
• Evaluate the existence, effectiveness and continuity of internal controls over bills payable.
Controls should usually include the following-
Ø Drafts, mail transfers,etc. made out in std printed forms.
Ø Unused forms relating to drafts, traveller’s cheques, etc. kept under custody of
responsible officer.
Ø The bank have a reliable private code known only to responsible officers of branches,
coding and decoding of telegrams should be done only by such officers.
Ø The signatures on demand draft, checked by officer with specimen signature book.
Ø All TTs and DDs issued by a branch should be immediately confirmed by advices to the
branches concerned. On payment, paying branch should send a debit advice to originating
branch
• Examine sample of outstanding items comprised in bills payable accounts with relevant
registers.
Reasons for old outstanding debits in respect of drafts or other similar instruments paid
without advice should be ascertained.
• Correspondence with other branches after year-end should be examined specially for large
value items outstanding on balance sheet date .

CA SHUBHAM KESWANI 168

 Contingent Liabilities
Management Representation:
The auditor should obtain representation from mgt that:-
(i) all off-balance sheet transactions have been accounted in books of a/cs as and when such
transaction has taken place;
(ii) all off balance sheet transactions have been entered into after following due procedure laid
down;
(iii) all off balance sheet transactions are supported by the underlying documents;
(iv) all year end contingent liabilities have been disclosed;
(v) disclosed contingent liabilities don’t include any crystallised liabilities which are of nature of loss/
expense and which require creation of a provision/adjustment in F.S;
(vi) estimated amounts of financial effect of contingent liabilities are based on best estimates in
terms of AS 29, including consideration of possibility of any reimbursement;

Contingent Liabilities (Presentation)

- Claims against the bank not acknowledged as debts
- Liability for partly paid investments
- Liability on account of outstanding forward exchange contracts.
- Guarantees given on behalf of constituents (within India; outside India)
- Acceptances, endorsements and other obligations
- Other items for which the bank is contingently liable

Audit procedures:
Contingent Liability (CL)
• Adequte Internal Controls ensure transn executed by persons authorised
• Verify in case of Letter of Credits for import of goods, payments made in terms of LC
• Test completeness of recorded obligations
• Review reasonableness of year end contingent liab in light of prev experience
• Review whether comfort letters issued included in CL

Claims against bank not acknowledged as debt

• Examine relevant evidence, e.g. correspondence with lawyers, workers, officers etc.
• Review minutes of meetings of BOD/committees of BOD, contracts, agreements &
arrangements, etc
• Ascertain from mgt: status of claims o/s at year end
• Review of subsequent events: completeness & valuation

Guarantees
• Check Internal Controls over issue of guarantees
• Controls over unused guarantee forms e.g. under custody of responsible officers
• Examine guarantee register- procedure of marking off expired guarantees
• Check guarantee register- ensure all included in disclosures
• If claim risen, provision as per AS 29

Auditor’s Reports

In case of nationalized bank, report is issued to Central Govt. stating following:

• Whether, in auditor’s opinion, balance sheet is full and fair balance sheet containing all
necessary particulars and is properly drawn up to exhibit true and fair view of affairs of bank.

CA SHUBHAM KESWANI 169

 • In case auditor had called for any explanation or information, whether it has been given and
whether it is satisfactory.
• Whether or not transactions of bank, which have come to auditor’s notice, have been within
powers of bank.
• Whether or not returns received from offices and branches of bank have been found
adequate for purpose of audit.
• Whether profit and loss account shows true balance of profit or loss for period covered by
such account.
• Any other matter which auditor considers should be brought to notice of Central Government.

Long Form Audit Report (LFAR)

LFAR is to be given by statutory branch auditors as well as SCAs. LFAR for branch auditors is in form
of questionnaire where observations/comments have to be provided on range of matters including cash,
balance with banks, investments, advances, deposits etc. These are submitted by statutory branch
auditors to statutory central auditors.

The consolidation is done at head office level and LFAR for bank is submitted by SCAs to mgt. LFAR,
on the bank, after due examination, should be placed before ACB of bank indicating action
taken/proposed to be taken for rectification of irregularities, if any, mentioned therein; and a copy of
LFAR and relative agenda note, together with Board's views or directions, is submitted to RBI within
60 days of submission of LFAR by statutory auditors.

Notes:
• In case of fraud report to:
Ø RBI
Ø Chairman/MD/CEO of bank
Ø CG u/s 143(12)

SCAs have to furnish following reports in addition to main report:

• Report on ICFR as per Sec 143(3)(i) of Cos Act 2013
• Long Form Audit Report (LFAR)
• Report on compliance with SLR Requirements
• Report on income recognition, asset classification & provisioning as per RBI Guidelines
• Report on fraud u/s 143(12) of Companies Act,2013
• Asset Liability Management

Concurrent Audit
Scope of Concurrent Audit in Banks
Ø Cash
Ø Deposits Advances
Ø Investments
Ø Foreign Exchange House
Ø Keeping
Ø Other Items

Coverage of Business/Branches for concurrent Audit

Banks are required to cover 50 % of total deposits and 50 % of total advances under concurrent
audit.
Ø Large and very large branches
Ø Special branches handling Foreign Exchange, Merchant Banking, large Corporate Wholesale
Banking and Forex dealing room operations

CA SHUBHAM KESWANI 170

 Ø Large problem branches rated as poor/very poor
Ø Head Office department dealing with Treasury/Funds management and handling Investment
portfolio.
Ø Any other branches or departments where in the opinion of the Bank concurrent audit is
desirable.

Areas of focus in Concurrent Audit:

Cash
• Daily cash transactions with particular reference to any abnormal/high value receipts and
payments.
• Proper accounting of inward and outward cash remittances.
• Proper accounting of currency chest transactions, its prompt reporting to the RBI.
• Expenses incurred by cash payment involving sizeable amount.

Investments
• Purchase/sale of securities should as per:
Ø HO instructions
Ø Rates beneficial to bank
• Securities in books à should be physically held by it
• Compliance with RBI/HO guidelines

Advances
• Ensure proper sanction of advances
• Securities properly recd and regd in name of bank.
• Proper post disbursement supervision & follow-up
• LC issued within delegated power
• BG issued, properly worded & recorded in register
• Classification as per RBI guidelines
• Claims to ECGC & DICGC submitted in time

Foreign Exchange
• Check foreign bills negotiated under letters of credit.
• Check FCNR and other non-resident accounts whether debits and credits are permissible
under rules.
• Check whether inward/outward remittance have been properly accounted for.
• Examine extension and cancellation of forward contracts for purchase and sale of foreign
currency. Ensure that they are duly authorised and necessary charges have been recovered.
• Ensure that balances in Nostro accounts in different foreign currencies are within prescribed
limit.
• Ensure adherence to guidelines issued by RBI/HO of bank about dealing room operations.
• Ensure verification/reconciliation of Nostro and Vostro account transactions/balances.

Appointment of concurrent auditor

• Option: own staff or external auditor
• If own official: experienced, trained & senior + independent of branch where audit is
conducted
• AC Board of bank shall decide max. tenure of external concurrent auditor. It’ll not be more
than 5 years. No auditor will continue with a branch/Business unit for more than 3 years.
• If omission/commission by auditor report to RBI & ICAI & appointment maybe cancelled

CA SHUBHAM KESWANI 171

Reporting Systems in case of concurrent audit
• There should be proper reporting of findings of concurrent auditors. For this purpose, each bank
should prepare a structured format.
• There should be zone-wise reporting of findings of concurrent audit to ACB and annual
appraisal/report of audit system should be placed before ACB.
• Before submission of report auditor should discuss important issues with branch manager and
concerned officers. This will enable auditor to consider opposite view point and clarify any
doubts.
• Minor irregularities pointed out by concurrent auditors are to be rectified in timely manner.
Serious irregularities should be reported to controlling offices/ Head Offices for immediate
action.
• Whenever fraudulent transactions are detected, they should immediately be reported to
Inspection & Audit Department (Head Office) as also Chief Vigilance Officer as well as Branch
Managers concerned (unless branch manager is involved).
• Follow-up action on concurrent audit reports should be given high priority by controlling
office/Inspection and Audit Department and rectification of features done without any loss of
time.

Audit Committee of Bank

The membership of audit committee is restricted to

• Executive Director,
• nominees of the Central Government and the RBI,
• Chartered Accountant director and
• one of the non-official directors

“Once you become Fearless, life becomes Limitless”

CA SHUBHAM KESWANI 172

 NBFC Audit

Definition
• A Financial Institution which is a Company
• A non-banking institution (NBI) which is a Co. & principal business receiving deposits & lending
• Such other institution as RBI may with approval of CG & notif. in official gazette specify
Co.= NBFC, if,
Financial Assets (FA) > 50% of total assets & Income from FA > 50% of gross income. If both
criteria fulfilled, qualify as NBFC & regd. with RBI.
Sec 45 IA of RBI Act 1997, No NBFC can do business of NBI w/o
• Certificate of Reg (CoR) issued by RBI
• Min Net owned Funds (NOW) of 2 Cr.

Categories
• Deposit taking & Non-Deposit taking (NBFC-ND)
• Non Deposit taking further classified into Systemically important & Non systemically
important (NBFC-NDSI & NBFC-ND)

Cos exempt from RBI registration (Doing financial business but regulated by other regulators)
• Housing Fin Institution (regulated by NHB)
• Merchant banking cos. (SEBI)
• Stock ex. (sebi)
• Stock broking/sub-broking(sebi)
• Venture cap fund (SEBI)
• Nidhi (MCA, GOI)
• Insurance (IRDA)
• Chit (Chit fund Act)
• Alt Inv Fund Cos.
• Mutual Benefit Cos.
• Mortgage Guarantee Cos.
• Core investment Cos with asset size <=100 Cr not accessing public funds

Diff b/w Bank & NBFC

a. NBFC can’t accept DD, but some NBFC can accept Term Deposits
b. NBFCs don’t form part of payment & settlement system & can’t issue cheques drawn on itself
c. Deposit insurance facility of DICGC not available to depositors of NBFC unlike banks
d. No min. exposure to priority sector in case of NBFC

Prudential Norms
Capital Adequacy Ratio
• Min capital ratio consisting of tier I & II capital not less than 15% of agg. Risk weighted
assets
• Tier I not less than 10% at any point of time. In case of lending against Gold jewellery, min
tier I cap 12%

Risk Weights
Nos Head Weight
1 Cash Bank 0
2 Approved securities 0
3 Loan & advances fully secured + loans to employees 0

CA SHUBHAM KESWANI 173

 4 TDS Deducted 0
5 Advance tax 0
6 Intt on Govt security 0
7 Fund based claims on CG 0
8 CG Guarantee claims 0
9 SG securities 0
10 SG guarantee claims, not in default > 90 days 20
11 Bonds of PS Banks 20
12 Post commercial operations date (PCOD) projects exist over 1 yr operation 50
13 Others 100

Provisioning (%)
Loss Assets: 100%
Doubtful Assets: Unsecured 100%
Period for which Secured Asset has been % of Provision
considered as doubtful
Up to 1 year 20
1-3 years 30
More than 3 years 50
Sub std asset: 10%
Std asset: 0.40% for systemically imp. & 0.25% for non-systemically imp.

*3/12 months in case of NBFC-Systemically Imp. (Deposit taking or Non deposit taking)

Spl point for NPA: The lease rental and hire purchase instalment, which has become overdue for
period of 12 months or more; (NBFC SI its 3 months only)

Audit Procedures
1. Ascertaining business of Co
• Check MOA & AOA (Memorandum & Articles)
• Check business policy à ascertain main business of co.
• Minutes of Board Meeting & discuss with top level mgt

2. Evaluation of Internal Control System

• Understand a/c system & related internal controls
• Review effectiveness of system of recovery
• Periodical review of advances facilitate monitoring & follow up

3. Registration with RBI

• Sec 45 IA, min Net owned fund of 2 cr
• Obtain copy of Certificate of Reg, or copy of application
• If NBFC holds Public Deposits à invest % in liquid assets as per RBI
• Qtr return filed with RBI maintenance of liquid assets

CA SHUBHAM KESWANI 174

 4. NBFC Acceptance of Public Deposit Directions (NBFC Acceptance of Public Deposits (Reserve
Bank) Directions, 2016)

i) Check NBFC appropriately classified

ii) Ceiling on quantum of deposits as per credit rating by approved credit rating agency
• Obtain copy of cr. Rating & check PD as per the rating assigned
• In event of up/downgrading à increase/decrease deposits à inform RBI
• If downgraded below min investment grade, regularise excess deposits as under:
Ø Not accept fresh deposits & not renew existing ones
Ø Existing deposits run off till maturity
Ø Report 15 days à Reg. office RBI where its regd
Ø no matured public deposit shall be renewed without express and voluntary
consent of depositor
iii) test check intt calculations, to check no excess intt paid
iv) Acceptance/renewal only after written application from depositor on form supplied by
NBFC
v) Verify deposit register & test check particulars with supporting receipts
vi) Check investments in liquid assets in safe custody with scheduled comm. Bank
vii) Check filed returns in timely manner
viii) NBFC not accepting/holding PD à BR passed

5. NBFC Prudential Norms

i) Check compliance with prudential norms (income recog, a/c stds, asset classification, PDD,
capital adequacy norms, prohibition of grant in loans against own shares)
ii) Ensure BOD granting/ intending to grant demand/call loans shall frame & implement policy
for Co.
iii) Assess compliance with prudential norms à advance properly classified as std, sub std,
doubtful & loss assets & proper provisions made
iv) In case of NPA à unrealised income not taken to p&l on accrual basis
v) A/cs classified as NPA in prev year continue shown as such in CY also. If made regular,
check with directions.

Classification of Frauds by NBFC

(a) Misappropriation & criminal breach of trust
(b) Fraudulent encashment through forged instruments, manipulation of Books of a/c or fictitious
a/cs
(c) Unauthorised cr. Facilities extended for reward or illegal gratification
(d) Negligence & cash shortages
(e) Cheating & forgery
(f) Irregularities in forex transn.
(g) Any other type of fraud
Case of (d) & ( f) to be reported as fraud if intention proved/suspected
In following cases it’ll be fraud:
Ø Cash shortage > 10,000 &
Ø Cash shortage > 5,000 if detected by mgt/auditor/inspector & not reported by cashier.

Audit Check list -- NBFC - Investment and Credit Company (NBFC-ICC)

(i) Physically verify all shares & securities held by NBFC.
(ii) Verify no loan advanced against security of its own shares.
(iii) Verify dividend income wherever declared recd by NBFC & intt wherever due (except NPA)
accounted for.

CA SHUBHAM KESWANI 175

 (iv) Dividend income on shares & units of MF recog. on cash basis.
(v) Test check bills/contract notes recd from brokers with reference to prices vis-à-vis stock mkt
quotations on respective dates.
(vi) Verify Board minutes for purchase & sale of investments. Ascertain from BR à long term/short
term.
(vii) In respect of shares/securities held through a depository, obtain a confirmation from the
depository regarding the shares/securities held by it on behalf of the NBFC.
(viii) Check whether requirements of AS 13 “Accounting for Investments” have been complied with.
(ix) Check the classification of loans and advances (including bills purchased and discounted) made
by a NBFC into Standard Assets, Sub-Standard Assets, Doubtful Assets and Loss Assets and
the adequacy of provision for bad and doubtful debts as required by NBFC Prudential Norms.

Auditor’s duty to Report

(A) In case of all NBFCs
I. Examine whether Co. obtained CoR (Certificate of Registration)
II. In case Co. holding CoR whether its entitled as per principal business criteria as on 31st March
of year
III. Whether its meeting NOF criteria laid down in master direction
A certificate from Auditor required within 1 month of finalization of B/sheet not later than Dec 30th
of year.

(B) NBFC holding/accepting public deposits

i) Whether PD held by it with other borrowings within limits of provisions of NBFC Acceptance of
Public Deposits (RB) Directions, 2016
ii) Where PD excess of quantum à regularised in manner provided in Directions
iii) Whether its accepting PD w/o min investment grade rating from approved institution as per
Directions
iv) Whether Cap Adequacy Ratio(CAR) correctly determined & compliance with min CRAR
prescribed therein
v) Whether Co has made default in paying intt/principal after they became due
vi) Whether Co. has furnished to RBI within stipulated period return on deposits as specified in
NBS 1 to – NBFC Returns (Reserve Bank) Directions, 2016;

(C) NBFC not accepting deposits

i) BOD passed BR non-accept of deposits
ii) Whether Co accepted any deposits during year
iii) Whether Co. complied with prudential norms (I/R, a/c std, Asset classification, PDD)
iv) In respect of NBFC- NDSI
(a) Whether capital adequacy ratio disclosed in NBS-7 correctly arrived & compliant with min
CRAR
(b) Whether Co has furnished to RBI, annual statement of capital funds, risk asset ratio in
NBS 7
v) Whether NBFC correctly classified as NBFC Micro Finance Institution (MFI) as per the
Directions
Reasons for Unfavourable/ Qualified statements
Where, in auditor’s report, statement regarding any of items referred to in paragraph 3 is
unfavourable or qualified, auditor’s report shall also state reasons for such unfavourable or qualified
statement, as case may be. Where auditor is unable to express opinion on any of items referred to in
para 3, report shall indicate such fact together with reasons therefor.

CA SHUBHAM KESWANI 176

 Obligation of auditor to submit an exception report to the RBI
(I) Where, in case of a NBFC, statement regarding any of items referred to in para 3 above, is
unfavourable or qualified, or in opinion of auditor company has not complied with:

a) provisions of Chapter III B of RBI Act (Act 2 of 1934); or

b) NBFC Acceptance of Public Deposits (Reserve Bank) Directions, 2016; or
c) NBFC– Non-Systemically Important Non-Deposit taking Company (Reserve Bank) Directions, 2016
and Non-Banking Financial Company - Systemically Important Non-Deposit taking Company and
Deposit taking Company (Reserve Bank) Directions, 2016.

It shall be obligation of auditor to make report containing details of unfavourable or qualified

statements and/or about non-compliance in respect of company to concerned Regional Office of
Department of Non-Banking Supervision of RBI under whose jurisdiction regd office of company is
located as per first Schedule to NBFC Acceptance of Public Deposits (Reserve Bank) Directions, 2016.

(II) The duty of Auditor under sub-para (I) shall be to report only contraventions of provisions of RBI
Act, 1934, and Directions, Guidelines, instructions referred to in sub-paragraph (1) and such report
shall not contain any statement with respect to compliance of any of provisions.

Difference b/w Division II (Ind AS- Other than NBFC) & Division III (Ind AS NBFC) of Schedule III
a) NBFC allowed present items of b/sheet in order of liquidity
b) NBFC à disclose by way of note item of ‘other income/expense’ > 1% of total income. Div II
requires disclosure of item > 1% of Revenue or 10 L (whichever is higher)
c) NBFC separately disclose under receivables debt due from LLP à Director partner/member
d) Disclose items comprising Revenue from operations & other income on face of SPL instead of only
notes
e) Separate disclosure of T/R significant increase in cr risk or cr impaired
f) Condn or restrictions for distribution attached to stat reserves separately disclosed.

Ind AS Applicability: Accounting period beginning

1.4.18: NW 500 Cr or more
1.4.19: NW 250 Cr or more

CA SHUBHAM KESWANI 177

 CARO 2020 Reporting
As per CARO 2020, auditor is required to report that –

I. Whether during year company has made investments in, provided any guarantee or security or
granted any loans or advances in nature of loans, secured or unsecured, to companies, firms, LLPs or
other parties,
If so,
(b) whether investments made, guarantees provided, security given and terms and conditions of grant
of all loans and advances in nature of loans and guarantees provided are not prejudicial to company’s
interest;
(c) in respect of loans and advances in nature of loans, whether schedule of repayment of principal and
payment of interest has been stipulated and whether repayments or receipts are regular;
(d) if amount is overdue, state total amount overdue for more than 90 days, and whether reasonable
steps have been taken by company for recovery of principal and interest;
(f) whether company has granted any loans or advances in nature of loans either repayable on demand
or without specifying any terms or period of repayment, if so, specify aggregate amount, percentage
thereof to total loans granted, aggregate amount of loans granted to Promoters, related parties;
[Paragraph 3(iii)]

(II) (a) Whether company is required to be registered under section 45-IA of RBI Act, 1934 and if
so, whether registration has been obtained.
(b) Whether company has conducted any Non-Banking Financial or Housing Finance activities without a
valid Certificate of Registration (CoR) from RBI as per the RBI Act, 1934;
(c) Whether company is a Core Investment Company (CIC) as defined in regulations made by RBI, if
so, whether it continues to fulfil criteria of a CIC, and in case company is an exempted or unregistered
CIC, whether it continues to fulfil such criteria;
(d) Whether Group has more than one CIC as part of Group, if yes, indicate number of CICs which are
part of the Group; [Paragraph 3(xvi)]

“Be a Warrior, not a Worrier”

CA SHUBHAM KESWANI 178

 Insurance Audit
Solvency Margin (Sec 64 VA of Insurance Act,1938)
It requires every insurer and re-insurer to maintain excess of assets over liabilities at all times which
shall not be less than 50% of amount of minimum capital as stated under sec 6 of Insurance Act i.e.
150%.

Note: The minimum paid-up ESC of Indian Insurance co. should be 100 crores excluding preliminary
expenses incurred in formation and registration of company.

If, at any time, insurer or re-insurer doesn’t maintain required control level of solvency margin,its
required to submit financial plan to Authority indicating plan of action to correct deficiency. If, on
consideration of plan, Authority finds it inadequate, insurer has to modify financial plan.

Sec 64VA states that if insurer or re-insurer fails to comply with prescribed requirement of
maintaining excess of value of assets over amount of liabilities, it shall deemed to be insolvent and may
be wound up by Court on application made by authority.

The Insurance Act requires every insurer to furnish a statement of assets and liabilities as assessed
in manner laid down by sec 64V.

Every Insurer is required to prepare statement of value of assets in “Form IRDA-Assets-AA.” A

statement of amount of liabilities in case of general insurance business is to be prepared in “Form HG”
and statement of Solvency Margin in “Form KG”.

No risk to be assumed unless premium received

As per sec 64VB, no risk to be assumed unless premium is received in advance-

(1) No insurer shall assume any risk in India in respect of any insurance business on which premium is
not ordinarily payable outside India unless and until premium payable is received by him or guaranteed
to be paid by person in such manner and such time as may be prescribed or unless and until deposit of
prescribed amt.

(2) For purposes of this sec, in case of risks for which premium can be ascertained in advance, risk
may be assumed not earlier than date on which the premium has been paid in cash or by cheque to
insurer.

Appointment of Auditors
The appointment of stat auditors in GIC, and its subsys and divisions as well as other public sector
Insurance Companies is made by C&AG, as in case of other PSUs (For eg, New India Assurance Company
Ltd., United India Insurance Company Ltd.).

However, in case of others, auditor is appointed at AGM after ensuring that auditor satisfies
compliance requirements with relevant sections of IRDAI Guidelines on Corporate Governance. These
guidelines pose certain restrictions on number of insurance companies a statutory auditor can audit.
Currently, an auditor can conduct audit only for 3 insurance companies and not more than 2 life or 2
general. The Guidelines also mandate a mandatory joint audit for all insurance companies.

Contents of Mgt Report

1. Confirmation regarding continued validity of registration granted by Authority;
2. Certification that all statutory dues have been duly paid;
3. Confirmation to effect that shareholding pattern and any transfer of shares during year are in
accordance with statutory or regulatory requirements;
4. Declaration that mgt hasn’t invested o/s India funds of the holders of policies issued in India.
5. Confirmation that the required solvency margins have been maintained.

CA SHUBHAM KESWANI 179

 Life Insurance Cos

Role of Auditor in Actuarial Process

The job of actuary involves detailed analysis of data to quantify risk. It is calculating and modelling
hub of Co. Within the department, fundamentals of Insurance business are determined from pricing
to policy valuations techniques.

Role of Auditor: Auditors required to certify, whether actuarial valuation of liabilities is duly certified
by appointed actuary, assumptions for valuation are in accordance with guidelines and norms, if any,
issued by authority and/or Actuarial Society of India in concurrence with IRDA.

Hence, Auditors generally rely on Certificate issued by Appointed Actuary, certifying Policy liabilities.
However, Auditor may discuss with Actuaries with respect to process followed and assumptions made
by him before certifying Policy liabilities.

Actuarial department broadly concentrates following key areas of Insurance business:

• Product Development/ Pricing and Experience analysis.
• Model Development.
• Statutory Valuations and reserving.
• Business Planning.
• Solvency management.
• Management reporting on various business valuations and profitability models of Life
Insurance business.
Free Look Cancellation
FLC is option provided to policyholder wherein he has period of 15 days from date of receipt of policy
document to review Terms & Conditions of policy and in case of disagreement, he/ she has option to
return policy stating reason for policy’s cancellation.

The primary objective of audit is to check and confirm that FLC requests are received within 15 days
from receipt of policy document by policy holder, verification of signatures of policy holder and
processing of FLC request within TAT( turnaround time) defined by insurer. Also checking of
appropriate a/c entries are recorded for refund.

FLC refund is calculated as follows:

FLC premium paid XXX
(Less) - proportionate risk premium (XXX)
(Less)- medical charges if any, by the insurer (XXX)

Policy Lapse & Revival

“Lapse” is discontinuance of policy owing to non-payment of premium dues.

In order to keep life insurance policy “in force” policy holder is reqd to pay premiums when due. If
payment is missed, insurer allows period of 15/30 days from premium due date for making the payment.
This period is termed as “grace period”. If the policy holder doesn’t make payment within grace period,
policy gets “lapsed”. Thus, payment within grace period is deemed to be payment on due date.

Lapsation affects all the stakeholders-policyholder, agent & insurer. Lapsed policy ceases to provide
insurance protection to insured. It forfeits benefits under the policy and cost of new policy is higher.
Agents do not get renewal premium commission if policy is lapsed.

The T&Cs of policy stipulate, where premium is not paid within grace period, policy lapses but may be
revived during life time of the life assured. Some insurers do not allow revival, if policy has remained

CA SHUBHAM KESWANI 180

in lapsed condition for more than 5 years. This is because of possibility that arrears of premiums on
such a policy would be too heavy and that it would be better to take out a fresh policy.

Role of Auditor: Check and confirm that due dates are recorded and monitored properly and polices
marked as “lapsed” on non-receipt of renewal premium within due dates/grace period. In case of revival
request, whether adequate checks in place for receipt of o/s amounts and documents are obtained
before reviving policy.

Policy Surrender
A policy becomes eligible for surrender on completion of 3 years from commencement of policy
provided that 3 years premium have been paid within due dates. The policy surrendered only when
insured person is alive.
Review of Investments
• Review Investment mgt structure to ensure adequate SODs b/w Investment front, mid and
back office
• Review SOPs prescribed by IRDA Reg
• Review insurer’s investment policy
• Review functioning, scope & minutes of Investment committee
• Compliance of all Investment regulations, various other circulars specified by IRDAI and
other regulations specified in Insurance Act, 1938;
• Review insurer’s Investment accounting & valuation policy
• Controls around personal dealings, insider trading & front running

Procedure to determine value of listed & unlisted Equity Securities & Derivative Instruments of
Insurance Co.
• Eq sec & Der instruments traded in active mkt à Fair Value on b/s date
• FV = lowest of last quoted closing prices at stock ex listed
• Unrealised gain/losses from change in FV of listed sec à Equity under ‘Fair Value Change A/C’
• On sale, p&l on sale including balance of above a/c which shall be recycled to Revenue a/c or P&L
on actual sale of security
• As per Auth. Directions, amt of Fair Value Change Account can be used for declaring bonus to
policyholders. Except for amount that is released to policyholders as per Authority’s
prescription, no other amount shall be distributed to shareholders out of Fair Value Change
Account.
• Also, any dr bal in FVC A/C shall be reduced from profit/free reserves while declaring
dividends.
• The insurer shall assess, on B/S date, whether any impairment has occurred. An impairment loss
shall be recognized as expense in Revenue/P&L to extent of difference between re-measured
fair value of security/investment and acquisition cost as reduced by any previous impairment
loss recognized as expense in Revenue/ P&L.
• Any reversal of impairment loss earlier recognized in Revenue/P&L shall be recognized in
Revenue/P&L.
• Unlisted equity securities and derivative instruments and listed equity securities and derivative
instruments that are not regularly traded in active markets shall be measured at historical cost.
Provision shall be made for diminution in value of investments. The provision shall be reversed
in subsequent periods if estimates based on external evidence show increase in value of
investment over carrying amount. The increased carrying amount of investment due to reversal
of provision shall not exceed historical cost.

CA SHUBHAM KESWANI 181

 Real estate investment property(IP)
• The value of IP à determined at historical cost, subject to revaluation at least once in every 3
years.
• The change in carrying cost of IP shall be taken to revaluation reserve.
• The insurer shall assess impairment of the property at each B.S. date.
• Gains/losses arising due to changes in carrying amt of real estate shall be taken to equity under
‘Revaluation Reserve’. The p&l on sale of investments including accumulated changes in
revaluation reserve shall be recycled to revenue account or p&l a/c on sale of property.
• The bases for revaluation à disclosed in notes to accounts. The authority may issue directions
specifying amount to be released from revaluation reserve for declaring bonus to policyholders.
• Its clarified that except for amount released to policyholders as per authority’s direction, no
other amount shall be distributed to shareholders out of revaluation reserve a/c.
• An impairment loss shall be recognized as expense in revenue/ P&l a/c immediately, unless asset
is carried at revalued amount.
• Any impairment loss of a revalued asset shall be treated as a revaluation decrease of that asset
and if impairment loss exceeds revaluation reserve, excess shall be recognized as expense in
Revenue/p&l a/c.

Debt Securities – Debt securities, including govt securities and redeemable preference shares, shall
be considered as ‘held to maturity’ securities and shall be measured at historical cost subject to
amortization.

Audit of Premium
Following are certain illustrative points, Auditors are required to follow during Audit of Accounting
of Premiums:

I. Collection of Premium:
• The premium collections are credited to separate bank a/c and no withdrawals permitted from that
account for meeting general expenditure.
• Check whether there is daily reconciliation process to reconcile amounts collected, entered into
system and deposited into bank.
• Check that there is appropriate mechanism to ensure all collections deposited into Bank on timely
basis.

II. Calculation of Premium:

• Check that A/C system, employed by Co, calculates premium amt and its respective due dates
correctly.
• Check that system employed as such is equipped to calculate all types of premium modes correctly.

III. Recognition of Income:

• Check that premium is recognised only on basis of ‘Issued Policies’ and not on underwriting dates.
• Check that premium collected are correctly allocated all various components of the Policies.
• Check that there is reconciliation on daily basis and reconciling items, if any, are rectified/
followed up.

IV. Accounting of ‘Advance Premium’:

• Check, whether system has capability to identify regular and advance premium.
• Check whether there is a process of applying advance premium to contract when premium is due.

V. Reporting of Premium figures to IRDA/ Management:

• Check methodology for generation of MIS from system and there is no manual intervention.
• Check the procedure for Maker/ Checker before finalising the MIS.

CA SHUBHAM KESWANI 182

• Check whether there is reconciliation process between premium Income as per financials and as
reported.

VI. Other Areas:

• Check whether there are appropriate SOPs developed by Companies and strictly followed by all
deptt/ branches of Company.
• Ensure duly approved Delegation of Authority parameters matrix already in place for authorisation
limits.
• Premium recognition and refund are independent processes with adequate SODs amongst personnel.

Claims (Life Insurance)

1. Auditor should review std policy document template to ensure that policy document
prescribes minimum documentary evidence needed to support claim.
2. Ensure that Insurer maintains a register or record of claims, in which every claim is entered
along with date of claim and date on which claim was discharged.
3. In case claims are rejected, reasons for rejections should be closely reviewed.
4. Check whether all claims received are registered and enter into system.
5. It should be ensured that there is a system of collecting appropriate KYC documents, and
discrepancies, if any, are intimated to policyholders within 15 days of intimation.

Commission payable to Agent

Insurance business is generally solicited by Insurance agents.

The remuneration of agent is paid by way of commission which is calculated by applying percentage to
premium collected by him. Agency commission contributes towards significant portion of expenses
incurred by Insurance Co. Commission is payable towards generation of new business and towards
settlement of renewal premium.

Role of Auditor: The Auditor during his review of Commission paid to Agents should mainly consider
following:
• Review system established by Insurer w.r.t calculation of commission to eligible agents
accurately and processing same in timely manner.
• Review commission payment system is in sync with premium collection system.
• Check whether commission paid is within limit prescribed under Insurance Act. Check whether
commission is clawed-back on cancelled policies.
• Check completeness of commission processing system.

Operating Expenses related to Insurance Business (Expenses of Management)

(i) Any major expenses (5L or in excess of 1% of net premium, whichever is higher) are reqd to
be shown separately.
(ii) Auditor should ensure that expenses are first aggregated and then apportioned to Revenue
Account of each class of business on reasonable and equitable basis.
(iii) The accounting policy should clearly indicate basis of apportionment of expenses to
respective Revenue Accounts (i.e., Participating and Non-participating policies and in
between Linked and Non- Linked business) along with certificate that all expenses of mgt,
have been fully debited to respective Revenue a/c as expenses.
(iv) Any expenses which are not covered under 14 heads as mentioned in Schedule 3 to be
disclosed under head ‘Others’.

CA SHUBHAM KESWANI 183

 Employees’ Remuneration and Welfare Benefits
• Reimbursement of medical expenses or premium in respect of employees’ health cover is covered
under employees’ remuneration and welfare.
• Any medical fees incurred towards maintenance of health care policies (which are not for
employees) are required to be debited to claims cost under the health care and not to be
included under this head.
• Any expenses towards medical treatment of employees incurred by company should also be
included under this head.
• Non-training expenses have to be shown separately.
• Incentives paid to employees of Co. who have solicited insurance policies is also debited in this
account and not to commission account.

Audit of Accounts of General Insurance Business

Verification of Premiums

(i) Look into internal controls and compliance for collection and recording of premiums.
(ii) The auditor should ensure premium in respect of risks incepting during relevant year has been
accounted as premium income of that year on basis of premium revenue recognition. Also see
whether the premium received during the year but pertaining to risk commencing in following
year has been accounted for under the head ‘Premium Received in Advance’ and has been
disclosed separately.
(iii) The auditor should verify collections lodged by agents after balance sheet date to see whether
any collection pertains to risk commencing for year under audit. Check premium originally
recorded at gross figure i.e. without providing for unexpired risks & reinsurances.
(iv) The auditor should check whether Premium Registers have been maintained chronologically, for
each underwriting deptt. These fig. should tally with general ledger.
(v) The auditor should also check money collected by agents from policyholders have been received
by company as quickly as possible.
(vi) Where premium originally received has been refunded, the auditor should verify whether the
agency commission paid on such premium has been recovered.
(vii) The auditor should also check that in case of cancellation of policies/cover notes issued, no risk
has been assumed between the date of issue and subsequent cancellation thereof.
(viii) The auditor should also check whether the BGs against which policies are issued are valid and
there is tracking mechanism of amounts of policies issued against the guarantees.

Verification of Claims
Claims Provision
• Provision for all unsettled claims at year end on basis lodged/communicated by the parties
• Provision has been made for only such claims for which Co. is legally liable, considering
particularly, that
o risk was covered by policy,
o claims arose during currency of policy; and
o claim did not arise during period company was not supposed to cover the risk.
• Provision made should not be in excess of amount insured.
• Application of ‘average clause’ in case of under-insurance.
• In case of co-insurance arrangements, provisions should be made only in respect of its own
share of anticipated liability.
• Claims are provided for net of estimated salvage, wherever applicable.

CA SHUBHAM KESWANI 184

 • No contingent liability is carried in respect of any claim intimated in respect of policies
issued.
• Intimation of loss is received within a reasonable time and reasons for undue delay in
intimation are looked into.

Register of Claims
(i) Claims Intimation Register;
(ii) Claims Paid Register;
(iii) Claims Disbursement Bank Book;
(iv) Claims Dockets, normally containing the following records: Claim intimation, claim form,
particulars of policy, survey report, Photograph showing damage, repairer’s bills, letter of
subrogation, police report (in case of theft), fire service report, claim settlement note,
claim satisfaction note, salvage report, salvage disposal note, claims discharge voucher,
etc.;
(v) Report of quality assurance team; and
(vi) Salvage register.

Claims Paid
• Coinsurance : claims paid have been booked only in respect of co’s share and balance debited
to other insurance cos;
• Claim not paid if prem not recd as per Sec 64 VB
• If claim as per advise of other Cos whether Co recd its share of premium
• Salvage recovered accounted for and letter of subrogation obtained as per procedure
• For final settlement of claims claimant has given unqualified discharge note not involving Co
for further liability
• Whether payment made within 30 days of receipt of final doc & intt in case of delay as per
IRDAI regulation

Commission/Brokerage
(a) Ensure that commission/brokerage is not paid in excess of limits specified by IRDAI.
(b) Ensure that commission/brokerage is paid as per rates agreed with the agent and filed with
IRDAI.
(c) Ensure that commission/brokerage is paid to agent/broker who has solicited business.
(d) Ensure agent/broker not blacklisted by IRDAI
(e) Vouch disbursement entries with reference to the disbursement vouchers with copies of
commission bills and commission statements.
(f) Check whether vouchers are authorised by officers-in–charge and income tax deducted at
source.
(g) Test check correctness of amounts of commission allowed.

Outstanding Premium and Agents’ Balances

The following are audit procedures to be followed for verification of outstanding premium and
agents’ balances:
• Inquire reasons for long outstanding cr balances in o/s prem a/c and examine reasons for
policies not being issued or outstanding premium not adjusted against amounts due.
• Scrutinise and review control a/c debit balances and their nature should be enquired into.
• Examine inoperative balances and treatment given for old balances with reference to company
rules.
• Enquire into reasons for retaining old balances.

CA SHUBHAM KESWANI 185

 • Verify old debit balances which may require provision or adjustment. Notes of explanation
may be obtained from management in this regard.
• Check age-wise, sector-wise analysis of outstanding premium.
• Verify whether o/s premiums have since been collected.
• Check availability of adequate BG or premium deposit for o/s premium.

Unexpired Risk Reserve

All policies are renewed annually except in specific cases where short period policies are issued. Since
insurers close their accounts on particular date, not all risks under policies expire on that date. Many
policies normally extend beyond this date into following year during which risks continue. In other
words, at closing date, there is unexpired liability under various policies which may occur during
remaining term of policy beyond year end.

There are two methods of creating this reserve.

One is based on proportionate number of days of risk remaining to risk expired, which is called 1/365
method. The other method is by taking URR directly on 50% of premium amount.

As per Income Tax provisions, insurance companies are allowed deduction of 50 % of net premium
income in respect of Fire and Miscellaneous Business and 100 per cent of the net premium income
relating to Marine Insurance business.

Reinsurance Contracts
1) Facultative Reinsurance
It is that type of reinsurance whereby contract relates to one particular risk and is expressed in
reinsurance policy. Each transaction has to be negotiated individually. Each party has free choice i.e.,
ceding company to offer and re-insurer to accept.

The Insurance is used when:

(i) Automatic cover has exhausted.
(ii) Risk is excluded from treaties
(iii) Reinsurance treaties have not to be overburdened for abnormal risks.
(iv) When insurer has no automatic cover.
(v) Where technical guidance is required at each stage of acceptance of risk.

2) Treaty Insurance: Agreement for reinsurances within the limits of treaty

Proportional Treaties- Such treaties are based on pro-rata apportionment of the sum insured,
premium and losses, according to pre-determined percentage/ratio.

Non-Proportional Treaties- Such treaties are characterised by distribution of liability b/w ceding
company and reinsurer on basis of losses rather than the sum insured, as is case in proportional
reinsurance.
The following are the other characteristics of non - proportional treaties:
• Premium is not calculated on each cession, but on whole portfolio of ceding company.
• The premium rate is predetermined.
• Cost of reinsurance can vary substantially each year, depending on premium income, loss ratio
and reinsurance marked situations.
• Normally no commission is paid.

CA SHUBHAM KESWANI 186

Reinsurance Outward:

• The auditor should check whether pattern of re-insurance underwriting for outward cessions
fits within parameters and guidelines applicable to relevant year.
• The auditor should check whether cessions been made as per stipulation applicable to various
categories of risk.
• The auditor should verify whether cessions been made as per agreements entered with
various companies.
• It should also be seen whether outward remittances to foreign re-insurers have been done as
per the foreign exchange regulations.
• Check whether commission on cession has been calculated as per terms of agreement with re-
insurers.

Re-insurance Inward:

• Re-insurance Inward underwriting should be as per norms and guidelines prescribed by

Insurance Act, 1938 and IRDA Regulations. It is necessary to ensure that inward reinsurance
arrangements and acceptances, both Indian and foreign are done as per prescribed parameters
applicable for particular year.
• The auditor should check that domestic inward acceptances are in accordance with approved
programme.
• The auditor should verify whether re-insurance inward acceptance, both Indian and foreign, are
as per arrangements / agreements entered into with Indian and foreign insurance companies.
• The auditor should evaluate the system and practice adopted in recognising the foreign
currency transaction and also whether it is in accordance with AS-11 “The Effects of Changes
in Foreign Exchange Rates”.
• The auditor must ensure that foreign inward accounts balances have been re -stated at
prevailing value at year end and that difference arising out of re-statement has been taken to
Profit and Loss Account.

Trade Credit Insurance

• Policyholder's loss is non-receipt of trade receivable arising out of trade of goods or services.
• Policyholder is supplier of goods or services in consideration for fair market value.
• Policyholder's trade receivable does not arise out of factoring or reverse factoring
arrangement or any other similar arrangement.
• Policyholder has a customer (i.e. Buyer) liable to pay trade receivable to policyholder in return
for goods and services,in accordance with a policy document filed with insurer.
• Policyholder undertakes to pay premium for entire Policy Period.
• Any other requirement that may be specified by Authority from time to time.

Investment Risk Management Systems and Process Audit

IRDA advised that the CA firm, which is not the Statutory or Internal or Concurrent Auditor of
concerned Insurer shall certify that the Investment Risk Management Systems and Processes are in
place.

“The Harder you work, the Better you get”

CA SHUBHAM KESWANI 187

 Audit of PSU

Government Company [Sec 2(45)]

• >= 51% of paid-up share capital held by
Ø Central Govt
Ø Any state govt(s)
Ø Partly by both
• Includes subsidiary Co. of a govt Co.

Articles of Constitution
Article • Appointment of C&AG by President
148 • Special procedure for removal of C&AG, only on the ground of proven misbehaviors or
incapacity.
• Salary and other conditions of service to be determined by the Parliament.
Article • The C&AG’s (Duties, Powers and Conditions of Service) Act, 1971 defines these
149 functions and powers of C&G.
Article • On the advice of the C&AG, President to prescribe such form in which accounts of
150 the Union and States shall be kept.
Article • Audit reports of C&AG on A/Cs of Central/ State Government should be submitted
151 to President/Governor of State who shall cause them to be laid before
Parliament/State Legislative Assemblies.

C&AG shall hold office for term of six years or upto age of 65 years, whichever is earlier

Organizations subject to C&AG Audit

Ø All Union and State Government departments and offices including Indian Railways and Posts
and Telecommunications.
Ø Public commercial enterprises controlled by Union and State govts, i.e. govt cos and
corporations.
Ø Non-commercial autonomous bodies and authorities owned or controlled by Union or States.
Ø Authorities and bodies substantially financed from Union or State revenues.

Three Committees:

1. Public Accounts Committee: Duty to satisfy itself that:

(i) that moneys were disbursed legally on service or purpose to which they were applied;
(ii) that expenditure incurred was authorised;
(iii) that re-appropriation has been made in accordance with provisions made (i.e.
distribution of funds).
(iv) to examine statement of accounts of autonomous and semi - autonomous bodies, audit
of which is conducted by C&AG

2. Estimates Committee: The Committee examines estimates with a view to:

(i) report what economies, improvements in organization, efficiency or administrative
reform,consistent with policy underlying estimates may be effected;
(ii) suggest alternative policies;
(iii) examine whether money is well laid out within limit; and suggest form in which
estimates shall be presented to Parliament.

CA SHUBHAM KESWANI 188

 3. Committee on Public Undertakings (COPU)
(i) to examine reports and accounts of PSUs
(ii) to examine reports of C&AG on public undertakings
(iii) to examine autonomy and efficiency of psu and to see whether they are being
managed in accordance with sound business principles and prudent commercial
practices
(iv) to exercise such other functions vested in PAC and Estimates Committee not covered
above and as may be allotted by Speaker from time to time

C&AGs Role as Friend, Philosopher & Guide to committees

• Report generally forms basis of committee’s working
• Scrutinises notes submitted by ministries to committees to check correctness of submissions
• Financial Committees present their Report to Parliament/ State Legislature with their
observations and recommendations.

The various Ministries / Deptt of Govt are required to inform Committees of the action taken
by them on recommendations of Committees (which are generally accepted) and Committees
present Action Taken Reports to Parliament / Legislature;
[Financial committees à Report à Parliament/ State legislature
(observations/recommendations) Ministries/Dept à Inform action à Committees à Action
taken report à Parliament/State legislature]

• If A/R couldn’t be discussed in detail, written ans. obtained from dept/ministries to ensure
A/R not taken lightly by Govt even if entire report not deliberated by committee

Objective & Scope of PSU Audit

1. Audit of PSU not constrained to Financial & Compliance audit
2. Propriety audit
3. Comprehensive audit
4. Org decision by competent authority
5. Helping govt
6. Highlight issues of efficient & economic operations
7. Fiscal & managerial accountability
Fiscal Accountability: Audit of provision of funds, sanctions, compliances, propriety etc
Managerial Accountability: Efficiency, Economy & effectiveness

Basic Elements of
PSU Audit

Three Parties Subject Matter, Types of

criteria & subject Engagement
matter info

Responsible Party Intended users Attestation Engg. Direct Reporting

Engg

Auditor

CA SHUBHAM KESWANI 189

Auditor: Its SAI (Supreme Audit Institution), India & person delegated by it for audit
[SAI= C&AG + Indian Audit & Accounts Department(IAAD) ]

Subject matter: This refers to information, condition or activity measured or evaluated against
certain criteria.

Criteria: These are benchmarks used to evaluate subject matter.

Subject matter information: This refers to outcome of evaluating or measuring subject matter
against criteria.

Attestation Engagements: In attestation engagements, responsible party measures subject matter

against criteria and presents subject matter info, on which auditor then gathers SAAE to provide
reasonable basis for expressing conclusion.

Direct Reporting Engagement: In direct reporting engagements, it is auditor who measures or

evaluates subject matter against criteria.

Financial audits are always attestation engagements, as they are based on financial information
presented by responsible party. Performance audits and compliance audits are generally direct
reporting engagements.

Principles of PSU Audit

General Principles Principles relating to Audit process
• Ethics & Independence • Planning the audit (Agreeing terms of
• Professional Judgement, due care and engg, understanding entity, developing
skepticism audit plan)
• Quality Control • Conducting Audit (Performing audit
• Audit Team Management & Skill procedures, evaluating evidence &
• Audit Risk drawing conclusions)
• Materiality • Reporting & follow up (Reporting based
• Documentation on conclusions & following up on reported
matters)
• Communication

Role of C&AG in Audit of Govt Cos.

1. 143(5) C&G direct manner a/c audited + auditor includes in report (*3)
Directions issued+ action taken thereon + impact on a/cs & financials
2. 143(6)(a) Supplementary Audit
Within 60 days from date of receipt of audit report
3. 143(6)(b) C&AG Comment upon/ supplement audit report à Sent by Co. to every person entitled
to secure copies of audited f/s + place before members in AGM
4. Test Audit u/s 143(7)
Provisions of sec 19A of C&AG (Duties, Powers & Conditions of Services Act,1971) shall apply to
such test audit
Compliance Audit
Compliance audit is independent assessment of whether given subject matter is in compliance with
applicable criteria.

Compliance audit is concerned with:

(a) Regularity- adherence of subject matter to formal criteria emanating from relevant laws,
regulations and agreements applicable to entity.

CA SHUBHAM KESWANI 190

 (b) Propriety- observance of general principles governing sound financial management and ethical
conduct of public officials.

Perspective of Compliance Audit:

Compliance auditing is generally conducted either-
(i) in relation with audit of F.S, or
(ii) separately as individual compliance audits, or
(iii) in combination with performance auditing.

Performance Audit
A performance audit is objective and systematic examination of evidence for purpose of providing an
independent assessment of performance of govt organization, program, activity, or function in order
to provide info to improve public accountability and facilitate decision-making by parties with
responsibility to oversee or initiate corrective action.

(i) Economy: Minimize cost of resources used for an activity, having regard to qty, quality
andbest price.

(ii) Efficiency: Input-output ratio. Max output with min input. Or min input for given quality
& qtyof output
Following to be checked:
• Sound procurement policies
• Resources are protected & maintained
• Efficient utilization of physical, financial & HR
• Public sector prog/entities/ activities efficiently managed
• Objectives met cost effectively

(iii) Effectiveness: Extent to which objectives achieved & relation b/w intended & actual
impact of activity
Check:
• Objectives & means provided (legal, financial etc) for public sector prog. consistent
with policy
• Extent to which results achieved
• Assess & establish with evidence that social & economic impact due to policy or
other causes
• Identify factors inhibiting satisfactory performance
• Assess compliance with laws & regulations
• Assess effectiveness of prog or individual components

Case study by ICAI

Q. Performance audit of enforcement mechanism administering provisions of Minimum Wages Act (
social welfare legislation)

Ø Auditor possess knowledge of industries or labour contracts where provisions applicable

Ø Evaluate std of living before and after implementation of the Act
Ø Also evaluate EEE in welfare system to be audited
Ø Study shortcomings in coordination b/w different agencies like labor dept,
ESI , EPF organisations
Ø Shall also point out lacuna in existing legal framework to strengthen objective of
legislation.

CA SHUBHAM KESWANI 191

 Planning for performance Audit
• Understanding entity/programme

Sources of understanding the entity

Documents Legislative Policy Academic Past Audits Media

of the documents documents or spl Coverage
entity research

(i) Documents of the entity: Documents on administration and functions of entity, policy files,
annual reports, budget docs, accounts, minutes of meetings, information on website, internal audit
reports, electronic databases and MIS reports, RTI material etc.

(ii) Legislative documents: Legislation, parliamentary questions and debates, reports of Public
Accounts Committee, Committee on Public Undertakings, Estimates Committee and letters from MP.

(iii) Policy documents: Documents of Planning Commission, Ministry of Finance etc.

(iv) Academic or special research: Independent evaluations on entity, academic research and similar
work done by other govts and other SAIs.

(v) Past audits: Past financial and performance audits of entity provide major source of info and
understanding.

(vi) Media coverage: Print and electronic media - their systematic documentation on regular basis in
a transparent manner.

• Defining objectives and scope of audit

• Determining audit criteria: Stds to determine if program meets expectations
Audit criteria can be obtained from following sources:
Ø Procedure manuals of entity
Ø Policies, std, directives, guidelines
Ø Independent expert opinion or know how
Ø Scientific knowledge or other reliable info
Ø General mgt & subject matter literature

• Deciding audit approach: Selection of approach also determines methods & means to conduct
performance audit.

Methods & means for conducting Performance audit:

i. Analysis of procedures: It involves review of the systems in place for planning, conducting,
checking and monitoring the activity.
ii. Case studies: A case study is a descriptive analysis of an entity, scheme or a programme. It
involves analysis of a particular issue within the context of the whole area under review.
iii. Use of existing data: The audit staff should investigate the data held by entity mgt and by
other relevant sources.
iv. Surveys: Survey is a method of collecting information from members of a population to
assess the interrelation of events and conditions.
v. Analysis of results: It requires the auditor to carry out actual output-input analysis to
determine the efficiency of the programme.
vi. Quantitative analysis: It involves examination of available data relating to financials like
earnings, revenue, or data relating to programme implementation like details of
beneficiaries etc.

CA SHUBHAM KESWANI 192

 • Developing audit questions
• Assessing audit team skills and whether outside expertise required
• Preparing Audit Design Matrix
• Establishing time table and resources
• Intimation of Audit programme to audit entities

Comprehensive Audit
Efficiency cum performance audit. Locate area of weakness and extravagance for mgt info.

Some of issues examined in comprehensive audit are:

• Overall cost of capital compared with approved planned cost? Is there a substantial
increase? If yes any extravagance or unnecessary expenditure?
• Accepted prodn or output achieved? Underutilisation of installed capacity or shortfall in
performance?
• Planned rate of return achieved?
• System of project formulation and implementation sound?
• Are cost control measures adequate?
• Does enterprise have R&D program?
• Does enterprise have adequate system of Repair & Maintenance (R&M)

Propriety Audit
Verification of transaction under test of public propriety, commonly accepted customs, & stds of
conduct.

Principles of Propriety

• Expenditure not prima facie more than what occasion demands + sufficient vigilance by
officers
• Authority utilising power to sanction expenditure not accruing to its own benefit
• Funds not to be utilised to benefit particular person(s)
• Apart from agreed remuneration & reward no other avenue benefit indirectly mgt person,
employee or others

Provisions of Cos Act relating to Propriety

1. Sec 143(1) requiring enquiry into certain specified matters (Covered in Co. Audit)
2. 143(6) & (7) à Supplementary & test audit
3. Sec 148 àCost records & Audit à Cost consciousness in mgt
4. Additional info. Part II of Schedule III

Proprietory Elements under CARO 2020

Clause iii, iv, viii, ix, x, xi, xiii, xv, xviii of Para 3 (Refer CARO 2020 for details)

Parts of Audit Report of C&AG

• Introduction containing general review of working results of Govt Co/ deemed govt co.
• Results of comprehensive appraisals of selected undertakings conducted by Audit board
• Resume of Co. Auditor’s report submitted under directions of C&AG & that of comments
on A/Cs of govt cos.
• Significant results of audit of undertakings not taken up for appraisal by audit board.

“Discipline is the Bridge between Goals & Accomplishment”

CA SHUBHAM KESWANI 193

 Liabilities of Auditor

Civil Liabilities under Companies Act,2013

Mis-statement in prospectus u/s 35 of Companies Act, 2013, are:

(1) Where person subscribed for securities of Co. acting on any statement included, or inclusion or
omission of any matter, in prospectus which is misleading and has sustained any loss or damage,
company and every person who—
(a) is a director of Co. at time of issue of prospectus;
(b) has authorized himself to be named in prospectus as director of company or has agreed to become
such director either immediately or after an interval of time;
(c) is promoter of company;
(d) has authorised issue of prospectus; and
(e) is expert referred to in sub-section (5) of sec 26, shall, without prejudice to any punishment to
which any person may be liable under sec 36, be liable to pay compensation to every person who has
sustained such loss or damage.

Where it is proved that prospectus has been issued with intent to defraud applicants for securities of
company or any other person, every person referred to in subsection (1) shall be personally responsible,
without any limitation of liability, for all or any of losses or damages that may have been incurred by
any person who subscribed to securities on the basis of such prospectus.

No person shall be liable, if he proves—

(a) that, having consented to become a director of Co., he withdrew his consent before issue of
prospectus, and that it was issued without his authority or consent; or

(b) that prospectus was issued without his knowledge or consent, and that on becoming aware of its
issue, he forthwith gave a reasonable public notice that it was issued without his knowledge or consent.

(c) that, as regards every misleading statement purported to be made by an expert or contained in
what purports to be a copy of or an extract from a report or valuation of an expert, it was a correct
and fair representation of the statement, or a correct copy of, or a correct and fair extract from,
report or valuation; and he had reasonable ground to believe and did up to the time of the issue of the
prospectus believe, that person making statement was competent to make it and that said person had
given the consent required by subsection (5) of section 26 to issue of the prospectus and had not
withdrawn that consent before delivery of a copy of prospectus for registration or, to the defendant's
knowledge, before allotment thereunder

Criminal Liability
Criminal liability for Misstatement in Prospectus –
As per Sec 34 of Companies Act, 2013, where prospectus issued, circulated or distributed includes any
statement which is untrue or misleading, every person who authorises issue of prospectus shall be
liable under section 447.

This section shall not apply to person if he proves that such statement or omission was immaterial or
that he had reasonable grounds to believe, that statement was true or inclusion or omission was
necessary.

CA SHUBHAM KESWANI 194

Punishment for false statement - According to Sec 448 of Companies Act, 2013 if in any return, report,
certificate, financial statement, prospectus, statement or other document required by, or for,
purposes of any of provisions of this Act or rules made thereunder, any person makes a statement —
(a) which is false in any material particulars, knowing it to be false; or
(b) which omits any material fact, knowing it to be material, he shall be liable under section 447.

Punishment of Fraud u/s 447

Amount of Fraud >= 10L or 1% of turnover of Co. (lower)
Punishment of Imprisonment 6 months – 10 Years & Fine of amt of fraud..max 3 times
If it involves public intt à Imprisonment min 3 years

Amt of fraud < 10 L or 1% of turnover of Co.(Lower)

Punishment of imprisonment extend to 5 yrs or fine upto 50 L or both

Liabilities under Income Tax Act 1961

Sec 288:
• Person who has been convicted of any offence connected with any Income Tax proceeding or on
whom a penalty has been imposed under said Act is disqualified from representing an assessee.
• CA found guilty of professional misconduct by Council of ICAI, cannot act as a representative
for such time that order of Council disqualifies him from practising.

Sec 278:
Any person who acts or induces another person to make & deliver to IT Authorities false a/c,
statement, or declaration, relating to taxable income which he knows to be false or does not believe
to be true is punishable:
• with imprisonment from 6 months to 7 years & fine if tax evaded exceeds ₹ 25 Lacs
• with imprisonment from 3 months to 2 years & fine if tax evaded is up to ₹ 25 Lacs

Rule 12A
• A CA who as authorised representative prepared return filed by assessee, has to furnish to
A.O., particulars of a/cs, statements and other docs supplied to him by assessee for preparation
of return.
• Where CA has conducted an examination of such records, he has also to submit a report on
scope and results of such examination.
• If this report contains any information which is false and which CA either knows or believes to
be false à liable to rigorous imprisonment which may extend to 7 years and fine.

Sec. 271J
For incorrect info in any report or certificate furnished under this Act or Rules, A.O. or CIT (Appeals)
may impose a penalty of ₹ 10,000 for each such report or certificate.

CA SHUBHAM KESWANI 195

 Internal Audit (IA)
Ø Independent assurance
Ø on effectiveness of internal controls and risk management processes
Ø to enhance governance and achieve organisational objectives

The objectives and scope of IA Function as per SA 610 may include:

• Monitoring of internal controls : Monitoring through Exception Reports of Continuous Control
Management Tool in ERP system
• Examination of financial and operating information: Internal Audit for identifying reasons of
Year to Year deviation in Profit & Loss Account Items
• Review of operating activities: Reviewing Store Management Practices vis-a-vis Indutry's Best
Practices
• Review of compliance with laws and regulations: Review of compliance with newly applicable Tax
Regime.
• Risk management: Evaluation and management of Risk Exposure for complex financial instruments
transactions
• Governance: Assessment of Governance Process in the accomplishment of objectives on ethics
and values.

Applicability of Internal Audit

Sec 138 of Companies Act, 2013 read with Rule 13 of Companies Accounts Rules 2014
• Listed Cos
• Unlisted public Companies (25/50/100/200)
Ø Deposits >= 25 Cr (anytime) or
Ø PSC >= 50 Cr or
Ø Borrowings (Bank/FI) > 100 Cr (anytime) or
Ø T/o >= 200 Cr
• Pvt Co. (100/200)
Ø Borrowings > 100 Cr (anytime) or
Ø T/o >= 200 Cr
JKT Pvt. Ltd. having ` 40 lacs paid-up capital, `9.50 crores reserves and turnover of last 3 consecutive
FY, immediately preceding FY being ` 49 cr, ` 145 cr and ` 260 cr, but does not have any internal audit
system. In view of management, internal audit system is not mandatory. Comment.
As per sec 138 of Companies Act, 2013, read with rule 13 of Companies (Audit and Auditors) Rules,
2014, every pvt company shall be required to appoint internal auditor or a firm of internal auditors,
having-
(i) turnover of 200 crore rupees or more during preceding FY; or
(ii) outstanding loans or borrowings from banks or public financial institutions exceeding 100 crore
rupees or more at any point of time during preceding FY.
Conclusion: In the instant case, JKT Pvt. Ltd. is having a turnover of ` 260 crores during preceding FY
which is more than 200 cr. Hence, co. has statutory requirement to appoint Internal Auditor and
conduct internal audit.

Who can be Internal Auditor?

Ø Individual/firm/body corporate
Ø CA/Cost a/c /any other professional whether in practice or not
Ø May or may not be employee of Co.

CA SHUBHAM KESWANI 196

AB Pvt. Ltd. company, having outstanding loans and borrowings from banks exceeding one hundred crore
rupees, wants to appoint Mr. X, a practicing cost accountant, as an internal auditor. Is the appointment
of Mr. X valid?
As per Sec 138 of companies Act, 2013, internal auditor shall either be a CA or cost accountant
(whether engaged in the practice or not), or such other professional as may be decided by Board to
conduct an internal audit of companies. Thus, Appointment of Mr. X as an internal auditor of AB Pvt.
Ltd is valid.

Main Responsibilities of Internal Auditor

• Maintain adequate system of Internal Control (IC)
• To operate independently of a/c staff
• Not involve himself in executive functions to maintain objective outlook
• To observe facts & situations & bring them to notice of authorities
• Associate closely with mgt & keep knowledge upto date about business
• At all times, enjoy independent status

Scope of Internal Auditor’s work includes review of:

1. Internal control systems & procedures
• Assess design & operating efficiency & effectiveness of IC
• To minimize overall internal audit risk, inherent risk, control risk & detection risk
• Controls should be inbuilt in operating functions à cost effective
• Review should consider limitations of Internal Control à cost benefit, human errors,
collusion & abuse by process owner

2. Custodianship & Safeguarding of Assets

• Verify existence of assets
• Review Segregation of Duties is in place
• Ensure all assets accounted fully
• Review control systems for intangible assets e.g. procedures related to credit control

3. Compliance with Policies, Procedures & Regulations

• Point out specific weakness & suggest remedial action

4. Relevance & Reliability of Information

• Review information systems
• Examine whether reporting by exception i.e reports highlight significant & distinctive
features

5. Review of Organisation structure

• Manner in which activities of organisation are grouped for managerial control
• Examine org chart à check structure is simple & economical & no function enjoys undue
dominance over the others
• Responsibilities of staff at headquarter shouldn’t overlap with CEO of operating units
• Reasonableness of Span of control of each executive (no. of subordinates that executive
controls)
• Where dual responsibilities can’t be avoided, primary one should be specified
• Evaluate process of mgt development in enterprise

6. Review of utilisation of Resources

• Check proper operating std & norms established

CA SHUBHAM KESWANI 197

 • Whether – detailed enough to be identified with specific operating responsibility
• Review method of establishing stds & norms
• Wide divergence – b/w actual performance & std – reasons maybe considered

7. Accomplishment of Goals & Objectives

• Objectives clearly stated & attainable
• Expressed in quantifiable terms
• Sufficient flexibility in plan to permit improvements

Integrity, Objectivity & Independence of Internal Auditor

1) IA shall be free from undue influences which force him to deviate from truth.
The independence shall not only be of mind but also in appearance.
2) IA shall be honest, truthful & be person of high integrity
3) IA shall complete work in highly objective manner. Shall not allow bias & prejudice to override
objectivity esp. while arriving at conclusions or reporting opinion.

Qualities of Internal Auditor

1) Special expertise for evaluating mgt controls esp. financial & accounting controls
2) Accounting & financial expertise
3) Expected to evaluate operational performance & non-monetary controls. Requires basic
knowledge of technology & commercial practices of entity
4) Basic knowledge of commerce, laws, taxation, cost accounting, tax, economics, EDP systems,
5) Understanding of mgt principles & techniques (MTP)
6) By conduct à assurance to mgt confidentiality will be maintained

Internal Audit Report

SIA 370 Reporting by IA in 2 stages:
1) At end of assignment IA Report covering specific area, fn or part of entity is prepared
highlighting key observations. Issued with details of manner of conducting assignment & key
findings from audit. Issued to Auditee with copies to local mgt agreed in planning phase.
2) On periodic basis, at close of plan period, report on IA activities covering Entity & plan period
is prepared by Chief Internal Auditor (or EP in case of external service provider). Normally
done on Quarterly basis & submitted to Audit Committee. A part of IA report may form part
of the Periodic Report shared with AC.
This SIA pertains to responsibility to issue only IA report pertaining to specific assignments.

Key Elements of Internal Audit Report

a) Overview of scope, objective & approach (SOA) of audit assignments
b) Fact that Internal audit completed as per Standard on Internal Audit (SIA)
c) Executive summary of key observations covering important aspects & specific to scope of
assignment
d) Summary of corrective actions required(or agreed by mgt) for each observation
e) Nature of assurance, if any, which can be derived from observations.
Notes:
• Content & form depends on Prof judgment of IA in consultation with auditee
• Draft report to be issued before Final Report
Follow Up

CA SHUBHAM KESWANI 198

• As per SIA 390 Monitoring & Reporting of Prior Audit Issues(PAI), CIA is responsible for
continuous monitoring closure of PAI through timely implementation of action plans.
• The responsibility to implement action plans stays with the mgt.
• IA should review follow up action taken by mgt based on his observations. If no action taken in
reasonable time à draw mgt attention to it. Where mgt not acted on his suggestions or
implemented recommendations à IA ascertain reasons
• Where mgt has accepted recommendations & initiated necessary action, IA periodically review the
manner & extent of implementation of recommendations & report which recomm. not implemented
fully/partly.

Relationship b/w Internal Auditor(IA) & External Auditors(EA)

• Scope & objective of Internal audit dependent on size & structure of entity & requirements of
management. IA reviews a/c systems & internal control, examines financial & operating info for
mgt, there’s a lot of overlap b/w work of IA & EA.
• Work done by IA has important bearing on work of EA. Function of IA is integral part of system
of Internal Control.
• It’s a statutory requirement as per sec 138, Audit committee in consultation with IA formulate
scope, functioning, methodology, & periodicity (SFMPE) for conducting Internal audit.
• Its obligatory for stat auditor (EA) to examine scope & effectiveness of work carried out by IA.
He should examine internal audit dept of org, strength of staff & qualification & powers.
• Extent of independence exhibited by IA & status in organisation, determine effectiveness of
audit.
• EA should evaluate internal audit function to determine NTE of compliance & substantive
procedures.
Difference between Internal & External Audit
Basis Internal Audit External Audit
Meaning Ongoing audit function performed within Audit function performed by
an organisation by separate internal audit independent body not part of
dept organisation
Examination Examines operational efficiency of Examines accuracy & validity of
organisation F.S.
Appointment By mgt By members
Users of Report Management Stakeholders
Period Continuous process throughout year Done once in a year
Opinion On the effectiveness of operational acts On truthness & fairness of F.S.
of organisation
Status of Auditor Could be employee Can’t be employee

Factors responsible for high employee attrition rate are as under:

i. Job Stress & work life imbalance;
ii. Wrong policies of the Management;
iii. Unbearable behaviour of Senior Staff;
iv. Safety factors;
v. Limited opportunities for promotion;
vi. Low monetary benefits;
vii. Lack of labour welfare schemes;

CA SHUBHAM KESWANI 199

 SA 610: Using the work of Internal Auditor

• Sole responsibility of audit opinion à External Auditor

• External auditor has to obtain SAAE that work of IA Function or Internal auditor providing
direct assistance is adequate for purpose of audit
• Scope of SA:
a) Using work of IA Function in obtaining audit evidence &
b) Using internal auditors to provide direct assistance (DA) under Direction, Supervision
& Review of External auditor (DSR)
• This SA doesn’t apply if entity doesn’t have IA function

Objectives of Auditor where entity has internal audit function:

• To determine if work of IA function or direct assistance of Internal auditor can be used
• If using work of IA Function, determine whether work is adequate for Audit purpose
• If using IA to provide DA, to DSR their work

Internal Audit Function: A function of entity that performs assurance and consulting activities
designed to evaluate and improve effectiveness of entity’s governance, risk management and internal
control processes (GRC).
Direct Assistance: The use of internal auditors to perform audit procedures under direction,
supervision and review of external auditor.

Evaluating whether work of Internal Audit Function can be used for Audit Purpose
(a) The extent to which internal audit function’s organizational status and relevant policies and
procedures support objectivity of internal auditors;
(b) The level of competence of internal audit function; and
(c) Whether internal audit function applies a systematic and disciplined approach, including quality
control. (DISCO)

Determining Nature & Extent of work of Internal Audit Function that can be used

Types of Work of internal audit function that can be used by external auditor include following:
• Testing of operating effectiveness of controls.
• Substantive procedures involving limited judgment.
• Observations of inventory counts.
• Tracing transactions through the information system relevant to financial reporting.
• Testing of compliance with regulatory requirements.
• In some circumstances, audits or reviews of financial information of subsidiaries that are not
significant components to group (where this does not conflict with the requirements of SA
600).

To determine adequacy of specific work performed by internal auditors for external auditor’s
purposes, external auditor shall evaluate whether:
i. The work was performed by internal auditors having adequate technical training and
proficiency;
ii. The work was properly supervised, reviewed and documented;
iii. Adequate audit evidence has been obtained to enable internal auditors to draw reasonable
conclusions;

CA SHUBHAM KESWANI 200

 iv. Conclusions reached are appropriate in circumstances and any reports prepared by internal
auditors are consistent with results of work performed; and
v. Any exceptions or unusual matters disclosed by internal auditors are properly resolved.

Written Agreements: Prior to using internal auditors to provide direct assistance for purposes of audit
(a) Obtain written agreement from authorized representative of entity that IA will be allowed to
follow external auditor’s instructions, and entity will not intervene in work the internal auditor
performs for external auditor; and
(b) Obtain written agreement from internal auditors that they will keep confidential specific matters
as instructed by external auditor and inform external auditor of any threat to their objectivity.

Areas where Internal auditor can’t provide Direct Assistance:

(a) Involve making significant judgments in audit;

(b) Relate to higher assessed RMM where judgment required in performing relevant audit procedures
or evaluating audit evidence gathered is more than limited;

(c) Relate to work with which internal auditors have been involved and which has already been, or will
be, reported to Mgt or TCWG by internal audit function; or
(d) Relate to decisions external auditor makes in accordance with this SA regarding internal audit
function and use of its work or direct assistance.

Significant judgments include following:

• Assessing risks of material misstatement (RoMM) ;
• Evaluating sufficiency of tests performed;
• Evaluating appropriateness of management’s use of going concern assumption;
• Evaluating significant accounting estimates; and
• Evaluating the adequacy of disclosures in the financial statements, and other matters
affecting the auditor’s report.

Documentation: External auditor uses IA to provide direct assistance

(a) Evaluation of existence and significance of threats to objectivity, and level of competence of
internal auditors used to provide direct assistance;
(b) Basis for decision regarding nature and extent of work performed by internal auditors;
(c) Who reviewed work performed and date and extent of that review
in accordance with SA 230;
(d) Written agreements obtained from authorized representative of entity and the internal auditors
(e) Working papers prepared by internal auditors who provided direct assistance on the audit
engagement.

Factors to be considered while evaluating existence & significance of

threats to objectivity of Internal Auditor
• The extent to which internal audit function’s organizational status and relevant policies and
procedures support objectivity of internal auditors
• Family and personal relationships with individual working in, or responsible for, aspect of entity to
which work relates.
• Association with division or deptt in entity to which work relates.
• Significant financial interests in entity other than remuneration on terms consistent with those
applicable to other employees.

“If you want to fly, give up everything that Weighs you down”

CA SHUBHAM KESWANI 201

 Management Audit

Management Audit vs Operational Audit

The scope and content of mgt audit should cover everything that we know as operational audit and, in
addition, it should also include review of adequacy and competence of objectives, plans, policies and
decisions of top mgt.

• Mgt audit is concerned with “Quality of managing”, whereas operational audit focuses on “Quality of
operations”.

• Management audit is “Audit of management” while operational audit is “Audit for the management”.
The focus of mgt audit is on “Quality of Decision Making” rather than effectiveness or efficiency of
operations.

• The basic difference b/w two audits, then, is not in method, but in level of appraisal. In a mgt audit,
the auditor is to make his tests to the level of top management, its formulation of objectives, plans
and policies and its decision making.

Mgt audit is wider in scope compared to operational audit.

Example:
• If Co. facing issues due to long decision making cycles à Mgt Audit
• If issues due to policy implementation à Operational Audit

What knowledge necessary to be a mgt. auditor?

i. Purpose for which org. has been created (eg, steel mill to produce to reduce imports, create
employment opportunities, develop backward areas, etc)
ii. Mgt structure including delegation of authority, planning & budgeting
iii. Reports required & reports actually received for mgt
iv. Internal Controls
v. Production Planning
vi. Factory layout, design & installed capacity
vii. Sales mgt & sales planning
viii. Personnel policy & personnel mgt including requirements, training, welfare, incentives &
disincentives

Desirability or Importance of Management Audit

• Detecting & overcoming current managerial deficiencies in ongoing operations. It represents a
positive, forward looking approach that evaluates
Ø how well mgt accomplish its objectives
Ø how effective management is planning, organising, directing, controlling, & coordinating
org acts.
This evaluation is aided with Mgt Audit Questionnaire.
• Managerial problems & operational difficulties can be spotted before the fact. They can help
pinpoint problems developing from small scale.
• Its another mgt tool to achieve org objectives. Capability of mgt audit questionnaire to pinpoint
problem areas is a plus factor.
• Clearly helpful in case of ailing industries, to isolate problems & account for their ailments.
• Often, mgt audits conducted prior to investments in entity, M&A, or b4 any other strategic
decision.

CA SHUBHAM KESWANI 202

 Organising the management Audit
1. Devising statement of Policy
• Mgt support reflected clearly & policy statement to be specific
• Spell out clearly scope & status of mgt auditing in enterprise, authority to carry out
audits, issue reports, make recommendations, & evaluate corrective action
• Lay in clear terms scope of activities to be performed by mgt auditor
• Statement must categorically say that mgt auditor is capable of reviewing admin & mgt
controls over any activity within Co.

2. Location of audit function within organisation

The function should be independent.

3. Allocation of Personnel
• Persons selected & assigned should have good understanding of audit theory, fundamentals
of organisation & mgt
• Basic knowledge of:
Ø Technology & commercial practices
Ø Commerce, law, tax, cost a/c, Economics, EDP systems

4. Staff training program

• Will help to achieve quality in assignments.
• Incentive to draw capable people in dept & retain them.

5. Time & other aspects

Depends on nature & scope of work.

6. Frequency
Vary as per nature, size & structure of organisation. Interval shouldn’t exceed 3 years.

Ways to Conduct Mgt Audit

1. Getting facts through interviews
• Adequate prep necessary to avoid waste of time & effort.
• Begin by stating purpose of audit.
• Emphasis on getting facts essential to review & appraise the area of study
• Exchange of info should be friendly & conducted in open atmosphere

2. Management Audit Questionnaire

• Aims at comprehensive & continuous examination of org mgt
• Its concerned with appraisal of mgt actions in accomplishing org objectives
• Primary objective it to Highlight weakness & deficiencies of mgt for possible
improvements
• It enables mgt auditor to synthesise elements causing mgt difficulties & deficiencies
(d&d)

There are three possible answers to the management audit questions:

Yes: It indicates that the specific area, or function under study is functioning in an acceptable
manner. No written application is needed in that case.
No: It indicates unacceptable performance & should be explained in writing.
Not applicable :It indicates that question does not apply.

CA SHUBHAM KESWANI 203

 Types of Reports
1. Oral Reports: For emergency reporting i.e. followed up with written report
2. Interim written report: Inform about significant developments during audit for early
consideration
3. Regular written reports: Issued after audit
4. Summary written reports:
Ø Also referred as Flash Reports
Ø They summarise individual reports
Ø These are primarily for audit committees or higher level mgt
Ø Especially useful for top level managers who don’t actively review individual reports
Ø Also useful for general auditor to see overall reporting effort with more perspective &
on integrated basis

Steps to prepare Mgt Audit Report

1. Planning the audit report: Deciding what to be communicated to the reader
2. Supporting Information: Supplement report with audit evidence that sufficiently &
convincingly supports conclusions
3. Preparing Draft Report: Before issue of final report
4. Writing & issuing final report: When completely satisfied with draft report, before that
discuss conclusions & recommendations with mgt
5. Follow up audit report: Review whether follow up action taken by mgt
6. Action/response of mgt on Audit report: Where mgt has not acted upon suggestions of
auditor or not implemented his recommendations, auditor should ascertain reasons for same

Behavioural Aspects encountered in Mgt Audit

Nature & Cause of behavioural problems:

1. Relationship conflict between mgt auditor & other personnel

Mgt auditors maybe employee of Co. & other persons will regard them as employee only. On
other hand, mgt auditor being specialist of field, may think their approach & solutions, only way
to resolve mgt problems.

2. Control: Mgt auditor evaluates effectiveness of controls, auditees may feel that auditor’s
report might create incompetent impression on mgt, this creates feeling of antagonism

Causes of Antagonism are as follows:

Ø Fear of criticism stemming from adverse audit findings.
Ø Fear of changes in day-today working habits because of changes resulting from audit
recommendations.
Ø Punitive action by superiors prompted by reported deficiencies.
Ø Insensitive audit practices - reports which are overly critical, reports which focus on
deficiencies only, and the perception that auditors gain personally from reporting
deficiencies.
Ø Hostile audit style - a cold and distant aspect is a lack of understanding of the auditee’s
problems, an absence of empathy, an excessive concentration on insignificant errors, &
prosecutional tone when asking questions.

3. Resistance to change: Auditor’s study of systems & procedures give room for
recommendations for changes in systems.

CA SHUBHAM KESWANI 204

 Solutions to behavioural problems:

There is a need to demonstrate to extent possible that:

1. The audit is part of an overall programme mandated by higher-level authority to meet higher-level
organisational needs for both protection and maximum constructive benefit.

2. The objective of review is to provide maximum service in all feasible managerial dimensions.

3. The review will be conducted with minimum interference with regular operations of the operating
personnel.

4. the responsible officers will be kept fully informed and have opportunity to review findings and
recommendations before any audit report is formally released.

It is essential to create an atmosphere of trust and friendliness so that audit reports will be
understood in their proper perspective.

1. Constructive criticism - He should also make obvious in his report the value of his comments in
tangible terms. Only then would suggestions carry weight with the auditees and they will feel convinced
that the auditor has been objective in his remarks in the report.

2. Reporting methods - Adopting friendly but firm tone in report. It is always possible to disagree
without being disagreeable and to criticise without being critical. The reports should concentrate on
areas that need improvement rather than listing inefficiencies and deficiencies in performance of
auditee.

3. Participative approach - Auditor’s reports have better acceptability if improvements suggested are
discussed with those who have to implement them and made to feel that they have participated in the
recommendations made for improvements.

CA SHUBHAM KESWANI 205

 Operational Audit

It involves evaluating the effectiveness & efficiency of operations. Not a one-time activity should be
conducted at least once in 3 years.

XYZ, a manufacturing unit does not accept recommendations for improvements made by Operational
Auditor. Suggest an alternative way to tackle hostile management.

While conducting operational audit auditor has to come across many irregularities and areas where
improvement can be made and therefore gives his suggestions and recommendations.
These suggestions and recommendations may not be accepted by hostile managers and there may be
cold war between operational auditor and managers. This would defeat purpose of operational audit.

The Participative Approach comes to help of auditor. In this approach auditor discusses ideas for
improvements with those managers that have to implement them and make them feel that they have
participated in recommendations made for improvements. By soliciting views of operating personnel,
operational audit becomes a co-operative enterprise.

This participative approach encourages auditee to develop friendly attitude towards auditors and look
forward to their guidance in more receptive fashion. When participative method is adopted then
resistance to change becomes minimal, feelings of hostility disappear and gives room for feelings of
mutual trust. Team spirit is developed. Auditors and auditee together try to achieve common goal. The
proposed recommendations are discussed with auditee and modifications as may be agreed upon are
incorporated in operational audit report.

With this attitude of auditor, it becomes absolutely easy to implement proposed suggestions as auditee
themselves take initiative for implementing and auditor does not have to force any change on auditee.

Hence, the Operational Auditor of XYZ manufacturing unit should adopt the above mentioned
participative approach to tackle hostile management of XYZ.

Why Operational Audit?

The need for operational auditing has arisen due to inadequacy of traditional sources of information
for effective management of company where management is at a distance from actual operations due
to layers of delegation of responsibility, separating it from actualities in organisation.

Operational audit is considered as a specialised management information tool to fill the void that
conventional information sources fail to fill. Conventional sources of management information are
departmental managers, routine performance report, internal audit reports, and periodic special
investigation and survey. These conventional sources fail to provide information for best direction of
departments. The shortcomings of these sources can be stated as under:

(i) Executives and managers are too preoccupied with implementation of plans and achieving of
targets.
(ii) Managers or their aides are generally relied upon for transmitting information than for booking
for information or for analysing situations.
(iii) The information that is transmitted by managers is not necessarily objective - often it may be
biased for various reasons.
(iv) Conventional internal audit reports are often routine and mechanical in character and have definite
leaning towards accounting and financial information. They are also historical in nature.
(v) Other performance reports contained in annual audited accounts and routine reports prepared by
operating departments have own limitations.

CA SHUBHAM KESWANI 206

(vi) Surveys and special investigations, are very useful but these are at best occasional in character.
Also, they are costly, time consuming and keep departmental key personnel busy during the period
they are on.
Operational vs Internal Audit
The difference in approach of both of these audits is illustrated below:

1. Perception - Traditionally, internal auditors have been engaged in a sort of protective function. They
view and examine internal controls in financial and accounting areas to ensure that possibilities of loss,
wastage and fraud are not there; they check accounting books and records to see, whether internal
checks are properly working and resulting accounting data are reliable.

2. Issues - The basic difference that exists in technique of operational auditing is in auditor’s role in
recommending corrections or in installing systems and controls.
A further distinction lies in attitude and approach to whole auditing proposition. Every aspect of
operational auditing programme should be geared to management policies, objectives and goals.

3. Objectives - Main objective of operational auditing is to verify fulfilment of plans and sound business
requirements as also to focus on objectives and their achievement objectives; operational auditor
should not only have a proper business sense, he should also be equipped with thorough knowledge of
policies, procedures, systems and controls, he should be intimately familiar with business.

Today, however, concept of modern internal auditing suggests that there is no difference in internal
and operational auditing. The modern internal auditing performs both protective as well as constructive
functions.

Qualities of Operational Auditor

1. His knowledge beyond accounting and finance would be scanty and this is reason which should make
him even more inquisitive.

2. He should ask the who, why, how of everything. He should try to visualise whether simpler alternative
means are available to do a particular work.

3. He should try to see everything as to whether that properly fits in business frame and organisational
policy. He should be persistent and should possess attitude of skepticism.

4. He should imbibe collaborative and constructive approach rather than fault-finding approach and
should give feeling that his efforts are to help to attain an improved operation and not merely fault
finding.

5. If auditor succeeds in giving feeling of help and assistance through constructive criticism, he will
be able to obtain co-operation of persons who are involved in operations. Try to develop a team
comprised of people of different backgrounds. The involvement of technical people in operational
auditing is generally helpful.

CA SHUBHAM KESWANI 207

 Objectives of Operational Audit
Ø Appraisal of Controls
Ø Evaluation of Performance
Ø Appraisal of Objectives and Plans
Ø Appraisal of Organisational Structure: Organisational structure provides line of relationships
and delegation of authority and tasks.
In evaluating organisational structure, aspects that may be considered by operational auditor
may be as follows:
(i) Is organisational structure in conformity with management objectives?
(ii) Whether organisational structure is drawn up on basis of matching of responsibility and
authority?
(iii) Whether line of responsibility from top to bottom is clearly discernible from structure?
(iv) Whether delegation of responsibility and authority at each stage is clear and overlapping
are avoided?

Differences between Financial and Operational Auditing

(i) Purpose - The financial auditing is concerned with opinion whether historical information recorded
is correct or not, whereas operational auditing emphasizes on effectiveness and efficiency of
operations for future performance.

(ii) Area - Financial audits are restricted to matters directly affecting appropriateness of presented
financial statements but operational auditing covers all activities that are related to efficiency and
effectiveness of operations directed towards accomplishment of objectives of organization.

(iii) Reporting -The financial audit report is sent to all stockholders, bankers and other persons having
a stake in the Organisation. However, operational audit report is primarily for management.

(iv) End Task - The financial audit has to report findings to persons getting the report as its end
objective, however, the operational auditing is not limited to reporting only but includes suggestions
for improvement also.

To determine whether the system or procedure is meeting current requirements, the following among
other things should be considered:
1. Is the system or procedure designed to promote achievement of company’s objectives, and is it
accomplished effectively?
2. Does the system or procedure operate within framework of organisational structure?
3. Does system or procedure adequately provide methods of control in order to obtain maximum
performance with least expenditure of time and effort?
4. Does system or procedure provide means for effective coordination between one deptt and another?
5. Have all required functions been established?

Q. “In reviewing any System or Procedure, the management auditor must concern himself with its
purpose as well as its design.” Elucidate how you as a management auditor will study system and
procedural functions?
In the study of the systems and procedural functions, the auditor should ask himself:
1. Is the function properly located in organisation?
2. Do the staff personnel have necessary training and experience to perform the work?
3. Has a definite programme been established and has been taken for its attentive accomplishment?
4. Is productivity satisfactory?
“Believe you can & you are halfway there”

CA SHUBHAM KESWANI 208

 Due Diligence

It is process of investigation, performed by investors, into details of a potential investment such as

examination of operations and management and verification of material facts.

Importance
• To confirm that the business is what it appears to be;
• To identify potential ‘deal killer’ defects in target company and avoid bad business
transaction;
• To gain information that will be useful for valuing assets, defining representations and
warranties, and/on negotiating price concessions; and
• To verify that transaction complies with investment or acquisition criteria.

Classification
• Commercial/Operational: Evaluation from commercial, strategic and operational perspectives.
For example, whether proposed merger would create operational synergies.
• Financial: Analysis of books of accounts and other info pertaining to financial matters of
entity.
• Tax: The accountant has to look at tax effect of merger or acquisition.
• Information system: It pertains to all computer systems and related matter of entity.
• Legal: Legal aspects of functioning of Entity are reviewed.
• Environmental Due Diligence: It is carried out in order to study entity’s environment, its
flexibility and adaptiveness to acquirer entity.
• Personnel: to ascertain that entity’s personnel policies are in line or can be changed to suit the
requirements of restructuring.

Scope of Financial Due Diligence

a) Brief history of target Co. & background of promoter
b) Accounting policies : Check if appropriate & see if changed in recent past
c) Review of F.S.
d) Taxation: Tax implications of merger
e) Cash flow
It is important to know if company is able to meet its cash requirements. It is necessary to
check that:
(a) Is the company able to honor its commitments to its trade payables, to the banks, to
government and other stakeholders?
(b) How well is the company able to turn its trade receivables and inventories?
(c) How well does it deploy its funds?
(d) Are there any funds lying idle or is the company able to reap maximum benefits out of the
available funds?
(e) What is investment pattern of company and are they easily realisable?
f) Financial projection: For next 5 years with assumptions & workings
g) Management & employees
h) Statutory compliance: If not legally compliant may have to pay penalty

CA SHUBHAM KESWANI 209

 Hidden Liabilities
• Show cause notice not matured into demand. Maybe material & imp.
• Letters of comfort to Banks & Financial Institutions.
• Tax liab. Under direct & indirect tax
• Long pending sales tax assess.
• Pending final assess. of custom duty
• Agreement to buyback shares at stated price
• Future lease liability
• Unresolved labour litigations

Over-Valued Assets
• Uncollected/uncollectable receivables.
• Obsolete, slow non-moving inventories or inventories valued above NRV
• Underused or obsolete Plant and Machinery and their spares; asset values which have been
impaired due to sudden fall in market value etc.
• Intangible assets of no value
• Litigated assets and property.
• Investments carried at cost though realizable value is much lower.
• Investments carrying a very low rate of income / return.
• Infructuous project expenditure/deferred revenue expenditure etc.

Work approach to DD
• Reviewing & reporting on financials submitted by target Co.
• Assessing the business first hand by a site visit
• Working through the due diligence process with acquisitioning Co. or investor by defining key
areas
• Helping prepare an offer based on completing of due diligence

How to conduct DD?

• Start with open mind. Identify trouble spots & ask for expln.
• Get best team of people. You may hire DD experts.
• Get help in all areas to get 360-degree view of Co.
• Talk to customers, suppliers, business partners, and employees are great resources.
• Take a risk mgt. approach.
• Prepare comprehensive report detailing compliances & substantive risks/issues

Contents of DD Report
• Executive summary
• Intro.
• Background of Co.
• Objective of DD
• Terms of reference & scope of verification
• Brief history of Co.
• Assessment of Financial Liabilities
• Assessment of valuation of assets
• Assessment of Net Worth

CA SHUBHAM KESWANI 210

 Investigation

Basis Investigation Audit

Nature Voluntary Mandatory

Observance of a/c Analytical, involves application of mind Compliance of GAAP,

principles Audit procedures & disclosures

Objective Establish a fact Verify f/s give t&f view of SOF

of entity

Periodicity Not limited by rigid time frame Qtrly, half yearly or annually

Reporting To person on whose behalf investigation To owners of business entity

carried out

Scope Governed by statute/non statutory Scope is wide, for statutory

audit governed by law

Steps in Investigation
1. Determination of objectives and establishment of scope of investigation.
2. Formulation of the Investigation programme.

The investigation programme should be drawn up having regard to:

(a) Nature of business
(b) Structure of business organization
(c) Instructions from client embodying objectives and scope of work
(d) Consequent scope and depth of investigation
(e) Necessity to extend investigation into books and records belonging to others.
(f) Investigator concentrate on areas considered relevant rather than undertaking wide-range
verification.

3. Examination and study of various records by reference to appropriate evidence.

4. Analysis, processing and interpretation of findings.
5. Preparation of report and drawing up of conclusions.

Important issues in mind while preparing his report

Ø Report to not contain anything irrelevant
Ø Every word/expression to be used properly to minimize possibility of diff. interpretation
Ø Facts & conclusions should be linked with evidence
Ø Basis & assumptions to be explicitly stated. Should be reasonable & not in conflict with the
objectives of entity
Ø Report should clearly spell out nature & objective of assignment, its scope & limitations
Ø Opinion in final para of report

Spl issues in investigation

Ø Whether to adopt cent percent verification approach or adopt selective verification
• Depends on circumstances
• Cash defalcation à examine all cash vouchers
• Profitability of concern à adopt selective approach

CA SHUBHAM KESWANI 211

 Ø Whether rely on already audited statement of a/c
• Doubt on audited statement of a/c à no Q of reliance
• Value of business/share/Goodwill à rely on audited materials
Ø Assistance of expert?
• Get written consent of client

Ø Investigation out of disputes & conflicting claims

• Remain above disputes
• Alert of possibilities of info available to be prejudiced
• Requires maturity & experience
Ø Basis of opinion
• Refrain from issuing speculative opinion
• Confine opinion to established facts, nothing more
Ø Retain working papers or not?
• Take representation letter from appointing authority
• Help in correlating facts & events while drafting report

Factors to consider for studying economic & financial position of business:

• Adequacy of fixed & working capital
• Trend of sales & profits in future?
• Whether profit maintained in future would yield adequate return on capital employed?
• Whether business operating at 100% capacity or improvements can be made?

Factors- future maintainability of turnover

• Trend: Past sales increase consistent or fluctuating.
• Marketability: Is it possible to extend sales to new market?
• Political & economic considerations: Are policies of govt likely to extend market of goods to
other countries?
• Competition: Is demand for competitor’s products increasing?

Types of Investigation

Statutory Non-Statutory

Investigation into the Investigation of Investigation on behalf of

affairs of a Company ownership of a Company incoming partner
(Sec 216)
Investigation for valuation of
By inspector through shares of pvt Co.
order of CG (Sec 210)
Investigation of frauds
By SFIO (Sec 212)
Investigation on behalf of bank or
Other Cases financial institution proposing to
advance loan to a co.

Investigation on behalf of
individual or firm proposing to buy
a business

Investigation in connection with

review of profit forecast

CA SHUBHAM KESWANI 212

 Statutory Investigations
Investigation into the affairs of a company (Sec 210)
Where CG is of opinion, that its necessary to investigate into affairs of a company-
a) on receipt of a report of Registrar or inspector;
b) on intimation of a SR passed by a Co. that affairs of the company ought to be investigated or
c) in public interest,
it may order (discretionary) an investigation into the affairs of the company.

Order passed by court or Tribunal requiring investigation à CG shall order investigation into affairs
of Co.

Investigation by SFIO (Serious Fraud Investigation Office) (Sec 212)

Where report states that fraud taken place in Co. à as a result any director, KMP, other officer of
Co. or any other person or entity, has taken undue advantage or benefit (in form of asset, property or
cash or any other manner) à CG may file application before Tribunal for appropriate orders of
disgorgement of such asset, property or cash and holding such director, KMP, other officer or other
person personally liable without any limitation of liability.

Power of Inspector to conduct investigation into affairs of related companies etc (Sec 219)
It provides that an inspector may also investigate, subject to approval of CG, into affairs of—
a) any other body corporate which is, or has at any relevant time been company’s subsidiary or
holding Co, or a subsidiary of its holding Co;
b) any other body corporate which is, or has at any relevant time been managed by any person as
MD or as manager, who is, or was, at relevant time, MD or manager of company;
c) any other body corporate whose BOD comprises nominees of company or is accustomed to act
in accordance with directions or instructions of company or any of its directors; or
d) any person who is or has at any relevant time been Co’s MD or manager or employee.

Evidence from place o/s India: If in course of investigation, application made to competent court in
India by inspector stating that evidence may be available in a country or place o/s India, such court
may issue a letter of request to court or authority in such country or place for seeking such evidence.

Authentication of Report: The report shall be authenticated either by

• seal of the Co. whose affairs have been investigated, or
• by a certificate of a public officer having custody of report, and
such report shall be admissible in any legal proceeding as evidence in relation to any matter contained
in report.

Who can act as inspector: A Body Corporate, FIRM or Other association can’t be appointed as
inspector. Only Individual can be appointed.

MCQ: Inspector not to keep books & papers in custody for more than 180 days.

General approach for investigation under Cos. Act,2013

1. Clarity of Terms of reference: Obtain clarity on TOR in writing.
2. Scope of investigation: Determined on basis of TOR
3. Period of investigation: Based on TOR & Scope
4. Framing of programme: For investigating in systematic manner.
5. Using the work of experts: Engineers, lawyers etc
6. Legal requirements & investigation report: Report should be fair & unbiased

CA SHUBHAM KESWANI 213

 Investigation of ownership of Co
Section 216 of Companies Act, 2013, CG may appoint one or more inspectors to investigate and report
on matters relating to company, and its membership for purpose of determining true persons,
(a) financially interested in success or failure, whether real or apparent, of the company; or
(b) able to control or to materially influence policy of company; or
(c) beneficial interest in shares of a company or who are or have been beneficial owners or significant
beneficial owner of a company.

Investigation on behalf of Incoming Partner

a. History of inception & growth of firm
b. Record of profitability of firm’s business
c. Examination of asset & liability position
d. Orders in hand and quality of clientele
e. Composition & quality of key personnel
f. Reasons for offer of admission
g. Record of capital employed & rate of return
h. Computation of goodwill on admission & retirement

Investigation in Valuation of Shares of Pvt Co.

For equity shares, there are 2 main methods of valuation.

1st method: Value is determined on the basis of net worth of Co.

Net worth is divided by no. of shares comprising equity capital to arrive at value for one share.
When this method is followed, goodwill of business, and non-trading assets (like investments) based on
estimated future maintainable profit, included among the assets to arrive at amount of net worth.

2nd method: Capitalisation of Avg Profits

• Avg profit earned by business during preceding 5 to 7 years is computed.
• On the assumption that same would continue to be earned in future, value of business is
calculated by capitalising it at reasonable rate of interest.
• If rate assumed is high, value of the business would be smaller.
• Correspondingly, it would be high if rate of interest applied is low. A provision of risk factor
and restriction on transfers in value of shares is made by varying the rate of interest applied.
• The rate of return that an investor expects to earn in a business of the type in which the Co.
is engaged, is ascertained from prices of the shares of cos. engaged in a similar business quoted
on stock exchange.
Variety of Frauds

Payroll Frauds – Data Frauds –

•Extra number of employees • Change in computer data
•Extra hours • Destroy, suppress or insert records
•Calculation of net pay by transferring rounding off amount • Using open fields in computerized accounting
to personal account. system
•Not deactivating the retired employees’ IDs
•Fictitious employees/ workers paid salary.

CA SHUBHAM KESWANI 214

 Others –
• Teaming and Lading
• Process houses mixing
Technology related Frauds – Banking related Frauds – inferior quality material to
• Employing hostile Software • Forged Signatures sale good quality material
Prog. or malware attacks • Cheque Frauds - Alteration in amts, • Pilferage and theft in super
• Phishing mails Alteration in a/c titles, Kite flying markets
• Vishing – Voice Mail • Cash lending during working hours • Selling classified
• Smishing - Text messages • Missing notes in bundles information,
• Whaling – Targeted phishing on • Use of same notes bundles by two • Withholding information
high network individuals branches from customer about free
• Card duplications • Wrong posting in other accounts product schemes, discount and
• Stealing confidential data • Misuse of sensitive stationery concession.
• ATM transaction misuse • Enhancement of
• Using PINs of debit card/credit performance
card holder • Taking advantage of disaster
• Advances - inflated stock or natural calamity.
statements, inflated projections, • Trust FDs
forged/duplicate land documents, • Fictitious journal entries to
L/Cs inflate expenses or income.

Investigation on behalf of a Bank/ FI Proposing to Advance Loan to a Company

ü Purpose for which loan is required
ü Schedule of repayment submitted by borrower including assumptions of cash profits & cash
available for repayment
ü Financial standing & reputation of business enjoyed by directors & officers
ü Co. authorised by MOA to borrow money
ü History of growth & development & performance in past 5 years
ü Whether any loan application made to other bank & if so reasons for rejection

To investigate profitability of business to judge accuracy of schedule of repayment furnished by

borrower & value of security in form of assets of business and those which will be created out of
loan, investigating accountant should take under-mentioned steps:

(a) Prepare condensed income statement from Statement of P&L for previous 5 years, showing items
of income and expenses, amounts of gross and net profits earned and taxes paid annually during each
of 5 years. Amount of maintainable profits determined on basis of foregoing statement should be
increased by amount by which these would increase on investment of borrowed funds.

(b) Compute under-mentioned ratios separately to show trend as well as changes that have taken
place in financial position of Co:
(i) Sales to Average Inventories held.
(ii) Sales to Fixed Assets.
(iii) Equity to Fixed Assets.
(iv) Current Assets to Current Liabilities.
(v) Quick Assets (the current assets that are readily realisable) to Quick Liabilities.
(vi) Equity to Long Term Loans.
(vii) Sales to Book Debts.
(viii) Return on Capital Employed.

CA SHUBHAM KESWANI 215

(c) Enter in separate part of statement break-up of annual sales product-wise to show their trend.

Steps involved in the verification of assets and liabilities included in Balance Sheet of borrower
company which has been furnished to Bank
a. Fixed Assets: Gross value, Depreciation, Charge on asset, Revaluation
b. Inventory : Nature & types, if pledged for loan then disclose amt of loan
c. Trade Receivables:
• Debts where credit period not expired
• Debts due within 6 months
• Debts due but not recovered for over 6 months
d. Investments: Date of purchase, cost, nominal & market value
e. Secured & unsecured loans: Details of assets pledged should be disclosed
f. Provision for tax: PY upto which tax assessed
g. Insurance: Schedule of insurance policies
h. Contingent liabilities: Ensure completeness of disclosure

Fraud at operational level employees

(i) Tampering of Cheques/Drafts/On-line payments/receipts: On-line payments generally are
considered a transparent mechanism to prevent the above frauds.
(ii) Off Book Frauds: Fraud perpetrator misappropriates cash before these are recorded in
books or before sale is recorded in books.
(iii) Cash Misappropriation: Cash is misappropriated after accounting entries are already passed
in the books.
(iv) Teeming and Lading: Cash deposits or cheques collected from customers being overlapped
with collections from subsequent customers and amount collected is diverted to personal
A/c. Reconciliation of customer accounts at single point of time and confirmation from
customers for amounts outstanding in their accounts helps in identifying any leakage in
collections.
(v) Fraudulent Disbursements: Issuing or submission of false bills, or personal expense bills
being
converted into official expenses bills.
(vi) Expense Reimbursement Schemes: Multiple expense claims based on duplicate bills or
photostat copies.
(vii) Payroll Fraud: Payment to non-existent employees or in a contractual arrangement inflating
of manpower resources than those actually deployed while billing the client.
(viii) Commission Schemes: The salesman exaggerates sales through fictitious billings to earn
higher commission or alter sales prices of products sold from those stipulated by Co. or
share sales volumes achieved with other employees to share higher commission.

Situations in which frauds can occur:

A. Cash Receipts
(i) Issuing a receipt to payee for full amount collected and entering only part of amount on
counterfoil.
(ii) Showing larger cash discount than actually allowed.
(iii) Adjusting cash sale as credit sale, and raising debit in account of customer.
(iv) Writing off good debt as bad and irrecoverable to cover up amount collected which has
been misappropriated.
(v) Short-debiting customer’s account in ledger with intention to withdraw difference when
full amount payable by him is collected.

CA SHUBHAM KESWANI 216

 Audit procedures:
ü Carbon copies of receipts marked ‘duplicate’, should be scrutinised to confirm that they
are in fact copies of receipts issued earlier.
ü The record of sales of scrap of waste paper, that of collection of rents from labourers
temporarily accommodated in the company’s quarters, that of refunds of amounts
deposited with the electric supply co., or any other Government authorities should be
examined for finding out if any of these amounts have been misappropriated.
ü Cash sales should be vouched in detail.
ü Recoveries from customers and sundry parties should be checked with the copies of
receipts issued to them; deductions made on account of cash discounts should be
reviewed.
ü All withdrawals from the bank should be checked by reference to corresponding entries
in the bank pass book.

B. Inflating cash payment – Cash payment frauds may be in the form of:
(i) Making double payment of invoice or paying false invoice.
(ii) Paying personal expenses out of business by falsifying details. e.g., showing betting losses
as advertisement charges.
(iii) Withdrawing unclaimed credit balances of customers or amounts falsely credited in accounts
of parties.
(iv) Falsely adjusting refund in account of customer and withdrawing credit balance.
(v) Wrong totalling of wage sheets and misappropriating the excess amount withdrawn from the
bank for payment of wages.

Audit procedures:
ü All evidence as regards cash payments made, including acknowledgement by parties, should be
carefully scrutinised.
ü In case where a figure appears to have been erased or altered on receipts issued by party, on
reference to party concerned, actual amount paid to him should be confirmed.
ü All payments by bearer cheques should be examined.
ü The system of recording of wages should be reviewed, for possible over-totalling of wage
sheets, and entries in them of dummy workmen.
ü The system of ordering and receiving goods reviewed to confirm that no payment made in
respect of supplies not received.
ü Confirmations should be obtained from partners or Directors in respect of amounts shown to
have been paid to them.

C. Frauds through suppliers’ ledger –

(i) Adjusting fictitious or duplicate invoices as purchases in accounts of suppliers and
subsequently misappropriating amounts when payments are made to suppliers in respect of
these invoices.
(ii) Suppressing Credit Notes issued by suppliers and withdrawing corresponding amounts not
claimed by them.
(iii) Withdrawing amounts unclaimed by suppliers, for one reason or another by showing that
same have been paid to them.
(iv) Accepting purchase invoices at prices considerably higher than market prices and
collecting excess amount, paid in cash, from suppliers.

CA SHUBHAM KESWANI 217

Audit procedures
ü The Purchase Journal should be vouched by reference to entries in Goods Inward Book and
suppliers’ invoices to confirm that amounts credited to the accounts of suppliers were in
respect of goods, which were duly received and the suppliers’ accounts had been credited
correctly.
ü All suppliers should be requested to furnish statements of their accounts to see whether or
not any balance is outstanding or due so as to confirm that allowances and rebates given by
them have been correctly adjusted and were duly authorized by the authorized person/
officer.
ü Examine system of internal control w.r.t purchase orders and possibilities of collusion with
suppliers.

D. Customers Ledger
(i) Teeming & lading
(ii) Misappropriating amount collected from customer and subsequently adjusting his account
by crediting amount on account of allowance or a rebate for excess price charged.
(iii) Crediting amount received from a customer to account of another customer and
subsequently withdrawing amount wrongly credited.

Audit procedures:
ü Spl attention should be paid to allowances adjusted on account of goods returned or difference
in price
ü To confirm that accounts of customers have been debited in respect of goods supplied to them,
entries in Order Book should be cross-checked with those in Sales Day Book where the same is
kept.
ü The accountant should obtain confirmation of customers in respect of amounts standing in
accounts.
ü Those of them who have no balance in accounts should be requested to confirm statement of
their account (which should be sent to them) for ascertaining that the entries shown therein
were genuine.

E. Inventory Fraud
• Employees remove goods from premises
• Theft of goods concealed by writing them off
• Inventory records manipulated by employees
• Inflating quantities issued for production for defalcating raw material

Verification Procedure for Defalcation of inventory - Such thefts usually are possible through collusion
among no. of persons. Therefore, for their detection, entire system of receipts, storage and despatch
of all goods, etc. should be reviewed to localise the weakness in system.

The determination of factors which have been responsible for theft and establishment of guilt would
be difficult in the absence of:
(a) a system of inventory control, and existence of detailed record of the movement of inventory, or
(b) availability of sufficient data from which such a record can be constructed.

The step in such an investigation is to establish the different items of inventory defalcated and their
quantities by checking physically the quantities in inventory held and those shown by Inventory Book.

CA SHUBHAM KESWANI 218

Defalcations of inventory, sometimes, also are committed by mgt, by diverting a part of production
and the consequent shortages in production being adjusted by inflating the wastage in production;
similar defalcations of inventories and stores are covered up by inflating quantities issued for
production.

For detecting such shortages, investigating accountant should take assistance of an engineer. For that
he will be more conversant with factors which are responsible for shortage in production and thus will
be able to correctly determine the extent to which the shortage in production has been inflated.

In this regard, guidance can also be taken from past records showing the extent of wastage in
production in the past. Similarly, he would be able to better judge whether the material issued for
production was excessive and, if so to what extent.

The per hour capacity of the machine and the time that it took to complete one cycle of production,
also would show whether the issues have been larger than those required.

Investigation on behalf of an Individual or Firm Proposing to Buy a Business:

A. Proprietary concerns or partnerships

ü Reasons for sale & effect on turnover & profits
ü Length of lease
ü Unexpired period of patents
ü Age & prospects of employees continuing
ü Valuation of Goodwill

B. Ltd Co.
ü Auth & issued share capital
ü Uncalled liability on shares
ü Capital divided in classes à rights of each class
ü Mortgage or charge on assets à registrar of charges
ü Price at which shares offered
• Public co -> quoted price
• Pvt co -> valuation

Investigation in connection with review of Profit/Financial Forecasts

Investigations which involve examination of future profits like,

(1) Profit reports can be required as part of general investigation into purchase of a business or,

(2) By banks and financial institutions with regard to project cash flow and profitability statements
for appraisal of loan applications submitted by the intending borrowers.
• All forecasts depend on nature of business with its numerous and substantial uncertainties.
• Therefore, such forecasts are not capable of verification in same way as F.S. which present results
of a completed accounting period.
• Normally, such situations involve special review as these depart from auditor’s traditional role of
expressing an opinion in relation to past events.

CA SHUBHAM KESWANI 219

 Forensic Audit

Particulars Other Audits Forensic Audit

Objectives Express an opinion as to Whether fraud has actually taken
‘True & fair’ presentation place in books
Techniques Substantive & compliance Investigative, substantive & in-depth
checking
Period Accounting period No such limitation
Verification of stock, Relies on mgt certificate Verification of suspected/selected
estimation realizable value of items where misappropriation
assets, provisions, liability etc expected
Off balance sheet items (like Vouch arithmetic accuracy Regulatory & propriety of these
contracts etc) transactions & contracts examined
Adverse findings, if any Negative or qualified Legal determination of fraud impact
opinion & identification of perpetrators

Need for forensic Audit

1. Fraud Detection: Investigating and analyzing financial evidence, detecting financial frauds and
tracing misappropriated funds

2. Computer Forensics: Developing computerized applications to assist in recovery, analysis and

presentation of financial evidence.
3. Fraud Prevention: Either reviewing internal controls to verify their adequacy or providing
consultation in development and implementation of internal control framework aligned to
organization's risk profile.

4. Providing Expert Testimony: Assisting in legal proceedings, including testifying in court as

expert witness and preparing visual aids to support trial evidence.

Services rendered by Forensic Auditors

Ø Crafting questions to be posed
Ø Responding to questions posed
Ø Identifying individuals to be most knowledgeable of facts
Ø Identifying documents to be requested and/or subpoenaed
Ø Evaluating produced documentation and information for completeness
Ø Analysing produced records and other information for facts
Ø Identifying and preserving key evidence
Ø Identifying alternative means to obtain key facts and information

Areas where services of Forensic Audit are in great demand in following areas
• Criminal Investigation: Matters relating to financial implications services of forensic
accountants are availed of. Report of accountants is considered in preparing and presentation
as evidence.
• Professional Negligence Cases: Professional negligence cases are taken up by forensic
accountants. Non confirmation to Generally Accepted Accounting Standards (GAAS) or
noncompliance to auditing practices or ethical codes of any profession, Forensic Auditors are
needed to measure loss due to such professional negligence or shortage in services.

CA SHUBHAM KESWANI 220

 • Arbitration service: Forensic accountants render arbitration and mediation services for
business community. Their expertise in data collection and evidence presentation makes them
sought after in this specialized practice area.

• Fraud Investigation & Risk/Control Reviews: Forensic accountants render such services both
when called upon to investigate specific cases as well for review of or implementation of
Internal Controls. Another area of significance is Risk Assessment and Risk Mitigation.

• Settlement of Insurance claims: Insurance cos engage forensic accountants to have accurate
assessment of claims to be settled. In case policyholders seek help of forensic accountant when
they need to challenge claim settlement as worked out by insurance companies. A forensic
accountant handles claims relating to consequential loss policy, property loss due to various
risks, fidelity insurance and other types of insurance claims.

• Dispute settlement: Business firms engage forensic accountants to handle contract disputes,
construction claims, product liability claims, infringement of patent and trademarks cases,
liability arising from breach of contracts and so on.

Process of forensic Accounting

1. Initialization:
Ø Clarify and remove all doubts as to the real motive, purpose and utility of assignment.
Ø It is helpful to meet client to obtain understanding of important facts, players and
issues at hand.
Ø A conflict check should be carried out as soon as relevant parties are established.
Ø Carry out a preliminary investigation prior to development of detailed plan of action.
This will allow subsequent planning to be based upon a more complete understanding of
issues.

2. Develop Plan: Consider the knowledge gained by meeting with client and carrying out initial
investigation and set out objectives to be achieved and methodology to be utilized to
accomplish them.

3. Obtain relevant evidence: The evidence should be sufficient to ultimately prove identity of
fraudster(s), mechanics of fraud scheme, and amount of financial loss suffered.

4. Perform the analysis:

The actual analysis performed will be dependent upon the nature of the assignment and may
involve:
• calculating economic damages;
• summarizing a large number of transactions;
• performing present value calculations utilizing appropriate discount rates;
• performing a regression or sensitivity analysis;
• utilizing a computerized application such as a spread sheet, data base or computer model
• utilizing charts and graphics to explain the analysis.

5. Reporting
• Issuing report is final step of fraud audit. Auditors will include info detailing fraudulent
activity, if any has been found.
• The client will expect report containing findings of investigation, including summary of
evidence, a conclusion as to amount of loss suffered as result of fraud and to identify those
involved in fraud.

CA SHUBHAM KESWANI 221

 • The report may include sections on nature of the assignment, scope of investigation, approach
utilized, limitations of scope and findings and/or opinions.
• The report will include schedules and graphics necessary to properly support and explain
findings.
• The report will also discuss how fraudster set up the fraud scheme, and which controls, if any,
were circumvented.
• It is also likely that investigative team will recommend improvements to controls within the
organization to prevent any similar frauds occurring in future.
• The forensic auditor should have active listening skills which will enable him to summarize
facts in report. It should be kept in mind that report should be based on facts assimilated
during the process and not on the opinion of person writing the report.

6. Court Proceedings: Evidence gathered will be presented in court proceedings & team members
may be called.

Characteristics of Forensic Auditor

Out of the Box Thinking ,Creativity, Curiosity, Confidence, Discretion, Detail oriented, Objectivity &
Credibility
Skills of Forensic Auditor
Audit stds, Accounting & business reporting systems, Criminology, Data Analytics, Evidence
Gathering, IT
Forensic Audit Techniques
(I) General Audit Techniques:
• Testing defenses: A good initial forensic audit technique is to attempt to circumvent these
defenses yourself. The weaknesses you find within organizations control will guide you down sea path
taken by suspected perpetrators. This technique requires you to attempt to put yourself in shoes and
think like your suspect.

(II) Statistical & Mathematical Techniques:

• Trend Analysis:
Ø Businesses have cycles and seasons much akin to nature itself.
Ø An expense or event within business that would be analogous to snowy day in middle of
summer is worth investigating.
• Ratio Analysis:
Ø Another useful fraud detection technique is calculation of data analysis ratios for key numeric
fields.
Ø Like financial ratios indicate financial health of company, data analysis ratios report on fraud
health by identifying possible symptoms of fraud.

(III) Technology based /Digital Forensics Techniques:

Ø Every transaction leaves digital footprint in today's computer-driven society.
Ø Close scrutiny of relevant emails, accounting records, phone logs and target company hard
drives is requisite facet of any modern forensic audit.
Ø Before taking steps such as obtaining data from email etc. take appropriate legal advice so
that it doesn’t amount to invasion of privacy.
Ø Digital investigations can become quite complex and require support from trained digital
investigators.
Ø However, many open-source digital forensics tools are available to assist in phase of
investigation.

CA SHUBHAM KESWANI 222

(IV) Computer Assisted Auditing Techniques (CAATs):
Ø These are computer programs that auditors uses to process data of audit significance
contained in client’s information systems, without depending on him.

(V) Generalised Audit Software (GAS):

Ø It is class of CAATs that allows auditors to undertake data extraction, querying, manipulation,
summarization and analytical tasks.
Ø It focuses on fully exploiting the data available in entity’s application systems.
Ø It support auditors by allowing them to examine entity’s data easily, flexibly, independently
and interactively in data-based auditing.
Ø Using GAS, auditor can formulate range of alternative hypotheses for particular potential
misstatement in subject matter and then test those hypotheses immediately.
Ø “What if” scenarios can be developed with results and auditors can examine generated report
rapidly. Currently, latest versions of GAS include Audit Command Language (ACL), Interactive
Data Extraction and Analysis (IDEA) and Panaudit.

(VI) Common Software Tool (CST):

Ø Due to shortcomings of GASs, CSTs have become popular over period. Spreadsheets (like MS
Excel, Lotus, etc.), RDBMS (like MS Access, etc.) and Report writers (like Crystal reports,
etc.) are few examples of CSTs.
Ø Their widespread acceptability is due to its instant availability and lower costs.
Ø While spreadsheets may be extremely easy to use due to its simplicity and versatility, other
CSTs may need some practice.

(VII) Data Mining Techniques:

Ø It is a set of assisted techniques designed to automatically mine large volumes of data for
new, hidden or unexpected information or patterns.
Ø They are categorized in three ways: Discovery, Predictive modeling and Deviation and Link
analysis.
Ø It discovers usual knowledge or patterns in data, without predefined idea or hypothesis about
what pattern may be, i.e. without any prior knowledge of fraud.
Ø It explains various affinities, association, trends and variations in the form of conditional
logic.

(VIII) Laboratory Analysis of Physical and Electronic Evidences: Use of Computer Forensics &
protection of evidence.

CA SHUBHAM KESWANI 223

 Sample Table of Contents of a Forensic Audit Report may include following:
1. EXECUTIVE SUMMARY
(Background, Origin of Audit, Audit Objective, Proposed Audit Outputs, Audit Implementation
Approach)

2. RISK ANALYSIS
Internal Environment Risk & External Environment Forces

3. AUDIT PROCESS
3.1. Preliminary understanding of scope and incident coverage
(i) Identification of all related data elements
(ii) Preparation of a List of "persons of interest" for interview
(iii) Obtain management approval for scope
3.2. Collect Evidence
3.3. Conduct Interviews
3.4. Analyse findings
3.5. Validate Inferences and conclusions

4. EVIDENCE OF RISK EVENTS

(Conflicts of interest, Bribery, Extortion, Theft, Fraudulent transactions, Inventory frauds, Misuse
of assets, Financial Statement frauds)

5. AUDIT RECOMMENDATIONS
5.1 Logical Framework Approach
5.2 Preconditions and Risks

6. GOVERNANCE ON RECOMMENDATION IMPLEMENTATION

6.1 Stakeholders
6.2 Budget Consideration

“The secret of getting things is to ACT”

CA SHUBHAM KESWANI 224

 Peer Review
Definition:
“Peer Review” means
Ø an examination and review of systems and procedures
Ø to determine whether same have been put in place by Practice Unit (PU)
Ø for ensuring quality of assurance services as envisaged by
Ø Technical, Professional and Ethical (TPE) Stds applicable including other regulatory
requirements and
Ø whether same were consistently applied during period under review.”

Objectives of Peer Review

The main objective to ensure that in carrying out assurance service assignments, members:
• comply with TPE Stds including other regulatory requirements &
• have in place proper systems including documentation, to amply demonstrate quality of
assurance services.
Thus, primary objective is not to find out deficiencies but to improve quality of services rendered by
members.

Scope of Peer Review

(i) Compliance with Technical, Professional and Ethical Standards.

(ii) Quality of reporting.

(iii) Systems and procedures for carrying out assurance services.

(iv) Training programmes for staff (including articled and audit assistants) concerned with
assurance functions, including availability of appropriate infrastructure.

(v) Compliance with directions and / or guidelines issued by Council to Members, including Fees
to be charged, Number of audits undertaken, register for Assurance Engagements
conducted during year.

(vi) Compliance with directions and / or guidelines issued by Council relating to article assistants
and / or audit assistants, including attendance register, work diaries, stipend payments.

Statement of Peer Review aims to confine scope of review to preceding 3 years since this would
establish the consistency or deviations, if any, in respect of procedures followed by PU.

As per the Statement, Technical, Professional and Ethical Standards – means

(i) Accounting Standards issued by ICAI applicable for entities other than companies under
Companies Act, 2013;
(ii) Accounting Standards prescribed under section 133 of Companies Act; 2013 by CG based
on recommendation of ICAI in consultation with NFRA
(iii) Ind AS prescribed under section 133 of Companies Act 2013 by CG based on
recommendation of ICAI in consultation with NFRA
(iv) Standards
(v) Framework for preparation and presentation of F.S., Preface to Standards on Quality
Control, Auditing, Review, Other Assurance and Related Services and Framework for
Assurance engagements;
(vi) Provisions of relevant statutes and / or rules or regulations which are applicable in context
of specific engagements being reviewed including instructions, guidelines, notifications,
directions issued by regulatory bodies as covered in scope of assurance engagements.

CA SHUBHAM KESWANI 225

 Assurance Engagement does not include:
(i) Management Consultancy Engagements;
(ii) Representation before various Authorities;
(iii) Engagements to prepare tax returns or advising clients in taxation matters;
(iv) Engagements for the compilation of financial statements;
(v) Engagements solely to assist client in preparing, compiling or collating information other
than financial statements;
(vi) Testifying as an expert witness
(vii) Providing expert opinion on points of principle, such as Accounting Standards or
applicability of certain laws, on basis of facts provided by client; and
(viii) Engagement for Due diligence.

Types of Entities
Level 1 : (Once in 3 years*)
PU which has undertaken audit of any of the below entities:
• SCA of any Banks or Insurance Cos.
• CSA of PSU & Central Coop societies with turnover > 250 Cr. Or NW > 5 Cr.
• SA of AMCs/ MFs
• Listed Enterprises (India or o/s India) whether equity/debt
• Body Corp. including trust covered under public interest entities
• NBFC with deposits >= 100 Cr
• Stat. Audit of Entities preparing the F.S. as per Ind AS
• Entities raised funds from public, banks or financial institutions of over 50 Cr
• Entities raised donations/contributions over 50 Cr
• N.W. > 100 Cr or turnover of 250 cr or above
• Funding by CG/SG of over 50 Cr

Level II: Other than level 1 (Once in 4 years*)

*If board decides à conducted at shorter intervals

Any Practice Unit not selected for Peer Review, may suo moto apply to Board for conduct of Peer
Review. Board shall act upon same within 30 days from date of receipt of such request.
An auditee (Client) may request Board for conduct of Peer Review of its auditor (Practice Unit). Board
shall act upon same within 30 days from date of receipt of such request.

Peer Review Board

• Max 12 members, >=50% from Council of ICAI
• Chairman & VC from council (maybe rotated every year)
• Term 2/3rd members à 3 years or Council term (earlier)
• Casual Vacancy filled by council
• Member of Disciplinary board/committee not be member of Board
• Quorum:
ü 1/3rd members but not less than 3
ü Include Chairman (VC in absence)
ü Atleast once in every calendar quarter

Eligibility of becoming Peer Reviewer

• Member in practice at least 7 yrs of experience.
• Moved from Industry à Practice then 10 yrs Industry + 3 yrs exp. in practice
• Requisite training & test
• Furnish declaration as prescribed by Board + sign Declaration of Confidentiality

CA SHUBHAM KESWANI 226

 • Not eligible if:
ü Disciplin. Action pending against him
ü Guilty of misconduct by Council/BOD/DC
ü Convicted by Comp. court within or o/s India offence involving Moral Turpitude &
imprisonment
ü Partner or personnel has obligation or conflict of intt with PU
ü He has undergone training/articleship under any of the partner of Practice Unit
• Reviewer shall not accept prof assignment from PU 2 yrs from/before date of appointment

Qualified Assistant
• CA + No disqualification u/s 8 or 21 of CA Act 1949
• Name intimated to Board & PU b4 P/R
• Sign Declaration of Confidentiality
• No direct interface with PU or Board
• Should be from firm of reviewer as partner or Paid Asst as per records of ICAI

Approach of Peer Reviewer

a) Gain understanding of Engg letter that defines scope & nature of assurance engg.
b) No of assurance engagements to be selected requires prof judgment based on replies of
questionnaire & size of PU
c) The PU may have policies and procedures for accepting particular engg. Check compliance with
such P&P.
d) Reviewer may follow combination of compliance & substantive procedures throughout the
process.
e) Evaluating records consider following:
ü Any significant issues, matters, problems, arose during engg have been appropriately
considered, resolved & documented
ü Evidence & reasonableness of conclusion
ü Significant decisions, prof judgment, resolution of significant matters documented

Obligations of Practicing Unit (PU)

i) Produce or allow access to record, doc or register maintained by PU
ii) Provide expln or further particulars/info.
iii) All assistance
iv) If info not in legible form à PU will translate to English/hindi à PU shall be responsible
and accountable for accuracy and truthfulness of translation so provided.

Obligation of Reviewer
• The reviewer shall not take PU’s client’s file or records examined by him
• Complete review in prescribed time & submit report to Board
• The Reviewer shall document all his working papers and submit a copy of his working papers to
the Board, if called for by the Board within 18 months of submission of Review Report.

Peer Review Process

Selection of Practice Unit(PU) & appointment of Reviewer (7 Days)

(i) Notification to PU : PU which has been selected for Peer Review shall be notified by Board.

(ii) A detailed declaration cum questionnaire in the form approved by Board shall be submitted by PU
within 7 days from date PU has been notified by Board so that Reviewer to be allotted from Panel of
3 reviewers can be identified by Board as per declaration cum questionnaire submitted by PU.

CA SHUBHAM KESWANI 227

(iii) Name of three Reviewers shall be recommended by Board to Practice Unit so selected.

(iv) PU shall select one out of three Reviewers & intimate to Board within 7 days of receipt of names.

(v)The Board shall intimate Reviewer so selected and seek consent within 7 days.

Planning:

i)Questionnaire: On intimation given by Board of Reviewer’s consent, PU shall within 2 days furnish
following info to reviewer:
Proceedings against PU or partners or qualified assistants during 3 yrs preceding period of review i.e.
till date of submission of questionnaire

ii) Information to be furnished by Peer Review Board: Board shall call for relevant infor. from the
UDIN Directorate and may share concerned details with Peer Reviewer which shall form part of Peer
Review.

Selection of sample by Reviewer:

(a) The Reviewer shall within 7 days of receiving info. from Practice Unit select sample of assurance
services that he would like to Review and intimate the same to PU & PRB.
(b) The Reviewer may also seek further / additional clarification from PU on info furnished / not
furnished.
(c) The Reviewer shall plan for on–site Review visit or initial meeting in consultation with Practice Unit.
Reviewer shall give PU at least 5 days’ time to keep ready necessary records of selected assurance
services.
(d) Reviewer and PU shall mutually co-operate and ensure that entire Review process is completed
within 60 days from date of notifying PU about selection for Review.

Execution
Onsite Review: This on-site Review should not extend beyond 7 working days based on size of PU.

Compliance Review- General Controls

• Independence
• Maintainence of professional skills & stds
• Outside consultation
• Staff recruitments, Supervision & Developments
• Office admin

Selection of Assurance Service Engagements for Review:

(a) The no. of assurance service engagements to be reviewed shall depend upon:
¨ The SQCs generally prevailing;
¨ The size and nature of assurance engagements undertaken by PU.
¨ The methodology generally adopted by PU in providing assurance services.
¨ The no. of partners / members involved in assurance service engagements in PU;
¨ The no. of locations / branch offices of PU;
The Fees charged / received / GST paid by PU.

(b) From initial sample selected at planning stage, Reviewer, in consultation with Peer Review
Board, may reduce or enlarge initial sample size of assurance service engagements for Review.

CA SHUBHAM KESWANI 228

 Review of Records
Compliance Approach: To check controls that audit is performed as per TPE Stds
Following areas to be considered:-
• Assurance services records for administration
• Review & evaluation of system of Internal Controls
• Substantive tests
• Financial Statements Presentation & disclosure
• Assurance services conclusion
• Assurance services Reporting

Substantive Approach: Review of workpapers to check work done as per TPE Stds

Reporting
ü Before making report to Board communicate findings to PU if systems/procedures are deficient
or he needs clarification
ü PU shall reply back within 5 days
ü If reviewer satisfied à submit P/R Report to Board + initial findings + response of PU (A Copy
to PU)
ü Not satisfied à Modified report to Board + Initial findings + response of PU (Copy to PU)
ü Follow on Review after 1 year (maybe reduced to 6 months) from date of issue of MR

Peer Review Certificate

On Receipt of Peer Review Report Board shall within 3 months
• Issue a Peer Review Certificate to PU mentioning validity period.
• Inform PU Certificate can’t be issued with reasons + inform due date of follow on review

PU can’t continue with expired certificate and all docs will be invalid if signed in intervening period à
so PU should submit docs & get PR completed 1 month before expiry

Inherent Limitations of Peer Review

ü The reviewer conducts review in accordance with Statement on Peer Review.
ü The review would not necessarily disclose all weaknesses in compliance of technical standards
and maintenance of quality of assurance services since it would be based on selective tests.
ü As there are inherent limitations in effectiveness of any system of quality control which
happens to be subject-matter of review, departure from system may occur and may not be
detected.

Difference between Peer Review & Quality Review

Peer review is review of systems and procedures of audit firm. Although sample audit files are
inspected by peer reviewer, it is done for purpose of testing effectiveness of systems and procedures.
Intention is not to find faults but help the firm develop effective systems. It is kind of mentoring
process. Peer review is part of activities of ICAI aimed at improving quality of service.

In contrast, quality review is supposed to act as deterrent. Quality Review Board (QRB) is constituted
by CG and is independent of ICAI. As per Sec 28A of CA’s Act, CG has authority to constitute QRB
which carries out supervisory and disciplinary functions. Quality review normally pertains to one
particular audit conducted by audit firm. Main objective is to find errors or inadequacies committed
by auditor. Serious errors lead to disciplinary action against member.

“If you get Tired, learn to Rest not to Quit”

CA SHUBHAM KESWANI 229

 Quality Review

‘Quality means doing it right when no one is looking.’ Henry Ford

Examples of Imp areas as per Quality Review Report 2018-19 in accordance with SQC-1 are:
• Whether audit firm establishes and implements policies and procedure on all element of
system of quality control
• Whether EQCR review at appropriate time for planning audit, significant audit judgement, and
expressions of audit opinion.
• Whether audit firm assigns person responsible for monitoring system of quality control with
appropriate experience & sufficient and appropriate authority.
• Whether audit firm obtain, at least annually, confirmation letter concerning compliance with
policies and procedure for maintenance of independence from all person required to maintain
independence.
• Whether audit firm perform independence confirmation procedure before acceptance and
continuance of audit engagement, and when issuing auditor’s report appropriately confirms
there was no change in status of independence.
• Whether audit firm develop and provides education/ training program that fully take into
account knowledge, experience, competence and capabilities of professional staff.

The scope & objective of quality review includes:

• Examining whether Stat auditor has ensured compliance with applicable technical stds and
other professional and ethical stds and relevant guidance.
• Examining whether Statutory Auditor has ensured compliance with relevant laws and
regulations as required under applicable audit std.
• Examining whether Audit firm under review (AFUR) has implemented system of quality control
with reference to applicable quality control stds.
• Examining whether there is no MM of assets and liabilities at reporting date in selected
entity.

Meaning of Technical Std as per Quality Review Board (QRB)

• Preface to Statements of A/C Std;
• Preface to Standards on Quality Control, Auditing, Review, Other Assurance and Related
Services;
• The a/c std notified under sec 133 of Cos Act, 2013;
• The A/C Std issued by ICAI;
• The FFPPFS issued by ICAI; (FFPPFSà Framework for Preparation & Presentation of FS)
• The applicable Quality Control and Standards on Auditing issued by ICAI and notified under
statute;
• The Statements on Auditing issued by ICAI;
• The Notifications/Directions/Guidelines issued by ICAI
• Other relevant L&R (Legal & Regulatory) requirements which include Code of Ethics &
Guidance Notes issued by ICAI

QRB Composition
• CP & 10 other members (CG nominates CP & 5 members, other 5 by Council ICAI)

CA SHUBHAM KESWANI 230

Functions of QRB
• Make recommendations to Council w.r.t quality of services of members
• Review quality of services provided by members
• To guide members of ICAI to improve quality of services and adherence to various statutory
and other regulatory requirements

QRB to review audit of Cos. under NFRA applicability only if referred by NFRA. For others it can do
suo moto.

Powers of QRB
• On its own or through spl arrangement with ICAI, evaluate quality of work of members
• Lay down evaluation criteria for evaluating the services of members
• Call for info from members, ICAI, Council, Clients etc.
• Invite experts for expert/technical advice or opinion
• Make recommendations to council to guide members to improve quality of service

Quality review excludes Internal/Tax/GST & other spl purpose audits. Also excludes employment
services.
Selection of Audit Firms (Criteria)
• Other than those covered by NFRA Rules
Ø risk based selection including regulatory concerns pointing towards stakeholder risk
Ø on account of being part of a sector identified as being susceptible to risk on basis of
market intelligence reports.
Ø reported fraud or likelihood of fraud.
Ø serious a/c irregularities in the f/s highlighted by the media and other reports
Ø major non-compliances under relevant statutes highlighted in past reviews
• Joint Audits à All joint auditors maybe reviewed
• Also review firms if recommendation by RBI, SEBI, IRDA, MCA, NFRA
• Not consider complaints by others à dealt by CA Act 1949

Quality Review Cycle

The following quality review cycle of Audit firms may be followed generally or as maybe decided by
Board:
• Once in 3 years for Audit firms having 20 or more Partners
• Once in 4 years for Audit firms having 10 or more but less than 20 Partners
• Once in 5 years for Audit firms having less than 10 Partners.
Upto 3 engagements may be selected by QRB in a cycle. If no adverse findings in past review then
only 1.
If adverse finding in previous review à then >3 also possible.

Criteria for Technical Reviewers

• Min 15 yrs of post qualification exp & practicing
• Atleast signed 3 stat audits as CSA of Bank/public ltd cos/Govt cos/Pvt ltd cos with t/o >= 50
cr (last 10 yrs)
Out of 3 one must be other than pvt
• No disciplinary proceedings under CA Act 1949
• Not member of QRB/ICAI Council/ Regional council/ Branch comm.

Submit 6 annual declarations along with relevant evidences, to QRB regarding participation in training
workshops/programmes.

CA SHUBHAM KESWANI 231

 Stages of QR Assignments
• QRB selects Audit Firm and audit file for review and identifies TR to conduct Quality Review.
• QRB sends Offer Letter of Engagement to TR.
• TR conveys his acceptance of Letter of Engagement to QRB by sending necessary declarations
for meeting eligibility conditions and furnishing statement of confidentiality by himself and his
assistant/s.
• QRB intimates AFUR about proposed Quality Review. QRB also sends copy of intimation letter
to TR and provides them contact details of each other for further communication.
• TR sends specified QR Questionnaire to AFUR for filling-up. He also calls for additional info
from AFUR, if reqd.
• TR & his team carry out Quality Review by starting off-site review by making proper planning
for review and then on-site visiting office of AFUR by fixing date as per mutual consent
ensuring that review exercise gets completed within specified time.
• On completion of on-site review, TR to send preliminary report to AFUR. TR shall send a copy
of preliminary report to QRB as well.
• AFUR to submit representation on preliminary report to TR and TR to immediately send reply
of AFUR to QRB.
• TR to submit final report along with copy of Annual report of entity for year under review, to
QRB in specified format, on his letterhead, duly signed and dated. In addition, also send copy
of final report to AFUR, requesting them to send final reply thereon to QRB within 7 days of
receipt of final report. AFUR shall also send a copy of their final reply to TR.
• AFUR to submit to QRB their reply on final report and feedback regarding experience of quality
review.
• Upon receipt of final reply from AFUR, TR shall submit to QRB within next 7 days a summary
of his findings, containing findings, technical requirements, final reply of AFUR and final
comments thereon.
• QRG to consider report of TR and responses of AFUR and make recommendations to QRB. QRG
may also call for additional details/information, if reqd, from TR/AFUR or issue such directions
as it may deem appropriate, enabling to assess quality of audit and reporting by AFUR.
• QRB to consider report and recommendations of QRG and decide further course of action.

Composition Of Review Team

QR Team headed by TR + upto 5 assistants, No firm of CA be a member.

Independence & Qualification of Technical Reviewers

• No discipl. Proceedings under CA Act 1949
• He/ firm/network firm not stat auditor of Co. or rendered other service in last 3 FY or
thereafter
• He/ firm/network firm no association with AFUR last 3 FY or thereafter
• Comply with condn of Sec 141(3) of Cos Act 2013 w.r.t review of stat audit (not disqualified)
• Not belong to city/region of HO of AFUR

Independence of Assistant (Qualified Assistance)

• He shall be CA;
• Not disqualified under CA Act 1949;
• Sign statement of confidentiality;
• No direct interface either with audit firm under review (AFUR) or Board;
• Should be working with them for at least one year as member/ partner in CA firm;
• Not associated with AFUR and concerned entity, whose audit is being reviewed, last 3 FY/After.

CA SHUBHAM KESWANI 232

 • No disciplinary proceeding under CA Act, 1949 pending against him or any disciplinary action
under CA Act, 1949 / penal action under any other law taken/pending against him during last 3
FY/after;
• Not member of current QRB/ICAI’s Central Council/Regional Council/Branch level Mgt
Committee; and
• He should not himself be empanelled as TR with Quality Review Board.

Situations where Technical Reviewer can Qualify Quality Review Report

A reviewer may qualify report due to one or more of the following:
• non-compliance with technical standards;
• non-compliance with relevant laws and regulations;
• quality control system design deficiency;
• non-compliance with quality control policies and procedures;

Basic Elements of Quality Review Report

(a) Elements relating to audit quality of companies:
i. A ref. to scope and period of review of audit firm conducted along with limitations on scope.
ii. A statement indicating instances of lack of compliance with T/P/E stds.
iii. A statement indicating the instances of lack of compliance with relevant laws and regulations.

(b) Elements relating to quality control framework adopted by audit firm in conducting audit:
i. An indication whether AFUR has implemented system of quality control with ref. to quality control
Stds.
ii. A statement indicating that system of quality control is responsibility of AFUR.
iii. An opinion on whether AFUR's system of quality control is designed to meet requirements of quality
control stds for attestation services and whether it was complied with during period reviewed to
provide reasonable assurance w.r.t complying with T/P/E stds, other guidance and laws and regulations
in all material respects.
iv. Where reviewer concludes modification in report is necessary, description of reasons with
suggestions.
v. A reference to preliminary report.
vi. An attachment which describes quality review including info on planning and performing the review.

Actions that maybe recommended by QRB

(a) Make recommendations to Council of ICAI u/s 28B(a) of CA Act, 1949 for referring case to
Director (Discipline) of ICAI for consideration and necessary action under CA Act, 1949.
(b) Issue advisory and guidance to the AFUR u/s 28B(c) of CA Act, 1949 for improvement in quality of
services and adherence to various statutory and other regulatory requirements. A copy of such
advisory may also be sent to ICAI for information.

(c) Inform details of non-compliance to regulatory bod(y)/ies relevant to entity as may be decided by
Board.

(d) Intimate AFUR as to findings of Report as well as action initiated as above.

(e) In case of review arising out of reference received from regulatory body, inform results of review
and details of action taken to the concerned regulatory body.

(f) Consider matter complete and inform AFUR accordingly.

CA SHUBHAM KESWANI 233

 Type of Report to be issued
In deciding on type of report to be issued, reviewer should consider evidence obtained and should
document overall conclusions w.r.t year being reviewed in respect of following matters:
(a) whether AFURs system of quality control has been designed to provide firm with reasonable
assurance of complying with technical standards , other relevant guidance and other relevant laws and
regulations.
(b) whether personnel of AFUR complied with such policies and procedures
(c) whether independence of AFUR is maintained in conducting audit.
(d) whether AFUR has instituted adequate mechanism for training of staff.
(e) whether AFUR ensures availability of expertise and/or experienced individuals for consultation.
(f) whether skill and competence of assistants are considered before assignment of attestation
engagement.
(g) whether progress of attestation service is monitored and work performed by each assistant is
reviewed by service in-charge and necessary guidance is provided to assistants.
(h) whether AFUR has established procedure to record the audit plan, NTE of auditing procedures
performed and conclusions drawn from evidences obtained.
(i) whether AFUR maintains audit documentation as per relevant standards.
(j) whether AFUR verifies compliance with laws and regulations to the extent it has material effect
on financial statement.
(k) whether internal controls within AFUR contribute towards maintenance of quality of reporting.

“Don’t stop until you’re Proud”

CA SHUBHAM KESWANI 234

 Direct Tax Audit

Audit Report
Form 3CA: Person carrying Business/profession + reqd audit under any other law (Eg Company)
Form 3CB: Person carrying business/profession but no audit reqd by other law
Form 3CD: Particulars to be furnished with Audit Report

Audit of Public Trust

An auditor should conduct routine checking during course of audit of public trust, in following
manner:
(i) Check books of account and other records having regard to system of accounting and internal
control;
(ii) Vouch the transactions of trust to ensure that:
• transaction falls within ambit of trust;
• the transaction is properly authorized by trustees or other authority permissible in law;
• all incomes due to trust have been properly accounted for on basis of system of accounting
followed;
• all expenses and outgoings appertaining to trust have been recorded on basis of system of
accounting;
• amounts shown as applied towards object of trust are covered by objects of trust as
specified in the document governing the trust.
(iii) Obtain trial balance on closing date duly certified by trustee;
(iv) Obtain Balance Sheet and Profit & Loss Account of trust authenticated by trustees and check
with trial balance with which they should agree.
Notes:
Ø Charitable or religious trust or institution to make an application for registration within 1 year
from date of creation of trust or establishment of institution.
Ø The report of audit of accounts of a trust or institution which is required to be furnished
under Clause (b) of Section 12A should be in Form No. 10B.

Who should get accounts audited?

• Business à T/o > 1 Cr*
w.e.f AY 20-21 its 5Cr if 95% transn through banking channels
• Profession à Gross receipts > 50 L
• Business u/s 44AE, 44BB, 44BBB à claims profits lower than deemed
• Professionà profits deemed u/s 44ADA à claims profits lower than deemed
• Business à provision of Sec 44AD(4) applicable i.e. declares profits as per 44AD for AY &
fails to do that in any 5 succeeding AY à ineligible to claim benefit of 44AD

Notes:
• 44AD isn’t applicable to commission income
• Computation of Turnover to determine eligibility of Tax Audit
(i) Discount allowed in sales invoice deducted from turnover.
(ii) Cash discount not allowed in a cash memo/sales invoice is in nature of a financing charge
and is not related to turnover. Therefore, should not be deducted from the turnover.
(iii) Turnover discount is normally allowed to a customer if sales made to him exceed a
particular quantity. As per trade practice, it is in nature of trade discount and should be
deducted from the figure.
(iv) Special rebate allowed to customer can be deducted from sales if it is in nature of trade
discount. If it is in nature of commission on sales, then it cannot be deducted.

CA SHUBHAM KESWANI 235

 (v) Price of goods returned should be deducted from turnover even if returns are from sales
made in earlier year/s.
(vi) Sale proceeds of any shares, securities, debentures, etc., held as investment will not form
part of turnover. However, if shares, securities, debentures etc., are held as stock-in-trade,
sale proceeds thereof will form part of turnover.

Considerations while furnishing particulars in Form 3CD

i. If item of income/expenditure is covered in more than one of specified clauses in statement of
particulars, suitable cross reference to such items be given at appropriate places.
ii. If there is difference in opinion of tax auditor and assessee in respect of any info furnished in
Form, auditor should state both viewpoints and relevant info to enable tax authority to decide
in the matter.
iii. If any clause is not applicable, he should state that same is not applicable.
iv. In computing allowance or disallowance, he should keep in view law applicable in relevant year,
even though form of audit report may not have been amended to bring it in conformity with
amended law.
v. The info in Form should be based on books of accounts, records, documents, information and
explanations made available to tax auditor for examination.
vi. In case auditor relies on judicial pronouncement, he may mention the fact.

Revision of Tax Audit Report

(a) Normally, report of tax auditor cannot be revised later.
(b) However, when accounts are revised in following circumstances, tax Auditor may have to revise
his Tax audit report also.
i. Revision of accounts of company after its adoption in AGM.
ii. Change in law with retrospective effect.
iii. Change in interpretation of law (e.g.) CBDT Circular, Notifications, Judgments, etc.
The Tax Auditor should state it is a revised Report, clearly specifying the reasons for such revision
with a reference to the earlier report.

Disclosure of GST Registration (Clause 4)

• Clause 4 requires auditor to ensure whether assessee is liable to pay indirect tax like excise
duty, service tax, sales tax, goods and service tax, custom duty, etc.
• If yes, furnish registration no. or GST no. allotted for same.
• Thus, auditor is primarily required to furnish details of registration nos. as provided to him by
assessee. The reporting is required to be done in manner or format specified by e-filing.

NR Co. engaged in extraction of mineral oils claiming lower than deemed income u/s 44BB
Clause 8: Auditor reqd to mention clause of sec 44AB under which tax audit is conducted.
Clause 12: If p&l includes profits & gains assessable to tax on presumptive basis, indicate the amt &
relevant sections. Tax auditor will state clause (c) of sec 44AB under clause 8 & as per clause 12
report profits u/s 44BB of Income Tax Act 1961.

Method of accounting [Clause 13]

• It requires to state method of accounting employed in PY.
• It also requires to state change in method of accounting vis-à-vis the preceding year.
• If so, details of change and effect on profit or loss are to be stated.
• Also details of deviation thereof, if any, from accounting standards prescribed under section
145 and effect thereof on profit or loss are stated.

CA SHUBHAM KESWANI 236

 • Section 145 provides that method of accounting be either cash or mercantile. Hybrid system
is not permitted.

Method of Valuation of Closing stock (Clause 14)

(a) Method of valuation of closing stock employed in PY.
(b) Details of deviation from method of valuation prescribed under section 145A and effect on P&L.

Non- Maintenance of Stock Register by Printing Entity that receives variety of Job Orders & having
variety of Materials à Is it fine?
• Explanation of entity for use of varieties of raw materials for different jobs undertaken may
be valid.
• Auditor needs to verify specified job-orders received and different raw materials purchased
for each job separately.
• The use of different papers (quality, quantity and size) ink, colour etc. may be examined.
• Auditor enquire with other similar printers in locality to ensure prevailing custom.
• At the same time, he has to report and certify under the clause 35(b) and clause 11(b) of Form
3CD read with the Rule 6G(2) of the Income-tax Act, 1961, about details of stock and account
books (including stock register) maintained.
• He (or his deputy) must verify closing stock of raw materials, work-in-progress and finished
goods of the concern, at least on date of its balance sheet.
• In case the said details are not properly maintained, he has to specifically mention the same
with reasons for non-maintenance of stock register by the entity.

Capital Asset converted to Stock in Trade [Clause 15]

Give the following particulars of the capital asset converted into stock-intrade:-
(a) Description of capital asset;
(b) Date of acquisition;
(c) Cost of acquisition;
(d) Amount at which the asset is converted into stock-in-trade.

Audit checklist:
• Ask assessee whether he has converted any capital asset into SIT during PY.
• Details of capital assets converted into SIT during the year to be given.
• Check whether assessee has converted any capital asset into SIT during year under audit.
• If yes, then obtain details as to nature of such capital asset, its date and cost of acquisition and
amount at which asset has been converted into stock-in-trade.

Clause 16: Amounts not credited to the profit and loss account, being,-
(a) the items falling within the scope of section 28;
(b) proforma credits, drawbacks, refund of duty of customs or excise or service tax, or sales tax or
VAT, where such credits, drawbacks or refunds are admitted as due by authorities concerned;
(c) escalation claims accepted during the previous year;
(d) any other item of income;
(e) capital receipt, if any.

Proforma Credits, Drawbacks, Refund of Duty, Etc. [Clause 16(b)]

Ø Enquire whether there has been admitted any claim in respect of proforma
credits/drawbacks/refund of duties of customs or excise or both/sale tax/service tax/VAT by
authorities.

CA SHUBHAM KESWANI 237

Ø If yes, then obtain schedule from assessee indicating details of all such claims admitted by
authorities but not credited to P&L a/c.
Ø Cross check the details contained in schedule with the claim papers and other relevant
correspondence including assessment orders.
Ø Ensure that claims have been admitted as due by concerned authorities.
Ø Note that the item admitted by authorities will mean the item admitted before closing of a/cs.
Ø Ensure that accounting of such claims is in accordance with method of accounting regularly
followed by assessee.
Ø Ensure that all claims admitted have been cr. to p&l a/c. Any exception should be reported.
Ø Where cash system of accounting is followed then this fact should be stated in the report.

Escalation claims to Customers not accounted as income [Clause 16(c)]

• A tax auditor has to report under clause 16(c) of Form 3CD on any escalation claim accepted
during PY and not credited to P&L account.
• If such amount not credited to P&L a/c fact should be reported.
• The system of accounting followed in respect of this particular item may also be brought out
in appropriate cases.
• If assessee is following cash basis of accounting with reference to this item, it should be
clearly brought out since acceptance of claims during relevant PY without actual receipt has
no significance in cases where cash method of accounting is followed.
• Escalation claims should normally arise pursuant to a contract (including contracts entered
into in earlier years), if so permitted by contract.
• Only claims to which other party has given unconditional acceptance could constitute accepted
claims.
• Mere making claims by assessee or claims under negotiations cannot constitute accepted
claims. After ascertaining relevant factors as outlined above, decision whether to report or
not, can be taken.

Instances of Capital Receipt not cr. to P&L A/c [Clause 16(e)]

Guidance for reporting capital receipts: Capital receipts are not generally credited to p&l hence auditor
should take enough care to check out any transaction generating capital receipts by –
• Enquiring whether assessee is in receipt of any amount of capital nature during the previous year.
• Going through financial statements, in particular reserve account, to ascertain whether assessee has
received any such receipts and credited them directly to reserve account.
• Enquiring whether assessee has credited such receipts to p&l a/c.
• Checking that any such receipts is accounted in terms of method of accounting followed by assessee.

Illustrative examples of capital receipts:

(a) Capital subsidy received in form of Government grants, which are in nature of promoters’
contribution. For e.g., Capital Investment Subsidy Scheme.
(b) Government grant in relation to specific fixed asset where such grant is shown as a deduction
from gross value of asset by concern in arriving at its book value.
(c) Compensation for surrendering certain rights.
(d) Profit on sale of fixed assets/investments to the extent not credited to profit and loss account.

Sale of Property at Price < Stamp duty Value

Clause 17 of Form 3CD requires tax auditor to furnish information if land or building is transferred
during PY for consideration less than value adopted by any authority of a State Government as under:

CA SHUBHAM KESWANI 238

 Details Consideration Value adopted or Whether provisions of 2nd proviso to subsection (1)
of Received or assesses or of section 43CA or 4th proviso to clause (x) of sub-
Property Accrued assessable section (2) of section 56 applicable? [Yes/No]

• Auditor should obtain list of all properties trfd by assessee during PY and furnish amt of
consideration received or accrued, as disclosed in books of account of assessee.
• For reporting value adopted or assessed or assessable, auditor should obtain from assessee copy of
regd sale deed. In case property is not regd, auditor may verify relevant docs from relevant authorities
or obtain third party expert like lawyer, solicitor representation to satisfy compliance of sec 43CA /
section 50C of the Act.

Capital expenditure incurred for scientific research assets [Clause 19]

Expenditure on Scientific Research covered under sec 35 of IT Act, 1961, is to be reported by tax
auditor under clause 19 of Form 3CD.
The tax auditor is required to report following:
(a) amount debited to profit and loss account, and
(b) amounts admissible as per provisions of the Income-tax Act, 1961 and also fulfils specified
conditions.

Payment to Clubs [Clause 21(a)]

• As per Clause 21(a) of Form 3CD, amt of expenditure incurred at clubs by assessee during
year being entrance fees and subscriptions, and cost for club services and facilities used
should be indicated.
• The payments made may be for directors and other employees in case of companies, and
partners or proprietors in other cases.
• The fact whether such expenses are incurred in course of business or whether they are of
personal nature should be ascertained.
• The tax auditor is required to furnish details of amounts debited to P&L a/c, being in nature
of capital, personal, advertisement expenditure etc.

Advertisement expenditure in Brochure of political Party [Clause 21(a)]

As per Clause 21(a), auditor is reqd to furnish details of amts debited to P&L a/c, being in nature of
advertisement exp. in any souvenir, brochure, tract, pamphlet or the like published by political party
in tax audit report.

Clause 21(b): Amounts inadmissible under section 40(a):

(i) As payment to non-resident referred to in sub-clause (i) [Pay to NR]
(A) Details of payment on which tax is not deducted:
(I) date of payment
(II) amount of payment
(III) nature of payment
(IV) name and address of the payee
(B) Details of payment on which tax has been deducted but has not been paid during the previous
year or in the subsequent year before the expiry of time prescribed under section 200(1)
(I) date of payment (II) amount of payment (III) nature of payment (IV) name and
address of the Payee (V) amount of tax deducted

(ii) As payment referred to in sub-clause (ia) [Pay to Resident]

(A) Details of payment on which tax is not deducted:

CA SHUBHAM KESWANI 239

 (I) Date of payment (II) Amount of payment (III) Nature of payment (IV) Name and address of
the payee
(B) Details of payment on which tax has been deducted but has not been paid on or before the
due date specified in subsection (1) of section 139.
(I) Date of payment (II) Amount of payment (III) Nature of payment (IV) Name and address of
the payer* (V) Amount of tax deducted (VI) Amount out of (V) deposited, if any

Cash Payments to Parties > Limit u/s 40A(3) [Clause 21(d)]

• Rs 35,000 for Goods Carriage & 10,000 for others per party per day
• If client says cash payment made because other party insisted then also report them
• Limit is per party not per bill
• Limit of 35k applies only if payee is engaged in goods carriage business not payer

Payment to Specified Persons u/s 40A(2)(b) [Clause 23]

Section 40(A)(2) provides exp. for which payment has been to certain specified persons (Related
Party) may be disallowed if, in opinion of Assessing Officer, expenditure is excessive or unreasonable
having regard to:
(i) fair market value of goods, services or facilities for which payment is made; or
(ii) for legitimate needs of business or profession of assessee; or
(iii) benefit derived by or accruing to assessee from such expenditure.

Clause 25: Any amount of profit chargeable to tax under section 41 and computation thereof.

The tax auditor should obtain a list containing all the amounts chargeable under section 41 with the accompanying
evidence, correspondence, etc. He should in all relevant cases examine the past records to satisfy himself about
the correctness of the information provided by the assessee. The tax auditor has to state the profit chargeable
to tax under this section. This information has to be given irrespective of the fact whether the relevant amount
has been credited to the profit and loss account or not. The computation of the profit chargeable under this
clause is also to be stated.

The tax auditor should maintain the following in his working papers for the purpose of furnishing details required
in the format provided in the e-filing utility:
S No. Name of person Amt of income Section Description of transn Computation if any

Delay in depositing GST or other indirect tax/cess/fees [Clause 26]

Any amt of GST/Tax payable on last day of PY (opening balance) as well as on last day of current
year has to be reported in Tax Audit Report under clause 26(A) and 26(B) in reference of Sec 43B.

Clause 26 (A) dealt GST/VAT payable pre-existed on the first day of previous year but was not
allowed in assessment of any preceding previous year and was either paid {clause 26(A) (a)}/ or/ and/
not paid during the previous year {clause 26(A)(b)}

Sec 26(A) The details will be as under in regard to opening balances:

S No Section Nature of o/s opening Amount paid Amt Amt unpaid
Liability balance not /set off written at end of
allowed in PY during year back to p&l year (b)
(a) a/c

CA SHUBHAM KESWANI 240

Sec 26(B) Liability incurred during the previous year:
S No Section Nature of Amount incurred Amount paid/set-off before Amount unpaid on due of
Liability in PY but due date of filing filing of return/date
remaining o/s on return/date upto which upto which reported in
last day of PY (a) reported in tax audit report, tax audit report,
whichever is earlier. whichever is earlier (b)

Clause 27(a): Amount of GST credits availed of or utilized during the PY and its treatment in profit
and loss account and treatment of outstanding GST credits in the accounts.

The amount of CENVAT/GST availed and utilised should be reported under this sub-clause. In some
cases, CENVAT/GST availed may be lesser than the CENVAT /GST credit utilised during the year on
account of opening balance in CENVAT/GST account or vice-versa and as such it would be advisable, in
order to avoid any misleading conclusion and inferences, to report the opening and closing balances of
CENVAT/GST. Further the sub-clause requires reporting of the credits availed of or utilized during
the previous year, it is desirable to report both the credits availed and the credits utilized.

In so far as the reporting of accounting treatment of CENVAT/GST credit is concerned the clause
requires that its treatment in profit and loss account and the treatment of outstanding CENVAT/GST
credit in the account have to be reported upon.

The tax auditor should verify and maintain the following information in his working papers for the
purpose of reporting in the format provided in the e-filing utility:
CENVAT/GST Amount Treatment in P&L A/c
Opening Balance
GST Availed
GST Utilised
Closing balance

Income or Expenditure of Prior period cr/dr to P&L A/c [Clause 27(b)]

Particulars of income or expenditure of prior period credited or debited to P&L a/c to be verified:
(i) Clause would be relevant only where assessee follows mercantile system of accounting.
(ii) Under cash system of accounting, expenses debited/ income credited to P&L a/c would be current
year’s expenses/income even though they may relate to earlier years.
(iii) The tax auditor should obtain particulars of expenditure or income of any earlier year debited or
credited to p&l a/c of relevant PY when mercantile system of accounting is followed.
(iv) Business or profession audited under any other law, info. may be available from annual accounts.
(v) Business or profession not required to get his accounts audited, close scrutiny of ledger in regard
to period for which expenditure or income is entered in books may be necessary.
(vi) Tax auditor should maintain following information in his working papers file for purpose of
reporting in format provided in the e-filing utility:
S No Type Particulars Amount Prior Period to which it relates

IFOS Reporting [Clause 29]

Clause 29: Whether during PY assessee recd consideration for issue of shares > FMV of shares as
ref in sec 56(2)(viib), if yes, furnish details.
29A: Amt included in IFOS u/s 56(2)(ix), if yes furnish details.
56(2)(ix): Amt recd as advance for capital assetà forfeited à treated as income

CA SHUBHAM KESWANI 241

29B: Amt of income chargeable to tax u/s 56(2)(x), if yes furnish details

Sec 56(2)(x): where any person receives, in any PY, from any person or persons on or after 1.4.17,—
(a) any sum of money, w/o consideration, > 50,000, whole of aggregate value of such sum;
(b) any immovable property,—
(A) without consideration, SDV > 50,000, SDV of such property;
(B) for a consideration, (SDV- consideration), if amount of such excess is more than higher of
following amounts:—
(i) 50,000; and
(ii) amount equal to 10% of consideration:
(c) any property, other than immovable property,—
(A) without consideration, aggregate FMV of which exceeds 50,000, whole of aggregate FMV of such
property;
(B) for a consideration < aggregate FMV of property by an amount exceeding 50,000, à (FMV-
Consideration)

Clause 30: Details of any amount borrowed on hundi or any amount due thereon (including interest on
the amount borrowed) repaid, otherwise than through an account payee cheque. [Section 69D].

30A. (a) Whether primary adjustment to transfer price, as referred to in Sec 92CE(1), has been made
during the previous year? (Yes/No)
(b) If yes, please furnish the following details:-
(i) Under which clause of sub-section (1) of section 92CE primary adjustment is made?
(ii) Amount (in Rs ) of primary adjustment:
(iii) Whether excess money available with associated enterprise is required to be repatriated to
India as per the provisions of of section 92CE(2)? (Yes/No)
(iv) If yes, whether the excess money has been repatriated within the prescribed time (Yes/No)
(v) If no, the amount (in Rs) of imputed interest income on such excess money which has not been
repatriated within the prescribed time.

Clause 30B – Limitation on Interest Deduction 30B.

(a) Whether the assessee has incurred expenditure during PY by way of interest or of similar nature
exceeding 1 Cr as referred to in section 94B(1)?(Yes/No)
(b) If yes, please furnish following details:-
(i) Amount (in Rs) of expenditure by way of interest or of similar nature incurred:
(ii) EBITDA during PY (in Rs):
(iii) Amount (in Rs) of expenditure by way of interest which exceeds 30% of EBITDA
(iv) Details of interest expenditure brought forward as per subsection (4) of section 94B
(v) Details of interest expenditure carried forward as per subsection (4) of section 94B

Business Receipt in Cash

Clause 31 (a): Particulars of each loan or deposit in an amount exceeding limit specified in section
269SS (i.e. 20,000) taken or accepted during PY:-
(i) name, address and PAN (if available with assessee) of lender or depositor;
(ii) amt of loan or deposit taken or accepted;
(iii) whether loan or deposit was squared up during PY;
(iv) maximum amt o/s in the account at any time during PY;
(v) whether loan or deposit was taken or accepted by cheque or bank draft or use of ECS through a
bank a/c; (v) in case loan or deposit was taken or accepted by cheque or bank draft, whether the
same was taken or accepted by an account payee cheque or an a/c payee bank draft.

CA SHUBHAM KESWANI 242

*(These particulars need not be given in the case of Govt co., banking company or corporation
established by a Central, State or Provincial Act.)

For reference:
Sec 269SS: Prohibits Accepting loan/deposit from a person(cumulatively) >= 20,000 otherwise than
by a/c payee cheque/bank draft
Section 269ST: no person shall receive >=2L from a person/day in a single
transaction/event/occasion during PY other than a/c payee cheque/bank draft/ECS

Clause 31 (ba) particulars of each receipt in an amount exceeding limit specified in Sec 269ST (i.e. 2L),
in aggregate from a person in a day or in respect of a single transaction or in respect of transactions
relating to one event or occasion from a person, during PY, where receipt is otherwise than by cheque
or bank draft or use of ECS through bank account:-
i. Name, address and PAN (if available with assessee) of payer
ii. Nature of transaction
iii. Amount of receipt
iv. Date of receipt
Particulars need not be given in case of receipt by or payment to a Govt. company, a banking Company,
a post office savings bank, cooperative bank

Speculation loss on Purchase & sale of securities [Clause 32(e)]

A tax auditor has to furnish details of speculation loss incurred during PY, under Clause 32(e) of Form
3CD, regarding whether Co. is deemed to be carrying on speculation business as referred in expln to
Sec 73.
Expln. to sec 73 provides that where any part of business of Co. consists in purchase and sale of shares
of other companies, such Co. shall, for purpose of this section, be deemed to be carrying on speculation
business to extent to which business consists of purchase and sale of such shares.

Disqualifications in Cost Audit Report

• A tax auditor is reqd to check under Clause (37) of Form 3CD whether cost audit was carried out
& if yes, provide details of disqualification or disagreement on any matter/item/value/qty as may
be reported/identified by cost auditor.
• The tax auditor should obtain copy of cost audit from assessee.
• Even though tax auditor is not reqd to make detailed study of such report, he has to take note of
details of disqualification or disagreement on any matter/item/value/qty as may be
reported/identified by the cost auditor.
• The tax auditor need not express any opinion in a case where such audit has been ordered but
same has not been carried out.
Accounting Ratios (Clause 40)
Details regarding turnover, gross profit, etc., for PY and preceding PY should be provided as follows:
S No. Particulars PY Preceding PY
1 Total turnover of assessee
2 Gross profit or turnover of assessee
3 Net profit/turnover of assessee
4 Stock in trade/turnover
5 Material consumed/FG produced

• Details reqd to be furnished for principal items of goods traded or manufactured or services
rendered.

CA SHUBHAM KESWANI 243

 • These ratios have to be calculated only for assessees who are engaged in manufacturing or
trading activities.
• This clause is not applicable to assessees carrying on profession.
• Moreover, ratios have to be given for business as a whole and need not be given product wise.

Demand raised under Tax laws other than Income tax Act (Clause 41)
Please furnish details of demand raised or refund issued during PY under any tax laws other than
Income Tax Act, 1961 and Wealth tax Act, 1957 along with details of relevant proceedings.
• Tax auditor should obtain copy of all demand/ refund orders issued by govt authorities during
PY under other tax laws. Even though demand order issued in current PY it may relate to other
PY then also reporting reqd.
• Adjustments of refund against demand also to be reported.

S Name Demand Date of FY to which Amt of Adjustment Remark

No. of or demand demand or demand of refund s
Act Refund raised/ refund raised/refun against
order no. refund issued relates d issued demand, if
any

SFT Reporting (Clause 42)

Clause 42 (a) Whether the assessee is required to furnish statement in Form No.61 or Form No. 61A
or Form No. 61B? (Yes/No)
(b) If yes, please furnish:

With respect to Form 61, tax auditor should verify whether taxpayer has entered into any transaction
where the other party was required to quote PAN. He should verify whether taxpayer has obtained
declaration in Form No. 60 where the other party has not furnished his PAN. Wherever the taxpayer
has received declarations in Form No. 60, the auditor should verify if the taxpayer has filed Form No.
61 including therein all the necessary particulars.

With respect to Form 61A, the tax auditor should ascertain whether the taxpayer is required to report
any transactions under Section 285BA read with Rule 114E. It may be noted that specified transactions
under Section 285BA include the issue of bonds, issue of shares, buyback of shares by a listed
company, etc. These transactions may not happen every year and hence special attention should be
given in the year when a company taxpayer issues any security or a listed company undertakes buyback
of shares.

While verifying the same, the tax auditor should ensure that the provisions of Rule 114E(3) have been
properly considered and applied. Failure to do so may result in a certain transaction not being reported.
It may be noted that the payment may be received for various transactions and on different dates,
and hence these may not be covered under Section 269ST but will have to be reported under Section
285BA.

With respect to Form 61B, the tax auditor should review the due diligence procedures carried out by
the taxpayer in accordance with provisions of Rule 114H and the results of such procedures. The tax
auditor should review the list of Reportable Accounts identified by the due diligence process and the
information to be maintained and reported by the taxpayer.

In case any reportable account has been omitted, or there is any error or omission in Form 61B, the
same may be reported under the Form No. 3CD. The auditor should verify if the taxpayer has filed
Form No. 61B for correcting errors or omissions in the form filed originally. In such a case the auditor

CA SHUBHAM KESWANI 244

should give details of both the forms filed. The errors in the original Form 61B which are corrected in
the revised Form 61B need not be reported under Form No. 3CD.

The tax auditor should verify that Form 61B is duly signed by the designated director and filed.

Country by Country Reporting

Clause 43 (a) Whether the assessee or its parent entity or alternate reporting entity is liable to
furnish the report as referred to in section 286(2) (Yes/No)
(b) if yes, please furnish following details:
(i) Whether report has been furnished by assessee or its parent entity or an alternate reporting entity
(ii) Name of parent entity
(iii) Name of alternate reporting entity (if applicable)
(iv) Date of furnishing of report
• Under Sec 286, international group has to furnish CbCR containing info about whole group
comprising of various constituent entities.
• Such report is to be filed in India if parent entity is resident of India or international group
has appointed constituent entity resident in India to file CbCR on behalf of whole group.
• The report under Sec 286(2) is filed by parent entity which is resident in India or alternate
reporting entity resident in India.
• The tax auditor should verify if taxpayer is required to file Form 3CEAC based on satisfaction
of the conditions prescribed.
• Tax auditor should also verify if taxpayer whose parent is non-resident has filed Form No.
3CEAC.
• The tax auditor may obtain a necessary certificate from taxpayer in respect of constitution of
the international.

CA SHUBHAM KESWANI 245

 Reports vs Certificate

Distinction between Audit Report & Certificate

• The term ‘report’ is used where an expression of opinion is involved.
• The term ‘certificate’ is preferable where auditor comments on or verifies facts such as a
verification of investment by inspection or the checking of ballot papers on a poll in a company
meeting.
• Under the Companies Act, 2013, a number of situations are there where an auditor is required
to issue a certificate rather than a report, like under Section 66 of the Companies Act, 2013,
an auditor is required to file a certificate in the tribunal where company is proposing for the
reduction of capital.
• However, the report under Section 143 of the Companies Act, 2013, is an opinion based report
and is not a certificate.

Some situations where Audit Reports and Certificates are required is given below -
(1) Under the Payment of Bonus Act, 1965, CA may be required to issue a ‘report’ on computation of
bonus payable.

The report may be as under:

“We have reviewed the figures in above computation in comparison with books and records produced
to us, audit of which has already been completed by us and report that subject to the notes given on
face of the computation in our opinion, and to the best of our knowledge and belief and according to
information and explanation given to us, above computation is in due accordance therewith and has been
made on a basis reasonably consistent with provisions of Payment of Bonus Act, 1965.”

Place: For X & Co.

Date: Chartered Accountants

(2) Auditor’s Report in accordance with Regulation 54 of the SEBI (Mutual Fund) Regulations, 1993.

(i) All Mutual funds shall be required to get their accounts audited in terms of a provision to that
effect in their trust deeds. The Auditor’s Report shall form part of Annual Report. It should
accompany the Abridged Balance Sheet and Revenue Account. The auditor shall report to Board of
Trustees and not to unit holders.

(ii) The auditor shall state whether:

1. He has obtained all information and explanations which, to the best of his knowledge and
belief, were necessary for the purpose of his audit.
2. The Balance Sheet and the Revenue Account are in agreement with the books of account of
the fund.

(iii) The auditor shall give his opinion as to whether:

1. The Balance Sheet gives a true and fair view of the scheme wise state of affairs’ of the fund
as at the balance sheet date, and
2. The Revenue Account gives a true and fair view of the scheme wise surplus/deficit of the fund
for the year/period ended at the balance sheet date.

CA SHUBHAM KESWANI 246

 Professional Ethics
Fundamental Principles
a) Integrity:
• straightforward and honest in professional & business relationships
• shall not knowingly be associated with information
(a) Contains a materially false or misleading statement;
(b) Contains statements or information provided negligently; or
(c) Omits required information.

b) Objectivity: not to compromise professional or business judgment because of bias,

conflict of interest or undue influence of others

c) Professional Competence & Due Care:

• Attain & maintain professional knowledge & skill
• Act diligently
• Exercise sound judgment
• Continuous awareness & understanding of technical, professional & business
developments
• Reasonable steps to ensure those working in his authority have training &
supervision

d) Confidentiality: Not disclose info acquired from client or employer (including prospective).
Not use such info for personal advantage. Continues even after relationship has ended.

Circumstances where professional accountants are or might be required to disclose confidential

information or when such disclosure might be appropriate:
• Disclosure is required by law
• Disclosure is permitted by law and is authorized by client or employing org;
• There is a professional duty or right to disclose, when not prohibited by law:
(i) To comply with requirements of Peer Review or Quality Review of the ICAI;
(ii) To respond to inquiry or investigation by professional or regulatory body
(iii) To protect the professional interests in legal proceedings; or
(iv) To comply with technical and professional standards, including ethics
requirements.

In deciding whether to disclose confidential information, professional accountants should consider

the following points:
(a) Whether interests of any party, including 3rd parties might be affected
(b) Whether all relevant info is known and substantiated, and
(c) The proposed type of communication, and to whom it is addressed;
(d) Whether parties to whom communication is addressed are appropriate recipients.

e) Professional Behaviour: avoid any conduct that accountant knows or should know might
discredit the profession.

If a professional accountant faces a situation when complying with one fundamental principle
conflicts with others, he should consult:
• Others within the organization
• TCWG
• ICAI
• Legal counsel

CA SHUBHAM KESWANI 247

 Types of Threats
• Self-interest threat –threat that a financial or other interest will inappropriately influence a
professional accountant’s judgment or behaviour;
• Self-review threat –threat that a professional accountant will not appropriately evaluate the
results of a previous judgment made; or an activity performed by the accountant, or by
another individual within the accountant’s firm or employing organization, on which the
accountant will rely when forming a judgment as part of performing a current activity;
• Advocacy threat –threat that a professional accountant will promote a client’s or employing
organization’s position to the point that the accountant’s objectivity is compromised;
• Familiarity threat –threat that due to a long or close relationship with a client, or employing
organization, professional accountant will be too sympathetic to their interests or too
accepting of their work;
• Intimidation threat –threat that a professional accountant will be deterred from acting
objectively because of actual or perceived pressures, including attempts to exercise undue
influence over the accountant.

Circumstances that may create self-interest threats

• Direct financial interest in client
• Undue dependence on total fees from a client.
• Concern about the possibility of losing a client.
• Potential employment with a client.
• Having a close business relationship with a client.
• Having access to confidential information of the client that might be used for personal gain.

Circumstances that may create Self Review Threat

• Loan to or from assurance client or any of its directors or officers
• Professional accountant holding financial interest in, or receiving a loan or guarantee from,
employing organization.
• Professional accountant participating in incentive compensation arrangements offered by
employing organization.
• Professional accountant having access to corporate assets for personal use.
• Professional accountant being offered a gift or special treatment from supplier of employing
organization.

Examples of circumstances that may create advocacy threats:

• Promoting shares in entity when that entity is financial statement audit client.
• Acting as an advocate on behalf of an assurance client in litigation or disputes with third
parties.
• lobbying in favor of legislation on behalf of a client.

Examples of circumstances that may create familiarity threats

• A member of engagement team having close or immediate family relationship with director or
officer of the client.
• A member of engagement team having a close or immediate family relationship with employee of
client who is in position to exert direct and significant influence over subject matter of
engagement.
• A former partner of firm being director or officer of client or employee in position to exert
direct and significant influence over the subject matter of the engagement.
• Long association of an audit team member with the audit client.

CA SHUBHAM KESWANI 248

 Examples of circumstances that may create intimidation threats
• Being threatened with dismissal or replacement
• Being feeling pressured to agree with the judgment of a client because the client has
more expertise on the matter in question.
• Being informed that a planned promotion will not occur unless the accountant agrees
with an inappropriate accounting treatment.

Examples of actions that in certain circumstances might be safeguards to address threats include:
• Assigning additional time and qualified personnel to reqd tasks when engagement has been
accepted.
• Having appropriate reviewer, not member of team, review work performed or advise to address
a self-review threat.
• Using different partners and engagement teams with separate reporting lines for provision of
non-assurance services.
• Involving another firm to perform or re-perform part of engagement .
• Separating teams when dealing with matters of a confidential nature.

Disabilities for the Purpose of Membership (Sec 8 of the CAs Act, 1949)
• Under 21 years
• Unsound mind and stands so adjudged by competent court;
• Undischarged insolvent;
• Being a discharged insolvent, has not obtained from court a certificate stating that
insolvency was caused by misfortune without any misconduct on his part;
• Convicted by competent Court within or without India, of offence involving moral turpitude
and punishable with transportation or imprisonment unless CG by order in writing, removed
disability;
• Removed from membership of ICAI been guilty of professional or other misconduct;

Types of Members
Associate Member: Person, whose name has been entered in Register, & entitled to use the letters
A.C.A. after his name.

Fellow Member: Following types of members shall be registered as Fellow of ICAI, on payment of
such fees along with the application-

(i) Associate member who has been in continuous practice in India for at least 5 years,
(ii) Member who has been associate for continuous period of not less than 5 years & who
possesses such qualification experience equivalent to continuous practice for period of 5 years
as CA.
Removal of Name from the Register: As per Sec 20 of Act, Council may remove, from Register, the
name of any member in following cases-
i. who is dead;
ii. from whom request received;
iii. not paid prescribed fee required to be paid by him;
iv. Disqualified u/s 8

CA SHUBHAM KESWANI 249

 Effective date of Restoration in case of Membership Removal
Application for restoration and requisite fees Restoration shall be with effect from the date
are made within same year of removal on which it was removed from the Register.
Removal of name under orders of Board of Restoration shall be in accordance with such
Discipline or the Disciplinary Committee or the orders.
Appellate Authority or the High Court
In other cases Restoration shall be with effect from the date
on which the application and fee are received.

Penalty for Falsely Claiming to be a Member- Sec 24 of the CAs Act, 1949 provides that any
person who-
(i) not being a member of ICAI;
(a) represents that he is member of ICAI; or
(b) uses designation CA;
(ii) being a member of ICAI, but not having certificate of practice, represents that he is in
practice or practice as a CA,
shall be punishable on first conviction with fine which may extend to 1000, and on any
subsequent conviction with imprisonment which may extend to 6 months or with fine which
may extend to 5,000, or with both.

Cancellation and Restoration of Certificate of Practice

Certificate of Practice (COP) shall be liable for cancellation, if:
(i) name is removed from the Register; or
(ii) Council is satisfied,that such certificate was issued on the basis of incorrect,
misleading or false information, or by mistake or inadvertence; or
(iii) a member has ceased to practise; or
(iv) a member has not paid annual fee for COP till 30th day of September of the relevant
year. Where COP is cancelled, the holder shall surrender the same to the Secretary.

Regulation 11 on restoration of COP states that, on an application made in approved Form and
payment of such fee, Council may restore COP w.e.f date on which it was cancelled, to member whose
certificate has been cancelled due to non-payment of the annual fee for the COP and whose
application, complete in all respects, together with fees, is received by the Secretary before expiry
of relevant year.

Members - deemed to be in Practice

As per Sec 2(2): “A member of ICAI shall be deemed “to be in practice” if he:
(i) engages himself in practice of accountancy; or
(ii) offers to perform or performs service involving auditing or preparation, verification
or certification of F.S. or holds himself out as accountant; or
(iii) renders professional services about matters of principle or relating to accounting,
presentation or certification of financial facts/data; or
(iv) such other services in opinion of Council, are rendered by CA in practice;

Explanation –Member who is salaried employee of CA in practice à deemed to be in practice for

limited purpose of training of Articled Assistants”.

CA SHUBHAM KESWANI 250

Pursuant to Sec 2(2)(iv) above, the Council has passed a resolution permitting a CA in practice to
render entire range of “Management Consultancy and other Services”.

The expression “Management Consultancy and other Services” shall include the following-
i. Financial management planning and financial policy determination.
ii. Capital structure planning and advice regarding raising finance.
iii. Working capital management.
iv. Preparing project reports and feasibility studies.
v. Preparing cash budget, cash flow statements, profitability statements, statements of
sources and application of funds etc.
vi. Budgeting including capital budgets and revenue budgets.
vii. Inventory management, material handling and storage.
viii. Market research and demand studies.
ix. Price-fixation and other management decision making.
x. Management accounting systems, cost control and value analysis.
xi. Control methods and management information and reporting.
xii. Personnel recruitment and selection.
xiii. Setting up executive incentive plans, wage incentive plans etc.
xiv. Management and operational audits.
xv. Valuation of shares and business and advice regarding amalgamation, merger and
acquisition. Acting as Registered Valuer under Cos. Act 2013.
xvi. Business Policy, corporate planning, organisation development, growth and diversification.
xvii. Organisation structure and behaviour, training programmes, work study, job-description,
job evaluation
xviii. Systems analysis and design, and computer related services and to carry out other
professional services relating to EDP.
xix. Acting as advisor or consultant to an issue, including such matters as:
a. Drafting of prospectus and memorandum containing salient futures of prospectus.
Drafting and filing of listing agreement and completing formalities with Stock
Exchanges, Registrar of Companies and SEBI.
b. Preparation of publicity budget, advice regarding arrangements for selection of (i) ad -
media, (ii) centres for holding conferences of brokers, investors, etc., (iii) bankers to
issue, (iv) collection centres, (v) brokers to issue, (vi) underwriters and the
underwriting arrangement.
c. Advice regarding selection of various agencies connected with issue, namely Registrars
to Issue, printers and advertising agencies.
d. Advice on the post issue activities, e.g., follow up steps which include listing of
instruments and dispatch of certificates and refunds.
Explanation – Portfolio mgt, underwriting & broking (PUB) not permitted.
xx. Investment counselling in respect of securities
xxi. Registrar to an issue and for transfer of shares/other securities.
xxii. Quality Audit.
xxiii. Environment Audit.
xxiv. Energy Audit.

CA SHUBHAM KESWANI 251

 xxv. Recovery Consultant in the Banking Sector.
xxvi. Insurance Financial Advisory Services under IRDA Act 1999, including Insurance
Brokerage.
xxvii. Insolvency Professional in terms of Insolvency and Bankruptcy Code, 2016
xxviii. Admin Services: Such services require little to no professional judgment and are clerical
in nature.
Note: Member of ICAI is deemed to be in practice during period he renders ‘service with armed
forces’.

Important Note:
A CA whose name has been removed from membership for prof. or other misconduct à during such
period of removal à will not appear before various tax authorities or other bodies before whom
he could have appeared in his capacity as a member of ICAI à Because once a person becomes a
member of ICAI; he is bound by provisions of CA Act, 1949 and its Regulations

Companies not to practice as CAs à If LLP has Co. as partner it can’t engage in practice

Member in Practice Prohibited from using a Designation Other Than CA – Sec 7

• Merchant Banker / Advisor to an issue: Members may obtain registration as category IV

Merchant Banker & act as Advisor or Consultant to issue. In client Companies’ offer
documents and ads regarding capital issue, name and address of CA or firm of CAs acting as
Advisor or Consultant to the Issue could be indicated under the caption “Advisor/Consultant
to the Issue”. However, name & address of such CA/firm of CAs should not appear
prominently.
• The members of ICAI who are also Directors in Companies, members of Political parties or
CAs Cells in political parties, holding different positions in clubs are not permitted to
mention these positions as these would be violative of provisions of Sec 7 of the Act.
• Member can’t designate as Cost Accountant; he can use letters A.C.M.A (Associate) or
F.C.M.A (Fellow) after his name.
• Permitted to mention membership of foreign Institute of Accountancy, recognized by Council
through MOU / Mutual Recognition Agreement (MRA) with ICAI.
• Improper for CA to state on professional docs à Income-tax Consultant, Cost Accountant,
Company Secretary, Cost Consultant or a Management Consultant.
• Designation “Corporate Lawyer” not permitted.
• Use of initials ‘CPA’ not permitted on visiting cards.

CA SHUBHAM KESWANI 252

 Branch office (Section 27)

Sec 27 of Act: If a CA in practice or Firm of CAs has more than one office in India, each one of
such offices should be in separate charge of member of ICAI.

Exemption for Hilly Areas

• Temp office in plains allowed for limited period not exceeding 3 months pa
• No need to close regular office & correspondence made at reg office
• Name board on temp office not displayed when its not functional
• Temp office not mentioned on Visit cards/letter heads as Place Of Business
• Before winters, member/firm informs ICAI about opening temp office from date & after
closure intimated ICAI via regd post

To comply with requirement of being in charge of office:

• Member to reside in place office situated/attends the office >= 182 days
• Member can be in-charge of two offices if they are in one and the same Accommodation

Council Decisions:

i) Use of the name-board: nameboard in place of residence allowed of member with

designation of CA, provided it is nameplate of individual member & not of firm.
ii) The exemption may be granted to member or firm of CAs in practice to have a second
office without such second office being under separate charge of member of ICAI,
provided-
a. second office is in same premises, in which first office is located or,
b. second office is in same city, in which first office is located or,
c. second office is located within 50 km. from the municipal limits of a city, in which the
first office is located.

CA SHUBHAM KESWANI 253

 KYC Norms
The KYC Norms approved by the Council of ICAI are given below:
1. Where Client is an Individual/ Proprietor
A. General Information
• Name of the Individual
• PAN No. or Aadhar Card No. of the Individual
• Business Description
• Copy of last Audited Financial Statement
B. Engagement Information
• Type of Engagement

2. Where Client is a Corporate Entity

A. General Information
• Name and Address of the Entity
• Business Description
• Name of the Parent Company in case of Subsidiary
• Copy of last Audited Financial Statement
B. Engagement Information
• Type of Engagement
C. Regulatory Information
• Company PAN No.
• Company Identification No.
• Directors’ Names & Addresses
• Directors’ Identification No.

3. Where Client is a Non-Corporate Entity

A. General Information
• Name and Address of the Entity
• Copy of PAN No.
• Business Description
• Partner’s Names & Addresses (with their PAN/Aadhar Card/DIN No.)
• Copy of last Audited Financial Statement
B. Engagement Information Type of Engagement

CA SHUBHAM KESWANI 254

 First Schedule

PART I - Professional Misconduct in relation to CAs in Practice

A CA in practice is deemed to be guilty of professional misconduct if he:

Clause (1):
• allows any person to
• practice in his name as a CA unless such person is also
• a CA in practice and
• is in partnership with or
• employed by him.
Ø The above clause is intended to safeguard public against unqualified accountant practicing
under the cover of qualified accountants.
Ø It ensures that work of accountant will be carried out by a CA who may be his partner, or his
employee and would work under his control and supervision.

Clause (2):

• pays or allows or agrees to pay or allow, directly or indirectly,

• any share, commission or brokerage in the fees or profits of his professional business, to any
person other than
• a member of the ICAI or a partner or a retired partner or the legal representative of a
deceased partner, or a member of any other professional body or with such other persons
having such qualification as may be prescribed,
• for the purpose of rendering such professional services from time to time in or outside India.

Reg. 53A: Professional bodies:

ICSI (CS), ICWAI (Cost a/c), Bar Council (Advocate), Inst of Architects (Architect), Inst of
Actuaries (Actuary), Engineer, LLB(Lawyer), MBA

Example: CA gave 50% of audit fees received by him to complainant, not a CA, under nomenclature
of office allowance and such arrangement continued for no. of years, held by Council that in
substance CA had shared his profits and was guilty of professional misconduct. It is not
nomenclature to a transaction that is material, but it is substance of transaction, which is to be
looked into.

Note: Paying % of profits to article as stipend not allowed even if financial condition weak

Share of Profit/Sale of Goodwill (Death Cases)

Partnership Firm: Legal representative (LR) will continue to receive share if Deed provides for it.
Sole Proprietorship(SP) Firm:
1. No sharing of fees between LR & purchaser of G/W on death of SP + payments in instalments
allowed if agreement allows
2. Goodwill can be transferred to other CA if:
• Sale completed within 1 year of death
• If dispute of legal heir à inform ICAI within 1 year about dispute & name preserved for 1
year from dispute settlement.

CA SHUBHAM KESWANI 255

 Mr. Qureshi, CAiP died in road accident. His widow proposes to sell practice of husband to Mr.
Pardeshi, CA, for ` 5 lakhs. The price also includes right to use the firm name - Qureshi and
Associates. Can widow of Qureshi sell practice and can Mr. Pardeshi continue to practice in that
name as a proprietor?

Sale of Goodwill: With reference to Clause (2) of Part I to First Schedule to Chartered
Accountants’ Act, 1949, Council of ICAI considered whether goodwill of proprietary concern of CA
can be sold to another member who is otherwise eligible, after death of proprietor.
It lays down that sale is permitted subject to certain conditions. It further resolved that legal heir
of deceased member has to obtain permission of Council within a year of the death of proprietor
concerned.

Conclusion: Thus, in a given case, the widow of Mr. Qureshi, who has proposed to sell the practice
for ` 5 lakhs is in effect proposing the sale of goodwill. Thus, the act of Mrs. Qureshi is
permissible and Mr. Pardeshi can continue to practice in that name as a proprietor.

Clause (3): accepts or agrees to accept any part of profits of professional work of person who is
not member of ICAI.

Provided that nothing herein contained shall be construed as prohibiting a member ‘from entering
into profit sharing or other similar arrangements, including receiving any share commission or
brokerage in the fees, with member of such professional body or other person having
qualifications, as is referred to in item (2) of this part.

Referral fees amongst members: It is not prohibited for a member in practice to charge Referral
Fees, being fees obtained by a member in practice from another member in practice in relation to
referring client to him.

Note: Accepting commission from regd valuer for referring valuation assignments à Guilty

Clause (4):

• enters into partnership, in or o/s India, with person other than

• CA in practice or such other person who is member of any other professional body having such
qualifications as may be prescribed,
• including a resident who but for his residence abroad would be entitled to be regd. as member
under section 4(1)(v) or
• whose qualifications are recognized by CG or Council for purpose of permitting such
partnerships.

Eg: CA had engaged himself as partner in two business firms and MD in 2 Companies and holding
Certificate of Practice without obtaining permission of ICAI. Held that he was guilty of
professional misconduct inter under Clauses (4) and (11).

Clause (5) Secures either through the services of a person who is not an employee of such CA or
who is not his partner or by means which are not open to a CA, any professional business. Provided
that nothing herein contained shall be construed as prohibiting any agreement permitted in
terms of item (2), (3) and (4) of this part.

Clause (6) Solicits clients or professional work either directly or indirectly by circular,
advertisement, personal communication or interview or by any other means.

CA SHUBHAM KESWANI 256

Provided that nothing herein contained shall be construed as preventing or prohibiting –
(i) Any CA from applying or requesting for or inviting or securing professional work from another
CA in practice; or
(ii) A member from responding to tenders or enquiries issued by various users of professional
services or organizations from time to time and securing professional work as a consequence.

As per Council guidelines, member in practice shall not respond to any tender in areas of services
which are exclusively reserved for CAs, such as audit and attestation services. Such restriction
not applicable where min. fee of assignment prescribed in tender document or where areas are
open to other professionals along with CAs.

The members should not adopt any indirect methods to adventure their professional practice
with a view to gain publicity and thereby solicit clients or professional work.

Such a restraint must be practiced so that members may maintain their independence of
judgment and may be able to command respect of their prospective clients.

An advertisement of Coaching /teaching activities by member in practice may amount to indirect

solicitation, as well as solicitation by any other means, and may therefore be violative of
provisions of Clause (6) of Part I of First Schedule to CAs Act, 1949.
• Members may put, o/s Coaching/teaching premises, sign board mentioning the name of
Coaching / teaching Institute, contact details and subjects taught therein only.
• Advert/notes in press: Not circulate letters to possible clients
Exceptions:
Ø May advertise changes in partnerships or dissolution of firm, or change in address and
telephone numbers. Bare statement of facts allowed and consideration given to
appropriateness of area of distribution of newspaper or magazine and number of
insertions.
Ø Permitted to issue classified ad in journal/ newsletter of ICAI intended to give info for
sharing professional work on assignment basis or seeking partnership or salaried
employment of accountancy nature, provided it only contains accountant’s name, address
or telephone number, fax number, e-mail address and address(es) of social Networking
sites of members. However, mere factual position of experience and area of
specialization, relevant to seek response to the advertisement, are permissible.
• Application for empanelment for allotment of audit and other professional work: Free to
write to concerned org. Not proper for CA to make roving enquiries. Permissible to quote
fees on enquiries received from bodies, which maintain such panel.
• Publication of Books, Articles or Presentation: Not permissible for member to mention in
book or article published, or presentation made by him, any professional attainment(s),
whether of member or firm. He may indicate in book, article or presentation designation “CA”
as well as name of firm.
• Issue of Greeting Cards or Invitations: Designation “CA” as well as name of firm may be used
in greeting cards, invitations for marriages and religious ceremonies and any invitations for
opening or inauguration of office of members, change in office premises and change in
telephone numbers, provided that invitations are sent only to clients, relatives and friends of
the members concerned.
• Advertisement for Silver, Golden, Platinum or Centenary celebrations of CA Firms may be

CA SHUBHAM KESWANI 257

 published in newspaper or newsletter.
• Sponsoring Activities
(a) A member in practice or Firm of CAs is not permitted to sponsor an event. May sponsor
event conducted by a Programme Organizing Unit (PoU) of ICAI, provided it has prior
approval of Continuing Professional Education (CPE) Directorate of ICAI.
(b) Members sponsoring activities relating to CSR may mention their individual name with
the prefix “CA”. However, the mention of Firm name or CA Logo is not permitted.
• Sharing Firm Profile with prospective Client: Not permitted to share Firm profile with a
prospective Client unless it is in response to a proposed client’s specific query, and otherwise
not prohibited to be used by the client.
• Television or Movie Credits: Exhibition of name is not made differently as compared to other
entries in the credits.
• Soliciting professional work by making roving enquiries: Not permissible for member to
address letters, emails or circulars to persons who are likely to require services of CA since it
would tantamount to advertisement.
• Seeking work from Professional Colleagues: Issue of advertisement or a circular by CA,
seeking work from professional colleagues on any basis whatsoever except as provided above
would be in violation
• Scope of representation which an auditor is entitled to make under Section 140(4) of the
Companies Act, 2013: Opportunity not being abused to secure needless publicity. The letter
should merely set out in dignified manner how he has been acting independently and
conscientiously through the term of office and in addition, indicate his willingness to continue
as auditor if reappointed by shareholders.
• Acceptance of original professional work by a member emanating from the client introduced to
him by another member: Member not accept original professional work emanating from client
introduced to him by another member. If any professional work of such client comes directly, it
should be his duty to ask the client that he should come through other member dealing generally
with his original work.
• Giving Public Interviews: Not result in publicity. Details about members or their firms not
given in a manner highlighting professional attainments. Detail given as response to specific
question, and factual nature only.
• Members and/or firms who publish advertisements under Box numbers: prohibited from
inserting advertisements under box numbers in newspapers. It is violation of this clause.
• Educational Videos: No reference made to CAs Firm wherein member is a partner/ proprietor.
It should not contain contact details or website address.
• CA sent letters to other CAs claimed to be pioneer in liasoning with govt depts as expertise
àheld guilty in this clause

Website for CA Firms

• Should be on Pull model instead of Push model
• Info on website shouldn’t be circulated own own or emails except on specific ‘pull’ request
• Not issue material to solicit users to visit their website
• Info that can be displayed:
ü Member/firm Name

CA SHUBHAM KESWANI 258

 ü Year of establishment
ü Address of firm/member + Tel nos + E mail ids
ü Nature of services rendered (specific pull request)
ü Partners [Name, Year of qualification, Other qualification, Phone, email, Area of
experience (pull request)]
ü Details of employees (like partners)
ü Job vacancies
ü No of article assistants (pull request)
ü Nature of assignments handled (pull request)
ü Name of clients & fees charged can’t be given (Note)

Note: It can be given if required by regulator (whether or not constituted under a statute in India
or o/s India) only to extent reqd & period reqd by regulator.
Where such disclosure of names of clients and/or fees charged is made on the website, the
member/ firm shall ensure that it is mentioned on the website [in italics], below such disclosure
itself, that

“This disclosure is in terms of the requirement of [name of the regulator] having jurisdiction in
[name of the country/ area where such regulator has jurisdiction] vide [Rule/ Directive etc. under
which the disclosure is required by the Regulator].

• Display of Passport size pic permitted

• May include bulletin boards, articles, prof info, & educational videos
• Chat rooms can be provided with confidentiality protocol
• Can provide Document Management Facility
• Can share link to Social Networking Site but not solicit to visit or like their pages
• Can provide online advice on specific request for free/payment
• Ensure adequate secrecy of matters of clients
• No ad on website of banner or any nature
• May provide link to website of ICAI, Regional councils, Branches & website of Govt/depts/Reg
authorities/Professional bodies
• Website name should be similar to firm name & not amount to solicitation
• Mention info not at material variance from ICAI’s records

Online Third Party Platforms

• Some websites provide consultancy services of CAs or CA Firms
• Contact address of CA shouldn’t be provided
• It should not advertise professional achievements or status of CAs just mention they are
CAs
• Name of CA Firm with suffix “Chartered Accountants’ not permitted

Publication of Name or Firm Name by CAs in Telephone or other Directories published by

Telephone Authorities or Private Bodies
• Name under section ‘Chartered Accountants’
• Member/firm should be from town/city of directory publication
• Order of entries should be alphabetical
• Entry shouldn’t be made in a differential or prominent manner giving impression of
publicity /advertisement

CA SHUBHAM KESWANI 259

 • Entries shouldn’t be restricted & open to all CAs of that town
• Members can also include their names in Trade/social directories

Application based Service provider Aggregators (Eg UrbanClap)

• Not permissible for CAs

Specialised Directories for limited circulation

• name, description and address of member (or firm) may appear in any directory or list of
members of a particular body in which the names are listed alphabetically.
• Member shouldn’t give name of clients
• May supply info for spl. directories on own discretion

Exemptions:
• Advertisement for following purpose allowed:
ü For recruiting staff for own office
ü Inserted on behalf of client for staff for their office or acquisition or disposition
of property
ü For sale of business or property by member acting in prof capacity as trustee,
liquidator or receiver (litre)
ü When advertising for staff its desirable to avoid saying “Well known firm”.
Examples:
M/s XYZ, firm of CAs created website “www.xyzindia.com”. Website besides containing details of
firm and bio-data of partners also contains passport size photographs of all partners of firm.

Hosting Details on Website: As per Clause (6) of Part I of First Schedule to Chartered Accountants
Act, 1949, CA of firm can create its own website using any format subject to guidelines. However,
website should be so designed that it does not solicit clients or professional work and should not
amount to direct or indirect advertisement. Guidelines of ICAI allow a firm to put up the details of
firm, bio-data of partners and display of a passport size photograph.
Conclusion: In the case of M/s XYZ, all guidelines seem to have been complied and there appears to
be no violation of Chartered Accountants Act, 1949 and its Regulations.

M/s LMN, firm of Chartered Accountants responded to tender from State Government for
computerization of land revenue records. For this purpose, firm also paid ` 50,000 as earnest
deposit as part of terms of tender.

Responding to Tenders: Clause (6) of Part I of First Schedule to Chartered Accountants Act, 1949
lays down guidelines for responding to tenders, etc. As per guidelines if a matter relates to any
services other than audit, members can respond to any tender. Further, in respect of non-exclusive
area, members are permitted to pay reasonable amount towards earnest money/security deposits.

Conclusion: In instance case, since computerization of land revenue records does not fall within
exclusive areas for chartered accountants, M/s LMN can respond to tender as well as deposit `
50,000 as earnest deposit and shall not have committed any professional misconduct.

Mr. Honest, CAiP, wrote two letters to M/s XY Chartered Accountants firm of CAs; requesting them
to allot him some professional work. As he did not have significant practice or clients he also wrote
letter to M/s ABC, a firm of CAs for securing professional work. Mr. Clever, another CA, informed

CA SHUBHAM KESWANI 260

ICAI regarding Mr. Honest's approach to secure the professional work. Is Mr. Honest wrong in
soliciting professional work?

Securing Professional Work: Clause (6) of Part I of First Schedule to Chartered Accountants Act,
1949 states that CAiP shall be deemed to be guilty of misconduct if he solicits clients or professional
work either directly or indirectly by a circular, advertisement, personal communication or interview or
by any other means.

Provided that nothing herein contained shall be construed as preventing or prohibiting any CA from
applying or requesting for or inviting or securing professional work from another CAiP. Such restraint
has been put so that members maintain their independence of judgment and may be able to command
respect from their prospective clients.

Conclusion: In given case, Mr. Honest wrote letters only to other CAs, M/s XY and M/s ABC requesting
them to allot some professional work to him, which is not prohibited under Clause (6). Thus, Mr. Honest
has not committed any professional misconduct by soliciting professional work.

Clause (7)
Ø Advertises his professional attainments or services, or
Ø uses any designation or expressions other than the CA on professional documents, visiting
cards, letter heads or sign boards unless it be a degree of a University established by law
in India or recognized by the Central Government or a title indicating membership of the
Institute of CAs or of any other institution that has been recognized by the Central
Government or may be recognized by the Council.

Member in practice may advertise through a write up, setting out service provided by him or firm
and particulars of his firm subject to such guidelines as issued by Council.

• Use of designation ‘Member of Parliament’, ‘Municipal Councilor’ not permitted.

• A member can mention “Insolvency Professional” or “Registered Valuer” respectively on his
visiting card and letter head.
• Date of setting-up practice: Should not be mentioned on the letter heads and other professional
documents.
• Notice in the Press relating to the Success in an Examination: It should not contain any element
of undesirable publicity. Candidate’s name and address, school and local background, examination
passed with details of any prize or place gained, name of principal, firm and town in which principal
practices may be published.
• Reports and Certificates: Manner of publication limited to what is necessary to enable report or
certificate to serve its proper purpose. Members should use letterhead for issuing reports and
certificates.
• Appearance of CAs on Electronic Media (including Internet): Members may appear on television,
films and Internet and Radio or give lectures at forums and may give their names and describe
themselves as CAs. Spl. qualifications or specialised knowledge directly relevant to subject
matter of prog. may be given. Firm name may also be mentioned; however, exaggerated claim or
comparison is not permissible. It must not be promotional of him or his firm but must be an
objective professional view of topic. Mention of membership of Institute is desirable in such
cases to achieve suitable publicity for ICAI.
• Members giving talks or lectures or attending conference may describe themselves as CAs only
when they are acting in their capacity as CAs. However, reference to professional firm of the
member should not be given.

CA SHUBHAM KESWANI 261

• Organising Training Courses, Seminars etc. for his staff: CAiP may invite staff of other CAs
and clients to attend the same. Undue prominence should not be given to name of CA in any
booklet or document.
• Writing Articles or Letters to the Press: May give their names and use the description
CAs.
• Size of Sign Board: Use of glow signs or lights on large-sized boards not permissible.
• Public Announcements with details of Directors: Many Cos have CAs as directors. The prospectus
or public announcements shouldn’t publish descriptions about CA’s expertise, specialisation &
knowledge in any field.
Member should invite attention of mgt to provisions and request that before communication, is
issued, it should be approved by him.
The use of expression ‘CA’ is permissible. Directorships held by member in other Companies can
be given, but name of firm in which member is partner, should not be given.
• Use of logo/monogram of any kind/form/ style/design/colour etc. is prohibited.
• Printing QR code on visiting card allowed giving name/address/contact details/firm name

Notes:
• Giving names of all firms in which CA is partner on letterhead is allowed
• When CA while delivering speech at Conference talks about his expertise & services of firm &
requests audience to approach him à guilty under clause 6 & 7
• CA after Demonitisation messaged ppl that he offers cash conversion service à guilty of Prof
misconduct under Clause 6 & 7 + Other misconduct under clause 2 of Part IV of First Schedule
read with Sec 22 of CA Act 1949

Advertisements through write up

ü Honest & truthful
ü No exaggerated claims
ü No disparaging references or unsubstantiated comparisons
ü Not bring profession to disrepute
ü Not contain testimonials
ü Not contain info about achievements or awards (except awards by CG/SG/ Regulatory
Bodies)
ü Monogram of any sort not permissible
ü Membership no/firm reg no to be mentioned
ü Font size upto 14

Eg. The offer document of listed company in which Mr. D, practising CA is a director mentions name
of Mr. D as a director along with his various professional attainments and spheres of specialisation.

Council of ICAI has in communication to members stated that if public Co, in which CAiP is director,
issues prospectus or gives any announcement that gives descriptions about CA’s expertise,
specialisation and knowledge in any particular field, it shall constitute a misconduct under Clauses (6)
and (7) of Part I of the First Schedule to Chartered Accountants Act, 1949.

The Council further stated that in such cases member concerned has to take necessary steps to ensure
that such prospectus or public announcements or public communications do not advertise his
professional attainments and also that such prospectus or public announcements or public

CA SHUBHAM KESWANI 262

communications do not directly or indirectly amount to solicitation of clients for professional work by
the members.

Conclusion: Thus, Mr. D would be guilty of professional mis - conduct and liable for disciplinary action.

Clause (8) accepts a position as auditor previously held by another chartered accountant or a
certified auditor who has been issued certificate under the Restricted Certificate Rules, 1932
without first communicating with him in writing.

As a matter of professional courtesy and professional obligation it is necessary for new auditor
appointed to communicate with such earlier auditor.

Objective is to ascertain whether there are any circumstances which warrant him not to accept
appointment.

The professional reasons for not accepting an audit would be:

(a) Non-compliance of Sec 139 and 140 of Companies Act, 2013
(b) Non-payment of undisputed Audit Fees by auditees other than in case of Sick Units
(c) Issuance of qualified report*

*may accept audit if satisfied that attitude of retiring auditor was not proper and justified. If he
feels that retiring auditor qualified report for good and valid reasons, refuse to accept audit. There
is no rule, written or unwritten, which would prevent auditor from accepting appointment offered
to him in these circumstances. Before accepting audit, ascertain full facts of case.

What should be the correct procedure to adopt when a prospective client tells you that he
wants to change his auditor and wants you to take up his work?

Company should be asked whether retiring auditor had been informed of intention to change. If
answer is ‘Yes’, then communication should be addressed to retiring auditor. If it is learnt that
old auditor hasn’t been informed, and client is not willing to inform, it would be necessary to ask
reason for proposed change. If no valid reason for change, it would be healthy practice to not
accept audit. If he decides to accept audit he should address a communication to retiring auditor.

Members should retain positive evidence of delivery of communication to addressee. In opinion of

Council, following would provide such evidence: -

(a) Communication by a letter sent through “Registered Acknowledgement due”, or

(b) By hand against a written acknowledgement, or
(c) Acknowledgement of communication from retiring auditor’s vide email address
registered with Institute or his last known official email address, or
(d) Unique Identification Number (UDIN) generated on UDIN portal

*Letters posted under Certificate of Posting not considered valid (No positive evidence of delivery)

Premises found Locked : Deemed as having been delivered to retiring auditor.

Firm not found at the given Regd address : Address of communication is same as regd with ICAI
on date of dispatch, letter will be deemed to be delivered, unless retiring auditor proves it was not
really served and he was not responsible for such non-service.

CA SHUBHAM KESWANI 263

Joint audit with earlier auditor: As a matter of professional courtesy and obligation it is
necessary for new auditor appointed to act jointly with earlier auditor to communicate with
such earlier auditor.

Special Audit under Income Tax Act, 1961: It would be healthy practice if Tax Auditor conducting
spl audit under Income Tax Act,1961 communicates with member who conducted Statutory Audit.

Council decisions:
• Requirement for communicating with previous auditor being CAiP would apply to all types
of Audit viz., Statutory Audit, Tax Audit, GST Audit, Internal Audit, Concurrent Audit
or any other kind of audit.
• Communication in case of Assignments done by other professionals: Communication is
mandatorily reqd for all types of Audit/Report where previous auditor is a CA.
For assignments done by other professionals not being CAs, it would be a healthy practice
to communicate.
• Lack of time in acceptance of Government Audits: No time to wait for reply from outgoing
auditor, incoming auditor may give conditional acceptance of appointment and commence
work.
In acceptance letter, make clear to client that acceptance of appointment is subject to
professional objections, from previous auditors and that he will decide about final
acceptance after considering information recd from previous auditor.

Clause (9) accepts an appointment as auditor of company without first ascertaining from it whether
requirements of Section 225 of the Companies Act, 1956 (1 of 1956), in respect of such appointment
have been duly complied with;

Clause (9) of Part I of the First Schedule to Chartered Accountants Act, 1949 provides that a
member in practice shall be deemed to be guilty of professional misconduct if he accepts an
appointment as auditor of a Company without first ascertaining from it whether the requirements of
Sections 139 and 140 of the Companies Act, 2013, in respect of such appointment have been duly
complied with.

It would not be sufficient for incoming auditor to accept certificate from mgt that provisions of
above sections have been complied with. It is necessary to verify relevant records of Co. and
ascertain as to whether Co. has complied with provisions of above sections. If Co. is not willing to
allow incoming auditor to verify relevant records, should not accept audit assignment.

ESB Guidelines in case of removal/resignation by Auditor

A. Auditor willing for reappointment but not reappointed à shall file with ICAI a copy of
statement which is also sent to shareholders by mgt of Co (Obligatory for incoming auditor to
obtain such copy from BOD & consider before accepting audit)
B. Auditor resigns à send communication to BOD + ICAI stating professional reasons
(Obligatory for incoming auditor to obtain such copy from BOD & consider before accepting
audit)
C. ESB can ask for add. info if required
D. Also applicable to removal of auditor by govt/other statutory bodies

CA SHUBHAM KESWANI 264

Clause (10)
• Charges or offers to charge,
• accepts or offers to accept
• in respect of professional employment
• fees based on percentage of profits or contingent upon findings, or results of such
employment, except as permitted under any regulations made under this Act.

Exceptions: Regulation 192

(a) Receiver or a liquidator, fees based on percentage of realization or disbursement of assets;
(b) Auditor of co-operative society, fees based on percentage of paid up capital or working capital
or the gross or net income or profits;
(c) Valuer for purposes of direct taxes and duties, fees based on percentage of value of property
valued;
(d) management consultancy services, fees contingent upon findings, or results of such work;
(e) fund raising services, fees based on percentage of fund raised;
(f) Debt recovery services, fees based on percentage of debt recovered;
(g) services related to cost optimisation, fees based on percentage of benefit derived; and
(h) any other service or audit as may be decided by Council.
[Following activities have been decided by Council under “h” above :-
(i) Acting as Insolvency Professional (ii) Non-Assurance Services to Non-Audit Clients]

Note: Getting a loan sanctioned from bank is not covered under fund raising service à hence
CAiP can’t charge fees basis % of loan raised by client

Clause (11) Engages in business or occupation other than profession of chartered accountant unless
permitted by Council so to engage.

Provided that nothing contained herein shall disentitle a chartered accountant from being a director
of a company (Not being managing director or a whole time director*) unless he or any of his
partners is interested in such company as an auditor.

Exception: Ch-XVII of Council General Guidelines to be discussed later.

Subject to control of Council, CAiP may act as liquidator, trustee, executor, administrator,
arbitrator, receiver, adviser or representative for costing, financial or taxation matter, or may take
up appointment that may be made by the CG or a State Government or a court of law or any other
legal authority or may act as Secretary in his professional capacity, provided his employment is not
on a salary-cum-full-time basis.

Permission granted generally –

• Employment under CAiP or firms of such CAs.
• Private tutorship.
• Authorship of books and articles.
• Holding of Life Insurance Agency License for purpose of getting renewal commission.
• Attending classes and appearing for any examination.
• Holding of public elective offices such as M.P., M.L.A. and M.L.C.
• Honorary office leadership of charitable-educational or other non-commercial organisations.
• Acting as Notary Public, Justice of the Peace, Special Executive Magistrate and the like.
• Part-time tutorship under coaching organisation of Institute.
• Valuation of papers, acting as paper-setter, head-examiner or a moderator, for any examination.

CA SHUBHAM KESWANI 265

• Editorship of professional journals (Eg Company Audit Journal)
• Acting as Surveyor and Loss Assessor under the Insurance Act, 1938
• Acting as recovery consultant in banking sector
• Owning agricultural land and carrying out agricultural activity

Specific Resolution - Members in practice may engage in the following categories of business or
occupations, after obtaining the specific and prior approval of the Council in each case:
• Employment in business concerns provided member and/or his relatives do not hold “substantial
interest” in such concerns. (20% or more)
• Full-time or part-time employment in non-business concern.
• Office of MD or a WTD of body corporate provided member and/or any of his relatives don’t
hold substantial interest in such concern
• Interest in family business concerns (including such interest devolving on the members as a result
of inheritance / succession / partition of family business) or concerns in which interest has been
acquired as a result of relationships and in management of which no active part is taken.
• Interest in an educational institution.
• Part-time or full-time lectureship for courses other than those relating to Institute’s examinations
conducted under the auspices of the Institute or the Regional councils or their branches.
• Part-time or full-time tutorship under any educational institution other than coaching
organization of Institute.
• Editorship of journals other than professional journals.
• Any other business or occupation for which Executive Committee considers that permission may
be granted.
Notes:
• No bar for member to be promoter / signatory to Memorandum and Articles of Association of Co.
• No bar for such promoter / signatory to be Director Simplicitor of that Co.
• Teaching hours should not exceed 25 hrs a week in order to be able to undertake attest functions.
• Trading in commodity derivates treated as business
• Need specific permission of Council for becoming director if partner is Auditor of Co.
Q. Whether the auditor of a Subsidiary Company can be a Director of its Holding Company?
The Ethical Standard Board (ESB) via a clarification, decided that auditor of a Subsidiary Co. can’t
be a Director of its Holding Company, as it will affect independence of an auditor.
Public conscience needs to be kept ahead of the law.

Clause (12) Allows a person not being a member of the institute in practice or a member not being
his partner to sign on his behalf or on behalf of his firm, any balance sheet, profit and loss
account, report or financial statements.

Exceptions:
Council has clarified that power to sign routine documents on which professional opinion or
authentication is not required to be expressed may be delegated in the following instances and such
delegation will not attract provisions of this clause:
(i) Issue of audit queries during course of audit.
(ii) Asking for information or issue of questionnaire.
(iii) Letter forwarding draft observations/financial statements.
(iv) Initiating and stamping of vouchers and of schedules prepared for purpose of audit.

CA SHUBHAM KESWANI 266

(v) Acknowledging and carrying on routine correspondence with clients.
(vi) Issue of memorandum of cash verification and other physical verification or recording results
thereof in books of clients.
(vii) Issuing acknowledgements for records produced.
(viii) Raising of bills and issuing acknowledgements for money receipts.
(ix) Attending to routine matters in tax practice, subject to provisions of Section 288 of Income
Tax Act.
(x) Any other matter incidental to office administration and routine work involved in practice of
accountancy.

Authority delegated by CA à But Authority not used à not a defence for firm/CAà Prof
misconduct

Sec-26 à No person other than member of ICAI will sign document on behalf of CAiP
Note: Issue of stock certificate by assistant shall also make CAiP guilty

PART II – Professional misconduct in relation to members of the Institute inservice

A member of the Institute (other than a member in practice) shall be deemed to be guilty of
professional misconduct, if he being an employee of any company, firm or person:

Clause (1) pays or allows or agrees to pay directly or indirectly to any person any share in the
emoluments of the employment undertaken by him.

Can share with relatives,dependents,friends etc. if it’s not consideration for procuring or
retaining a job.

Job must be procured and retained with own professional capabilities and not by any financial
deal impairing professional dignity.

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.

A member in foregoing circumstances would be guilty of misconduct regardless of fact that he

was in whole-time or part-time employment or that he was holding COP along with his
employment.

(CAiP & Employment refers lawyer to employer à Gets referral fees from lawyer à Guilty in
this clause)

PART III - Professional misconduct in relation to members of the Institute generally

Clause (1) not being a fellow of the Institute, acts as a fellow of the Institute.

Clause (2) does not supply the information called for, or does not comply with the requirements
asked for, by the Institute, Council or any of its Committees, Director (Discipline), Board of
Discipline, Disciplinary Committee, Quality Review Board or the Appellate Authority.

Where a Chartered Accountant had continued to train an articled clerk though his name was
removed from the membership of the Institute and he had failed to send any reply to the Institute

CA SHUBHAM KESWANI 267

asking him to send his explanation as to how he was training as his articled clerk when he was not a
member of the Institute. Held that he was guilty under Clause (2) of Part III of the First Schedule.

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 items (6)
and (7) of Part I of this Schedule, gives information knowing it to be false.

PART IV- Other misconduct in relation to members of the Institute generally

A member of the Institute, whether in practice or not, shall be deemed to be guilty of other
misconduct, if he –

Clause (1) is held guilty by any civil or criminal court for offence which is punishable with
imprisonment for a term not exceeding six months.

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.

CA is expected to maintain highest standards of integrity even in his personal affairs and any deviation
from these standards, even in his non-professional work, would expose him to disciplinary action.

Note: Before starting any ans. of this clause ICAI gives this line à Section 21 of the Chartered
Accountants Act, 1949 provides that a member is liable for disciplinary action if he is guilty of any
professional or “Other Misconduct.”

Examples, where a member may be found guilty of “Other Misconduct”:

• Retains books of a/c and documents of client and fails to return on request without reasonable
cause.
• Makes material misrepresentation.
• Uses the services of his articled or audit assistant for purposes other than professional practice.
• Conviction by a competent court of law for any offence under Sec 8 (v) of the CAs Act 1949.
• Misappropriation of money by office-bearer of Regional Council of ICAI and utilisation for his
personal use.
• Not replying within reasonable time and without good cause to letter of public authorities.
• Assessment records of IT Dept belonging to client of were found in almirah of bed-room of CA.
• Where CA had adopted coercive methods on a bank for having a loan sanctioned to him.

The Second Schedule

Director discipline opinion àmember guilty of prof/other misconduct in 2nd or both schedule
àDisciplinary Committee

Part I - Professional Misconduct in relation to Chartered Accountants in Practice

A Chartered Accountant in practice shall be deemed to be guilty of professional misconduct, if he

Clause (1) Discloses Information acquired in the course of his professional engagement to any person
other than his client so engaging him without the consent of his client or otherwise than as required
by any law for the time being in force.

Exceptions:
• Disclosure allowed only with consent of client or as part of professional duties (Eg
submitting info to Exchange Control Authorities)

CA SHUBHAM KESWANI 268

• No misconduct in case of legal compulsion as reqd by Evidence Act
• Sec 143(12) – Reporting of fraud

Eg. CA while presenting paper at event shared vital info of his client to help Nation à Held guilty

Note: When external party like Bank asks for info of your working papers à This clause + SA 200
Confidentiality is to be maintained + SA 230 Property of Auditor (discretion)

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 chartered accountant 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.

He can prepare profit forecast provided he indicates clearly in his report the
• sources of information,
• the basis of forecasts and
• major assumptions made in arriving at the forecasts, so long as 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.
• CA can’t certify f/s of concern where he’s employed
• Not audit a/c of college where he is part time lecturer
• Not audit trust if partner is either trustee or employee of trust
• Applicable to all types of Audit
• The client shouldn’t be relative of member
• Not permitted to prepare books of a/cs for auditee clients
• Stat auditor can’t be internal auditor
• Internal auditor can’t be appointed as Tax/GST Auditor
• Cooling off period: Not accept Audit of Co for 2 years from date of completion of
tenure/resignation as Director.

Note: Evaluating costs or other assignments of such nature à not covered in this clause

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.

Example:
• CA failed to report to shareholders of Co. about non-creation of sinking fund as per
Debenture Trust Deed and did not make clear that amounts shown as towards sinking fund
were borrowed from managing agents of the company -Held, that the chartered accountant
was duty bound to see that nature and subject matter of the charge over a security and the
nature and mode of valuation of the sinking fund investment were disclosed in Balance
Sheet, held guilty of misconduct.

CA SHUBHAM KESWANI 269

 • CA knew Co. had taken loan of 10L from EPF which wasn’t disclosed in F.S. àHeld
guilty
Note:
If CA appears before tax authorities on behalf of client à submits info or expln that’s found
false misleading à not guilty as data provided by mgt + acting on instructions of client

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.

Example:
The Respondent had failed to give disclosure of Contingent Liabilities in F.S. against Corporate
Guarantee given in favour of Group Company. Respondent should have verified charges created on
basis of material available with Company and Registrar of Companies. Further, charge of Rs.4.35
crores against the Balance Sheet size of Rs.26.12 crores was significant. Hence, omission of such
information from F/S makes them misleading and thereby reflects gross negligence on the part
of the Respondent in conducting audit and failing to report material misstatement in financial
statements of. Held guilty of professional misconduct under Clauses (6) and (7) of Part I of the
Second Schedule to the Chartered Accountants Act, 1949.

Clause (7) does not exercise due diligence, or is grossly negligent in the conduct of his professional
duties.
• It is a vital clause which gets attracted whenever it is necessary to judge whether accountant
has honestly and reasonably discharged his duties.
• The expression negligence covers a wide field and extends from frontiers of fraud to
collateral minor negligence.

Examples:
• CA fails to indicate mode of valuation of investments in shares reqd by Cos. Act 2013
• Conducted Stock audit without visiting the site, relied on mgt reports
• Wrongly certified increase in Paid up share capital of Pvt ltd Co in Balance Sheet (Clause 7/8/9
of Part 1 of Second Schedule to CA Act 1949)
• Issued turnover certificate of betel nuts to firm for import license w/o checking books & docs
but relying on article clerk à Guilty
• Issued certificate of consumption of Raw material based on minutes of BODà guilty clause 2 &
7 of this schedule
• Issued incorrect certificate of export of Onions
• Issued report subject to separate notes (No audit report is issued with Notes)
• Failure to examine cash balance & passbook i.e. basic audit procedure
• Not submitted his report in due time to enable Co to comply with Statutory requirement
• Wrong audit report issued to School, claimed correction slip sent but couldn’t prove
• Issued 2 certificates of circulation for 1 daily newspaper àclause 7 & 8 (Should have issued
only 1)
• A material prior period adjustment made to accounts àauditor didn’t consider materiality à
didn’t exercise due diligence + wrong opinion insufficient info + didn’t follow SA à Clause 7,8 & 9
• Failed to check a forged signature which he could have checked
• Shared password of his digital signature certificate with client àGuilty

CA SHUBHAM KESWANI 270

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.

Examples:
• Transaction took place between ABC Firm & R developers but reported in books of ABC
Construction. Loan amount was material. Guilty under clause 6, 7 & 8 of Part I of Second
Schedule to CA Act 1949
• CA issued false certificates to several parties for past exports for monetary consideration
without verifying any supporting records or documents which helped parties to make imports
free of duty.
Held that he was guilty of professional misconduct within the meaning of clauses (2), (7) & (8)
of Part I of the second schedule of CA Act, 1949 in terms of section 21 & 22 of the said Act
• CA audited books of A ltd that had investment of Rs 10L, later it was found real value was 25k à
CA guilty under clause 2, 7, 8 of Part I of Second Schedule of CA Act,1949
• Certificate of circulation of Periodical w/o verifying undelying record bank statements, printer
bills, sales records etc à Guilty under clause 7 & 8

Clause (9) Fails to invite attention to any material departure from the generally accepted procedure
of audit applicable to the circumstances

Generally accepted audit procedure = Engagement and Quality Control Standards, Statements,
General Clarifications, Guidance Notes Technical Guides, Practice Manuals, Studies and Other
Papers.

Special Points:
• Audit of listed cos : Done by Auditor subject to Peer Review process of ICAI & hold valid
certificate issued by Peer Review Board of ICAI
• Firm Reg No & Membership No to be mentioned on reports pursuant to attestation engagements
• UDIN is mandatory to be generated for all kinds of certifications

Examples:
• CA didn’t conduct sample checking of bank a/c of Co & didn’t do vouching & depended on work of
Article Assistant à guilty under clause 7,8,9
• CA didn’t check bank column totals, didn’t verify contra entries, test checked when no internal
check present,didn’t check Bank recos à guilty under clause 7,8,9

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.

Spl points:
• Advance received against services excluded from scope
• Money recd for expenses to be incurred in reasonably short time not to be deposited in bank a/c
• Money recd in capacity of trustee, executor liquidator, etc keep in separate bank a/c

Mazedar Kisse:

• Refund voucher issued by Income Tax dept in name of client credited to his a/c à Guilty under
clause 7 & 10
• CA acting as financial advisor to client converted his own a/c to joint a/c with client withouthis
consent & fraudulently discharged 3 FDRs in client’s name. Gulity à Clause 10 of Part I of

CA SHUBHAM KESWANI 271

 Second Schedule + Other Misconduct u/s 22 read with sec 21

PART II - Professional misconduct in relation to members of the Institute generally

A member of the Institute, whether in practice or not, shall be deemed to be guilty of professional
misconduct, if he –

Clause (1) contravenes any of the provisions of this Act or the regulations made there under or
any guidelines issued by the Council.

Examples:
• CA certified in Form K-2 audit clerk in service with him, the article employed elsewhere 11-5 pm
& then come to office work till 8 pm.
• Took article intern under him even when no vacancy was there, intern got to know that
Articleship deed not regd.
• Issued certificate as a CA even if no COP there with him. Guilty as violation of Section 6
• In pvt circular to clients in addition to CA described himself as Investment Consultant Public
Accountant
• Took loan from firm where article & his father were interested
• Didn’t pay stipend as per Reg 48 to article, only paid when article left. Said he had agreement
to pay fees annually à held guilty
• Accepted audit even when UNDISPUTED audit fees wasn’t paid to earlier auditor à Guilty
under Clause 1 of Part II of Second Schedule of CA Act 1949
• Conducted more TAX audits than prescribed limit

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 for the time
being in force or except as permitted by the employer.

Clause (3) Includes in any information, statement, return or form (SIRF) 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.

Examples:
• A CA manager in firm applied for admission as fellow to ICAI saying he’s partner in firmà made
a statement that’s false à Guilty
• In a hearing before Disciplinary Committee made a false statement on oath
• CA in full time employment in a Co while filling bank empanelment form gave declaration that he
was not in any occupation/business/vocation e t c
• CA being manager of Co devoting 30 hrs. per week showed himself as CA in full time practice for
employment for Bank branch Audits

Clause (4) Defalcates or embezzles money received in his professional capacity.

SA 240 à Defalcation & embezzlement of money recd in prof capacity à Fraud

Part III - Other misconduct in relation to members of the Institute generally

A member of Institute, whether in practice or not, shall be deemed to be guilty of other misconduct,
if he is held guilty by any civil or criminal court for an offence which is punishable with imprisonment
for a term exceeding 6 months.

CA SHUBHAM KESWANI 272

 Council General Guidelines (Final Stage of Chapter)

Chapter I: Applicable to all the Members of the Institute whether in practice or not

Chapter II: A member of the ICAI who is an employee shall exercise due diligence and shall not be
grossly negligent in the conduct of his duties.

Chapter V: Maintenance of books of account

Member or firm in practice shall maintain following books of a/c:

• Cash Book
• Ledger

Chapter VI: Tax Audit assignments under Section 44 AB of the Income-tax Act, 1961
A member of the Institute in practice shall not accept, in a financial year, more than the “specified
number of tax audit assignments” under Section 44AB of the Income-tax Act, 1961.
• As per clarification on Tax Audit Assignments, if there are 10 partners in a firm of CAs in
practice, then all
• partners of the firm can collectively sign 600 tax audit reports. This max. limit of 600 tax
audit assignments may be distributed between partners in any manner. For instance, 1 partner
can individually sign 600 tax audit reports & remaining 9 partners are not signing any tax audit
report.
• In computing “specified no. of tax audit assignments” each year’s audit would be taken as
separate
• assignment.
• Mr A partner in ABC as well as ADE, then also only 60 allowed for A
• Mr A partner in ABC & also in A proprietorship, then also 60 allowed to A
• Audits u/s 44AD, 44ADA, & 44AE of IT Act 1961 not counted
• Audit of H.O. & Branch office counted as 1 assignment
• Audit of More than 1 branch of same concern = 1 assignment
• Mr Badal is part time practicing partner then will he be considered for limit? No

Chapter VII: Appointment of an Auditor in case of non-payment of undisputed fees

• A member of the Institute in practice shall not accept the appointment as auditor of an
entity in case the undisputed audit fee of another Chartered Accountant for carrying out the
statutory audit under the Companies Act, 2013 or various other statutes has not been paid:
• Provided that in the case of sick unit, the above prohibition of acceptance shall not apply.
• Undisputed audit fees include expense incurred by Auditor
• Sick unit means unit regd for 5 years or more & has accumulated loss >= Net worth

Chapter VIII: Specified no of Audit assignments

A member of the Institute in practice shall not hold at any time appointment of more than the
“specified number of audit assignments” of Companies under Section 141 of the Companies Act 2013.
• 30 audits per CA in full time practice allowed
• One Person Co & Dormant Co excluded from limit
• No of partners on date of acceptance to be considered

Chapter IX Appointment as Statutory auditor

• A member of Institute in practice shall not accept appointment as statutory auditor of
PSU(s)/ Govt Company(s)/Listed Company(s) and

CA SHUBHAM KESWANI 273

 • other Public Company(s) having turnover of 50 Cr or more in a year
• where he accepts any other work(s) or assignment(s) or service(s) in regard to the same
Undertaking(s)/ Company(s) on a
• remuneration which in total exceeds fee payable for carrying out stat audit of same
Undertaking /Co.

Other work excludes:

• audit under any other statute.
• certification work required to be done by statutory auditors; and
• any representation before an authority

Chapter X Appointment of an auditor when he is indebted to a concern

Member in practice or partner of firm in practice or firm or relative of such member or partner shall
not accept appointment as auditor of concern while indebted to concern or given any guarantee or
provided any security in connection with indebtedness of any 3rd person to concern, for limits fixed
in statute and in other cases for amount exceeding 100,000/-.

Notes:
• Recovery of fees on progressive basis doesn’t mean indebtness.
• Limit as per Cos. Act for indebtness is 5L & for guarantee or security is 1L

Chapter XI Directions in case of unjustified removal of auditors

Incoming auditor(s) not to accept the appointment as auditor(s), in case of unjustified removal of
earlier auditor(s).

Chapter XIII Guidelines on Tenders

• Member in practice shall not respond to any tender issued by any organization or user of
professional services
• in areas of services which are exclusively reserved for CAs, such as audit and attestation
services.

Not applicable
• where minimum fee of the assignment is prescribed in tender document itself or
• where areas are open to other professionals along with CAs.

Chapter XV: Networking

Where larger structure is aimed at co-operation and entities within structure share significant
part of professional resources, it is deemed to be a network.

Professional resources include:

• Common systems that enable firms to exchange info such as client data, billing and time
records;
• Partners and staff;
• Technical departments that consult on technical or industry specific issues, transactions or
events for assurance engagements;
• Audit methodology or audit manuals; and
• Training courses and facilities

The different forms of Network can be as under:-

• Network can be constituted as a mutual entity which will act as a facilitator for
constituents of Network. In such case Network itself will not carry out any professional
practice.
• Network can be constituted as a partnership firm subject to condition that total number
of partners does not exceed 20.
• Network can be constituted as a LLP subject to provision of Chartered Accountant Act and

CA SHUBHAM KESWANI 274

 Rules and such other laws as may be applicable.
• Network can be constituted as company subject to the guidelines prescribed by Institute
for corporate form of practice and formation of management consultancy services
company. (Chap xvii)
• Network Firms shall consist of sole Practitioner/proprietor, partnership or any such entity
of professional accountants as may be permitted by the Act.
• Firm is allowed to join only one network.
• Firms having common partners shall join only one Network.

Naming of Network
1.The Network may have distinct name which should be approved by ICAI. To distinguish a “Network”
from a “firm” of CAs, the words “& Affiliates” shall be used after the name of network and words “&
Co.” /“& Associates” shall not be used. The prescribed format of application for approval of Name for
Network is at Form ‘A’ (enclosed). The names of the network may be as mentioned in Appendix II.

2.ICAI shall approve or reject name of Network and intimate to Network at its address mentioned in
Form ‘A’ within 30 days from date of receipt of said Form.

3.Mere approval of name of Network shall not entitle Network to carry on practice in its own name.

Registration of Network with entities in India

1. After name of Network approved, Institute same shall reserve name for period of three (3)
months from date of approval.
2. Network shall get itself registered with Institute by applying in Form B within period of 3
months, failing which name assigned shall stand cancelled on expiry of said period.
3. Registration of Network with Institute is mandatory.
4. If different Indian firms are networked with a common Multinational Accounting Firm, they
shall be considered as part of network.

Listing of Network with entities outside India

1. Authorized representative of Indian Member firm (s)/Member constituting Network with
entities outside India shall file declaration with ICAI in Form `D’ for Listing such Network within
30 days from date of entering into Network arrangement.

2. Proprietary/individual members, partnership firms as well as members in LLP or any such other
entity, shall be permitted to join such network with entities outside India provided that they can
join only one network and firms having common partners shall join only one such network.

Framework of Internal Byelaws of Network:

Bye-laws may contain following clauses on which the affiliates of the network may enter into a
written agreement among themselves:
(i) Appointment of a Managing Committee
(ii) Administration of network
(iii) Contribution of membership fees to meet the cost of the administration of the network.
(iv) Identifying a partner of any of member firms of network to be responsible for the assignment
(engagement partner)
(v) Dispute settlement procedures through arbitration and conciliation
(vi) Development of training materials for members of the network
(vii) Issue of News-letters for staff and clients
(viii) Development of software for different types of assignments
(Manage/Administer/EP/Fees/Dispute settle/Train/Newsletters/Softwares)

CA SHUBHAM KESWANI 275

Ethical Compliance: It will be necessary for such network to comply with applicable ethical
requirements prescribed by ICAI and following requirements in particular: -

1. If one firm of network is statutory auditor of entity then associate [including networked firm(s)] or
said firm directly/indirectly not accept internal audit or book-keeping or other assignments prohibited
for stat auditor firm.
2. Guidelines of ceiling on Non-audit fees is applicable in relation to Network as follows:
- i) For a Network firm who is doing statutory audit (including its associate concern and/or firm(s)
having common partnership), it shall be same as mentioned in said notification; and
ii) For other firms of same Network collectively, it shall be 3 times of fee payable for carrying out
statutory audit of same undertaking/ company.
3. In cases where rotation of firms prescribed by regulatory authority, no member firm of network
can accept appointment as auditor in place of any member firm of network which is retiring.
4. Network may advertise to extent permitted by Advertisement Guidelines issued by ICAI. Firms
constituting network are permitted to use words “Network Firms” on their professional stationery.
5. Constituent member firms of Network and Network shall comply with all Ethical Standards
prescribed by Council from time to time.

Change in constitution of registered Network:

In case of change in constitution of regd Network on account of any entry into or exit from
Network, network shall communicate to ICAI by filing Form ‘C’ within 30 days from date of change in
the constitution.

Chapter XIV Unique Document Identification Number (UDIN) Guidelines

• To curb malpractice of false certification/ attestation by unauthorised persons & reduce
bogus certificates.
• Mandatory for all certificates, GST & Tax audit reports & other audit/assurance attest
functions

Chapter XVI Logo Guidelines

The logo consists of letter ‘CA’ with a tick mark inside a rounded rectangle with white background.

Chapter XVII Guidelines for Corporate form of Practice

• Council has allowed members in practice to be MD/WTD/Manager of a Body Corporate that is

exclusively engaged in providing Management Consultancy & Other Services permitted u/s
2(2)(iv) of CA Act 1949
• No restriction on equity holding in such Company
• Entitled to do attest functions & train article assistants
• Name of Mgt Consulting Co to be approved by ICAI & registered with it
• Compliances for Mgt Consulting Co:
ü Not to accept Internal audit or bookkeeping service or other assignments from entity where
practitioner or firm is auditor
ü Ceiling of non-audit fees applicable to it
ü Mgt consulting co shall comply with clause 6 & 7 of Part 1 of First Schedule of CA Act 1949

CA SHUBHAM KESWANI 276

 Recommended Self-Regulatory Measures

• Branch Audits
ü Branch audit of Co shouldn’t be conducted by Stat Auditors consisting 10 or more
members
ü But by local firms of auditors less than 10 members
ü Restriction not apply in following cases:
o A/c records of branch at HO
o Significant operations carried out at Branch
• Joint Audit
ü Large Cos should have practice of having firms with < 5 members as Joint Auditors
ü Senior firms shouldn’t object to such practice
• Ratio b/w Qualified & Unqualified Staff
ü Atleast 1 member for every 5 non-members excluding articled/audit assistants,
typists, peons, & others not engaged in professional work
• Disclosure of Interest by Auditors
ü Disclose the payments received for other services through medium of different
firm or firms where he maybe a partner or proprietor
• Recommended minimum scale of fees
Recommended Min. fees for professional services is to be charged

Recent Decisions of Ethical Standards Board

• CA may be Equity research adviser but can’t publish retail report as it’d be business or
occupation
• Member of trust can’t be its auditor
• May engage himself as Registration Authority for obtaining Digital Signature Certificate
for clients
• Can hold credit card of bank even if auditor of same bank but o/s balance shouldn’t exceed
1L from limit (If limit 2L, o/s balance can’t be > 3L)
• CA can act as mediator in Court
• Can’t accept audit of bank if taken loan against FD
• CA in practice can’t become Financial Advisors & receive fees/commission from Financial
Institutions such as Mutual Funds, Insurance cos, NBFCs
• Can’t exercise lien over client docs for non-payment of fees
• Not permissible to print vision or values behind visiting cards as it’d result in solicitation &
thus violative of Clause 6 of First Schedule of CA Act 1949
• Not permissible to take agencies of UTI, GIC & NSDL
• Permissible to be settlor of a trust (provides property to beneficiary)
• Can’t hold customs broker license
• CA in employment can appear as Tax representative before tax authorities on behalf of
employer but not for other employees of that employer
• Stat auditor of bank can’t do stock audit of such bank
• Internal auditor of PF trust of Govt co can’t be stat auditor
• Concurrent auditor of bank X can’t be stat auditor of bank Y which is sponsored by X
• CA/ CA firm can act as internal auditor of Co & stat auditor of its EPF
• Internal auditor not to undertake Tax Audit

CA SHUBHAM KESWANI 277

 Disciplinary Proceedings

Receipt of complaint + Fees by Disciplinary directorate (DD)

GUILTY NON-GUILTY

First Schedule Second Schedule or both Board of

Discipline

Board of Disciplinary
Discipline Committee Accept Reject
(BOD) (DC)

Close • Advise DD to
GUILTY* matter investigate further
GUILTY*
• May proceed if
matter of 1st
• Reprimand
• Reprimand Schedule
• Remove name
• Remove name • Refer to DC if 2nd
permanently
upto 3 months Schedule
or any
• Fine upto 1L
duration
• Fine upto 5L

If not found guilty à Matter closed

Appeal:
Can be made by member or Director (Discipline) within 90 days à Appellate Authority

Orders possible:
• Confirm, modify or set aside order
• Impose, set aside, reduce or enhance penalty
• Remit case to BOD/DC to reconsider
• Such order it thinks fit

CA SHUBHAM KESWANI 278

 Non-Compliance with Laws and Regulations (NOCLAR)
Non-compliance with laws and regulations comprises of acts of omission or commission, intentional or
unintentional, which are contrary to prevailing laws or regulations committed by:
• a client/professional accountant’s employing organisation;
• or TCWG or Mgt or other individuals
• working for or under direction of a client/ employing organisation.

Some important facts about NOCLAR are given below:

• During Course of Providing a Service: NOCLAR will be applicable if a professional accountant

encounters, or is made aware of, non-compliance or suspected non-compliance while providing a
professional service to a client. He is not required to investigate, nor responsible for ensuring
compete compliance.

• Expertise of Laws not Required: A professional accountant is expected to apply knowledge and
expertise, and exercise professional judgment. However, he is not expected to have a level of
knowledge of laws and regulations greater than that which is required to undertake the
engagement. Whether an act constitutes non-compliance is ultimately a matter to be determined
by a court or other appropriate adjudicative body.

• Certain Matters Expressly out of Purview: Matters that are clearly inconsequential, or relating to
personal misconduct pertaining to business activities of client not covered.

• Disclosure, which is Contrary to Law not Required: As per IESBA Code, disclosure of the matter
to an appropriate authority would be precluded if doing so would be contrary to law or regulation.

Applicability of NOCLAR in India:

• The IESBA Code of Ethics makes NOCLAR applicable to all assignments (members in
practice), and to all employers (members in service).
• ICAI Code has restricted applicability of NOCLAR to Audits assignment of listed entities
(members in practice) and for members in service applicability has been restricted to
employees of listed entities.

Documentation Requirements in NOCLAR: Revised Code over and above require professional accountant
to follow additional documents requirements as under:
• How management / TCWG have responded to the matter.
• The course of action accountant considered, judgments made and decisions that were taken, having
regard to reasonable and informed third party test.
• How accountant is satisfied that responsibility of public interest has been fulfilled.

NOCLAR vs. SA 250

Applicability
1. SA 250 is applicable only on Audit, and not on other Assurance engagements. However, NOCLAR is
applicable on professional accountants in service, and in practice. Among those in practice, it applies to
Auditors, as well as professional services other than Audit. However, degree of responsibility of the
professional accountant varies as per the role.

Coverage of Laws
2. SA 250 talks of auditor’s responsibilities for laws having direct effect on the determination of
material amounts and disclosures in the financial statements (such as tax and labour laws); and other

CA SHUBHAM KESWANI 279

laws and regulations that do not have a direct effect on the determination of the amounts and
disclosures in the financial statements, but compliance with which may be fundamental to the
operating aspects of the business. NOCLAR, while being alike to SA 250 till this point, is further
ahead of it in that it takes into account non-compliance that causes substantial harm resulting in
serious consequences in financial or non-financial terms.

Definition of Stakeholders
3. SA 250 doesn’t define stakeholders. NOCLAR is related to effect of non-compliance on investors,
creditors, employees as also the general public.

Disclosure of Imminent Breach

4. As per NOCLAR, in exceptional circumstances, professional accountant might become aware of an
imminent breach of a law or regulation that would cause substantial harm to investors, creditors,
employees or the general public. Having first considered whether it would be appropriate to discuss
matter with mgt or TCWG, accountant shall exercise professional judgment and determine whether to
disclose the matter immediately to an appropriate authority in order to prevent or mitigate
consequences of such imminent breach. If disclosure is made, disclosure is permitted. This provision is
not existent in SA 250.

CA SHUBHAM KESWANI 280

 First Schedule
Part I Professional misconduct in relation to Chartered Accountants in practice
A Chartered Accountant in practice is deemed to be guilty of professional misconduct if he:
Clause (1) allows any person to practice in his name as a chartered accountant unless such person is also a
chartered accountant in practice and is in partnership with or employed by him.
Clause (2) pays or allows or agrees to pay or allow, directly or indirectly, any share, commission or
brokerage in the fees or profits of his professional business, to any person other than a
member of the Institute or a partner or a retired partner or the legal representative of a
deceased partner, or a member of any other professional body or with such other persons
having such qualification as may be prescribed, for the purpose of rendering such professional
services from time to time in or outside India.
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 the Institute.
Clause (4) enters into partnership, in or outside India, with any person other then Chartered Accountant
in practice or such other person who is a member of any other professional body having such
qualifications as may be prescribed, including a resident who but for his residence abroad
would be entitled to be registered as a member under close (V) of sub-section (1) of section 4
or whose qualifications are recognized by the Central Government or the Council for the
purpose of permitting such partnerships.
Clause (5) Secures either through the services of a person who is not an employee of such Chartered
Accountant or who is not his partner or by means which are not open to a Chartered
Accountant, any professional business.
Provided that nothing herein contained shall be construed as prohibiting any agreement
permitted in terms of item (2), (3) and (4) of this part.
Clause (6) Solicits clients or professional work either directly or indirectly by circular, advertisement,
personal communication or interview or by any other means.

Provided that nothing herein contained shall be construed as preventing or prohibiting –

(i) Any Chartered Accountant from applying or requesting for or inviting or securing
professional work from another chartered accountant in practice; or
(ii) A member from responding to tenders or enquiries issued by various users of professional
services or organizations from time to time and securing professional work as a consequence.

However, as per the guideline issued by the Council of the Institute of Chartered Accountants
of India, a member of the Institute in practice shall not respond to any tender issued by an
organization or user of professional services in areas of services which are exclusively
reserved for chartered accountants, such as audit and attestation services.

However, such restriction shall not be applicable where minimum fee of the assignment is
prescribed in the tender document itself or where the areas are open to other professionals
along with the Chartered Accountants.
Clause (7) Advertises his professional attainments or services, or uses any designation or expressions
other than the Chartered Accountant on professional documents, visiting cards, letter heads or
sign boards unless it be a degree of a University established by law in India or recognized by
the Central Government or a title indicating membership of the Institute of Chartered
Accountants or of any other institution that has been recognized by the Central Government or
may be recognized by the Council.

Provided that a member in practice may advertise through a write up, setting out the service
provided by him or his firm and particulars of his firm subject to such guidelines as may be
issued by the Council.
Clause (8) Accepts a position as auditor previously held by another chartered accountant or a certified
auditor who has been Issued certificate under the Restricted Certificate Rules, 1932 without
first communicating with him in writing.

CA SHUBHAM KESWANI 281

Clause (9) Accepts an appointment as auditor of a company without first ascertaining from it whether the
requirements of Section 225 of the Companies Act, 1956, in respect of such appointment have
been duly complied with.
Clause (10) Clause (10) Charges or offers to charge, accepts or offers to accept In respect of any
professional employment fees which are based on a percentage of profits or which are
contingent upon the findings, or results of such employment, except as permitted under any
regulations made under this Act.
The Council of the Institute has however framed Regulation 192 which exempts members from
the operation of this clause in certain professional services.
Clause (11) Engages in any business or occupation other than the profession of chartered accountant
unless permitted by the Council so to engage.
Provided that nothing contained herein shall disentitle a chartered accountant from being a
director of a company (Not being managing director or a whole time director) unless he or any
of his partners is interested in such company as an auditor.
Clause (12) Allows a person not being a member of the institute in practice or a member not being his
partner to sign on his behalf or on behalf of his firm, any balance sheet, profit and loss
account, report or financial statements.
Part II Professional misconduct in relation to members of the Institute in service
A member of the Institute (other than a member in practice) shall be deemed to be guilty of
professional misconduct, if he being an employee of any company, firm or person:
Clause (1) pays or allows or agrees to pay directly or indirectly to any person any share in the emoluments
of the employment undertaken by him.
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 Professional misconduct in relation to members of the Institute generally
A member of the Institute, whether in practice or not, shall be deemed to be guilty of
professional misconduct, if he:
Clause (1) not being a fellow of the Institute, acts as a fellow of the Institute.
Clause (2) does not supply the information called for, or does not comply with the requirements asked for,
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
items (6) and (7) of Part I of this Schedule, gives information knowing it to be false.
Part IV Other misconduct in relation to members of the Institute generally
A member of the Institute, whether in practice or not, shall be deemed to be guilty of other
misconduct, if he:
Clause (1) is held guilty by any civil or criminal court for an offence which is punishable with imprisonment
for a term not exceeding six months.
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.
Second Schedule
Part I Professional misconduct in relation to chartered Accountant in practice
Clause (1) Discloses Information acquired in the course of his professional engagement to any person
other than his client so engaging him without the consent of his client or otherwise than as
required by any law for the time being in force.
Clause (2) If he 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 chartered
accountant 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.

CA SHUBHAM KESWANI 282

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.
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 th ey are
intended within a reasonable time.
Part II Professional misconduct in relation to members of the Institute generally
A member of the Institute, whether in practice or not, shall be deemed to be guilty of
professional misconduct, if he:
Clause (1) contravenes any of the provisions of this Act or the regulations made there under or any
guidelines issued by the Council.
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 for the time being in
force 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 Other misconduct in relation to members of the Institute generally
A member of the Institute, whether in practice or not, shall be deemed to be guilty of other
mis - conduct, if he is held guilty by any civil or criminal court for an offence which is
punishable with imprisonment for a term exceeding six months.

CA SHUBHAM KESWANI 283