Auditing For JUNE 2019-Executive-Revision PDF

INDEX
UNIT 1: AUDITING CONCEPTS ......................................................................................................... 3

UNIT 2: TYPES OF COMPANY AUDIT .............................................................................................. 11
UNIT 3: INTERNAL AUDIT ............................................................................................................... 36
UNIT 4: INTERNAL CONTROL ......................................................................................................... 44
UNIT 5: REVIEW OF INTERNAL CONTROL...................................................................................... 54
UNIT 6: AUDIT ENGAGEMENT & DOCUMENTATION ...................................................................... 58
QUESTION PAPER: JUNE 15 .......................................................................................................... 68
QUESTION PAPER: Dec. 15 ............................................................................................................ 69
QUESTION PAPER: JUNE – 16 ........................................................................................................ 70
QUESTION PAPER: Dec. 16 ............................................................................................................ 71
QUESTION PAPER: JUNE 17 .......................................................................................................... 72
QUESTION PAPER: DECEMBER 2017 ............................................................................................. 73
QUESTION PAPER: JUNE 2018....................................................................................................... 74
QUESTION PAPER: DECEMBER 2018 ............................................................................................. 75
1|P ag e CA. Amit Talda 9730768982 www.amittaldaclasses.com/

VIDEO LECTURES & BOOKS
AVAILABLE FOR JUNE 2019

UNIT 1: AUDITING CONCEPTS
DEFINITION OF  Audit is an independent examination,
AUDITING
 Of financial information,
 Of any entity whether profit making or not, irrespective of its size & legal
structure,
When such an examination is conducted with a view to express an opinion

thereon.
FEATURES OF Systematic  Audit has to be conducted in a proper way.

AUDITING &
independent  Auditor should be completely objective (unbiased) in his
approach.
 He should not be influenced by client.
Financial  Auditorsopinion is on financial statements including

statements profit and loss account, balance sheet, & notes to
accounts.
 The preparation of financial statements is the

responsibility of management of entity.
Entity  His client can be any entity whatever is the legal form i.e.
may be proprietorship, partnership, trust or company etc.
 The entity may be profit oriented or a charitable one.

Opinion  His opinion is on ‗true & fair view’ of financial
statements.
 For this it is necessary that:

 Financial statement have been prepared using acceptable
policies which are consistently applied,
 Financial statements have been prepared as per relevant
regulations, &
 There is appropriate disclosure of all material items.
BY WHOME In India, audit is to be conducted by a professional having

good accounting & auditing background.A chartered
accountant having certificate of practice is eligible to
conduct audit.
OBJECTIVES & Objective of  The objective is to enable the auditor to express an

SCOPE OF an audit opinion on financial statements prepared by management
AUDITING of entity.
 For this it is essential that financial statements are
prepared as per the recognised accounting policies and
practice and relevant statutory requirement and they
should disclose all material matters.
 However, this opinion does not constitute an assurance
as to future viability of the enterprise or the efficiency
or effectiveness with which its management has conducted
the affairs of the enterprise.
Responsibility  The management is responsible for maintaining an upto

for the date and proper accounting system and finally to prepare
financial financial statements.
statements  The auditor is responsible for forming and expressing
an opinion on the financial statements.
 The audit of financial statement does not relieve the
management of its responsibility.
Scope of an The auditor decides the scope of his audit having regard to:
audit The requirement of the relevant legislation.
The pronouncements of the institute (ICAI)
Terms of engagement.
However, the terms of engagement cannot override the
pronouncement of the institute or the provisions of relevant
legislation.
BASIC PRINCIPLES GOVERNING AN AUDIT(Nov 2008, Nov 2009, May 2011)

Integrity,  The Auditor should be straight forward, honest and sincere in his approach
Objectivity and to his professional work.
Independence  He must be fair and must not allow bias to override his objectivity.
 He should maintain an impartial attitude and both be and appear to be free
of any interest which might be regarded as being incompatible with integrity
and objectivity.
Confidentiality  The auditor should respect the confidentiality of information acquired in the
course of his work and should not disclose any such information to a third
party without specific authority or unless there is a legal or professional duty
to disclose.
Skills and  The audit should be performed and the report prepared with due
Competence professional care by person who have adequate training, experience and
competence in auditing.
 The auditor requires specialized skills and competence which are acquired
through a combination of general education, knowledge obtained through
study and formal courses concluded by qualifying examination recognized
for this purpose and practical experience under proper supervision.
 In addition, the auditor requires a continuing awareness of developments
including pronouncements of ICAI on accounting and auditing matters and
relevant regulations and statutory requirements.
Work performed  When the auditor delegates work to assistants or uses work performed by
by others other auditors and experts he continues to be responsible for forming and
expressing his opinion on the financial information.
 However, he will be entitled to rely on the work performed by others,
provided he exercises adequate skill and care and is not aware of any reason
to believe that he should not have so relied.
 In the case of any independent statutory appointment to perform the work
on which the auditor has to rely in forming his opinion, as in the case of
work of branch auditors appointed under companies act, 2013 the auditor‘s
report should expressly state the fact of such reliance. The auditor should
carefully direct, supervise and review work delegated to assistants.
 The auditor should obtain reasonable assurance that work performed by
other auditor or experts is adequate for his purpose.
Documentation The auditor should document matters which are important in providing
evidence that the audit was carried out in accordance with basic principles.
Planning The auditor should plan his work to enable him to conduct an effective audit in
an efficient and timely manner. Plans should be based on knowledge of the
client‘s business. Plans should be made to cover, among other things:
(a) Acquiring knowledge of the client‘s accounting system, policies and internal
control procedures;
(b) Establishing the expected degree of reliance to be placed on internal control;
(c) Determining and programming the nature, timing and extent of the audit
procedures to be performed and
(d) Coordinating the work to be performed.
Plans should be further developed and revised as necessary during the course of
the audit.
Audit Evidence The auditor should obtain sufficient appropriate audit evidence through the
performance of compliance and substantive procedures to enable him to draw
reasonable conclusions therefrom on which to base his opinion on the financial
information.
Compliance procedures are tests designed to obtain reasonable assurance that

thoseinternal controls on which audit reliance is to be placed are in effect.
Substantive procedures are designed to obtain evidence as to the

completeness,accuracy and validity of the data produced by the accounting
system.
They are of two types:

(i) Tests of details of transactions and balances;
(ii) Analysis of significant ratios and trends including the resulting enquiry of
unusualfluctuations and items.
Accounting The auditor should gain an understanding of the accounting system and related
system and internal controls and should study and evaluate the operation of those internal
Internal Control controls upon which he wishes to rely in determining the nature, timing and
extent of other audit procedures.
Audit The auditor should review and assess the conclusions drawn from the audit
conclusions & evidenceobtained and from his knowledge of business of the entity as the basis
Reporting for the expression of his opinion on the financial information.
TRUE & FAIR VIEW (June 2014, June 2015)
Meaning  The concept of true and fair is a fundamental concept in auditing.
 The phrase ―True and Fair‖ in the auditor‘s report signifies that the auditor
is required to express his opinion as to whether the state of affairs and the

results of the entity as ascertained by him in the course of his audit are truly
and fairly represented in the accounts under audit.
Explanation  What constitutes ―true and fair‖ has not been defined in any legislation.
 Sec 129 of the Companies Act, 2013states that the financial statements
shall give a true & fair view of the state of affairs of the company or
companies, comply with the accounting standards notified under section
133 and shall be in the form or forms as may be provided for different class
or classes of companies in schedule III.
 Sec 128(1) of the companies Act, 2013 also contemplates that every
company shall prepare and keep books of account which give a true & fair
view of the state of the affairs of the company and explain its transactions.
In more specific Assets  That the assets are neither undervalued or overvalued
terms, to ensure according to the applicable accounting principles;
true & fair view, (Valuation)
an auditor has to  No material asset is omitted; (Omission)
see  The charge, if any, on assets are disclosed; (Disclosure)
Liabilities  Material liabilities should not be omitted; (Omission)
 Liabilities are neither undervalued nor overvalued and the

same are properly classified. (valuation)
Schedule III  The Profit and Loss account and Balance Sheet discloses
all the matters required to be disclosed as per Schedule
VI; (Disclosure)
Accounting  Accounting policies have been followed consistently.

policies
Non-recurring  All unusual, exceptional or non-Recurring items have
items been disclosed separately; (Disclosure)
INDEPENDENT AUDIT
Meaning  Independence means that the judgement of a person is not subordinated to
wishes of another person.
 It requires that he should not act under any influence.
 Thus, he can work in a complete unbiased manner.
Auditor’s  The need for auditor independence is provided in standards on auditing.

independence  The Companies act 2013 also contains specific provision to ensure auditors
independence. (For example, section 141 of companies act 2013.)
 Moreover, as per the chartered accountants act, 1949 Independence of
auditor required.
Why  If auditor maintains high degree of independence, credibility of financial

independence? statement is enhanced.
 The Independent audit report will be acceptance and respected by all the
stakeholders.

Advantages of
independent Protection of interest It safeguards the financial interest of persons who are
audit not associated with the management of the
(May 2012) organisation whether they are partners or
shareholders.
Moral check It acts as a moral check on the employees from
committing defalcations.
Tax liability Audited statements of accounts are helpful in setting
liability for taxes.
Credit negotiation Financiers and Bankers use audited financial

statements in evaluating the credit worthiness of
individuals in negotiating loans.
Trade dispute Audited statement is useful in settling the trade
settlement disputes for higher wages or bonus, etc.
Control over It helps in detection of wastages and losses and also

inefficiency helps in recommending ways to correct it.
Arbitration It is helpful in settling disputes by arbitration.
Assistance to Government may required audited and certified

government statements before it gives assistance or issues a
license for a particular trade.
Appraisal Audit reviews the existence and operations of various

controls in the organisation and report in adequacies,
weaknesses, etc in them. Management can take
suitable action based on the reports.
AUDIT VS Basis Investigation Audit
INVESTIGATION Objective An investigation aims The main objective of an audit is
(Nov 2012, Dec atestablishing a fact or to verify whether the financial
2013, June ahappening or at statements display a true and
2015) assessing aparticular fair view of the state of affairs
situation. andthe working results of an
entity.
Scope The scope of investigation The Scope of audit is wide and

may be governed by in case of statutory audit the
statute or it may be non – scope of work is determined by
statutory. provision of relevant law.
Periodicity The work is not limited by The audit is carried oneither

rigid time frame. It may quarterly, half-yearlyor yearly.
cover several years, as
the outcome of the same
is not certain
Nature Requires a detailed study Involves tests checking or

and examination of facts sample technique to draw
and figures evidences for forming a

judgement and expression of
opinion
Inherent No inherent limitation Audit suffers from

limitations owing to its nature of inherentLimitation
engagement
Evidences It seeks conclusive Audit is mainly concernedwith

evidences prima- facie evidence
Observance It is analytical in nature Is governed by compliancewith

of and requires a thorough generally acceptedaccounting
Accounting mind capable of principles, auditprocedures and
policies observing, collectingand disclosurerequirements.
evaluating facts.
Reporting The outcome is reported The outcome is reported tothe
to the person(s) on whose owners of the businessentity.
behalf investigation is
carried out.
REASONS FOR The common reasons of getting the investigation done are listed below:
CARRYING OUT (1) Proposed purchase of business.
INVESTIGATION (2) Proposed sale of business.
(3) Reasons for low profitability.
(4) Cause of high employee turnover.
(5) Reliability of business data.
(6) Proposed investment in particular securities.
(7) Suspected fraud.
(8) Joining in existing partnership business.
(9) Borrowing funds.
(10) Lending funds.
(11) Proposed purchase of controlling shares in a company.
(12) Suspected misfeasance against directors.
(13) Detection of undisclosed income for tax purposes.
(14) Suspected misappropriation by trustees
MATERIALITY MEANING:
 Material items are those which may affect the judgement of users of financial
statements. Some items which individually may not be material but
collectively, might be material.
 The auditors determination of materiality is a matter of professional

judgement, and it depends upon-
 size of item;
 Nature of item;
 Statutory provisions
 The auditor considers materiality from the point of view of both the following:
 Overall financial information
 Individual account balances
 Materiality could be either qualitative or quantitative.

 Auditor should consider materiality while-
 Determining NTE of audit procedures; (as per SA 320)
 Evaluating effect of misstatements. (as per SA 450)
Accounting &  The International Federation of Accountants (IFAC) came into existence in
Assurance 1977 and constituted International Auditing Practices Committee (IAPC) to
Standard Board formulate International Auditing Guidelines.
of ICAI  These guidelines were later on converted into International Standards on
Auditing (ISA). Considering the developments in the field of auditing at
international level, the need for issuing Standards and Guidance Notes in
tandem with international standards but conforming to national laws,
customs, usages and business environments was felt.
 With this objective, ICAI constituted the Auditing Practices Committee (APC)
on September 17, 1982, to spearhead the new framework of Statements on
Standard Auditing Practices (SAPs) and Guidance Notes (GNs) inter alia to
replace various chapters of the old omnibus Statement on Auditing Practices
issued in 1964.
 In July, 2002, the Auditing Practices Committee has been converted into an
Auditing and Assurance Standards Board by theCouncil of the Institute, to
be in line with the international trend.
 The main function of the AASB is to review the existing auditing practices in
India and to develop Statements on Standards on Auditing (SAs) so that
these may be issued by the Council of the Institute.
 While formulating the SAs, the AASB takes into consideration the ISAs
issued by the IAPC, applicable laws, customs, usages and business
environment in India. The SAs are issued under the authority of the Council
of the Institute. The AASB also issues Guidance Notes on the issues arising
from the SAs wherever necessary. The AASB has also been entrusted with
the responsibility to review the SAs at periodical intervals.
Standards on Auditing standards refers to the code of best practices/procedures which an

Auditing (SAs) auditor is expected to follow duringan audit to ensure consistency of findings.
The auditing standard specifies a minimum level of performance.
Auditing standards help the auditor in proper and optimum discharge of their
profession duties. Auditing standardsalso promote uniformity in practice as also
comparability. In India the Auditing and Assurance StandardsBoard of the
Institute of Chartered Accountants of India formulates the auditing standards.
Procedure to 1. The Auditing and Assurance Standards Board identifies the areas where
issue SAs auditing standards need to beformulated and the priority in regard to their
selection.
2. In the preparation of the auditing standards, the Board is normally, assisted

by study groups comprising of across section of members of the Institute.
3. On the basis of the work of the study groups, an Exposure Draft of the
proposed auditing standard is preparedby the Board and issued for comments
of the members.
4. After taking into the comments received, the draft of the proposed auditing
standard is finalized by the Boardand submitted to the Council of the Institute.

5. The Council considers the final draft of the proposed auditing standard and,
if necessary, modifies the samein consultation with the Board. The auditing
standard is then issued under the authority of the Council.
While formulating the auditing standards, the Board also takes into
consideration the applicable laws, customs,usages and business environment in
the country.
Need of The Institute of Chartered Accountants of India (ICAI) is a founder member of

Harmonization the International Federation of Accountants (IFAC). It is one of the membership
of Indian obligations of the Institute to actively propagate the pronouncements of the
Auditing International Auditing and Assurance Standards Board (IAASB) of the IFAC to
Standards and contribute towards global harmonization and acceptance of the Standards
International issued by the IAASB. Accordingly, while formulating Engagement and Quality
Standards Control Standards, the AASB takes into consideration the corresponding
Standards, if any, issued by the IAASB. In addition, the AASB also takes into
consideration the applicable laws, customs, usages and business environment
prevailing in India.
With effect from 1st April, 2008, the AASB re-categorised and re-numbered the
existing Auditing and Assurance Standards on the lines as followed by the
IAASB. With this change, all auditing and assurance standards (AAS) were
renamed as standards on Auditing (SAs)
10 | P a g e CA. Amit Talda 9730768982 www.amittaldaclasses.com/

UNIT 2: TYPES OF COMPANY AUDIT
Types of Audit under Companies Act 2013
The Companies Act, 2013 is focused on transparency and disclosure. In the new Act, attempt
has been made to cover each aspect of corporate functioning under audit by prescribing various
types of audits like internal audit and secretarial audit. The various types of audits prescribed
under the Companies Act, 2013 are:
• Statutory Audit
• Internal Audit
• Secretarial Audit
• Cost Audit
STATUTORY AUDIT
QUALIFICATION & DISQUALIFICATION OF AUDITOR (SECTION 141)

(Dec 2013, Dec 2014)
The provisions relating to eligibility, qualifications and disqualifications of an auditor are
governed by section 141 of the Companies Act, 2013 (hereinafter referred as the Act). The
Main provisions are stated below:
(1) A person shall be eligible for appointment as an auditor of a company only if he is a

chartered accountant:
Provided that a firm whereof majority of partners practicing in India are qualified for
appointment as aforesaid may be appointed by its firm name to be auditor of a
company.
(2) Where a firm including a limited liability partnership is appointed as an auditor of a

company, only the partners who are chartered accountants shall be authorised to act
and sign on behalf of the firm.
(3) Under sub-section (3) of section 141 along with Rule 10 of the Companies (Audit and
Auditors) Rule, 2014 (hereinafter referred as CAAR), the following persons shall not be
eligible for appointment as an auditor of a company, namely:- (Disqualifications)
BODY (a) A Body Corporate other than a limited liability partnership

CORPORATE registered under the Limited Liability Partnership Act, 2008;
OFFICER OR (b) An Officer Or Employeeof the company;

EMPLOYEE
PARTNER/ (c) a person who is a partner, or who is in the employment, of
EMPLOYEE an officer or employee of the company;
HOLDING ANY (d) A person who, or his relative or partner -

SECURITY OF OR
INTEREST (i) Is HOLDING ANY SECURITY OF OR INTERESTin the
company or its subsidiary, or of its holding or associate
company or a subsidiary of such holding company:
Provided that the relative may hold security or interest

in the company of face value not exceeding rupees one
lakh;

Provided that the condition of rupees one lakh shall,
wherever relevant, be also applicable in the case of a
company not having share capital or other securities:
Provided further that in the event of acquiring any

security or interest by a relative, above the threshold
prescribed, the corrective action to maintain the limits as
specified above shall be taken by the auditor within sixty
days of such acquisition or interest.
(ii) is INDEBTED TO THE COMPANY, or its subsidiary,

or its holding or associate company or a subsidiary of
such holding company, in excess of rupees five lakh; or
(iii) has given a GUARANTEE or provided any SECURITY

in connection with the indebtedness of any third person
to the Company or its Subsidiary, or its Holding or
Associate Company or a Subsidiary of such Holding
Company, in excess of one lakh rupees;
BUSINESS (e) a person or a firm who, whether directly or indirectly has

RELATIONSHIP business relationshipwith the Company, or its Subsidiary, or
its Holding or Associate Company or Subsidiary of such holding
company or associate company, of such nature as may be
prescribed;
Student may note that for the purpose of clause (e) above, the
term ―business relationship‖ shall be construed as any
transaction entered into for a commercial purpose, except –
(i) commercial transactions which are in the nature of
professional services permitted to be rendered by an auditor or
audit firm under the Act and the Chartered Accountants Act,
1949 and the rules or the regulations made under those Acts;
(ii) commercial transactions which are in the ordinary course

of business of the company at arm‘s length price - like sale of
products or services to the auditor, as customer, in the
ordinary course of business, by companies engaged in the
business of telecommunications, airlines, hospitals, hotels
and such other similar businesses.
RELATIVE IS A (f) a person whose relative is a director or is in the employment

DIRECTOR OR IS of the company as a director or key managerial personnel;
IN THE
EMPLOYMENT Meaning of Relative:
i) Members of HUF;
ii) They are husband & Wife;
iii) They are related to another in the following manner:
a. Father
b. Mother
c. Son
d. Daughter
e. Brother
f. Sister
FULL TIME (g) a person who is in full time employment elsewhere or a

EMPLOYMENT person or a partner of a firm holding appointment as its
ELSEWHERE OR auditor, if such person or partner is at the date of such
BREACH OF appointment or reappointment holding appointment as auditor
CEILING of MORE THAN TWENTY COMPANIES;
OFFENCE (h) a person who has been convicted by a court of an offence

involving fraud and a period of ten years has not elapsed from
the date of such conviction.
PROVIDING (i) (i) a person who, directly or indirectly, renders any service
CONULSTING & referred to in section 144 to the company or its holding
SPECIALISED company or its subsidiary company.
SERVICES
Section 144 of the Companies Act, 2013 is a new provision
(Dec 2014) which prescribes certain services not to be rendered by the
auditor. An auditor appointed under this Act shall provide to
the company only such other services as are approved by the
Board of Directors or the audit committee, as the case may be,
but which shall not include any of the following services
(whether such services are rendered directly or indirectly to the
company or its holding company or subsidiary company),
namely:
(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.
Provided thatan auditor or audit firm who or which has been

performing any non-audit services on or before the
commencement of this Act shall comply with the provisions of
this section before the closure of the first financial year after the
date of such commencement.
(4) Where a person appointed as an auditor of a company incurs any of the

disqualifications mentioned in sub-section (3) AFTER HIS APPOINTMENT, he shall
VACATE his office as such auditor and such vacation shall be deemed to be a casual
vacancy in the office of the auditor.

APPOINTMENT OF AUDITOR (SECTION 139) (June 2016)
APPOINTMENT OF As per Section 139(6), the first auditor of a company, other than a
FIRST AUDITORS Government company, shall be appointed by the Board of Directors within 30
IN THE CASE OF A days from the date of registration of the company.
COMPANY, OTHER
THAN A
GOVERNMENT
In the case of failure of the Board to appoint the auditor, it shall inform the
COMPANY members of the company. The members of the company shall within 90 days
at an extraordinary general meeting appoint the auditor. Appointed auditor
shall hold office till the conclusion of the first annual general meeting.
APPOINTMENT OF Section 139(7) provides that in the case of a Government company or any
FIRST AUDITORS other company owned or controlled, directly or indirectly, by the Central
IN THE CASE OF Government, or by any State Government, or Governments, or partly by the
GOVERNMENT Central Government and partly by one or more State Governments, the first
COMPANY:
auditor shall be appointed by the Comptroller and Auditor-General of
Indiawithin 60 days from the date of registration of the company.
In case the Comptroller and Auditor-General of India does not appoint such
auditor within the above said period, the Board of Directors of the
companyshall appoint such auditor within the next 30 days. Further, in the
case of failure of the Board to appoint such auditor within next 30 days, it
shall inform the members of the companywho shall appoint such auditor
within 60 days at an extraordinary general meeting. Auditors shall hold office
till the conclusion of the first annual general meeting.
APPOINTMENT OF Section139(1) of the Companies Act, 2013 provides that every company shall,
SUBSEQUENT at the first annual general meeting appoint an individual or a firm as an
AUDITOR/REAPPO auditor who shall hold office from the conclusion of that meeting till the
INTMENT OF conclusion of its sixth annual general meeting and thereafter till the
AUDITOR IN CASE
conclusion of every sixth meeting.
OF COMPANIES
OTHER THAN
GOVERNMENT The following points need to be noted in this regard-
COMPANY (i) The company shall place the matter relating to such appointment of
ratification by member at every Annual General Meeting.
(Clause Deleted) (Now, No requirement of Ratification)
(ii) Before such appointment is made, the written consent of the auditor to
such appointment, and a certificate from him or it that the appointment, if
made, shall be in accordance with the conditions as may be prescribed, shall
be obtained from the auditor.
(iii) The certificate shall also indicate whether the auditor satisfies the
criteria provided in section 141.
(iv) The company shall inform the auditor concerned of his or its
appointment, and also file a notice of such appointment with the Registrar
within 15 days of the meeting in which the
Auditor is appointed.
APPOINTMENT OF As per Section 139(5), in the case of a Government company or any other
SUBSEQUENT company owned or controlled, directly or indirectly, by the Central
AUDITORS IN Government, or by any State Government or Governments, or partly by the
CASE OF Central Government and partly by one or more State Governments, the
GOVERNMENT Comptroller and Auditor-General of India shall, in respect of a financial year,
COMPANIES: appoint an auditor duly qualified to be appointed as an auditor of companies
under this Act, within a period of 180 days from the commencement of the
financial year, who shall hold office till the conclusion of the annual general
meeting.
FILLING OF A As per Section 139(8), any casual vacancy in the office of an auditor shall-
CASUAL
VACANCY COMPANIES OTHER THAN GOVERNMENT COMPANY:
(i) In the case of a company other than a company whose accounts are
subject to audit by an auditor appointed by the Comptroller and Auditor-
General of India, be filled by the Board of Directorswithin thirty days.
If such casual vacancy is as a result of the RESIGNATION OF AN AUDITOR,
such appointment shall also be approved by the company at a general
meetingconvened within three months of the recommendation of the Board
and he shall hold the office till the conclusion of the next annual general
meeting;
GOVERNMENT COMPANY:
(ii) In the case of a company whose accounts are subject to audit by an
auditor appointed by the Comptroller and Auditor-General of India, be filled
by the Comptroller and Auditor-General of Indiawithin thirty days:
It may be noted that in case the Comptroller and Auditor-General of India

does not fill the vacancy within the said period the Board of Directorsshall fill
the vacancy within next thirty day.
CASUAL As per section 140 (2) the auditor who has resigned from the company shall
VACANCY BY file within a period of thirty days from the date of resignation, a statement in
RESIGNATION: the prescribed form ADT–3 (as per Rule 8 of CAAR) with the company and
the Registrar, and
in case of the companies referred to in section 139(5) i.e. subsequent auditor

of Government company, the auditor shall also file such statement with the
Comptroller and Auditor General of India, indicating the reasons and other
facts as may be relevant with regard to his resignation.
If the auditor does not comply with the provisions of sub-section (2), he or it
shall be liable to a penalty of fifty thousand rupees or an amount equal to
the remuneration of the auditor, whichever is less, and in case of continuing
failure, with further penalty of five hundred rupees for each day after the
first during which such failure continues, subject to a maximum of five lakh
rupees.
(Substituted by Companies Amendment Ordinance 2018)
OTHER 1. A retiring auditor may be re-appointed at an annual general meeting, if-

IMPORTANT (a) he is not disqualified for re-appointment;
PROVISIONS (b) he has not given the company a notice in writing of his unwillingness to
REGARDING be re-appointed; and
APPOINTMENT OF
(c) a special resolution has not been passed at that meeting appointing some
AUDITORS
other auditor or providing expressly that he shall not be re-appointed.
2. Where at any annual general meeting, no auditor is appointed or re-

appointed, the existing auditor shall continue to be the auditor of the
company
ROTATION OF AUDITORS
Applicability of section 139(2) Rotation of Auditor: (Dec 2014)
As per Section 139(2) , No listed company or a company belonging to such class or classes
of companies as mentioned Below, shall appoint or re-appoint-
(a) an individual as auditor for more than one term of five consecutive years; and
(b) an audit firm as auditor for more than two terms of five consecutive years: Provided that -
(i) an individual auditor who has completed his term under clause (a) shall not be eligible for re-
appointment as auditor in the same company for five years from the completion of his term;
(ii) an audit firm which has completed its term under clause (b), shall not be eligible for re-
appointment as auditor in the same company for five years from the completion of such term.
As per rules prescribed in Companies (Audit and Auditors) Rules, 2014, for applicability of
section 139(2) the class of companies shall mean the following classes of companies excluding
one person companies and small companies:-
(I) all unlisted public companies having paid up share capital of rupees ten crore or more;
(II) all private limited companies having paid up share capital of rupees Fifty crore or more;
(III) all companies having paid up share capital of below threshold limit mentioned in (a) and (b)
above, but having public borrowings from financial institutions, banks or public deposits of
rupees fifty crores or more.
The following points merit consideration in this regard-

1. As on the date of appointment, no audit firm having a common partner or partners to the
other audit firm, whose tenure has expired in a company immediately preceding the financial
year, shall be appointed as auditor of the same company for a period of five years:
2. Provided also that every company, existing on or before the commencement of this Act which
is required to comply with the provisions of this sub-section, shall comply with requirements of
this sub-section within a period which shall not be later than the date of the first annual general
meeting of the company held, within the period specified under sub-section (1) of section 96,
after three years from the date of commencement of this Act.
3. It has also been provided that right of the company to remove an auditor or the right of the
auditor to resign from such office of the company shall not be prejudiced.
4 Subject to the provisions of this Act, members of a company may resolve to provide that-
(a) In the audit firm appointed by it, the auditing partner and his team shall be rotated at
such intervals as may be resolved by members; or
(b) The audit shall be conducted by more than one auditor.
5. The Central Government may, by rules, prescribe the manner in which the companies shall
rotate their auditors.
Manner of Rotation of Auditors by the Companies on Expiry of their Term:

Rule 6 of the Companies (Audit and Auditors) Rules, 2014 prescribes the manner of rotation of

auditors on expiry of their term which is given below:
(1) The Audit Committee shall recommend to the Board, the name of an individual auditor or of
an audit firm who may replace the incumbent auditor on expiry of the term of such incumbent.
(2) Where a company is required to constitute an Audit Committee, the Board shall consider the
recommendation of such committee, and in other cases, the Board shall itself consider the
matter of rotation of auditors and make its recommendation for appointment of the next auditor
by the members in annual general meeting.
(3) For the purpose of the rotation of auditors-

(i) in case of an auditor (whether an individual or audit firm), the period for which the individual
or the firm has held office as auditor prior to the commencement of the Act shall be taken into
account for calculating the period of five consecutive years or ten consecutive years, as the case
may be;
(ii) the incoming auditor or audit firm shall not be eligible if such auditor or audit firm is
associated with the outgoing auditor or audit firm under the same network of audit firms.
Explanation. I - For the purposes of these rules the term ―same network‖ includes the firms
operating or functioning, hitherto or in future, under the same brand name, trade name or
common control.
Explanation. II - For the purpose of rotation of auditors,-

(a) a break in the term for a continuous period of five years shall be considered as fulfilling the
requirement of rotation;
(b) if a partner, who is in charge of an audit firm and also certifies the financial statements of
the company, retires from the said firm and joins another firm of chartered accountants, such
other firm shall also be ineligible to be appointed for a period of five years
(4) Where a company has appointed two or more individuals or firms or a combination thereof
as joint auditors, the company may follow the rotation of auditors in such a manner that both or
all of the joint auditors, as the case may be, do not complete their term in the same year.
AUDITOR’S As per section 142 of the act the remuneration of the auditor of a company
REMUNERATION shall be fixed in its general meeting(Members) or in such manner as may
be determined therein.
However, board may fix remuneration of the first auditor appointed by it.
Further, the remuneration, in addition to the fee payable to an auditor,

include the expenses, if any, incurred by the auditor in connection with the
audit of the company and any facility extended to him but does not include
any remuneration paid to him for any other service rendered by him at the
request of the company. Therefore, it has been clarified that the
remuneration to Auditor shall also include any facility provided to him.
REMOVAL OF AUDITORS
REMOVAL OF According to Section 140 (1) the auditor appointed under section 139 may
AUDITOR BEFORE be removed from his office before the expiry of his term only by a special
EXPIRY OF TERM: resolution of the company, after obtaining the previous approval of the
Central Government in that behalf as per Rule 7 of CAAR, 2014:
(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 thirty
days of the resolution passed by the Board.
(3) The company shall hold the general meeting within sixty 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, the auditor concerned shall be given a reasonable opportunity of
being heard.
APPOINTMENT OF Section 140 lays down procedure to appoint an auditor other than retiring
AUDITOR OTHER auditor who was removed:
THAN RETIRING
AUDITOR: 1. Special notice shall be required for a resolution at an annual general
meeting appointing as auditor a person other than a retiring auditor, or
providing expressly that a retiring auditor shall not be re-appointed, except
where the retiring auditor has completed a consecutive tenure of five years
or as the case may be, ten years, as provided under sub-section (2) of
section 139.
2. On receipt of notice of such a resolution, the company shall forthwith

send a copy thereof to the retiring auditor.
3. Where notice is given of such a resolution and the retiring auditor

makes with respect thereto representation in writing to the company (not
exceeding a reasonable length) and requests its notification to members of
the company, the company shall, unless the representation is received by it
too late for it to do so,-
(a) in any notice of the resolution given to members of the company, state
the fact of the representation having been made; and
(b) Send a copy of the representation to every member of the company to

whom notice of the meeting is sent, whether before or after the receipt of
the representation by the company. and if a copy of the representation is
not sent as aforesaid because it was received too late or because of the
company's default, the auditor may (without prejudice to his right to be
heard orally) require that the representation shall be read out at the
meeting:
Provided that if a copy of representation is not sent as aforesaid, a copy

thereof shall be field with the Registrar.
DUTY OF AUDITOR It is the duty of auditor to inquire into the following matters:
TO INQUIRE ON
CERTAIN MATTERS (a) Whether loans and advances made by the company on the basis of
security have been properly securedand whether the terms on which they
have been made are prejudicial to the interests of the company or its
members;

(b) Whether transactions of the company which are represented merely by
book entriesare prejudicial to the interests of the company;
(c) Where the company not being an investment company or a banking

company, whether so much of the assets of the company as consist of
shares, debentures and other securities have been sold at a price less than
that at which they were purchased by the company;
(d) Whether loans and advancesmade by the company have been shown as
deposits;
(e) Whether personal expenseshave been charged to revenue account;
(f) Where it is stated in the books and documents of the company that any
shares have been allotted for cash, whether cash has actually been
received in respect of such allotment, and if no cash has actually been so
received, whether the position as stated in the account books and the
balance sheet is correct, regular and not misleading.
DUTY TO AUDIT As per sub section 3 of section 143, the auditor‘s report shall also state –
REPORT (CARO
2003) (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 required by law

have been kept by the company so far as appears from his examination of
those books and proper returns adequate for the purposes of his audit
have been received from branches not visited by him;
(c) Whether the report on the accounts of any branch office of the company
audited under sub-section (8) by a person other than the company‘s
auditors has been sent to him under the proviso to that sub-section and
the manner in which he has dealt with it in preparing his report;
(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 direct is disqualified from being appointed as a director

under sub-section (2) of the section 164;
(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 system in

place and the operating effectiveness of such controls;
(j) Such other matters as may be prescribed. Rule 11 of the Companies

(Audit and Auditors) Rules, 2014 prescribes the other matters to be included
in auditors report. The auditor‘s report shall also include their views and
comments on the following matters, namely:-
(i) Whether the company has disclosed the impact, if any, of pending
litigations on its financial position in its financial statement;
(ii) Whether the company has made provision, as required under any law
or accounting standards, for material foreseeable losses, if any, on long
term contracts including derivative contracts;
(iii) Whether there has been any delay in transferring amounts, required to
be transferred, to the Investor Education and Protection Fund by the
company.
DUTY TO REPORT  If an auditor of a company, in the course of the performance of his

ON FRAUDS duties as auditor, has reason to believe that an offence involving fraud
is being or has been committed against the company by officers or
(June 2015) employees of the company, which involves or is expected to involve
individually an amount of Rs. 1 Crore or above, he shall immediately
report the matter to the Central Government within such time and in
such manner prescribed in Rule 13.
 Auditor shall forward his report to the Board or the Audit Committee,
as the case may be, immediately after he comes to knowledge of the
fraud but not later than 2 days, seeking their reply or observations
within forty-five days;
 On receipt of such reply or observations the auditor shall forward his

report and the reply or observations of the Board or the Audit
Committee along with his comments (on such reply or observations of
the Board or the Audit Committee) to the Central Government within 15
days of receipt of such reply or observations;
 In case the auditor fails to get any reply or observations from the Board
or the Audit Committee within the stipulated period of forty-five days,
he shall forward his report to the Central Government alongwith a note
containing the details of his report that was earlier forwarded to the
Board or the Audit Committee for which he failed to receive any reply or
observations within the stipulated time.
 Further, the report shall be sent to the Secretary, Ministry of Corporate

Affairs in a sealed cover by Registered Post with Acknowledgement Due
or by Speed post followed by an e-mail in confirmation of the same. This
report shall be on the letter-head of the auditor containing postal
address, e-mail address and contact number and be signed by the
auditor with his seal and shall indicate his Membership Number. The
report shall be in the form of a statement as specified in Form ADT-4.
 No duty to which an auditor of a company may be subject to shall be

regarded as having been contravened by reason of his reporting the
matter above if it is done in good faith. It is very important to note that
the provision of this rule shall also apply, mutatis mutandis, to a cost
auditor and a secretarial auditor during the performance of his duties
under section 148 and section 204 respectively. If any auditor, cost
accountant or company secretary in practice do not comply with the
provisions of sub-section (12) of section 143, he shall be punishable
with fine which shall not be less than one lakh rupees but which may
extend to twenty-five lakh rupees)
 In case of a fraud involving lesser than the amount of Rs. 1 Crore, the
auditor shall report the matter to Audit Committee constituted under
Section 177 or to the Board immediately but not later than 2 days of his
knowledge of the fraud and he shall report the matter specifying the
following:
o Nature of Fraud with description]
o Approximate Amount involved
o Parties involved
 The following details of each of the fraud reporting to the Audit

Committee or the Board shall be disclosed in the Board‘s Report:
o Nature of Fraud with description
o Approximate Amount involved
o Parties involved, remedial action not taken
o Remedial actions taken
 The provision of this Rule shall also apply mutatis mutandis to a Cost
auditor and a Secretarial Auditor during the performance of his duties
under section 148 & 204 respectively.

SIGNING OF Section 145 of the Companies Act 2013, provides that the person
AUDIT REPORT appointed as an auditor of the company shallsign the auditor‘s report or
sign or certify any other document of the company.
It also provides that the qualifications, observations or comments on

financial transactions or matters, whichhave any adverse effect on the
functioning of the company mentioned in the auditor‘s report shall be read
beforethe company in general meeting and shall be open to inspection by
any member of the company.
AUDITOR TO Section 146 of the Companies Act 2013, provides that all notices of, and
ATEND AGM other communications relating to, anygeneral meeting shall be forwarded to
the auditor of the company, and the auditor shall, unless
otherwiseexempted by the company, attend either by himself or through
his authorised representative, who shall also bequalified to be an auditor,
any general meeting and shall have right to be heard at such meeting on
any part ofthe business which concerns him as the auditor.
PENALTY ON (1) If any of the provisions of sections 139 to 146 (both inclusive) is
AUDITORS contravened, the company shall be punishable with fine which shall not be
less than twenty-five thousand rupees but which may extend to five lakh
rupees and every officer of the company who is in default shall be
punishable with imprisonment for a term which may extend to one year or
with fine which shall not be less than ten thousand rupees but which may
extend to one lakh rupees, or with both.
(2) If an auditor of a company contravenes any of the provisions of section

139, section 143, section 144 or section 145, the auditor shall be
punishable with fine which shall not be less than twenty-five thousand
rupees but which may extend to five lakh rupees or four times the
remuneration of the auditor, whichever is less;
Provided that if an auditor has contravened such provisions knowingly or

wilfully with the intention to deceive the company or its shareholders or
creditors or tax authorities, he shall be punishable
with imprisonment for a term which may extend to one year and with fine
which shall not be less than one lakh rupees but which may extend to
twenty-five lakh rupees or eight times the remuneration of the auditor,
whichever is less;
(3) Where an auditor has been convicted under sub-section (2), he shall be
liable to— (i) refund the remuneration received by him to the company; and
(ii) pay for damages to the company, statutory bodies or authorities or to
the members or Creditors of company for loss arising out of incorrect or
misleading statements of particulars made in his audit report.
(4) The Central Government shall, by notification, specify any statutory

body or authority or an officer for ensuring prompt payment of damages to
the company or the persons under clause (ii) of sub-section (3) and such
body, authority or officer shall after payment of damages to such company
or persons file a report with the Central Government in respect of making
such damages in such manner as may be specified in the said notification.

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

liability other than fine, the concerned partner or partners, who acted in a
fraudulent manner or abetted or, as the case may be, colluded in any fraud
shall only be liable."
PENALTY FOR Any person who is found guilty of fraud involving an amount of at least 10
FRAUD U/S 447 Lakhs or 1% of turnover of company, whichever is lower, shall be punishable
with imprisonment not less than 6 months but not more than 10 years and
shall also be liable for fine of not less than the amount involved in the mis-
statement, but not more than 3 times the amount involved.
If the fraud in question involves public interest, the term of imprisonment

shall not be less than 3 years.
Provided further that where the fraud involves an amount less than ten lakh
rupees or one per cent. of the turnover of the company, whichever is lower,
and does not involve public interest, any person guilty of such fraud shall be
punishable with imprisonment for a term which may extend to five years or
with fine which may extend to Fifty lakh rupees or with both.
AUDIT OF As per section 128 of the Companies Act, 2013 :

BRANCH OFFICE (1) Every company shall prepare and keep at its registered office books of
ACCOUNTS account and other relevant books and papers and financial statement for
every financial year which give a true and fair view of the state of the affairs
of the company, including that of its branch office or offices, if any, and
explain the transactions effected both at the registered office and its
branches and such books shall be kept on accrual basis and according to
the double entry system of accounting:
Provided that all or any of the books of account aforesaid and other
relevant papers may be kept at such other place in India as the Board of
Directors may decide and where such a decision is taken, the company
shall, within seven days thereof, file with the Registrar a notice in writing
giving the full address of that other place:
Provided further that the company may keep such books of account or
other relevant papers in electronic mode in such manner as may be
prescribed.
(2) Where a company has a branch office in India or outside India, it shall
be deemed to have complied with the provisions of (1), if proper books of
account relating to the transactions effected at the branch office are kept at
that office and proper summarized returns periodically are sent by the
branch office to the company at its registered office or the other place

referred in (1).
Further, sub-section (8) of section 143 of the Companies Act, 2013,

prescribes the duties and powers of the company‘s auditor with reference
to the audit of the branch and the branch auditor. Where a company has a
branch office, the accounts of that office shall be audited either by the
auditor appointed for the company (herein referred to as the company's
auditor) under this Act or by any other person qualified for appointment as
an auditor of the company under this Act and appointed as such under
section 139, or where the branch office is situated in a country outside
India, the accounts of the branch office shall be audited either by the
company's auditor or by an accountant or by any other person duly
qualified to act as an auditor of the accounts of the branch office in
accordance with the laws of that country and the duties and powers of the
company' s auditor with reference to the audit of the branch and the
branch auditor, if any, shall be such as may be prescribed:
Provided that the branch auditor shall prepare a report on the accounts of
the branch examined by him and send it to the auditor of the company who
shall deal with it in his report in such manner as he considers necessary.
Further as per rule 12 of the Companies (Audit and Auditors) Rules, 2014,
the branch auditor shall submit his report to the company‘s auditor and
reporting of fraud by the auditor shall also extend to such branch auditor
to the extent it relates to the concerned branch.
Using the Work of another Auditor‖: When the accounts of the branch are
audited by a person other than the company‘s auditor, there is need for a
clear understanding of the role of such auditor and the company‘s auditor
in relation to the audit of the accounts of the branch and the audit of the
company as a whole; also, there is great necessity for a proper rapport
between these two auditors for the purpose of an effective audit. In
recognition of these needs, the Council of the Institute of Chartered
Accountants of India has dealt with these issues in SA 600, ―Using the
Work of another Auditor‖. It makes clear that in certain situations, the
statute governing the entity may confer a right on the principal auditor to
visit a component and examine the books of account and other records of
the said component, if he thinks it necessary to do so. Where another
auditor has been appointed for the component, the principal auditor would
normally be entitled to rely upon the work of such auditor unless there are
special circumstances to make it essential for him to visit the component
and/or to examine the books of account and other records of the said
component. Further, it requires that the principal auditor should perform
procedures to obtain sufficient appropriate audit evidence, that the work of
the other auditor is adequate for the principal auditor's purposes, in the
context of the specific assignment.
When using the work of another auditor, the principal auditor should
ordinarily perform the following procedures:
(a) Advise the other auditor of the use that is to be made of the other
auditor's work and report and make sufficient arrangements for co-
ordination of their efforts at the planning stage of the audit. The principal

auditor would inform the other auditor of matters such as areas requiring
special consideration, procedures for the identification of inter-component
transactions that may require disclosure and the time-table for completion
of audit; and
(b) Advise the other auditor of the significant accounting, auditing and
reporting requirements and obtain representation as to compliance with
them.
The principal auditor might discuss with the other auditor the audit
procedures applied or review a written summary of the other auditor‘s
procedures and findings which may be in the form of a completed
questionnaire or check-list. The principal auditor may also wish to visit
the other auditor. The nature, timing and extent of procedures will depend
on the circumstances of the engagement and the principal auditor's
knowledge of the Professional competence of the other auditor. This
knowledge may have been enhanced from the review of the previous audit
work of the other auditor.
COST AUDIT
CONCEPT It is an audit process for verifying the cost of manufacture or production of
any article, on the basis of accounts as regards utilisation of material or
labour or other items of costs, maintained by the company.
LEGAL PROVISIONS Cost Audit is covered by Section 148 of the Companies Act, 2013. The
audit conducted under this section shall be in addition to the audit
conducted under section 143.
As per the section 148 the Central Government may by order specify audit
of items of cost in respect of certain companies.
Further, the Central Government may, by order, in respect of such class of

companies engaged in the production of such goods or providing such
services as may be prescribed, direct that particulars relating to the
utilisation of material or labour or to other items of cost as may be
prescribed shall also be included in the books of account kept by that class
of companies:
Provided that the Central Government shall, before issuing such order in
respect of any class of companies regulated under a special Act, consult
the regulatory body constituted or established under such special Act.
If the Central Government is of the opinion, that it is necessary to do so, it

may, by order, direct that the audit of cost records of class of companies,
which are covered under sub section (1) and which have a net worth of
such amount as may be prescribed or a turnover of such amount as may
be prescribed, shall be conducted in the manner specified in the order.
WHO CAN BE COST The audit shall be conducted by a Cost Accountant in Practice who shall be
AUDITOR appointed by the Board of such remuneration as may be determined by the
members in such manner as may be prescribed:
Provided that no person appointed under section 139 as an auditor of the

company shall be appointed for conducting the audit of cost records:
(Statutory Auditor & Cost Auditor cannot be same person)
Provided further that the auditor conducting the cost audit shall comply
with the cost auditing standards ("cost auditing standards" mean such
standards as are issued by the Institute of Cost and Works Accountants of
India, constituted under the Cost and Works Accountants Act, 1959, with
the approval of the Central Government).
APPOINTMENT OF As per rule 14 of the Companies (Audit and Auditors) Rules, 2014
COST AUDITOR
(a) in the case of companies which are required to constitute an audit
committee-
(i) the Board shall appoint an individual, who is a cost accountant in
practice, or a firm of cost accountants in practice, as cost auditor on the
recommendations of the Audit committee, which shall also recommend
remuneration for such cost auditor;
(ii) the remuneration recommended by the Audit Committee under (i) shall
be considered and approved by the Board of Directors and ratified
subsequently by the shareholders;
(b) in the case of other companies which are not required to constitute an
audit committee, the Board shall appoint an individual who is a cost
accountant in practice or a firm of cost accountants in practice as cost
auditor and the remuneration of such cost auditor shall be ratified by
shareholders subsequently.
QUALIFICATION, The qualifications, disqualifications, rights, duties and obligations

DISQUALIFICATION, applicable to auditors under this Chapter shall, so far as may be
RIGHTS, DUTIES applicable, apply to a cost auditor appointed under this section and it shall
AND OBLIGATIONS be the duty of the company to give all assistance and facilities to the cost
OF COST AUDITOR
auditor appointed under this section for auditing the cost records of the
company:
Provided that the report on the audit of cost records shall be submitted by
the cost accountant in practice to the Board of Directors of the company.
SUBMISSION OF A company shall within 30 days from the date of receipt of a copy of the
COST AUDIT cost audit report prepared (in pursuance of a direction issued by Central
REPORT Government) furnish the Central Government with such report along with
full information and explanation on every reservation or qualification
contained therein. If, after considering the cost audit report referred to
under this section and the, information and explanation furnished by the
company as above, the Central Government is of the opinion, that any
further information or explanation is necessary, it may call for such further
information and explanation and the company shall furnish the same
within such time as may be specified by that Government.
INTERNAL AUDIT
Applicability of Sec. 138 shall apply only to such class or classes of companies as may be
Sec. 138 prescribed. As per Rule 13 of the Companies Rules, 2014, following class of
companies shall be covered u/s 138:
(Dec 2016) (a) every listed company;
(b) every unlisted public company having-

(i) paid up share capital of fifty crore rupees or more during the
preceding financial year; or
(ii) turnover of two hundred crore rupees or more during the preceding
financial year; or
(iii) outstanding loans or borrowings from banks or public financial
institutions exceeding one hundred crore rupees or more at any point of
time during the preceding financial year; or
(iv) outstanding deposits of twenty five crore rupees or more at any
point of time during the preceding financial year; and
(c) everyprivate company having-

(i) turnover of two hundred crore rupees or more during the preceding
financial year; or
(ii) Outstanding loans or borrowings from banks or public financial
institutions exceeding one hundred crore rupees or more at any point of
time during the preceding financial year.
Legal a) Every company, to which Sec. 138 is applicable, shall appoint an

Requirements u/s Internal Auditor.
138 b) The internal Auditor shall conduct the internal audit of the functions
and activities of the company.
c) The internal auditor shall be-
i) A chartered accountant; or
ii) A cost accountant; or
iii) Such other professional as may be decided by the Board.
d) The internal auditor may or may not be an employee of the company.
e) A ‗Chartered Accountant‘ may be appointed as an internal auditor
whether or not he is engaged in practice.
Manner & interval a) CG may, by rules, prescribe the manner and the intervals in which the
of internal audit internal audit shall be conducted and reported to the Board.
b) The Audit Committee of the company or the Board shall, in consultation

with the Internal Auditor, formulate the scope, functioning, periodicity
and methodology for conducting the internal audit.
Legal If an existing company satisfies any of the criteria laid down under Rule 13
Requirements for (i.e. falls under prescribed class of companies for the purpose of Sec. 138),
Existing it shall within six months of commencement of section 138, comply with
Companies the requirements of Sec. 138 and Rule 13.
STATUTORY AUDITOR INTERNAL AUDITOR
1. The extent of the work undertaken It is statutory requirement too as per section 138
bystatutory auditor arises from the of the Companies Act, 2013 where the Audit
responsibility placed on him by the Committee of the company or the Board shall, in
statutes. consultation with the Internal Auditor,
Formulate the scope, functioning, periodicity and
methodology for conducting the internal audit.
2. The approach of this auditor is The approach of this auditor is with a view to
governed by his statutory duty to satisfy satisfy that the accounting system is efficient, so

himself that the accounts to be presented that the accounting information presented to the
to the shareholder show a true and fair management is accurate and discloses material
view of the financial position. facts.
3.This auditor is responsible directly to This auditor is responsible to management.

the shareholder.
4.External auditor is not the employee of If internal auditor is an employee of the company.
the company so he has independent He cannot enjoy independence that statutory
status. auditor has.
C & AG Audit 1. In India, government audit is performed by an independent constitutional
authority, i.e. Comptroller and Audit General of India (C&AG), through the
Indian Audit and Accounts Department.
2. The Constitution of India gives a special status to the C&AG and contains
provisions to safeguard his independence.
3. Article 148 of the constitution provides that the C&AG shall be appointed
by the President and can be removed from the office only in a like manner
and on the like grounds as a judge of the Supreme Court.
4. Article 151 of the Constitution requires that the audit reports of the C&AG
relating to the accounts of the Central/State Government should be
submitted to the President/Governor of the State who shall cause them to be
laid before Parliament/State Legislative.
5. The Comptroller and Audit General‘s (Duties, Power and Conditions of

Services) Act, 1971, prescribes that the C&AG shall hold office for a term of
six years or upto the age of 65 years, which is earlier. He can resign at any
time through a resignation letter addressed to the President. The Act also
assigns the duties regarding the audit to be followed by C&AG
6. Organizations subject to the audit of the Comptroller and Auditor General

of India
– All the Union and State Government departments and offices including the
Indian Railways and Posts and Telecommunications.
– About 1500 public commercial enterprises controlled by the Union and
State governments, i.e. government companies and corporations.
– Around 400 non-commercial autonomous bodies and authorities owned or
controlled by the Union or the States.
– Over 4400 authorities and bodies substantially financed from Union or
State revenues.
SECRETARIAL Secretarial Audit means correction and verification of secretarial records and
AUDIT compliances to be maintained by the Company. In other words, secretarial
(Section 204) audit is a compliance audit and it is a part of total compliance management
in an organization. It is an effective tool for corporate compliance
management. It helps to detect non – compliance and to take corrective
measures.
Secretarial Audit is a process to check compliance with the provisions of

various laws and rules/regulations/procedures, maintenance of books,
records etc., by an independent professional to ensure that the company has
complied with the legal and procedural requirements and also followed the
due process. It is essentially a mechanism to monitor compliance with the
requirements of stated laws.
1st Time, the Companies Act, 2013 gives statutory recognitions to the
Secretarial Audit. As per section 204 of the Companies Act, 2013, every
listed company and other class of companies as notified have to annex a
Secretarial Audit Report.
Applicability of Secretarial Audit : The following companies are required to do

the secretarial audit :
(a) Every listed companies; or
(b) Every public company having a paid – up share capital of Rs.50 crore or
more; or
(c) Every public company having a turnover of Rs.250 crore or more.
Who will conduct the Secretarial Audit of the Companies?

Only a practicing company secretary can conduct the secretarial audit of the
Companies. It shall be the duty of the company to give all assistance and
facilities to the company secretary in practice, for auditing the secretarial
and related records.
Note: Secretarial Audit should be an independent, objective assurance

intended to add value and improve an organization‘s operations. It helps to
accomplish the organization‘s objectives by bringing a systematic, disciplined
approach to evaluate and improve effectiveness of risk management, control,
and governance processes.
Report of Secretarial Audit: A secretarial audit report shall be annexed with

the Board‘s report of thecompany.The Board of Directors shall explain, in
their report, in full any qualification made in the Secretarial Audit Report.
The format of the Secretarial Audit Report shall be in Form No.MR.3.
JOINT AUDIT Meaning of Joint Audit:when two or more auditors are appointed for the
execution of same audit assignment,it is termed as joint audit. Joint
auditors are mainly appointed for audit assignment of public enterprises and
bigcompanies.
Institute of Chartered Accountants of India (ICAI) has issued SA 299 on

―Responsibility of Joint Auditors‖ w.e.f.April, 1996. Basic principles
governing a joint audit are discussed herein given below
Division of Work - Where joint auditors are appointed, they should, by

mutual discussion, divide the audit workamong themselves in terms of audit
of identifiable units or specified areas. If due to the nature of the business
ofthe entity under audit, such a division of work may not be possible the
division of work may be with reference toitems of assets or liabilities or
income or expenditure or with reference to periods of time. The division of
workamong joint auditors as well as the areas of work to be covered by all of
them should be adequately documentedand preferably communicated to the
entity.
Coordination -Where, in the course of his work, a joint auditor comes across
matters which are relevant to theareas of responsibility of other joint

auditors and which deserve their attention, or which require disclosure
orrequire discussion with, or application of judgement by, other joint
auditors, he should communicate the same toall the other joint auditors in
writing. Thus should be done by the submission of a report or note prior to
thefinalisation of the audit.
Relationship among joint auditors -In respect of audit work divided among the
joint auditors, each jointauditor is responsible only for the work allocated to
him, whether or not he has prepared as separate report onthe work
performed by him. On the other hand, all the joint auditors are jointly and
severally responsible:
(a) In respect of the audit work which is not divided among the joint auditors
and is carried out by all of them;
(b) In respect of decisions taken by all the joint auditors concerning the
nature, timing or extent of the auditprocedures to be performed by any of the
joint auditors. It may, however, be clarified that all the joint
auditors are responsible only in respect of the appropriateness of the
decisions concerning the nature,timing or extent of the audit procedures
agreed upon among them; proper execution of these audit
procedures is the separate and specific responsibility of the joint auditor
concerned;
(c) In respect of matters which are brought to the notice of the joint auditors
by any one of them and onwhich there is an agreement among the joint
auditors;
(d) For examining that the financial statements of the entity comply with the
disclosure requirements of therelevant statute; and
(e) For ensuring that the audit report complies with the requirements of the
relevant statute.
If any matters of the nature referred above are brought to the attention of the
entity or other joint auditors by anauditor after the audit report has been
submitted, the other joint auditors would not be responsible for
thosematters. Subject to paragraph (b) above, it is the responsibility of each
joint auditor to determine the nature,timing and extent of audit procedures
to be applied in relation to the area of work allocated to him; The issuessuch
as appropriateness of using test checks or sampling should be decided by
each joint auditor in relation tohis own area of work. This responsibility is
not shared by the other joint auditors.
Thus, it is the separate and specific responsibility of each joint auditor to

study and evaluate the prevailingsystem of internal control relating to the
work allocated to him. Similarly, the nature, timing and extent of
theenquiries to be made in the course of audit as well as the other audit
procedures to be applied are solely theresponsibility of each joint auditor. In
the case of audit of a large entity with several branches, including
thoserequired to be audited by branch auditors, the branch audit
reports/returns may be required to be scrutinised bydifferent joint auditors
in accordance with the allocation of work. In such cases, it is the specific

and separateresponsibility of each joint auditor to review the audit
reports/returns of the divisions/branches allocated to himand to ensure that
they are properly incorporated into the accounts of the entity. In respect of
the brancheswhich do not fall within any divisions or zones which are
separately assigned to the various joint auditors, theymay agree among
themselves as regards the division of work relating to the review of such
branch returns. It is
also the separate and specific responsibility of each joint auditor to exercise
his judgement with regard to thenecessity of visiting such
divisions/branches in respect of which the work is allocated to him. A
significant part ofthe audit work involves obtaining and evaluating
information and explanations from the management. Thisresponsibility is
shared by all the joint auditors unless they agree upon a specific pattern of
distribution of thisresponsibility. In cases where specific responsibility of
each joint auditor to obtain appropriate information andexplanations from
the management in respect of such divisions/zones/units and to evaluate
the information andexplanations so obtained by him.
Each joint auditor is entitled to assume that the other joint auditors have
carried out their part of the audit workin accordance with the generally
accepted audit procedures. It is not necessary for a joint auditor to review
thework performed by other joint auditors or perform any tests in order to
ascertain whether the work has actuallybeen performed in such a manner.
Each joint auditor is entitled to rely upon the other joint auditors for
bringingto his notice accounting principles or any material error noticed in
the course of the audit. Where separate
financial statements of a division/branch are audited by one of the joint
auditors, the other joint auditors areentitled to proceed on the basis that
such financial statements comply with all the legal and
professionalrequirements regarding the disclosures to be made and present a
true and fair view of the state of affairs and ofthe working results of the
division/branch concerned, subject to such observations as may be
communicated bythe joint auditor concerned.
Reporting Responsibilities -Normally, the joint auditors are able to arrive at

an agreed report. However, wherethe joint auditors are in disagreement with
regard to any matters to be covered by the report, each one of themshould
express his own opinion through a separate report. A joint auditor is not
bound by the view of the majorityof the joint auditors regarding matters to be
covered in the report and should express his opinion in a separatereport in
case of a disagreement. For the purpose of computation of the number of
company audits held by anauditor pursuant to the ceiling rule introduced in
the Companies Act, 2013 each joint auditor ship in a companywill be
counted as one unit.

CARO, 2016
Short title, (1) This Order may be called the Companies (Auditor’s Report) Order,
application and 2016.
commencement (2) It shall apply to every company including a foreign company as defined
in clause (42) of section 2 of the Companies Act, 2013 (18 of 2013)
[hereinafter referred to as the Companies Act], except–
(i) a banking company as defined in clause (c) of section 5 of the Banking
Regulation Act, 1949 (10 of 1949);
(ii) an insurance company as defined under the Insurance Act,1938 (4 of
1938);
(iii) a company licensed to operate under section 8 of the Companies Act;
(iv) a One Person Company as defined under clause (62) of section 2 of the
Companies Act and a small company as defined under clause (85) of section
2 of the Companies Act; and
(v) a private limited company, not being a subsidiary or holding company of
a public company, having a paid up capital and reserves and surplus not
more than rupees one crore as on the balance sheet date and which does
not have total borrowings exceeding rupees one crore from any bank or
financial institution at any point of time during the financial year and
which does not have a total revenue as disclosed in Scheduled III to the
Companies Act, 2013 (including revenue from discontinuing operations)
exceeding rupees ten crore during the financial year as per the financial
statements.

Auditor’s report Every report made by the auditor under section 143 of the Companies Act,
to contain 2013 on the accounts of every company audited by him, to which this
matters specified Order applies, for the financial years commencing on or after 1st April,
in paragraphs 3 2015, shall in addition, contain the matters specified in paragraphs 3 and
and 4 4, as may be applicable:
Provided the Order shall not apply to the auditor‘s report on consolidated
financial statements.
Matters to be The auditor‘s report on the accounts of a company to which this Order
included in the applies shall include a statement on the following matters, namely:-
auditor’s report (i) (a) whether the company is maintaining proper records showing full
particulars, including quantitative details and situation of fixed assets;
(b) whether these fixed assets have been physically verified by the
management at reasonable intervals; whether any material discrepancies
were noticed on such verification and if so, whether the same have been
properly dealt with in the books of account;
(c) whether the title deeds of immovable properties are held in the name of
the company. If not, provide the details thereof;
(ii) whether physical verification of inventory has been conducted at
reasonable intervals by the management and whether any material
discrepancies were noticed and if so, whether they have been properly dealt
with in the books of account;
(iii) whether the company has granted any loans, secured or unsecured to
companies, firms, Limited Liability Partnerships or other parties covered in
the register maintained under section 189 of the Companies Act, 2013. If
so,
(a) whether the terms and conditions of the grant of such loans are not
prejudicial to the company‘s interest;
(b) whether the schedule of repayment of principal and payment of interest
has been stipulated and whether the repayments or receipts are regular;
(c) if the amount is overdue, state the total amount overdue for more than
ninety days, and whether reasonable steps have been taken by the
company for recovery of the principal and interest;
(iv) in respect of loans, investments, guarantees, and security whether
provisions of section 185 and 186 of the Companies Act, 2013 have been
complied with. If not, provide the details thereof.
(v) in case, the company has accepted deposits, whether the directives
issued by the Reserve Bank of India and the provisions of sections 73 to 76
or any other relevant provisions of the Companies Act, 2013 and the rules
framed thereunder, where applicable, have been complied with? If not, the
nature of such contraventions be stated; If an order has been passed by
Company Law Board or National Company Law Tribunal or Reserve Bank of
India or any court or any other tribunal, whether the same has been
complied with or not?
(vi) whether maintenance of cost records has been specified by the Central
Government under sub-section (1) of section 148 of the Companies Act,
2013 and whether such accounts and records have been so made and
maintained.
(vii) (a) whether the company is regular in depositing undisputed statutory
dues including provident fund, employees‘ state insurance, income-tax,
sales-tax, service tax, duty of customs, duty of excise, value added tax, cess
and any other statutory dues to the appropriate authorities and if not, the
extent of the arrears of outstanding statutory dues as on the last day of the
financial year concerned for a period of more than six months from the date
they became payable, shall be indicated;
(b) where dues of income tax or sales tax or service tax or duty of customs
or duty of excise or value added tax have not been deposited on account of
any dispute, then the amounts involved and the forum where dispute is
pending shall be mentioned. (A mere representation to the concerned
Department shall not be treated as a dispute).
(viii) whether the company has defaulted in repayment of loans or
borrowing to a financial institution, bank, Government or dues to
debenture holders? If yes, the period and the amount of default to be
reported (in case of defaults to banks, financial institutions, and
Government, lender wise details to be provided).
(ix) whether moneys raised by way of initial public offer or further public
offer (including debt instruments) and term loans were applied for the
purposes for which those are raised. If not, the details together with delays
or default and subsequent rectification, if any, as may be applicable, be
reported;
(x) whether any fraud by the company or any fraud on the Company by its
officers or employees has been noticed or reported during the year; If yes,
the nature and the amount involved is to be indicated;
(xi) whether managerial remuneration has been paid or provided in
accordance with the requisite approvals mandated by the provisions of
section 197 read with Schedule V to the Companies Act? If not, state the
amount involved and steps taken by the company for securing refund of the
same;
(xii) whether the Nidhi Company has complied with the Net Owned Funds
to Deposits in the ratio of 1: 20 to meet out the liability and whether the
Nidhi Company is maintaining ten per cent unencumbered term deposits as
specified in the Nidhi Rules, 2014 to meet out the liability;
(xiii) whether all transactions with the related parties are in compliance
with sections 177 and 188 where applicable and the details have been
disclosed in the Financial Statements etc., as required by the applicable
accounting standards;
(xiv) whether the company has made any preferential allotment or private
placement of shares or fully or partly convertible debentures during the
year under review and if so, as to whether the requirement of section 42 of
the Companies Act, 2013 have been complied with and the amount raised
have been used for the purposes for which the funds were raised. If not,
provide the details in respect of the amount involved and nature of non-
compliance;
(xv) whether the company has entered into any non-cash transactions with
directors or persons connected with him and if so, whether the provisions of
section 192 have been complied with;
(xvi) whether the company is required to be registered under section 45-IA
of the Reserve Bank of India Act, 1934 and if so, whether the registration
has been obtained.
Reasons to be (1) Where, in the auditor‘s report, the answer to any of the questions
stated for referred to in paragraph 3 is unfavorable or qualified, the auditor‘s report
unfavorable or shall also state the basis for such unfavorable or qualified answer, as the
qualified case may be.
answers (2) Where the auditor is unable to express any opinion on any specified
matter, his report shall indicate such fact together with the reasons as to
why it is not possible for him to give his opinion on the same.

UNIT 3: INTERNAL AUDIT
Meaning  It is an independent management function,
 which involves a continuous and critical appraisal of the functioning of
an entity
 with a view to suggest improvements thereto and
 add value to and strengthen the overall governance mechanism of the
entity, including the entity‘s risk management and internal control
system.‖
NATURE OF 1. A Management tool:

INTERNAL AUDIT Internal Audit is management tool performed by the employees of the
organisationor the engaged professional firm to check the appropriateness
of internal checks and control in the organisation. The reporting authority
is generally board of directors and audit committee.
2. A continuous Exercise:
Internal Audit is a continuous and systematic process of examining and
reportingthe operations and records of a concern by its employees or
external agencies specially assigned for this purpose. It is, in essence,
auditing for the management and its scope may vary depending upon the
nature and size of the concern.
3. A Control System:
It is a control system concerned with examination and appraisal of other
controlmechanisms.
4. A Risk Management Tool:

The internal audit work encompasses fostering the creation of a risk
management process and ensuring it addresses key objectives, and the
subsequent evaluation of the process. The internal audit work also
encompasses an identical role in the creation and subsequent evaluation
of, the business continuity planning process, and the information security
and privacy system.
Functions of  Monitoring of internal control. The internal audit function may be

Internal Audit assigned specific responsibility for reviewing controls, monitoring their
operation and recommending improvements thereto.
 Examination of financial and operating information. The internal

audit function may be assigned to review the means used to identify,
measure, classify and report financial and operating information, and
to make specific inquiry into individual items, including detailed testing
of transactions, balances and procedures.
 Review of operating activities. The internal audit function may be

assigned to review the economy, efficiency and effectiveness of
operating activities, including non- financial activities of an entity.
 Review of compliance with laws and regulations. The internal audit

function may be assigned to review compliance with laws, regulations
and other external requirements, and with management policies and
directives and other internal requirements.

 Risk management. The internal audit function may assist the
organization by identifyingand evaluating significant exposures to risk
and contributing to the improvement of risk management and control
systems.
 Governance. The internal audit function may assess the governance

process in its accomplishment of objectives on ethics and values,
performance management and accountability, communicating risk and
control information to appropriate areas of the organization and
effectiveness of communication among those charged with governance,
external and internal auditors, and management.
Objectives (1) To verify the accuracy and authenticity of the financial accounting and
statistical recordspresented to the management.
(2) To ascertain that the standard accounting practices, as have been

decided to be followed by the organisation, are being adhered to.
(3) To establish that there is a proper authority for every acquisition,

retirement and disposalof assets.
(4) To confirm that liabilities have been incurred only for the legitimate
activities of the organisation.
(5) To analyse and improve the system of internal check; in particular to see
(i) that it is working; (ii) that it is sound; and (iii) that it is economical.
(6) To facilitate the prevention and detection of frauds.
(7) To examine the protection afforded to assets and the uses to which they
are put.
(8) To make special investigations for management.
(9) To provide a channel whereby new ideas can be brought to the

attention of management.
(10) To review the operation of the overall internal control system.
ADVANTAGES OF 1. Internal Auditing is a specialized service to look into the standards of

INTERNAL AUDIT efficiency of business operation.
2. Internal Auditing can evaluate various problems independently in terms

of overall management control and suggest improvement.
3. Internal Audit‘s independent appraisal and review can ensure the

reliability and promptness of MIS and the management reporting on the
basis of which the top management can take firm decisions.
4. Internal Audit system makes sure the internal control system including
accounting control system in an organization is effective.
5. Internal Audit ensures the adequacy, reliability and accuracy of

financial and operational data by conducting appraisal and review from an
independent angle.
6. Internal Audit is an integral part of ―Management by System‖.
7. Internal Audit can break through the power ego and personality factors
and possible conflicts of interest within the organization.
8. It ensures compliance of accounting procedures and accounting policies.
9. Internal Auditor can be of valuable assistance to management in

acquiring new business, in promoting new products and in launching new
projects for expansion or diversification of business.
LIMITATIONS OF 1. The installation and operation of internal audit involve extra expenditure
INTERNAL AUDIT which cannot be met by manysmall concerns. As a matter of fact, internal
audit is confined to larger business.
2. The limitation of internal audit starts when there is time lag between
recording and checking of entries.The accounting and internal audit must
go side by side with minimum time gap
3. Internal audit becomes as better as it is used by managers. There are

occasions when managerscannot accept the finding of internal audit and
take consequent actions. This defect arises mainly fromthe deficiencies of
the internal auditing staff, because of their advisory staff position,
unfamiliarity withoperating aspects of work and accounting bias, internal
auditors fail to be of any real help to the managerin many cases.
4. Internal audits are employed by the organization and this can be impair
their independence andobjectivity and ability to report fraud/error to
senior management because of perceived threats to theircontinued
employment within the company to ensure the transparency. Best practice
indicates thatthe internal audit should report both to management and
those charged with governance (auditcommittee).
5. Internal auditors are not required to be professionally qualified and so

there may be limitations in theirknowledge and technical expertise.
FUNCTIONS & Major roles and responsibilities of internal auditor are summarized below:
RESPONSIBILITIES 1. To work with board and management to ensure that a system is in place
OF INTERNAL which ensures that all majorrisks are identified and analyzed. Evaluate
AUDITOR and provide reasonable assurance that risk management, control, and
governance systems are functioning as intended and will enable the
organization‘s objectives and goals to be met.
2. To plan, organize and carry out the internal audit function including the
preparation of an audit plan which fulfils the responsibility of the
department, scheduling and assigning work and estimating resource
needs.
3. Report risk management issues and internal controls deficiencies

identified directly to the audit committeeand provide recommendations for

improving the organization‘s operations, in terms of both efficient
andeffective performance.
4. Evaluation of information security and associated risk exposures.

Evaluation of the organization‘s readiness in case of business interruption.
5. Evaluation of regulatory compliance program with consultation from

legal counsel.
6. Maintain open communication with management and the audit

committee. Team with other internal andexternal resources as appropriate.
Engage in continuous education and staff development. To reportto both
the audit committee and management on the policies, programmed and
activities of thedepartment.
7. Provide support to the company‘s anti-fraud programs.
8. To coordinate coverage with the external auditors and ensure that each
party is not only aware of theother‘s work but also well briefed on areas of
concern.
9. To make recommendations on the systems and procedures being

reviewed, report on the findings andrecommendations and monitor
management‘s response and implementation.
10. To review and report on the accuracy, timeliness and relevance of the
financial and other informationthat is provided for management.
ORGANISATION Where there is an internal audit function, its status is derived from the
STRUCTION OF needs of the organisation and should beset at the top of the organisation,
INTERNAL AUDIT i.e. by the board and the audit committee. There is no single model for
FUNCTION internalaudit and each organisation will determine what is appropriate to
suit its requirements. In general, internal auditcould, if agreed by the audit
committee, seek assurance that:
– The organisation has a formal governance process which is operating as

intended: values and goalsare established and communicated, the
accomplishment of goals is monitored, accountability is ensuredand values
are preserved.
– Significant risks within the organisation are being managed and

controlled to an acceptable level asdetermined by the board.
In addition, internal audit can be used to facilitate the strengthening of the

governance and risk framework withinthe organisation.
The audit committee should consider the role that has been set for internal
audit within the organisation‘s overallassurance framework. The evaluation
of internal audit role should be on an ongoing basis (at least annually).
The audit committee should challenge the organisation‘s decisions (if

required) in relation to the role that hasbeen set for internal audit and
question whether its scope, authority and resources are adequate and

consistentwith the risks that the organisation faces and the effectiveness of
the internal controls that are in place toaddress those risks.
ROLE OF The Internal auditor should examine and contribute to the ongoing
INTERNAL AUDIT effectiveness of the internal control systemthrough evaluation and
IN INTERNAL recommendations. However, the internal auditor is not vested with
CONTROL management‘s primaryresponsibility for designing, implementing,
maintaining and documenting internal control. Internal audit functionsadd
value to an organization‘s internal control system by bringing a systematic,
disciplined approach to theevaluation of risk and by making
recommendations to strengthen the effectiveness of risk management
efforts.
The internal auditor should focus towards improving the internal control
structure and promoting better corporategovernance. The role of the
internal auditor encompasses:
– Evaluation of the efficiency and effectiveness of controls
– Recommending new controls where needed or discontinuing unnecessary
controls
– Using control frameworks
– Developing Control self-assessment
ROLE OF Internal auditing professional standards require the function to monitor

INTERNAL AUDIT and evaluate the effectiveness of theorganization‘s Risk management
IN RISK processes. Risk management relates to how an organization sets
MANAGEMENT objectives,then identifies, analyzes, and responds to those risks that could
potentially impact its ability to realize itsobjectives.
Under the COSO Enterprise Risk Management (ERM) Framework, risks fall
under strategic, operational, financialreporting, and legal/regulatory
categories. Management performs risk assessment activities as part of the
ordinarycourse of business in each of these categories.
Examples include: strategic planning, marketing planning,capital

planning, budgeting, hedging, incentive payout structure, and
credit/lending practices. Sarbanes-Oxleyregulations also require extensive
risk assessment of financial reporting processes. Corporate legal
counseloften prepares comprehensive assessments of the current and
potential litigation a company faces. Internalauditors may evaluate each of
these activities, or focus on the processes used by management to report
andmonitor the risks identified. For example, internal auditors can advise
management regarding the reporting offorward-looking operating measures
to the Board, to help identify emerging risks.
In larger organizations, major strategic initiatives are implemented to

achieve objectives and drive changes. Asa member of senior management,
the Chief Audit Executive (CAE) may participate in status updates on
thesemajor initiatives. This places the CAE in the position to report on
many of the major risks the organization faces
to the Audit Committee, or ensure management‘s reporting is effective for
that purpose.

ROLE OF Internal auditing activity as it relates to corporate governance is generally
INTERNAL AUDIT informal, accomplished primarilythrough participation in meetings and
IN CORPORATE discussions with members of the Board of Directors. Corporate
GOVERNANCE governanceis a combination of processes and organizational structures
implemented by the Board of Directors to inform,direct, manage, and
monitor the organization‘s resources, strategies and policies towards the
achievement ofthe organizations objectives. The internal auditor is often
considered one of the ―four pillars‖ of corporategovernance, the other
pillars being the Board of Directors, management, and the external
auditor.
A primary focus area of internal auditing as it relates to corporate

governance is helping the Audit Committee ofthe Board of Directors (or
equivalent) perform its responsibilities effectively. This may include
reporting criticalinternal control problems, informing the Committee
privately on the capabilities of key managers, suggestingquestions or topics
for the Audit Committee‘s meeting agendas, and coordinating carefully
with the externalauditor and management to ensure the Committee
receives effective information.
PROPRIETY AUDIT 1. Kohler has defined propriety as that which meets the test of public
interest, commonly accepted customs and standard of conduct and
particularly as applied to professional performance, requirements of
Government regulations and professional codes.
2. Propriety Audit carry out to check, mean whether the transactions have
been done in conformity with established rules, principles and established
standard.
3. The Propriety Audit means the verification of following main aspects to

find out whether:
(i) Proper recording has been done in appropriate books of accounts.
(ii) The assets have not been misused and have been properly safeguarded.
(iii) The business funds have been utilized properly.
(iv) The concern is yielding the expected results.
4. The system of Propriety Audit is applied in respect to Government

companies, Government Department because public money and public
interest are involved therein.
5. It is an essential function of audit to bring to light not only cases of clear

irregularity but also every matter which in its judgement appears to involve
improper expenditure or waste of public money or stores, even though the
accounts themselves may be insufficient to see that sundry rules or orders
of competent authority have been observed.
6. It is of equal importance to ensure that the broad principles of orthodox

finance are borne in mind not only by disbursing officers but also by
sanctioning authorities.
COMPLIANCE 1. A compliance audit is a comprehensive review of an organization‘s

AUDIT adherence to regulatory guidelines.

2. What, precisely, is examined in a compliance audit will vary depending
upon whether an organization is a public or private company, what kind of
data it handles and if it transmits or stores sensitive financial data.
3. It is common to us that the business undertakings require some

certified statement on various matters and the auditors certify such
statements after carrying out audit which might be necessary under the
particular cases. All such audits are called Compliance Audit.
4. Benefits of Compliance Audit

i. Adherence to the established standards.
ii. Improvement of internal processes and technologies.
iii. Maintenance of Certifications.
iv. Adherence to governmental regulations.
v. Cost recovery.
vi. Elevate fraud awareness and deter fraudulent activity.
vii. Manage contract areas of risk
EFFICIENCY AUDIT 1. In essence, efficiency indicates how well an organization uses its
resources to produce goods and services.
2. It focuses on resources (inputs), goods and services (outputs), and the

rate (productivity) at which inputs are used to produce or deliver the
outputs.
3. To understand the meaning of ―efficiency‖, it is necessary to understand

the following terms: inputs, outputs (including quantity and quality),
productivity, and level of service.
4. Efficiency is a relative concept.
5. It is measured by comparing achieved productivity with a desired norm,

target, or standard. Output quantity and quality achieved and the level of
service provided are also compared to targets or standards to determine to
what extent they may have caused changes in efficiency.
6. Efficiency is improved when more outputs of a given quality are

produced with the same or fewer resource inputs, or when the same
amount of output is produced with fewer resources.
7. Efficiency audit refers to comparing the actual results with the

desired/projected results. It is directed towards the measurement of
whether plans have been effectively executed.
8. It is concerned with the utilisation of the resources in economic and

most remunerative manner to achieve the objectives of the concern.
9. It comprises of studying the plans of organisation, comparing actual

performance with plans and investigating the reasons for variances to take
remedial action.
10. The objectives of auditing efficiency can include assessing one or more
of the following:

i) the level of efficiency achieved by an organization or operation in relation
to reasonable standards;
ii) the adequacy and reliability of systems or procedures used to measure
and report efficiency;
iii) an organization‘s efforts to explore and exploit opportunities to improve
efficiency; and
iv) whether the management processes and information systems,
operational systems, and practices of an organization help to achieve
efficiency.
11. Advantages of Efficiency Audit:

i) help managers and staff to be more sensitive to their obligation of due
regard to efficiency;
ii) underline the importance of measuring efficiency and of using that
information for managing operations and providing accountability;
iii) identify means for improving efficiency, even in operations where
efficiency is difficult to measure;
iv) demonstrate the scope for lowering the cost of delivering programs
without reducing the quantity or quality of outputs or the level of service;
v) increase the quantity or improve the quality of outputs and level of
service without increasing spending; and
vi) identify needed improvements in existing controls, operational systems,
and work processes for better use of resources.

UNIT 4: INTERNAL CONTROL
Meaning  The planof organisation and
 All policies & procedures,
 Adopted by management,
 To ensure,
 Orderly & efficient conduct of business.
As per SA-315, ―Identifying and Assessing the Risk of Material Misstatement

Through Understanding the Entity and its Environment‖ the internal control
may be defined as ―The process designed, implemented and maintained by
those charged with governance, management and other personnel to provide
reasonable assurance about the achievement of an entity‘s objectives with
regard to reliability of financial reporting, effectiveness and efficiency of
operations, safeguarding of assets, and compliance with applicable laws and
regulations. The term ―controls‖ refers to any aspects of one or more of the
components of internal control.‖
Objectives of 1)Proper Execution of transaction as per management authorization;

Internal Control
2) Prompt recording of transaction:
(a) In appropriate account
(b) In proper period
(c) At correct amount
3)safeguarding of assets from unauthorised access, use or disposition;
4)periodic comparison of recorded assets with actual assets; &
5) Prevention, detection & correction of material misstatement on timely

basis.
Control Meaning  Overall attitude

Environment  awareness &
 actions of Management
 regarding I. C. system & its importance
 in the entity.
Factors affecting control environment
Organizational Structure Management supervision Personnel
1. (a) It should be such that no individual can override the I. C.

Organizat System.
ional
Structure (b) It should provide for segregation of incomplete function, so
that misstatement can‘t be committed easily.
(c) For example, authorization for purchase, record keeping

&access to assets are some functions regarding assets, which
should be segregated.
2. (a) Devising and maintaining I. C. System is responsibility of

Managem management.
ent
Supervisi (b) Management should review it periodically to ensure
on effectiveness.
(c) Management can establish a separate department called

―Internal audit‖ to check whether other internal controls are
operating effectively.
Note: Internal audit is a part of I. C. System itself, which
dedicatedly ensures worthiness of internal control system.
3. (a) Functioning of I. C. system depends on the capability &

Personnel honesty of those operating it.
(b) Thus, personnel should be properly qualified, trained and

experienced.
.
Inherent Meaning: Limitations which are inseparable from system of internal control.
Limitations of Effect: - due to limitations of I.C. System,
Internal Control - it can provide only reasonable,
- not absolute assurance,
- that its objectives are achieved.
Limitations:
1. Cost effectiveness  Cost of implementation of control may be more than
its benefits.
 Thus, management usually doesn‘t implement best
controls.
2. Human error  Human Error, which may occur while carrying out
I.C. system.
 Itmay be due to misunderstanding on part of
personnel.
3. Collusion among The possibility of circumvention of controls through

employees collusion with parties outside the entity or with
employees of entity; For example, management may
enter into side agreements with customers that alter
the terms and conditions of the entity‘s standard sales
contracts, which may result in improper revenue
recognition.
4. Abuse of The possibility that a person responsible for exercising

authority control could abuse that authority,
For example, person responsible for issuance of
stationery to various departments only for
authorizeduse, can himself misappropriate stationery
for personal use.
5. Manipulations by  Manipulation by high level management may not be
management detected by control system.
 For example manipulation in estimates appearing in
financial statements.

6. No control for The fact that most controls do not tend to be directed
unusual transaction at transactions of unusual nature.
7. Inadequate The possibility that procedures may become inadequate
procedure due to changes in conditions and compliance with
procedures may deteriorate.
Accounting and Internal Control so far as Financial and Accounting aspects are concerned
Financial aims at:
Controls  Breaking the chain of the work in a manner so that no single person can
handle a transaction from the beginning to the end.
 Segregation of accounting and custodial functions.
 Securing proper documentation at each stage.
 Safeguarding of assets.
 Making errors and frauds difficult.
 Evolving standardized records.
 Preparation of periodical accounting and financial report.
 Employment of persons of quality.
 Formulating a cut-off procedure to separate transactions of two
consecutive years.
 Building up a system to locate the deviations and departures from the
prescribed procedures and to detect frauds and errors automatically
without much loss of time
 Fixing responsibility for the work and the responsibility for deviations.
REVIEW OF INTERNAL CONTROL BY AUDITOR

Meaning Review of I.C refers to – Examination and evaluation of I.C system of the
client.
Need for review To assure that I.C. system is adequate.
Advantages of The review of internal controls will enable the auditor to know:
Review (i) Whether errors and frauds are likely to be located in the ordinary course of
operations of the business;
(ii) Whether an adequate internal control system is in use and operating

efficiently;
(iii) Whether an effective internal auditing department is operating;
(iv) Whether any administrative control has a bearing on his work (for
example, if the control over worker recruitment and enrolment is weak, there
is a likelihood of dummy names being included in the wages sheet and this is
relevant for the auditor);
(v) Whether the controls adequately safeguard the assets;
(vi) How far and how adequately the management is discharging its function
in so far as correct recording of transactions is concerned;
(vii) How reliable the reports, records and the certificates to the management
can be;
(viii) The extent and the depth of the examination that he needs to carry out

in the different areas of accounting;
(ix) What would be appropriate audit technique and the audit procedure in
the given circumstances?
(x) What are the areas where control is weak and where it is excessive; and
(xi) Whether some worthwhile suggestions can be given to improve the

control system.
Tools to review
Internal Control Tools to review IC system
1) Narrative 2) Check List 3) I.C. 4) Flow

Record Questionnaire Chart
1) NARRATIVE  This is a complete and exhaustive description of the system as found in

RECORD operation by the auditor.
 Actual testing and observation are necessary before such a record can be
developed. It may be recommended in cases where no formal control
system is in operation and would be more suited to small business.
 The basic disadvantages of narrative record are:
(i) To comprehend the system in operation is quite difficult.
(ii) To identify weaknesses or gaps in the system
(iii) To incorporate changes arising on account of reshuffling of manpower,
etc.
2) CHECK LIST This is a series of instructions and/or questions which a member of the
auditing staff must follow and/or answer.
 When he completes instruction, he initials the space against the

instruction.
 Answers to the check list instructions are usually Yes, No or Not
Applicable.
 This is again an on the job requirement and instructions are framed
having regard to the desirable elements of control.
 A few examples of check list instructions are given hereunder:
1. Are tenders called before placing orders?
2. Are the purchases made on the basis of a written order?
3. Is the purchase order form standardised?
4. Are purchase order forms pre-numbered?
5. Are the inventory control accounts maintained by persons who have
nothing to do with:
(i) custody of work;
(ii) receipt of inventory;
(iii) inspection of inventory; and
(iv) purchase of inventory?
 The complete check list is studied by the Principal/Manager/Senior to

ascertain existence of internal control and evaluate its implementation
and efficiency.
3) INTERNAL  This is a comprehensive series of questions concerning internal control.
CONTROL This is the most widely used form for collecting information about the
QUESTIONNAIRE existence, operation and efficiency of internal control in an organisation.
 An important advantage of the questionnaire approach is that oversight or
omission of significant internal control review procedures is less likely to
occur with this method.
 With a proper questionnaire, all internal control evaluation can be
completed at one time or in sections. The review can more easily be made
on an interim basis. The questionnaire form also provides an orderly
means of disclosing control defects.
 It is the general practice to review the internal control system annually
and record the review in detail. In the questionnaire, generally questions
are so framed that a ‗Yes‘ answer denotes satisfactory position and a ‗No‘
answer suggests weakness.
 Provision is made for an explanation or further details of ‗No‘ answers. In
respect of questions not relevant to the business, ‗Not Applicable‘ reply is
given.
 The questionnaire is usually issued to the client and the client is
requested to get it filled by the concerned executives and employees. If on
a perusal of the answers, inconsistencies or apparent incongruities are
noticed, the matter is further discussed by auditor‘s staff with the client‘s
employees for a clear picture. The concerned auditor then prepares a
report of deficiencies and recommendations for improvement.
4. FLOW CHART  It is a graphic presentation of each part of the company‘s system of

internal control. A flow chart is considered to be the most concise way of
recording the auditor‘s review of the system.
 It minimizes the amount of narrative explanation and thereby achieves a
consideration or presentation not possible in any other form.
 It gives bird‘s eye view of the system and the flow of transactions and
integration and in documentation, can be easily spotted and
improvements can be suggested.
 It is also necessary for the auditor to study the significant features of the
business carried on by the concern; the nature of its activities and various
channels of goods and materials as well as cash, both inward and
outward; and also a comprehensive study of the entire process of
manufacturing, trading and administration. This will help him to
understand and evaluate the internal controls in the correct perspective.
INTERNAL CHECK
Meaning  Checks on the day-to-day transaction.
 Operating continuously as a part of the routine system.
 Whereby work of each person is automatically checked by another.
Objective  To prevent fraud/ error, &

 Early detection of fraud and error
Relation with I.C. Internal Check is part of overall Internal Control System & operates as a built
System in device.
General (1) No single person should have an independent control over any important
considerations in aspect of the business. All dealings and acts of every employee should, in the
framing a system ordinary course, come under the review of another.

of internal check
(2) The duties of members of the staff should be changed from time to time
without any previous notice so that the same officer or subordinate does not,
without a break, perform the same function for a considerable length of time.
(3) Every member of the staff should be encouraged to go on leave at least

once in a year. Experience has shown that frauds successfully concealed by
employees are often unearthed when they are on leave.
(4) Persons having physical custody of assets must not be permitted to have
access to the books of account.
(5) There should exist an accounting control in respect of each important

class of assets; in addition, these should be periodically inspected so as to
establish their physical condition.
(6) To prevent loss or misappropriation of cash, mechanical devices, such as

the automatic cash register, should be employed.
(7) Budgets should be prepared for important activities. If difference between

budgeted & actual figure is significant, it should be enquired into.
(8) For inventory-taking, at the close of the year, trading activities should, if
possible, be suspended. The task of inventory-taking, and evaluation should
be done by staff belonging to several sections of the organisation. It may
prove dangerous to depend exclusively on the inventory section staff for these
tasks, since they may be tempted to under or over-state the inventory.
(9) The financial and administrative powers should be distributed very

judiciously among different officers and the manner in which these are
actually exercised should be reviewed periodically.
(10) Procedures should be laid down for periodical verification and testing of
different sections of accounting records to ensure that they are accurate.
AUDIT IN DEPTH Audit in depth as the name implies means checking a transaction extensively
from origin to end. It is an audittechnique which is used to evaluate the
effectiveness of internal control system in an organisation. It is used
ininvestigation exercises whereby the objective is to thorough examination of
transactions or records. In thistechnique all aspects relating to the
transaction are checked such as sanctity of transaction, validity of
transaction,adherences of prescribed procedures, arithmetical accuracy of
transaction, accounting treatment of transactionetc. It is also called vertical
vouching as against horizontal vouching.
For example, a purchase of goods may commence when a predetermined re-

order level has been reached. Theensuing stages may be summarized as given
below:-
1. Authorization of Purchase requisition: Check whether the requisitions are

pre-printed, pre-numberedand authorized. See whether the purchase
requisition have been authorized by competent official.

2. Issue of Request for quotation: Check whether request for quotatio0n have
been issued or not. If notfind the reasons of not issuing request for quotation.
Check whether the requests for quotation havebeen issued to approved
vendors.
3. Issue of Purchase order: Check whether purchase order have been issued
or not. If purchase orderhave been issued check whether it has been issued
from the competent authority. Check whether thepurchase order have been
issued to the approved vendor who has given lowest quote. If not check
thereasons. Check whether the reasons of issuing the purchase order to a
vendor other than the lowestbidder have been approved by the competent
authority.
4. Receipt of goods and entry of goods in store ledger: check whether the
goods receipt is as perspecification given in the purchase order. If not check
whether the deviations have been recorded andthe communication has been
made to the supplier or not. Check whether the goods receipt have
beenproperly recorded in store ledger or not.
5. Approval of payment of Supplier Invoice: Check whether the amount has

been approved by thecompetent authority.
6. Payment of supplier invoice: Check whether the supplier bill have ben paid
correctly. Check whetherall deduction for short receipt of goods, late delivery
of goods, inferior quality of goods, advance paymentfor the goods have been
done or not.
7. Accounting of Transaction: Check whether accounting made is correct or

not. Check whether correctexpenses code have been debited or not. Check
whether the applicable accounting standard havebeen complied with or not.
It should be noted that the above list is not necessarily comprehensive, nor
does its constituent stages inevitablytake place in the sequence suggested.
INTER FIRM 1. It is technique of evaluating the performance, efficiency, costs and profits
COMPARISON of firms in an industry. It consists of voluntary exchange of information/data
concerning costs, prices, profits, productivity and overall efficiency among
firms engaged in similar type of operations for the purpose of bringing
improvement in efficiency and indicating the weaknesses. Such a comparison
will be possible where uniform costing is in operation.
2. An inter-firm comparison indicates the efficiency of production and selling,

adequacy of profits, weak spots in the organisation, etc. and thus demands
from the firm‘s management an immediate suitable action. Inter-firm
comparison may enable the management to challenge the standards which it
has set for itself and to improve upon them in the light of the current
information gathered from more efficient units. Such a comparison may be
carried out in electrical industry, printing firms, cotton spinning firms,
pharmaceuticals, cycle manufacturing, etc
3. The main advantages of inter-firm comparison are:–

i. Such a comparison gives an overall view of the industry as a whole to its
members– the present position of the industry, progress made during the
past and the future of the industry.

ii. It helps a concern in knowing its strengths or weaknesses in relation to
others so that remedial measures may be taken.
iii. It ensures an unbiased specialized reporting on particular problems of the
concern.
iv. It develops cost consciousness among members of the industry.
v. It helps Government in effecting price regulation.
vi. It helps to improve the quality of products manufactured and to reduce the
cost of production. It is thus advantageous to the industry as well as to the
society.
4. Limitations of inter-firm comparison

The following are the limitations in the implementation of a scheme of inter-
firm comparison :
i. Top management feels that secrecy will be lost.
ii. Middle management is usually not convinced with the utility of such a
comparison.
iii. In the absence of a suitable Cost Accounting System, the figures supplied
may not be reliable for the purpose of comparison.
INTRA FIRM 1. Intra-firm comparison means comparison among different

COMPARISON units/products/strategic business unit (SBU) of a firm. This comparison is
possible only when uniform costing methods and practices are being adopted
by all units and SBUs.
2. Intra firm comparison helps the management in identifying the

units/Strategic SBUs which have not been performing as per the internal
benchmark or standards achieved by other units SBUs. This comparison is
difficult sometime when the firm is dealing in different product/sectors and
their working conditions are significantly different.
3. Advantages of Intra-firm comparison:

1. Such a comparison gives an overall view of the firm as a whole to the
owner or stakeholders and gives a comparative view of different
product/different business of the firm.
2. It helps a SBU in knowing its strengths or weaknesses in relation to others
SBUs.
3. It develops cost consciousness among units of the firm.
SAMPLING IN Sampling is a process of selecting a subset of a population of items for the

AUDIT TESTING purpose of making inferences to thewhole population. Accounting populations
usually consist of a large number of items (debtors, creditors), oftentotalling
millions of rupees, and a detailed examination of all accounts is not possible.
Audit sampling is definedas
―The application of audit procedures to less than 100% of the items within an
account balance or class oftransactions to enable the auditor to obtain and
evaluate evidence about some characteristic of the itemsselected in order to
form or assist in forming a conclusion concerning the population which
makes up theaccount balance or class of transactions‖
A fundamental element of any audit programme will be the selection of

transactions to be tested as a sample ofall available transactions. Sampling is
used in both compliance and substantive testing and is described

innumerous textbooks in auditing.
Need for Audit Sampling

Formalized audit sampling procedures offer innumerable benefits to all
auditors. These include:
1. Developing a consistent approach to audit areas;
2. Providing a framework within which sufficient audit evidence is obtained;
3. Forcing clarification of audit thinking in determining how the audit
objectives will be met;
4. Minimising the risk of over-auditing; and
5. Facilitating more expeditious review of working papers
STATISTICAL Statistical sampling involves the random selection of a number of items for
SAMPLING inspection and is endorsed by theaccountancy bodies. In statistical sampling,
each item has a calculable chance of being selected.
A commonly held misconception about statistical sampling is that it removes

the need for the use of the professionaljudgement. While it is true that
statistical sampling uses statistical methods to determine the sample size and
toselect and evaluate audit samples, it is the responsibility of the auditor to
consider and specify in advancefactors such as, materiality, the expected
error rate or amount, the risk of over-reliance or the risk of
incorrectacceptance, audit risk, inherent risk, control risk, standard deviation
and population size, before the sample sizecan be determined.
Statistical sampling allows an auditor‘s judgement to be concentrated on

those areas of the audit where it ismost needed. It allows the quantification of
key factors and the risk of errors. This is not to suggest thatstatistical
sampling methods remove the need for professional judgement, but rather
that they allow elements ofthe evaluation process to be quantified, measured
and controlled.
The advantages of statistical sampling are numerous:
1. The sample result is objective and defensible. Nearly all phases of the
statistical process are based ondemonstrable statistical principles.
2. The method provides a means of advance estimation of sample size on an

objective basis. The samplesize is no longer determined by traditional
methods of guesswork; it is determined by a statistical method.
3. The method provides an estimate of error. When probability sampling is

used, the results may bevalidated in terms of how far the sample projection
might deviate from the value that could be obtainedby a 100% check.
4. Statistical samples may be combined and evaluated, even though

accomplished by different auditors.
That the entire test operation has an objective and scientific basis makes it
possible for different auditorsto participate independently in the same test
and for the results to be combined as though accomplishedby one auditor.
5. Objective evaluation of test results is possible. Thus, all auditors

performing this audit would be able toreach the same conclusion about the
numerical extent of error in the population. While the impact ofthese errors

might be interpreted differently, there can be no question as to the facts
obtained, since themethod of determining their frequency in the population is
objective.
APPROACHES Simple Random Sampling

TO STATISTICAL In auditing, this method uses sampling without replacement; that is, once an
SAMPLING item has been selected for testingit is removed from the population and is not
subject to re-selection. An auditor can implement simple randomsampling in
one of two ways: computer programs or random number tables.
Systematic (Interval) Sampling

This method provides for the selection of sample items in such a way that
there is a uniform interval betweeneach sample item. Under this method of
sampling, every ―Nth‖ item is selected with a random start.
Stratified (Cluster) Sampling

This method provides for the selection of sample items by breaking the
population down into stratas, or clusters.Each strata is then treated
separately. For this plan to be effective, dispersion within clusters should be
greaterthan dispersion among clusters. An example of cluster sampling is the
inclusion in the sample of all remittancesor cash disbursements for a
particular month. If blocks of homogeneous samples are selected, the sample
willbe biased.
Remember, an essential feature of probability sampling methods is that each

element of the population beingsampled has an equal chance of being
included in the sample and, moreover, that the chance of probability
isknown. Only in this way, is a probability sample representative of a
population.

UNIT 5: REVIEW OF INTERNAL CONTROL
REVIEW OF Purchase is one of the most important functions in a manufacturing
PURCHASE organisation. In most of the manufacturingand trading organisation,
OPERATIONS purchases constitutes about 50-70% of the cost. So it becomes very
important to havean efficient internal control over the purchasing activities
of an organisation.
OBJECTIVES OF The objectives of review of internal control system includes to ascertain:

REVIEW 1. Whether controls are in place in the process to ensure that
accountability is established as early aspossible at all points along with the
accountability chain.
2. Whether segregation of duties, risk mitigating controls, exists within

transaction processing authorization.
Whether separation of duties exists between various types of transaction

processing (e.g., procurement,accounts payable, disbursements).
3. Whether the quantity and quality of goods and services received is

documented and agrees with therequisition and performance expectations
such as service level agreements, contract terms, and vendorperformance.
4. Whether transactions are properly verified before disbursement,

transactions and activities are properlyauthorized, transactions and events
are properly recorded.
5. Whether accountability for refunds and credits are maintained. Whether

staff understands their duties,responsibilities, and accountabilities.
6. Whether procurement practices and procedures are documented, and in

compliance with central andstate laws and other requirements such as
contract terms and conditions. Procurement records forauthorizations and
transactions are maintained in accordance with established requirements.
7. Whether accounting records are protected from theft, obsolescence, or

destruction. Whether assetsare safeguarded from loss through watchful
and responsible care and reconciliation functions.
SEGREGATION OF To ensure proper separation of duties, assign related buying functions to

DUTIES IN different people. Ensure propersegregation, no single person has complete
PURCHASE control over all buying activities.
OPERATION It is always preferable to have different people who –
I. Approve purchases
II. Receive ordered materials
III. Approve invoices for payment
IV. Review and reconcile financial records
V. Perform inventory counts
If segregation of duties does not exist in purchases operations, this may

result into unauthorized or unnecessarypurchases, improper charges to
department budgets, purchase of goods at excessive costs, use of goods
forpersonal purposes

ACCOUNTABILITY, In an efficient purchase system, the mechanism of authorization, review,
AUTHORIZATION and approval should exist. All purchasesshould be made on the basis of
& APPROVAL signed agreements, contract terms, and purchase orders.
MECHANISM
It will always be advisable to –
(i) Comply with ethical buying practices and policy.
(ii) Review and update signature authorizations periodically.
(iii) Obtain pre-approval of consultant agreements by Purchasing.
(iv) Verify receipt of goods and services against contract/ purchase order
and invoice information.
(v) Reconcile ledgers for accuracy of recorded transactions.
(vi) Monitor to ensure that invoices are paid in a timely manner.
In case the mechanism of ascertaining accountability does not exist. it may

result into unauthorized or unnecessarypurchases, purchases at higher
rate, misappropriation of funds.
PHYSICAL Once the purchases are done, it is necessary to secure the materials in a
CONTROL OVER safe location. To ensure that theresources are accounted for, it is necessary
ASSETS to periodically verify the inventory and compare the results with thebooks.
To ensure security of assets, it is advisable to –
(i) Secure goods received in a restricted area.
(ii) Restrict inventory access to appropriate staff.
(iii) Lock goods and materials, and provide key or combination to as few
people as possible.
(iv) Keep inventory records and periodically calculate beginning and ending
inventory amounts.
If physical control over assets does not exists, it may result into theft of
goods, inventory shortages, additionalcosts incurred for replacement of
goods.
REVIEW & Review and reconciliation is a very important part of purchase internal
RECONCILIATION control system. Timely review of supplier‘sinvoice, packing slips, and
purchase orders is very necessary to ensure accuracy of the information for
priorpayment, correct quantity ordered, and price charged. Monthly ledger
reconciliation enables to find improper
charges and validate appropriate financial transactions.
It is advisable to –
(i) Review supplier invoices for accuracy by comparing charges to purchase
orders.
(ii) Verify that the goods and services purchased have been received.
(iii) Perform monthly reconciliations of operating ledgers to ensure accuracy
and timeliness of expenses.
In case review and reconciliation process is missing, it may result into

improper charges to the departmentbudgets, Disallowances resulting from
costs charged to incorrect accounts/funds, payments made for items
orservices not provided.
REVIEW OF Selling and distribution function are one of the most important function for
SELLING & an organisation. The survival of anorganisation largely depends on the

DISTRIBUTION effectiveness of selling and distribution function. Management of
POLICY & distributionchannels involves efficient channel design, conflict
PROGRAMS management and implementation of sophisticated channelinformation
systems which will enhance the process of making the products available
to the end consumer in atimely manner.
Review of sales and distribution function is very important from internal

control point of view and it requires adetailed understanding of company
business.
Objectives of review of sales and distribution policies and programs

1. To determine whether sales and distribution policies and programs are
adequately documented
2. To determine whether sales and distribution policies and programs are

approved by the appropriateauthority.
3. To determine that sales and distribution policies are matching with the
overall corporate objective.
4. To determine whether maker checker and approver concept exist in the

framing, approval andimplementation of policies.
5. To check whether the distribution program is able enough to serve

customers of all regions.
6. Whether controls are in place in the process to ensure accountability is

established as early as possibleat all points along the accountability chain.
7. Whether segregation of duties, or mitigating controls, exists within

transaction processing authorization,custody, and recording functions.
Separation of duties exists between the various types of
transactionprocessing (e.g., Discount approval, selection of mode of
transportation. Accounts receivable etc).
REVIEW OF In general parlance, Manufacturing means converting an input (Raw

MANUFACTURING material) into output (finished product) withthe use of man, machines,
OPERATIONS material, power etc. Such finished goods may be used for manufacturing
other, morecomplex products, such as aircraft, household appliances or
automobiles, or sold to wholesalers, who in turnsell them to retailers, who
then sell them to end users – the ―consumers‖.Manufacturing operations is
a prime source of money outflow i.e. a large amount of money is spent
onmanufacturing process e.g. in buying machinery, raw material,
consumables, paying salary to workers etc. It isvery important to review the
manufacturing operations in timely manner so that the identified in-
efficiency maybe eliminated controlled on immediate basis.
Objectives of Review of Manufacturing Operations

1. Whether the organization have any manufacturing process management
system.
2. Whether the policies and procedures for production planning well

defined & well documented.

3. Whether the organisation have a quality management system in place. If
so, whether the organisationhave a written quality policy and whether it is
adhered or not.
4. Whether the organization is following six sigma. Whether the

organisation have a written maintenancepolicy.
5. Whether the organization have a written scrap policy.
6. Whether security policies are documented or not.
APPRAISAL OF Management decision making

MANAGEMENT Decision-making is an essential aspect of modern management. It is a
DECISIONS primary function of management. Amanager takes hundreds of decisions
consciously and subconsciously. A decision may be defined as ―a courseof
action which is consciously chosen from among a set of alternatives to
achieve a desired result.‖ It representsa well-balanced judgment and a
commitment to action. Decision-making pervades all managerial actions
and acontinuous process. Decision-making is an indispensable component
of the management process itself.
Management decision-making process steps:

1. Define the problem.
2. Identify limiting factors.
3. Develop potential alternatives.
4. Analyze the alternatives.
5. Select the best alternative.
6. Implement the decision.
7. Establish a control and evaluation system.

UNIT 6: AUDIT ENGAGEMENT & DOCUMENTATION
AUDIT PROGRAMME
Meaning  An audit programme is a predetermined detailed plan of auditing work
to be performed, specifying the procedure to be followed in verification of
each item in the financial statement, allocation of the audit staff and the
time framed to be followed in conducting the audit.
 Thus an audit programme is written plan for the conduct of an audit

specifying what work to be done, when to be done and by whom to be
done.
 It consist of series of verification procedure to be followed to the

financial statements and accounts of a given company for the purpose of
obtaining sufficient & appropriate evidence to enable the auditor to
express an informed opinion on such statements.
Advantages of 1. Selection of The programme helps in selection of assistants for jobs

audit programme team on the basis of their capability.
members
2. Instructions The audit programme specifies the extent and manner
for staff of checking and verification to be carried out in respect
of different aspects of accounting records.
These instructions helps assistants and the staff in
knowing how much to be checked and in what manner.
3. Ready It provides ready checklist of all the procedures and

checklist techniques to be adopted. Therefore minimizes the
possibility of overlooking any of important audit steps.
4. No Due to properly written programme, there is no chance

ignorance of forgetting / overlooking some important manner.
or
overlooking
5. Programme clearly sets out as to who is required to do
Responsibility a particular work. Thus responsibility can be fixed.
fixation
6. Progress of The progress of work can be determined on the basis of
work done entries on the programme.
7. Supervision Work by assistants can be easily supervised by

referring the programme.
8. Timely Time to time, compliance with program is checked as to

completion complete the work on timely basis.
9. Basis for Program easily sets out procedure – evidence-

reporting conclusions chain, to enable the auditor to express an
opinion.
10. Future It serves as a guide for audits to be carried out in

audits succeeding years.

11. Safeguard Audit programme is a record of work done, particularly
for in defending a suit brought against the auditor for
auditor negligent performance of work.
It is sufficient proof that work was carried out with
reasonable skill and care that is expected to be
professional.
Disadvantages of 1. Mechanical The audit may be performed mechanically without

audit programme work reference to the special circumstances of the client or to
the development of any new or unusual features in the
client‘s business.
2. Inflexibility The programme often become rigid& inflexible.

Assistants are not able to change it as per requirements
of specific case.
3. Lack of Independent judgment and initiative of the staff may be

initiative restricted. It may frustrate talented and efficient audit
staff.
4. False sense Members of the audit team may feel that everything is
of security being taken care of by the audit programme. They may
fail to apply their mind in circumstances that arise
during the course of work.
5. Lack of Wrong and redundant procedures may be undertaken

suitability which may be inappropriate to the circumstances of the
client‘s business.
6. Inefficient Inefficient staff may take shelter behind the programme

staff saying that matter does not contain any instructions.
VOUCHING Vouching means the examination of documentary evidence in support of

entries to establish the arithmeticaccuracy. When the auditor checks the
entries with some documents it is called vouching.
Vouching is the acid test of audit. It tests the truth of the transaction
recorded in the books of accounts. It is anact of examining documentary
evidence in order to ascertain the accuracy and authenticity of the entries
in thebooks of accounts.
According to Dicksee, ―Vouching consists of comparing entries in the books

of accounts with documentaryevidence in support thereof.‖
According to Joseph Lancaster, ―it is often thought that vouching consists

of the mere examination of thevouchers or documentary evidence with the
book entries. This is, however, quite wrong, for vouching comprisessuch an
examination of the ledger entries as will satisfy the auditor, not only that
the entry is supported by thedocumentary evidence but it has been properly
made upon the books of accounts.‖
From the above it becomes clear that vouching means testing the truth of
entries appearing in the primary booksof accounts. In short, vouching
means to examine the evidence in support of any transaction or entry
recordedin the books of accounts. Vouching does not merely see that the
entries and transactions are supported byproper documentary evidence.
The auditor should be satisfied that they are properly maintained, they
aresupported by all evidence and they are correctly recorded in the books of
accounts.
VOUCHER Any documentary evidence supporting the entries in the records is termed
as a voucher. Any document, whichsupports the entries in the books of
accounts and establishes the arithmetical accuracy, is called a voucher.
Examples Of Vouchers
A bill, a receipt, an invoice, goods received note, salaries and wages sheets,
goods inward and outward register,stores records, counterfoil of a cheque
book, counterfoil of pay-in-slip book, bank statement, bank pass
book,delivery challans, agreements, a material requisition slip, copy of
purchase order, minute book, memorandumand articles of association,
partnership deed, trust deed, prospectus etc. are the examples of vouchers.
OBJECTIVES OF The basic objectives of vouching are as under:

VOUCHING 1. To ensure that all the transactions are properly recorded in the books of
accounts.
2. To see the proper evidence supports all the entries of the transactions.
3. To make sure that fraudulent transactions are not recorded in the books
of accounts.
4. To see that all transactions relating to business are recorded in the
books of accounts.
5. To see that all transactions are properly authenticated by a responsible
person.
IMPORTANCE OF – Ensures genuineness of the transactions

VOUCHING – Enables to know transactions
– Helps to know relevance of the transaction
– Facilitates proper allocation of capital & revenue, expenditure
– Detects frauds and errors
– Decides authenticity of transactions
– Ensures proper accounting
– Compliance with law
– Ensures proper disclosure
The special considerations to be borne in mind by the auditor in the course

of vouching
 The date of the voucher falls within the accounting period;
 The name as recorded and as contained in voucher is same
 Voucher/transactions therein are duly and properly authorized by the
relevant signatory;
 The transaction for which payment have been made or amount have
been received relates to business.
 The transactions being examined belongs to the entity and took place
during the relevant period;
 Whether any alteration has been done in the voucher, if so whether it
has been duly recorded and authorized.
 Whether any control number maintained on voucher or not. Whether

there is any missing number or voucher.
 The transaction is recorded in the proper account and revenue or
expenses is properly allocated to the accounting period.
 All transactions which have actually occurred have been recorded.
 The posting from the voucher of the amount needs to be correctly taken
in the final accounts, disclosed in accordance with recognized
accounting policies and procedures.
VERIFICATION Spicer and Pegler have defined verification as, ―it implies an inquiry into the
value, ownership and title, existenceand possession and the presence of
any charge on the assets‖. Verification is a process by which an
auditorsatisfies himself about the accuracy of the assets and liabilities
appearing in the Balance Sheet by inspection ofthe documentary evidence
available. Verification means proving the truth, or confirmation of the
assets andliabilities appearing in the Balance Sheet.
Thus, verification includes verifying:-

1. The existence of the assets
2. Legal ownership and possession of the assets
3. Ascertaining that the asset is free from any charge, and
4. Correct valuation
According to the ‗statement of auditing practices‘ issued by ICAI, ―the

auditor‘s object in regard to assets generallyis to satisfy that:
1. They exist,
2. They belong to the client,
3. They are in the possession of the client or the persons authorized by him,
4. They are not subject to undisclosed encumbrances or lien,
5. They are stated in the balance sheet at proper amounts in accordance
with sound accounting principles,and
1. They are recorded in the accounts.
POINTS TO BE CONSIDERED IN VERIFICATION

While conducting verification following points should be considered by the
auditor:-
1. Existence:The auditor should confirm that all the assets of the company
physically exist on the date ofbalance sheet.
2. Possession:The auditor has to verify that the assets are in the possession
of the company on the dateof balance sheet.
3. Ownership:The auditor should confirm that the asset is legally owned by

the company.
4. Charge or lien:The auditor has to verify whether the asset is subject to

any charge or lien.
5. Record:The auditor should confirm that all the assets and liabilities are
recorded in the books ofaccount and there is no omission of asset or
liability.
6. Audit report:Under CARO the auditor has to report whether the

management has conducted physicalverification of fixed assets and stock

and the difference, if any, between the physical inventory and the inventory
as per the book.
7. Event after balance sheet date:The auditor should find out whether any
event after the date of balancesheet has affected any items of assets and
liabilities.
SCOPE OF VERIFICATION
Verification includes information on the following:-
1. That the assets were in existence on the date of the balance sheet.
2. That the assets had been acquired for the purpose of business only.
3. That the assets had been acquired under a proper authority.
4. That the right of ownership of the assets vested in the organization.
5. That the assets were free from any charge.
6. That the assets were properly valued and disclosed in the balance sheet.
OBJECTS OF VERIFICATION
Following are the objects of verification of assets and liabilities.
1. To show correct valuation of assets and liabilities.
2. To know whether the balance sheet exhibits a true and fair view of the
state of affairs of the business.
3. To find out the ownership and title of the assets.
4. To find out whether assets were in existence.
5. To detect frauds and errors, if any.
6. To find out whether there is an adequate internal control regarding
acquisition, utilisation and disposalof assets.
7. To verify the arithmetic accuracy of the accounts.
8. To ensure that the assets have been recorded properly.
ADVANTAGES OF VERIFICATION
Advantages of verification are as under:-
1. It avoids manipulation of accounts.
2. It guards against improper use of assets.
3. It ensures proper recording and valuation of assets.
4. It exhibits true and fair view of the state of affairs of the company.
TECHNIQUES OF VERIFICATION:
1. Inspection: It means physical inspection of the assets i.e. company cash
in the cash box, physical inventory,inspection of shares certificates,
documents etc.
2. Observation: The auditor may observe or witness the inspection of assets
done by others.
3. Confirmation: It means obtaining written evidence from outside parties
regarding existence of assets.
VERIFICATION OF Points requiring auditor‘s attention for verification are as under:

ASSETS
(i) Cost- In regard to assets, verification procedure need not generally be
extended to determination of the correctness of costs and authority to incur
costs unless the items concerned were purchased during the accounting
period under review. In such cases the auditor should check the
correctness of costs through normal vouching method. He should ensure
that adequate distinction has been made between ‗revenue‘ and ‗capital‘

nature of costs.
(ii) Ownership– Where ownership of assets is evidenced by documents of

title etc. as in the case of immovable property, a reference should be made
to such documents. If thedocuments are held by third person the auditor
should either obtain a certificate directly from that party or arrange to
inspect them at the third party‘s place of business.
(iii) Valuation - It must be ascertained that all assets are valued in

accordance with appropriate accounting policy. For the valuation made, the
basis must be consistently applied, unless circumstances necessitated a
change. Even then a disclosure is required for the change and its monetary
effect.
(iv) Existence – Physical inspection should be done wherever possible.

Where physical inspection is not possible, the possibility of obtaining
indirect evidence be considered e.g. machinery imported held in customs
godown or materials sent to subcontractor for job work or fabrication. In
such circumstances certificating of such parties should be obtained and if
considered necessary even physical verification may be requested.
(v) Presentation in accounts - Material assets must be properly disclosed

and correctly described in the accounts. It should be seen that the
description given to them is clear and complete and is not misleading e.g.
stating loans on the assets side of the balance sheet ―as dependent upon
realization‖ is just misleading as was held in the case of London and
General Bank Ltd. care must be taken to see that disclosures required
under the statute or statement issued by ICAI are complied with.
VOUCHING VS. Point of Vouching Verification

VERFICATION difference
Meaning Examination of Examination whether
documentary evidence in assets & liabilities are
support of transactions properly stated in B/s and
recorded in primary to some extent of P & L
books of A/c‘s A/c
Objective Establish authenticity of To inquire and confirm

transactions the ownership, valuation,
existence and
presentation of assets and
liabilities
Aspects Date of voucher As regards assets –

under review Proper authorisation of ownership, valuation,
voucher Existence, charge, Lien,
Supporting evidence etc. and proper
Completeness in all presentation and
respects disclosure in financial
Proper accounting statements
As regards liabilities – the
auditor should verify that
these are owned by the
firm and are disclosed in
proper amounts
NATURE Vouching is related to all Verification is specifically

accounting documents related to Assets &
Liabilities
Person Vouching is normally Verification is done by
performed by Assistants Auditor himself.
of auditor
DOCUMENTATION The word ―document‖ is used to refer to a written or printed paper that
bears the original, official, or legal form of something and can be used to
furnish decisive evidence or information. ―Documentation‖ refers to the act
or an instance of the supplying of documents or supporting references or
records.
“Documentation” refers to the working papers prepared or obtained by the

auditor and retained by him, in connection with the performance of the
audit.
FORM & The form and content of audit documentation should be designed to meet
CONTENT the circumstances of the particularaudit. The information contained in
audit documentation constitutes the principal record of the work that
theauditors have performed in accordance with standards and the
conclusions that the auditors have reached. Thequantity, type, and content
of audit documentation are a matter of the auditors‘ professional judgment.
The Auditdocumentation therefore is not restricted to being only on papers,
but can also be on electronic media.
Generally the factors that determine the form and content of documentation
for a particular engagement are:
(a) The nature of the engagement.
(b) The nature of the business activity of the client.
(c) The status of the client.
(d) Reporting format.
(e) Relevant legislations applicable to the client.
(f) Records maintained by the client.
(g) Internal controls in operation.
(h) Quality of audit assistants engaged in the particular assignment and the
need to direct and supervisetheir work.
NEED OF The need for Working papers listed as follows:

WORKING (a) They aid in the planning and performance of the audit;
PAPERS (b) They aid in the supervision and review of the audit work and to review
the quality of work performed, inaccordance with AAS 17 ―Quality Control
for Audit Work‖;
(c) They provide evidence of the audit work performed to support the
auditor‘s opinion;
(d) They document clearly and logically the schedule, results of test, etc.;
(e) The working papers should evidence compliance with technical
standards;
(f) They document that Internal control has been appropriately studied and
evaluated; and
(g) They document that the evidence obtained and procedures performed
afford a reasonable basis for anopinion;
(h) They retain a record of matters of continuing significance to future
audits of the entity;
(i) They enable an experienced auditor to conduct quality control reviews in
accordance with Statement onPeer Review issued by the Institute of
Chartered Accountants of India;
(j) The process of preparing sufficient audit documentation contributes to
the quality of an audit
(k) They fulfil the need to document oral discussions of significant matters
and communicate to thosecharged with governance, as discussed in AAS
27, ―Communication of Audit Matters with those Chargedwith Governance.
PERIOD OF The auditor should retain the working papers for a period of time sufficient
RETENTION to meet the needs of his practice andsatisfy any pertinent legal or
professional requirements of record retention.
OWNERSHIP & Working papers are the property of the auditor. The auditor may, at his
CUSTODY discretion, make portions of or extractsfrom his working papers available to
his client.
The auditor should adopt reasonable procedures for custody and

confidentiality of his working papersGeneral guidelines for the preparation
of working papers are:
1. Clarity and Understanding– As a preparer of audit documentation, step

back and read your workobjectively. Would it be clear to another auditor?
Working papers should be clear and understandablewithout supplementary
oral explanations. With the information the working papers reveal, a
reviewershould be able to readily determine their purpose, the nature and
scope of the work done and thepreparer‘s conclusions.
2. Completeness and Accuracy– As a reviewer of documentation, if you have

to ask the audit staff basicquestions about the audit, the documentation
probably does not really serve the purpose. Work papersshould be
complete, accurate, and support observations, testing, conclusions, and
recommendations.
They should also show the nature and scope of the work performed.
3. Pertinence– Limit the information in working papers to matters that are

important and necessary tosupport the objectives and scope established for
the assignment.
4. Logical Arrangement– File the working papers in a logical order.
5. Legibility and Neatness– Be neat in your work. Working papers should be

legible and as neat aspractical. Sloppy work papers may lose their worth as
evidence. Crowding and writing between linesshould be avoided by
anticipating space needs and arranging the work papers before writing.
6. Safety– Keep your work papers safe and retrievable.
7. Initial and Date– Put your initials and date on every working paper.
8. Summary of conclusions – Summarize the results of work performed and
identify the overall significanceof any weaknesses or exceptions found.

PERMANENT & CURRENT AUDIT FILES
In case of recurring audit, two types of files are maintained to avoid duplicity of documentation.
These are as follows:
Permanent It contains matters which are updated currently with information of

audit files continuing importance to succeeding audit.
Permanent The PERMANENT AUDIT file normally includes:

audit file  Information concerning the legal and organizational structure of the
normally entity. In the case of a company, this includes the MOA and AOA. In case
includes: of statutory corporation, it includes Act and Regulations which the
corporation functions.
 Extract or copies of important legal documents, agreements and minutes

relevant to the audit.
 A record of the study and the evaluation of the internal controls related to
the accounting system.
 Copies of audited financial statement for previous years.
 Analysis of significant ratios and trends.
 Copies of management letters issued by the auditor; if any
 Record of communication with the retiring auditor, if any, before the

acceptance of the appointment as auditor.
 Notes regarding significant accounting policies.
 Significant audit observations of earlier years.
Current Current audit files which contain information relating primarily to the audit
audit file of a single period.
The CURRENT FILE normally includes:
 Correspondence relating to acceptance of annual reappointment.
 Extracts of important matters in the minutes of Board Meetings and

General Meetings as relevant to audit.
 Evidence of the planning process of the audit and audit programmes.
 Analysis of transactions and balances.
 A record of the nature, timing and extent of auditing procedures

performed, and the results of such procedures.
 Evidence that the work performed by assistants was supervised and

reviewed.

 Copies of communication with other auditors, experts and other third
parties.
 Letters of representation or confirmation received from the client.
 Conclusions reached by the auditor concerning significant aspects of the

audit, including the manner in which exceptions and unusual matters, if
any, disclosed by the auditor‘s procedures were resolved or treated.
 Copies of the financial information being reported on and related audit

reports.

COMPANY ACCOUNTS & AUDITING
QUESTION PAPER: JUNE 15
PART – B
Q. 5. (a) Explain the penal provisions applicable to auditors under the Companies Act, 2013.
(b) What are the important matters which an auditor should ensure to ascertain and establish
true and fair view?
(c) Differentiate between ‗secretarial audit‘ and ‗internal audit‘. (5 marks each)
Attempt all parts of either Q. No. 6 or Q. No. 6A
Q. 6. (a) Explain the procedure of fraud reporting by an auditor as per the Companies Act, 2013.
(b) What are the techniques of internal control system? Discuss with examples.
(c) What is audit in – depth? Mention the various stages in purchase of goods. (5 marks each)
OR (Alternate question to Q. No. 6)
Q. 6. (A) (i) What are the points for consideration in audit planning in relation to the audit
engagement?
(ii) What precautions should be taken while adopting test checking?
(iii) Distinguish between ‗audit‘ and ‗investigation‘. (5 marks each)

COMPANY ACCOUNT & AUDITING
QUESTION PAPER: Dec. 15
PART – B
Q. 5. (a) What do you mean by ‗efficiency audit‘? How does it help the management of an
enterprise?
(b) Distinguish between ‗interest control‘ and ‗internal audit‘.
(c) An auditor appointed under Rule 3 of the Companies (Audit and Auditors) Rules, 2014 is
required to submit a certificate and notice to the Registrar of Companies. State the matters to be
covered in the certificate and name of the form of the notice required to be submitted.
(5 marks each)
Q. 6. (a) What is the difference between ‗inter – firm comparison‘ and ‗intra – firm comparison‘?
Explain the usefulness of ratio analysis in inter – firm comparison.
(b) Draft an internal control questionnaire for review of goods receiving procedures and controls.
(c) Audit documentation is pivotal to auditing process. In this context, mention any ten
documents and records which should be kept in permanent audit file. (5 marks each)
Q. 6. (A) (i) Following data is extracted from the books of Right Ltd., an unlisted company for the
accounting year 2014 – 15:
- Equity share capital : Rs.40 crore (80% of equity shares are held by the Central
Government)
- Outstanding term
loans from various
banks on balance sheet : Rs.85 crore (maximum outstanding balance during preceding
date accounting year was Rs.118 crore)
- Turnover for the year : Rs.1,750 crore.
Considering the above, answer the following questions with brief reasoning –
(a) Should the company be subject to CAG audit?
(b) Is the company required to appoint internal auditor?
(c) Is the company required to appoint secretarial auditor?
(d) Can the company appoint statutory auditor?
(e) Is it compulsory for the company to appoint cost auditor? (5 marks)
(ii) Distinguish between ‗vouching‘ and ‗verification‘. (5 marks)
(iii) In the course of audit of Growth Ltd. you want to review the internal control in the area of
sales return. Mention the aspects which are to be specifically looked into to ascertain its
soundness.
(5 marks)

CS EXECUTIVE GROUP – II ACCOUTING & AUDITING
QUESTION PAPER: JUNE – 16
PART – B
Q. 5. (a) Mention the areas in which all the joint auditors are jointly and severally responsible.
(b) What is the process of issuing audit standards by Auditing and Assurance Standards Board
(AASB)?
(c) Differentiate between ‗internal audit‘ and ‗statutory audit‘. (5 marks each)
Q. 6. (a) Despite numerous benefits, internal audit has got some limitations. Discuss.
(b) Distinguish between ‗internal control system‘ and ‗internal check system‘.
(c) What are the objectives of review of management information system (MIS) of an organization?
(5 marks each)
OR (Alternative question to Q. No. 6)
Q. 6. (A) (i) Explain the objectives of investigation and also list out business situations where
investigation may be considered necessary.
(ii) Explain the provisions of section 139(1) of the Companies Act , 2013 regarding appointment of
auditors.
(iii) What are the important points to be considered while reviewing the ‗process of taking
insurance during transit‘? (5 marks each)

QUESTION PAPER: Dec. 16
PART – B
5. (a) "Audit is advantageous even to those enterprises and organizations where it is not
compulsory." Discuss.
(b) As an auditor of a company, how will you instruct and guide your assistants about special
considerations to be borne in mind in the course of vouching?
(c) Directors of Secure Ltd. are of the opinion that section 138 of the Companies Act, 2013
regarding appointment of internal auditor is not applicable to them. State the provisions of the
section regarding requirement for appointment of internal auditor. (5 marks each)
6. (a) You are the auditor of a company covered under the Companies (Auditor's Report) Order,
2015. Describe the matters you will cover in your report in respect of:
(i) Inventory
(ii) Maintenance of cost records.
(b) What do you mean by 'materiality' in auditing ? As an auditor of a company, how will you
comply with materiality concept in auditing ?
(c) An auditor is required to maintain audit working papers in shape of permanent audit file and
current audit file. List out any ten documents finding place in the current audit file. (5 marks
each)
6A. (i) Distinguish between 'internal check' and 'internal audit'. (5 marks)
(ii) List out five factors that influence the reliability of audit evidence as per SA 500. (5 marks)
(iii) An auditor appointed under the Companies Act, 2013 shall provide only such other services
as are approved by the Board of directors or audit committee but shall not include some services.
Specify the services which cannot be rendered by an auditor of a company. (5 marks)

PART–B
5. (a) As per SA 200, explain any five basic principles governing an audit?
(b) Distinguish between Audit and Investigation.
(c) What constitute ‗True and Fair‘ is not defined under any law. In order to show a true and fair
view what is to be ensured by an auditor ? (5 marks each)
6. (a) What are the disqualifications as per the Companies Act, 2013 for appointment of auditor?
(b) Write short notes on techniques of internal control system.
(c) Explain the need of audit working papers. (5 marks each)
6A. (i) What steps are to be involved in verification of assets? (5 marks)
(ii) Explain the relationship between Internal Auditor and Statutory Auditor. (5 marks)
(iii) With respect to upkeep and custody of inventory after its purchase, certain controls are
required for its security. Comment. (5 marks)

QUESTION PAPER: DECEMBER 2017
PART – B
5.
(a) What is the importance of having the accounts audited by an independent auditor.
(b) What is the propriety audit? What are the objectives and scope of propriety audit.
(c) What services are prohibited to be rendered by an auditor appointed under Companies
Act, 2013. (5 marks each)
6.
(a) Write a short note on compliance audit.
(b) What are the importance matters which an auditor should ensure to ascertain and
establish true and fair view.
(c) Explain the term ―Secretarial Audit‖. In what circumstances secretarial audit is done?
(5 marks each)
6A.
(i) What are the points to be considered while carrying out the internal control review of
recruitment function. (5 marks)
(ii) Write short notes on responsibilities of Joint Auditor. (5 marks)
(iii) Managing Director of Alpha Ltd. himself wants to appoint Mr. R a practicing chartered
accountant, as first auditor of the company. Comment on the proposed action of the
managing director. (5 marks)

PART – B
5. (a) What are the reporting requirements of fraud detected while performing duties as auditor
under section 143(12) of Companies Act, 2013?
(b) What are the advantages of ―Efficiency Audit‖?
(c) ―Test checking reduce the volume of the work considerably but not reduce the liability of the
auditor.‖ Explain and write the advantages and disadvantages of test checking? (5 marks each)

6. (a) Explain the need of audit sampling in an audit of financial statements.
(b) The form and contents of audit documentation depends upon certain factors. Discuss.
(c) Explain objectives of ―Internal Control System‖. (5 marks each)
6A. (i) ―Internal audit has become an important tool in modern time.‖ Why?
(ii) Explain the term ―Segregation of Duties‖ in the context of Purchase Control Review.
(iii) Write a short note on tolerable error. (5 marks each)

QUESTION PAPER: DECEMBER 2018
PART – B
5.
(a) What are the objectives of Management Information system review?
(b) Which companies are excluded from CARO 2015?
(c) Explain the main points that should be considered by auditor in verification of Assets and
Liabilities. (5 marks each)
6.
(a) What is the procedure of issuing auditing standards?
(b) What do you mean by propriety audit? What main aspects to be verified by auditor under this
audit?
(c) Though internal controls may be well designed, yet certain limitations are inherent in all
internal control system. What are included in these limitations? (5 marks each)
6A.
(i) What are the duties of auditor if he notices fraud during the course of audit?
(ii) Explain commonly used methods to be used by auditor in selection of audit sample.
(iii) What are the objectives of review of Manufacturing operations? (5 marks each)

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INDEX

UNIT 1: AUDITING CONCEPTS ......................................................................................................... 3

1|P ag e CA. Amit Talda 9730768982 www.amittaldaclasses.com/

2|P ag e CA. Amit Talda 9730768982 www.amittaldaclasses.com/

When such an examination is conducted with a view to express an opinion

FEATURES OF Systematic  Audit has to be conducted in a proper way.

 He should not be influenced by client.

Financial  Auditorsopinion is on financial statements including

 The preparation of financial statements is the

 The entity may be profit oriented or a charitable one.

 For this it is necessary that:

BY WHOME In India, audit is to be conducted by a professional having

OBJECTIVES & Objective of  The objective is to enable the auditor to express an

Responsibility  The management is responsible for maintaining an upto

BASIC PRINCIPLES GOVERNING AN AUDIT(Nov 2008, Nov 2009, May 2011)

Compliance procedures are tests designed to obtain reasonable assurance that

Substantive procedures are designed to obtain evidence as to the

They are of two types:

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Liabilities  Material liabilities should not be omitted; (Omission)

 Liabilities are neither undervalued nor overvalued and the

Accounting  Accounting policies have been followed consistently.

Auditor’s  The need for auditor independence is provided in standards on auditing.

Why  If auditor maintains high degree of independence, credibility of financial

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Credit negotiation Financiers and Bankers use audited financial

Control over It helps in detection of wastages and losses and also

Arbitration It is helpful in settling disputes by arbitration.

Assistance to Government may required audited and certified

Appraisal Audit reviews the existence and operations of various

Scope The scope of investigation The Scope of audit is wide and

Periodicity The work is not limited by The audit is carried oneither

Nature Requires a detailed study Involves tests checking or

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Inherent No inherent limitation Audit suffers from

Evidences It seeks conclusive Audit is mainly concernedwith

Observance It is analytical in nature Is governed by compliancewith

 The auditors determination of materiality is a matter of professional

 Materiality could be either qualitative or quantitative.

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Standards on Auditing standards refers to the code of best practices/procedures which an

2. In the preparation of the auditing standards, the Board is normally, assisted

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Need of The Institute of Chartered Accountants of India (ICAI) is a founder member of

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QUALIFICATION & DISQUALIFICATION OF AUDITOR (SECTION 141)

(1) A person shall be eligible for appointment as an auditor of a company only if he is a

(2) Where a firm including a limited liability partnership is appointed as an auditor of a

BODY (a) A Body Corporate other than a limited liability partnership

OFFICER OR (b) An Officer Or Employeeof the company;

HOLDING ANY (d) A person who, or his relative or partner -

Provided that the relative may hold security or interest

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Provided further that in the event of acquiring any

(ii) is INDEBTED TO THE COMPANY, or its subsidiary,

(iii) has given a GUARANTEE or provided any SECURITY

BUSINESS (e) a person or a firm who, whether directly or indirectly has

(ii) commercial transactions which are in the ordinary course

RELATIVE IS A (f) a person whose relative is a director or is in the employment

FULL TIME (g) a person who is in full time employment elsewhere or a

OFFENCE (h) a person who has been convicted by a court of an offence

Provided thatan auditor or audit firm who or which has been

(4) Where a person appointed as an auditor of a company incurs any of the