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

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VIDEO LECTURES & BOOKS AVAILABLE FOR JUNE 2019

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UNIT 1: AUDITING CONCEPTS DEFINITION OF AUDITING

 Audit is an independent examination,  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 AUDITING

 Audit has to be conducted in a proper way. Systematic & independent  Auditor should be completely objective (unbiased) in his approach.  He should not be influenced by client.  Auditorsopinion is on financial statements including profit and loss account, balance sheet, & notes to accounts.

Financial statements

 The preparation of financial statements is the responsibility of management of entity.  His client can be any entity whatever is the legal form i.e. may be proprietorship, partnership, trust or company etc.

Entity

 The entity may be profit oriented or a charitable one.  His opinion is on ‗true & fair view’ of financial statements.

Opinion

 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. 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.

BY WHOME

OBJECTIVES & SCOPE OF AUDITING

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Objective an audit

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 The objective is to enable the auditor to express an opinion on financial statements prepared by management 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 9730768982

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as to future viability of the enterprise or the efficiency or effectiveness with which its management has conducted the affairs of the enterprise. Responsibility for the financial statements

 The management is responsible for maintaining an upto date and proper accounting system and finally to prepare financial 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: The requirement of the relevant legislation. audit 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,

Objectivity and Independence

 

The Auditor should be straight forward, honest and sincere in his approach to his professional work. 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 Competence



The audit should be performed and the report prepared with due 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 by others

  

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When the auditor delegates work to assistants or uses work performed by 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

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

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 system and Internal Control

The auditor should gain an understanding of the accounting system and related internal controls and should study and evaluate the operation of those internal controls upon which he wishes to rely in determining the nature, timing and extent of other audit procedures.

Audit conclusions & Reporting

The auditor should review and assess the conclusions drawn from the audit evidenceobtained and from his knowledge of business of the entity as the basis for the expression of his opinion on the financial information.

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

TRUE & FAIR VIEW (June 2014, June 2015)

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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

In more specific terms, to ensure true & fair view, an auditor has to see



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.

Assets

  

That the assets are neither undervalued or overvalued according to the applicable accounting principles; (Valuation) No material asset is omitted; (Omission) The charge, if any, on assets are disclosed; (Disclosure)



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 policies Non-recurring items



Accounting policies have been followed consistently.



All unusual, exceptional or non-Recurring items have been disclosed separately; (Disclosure)

Liabilities

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 independence

 The need for auditor independence is provided in standards on auditing.  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 independence?

 If auditor maintains high degree of independence, credibility of financial statement is enhanced.  The Independent audit report will be acceptance and respected by all the stakeholders.

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Advantages of independent audit (May 2012)

Protection of interest

Moral check Tax liability

Trade dispute settlement

Financiers and Bankers use audited financial statements in evaluating the credit worthiness of individuals in negotiating loans. Audited statement is useful in settling the trade disputes for higher wages or bonus, etc.

Control over inefficiency

It helps in detection of wastages and losses and also helps in recommending ways to correct it.

Arbitration

It is helpful in settling disputes by arbitration.

Assistance to government

Government may required audited and certified statements before it gives assistance or issues a license for a particular trade.

Credit negotiation

Appraisal

AUDIT VS INVESTIGATION (Nov 2012, Dec 2013, June 2015)

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It safeguards the financial interest of persons who are not associated with the management of the organisation whether they are partners or shareholders. It acts as a moral check on the employees from committing defalcations. Audited statements of accounts are helpful in setting liability for taxes.

Basis Objective

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. Investigation Audit An investigation aims The main objective of an audit is atestablishing a fact or to verify whether the financial ahappening or at statements display a true and assessing aparticular fair view of the state of affairs situation. andthe working results of an entity.

Scope

The scope of investigation may be governed by statute or it may be non – statutory.

The Scope of audit is wide and in case of statutory audit the scope of work is determined by provision of relevant law.

Periodicity

The work is not limited by rigid time frame. It may cover several years, as the outcome of the same is not certain

The audit is carried oneither quarterly, half-yearlyor yearly.

Nature

Requires a detailed study and examination of facts and figures

Involves tests checking or sample technique to draw evidences for forming a

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judgement opinion

and

expression

of

Inherent limitations

No inherent limitation owing to its nature of engagement

Audit suffers inherentLimitation

Evidences

It seeks evidences

Audit is mainly concernedwith prima- facie evidence

conclusive

from

It is analytical in nature Is governed by compliancewith and requires a thorough generally acceptedaccounting mind capable of principles, auditprocedures and observing, collectingand disclosurerequirements. evaluating facts. The outcome is reported The outcome is reported tothe Reporting to the person(s) on whose owners of the businessentity. behalf investigation is carried out. The common reasons of getting the investigation done are listed below: (1) Proposed purchase of business. (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 Observance of Accounting policies

REASONS FOR CARRYING OUT INVESTIGATION

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.

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 Auditor should consider materiality while Determining NTE of audit procedures; (as per SA 320)  Evaluating effect of misstatements. (as per SA 450) Accounting & Assurance Standard Board of ICAI

 The International Federation of Accountants (IFAC) came into existence in 1977 and constituted International Auditing Practices Committee (IAPC) to formulate International Auditing Guidelines.  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 (SAs)

Auditing standards refers to the code of best practices/procedures which an 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 issue SAs

1. The Auditing and Assurance Standards Board identifies the areas where 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.

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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 Harmonization of Indian Auditing Standards and International Standards

The Institute of Chartered Accountants of India (ICAI) is a founder member of the International Federation of Accountants (IFAC). It is one of the membership obligations of the Institute to actively propagate the pronouncements of the International Auditing and Assurance Standards Board (IAASB) of the IFAC to contribute towards global harmonization and acceptance of the Standards issued by the IAASB. Accordingly, while formulating Engagement and Quality 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)

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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 CORPORATE

OFFICER EMPLOYEE PARTNER/ EMPLOYEE

(a) A Body Corporate other than a limited liability partnership registered under the Limited Liability Partnership Act, 2008; OR (b) An Officer Or Employeeof the company; (c) a person who is a partner, or who is in the employment, of 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; 11 | P a g e

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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 RELATIONSHIP

(e) a person or a firm who, whether directly or indirectly has 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 12 | P a g e

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e. Brother f. Sister FULL TIME EMPLOYMENT ELSEWHERE OR BREACH OF CEILING

(g) a person who is in full time employment elsewhere or a person or a partner of a firm holding appointment as its auditor, if such person or partner is at the date of such appointment or reappointment holding appointment as auditor 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 CONULSTING SPECIALISED SERVICES (Dec 2014)

(i) (i) a person who, directly or indirectly, renders any service & referred to in section 144 to the company or its holding company or its subsidiary company. Section 144 of the Companies Act, 2013 is a new provision 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.

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APPOINTMENT OF AUDITOR (SECTION 139) (June 2016) APPOINTMENT OF FIRST AUDITORS IN THE CASE OF A COMPANY, OTHER THAN A GOVERNMENT COMPANY

As per Section 139(6), the first auditor of a company, other than a Government company, shall be appointed by the Board of Directors within 30 days from the date of registration of the company.

APPOINTMENT OF FIRST AUDITORS IN THE CASE OF GOVERNMENT COMPANY:

Section 139(7) provides that in the case of a Government company or any other company owned or controlled, directly or indirectly, by the Central Government, or by any State Government, or Governments, or partly by the Central Government and partly by one or more State Governments, the first auditor shall be appointed by the Comptroller and Auditor-General of Indiawithin 60 days from the date of registration of the company.

In the case of failure of the Board to appoint the auditor, it shall inform the 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.

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 SUBSEQUENT AUDITOR/REAPPO INTMENT OF AUDITOR IN CASE OF COMPANIES OTHER THAN GOVERNMENT COMPANY

Section139(1) of the Companies Act, 2013 provides that every company shall, at the first annual general meeting appoint an individual or a firm as an auditor who shall hold office from the conclusion of that meeting till the conclusion of its sixth annual general meeting and thereafter till the conclusion of every sixth meeting. The following points need to be noted in this regard(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 SUBSEQUENT AUDITORS IN CASE OF

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As per Section 139(5), in the case of a Government company or any other company owned or controlled, directly or indirectly, by the Central Government, or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments, the

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Comptroller and Auditor-General of India shall, in respect of a financial year,

GOVERNMENT COMPANIES:

FILLING OF CASUAL VACANCY

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. A

As per Section 139(8), any casual vacancy in the office of an auditor shallCOMPANIES 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 AuditorGeneral 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 VACANCY BY RESIGNATION:

As per section 140 (2) the auditor who has resigned from the company shall file within a period of thirty days from the date of resignation, a statement in the prescribed form ADT–3 (as per Rule 8 of CAAR) with the company and the Registrar, 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 IMPORTANT PROVISIONS REGARDING APPOINTMENT OF AUDITORS

1. A retiring auditor may be re-appointed at an annual general meeting, if(a) he is not disqualified for re-appointment; (b) he has not given the company a notice in writing of his unwillingness to be re-appointed; and (c) a special resolution has not been passed at that meeting appointing some other auditor or providing expressly that he shall not be re-appointed. 2.

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Where at any annual general meeting, no auditor is appointed or re-

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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 reappointment 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 reappointment 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 regard1. 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 16 | P a g e

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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 REMUNERATION

As per section 142 of the act the remuneration of the auditor of a company 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 AUDITOR BEFORE EXPIRY OF TERM:

According to Section 140 (1) the auditor appointed under section 139 may be removed from his office before the expiry of his term only by a special resolution of the company, after obtaining the previous approval of the Central Government in that behalf as per Rule 7 of CAAR, 2014: (1) The application to the Central Government for removal of auditor shall

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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 AUDITOR OTHER THAN RETIRING AUDITOR:

Section 140 lays down procedure to appoint an auditor other than retiring auditor who was removed: 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 TO INQUIRE ON CERTAIN MATTERS

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It is the duty of auditor to inquire into the following 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;

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(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 REPORT 2003)

AUDIT (CARO

As per sub section 3 of section 143, the auditor‘s report shall also state – (a) Whether he has sought and obtained all the information and explanations which to the best of his knowledge and belief were necessary for the purpose of his audit and if not, the details thereof and the effect of such information on the financial statements; (b) Whether, in his opinion, proper books of account as 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 audited under sub-section (8) by a person other auditors has been sent to him under the proviso to the manner in which he has dealt with it in preparing

office of the company than the company‘s that sub-section and 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 19 | P a g e

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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 ON FRAUDS (June 2015)

 If an auditor of a company, in the course of the performance of his duties as auditor, has reason to believe that an offence involving fraud is being or has been committed against the company by officers or 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

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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.

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SIGNING OF AUDIT REPORT

Section 145 of the Companies Act 2013, provides that the person 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 ATEND AGM

Section 146 of the Companies Act 2013, provides that all notices of, and 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 AUDITORS

(1) If any of the provisions of sections 139 to 146 (both inclusive) is 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.

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(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 FRAUD U/S 447

Any person who is found guilty of fraud involving an amount of at least 10 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 misstatement, 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 BRANCH OFFICE ACCOUNTS

As per section 128 of the Companies Act, 2013 : (1) Every company shall prepare and keep at its registered office books of account and other relevant books and papers and financial statement for every financial year which give a true and fair view of the state of the affairs of the company, including that of its branch office or offices, if any, and explain the transactions effected both at the registered office and its branches and such books shall be kept on accrual basis and according to the double entry system of accounting: 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

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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 coordination of their efforts at the planning stage of the audit. The principal 24 | P a g e

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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 AUDITOR

The audit shall be conducted by a Cost Accountant in Practice who shall be 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

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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 COST AUDITOR

OF

As per rule 14 of the Companies (Audit and Auditors) Rules, 2014 (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, DISQUALIFICATION, RIGHTS, DUTIES AND OBLIGATIONS OF COST AUDITOR

The qualifications, disqualifications, rights, duties and obligations applicable to auditors under this Chapter shall, so far as may be applicable, apply to a cost auditor appointed under this section and it shall be the duty of the company to give all assistance and facilities to the cost 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 COST AUDIT REPORT

A company shall within 30 days from the date of receipt of a copy of the cost audit report prepared (in pursuance of a direction issued by Central 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 Sec. 138 26 | P a g e

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(a) every listed company;

(Dec 2016)

(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. a) Every company, to which Sec. 138 is applicable, shall appoint an Internal Auditor. b) The internal Auditor shall conduct the internal audit of the functions and activities of the company. c) The internal auditor shall bei) 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 internal audit shall be conducted and reported to the Board. of internal audit Legal Requirements 138

u/s

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. If an existing company satisfies any of the criteria laid down under Rule 13 Legal 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 27 | P a g e

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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. 1. In India, government audit is performed by an independent constitutional C & AG Audit 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

SECRETARIAL AUDIT (Section 204)

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 Audit means correction and verification of secretarial records and compliances to be maintained by the Company. In other words, secretarial 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

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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. 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. Note:

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

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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 joint auditors, each jointauditor is responsible him, whether or not he has prepared as performed by him. On the other hand, all the severally responsible:

audit work divided among the only for the work allocated to separate report onthe work joint auditors are jointly and

(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 30 | P a g e

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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.

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CARO, 2016 Short title, application and commencement

(1) This Order may be called the Companies (Auditor’s Report) Order, 2016. (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.

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Auditor’s report to contain matters specified in paragraphs 3 and 4

Every report made by the auditor under section 143 of the Companies Act, 2013 on the accounts of every company audited by him, to which this Order applies, for the financial years commencing on or after 1st April, 2015, shall in addition, contain the matters specified in paragraphs 3 and 4, as may be applicable: Provided the Order shall not apply to the auditor‘s report on consolidated financial statements.

Matters to be included in the auditor’s report

The auditor‘s report on the accounts of a company to which this Order applies shall include a statement on the following matters, namely:(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

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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 noncompliance; (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 34 | P a g e

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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 stated for unfavorable or qualified answers

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(1) Where, in the auditor‘s report, the answer to any of the questions referred to in paragraph 3 is unfavorable or qualified, the auditor‘s report shall also state the basis for such unfavorable or qualified answer, as the case may be. (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.

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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 is management tool performed by the employees of the INTERNAL AUDIT 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 Internal Audit

of  Monitoring of internal control. The internal audit function may be 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.

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 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. (1) To verify the accuracy and authenticity of the financial accounting and statistical recordspresented to the management.

Objectives

(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 INTERNAL AUDIT

1. Internal Auditing is a specialized service to look into the standards of 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

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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 INTERNAL AUDIT

1. The installation and operation of internal audit involve extra expenditure 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 & RESPONSIBILITIES OF INTERNAL AUDITOR

Major roles and responsibilities of internal auditor are summarized below: 1. To work with board and management to ensure that a system is in place which ensures that all majorrisks are identified and analyzed. Evaluate 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

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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 STRUCTION OF INTERNAL AUDIT FUNCTION

Where there is an internal audit function, its status is derived from the needs of the organisation and should beset at the top of the organisation, i.e. by the board and the audit committee. There is no single model for 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

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consistentwith the risks that the organisation faces and the effectiveness of the internal controls that are in place toaddress those risks. ROLE OF INTERNAL AUDIT IN INTERNAL CONTROL

The Internal auditor should examine and contribute to the ongoing effectiveness of the internal control systemthrough evaluation and recommendations. However, the internal auditor is not vested with 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 AUDIT IN RISK MANAGEMENT

Internal auditing professional standards require the function to monitor and evaluate the effectiveness of theorganization‘s Risk management processes. Risk management relates to how an organization sets 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.

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ROLE OF INTERNAL AUDIT IN CORPORATE GOVERNANCE

Internal auditing activity as it relates to corporate governance is generally informal, accomplished primarilythrough participation in meetings and discussions with members of the Board of Directors. Corporate 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.

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1. A compliance audit is a comprehensive review of an organization‘s adherence to regulatory guidelines. CA. Amit Talda

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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: 42 | P a g e

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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.

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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 Environment

Meaning

    

Overall attitude awareness & actions of Management regarding I. C. system & its importance in the entity. Factors affecting control environment

Organizational Structure Management supervision Personnel 1. Organizat ional Structure

(a) It should be such that no individual can override the I. C. System. (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.

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(a) Devising and maintaining I. C. System is responsibility of

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Managem ent Supervisi on

management. (b) Management should review it periodically to ensure 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. Personnel

(a) Functioning of I. C. system depends on the capability & honesty of those operating it. (b) Thus, personnel should be properly qualified, trained and experienced.

. Meaning: Limitations which are inseparable from system of internal control. Inherent 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 collusion with parties outside the entity or with employees 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. of The possibility that a person responsible for exercising 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. 4. Abuse authority

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6. No control for unusual transaction 7. Inadequate procedure Accounting Financial Controls

The fact that most controls do not tend to be directed at transactions of unusual nature. The possibility that procedures may become inadequate due to changes in conditions and compliance with procedures may deteriorate.

and Internal Control so far as Financial and Accounting aspects are concerned aims at:  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 Review of I.C refers to – Examination and evaluation of I.C system of the client. To assure that I.C. system is adequate. Need for review Advantages of The review of internal controls will enable the auditor to know: (i) Whether errors and frauds are likely to be located in the ordinary course of Review operations of the business; Meaning

(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 46 | P a g e

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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 Record 1) NARRATIVE  RECORD  

2) CHECK LIST

2) Check List

3) I.C. Questionnaire

4) Flow Chart

This is a complete and exhaustive description of the system as found in 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.

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? 

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The complete check list is studied by the Principal/Manager/Senior to ascertain existence of internal control and evaluate its implementation and efficiency.

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3) INTERNAL  CONTROL QUESTIONNAIRE  



 

4. FLOW CHART

   

This is a comprehensive series of questions concerning internal control. This is the most widely used form for collecting information about the 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. 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. System General considerations in framing a system 48 | P a g e

Internal Check is part of overall Internal Control System & operates as a built in device. (1) No single person should have an independent control over any important aspect of the business. All dealings and acts of every employee should, in the ordinary course, come under the review of another.

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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 reorder 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.

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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.

INTER FIRM COMPARISON

It should be noted that the above list is not necessarily comprehensive, nor does its constituent stages inevitablytake place in the sequence suggested. 1. It is technique of evaluating the performance, efficiency, costs and profits 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.

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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 interfirm 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. 1. Intra-firm comparison means comparison among different 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.

INTRA FIRM COMPARISON

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 AUDIT TESTING

Sampling is a process of selecting a subset of a population of items for the 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

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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 SAMPLING

Statistical sampling involves the random selection of a number of items for 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

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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 TO STATISTICAL SAMPLING

Simple Random Sampling In auditing, this method uses sampling without replacement; that is, once an 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.

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UNIT 5: REVIEW OF INTERNAL CONTROL REVIEW OF PURCHASE OPERATIONS

Purchase is one of the most important functions in a manufacturing organisation. In most of the manufacturingand trading organisation, 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 REVIEW

The objectives of review of internal control system includes to ascertain: 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 DUTIES IN PURCHASE OPERATION

To ensure proper separation of duties, assign related buying functions to different people. Ensure propersegregation, no single person has complete control over all buying activities. 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

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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 CONTROL OVER ASSETS

Once the purchases are done, it is necessary to secure the materials in a safe location. To ensure that theresources are accounted for, it is necessary 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 & RECONCILIATION

Review and reconciliation is a very important part of purchase internal 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.

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DISTRIBUTION POLICY & PROGRAMS

effectiveness of selling and distribution function. Management of distributionchannels involves efficient channel design, conflict 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 MANUFACTURING OPERATIONS

In general parlance, Manufacturing means converting an input (Raw material) into output (finished product) withthe use of man, machines, 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 inefficiency 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.

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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 DECISIONS

Management decision making Decision-making is an essential aspect of modern management. It is a 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.

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UNIT 6: AUDIT ENGAGEMENT & DOCUMENTATION AUDIT PROGRAMME  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.

Meaning

 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 audit programme

1. Selection of team members 2. Instructions for staff

The programme helps in selection of assistants for jobs on the basis of their capability.

3. Ready checklist

It provides ready checklist of all the procedures and techniques to be adopted. Therefore minimizes the possibility of overlooking any of important audit steps.

4. No ignorance or overlooking 5. Responsibility fixation 6. Progress of work done

Due to properly written programme, there is no chance of forgetting / overlooking some important manner.

7. Supervision

Work by assistants can be easily supervised by referring the programme.

8. Timely completion

Time to time, compliance with program is checked as to complete the work on timely basis.

The audit programme specifies the extent and manner 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.

Programme clearly sets out as to who is required to do a particular work. Thus responsibility can be fixed. The progress of work can be determined on the basis of entries on the programme.

9. Basis for Program easily sets out procedure – evidenceconclusions chain, to enable the auditor to express an reporting opinion. 10. Future audits

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It serves as a guide for audits to be carried out in succeeding years.

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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 audit programme

1. Mechanical work

The audit may be performed mechanically without 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 staff VOUCHING

Inefficient staff may take shelter behind the programme saying that matter does not contain any instructions.

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

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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. 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.

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 VOUCHING

The basic objectives of vouching are as under: 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 VOUCHING

– – – – – – – – –

Ensures genuineness of the transactions 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 60 | P a g e

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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

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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 ASSETS

Points requiring auditor‘s attention for verification are as under: (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‘

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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. VERFICATION

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Point of difference Meaning

Vouching

Verification

Examination of documentary evidence in support of transactions recorded in primary books of A/c‘s

Examination whether assets & liabilities are properly stated in B/s and to some extent of P & L A/c

Objective

Establish authenticity of To inquire and confirm transactions the ownership, valuation, existence and presentation of assets and liabilities

Aspects under review

Date of voucher As regards assets – 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

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firm and are disclosed in proper amounts Vouching is related to all Verification is specifically accounting documents related to Assets & Liabilities Vouching is normally Verification is done by Person 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.

NATURE

“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 & CONTENT

The form and content of audit documentation should be designed to meet 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 WORKING PAPERS

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The need for Working papers listed as follows: (a) They aid in the planning and performance of the audit; (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 CA. Amit Talda

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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 RETENTION

The auditor should retain the working papers for a period of time sufficient to meet the needs of his practice andsatisfy any pertinent legal or professional requirements of record retention.

OWNERSHIP & CUSTODY

Working papers are the property of the auditor. The auditor may, at his 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.

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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 audit files

It contains matters which are updated currently with information of continuing importance to succeeding audit.

The PERMANENT AUDIT file normally includes: Permanent 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.

Current audit file



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 audit files which contain information relating primarily to the audit of a single period. The CURRENT FILE normally includes:

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

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.

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

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.

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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)

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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) Attempt all parts of either Q. No. 6 or Q. No. 6A 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) OR (Alternate question to Q. No. 6) 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

-

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.

-

: Rs.40 crore (80% of equity shares are held by the Central Government)

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)

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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)

Attempt all parts of either Q. No. 6 or Q. No. 6A 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)

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CS EXECUTIVE GROUP – II ACCOUTING & AUDITING

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) Attempt all parts of either Q. No. 6 or Q. No. 6A 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) OR (Alternate question to Q. No. 6) 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)

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CS EXECUTIVE GROUP – II ACCOUTING & AUDITING

QUESTION PAPER: JUNE 17 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) Attempt all parts of either Q. No. 6 or Q. No. 6A 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) OR (Alternative question to Q. No. 6) 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)

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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) Attempt all parts of either Q. No. 6 or Q. No. 6A 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)

OR (Alternate question to Q. No. 6) 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)

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QUESTION PAPER: JUNE 2018 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) Attempt all parts of either Q. No. 6 or Q. No. 6A 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) OR (Alternative question to Q. No. 6) 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)

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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) Attempt all parts of either Q. No. 6 or Q. No. 6A 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) OR (Alternate question to Q. No. 6) 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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