Audit Saar

on

Advanced Auditing And

Professional Ethics

Demo Chapters

 Audit of Limited Companies,

 Caro &
 SA 200 - 299

CA KHUSHBOO G. SANGHAVI
Visiting faculty of WIRC – ICAI

CA Khushboo Sanghavi
 ----- ABOUT THE AUTHOR -----

Visiting Faculty of
wirc – Mumbai & rajkot

CA KHUSHBOO G. SANGHAVI
Author is a visiting faculty of WIRC of ICAI having practical knowledge of
Auditing and Assurance. Being well-versed with practical & theoretical
knowledge she often uses real life examples to explain several concepts in
simple manner. She is a high quality orator and has chaired various
conferences organized by WIRC of ICAI. She is an expert faculty for Audit &
Law and is well known for use of Mnemonics and various memory
techniques which helps in remembering and retaining the content. She
strongly believes that proper learning and understanding leads to
expertise. She has been a guiding light for thousands of CA Intermediate
and Final students via her unique Mentoring Program, wherein she
personally guides the students about daily plans, timetable, achieving
targets & constantly boosting them to inspire students and making it
simple for the students to clear exams.

CA Khushboo Sanghavi
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 Read the below given short forms as
AFRF = Applicable Financial Reporting Framework.
B/S = Balance Sheet
BOA = Books of Accounts.
CAG = Comptroller and Auditor General of India.
CAR = Capital Adequacy Ratio
CG = Central Government.
DTL = Demand and Time Liabilities
EOM = Emphasis On Matter paragraph
FRF = Financial Reporting Framework
FRF = Fraud Risk Factor.
FS = Financial Statement.
GM = General Meeting.
IAR = Independent Audit Report.
MGT = Management.
MP = Market Price
NCLT = National Company Law Tribunal
OM = Other Matter paragraph
OOBH = Opportunity of Being Heard.
OR = Ordinary Resolution.
PEQ = Past Exam Question.
RA = Recurring Audit.
RMM = Risk of Material Misstatement.
SAAE = Sufficient and Appropriate Audit Evidence.
SFIO = Serious Fraud Investigating Officer.
SHS = Share Holders
SN = Special Notice.
SR = Special Resolution.
TCWG = Those Charged with Governance
w.r.t. = with respect to.
W/O = Without.

CA Khushboo Sanghavi
 CHAPTER 1A. AUDIT OF LIMITED COMPANIES
I] APPOINTMENT OF AUDITORS (Section 139)

Appointment of Auditors

A. Government Companies B. Other than government companies

(PEQ May16)

Section 2(45)
If stake of ≥ 51% is held by CG or SG or Jointly by both.  Appointed by Comptroller and
Auditor General of India (CAG)
E.g. In SAIL, 55% stake is of government, hence the auditor is appointed by CAG of India.

 A. Appointment of Auditors in Government Company (PEQ Nov16)

First Auditor Section 139(7) Subsequent Auditor Section 139(5)

Appointed by CAG of India Appointed by CAG of India

Within 60 days From the date of Within 180 days from the commencement
registration of the financial year.

If it fails then within next 30 days The Board of Directors will appoint

If the Board fails then

Members will appoint within next 60 days at EGM by passing an ordinary resolution

 B. Appointment of Auditors in other than Government Companies

First Auditor Section 139(6) Subsequent Auditor Section 139(1)

BOD will appoint within Appointed by the members

30 days from the date of at AGM by passing an
Registration of the company ordinary resolution

If BOD fails within the next 90 days, the members will appoint
at EGM by passing ordinary resolution

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II] ROTATION OF AUDITORS Section 139(2), (3), (4)
 Applicability
L – Listed Public Company
U – Unlisted Public Company  PUSC  10 Crores
P – Private Company  PUSC  50 Crores
A – Any Company
 whose PUSC requirement is within limit
 but Borrowings  50 Crores
 Tenure
Tenure for Individuals  1 term of 5 years  Cooling period (5 Years)
Firms  2 terms of 5 years = 10 years  Cooling period (5 Years)
 In case of an Audit firm, Partners of the firm may be internally rotated.
(if such resolution is passed by SHS)
[A] Where Audit Committee is required u/s 177.
 Manner & Procedure for selection and Appointment of Auditor. [Section 139(1) & Rules]

Does Audit Yes AC will give Does BOD

committee recommendation to BOD agree
(AC) Exist
No
Yes

No
BOD will record reason in writing BOD will forward
BOD will give own and ask re-recommendations to SHS who will
recommendation pass OR
to SHS

Shareholder will appoint

an Auditor by passing Are re- Yes
No
OR recommendation
proper

SHS – Shareholders
OR – Ordinary Resolution

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III] CASUAL VACANCY [SECTION 139(8)]

Causal Vacancy (RTP Nov17, 15)

Resignation Death Disqualification

(Refer sec. 141(3) & (4))
 Casual vacancy means: - Vacation of the office before expiry of the term.
 Filled by: - Casual vacancy is to be filled by BOD within 30 days.
 In case of resignation: - Such vacancy is filled by BOD (within 30 days) & approval from
SHS (max. within 3 months) is taken (RTP Nov14)

IV] REMOVAL OF AUDITOR (Section 140)

A) Removal of Auditor

By Members By Members

Before term  At EGM/ AGM Special Notice (SN) u/s 115  Special resolution at AGM

Initiated by BOD Initiated by members

Special Resolution in BOD Retiring auditor should not be re-appointed

Apply to CG to seek prior approval & Copy of SN to the Retiring Auditor

general meeting should be held within
60 days of such approval
Special resolution in general meeting
OOBH
Representation
(Unsubstantiated/ Derogatory remarks
against the management with the view
to gain attention or solicity)
Circulate Representation

Company must circulate unless received late & file with ROC (+) Read out at GM
w/o prejudice – Oral Representation

If Abused the right  Tribunal

Circulate X X Read

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 B) Resignation/ Removal of Auditor

Resignation Tribunal or CG

Within 30 Days from the Suo Moto Application

date of Resignation file ADT-3
CG Other
Auditor has to file

ROC ROC NCLT IS SATISFIED

+ +
CO CO That the audit of the co. have acted
+ in fraud or has abated or colluded
for other CAG can direct the co. to change its Auditors
Company
For Govt. Co. Cannot be appointed as auditor of any Co. for 5 years

If application is received from CG then order is passed within 15

days & CG will appoint new auditor

Firm will be Liable for penalty u/s 447

V] ELIGIBILITY, QUALIFICATION AND DISQUALIFICATION OF AUDITOR (Section 141)

[A] Qualification of Auditors [Section 141 (1), (2)]

Individual Practising CA OR Firm whose majority partners

are practising in India
(Including LLP)

[B] Disqualification of Auditors [Section 141 (3), (4) and Rules]

a) Any Body Corporate (except LLP)
b) An officer or employee of the company.
c) A person who is partner, or who is in the employment of an officer or employee of the company

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Important
d) A person who, or his relative or partner- (PEQ Nov 18)

Transactions
PPR CHA SS
(i) (ii) (iii)

P – Person C – Company H – Holding Co.

P – Partner A – Associate Co. S – Subsidiary Co.
R – Relative S – Subsidiary of Holding

i) Holds security, however relative can hold security up to Rs. 1 Lakh face value. In case if holding
of securities exceeds Rs. 1 Lakh, auditor should take corrective actions within 60 days (RTP Nov14, 16, 18)

ii) Is indebted for an amount exceeding Rs. 5 Lakhs (> 5 Lakhs) (RTP Nov14/ 15/ 16) (PEQ Nov16/ May19)

iii) Has given a guarantee or provided any security in connection with the indebtness of any
third person for an amount exceeding of Rs. 1 Lakh (> 1 Lakh)

PP Having commercial business transaction C H A S S S*

e)
S* - Subsidiary of Associate Co.
Exception: - Transactions which are in ordinary course of business & are at Arms Length Price
e.g. transactions by companies engaged in telecommunication, airlines, hospitals, hotels or other
similar business. (PEQ May 19)

f) A person whose relative is a director or is in employment of the company as a director or KMP.

g) Ceiling limit – 20 companies (as on the date of appointment) {Excluding OPC, Dormant company,
small company or Private company – PUSC <100 cr. (PEQ May16, 18)
Amendment:-
For counting of ceiling limit is available only if such company has not committed default
in filing its financial statement u/s 137 and Annual returns u/s 92 of the Act.
h) A person who has been convicted by a court, of an offence involving fraud, and a period of
10 years has not elapsed from the date of such conviction.
i) A person who, directly or indirectly, renders any service referred to in section 144 to the CHS

[C] Subsequent Disqualification = Casual Vacancy.

If auditor is disqualified u/s 141 (3), then he must immediately vacate the office. Such
vacation shall be treated as a casual vacancy.

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 VI] AUDITOR NOT TO RENDER CERTAIN SERVICES [Section 144] (PEQ) (RTP May15)
The following services shall not be provided by an Auditor directly or indirectly :-
(Key - AAMI R In2 Dangal O)
A - Accounting and Book keeping services.
A - Actuarial Services.
M - Management Services.
I - Internal Audit.
R - Rendering of Outsourced Financial Services.
In1 - Investment Advisory Services.
In2 - Investment Banking Services.
D - Design and Implementation of any Financial Information System.
O - Any Other kind of services as prescribed.

VII] REMUNERATION OF AUDITOR [Section 142]

Remuneration to be decided by

Members OR Members may decide manner in which

For 1st auditor – BOD) remuneration may be decided

Remuneration will include

Fees AND Expenses incurred

Note: - It does not include any amount paid for any other services (other than those specified
u/s 144)

VIII] RIGHTS AND DUTIES OF AUDITOR [Section 143]

[A] Rights of Auditor
i. Right to access BOA
Ii Right to obtain information & explanation
iii. Right to lien BOA (lien = Holding lawful possession) (PEQ May17)
Auditor can exercise lien only if his fees remains unpaid. Such lien can be exercised over BOA
for the year for which fees is unpaid and on which he has worked.
However, exercising this right is not practically possible because of: -
 Virtue of section 128 which states that BOA are required to be kept at Registered Office &
 In the opinion of council exercising lien attracts disrepute to ICAI and it’s a Professional
Misconduct under clause 1 of Part IV of the First Schedule.

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iv. Right to read out qualification at general meeting.
v. Right to receive notice and to attend AGM.
[B] Duties of Auditor
(i) ENQUIRE 143(1) (PEQ May18, 04) (RTP Nov14)
If any transactions give Negative results
Then such transactions are required
to be REPORTED.
The transactions to be enquired are: -
a) Advances
b) Book entries
c) Companies not being Investment company
& sold securities at a price
< cost (i.e. less)
d) Loans and Advances shown as Deposits.
e) Personal Expenses charged to revenue.
f) Where any (FPO) shares have been allotted
for cash, whether it has been received
or not and the same has been
accounted for.
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(ii) REPORT 143 (3) (PEQ Nov16) (RTP Nov14)
Whether the examination of transactions
give positive or negative results.
In both the circumstances, the auditor
Needs to REPORT
a) Sought and obtained all information
and explanations.
b) Proper Books of Accounts.
c) Report on accounts of Branch office.
d) Financial statements are in agreement
with the Books of Accounts
e) Financial statements comply with
Accounting Standards.
f) Any director attracts any
disqualifications u/s 164(2)
g) Modifications relating to
maintenance of Books of Accounts
h) Internal Financial controls with
respect to Financial statements
This is exempt to OPC, Small Company
and Private Company whose -
Turnover < 50 crores, &
Borrowings < 25 crores &
has not defaulted in return filing
(sec 92& 137)
i) Any other matter as prescribed.
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(iii) Reporting as to true and fair [Section 143(2)]
 Report that the financial statement are free from RMM either due to fraud or error.
(True & Fair view = FS made as per AFRF & Schedule III)
 The report shall be made after taking into account the following: -
- Provision of the Act
- Accounting and Auditing standards
- Matters required to be including in the report

(iv) Reasons For Negative qualification [Section 143(4)]

 If the auditors has issued opinion as per SA 705, then he has to give reasons for such
qualified, adverse or disclaimer of opinion.
 Qualification, Observations or comments on the Financial Transactions or matters
mentioned in the Auditor’s Report shall be –
 Read before the company in its general meeting ● Open for inspection by any member of the company

(v) Duties w.r.t. Audit of Government Companies [Section 143(5), (6), (7)]
 Duty to follow directions given by CAG
 Statutory Auditor must include the following in his report: -
a) Directions b) Actions c) Impact
 Supplementary Audit – within 60 days from the receipt of above Audit report the C&AG
have right to conduct a supplementary audit
 Comments of C&AG – Comments are given by C&AG, such comments and supplementary
audit is then given to the company.
The company shall forward the same to every person entitled to copies of Financial statement u/s 136(1).

(vi) Compliance With Auditing Standards [Section 143(9), (10)]

The Auditor has to comply with all the relevant Standards of Auditing (SA).

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(vii) Reporting of Frauds [Section 143 (12)]
Fraud

Amount < 1 crore Amount  1 crore

Report within Company to disclose in Within 2 days report to the Board/

2 days Board’s Report Audit Committee.

To Board/ a. Nature 45 days  seek reply

Audit committee b. Amount
c. Parties involved if reply received Reply not received
 Nature remedial action is not taken within time within time
 Amount (or)
 Parties involved d. Remedial action taken Report to CG Report to CG
within 15 days. within 15 days on
Applicable to: Statutory, Cost, Branch & Compliance Auditor (PEQ Nov18) expiry on 45 days.

(viii) Audit of Branches. [Section 143(8)] (RTP May16)

1. Main Auditor can audit financial statement of branches.

2. However, separate branch auditor may be appointed if required

Indian Branch Foreign Branch

Individual or firm qualified u/s 141(1), (2) An accountant or a person eligible to act as an
may be appointed auditor as per the requirement of that country’s law

IX] PENALTY FOR CONTRAVENING PROVISIONS U/S 139-146 & 148. [Section 147]

 Penalty

Company Officer in default Auditor

Min: Rs. 25K Min: Rs. 10K Intentional Unintentional

Max: Rs. 5 Lacs Max: Rs. 1 Lacs Rs. 50K to Rs. 25 Lacs Rs. 25K to
(or) (or) 8 times the amount Rs. 5 Lacs (or)
1 year of Imprisonment of remuneration 4 times the
(or) (or) 1 year of Imprisonment amount of
Both (or) Both remuneration

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 If acted fraudulently or abetted or colluded in fraud with Directors or officers then Penalty u/s
447 shall be levied.

 Penalty

Civil Criminal imprisonment

Fine imposed on Firm of Partner involved in crime

X] COST AUDIT. (Section 148)

[A] Sec 148(1) & Rule 3 - Maintaining Cost Record

CG may order Companies including foreign company engaged in: -
 Production of goods and  Rendering of services
To maintain cost record relating to utilisation of material, labour or other item.

Companies

Regulated Sector Non - Regulated Sector

Telecom, Electricity, Petroleum, Sugar, Iron Steel, Rubber, Cement etc.

Drugs, Pharmaceutical & Fertilizers.

T/O > 35 crores during PY to include cost record in BOA

[B] Sec 148(2) & Rule 4 - Audit of Cost Records

CG may order to conduct cost audit, if,

 Overall annual turnover from all the products and services PY in case of

Regulated sector = > 50 Cr Non-regulated sector = > 100 Cr

AND

 Aggregate T/O of individual product or service in PY in case of

Regulated sector = > 25 Cr Non-regulated sector = > 35 Cr

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 Except: -
 Whose audit from exports in foreign exchange > 75% of its total revenue
OR
 Which in case of operating from SEZ
OR
 Engaged in generation of electricity for captive consumption

Note: - PY = Immediately Preceding Previous Year

[C] Sec 148(1) & Rule 3 – Cost Auditor:

i. Cost audit shall be conducted by a Cost Accountant (AMENDMENT) (either individual/ Firm.)
ii. Statutory auditor of a company u/s 139 cannot be a cost auditor of the company.
iii. Cost auditor to be conducted appointed in 180 days of commencement of every financial year.
iv. Obtain written consent from auditor.
v. Company to inform cost auditor of his appointment.
vi. Company to file a notice with CG in form CRA-2 in 30 days of board meeting OR In 180
days of commencement of FY (whichever earlier)
vii. Cost auditor appointed as such will continue till expiry of 180 days of closure of FY or till
submission of cost Auditor.
viii. Company in 30 days of date of receipt = furnish such report to CG along with full info &
Explanation

[D] Appointment & Remuneration of Cost Accountant

Audit committee is required u/s 177 No requirement as to Audit committee

Appointment by the Board on Appointment by the Board on

Recommendation of the committee. its own.

Remuneration Remuneration

* Recommended by Audit Committee Fixed by Board of directors and

* Approved by Board of Directors Ratified by the Shareholders.
* Ratified by Shareholders

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[E] Why Cost auditor refers to financial data? -
While Framing opinion While Preparing Cost audit
Examine: - Report Examine: -
 Cost of raw materials  Value addition &
consumed distribution of earnings
 Cost of fuel  Reconciliation of profit
 Employee costs  Financial position and ratio
 Provision for analysis
depreciation (which is  Related party transactions
turn is available in  Reconciliation of indirect
financial records) taxes
(such information is available
only from financial records)
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Other information
covered in schedule III: -
 Consumption of raw
materials
 Purchase of stock-in-
trade
 Changes in inventories,
WIP, Stock-in-trade etc.
 Sales of products
P a g e | 1A.12
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 CHAPTER 1B. CARO 2016
I] APPLICABILITY (PEQ May 07) (RTP Nov 17/ Nov 15)
It is applicable to all the companies including a foreign company, except – (Key – BIPSO)
B – Banking company
I – Insurance Company
P – Private limited company, if
1) PUSC + Reserve ≤ 1crore (on B/S date)
2) Total Borrowing ≤ 1crore (any time of the year) (PEQ Nov 14)

3) Total Turnover/Reserve ≤ 10crores

S – Section 8 companies
O – One Person Company and Small Companies

II] REPORTING CLAUSES UNDER PARA 3

(i) Fixed Assets (PEQ May 18/ Nov 13) (RTP Nov 15, 16)
Following matters shall be including in the auditor’s report:-
a) Proper Records
 Whether the company is maintaining proper records showing full particulars including
quantitative details and situation of fixed assets.
b) Physical Verification
 Whether these fixed assets have been physically verified by the management at regular
Intervals. Where annual verification is not possible than all assets must be verified
at least one in every 3 years
 Whether any material discrepancies were noticed on such verification and if so whether
the same have been properly dealt.
c) Tittle Deed (PEQ May 17) (RTP May 17)

 Whether the tittle deeds of immovable properties are held in the name of the company.
If not provide the details thereof the auditor should carry out detailed examination in
the cases where: -

Immovable property is Immovable property have the TITLE DEED

transferred under conversion been MORTGAGED with banks/ FI were LOST check other

or AMALGAMATION related documents & FIR

details, if any.

(ii) Inventory (RTP May 11, 16)

Following matters shall be including in the report: -

a) Physical Verification
Whether physical verification of inventory has been conducted at regular intervals by the
management. all material items must be verified at least once in a year.

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 Material Discrepancies

YES NO
Whether they have been properly Written Representation
dealt with BOA.

(iii) Loans Given by the company (PEQ Nov’18)

Whether the company has granted any loans, secured or unsecured to companies, firms,
LLP’s or other parties covered in the register maintained under section 189 of the Companies
Act, 2013 If so,
a) Terms and Conditions
Whether the terms and conditions of the grant of such loan are not prejudicial to the
company’s interest.
b) Steps for recovery
 Whether the schedule of repayment of principal and payment of interest has been
stipulated and
 Whether reasonable steps have been taken by the company for recovery of the principal
and interest.
c) Regular recovery
 Whether the schedule of repayment of principal and payment of Interest has been
stipulated and
 Whether the repayment or receipts are regular.

(iv) Loans to directors and investment by company

In respect of loans, investments, guarantees and security whether provision of section 185 and
186 of the Companies Act, 2013 have been complied with, if so provide the details thereof.

(v) Deposits
In case, the company has accepted deposits, whether the following has been complied with:
 Directives issued by the RBI
 The provisions of section 73 to 76 or any other relevant provisions of the Companies
Act. 2013 and the rules framed there/ under, and
 If an order has been passed by CLB or NCLT or RBI or any other court or Tribunal.
However, if any of the above is not complied, the nature of the contraventions should be
stated.

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 (vi) Cost Records (PEQ May 17) (RTP Nov 18)
If the central government has specified maintenance of cost records under section 148 of the
Companies Act, 2013, whether such accounts and records have been made & maintained.
Important

(vii) Statutory dues (PEQ May 16, 08, 04 / Nov 11, 14) (RTP May 12/ Nov 15/ May 14)
a) Statutory dues for more than 6 months.
Whether the company is regular in depositing Undisputed statutory dues with
the appropriate authorities including: -
 Provident Fund
 Income Tax
 GST
 Customs Duty
 Any other statutory dues.
Author’s Note: - Also refer audit procedure under SA-250, provision of sec 43B of Income Tax
Act,1961. Quote above SA-250 & Sec 43B in the answers for appropriately linking the concepts

b) Dispute for tax and duty

In case, if the dues have not been deposited on account of any dispute, then the amounts
involved and the forum where Dispute is pending shall be mentioned.

(viii) Repayment of loans (PEQ May 11 / 13) (RTP May 14 / 15)

Following matters shall be reported:

 Whether the company has defaulted in repayment of loans or borrowings to a
financial institution, government or dues of debenture holders, If yes, the period and
amount of default to be reported.
 In case of default to banks, financial institutions and government, lender wise details
to be provided.

(ix) Utilization of IPO & Further public offer (PEQ Nov 18/ May 18) (RTP May 16)
Following matters shall be reported:
 Whether money raised by way of IPO or further public offer and term loans were
applied for the purpose for which those were raised.
 If not, the details together with delay or default and subsequent rectification, if any
must be reported.

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Important
(x) Reporting of Fraud (PEQ Nov 18) (RTP Nov 18)
Whether any fraud by the company or in the company by its officers or employees has been
noticed or reported during the year, if yes the nature and the amount shall be indicated.
Author’s Note: - Also refer SA-240 & Sec 143 (12) for cross linkages.

(xi) Approval of Managerial Remuneration (PEQ Nov 16)

 Whether managerial remuneration has been paid or provided in accordance with the
requisite approvals mandated by the provisions u/s 197 read with schedule V of
the Companies Act, 2013.
 If not, state the amount involved and steps taken by the company for securing
refunds of the same.

(xii) Nidhi Company

 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 10% unencumbered term deposits as
specified in the Nidhi Rules, 2014 to meet out the liability.

(xiii) Related party Transactions

 Whether all the transactions with the related parties are in compliance with
section 177 and 188 of the Companies Act, 2013 where applicable and
 The details have been disclosed in the FS, as required by the applicable
accounting standards.

(xiv) Private Placement Or Preferment Issue

 Whether the company has made any preferential allotment or private placement of
share 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 of non-compliance.

(xv) Non Cash Transaction (RTP May 17)

Whether the company has entered into any non-cash transactions with directors or persons
connected with him and if so whether provision of section 192 of Companies Act, 2013
have been complied with.

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(xvi) Register under RBI Act, 1934 (RTP May 17 / 18 / Nov 17)

Whether the company is required to be registered under section 45-IA of the RBI Act, 1934
and if so whether the registration has been obtained.

MEMORY TECHNIQUE FOR CARO

FILL D Cost Records Duly & Repayment Records Publicly, Fill Rum Glass with NaRiyal PaNi RBI

1. F  Fixed Assets
2. I  Inventory
3. L  Loan to Related Party
4. L  Loans / Guarantees / Securities / Investments
5. D  Deposits
6. Cost Records  Cost Records as per section 148
7. Duly  Statutory Dues
8. Repayment Records  Repayment of Loans
9. Publicly  Public Offer - IPO
10. Fill  Reporting of Fraud
11. Rum Glass with  Remuneration
12. Nidhi Company
13. Related Party Transaction
14. Private Placement or Preferential Allotment
15. Non-Cash Transactions
16. RBI  Register under RBI Act, 1934

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 CHAPTER 16. QUALITY CONTROL & ENGAGEMENT STANDARDS

 The Importance of this Chapter is emphasised as under:

 Apply logical, critical and creative thinking to analyse, synthesise and apply theoretical
knowledge, and technical skills to conduct audit & assurance as per engagement and
quality control standards.
 Determine and apply knowledge of auditing standards to your professional practice
and/ or further study.
 Understand the requirements of each standard to conduct audit in accordance with
standards.

SAE (3)

SA = Standard on Auditing
SRE = Standard on Review Engagement
SAE = Standard on Assurance Engagement
SRS = Standard on Related Service

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 SA 200 OVERALL OBJECTIVE OF AN INDEPENDENT AUDITOR
AND CONDUCT OF AUDIT IN ACCORDANCE WITH SA

I] OBJECTIVE

Primary Secondary

To express reasonable assurance* on Prevent fraud

historical financial statement that (Primary responsibility regarding prevention
The FS are free from fraud or error of fraud is of management)

*Obtain SAAE** Sufficient and Appropriate Audit Evidence, where sufficiency relates to
quantity and appropriateness relates to Quality.

 ** Possess Auditor Should Exercise

a) Professional Judgement b) Professional skepticism

i.e.
Experience Being alert Possessing questioning Critical
mind assessment of

 Ethical Requirements: (PEQ) evidences obtain

(Key – C O P P I)
C – Confidentiality
O - Objectivity
P - Professional Competence & Due care
P - Professional Behaviour
I - Integrity

II] INDEPENDENCES: - In mind as well as appearance.

III] CONDUCT: - As per relevant SA

IV] OPINION: - Owning to inherent limitation to audit, Auditor expresses Reasonable opinion

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 SA 210 AGREEING THE TERMS OF ENGAGEMENT
I] OBJECT: - In order to have a clear understanding between auditor & auditee.
II] PRECONDITIONAL

Acceptability of AFRF Mangt acknowledges their unrestricted access (all time)

responsibility
BOA all Inf Persons to provide
further explanation
III] LIMITATION ON SCOPE (PEQ)
 Valid to an extent which is acceptable by an audit and which does not override law
 If scope restricted

Before accepting Engagement After accepting engagement

No to accept request MGT not if management refuses to

to restrict remove such restriction

withdraw from engagement if allowed under law (or) Express disclaimed opinion
IV] CONTENT OF ENGAGEMENT LETTER

Primary content (PEQ May 19) Other content

a) Objective & scope a) Elaboration of scope

b) Auditor responsibility b) Fees

c) Mangt Responsibility c) Tentative Plan

d) Accept d) Confirmation of appointment

e) Reporting framework e) Involvement of expert etc.

V] RECURRING AUDIT (RA) (PEQ May 13)

In case of R.A, generally auditor is NOT required to issue Eng Lett. (EL)
However, in following circumstances auditor may decide to re-issue E-L
1. Any indication that the entity that misunderstood the objective and scope of the Audit.
2. Any revised or special terms of audit engagement
3. A recent change of senior management.
4. A significant change in ownership.
5. A change in legal or regulatory requirements.
6. A change in the financial reporting framework adopted in the preparation of the FS.
7. A change in other reporting requirements.

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 SA 220 QUALITY CONTROL FOR AUDIT WORK
Components of Quality Control : (Key - L E A H E M)
I] LEADERSHIP RESPONSIBILITIES
Engagement Partner should emphasize the Engagement Team the following: -
 Compliance with professional standard and legal requirements
 Compliance with firm’s Q.C. policies
 Issuance of appropriate audit report
 Ability to raise concerns without fear
 Quality is essential and indispensable performance

II] ETHICAL REQUIREMENTS

EP to remain evidence of non-compliance with relevant by ET through:
 Inquiry
 Observation
If there is an indication of non-compliance with relevant ethical requirements, EP should:
 Consult other is in the firm
 Determine appropriate action

III] ACCEPTANCE/CONTINUANCE OF CLIENT RELATIONSHIP

 Be satisfied that appropriate procedures regarding client acceptance/continuance have
been followed.
 Determine whether conclusions reached are appropriate.
If EP obtains information that would have caused firm to withdraw the engagement,
communicate information promptly to firm.
Example of information -
 Integrity of principal owners, Mngt and TCWG
 Competency of ET to perform engagement
 Availability of necessary capabilities including time and resources
 Compliance with relevant ethical requirements
 Significant matters that arise during the current or previous audit engagement

IV] HUMAN RESOURCES

EP to be satisfied that ET and auditor's expert not part of ET has appropriate competence and
capabilities to:
 Perform audit engagement in accordance with professional standards and regulatory of
legal requirements and
 Enable an AR that is appropriate in the circumstances.


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V] ENGAGEMENT PERFORMANCE
a) Direction, supervision and performance:
 EP shall take the responsibility for directions, supervision and performance of audit
engagement in compliance with standard and regulatory requirement
 to make an appropriate AR and
b) Reviews:
EP shall take the following responsibilities: -
i. reviews are being performed in accordance with policies/ procedures
ii. be satisfied that SAAE has been obtained to support the conclusions reached
and AR to be issued through
 review of audit documentation
 discussion with ET
c) Consultation:
EP shall undertake consultation
 Wherever required
 Ensure its implementation
d) Engagement quality control review (EQCR): -
It is process designed to provide an objective evaluation, before the report is issued.
EQCR

Mandatory Discretion

For Audit of listed entity other engagement

e) Difference of opinion
Follow the firm's policies and procedures for dealing with and resolving differences of
opinion. Report shall not be issued in case of difference of opinion.

VI] MONITORING
Obtain reasonable assurance that firm's policies/procedures relating to QC are relevant,
adequate, and operating effectively
Consider: -
 Results of firm's monitoring process.
 Whether deficiencies noted may affect the audit engagement.

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 230 AUDIT DOCUMENTATION
I] RECORD OF

Audit procedure Audit Evidence Conclusion

performed Obtained Drawn

II] BENEFITS OF AUDIT DOCUMENTATION

Benefits

Internal benefits External benefits

1) Assist engagement team to plan & 1) Enabling quality control review

perform audit. 2) Enabling external inspection

2) Assist senior audit engagement team

members to direct & supervise the team
3) Establishing the accountability of
engagement.

Points to remember: -
1. Working papers are property of auditor
2. He can make available copy of working paper to client on request at this discretion
3. Preserve up to 7 yrs.
4. Audit file should be prepared within 60 days after the date of audit report
5. Auditor shall not delete discard audit documentation but he can modify 
explain reason for modification and when and by whom they were made or reviewed?

 Form & content of audit documents depends on: - (PEQ Nov 15)
 The size and complexity of the entity.
 The nature of the audit procedures to be performed.
 The identified risks of material misstatement.
 The significance of the audit evidence obtained.
 The nature & extent of exceptions identified.
 The need to document a conclusion or the basis for a conclusion not readily
determinable from the documentation of the work performed or audit evidence obtained.
 The audit methodology & tools used.

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 SA 240 THE AUDITOR’S RESPONSIBILITIES RELATING TO FRAUD
IN AN AUDIT OF FINANCIAL STATEMENTS
I] OBJECTIVE

To obtain SAAE about To respond appropriately to

Identify and assets RMM
assessed risks due to fraud identified/ suspected fraud
in FS due to Fraud

II] MEANING OF FRAUD

An Intentional act by one or more individuals in an organisation with an intention to
obtain unjust or illegal advantage

III] FACTORS RESPONSIBLE FOR FRAUD (I.E. FRAUD RISK FACTORS) (PEQ Nov 15)
It is an event or condition that indicates Incentive, Pressure or Opportunity to commit fraud.
IV] TYPES OF FRAUD (PEQ May 12)

Fraudulent Financial reporting (PEQ May 12) Misappropriation of assets

1) Manipulation, falsification or correlation
of accounting records.
2) Misrepresentation/ Omission of events,
Transactions or other significant inform
Actions.
3) Intentional misapplication of accounting
principles.
4) Recording fictitious journal entries.
5) Inappropriately adjusting assumptions.
6) Omitting, advancing or delaying
Recognition in FS of entries/ events.
1) Embasseling receipts (e.g. misappropriating
collection on account receivables)
2) Stealing physical assets (e.g. Stock for personal
use)
3) Causing an entity to pay for goods and
services not received. (e.g. payment to fictitious
vendor or employee)
4) Using an entity assets for personal use.
(e.g. loan to related parties)

V] Risk Assessment Procedures

1. Enquires with mgt  (PEQ Nov 16)
 Make inquiries regarding mgt‘s assessment of RMM due to fraud.
 Mgt procedure in order to control fraud risk
 Mgt communication with TCWG
 Mgt communication regarding business practise, ethical behaviours and lose objectives.
Internal auditors, if any.
2. Enquire with TCWG
 How they supervise mgt procedure regarding RMM due to fraud
 Whether they have any knowledge of any fraud.

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 3. Evaluation of unexpected and unusal transaction .
 Apply - Analytical Procedures.
4. Evaluating existings of fraud risk factors
5. Identify and Assess RMM due to fraud
 Apply procedures of SA315
 Check w.r.t. Presumed Risk (Discussed in VI)
VI] Presumed/Deemed Risk

A. Revenue Recognition B. Mgt Override Control

A. Audit Procedures relating to Revenue Recognition
 Apply procedure of SA 330, Includes responding in following manner
a) Apply professional skepticism
b) Evaluates operating effectiveness of internal control
c) Check assignments of personal (i.e. Skill & Ability)
d) Check A/c policies and principle are followed consistently
B. Audit procedures relating to evaluate MOC: -
Responces to assessed Risk: - (PEQ Nov 13) (RTP Nov 18, 16)
Mgt is at a unique position it can we involved in fraudlent activity mgt posses ability to
manipulate accounting record and prepare fraudulent financial reports by overriding controls
Therefore, auditor shall design and perform audit procedure to:
a) Check appropriateness of Journal Entries
b) Check adjustments made @ year end (case study)
c) Review estimates and evaluate that there is no Fraud involved
d) Inquire about personal involved in financial reporting procedures

VII] If auditor is unable to continue performing (PEQ May17/ Nov 09, 06) (RTP May 17/ Nov 13, 12)
Then Auditor shall

Determine professional and OR Consider appropriateness of withdrawal w/d

legal responsibilities

1) Where w/d is not 2) Where w/d is legally

Including com with TCWG be
c
appropriate, auditor needs permitted, comc with TCWG
and regulatory authority to express modified opinion and other regulatory
Section 143(12) (also mention the reasons authorities required u/s 140
for same) - Resignation
Author’s Note: - Also mention clause 3(x) of CARO & 143(12) wherever appropriate.

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 SA 250 CONSIDERATION OF LAWS AND REGISTRATION
I] OBJECTIVE OF AUDITOR
To obtain SAAE regarding compliance with provision of laws and regulation, non-compliance
 Affects going concern
 Results in misstatement of FS
 Attracts heavy penalty
II] AUDITOR PROCEDURE (PEQ Nov 14)
1. Understand the entity’s environment.
2. Obtain exhaustive list represented by management of applications of laws and
regulations.
3. Discussion with -
Branch Auditor, Internal Auditor, Legal Consultant, Legal officers.
4. Obtain/expert’s opinion
5. Verification of correspondence with departmental authority?
6. Auditor should verify whether management has developed the system by which it can
be informed about non-compliance.
7. Verification or computation of:
 Figure
 Return
 Challan
 Duty paying documents
8. Obtain Sufficient & Appropriate Audit Evidence
III] REPORTING OF NON-COMPLIANCE TO - (PEQ Nov 18, 16/ RTP Nov 18)

Management (TCWG) Shareholder Regulators

IV] INDICATES OF NON-COMPLIANCE (PEQ May 18, 16) (RTP Nov 18)
 Payments of fines or penalties
 Payments for unspecified services, loan to consultations, related parties and employees.
 Payment towards legal fees & retainer ship fees
 Payments for goods or services mode other than to the country from which the goods or
services originated
 Payments without proper control document
 Unauthorized transaction or
 Purchasing at price significantly above or below market price
 Unusual payment in cash, bearer cheques
 Adverse media comment

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 SA 260 COMMUNICATION WITH TCWG
I] WHAT TO COMMUNICATE? (matter to be communicated) (Key - IFRS) (PEQ Nov 06)
I – Auditors Independence
F – Significant* Findings
R – Responsibility relating to audit of financial statements.
S – Planned Scope & timings.
*Significant findings – An auditor can give value added suggestions to TCWG about:
a) Significant qualitative aspect of entities acting practice including:

Accounting Policies Accounting Estimates Disclosures

b) Significant difficulties in performing audit

 Unavailability of personnel & information.
 Unwillingness to evaluate Going concern.
 Unreasonable time to complete audit.
 Unnecessary efforts required to obtain sufficient & appropriate audit evidence.
 Significant delay in giving information.
 Restriction imposed.

c) If TCWG and Management are different: -

Significant matters arising during audit or subject to correspondence with management
(Key - ABCDE)
A – Accounting practice
B – Business conditions
C – Consultancy
D – Dispute with management.
E – Any other significant Event or transaction

d) Circumstances affecting form & content of report SA 705 / SA 706.

e) Any other significant matter.

II] HOW TO COMMUNICATE? (Factors affecting form of communication)

a) Whether such discussion will be included in Independent auditor’s report (as RAM).
b) Was the matter resolved.
c) Structure of organization.
d) Expectation of TCWG.

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e) Ongoing dialogues & contract between auditor and TCWG.
f) Previous communication.
g) Changes in membership of governing body.
h) Legal requirements.
i) Special purpose financial statements.

III] WHEN TO COMMUNICATE?

In adequate interval of time.

IV] IMPORTANCE OF COMMUNICATING KEY AUDIT MATTERS TO TCWG (RTP Nov 18)
Communication with TCWG enables them to be made aware of the key audit matters that
the auditor intends to communicate in the auditor's report, & provides them with an
opportunity to obtain further clarification where necessary. The auditor may consider it useful
to provide TCWG with a draft of the auditor's report to facilitate this discussion.
Communication with TCWG recognizes their important role in overseeing the financial
reporting process, & provides the opportunity for TCWG to understand the basis for the
auditor's decisions in relation to key audit matters & how these matters will be described in
the auditor's report. It also enables TCWG to consider whether new or enhanced disclosures
may be useful in light of the fact that these matters will be communicated in the auditor's
report.

Space of Students Notes: -

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 SA 265 COMMUNICATING DEFICIENCIES IN INTERNAL CONTROL WITH
TCWG
I] MEANING OF DEFICIENCY IN INTERNAL CONTROL
a) Inability of internal control to prevent, detect & correct misstatements; or
b) Absence of control necessary to prevent, detect & correct misstatements.

II] AUDITOR’S OBLIGATION REQUIREMENT

Identify Indicators Communication Communication

Deficiency in writing with Management

 Evidence of ineffective control environment.

 Absence of risk assessment procedures within entity.
 Failure of management to identify RMM.
 Absence of control over risk.
 Disclosure of material misstatement due to fraud
& error as prior period items in CY financial statements.
 Evidence of managements inability to of financial statements.

III] CONTENTS OF REPORT (RTP May/Nov 18) (PEQ Nov 15) (Key – PILU)
P – Potential effect: -
It contains description of deficiencies & an explanation of their potential effects.
I – Scope of Improvement: -
It list down the area of weakness & offers suggestions for improvement.
L – Minimise legal Liability: -
The letter may also serve to minimize legal liability in the event of a major defalcation or
other loss resulting from a weakness in internal control.
U – Users: -
This letter is a valuable reference document for management for the purpose of revising the
system.

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 SA 299 RESPONSIBILITIES OF JOINT AUDITOR
I] JOINT AUDIT:

ADVANTAGES DISADVANTAGES
 Pooling and sharing of resources.  Sharing of fees.
 Everyone has expertise in different area.  Lack of clear definition in case of joint responsibility.

 Advantage of mutual discussion.  Co-ordination problems in conduct of work.

 Better quality of work performance.  Areas of common concern being neglected.
 Improved services to client company.  Problems when firms of different standing are
 Lower costs to carry out the audit work. associated.

II] REQUIREMENTS OF SA 299

 The engagement partner and other key members of the engagement team from each of
the joint auditors shall be involved in planning the audit.
 The joint auditors shall jointly establish an overall audit strategy that sets the scope.
timing and direction of the audit.
 Development of Audit Plan (Principles of SA 300 will be applicable).
 Identification of Risk of Material Mis-statements.

III] AREAS

Mutually decided Mutually divided

Joint & Several Responsibility Individual Responsibility

(PEQ Nov04, 15)

1) Discussion of work, overall audit 1) Individually divided working area.

plan and decision taken regarding
audit procedure.
2) Matters raised by one of the joint
auditor but solved mutually by all
joint auditors.
3) Unallocated and undivided work
4) Verification of compliance of
statutes relating to Financial
Statement, accounting policies and
format of FS
5) Disclosure requirements regarding FS
6) For obtaining an evaluation written
representation of mgmt.
2) Audit procedure decide by him.
3) Use of other’s work.
4) Conclusion of his procedure.
5) Reviewing the reports of the branches allocated to
him
6) Written representation by management for a
particular area. .
Note: - If division of work is not appropriately
documented then it will be joint and several
Responsibilities of all joint auditors.

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 JOINT AUDITORS ARE NOT REQUIRED TO REVIEW THE WORK OF OTHER JOINT
AUDITORS. HE CAN DEEM THAT THE WORK DONE BY OTHER JOINT AUDITORS
IS IN ACCORDANCE WITH GENERALLY ACCEPTED AUDITING PROCEDURES.

JOINT AUDIT REPORT:

Usually Joint auditor are of unanimous opinion but if one or more joint auditor is not
in agreement over the opinion, each disagreed joint auditor may submit his report on the
disagreed point separately.
In such circumstances, the audit reports issued by the joint auditors shall make a reference
to the separate audit reports issued by the joint auditors. Further such separate audit reports
shall also make reference to the audit report issued by other Joint Auditors under the
heading Other Matter Paragraph as per SA 706.

Reference of Separate Opinion in Reference of Joint Auditors Opinion

OTHER MATTERS Paragraph in OTHER MATTERS Paragraph

Space of Students Notes: -

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