Auditing Concepts Explained

UNIT 1: AUDITING CONCEPTS
DEFINITION OF  Audit is an independent examination,

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

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

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

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

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

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

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

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

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

for the upto date and proper accounting system and finally to
financial prepare financial statements.
statements  The auditor is responsible for forming and
expressing an opinion on the financial statements.
 The audit of financial statement does not relieve the
management of its responsibility.
Scope of an The auditor decides the scope of his audit having regard
audit to:
The requirement of the relevant legislation.
The pronouncements of the institute (ICAI)
Terms of engagement.
However, the terms of engagement cannot override the
pronouncement of the institute or the provisions of
relevant legislation.
BASIC PRINCIPLES GOVERNING AN AUDIT (Nov 2008, Nov 2009, May 2011)
Integrity,  The Auditor should be straight forward, honest and sincere in his
Objectivity and approach to his professional work.
Independence  He must be fair and must not allow bias to override his objectivity.
 He should maintain an impartial attitude and both be and appear to be
free of any interest which might be regarded as being incompatible with
integrity and objectivity.
Confidentiality  The auditor should respect the confidentiality of information acquired in

the course of his work and should not disclose any such information to a
third party without specific authority or unless there is a legal or
professional duty to disclose.
Skills and  The audit should be performed and the report prepared with due
Competence professional care by person who have adequate training, experience and
competence in auditing.
 The auditor requires specialized skills and competence which are
acquired through a combination of general education, knowledge
obtained through study and formal courses concluded by qualifying
examination recognized for this purpose and practical experience under
proper supervision.
 In addition, the auditor requires a continuing awareness of developments
including pronouncements of ICAI on accounting and auditing matters
and relevant regulations and statutory requirements.
Work performed  When the auditor delegates work to assistants or uses work performed by

by others other auditors and experts he continues to be responsible for forming
and expressing his opinion on the financial information.
 However, he will be entitled to rely on the work performed by others,
provided he exercises adequate skill and care and is not aware of any
reason to believe that he should not have so relied.
 In the case of any independent statutory appointment to perform the
work on which the auditor has to rely in forming his opinion, as in the
case of work of branch auditors appointed under companies act, 2013
the auditor‟s report should expressly state the fact of such reliance. The
auditor should carefully direct, supervise and review work delegated to
assistants.
 The auditor should obtain reasonable assurance that work performed by
other auditor or experts is adequate for his purpose.
Documentation The auditor should document matters which are important in providing
evidence that the audit was carried out in accordance with basic principles.
Planning The auditor should plan his work to enable him to conduct an effective audit
in an efficient and timely manner. Plans should be based on knowledge of
the client‟s business. Plans should be made to cover, among other things:
(a) Acquiring knowledge of the client‟s accounting system, policies and
internal control procedures;
(b) Establishing the expected degree of reliance to be placed on internal
control;
(c) Determining and programming the nature, timing and extent of the audit
procedures to be performed and
(d) Coordinating the work to be performed.
Plans should be further developed and revised as necessary during the

course of the audit.
Audit Evidence The auditor should obtain sufficient appropriate audit evidence through the
performance of compliance and substantive procedures to enable him to
draw reasonable conclusions therefrom on which to base his opinion on the
financial information.
Compliance procedures are tests designed to obtain reasonable assurance

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

Audit The auditor should review and assess the conclusions drawn from the audit
conclusions & evidence obtained and from his knowledge of business of the entity as the
Reporting basis for the expression of his opinion on the financial information.
TRUE & FAIR VIEW (June 2014, June 2015)
Meaning  The concept of true and fair is a fundamental concept in auditing.
 The phrase “True and Fair” in the auditor‟s report signifies that the
auditor is required to express his opinion as to whether the state of
affairs and the results of the entity as ascertained by him in the course of
his audit are truly and fairly represented in the accounts under audit.
Explanation  What constitutes “true and fair” has not been defined in any legislation.
 Sec 129 of the Companies Act, 2013states that the financial statements
shall give a true & fair view of the state of affairs of the company or
companies, comply with the accounting standards notified under section
133 and shall be in the form or forms as may be provided for different
class or classes of companies in schedule III.
 Sec 128(1) of the companies Act, 2013 also contemplates that every
company shall prepare and keep books of account which give a true &
fair view of the state of the affairs of the company and explain its
transactions.
In more specific Assets  That the assets are neither undervalued or overvalued
terms, to ensure according to the applicable accounting principles;
true & fair view, (Valuation)
an auditor has to
see  No material asset is omitted; (Omission)
 The charge, if any, on assets are disclosed;

(Disclosure)
Liabilities  Material liabilities should not be omitted; (Omission)
 Liabilities are neither undervalued nor overvalued and

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

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

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

independence? statement is enhanced.
 The Independent audit report will be acceptance and respected by all the
stakeholders.
Advantages of
independent Memory technique:
audit
(May 2012)
Protection of interest It safeguards the financial interest of persons who
are not associated with the management of the
organisation whether they are partners or
shareholders.
Moral check It acts as a moral check on the employees from
committing defalcations.
Tax liability Audited statements of accounts are helpful in
setting liability for taxes.
Credit negotiation Financiers and Bankers use audited financial

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

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

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

various controls in the organisation and report in
adequacies, weaknesses, etc in them.
Management can take suitable action based on
the reports.
AUDIT VS Basis Investigation Audit
INVESTIGATION Objective An investigation aims at The main objective of an
(Nov 2012, Dec establishing a fact or a audit is to verify whether the
2013, June happening or at financial statements display

2015) assessing a particular a true and fair view of the
situation. state of affairs and the
working results of an entity.
Scope The scope of investigation The Scope of audit is wide

may be governed by and in case of statutory audit
statute or it may be non – the scope of work is
statutory. determined by provision of
relevant law.
Periodicity The work is not limited The audit is carried on either
by rigid time frame. It quarterly, half-yearly or
may cover several years, yearly.
as the outcome of the
same is not certain
Nature Requires a detailed study Involves tests checking or

and examination of facts sample technique to draw
and figures evidences for forming a
judgement and expression of
opinion
Inherent No inherent limitation Audit suffers from inherent

limitations owing to its nature of Limitation
engagement
Evidences It seeks conclusive Audit is mainly concerned

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

of and requires a thorough with generally accepted
Accounting mind capable of accounting principles, audit
policies observing, collecting and procedures and disclosure
evaluating facts. requirements.
Reporting The outcome is reported The outcome is reported to

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

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

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

Auditing (SAs) auditor is expected to follow during an 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 standards also promote uniformity in
practice as also comparability. In India the Auditing and Assurance
Standards Board of the Institute of Chartered Accountants of India
formulates the auditing standards.
Procedure to 1. The Auditing and Assurance Standards Board identifies the areas where
issue SAs auditing standards need to be formulated 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 a cross 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 prepared by 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 Board and submitted to the Council of
the Institute.
5. The Council considers the final draft of the proposed auditing standard
and, if necessary, modifies the same in consultation with the Board. The
auditing standard is then issued under the authority of the Council.
While formulating the auditing standards, the Board also takes into
consideration the applicable laws, customs, usages and business
environment in the country.
Need of The Institute of Chartered Accountants of India (ICAI) is a founder member

Harmonization of the International Federation of Accountants (IFAC). It is one of the
of Indian membership obligations of the Institute to actively propagate the
Auditing pronouncements of the International Auditing and Assurance Standards
Standards and Board (IAASB) of the IFAC to contribute towards global harmonization and
International acceptance of the Standards issued by the IAASB. Accordingly, while
Standards 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)
UNIT 2: TYPES OF COMPANY AUDIT

Types of Audit under Companies Act 2013
The Companies Act, 2013 is focused on transparency and disclosure. In the new Act,
attempt has been made to cover each aspect of corporate functioning under audit by
prescribing various types of audits like internal audit and secretarial audit. The various

types of audits prescribed under the Companies Act, 2013 are:
• Statutory Audit
• Internal Audit
• Secretarial Audit
• Cost Audit
STATUTORY AUDIT
QUALIFICATION & DISQUALIFICATION OF AUDITOR (SECTION 141)

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

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

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

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

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

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

in the company of face value not exceeding rupees one
lakh;
Provided that the condition of rupees one lakh shall,

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

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

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

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

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

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

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

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

involving fraud and a period of ten years has not elapsed from
the date of such conviction.
PROVIDING (i) Any person whose subsidiary or associate company or any

CONULSTING & other form of entity, is engaged as on the date of appointment
SPECIALISED in consulting and specialized services as provided in section
SERVICES 144.
(Dec 2014) 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 that an 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.
Further, in case of auditor being an individual, either himself or

through his relative or any other person connected or
associated with such individual or through any other entity,
whatsoever, in which such individual has significant influence
or control, or whose name or trade mark or brand is used by
such individual; and in case of auditor being a firm, either itself
or through any of its partners or through its parent, subsidiary
or associate entity or through any other entity, whatsoever, in
which the firm or any partner of the firm has significant
influence or control, or whose name or trade mark or brand is
used by the firm or any of its partners.
(4) Where a person appointed as an auditor of a company incurs any of the

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

vacancy in the office of the auditor.
APPOINTMENT OF AUDITOR (SECTION 139) (June 2016)

APPOINTMENT OF As per Section 139(6), the first auditor of a company, other than a
FIRST AUDITORS Government company, shall be appointed by the Board of Directors
IN THE CASE OF A within 30 days from the date of registration of the company.
COMPANY, OTHER
THAN A
GOVERNMENT
In the case of failure of the Board to appoint the auditor, it shall inform
COMPANY 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.
APPOINTMENT OF Section 139(7) provides that in the case of a Government company or

FIRST AUDITORS any other company owned or controlled, directly or indirectly, by the
IN THE CASE OF Central Government, or by any State Government, or Governments, or
GOVERNMENT partly by the Central Government and partly by one or more State
COMPANY:
Governments, the first auditor shall be appointed by the Comptroller
and Auditor-General of India within 60 days from the date of
registration of the company.
In case the Comptroller and Auditor-General of India does not appoint

such auditor within the above said period, the Board of Directors of the
company shall 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 company who shall appoint
such auditor within 60 days at an extraordinary general meeting.
Auditors shall hold office till the conclusion of the first annual general
meeting.
APPOINTMENT OF Section139(1) of the Companies Act, 2013 provides that every company
SUBSEQUENT shall, at the first annual general meeting appoint an individual or a
AUDITOR/REAPPO firm as an auditor who shall hold office from the conclusion of that
INTMENT OF
meeting till the conclusion of its sixth annual general meeting and
AUDITOR IN CASE
OF COMPANIES
thereafter till the conclusion of every sixth meeting.
OTHER THAN
GOVERNMENT The following points need to be noted in this regard-
COMPANY (i) The company shall place the matter relating to such appointment of
ratification by member at every Annual General Meeting.
(ii) Before such appointment is made, the written consent of the

auditor to such appointment, and a certificate from him or it that the
appointment, if made, shall be in accordance with the conditions as
may be prescribed, shall be obtained from the auditor.
(iii) The certificate shall also indicate whether the auditor satisfies the
criteria provided in section 141.
(iv) The company shall inform the auditor concerned of his or its
appointment, and also file a notice of such appointment with the
Registrar within 15 days of the meeting in which the
Auditor is appointed.

APPOINTMENT OF As per Section 139(5), in the case of a Government company or any
SUBSEQUENT other company owned or controlled, directly or indirectly, by the
AUDITORS IN Central Government, or by any State Government or Governments, or
CASE OF partly by the Central Government and partly by one or more State
GOVERNMENT
COMPANIES:
Governments, the Comptroller and Auditor-General of India shall, in
respect of a financial year, appoint an auditor duly qualified to be
appointed as an auditor of companies under this Act, within a period of
180 days from the commencement of the financial year, who shall hold
office till the conclusion of the annual general meeting.
FILLING OF A As per Section 139(8), any casual vacancy in the office of an auditor
CASUAL shall-
VACANCY
COMPANIES OTHER THAN GOVERNMENT COMPANY:
(i) In the case of a company other than a company whose accounts are
subject to audit by an auditor appointed by the Comptroller and
Auditor-General of India, be filled by the Board of Directors within
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 meeting convened 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 India within 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
Directors shall fill the vacancy within next thirty day.
CASUAL As per section 140 (2) the auditor who has resigned from the company
VACANCY BY shall file within a period of thirty days from the date of resignation, a
RESIGNATION: 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.
In case of failure the auditor shall be punishable with fine which shall
not be less than fifty thousand rupees but which may extend to five
lakh rupees as per section 140 (3).
OTHER 1. A retiring auditor may be re-appointed at an annual general

IMPORTANT meeting, if-
PROVISIONS (a) he is not disqualified for re-appointment;
REGARDING
(b) he has not given the company a notice in writing of his
APPOINTMENT OF
unwillingness to be re-appointed; and
AUDITORS (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. Where at any annual general meeting, no auditor is appointed or re-

appointed, the existing auditor shall continue to be the auditor of the
company
ROTATION OF AUDITORS
Applicability of section 139(2) Rotation of Auditor: (Dec 2014) As per 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 twenty 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.
As per Section 139(2) , No listed company or a company belonging to such class or classes
of companies as mentioned above, shall appoint or re-appoint-
(a) an individual as auditor for more than one term of five consecutive years; and
(b) an audit firm as auditor for more than two terms of five consecutive years: Provided
that -
(i) an individual auditor who has completed his term under clause (a) shall not be eligible
for re-appointment as auditor in the same company for five years from the completion of
his term;
(ii) an audit firm which has completed its term under clause (b), shall not be eligible for
re-appointment as auditor in the same company for five years from the completion of such
term.
The following points merit consideration in this regard-

1. As on the date of appointment, no audit firm having a common partner or partners to
the other audit firm, whose tenure has expired in a company immediately preceding the
financial year, shall be appointed as auditor of the same company for a period of five
years:
2. Every company, existing on or before the commencement of this Act which is required
to comply with provisions of this sub-section, shall comply with the requirements of this
sub-section within three years from the date of commencement of this Act:
3. It has also been provided that right of the company to remove an auditor or the right of
the auditor to resign from such office of the company shall not be prejudiced.
4 Subject to the provisions of this Act, members of a company may resolve to provide that-
(a) In the audit firm appointed by it, the auditing partner and his team shall be rotated at
such intervals as may be resolved by members; or
(b) The audit shall be conducted by more than one auditor.

5. The Central Government may, by rules, prescribe the manner in which the companies
shall rotate their auditors.
Manner of Rotation of Auditors by the Companies on Expiry of their Term:

Rule 6 of the Companies (Audit and Auditors) Rules, 2014 prescribes the manner of
rotation of auditors on expiry of their term which is given below:
(1) The Audit Committee shall recommend to the Board, the name of an individual auditor
or of an audit firm who may replace the incumbent auditor on expiry of the term of such
incumbent.
(2) Where a company is required to constitute an Audit Committee, the Board shall
consider the recommendation of such committee, and in other cases, the Board shall itself
consider the matter of rotation of auditors and make its recommendation for appointment
of the next auditor by the members in annual general meeting.
(3) For the purpose of the rotation of auditors-

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

(a) a break in the term for a continuous period of five years shall be considered as
fulfilling the requirement of rotation;
(b) if a partner, who is in charge of an audit firm and also certifies the financial
statements of the company, retires from the said firm and joins another firm of chartered
accountants, such other firm shall also be ineligible to be appointed for a period of five
years
(4) Where a company has appointed two or more individuals or firms or a combination
thereof as joint auditors, the company may follow the rotation of auditors in such a
manner that both or all of the joint auditors, as the case may be, do not complete their
term in the same year.
AUDITOR’S As per section 142 of the act the remuneration of the auditor of a
REMUNERATION 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 According to Section 140 (1) the auditor appointed under section 139
AUDITOR BEFORE may be removed from his office before the expiry of his term only by a
EXPIRY OF TERM: 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 be made in Form ADT-2 and shall be accompanied with fees as
provided for this purpose under the Companies (Registration Offices
and Fees) Rules, 2014.
(2) The application shall be made to the Central Government within

thirty days of the resolution passed by the Board.
(3) The company shall hold the general meeting within sixty days of
receipt of approval of the Central Government for passing the special
resolution. It is important to note that before taking any action for
removal before expiry of terms, the auditor concerned shall be given a
reasonable opportunity of being heard.
APPOINTMENT OF Section 140 lays down procedure to appoint an auditor other than
AUDITOR OTHER retiring auditor who was removed:
THAN RETIRING
AUDITOR: 1. Special notice shall be required for a resolution at an annual
general meeting appointing as auditor a person other than a retiring
auditor, or providing expressly that a retiring auditor shall not be re-
appointed, except where the retiring auditor has completed a
consecutive tenure of five years or as the case may be, ten years, as
provided under sub-section (2) of section 139.
2. On receipt of notice of such a resolution, the company shall

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

makes with respect thereto representation in writing to the company
(not exceeding a reasonable length) and requests its notification to
members of the company, the company shall, unless the
representation is received by it too late for it to do so,-
(a) in any notice of the resolution given to members of the company,

state the fact of the representation having been made; and
(b) Send a copy of the representation to every member of the

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

copy thereof shall be field with the Registrar.

DUTY OF AUDITOR It is the duty of auditor to inquire into the following matters:
TO INQUIRE ON
CERTAIN MATTERS (a) Whether loans and advances made by the company on the basis of
security have been properly secured and whether the terms on which
they have been made are prejudicial to the interests of the company
or its members;
(b) Whether transactions of the company which are represented

merely by book entries are 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 advances made by the company have been
shown as deposits;
(e) Whether personal expenses have been charged to revenue account;
(f) Where it is stated in the books and documents of the company that
any shares have been allotted for cash, whether cash has actually
been received in respect of such allotment, and if no cash has
actually been so received, whether the position as stated in the
account books and the balance sheet is correct, regular and not
misleading.
DUTY TO AUDIT As per sub section 3 of section 143, the auditor‟s report shall also
REPORT (CARO state –
2003)
(a) Whether he has sought and obtained all the information and
explanations which to the best of his knowledge and belief were
necessary for the purpose of his audit and if not, the details thereof
and the effect of such information on the financial statements;
(b) Whether, in his opinion, proper books of account as required by

law have been kept by the company so far as appears from his
examination of those books and proper returns adequate for the
purposes of his audit have been received from branches not visited by
him;
(c) Whether the report on the accounts of any branch office of the
company audited under sub-section (8) by a person other than the
company‟s auditors has been sent to him under the proviso to that
sub-section and the manner in which he has dealt with it in
preparing his report;
(d) Whether the company‟s balance sheet and profit and loss account
dealt with in the report are in agreement with the books of account
and returns;
(e) Whether, in his opinion, the financial statements comply with the
accounting standards;

(f) The observations or comments of the auditors on financial
transactions or matters which have any adverse effect on the
functioning of the company;
(g) Whether any direct is disqualified from being appointed as a

director under sub-section (2) of the section 164;
(h) Any qualification, reservation or adverse remark relating to the

maintenance of accounts and other matters connected therewith;
(i) Whether the company has adequate internal financial controls

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

Companies (Audit and Auditors) Rules, 2014 prescribes the other
matters to be included in auditors report. The auditor‟s report shall
also include their views and comments on the following matters,
namely:-
(i) Whether the company has disclosed the impact, if any, of

pending litigations on its financial position in its financial statement;
(ii) Whether the company has made provision, as required under any
law or accounting standards, for material foreseeable losses, if any,
on long term contracts including derivative contracts;
(iii) Whether there has been any delay in transferring amounts,

required to be transferred, to the Investor Education and Protection
Fund by the company.
DUTY TO REPORT  If an auditor of a company, in the course of the performance of his

ON FRAUDS duties as auditor, has reason to believe that an offence involving
fraud is being or has been committed against the company by
(June 2015)
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 regarded as having been contravened by reason of his reporting
the matter above if it is done in good faith. It is very important to
note that the provision of this rule shall also apply, mutatis
mutandis, to a cost auditor and a secretarial auditor during the
performance of his duties under section 148 and section 204
respectively. If any auditor, cost accountant or company secretary
in practice do not comply with the provisions of sub-section (12)
of section 143, he shall be punishable with fine which shall not be
less than one lakh rupees but which may extend to twenty-five
lakh rupees)
 In case of a fraud involving lesser than the amount of Rs. 1 Crore,

the auditor shall report the matter to Audit Committee constituted
under Section 177 or to the Board immediately but not later than
2 days of his knowledge of the fraud and he shall report the
matter specifying the following:
o Nature of Fraud with description]
o Approximate Amount involved
o Parties involved
 The following details of each of the fraud reporting to the Audit

Committee or the Board shall be disclosed in the Board‟s Report:
o Nature of Fraud with description
o Approximate Amount involved
o Parties involved, remedial action not taken
o Remedial actions taken
 The provision of this Rule shall also apply mutatis mutandis to a

Cost auditor and a Secretarial Auditor during the performance of
his duties under section 148 & 204 respectively.

SIGNING OF Section 145 of the Companies Act 2013, provides that the person
AUDIT REPORT appointed as an auditor of the company shall sign 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, which have any adverse effect on
the functioning of the company mentioned in the auditor‟s report
shall be read before the company in general meeting and shall be
open to inspection by any member of the company.
AUDITOR TO Section 146 of the Companies Act 2013, provides that all notices of,
ATEND AGM and other communications relating to, any general meeting shall be
forwarded to the auditor of the company, and the auditor shall,
unless otherwise exempted by the company, attend either by himself
or through his authorised representative, who shall also be qualified
to be an auditor, any general meeting and shall have right to be
heard at such meeting on any part of the business which concerns
him as the auditor.
PENALTY ON Section 147 provides for punishment for contravention of the

AUDITORS provisions of sections 139 to 146. These penalty provisions are as
under.
• If a company contravenes any of the provisions of sections 139 to
146 it shall be liable to pay minimum fine of Rs. 25,000/- which may
extend to Rs. five lakh. Further, every officer who is in default shall
be punishable with imprisonment upto one year and minimum fine of
Rs. 10,000/- which may extend to Rs. one lakh or with both.
• If an auditor of a company contravenes any of the provisions of

sections 139, 143 144 or 145, the auditor shall be punishable with

minimum fine of Rs. 25,000/- which may extend to Rs. five lakh.
• If it is found that the auditor has contravened the provisions of

sections 139, 143 144 or 145, knowingly or willfully with the
intention to deceive the company, its share holders, creditors or tax
authorities, he shall be punishable with imprisonment for a term
upto one year and with a minimum fine of Rs. one lakh which may
extend upto Rs. 25 lakh.
• If any auditor contravened any of the provisions of sections 139,

143 144 or 145, he shall be liable to-
(b) refund the remuneration received by him to the company and
(c) pay for damages to the company, statutory bodies/authorities or
to any other persons for loss arising out of incorrect or misleading
statements of particulars made in his audit report.
• 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.
• 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.
PENALTY FOR Any person who is found guilty of fraud involving an amount of at least
FRAUD U/S 447 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 mis-statement, but not more than 3 times the
amount involved.
If the fraud in question involves public interest, the term of

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

BRANCH OFFICE (1) Every company shall prepare and keep at its registered office
ACCOUNTS 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 referred in (1).
Further, sub-section (8) of section 143 of the Companies Act, 2013,

prescribes the duties and powers of the company‟s auditor with
reference to the audit of the branch and the branch auditor. Where a
company has a branch office, the accounts of that office shall be
audited either by the auditor appointed for the company (herein
referred to as the company's auditor) under this Act or by any other
person qualified for appointment as an auditor of the company under
this Act and appointed as such under section 139, or where the
branch office is situated in a country outside India, the accounts of
the branch office shall be audited either by the company's auditor or
by an accountant or by any other person duly qualified to act as an
auditor of the accounts of the branch office in accordance with the
laws of that country and the duties and powers of the company' s
auditor with reference to the audit of the branch and the branch
auditor, if any, shall be such as may be prescribed:
Provided that the branch auditor shall prepare a report on the

accounts of the branch examined by him and send it to the auditor of
the company who shall deal with it in his report in such manner as
he considers necessary.
Further as per rule 12 of the Companies (Audit and Auditors) Rules,

2014, the branch auditor shall submit his report to the company‟s
auditor and reporting of fraud by the auditor shall also extend to
such branch auditor to the extent it relates to the concerned branch.
Using the Work of another Auditor”: When the accounts of the

branch are audited by a person other than the company‟s auditor,
there is need for a clear understanding of the role of such auditor and
the company‟s auditor in relation to the audit of the accounts of the
branch and the audit of the company as a whole; also, there is great
necessity for a proper rapport between these two auditors for the
purpose of an effective audit. In recognition of these needs, the
Council of the Institute of Chartered Accountants of India has dealt
with these issues in SA 600, “Using the Work of another Auditor”. It
makes clear that in certain situations, the statute governing the
entity may confer a right on the principal auditor to visit a
component and examine the books of account and other records of
the said component, if he thinks it necessary to do so. Where another
auditor has been appointed for the component, the principal auditor
would normally be entitled to rely upon the work of such auditor
unless there are special circumstances to make it essential for him to
visit the component and/or to examine the books of account and
other records of the said component. Further, it requires that the
principal auditor should perform procedures to obtain sufficient
appropriate audit evidence, that the work of the other auditor is
adequate for the principal auditor's purposes, in the context of the
specific assignment.
When using the work of another auditor, the principal auditor should
ordinarily perform the following procedures:
(a) Advise the other auditor of the use that is to be made of the other
auditor's work and report and make sufficient arrangements for co-
ordination of their efforts at the planning stage of the audit. The
principal auditor would inform the other auditor of matters such as
areas requiring special consideration, procedures for the
identification of inter-component transactions that may require
disclosure and the time-table for completion of audit; and
(b) Advise the other auditor of the significant accounting, auditing

and reporting requirements and obtain representation as to
compliance with them.
The principal auditor might discuss with the other auditor the audit
procedures applied or review a written summary of the other
auditor‟s procedures and findings which may be in the form of a
completed questionnaire or check-list. The principal auditor may
also wish to visit the other auditor. The nature, timing and extent of
procedures will depend on the circumstances of the engagement and
the principal auditor's knowledge of the Professional competence of
the other auditor. This knowledge may have been enhanced from the
review of the previous audit work of the other auditor.
COST AUDIT
CONCEPT It is an audit process for verifying the cost of manufacture or
production of any article, on the basis of accounts as regards
utilisation of material or labour or other items of costs, maintained by
the company.
LEGAL PROVISIONS Cost Audit is covered by Section 148 of the Companies Act, 2013.
The audit conducted under this section shall be in addition to the
audit conducted under section 143.

As per the section 148 the Central Government may by order specify
audit of items of cost in respect of certain companies.
Further, the Central Government may, by order, in respect of such

class of companies engaged in the production of such goods or
providing such services as may be prescribed, direct that particulars
relating to the utilisation of material or labour or to other items of
cost as may be prescribed shall also be included in the books of
account kept by that class of companies:
Provided that the Central Government shall, before issuing such

order in respect of any class of companies regulated under a special
Act, consult the regulatory body constituted or established under
such special Act.
If the Central Government is of the opinion, that it is necessary to do

so, it may, by order, direct that the audit of cost records of class of
companies, which are covered under sub section (1) and which have
a net worth of such amount as may be prescribed or a turnover of
such amount as may be prescribed, shall be conducted in the
manner specified in the order.
WHO CAN BE COST The audit shall be conducted by a Cost Accountant in Practice who
AUDITOR 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 company shall be appointed for conducting the audit of cost
records: (Statutory Auditor & Cost Auditor cannot be same person)
Provided further that the auditor conducting the cost audit shall
comply with the cost auditing standards ("cost auditing standards"
mean such standards as are issued by the Institute of Cost and
Works Accountants of India, constituted under the Cost and Works
Accountants Act, 1959, with the approval of the Central
Government).
APPOINTMENT OF As per rule 14 of the Companies (Audit and Auditors) Rules, 2014
COST AUDITOR
(a) in the case of companies which are required to constitute an
audit committee-
(i) the Board shall appoint an individual, who is a cost accountant in
practice, or a firm of cost accountants in practice, as cost auditor on
the recommendations of the Audit committee, which shall also
recommend remuneration for such cost auditor;
(ii) the remuneration recommended by the Audit Committee under (i)

shall be considered and approved by the Board of Directors and
ratified subsequently by the shareholders;
(b) in the case of other companies which are not required to

constitute an audit committee, the Board shall appoint an individual
who is a cost accountant in practice or a firm of cost accountants in
practice as cost auditor and the remuneration of such cost auditor
shall be ratified by shareholders subsequently.
QUALIFICATION, The qualifications, disqualifications, rights, duties and obligations

DISQUALIFICATION, applicable to auditors under this Chapter shall, so far as may be
RIGHTS, DUTIES applicable, apply to a cost auditor appointed under this section and it
AND OBLIGATIONS shall be the duty of the company to give all assistance and facilities
OF COST AUDITOR
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 A company shall within 30 days from the date of receipt of a copy of
COST AUDIT the cost audit report prepared (in pursuance of a direction issued by
REPORT 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 of Sec. 138 shall apply only to such class or classes of companies as
Sec. 138 may be prescribed. As per Rule 13 of the Companies Rules, 2014,
following class of companies shall be covered u/s 138:
(Dec 2016) (a) every listed company;
(b) every unlisted public company having-

(i) paid up share capital of fifty crore rupees or more during the
preceding financial year; or
(ii) turnover of two hundred crore rupees or more during the
(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) every private company having-

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

Requirements u/s Internal Auditor.
138 b) The internal Auditor shall conduct the internal audit of the
functions and activities of the company.

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

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

the shareholder.
4.External auditor is not the employee of If internal auditor is an employee of the company.
the company so he has independent He cannot enjoy independence that statutory
status. auditor has.
C & AG Audit 1. In India, government audit is performed by an independent
constitutional authority, i.e. Comptroller and Audit General of India
(C&AG), through the Indian Audit and Accounts Department.
2. The Constitution of India gives a special status to the C&AG and

contains provisions to safeguard his independence.
3. Article 148 of the constitution provides that the C&AG shall be

appointed by the President and can be removed from the office only in
a like manner and on the like grounds as a judge of the Supreme
Court.
4. Article 151 of the Constitution requires that the audit reports of the
C&AG relating to the accounts of the Central/State Government
should be submitted to the President/Governor of the State who shall
cause them to be laid before Parliament/State Legislative.
5. The Comptroller and Audit General‟s (Duties, Power and Conditions

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

General of India
– All the Union and State Government departments and offices
including the Indian Railways and Posts and Telecommunications.
– About 1500 public commercial enterprises controlled by the Union
and State governments, i.e. government companies and corporations.
– Around 400 non-commercial autonomous bodies and authorities
owned or controlled by the Union or the States.
– Over 4400 authorities and bodies substantially financed from Union
or State revenues.
SECRETARIAL Secretarial Audit means correction and verification of secretarial
AUDIT records and compliances to be maintained by the Company. In other
(Section 204) 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 due process. It is essentially a mechanism to monitor
compliance with the requirements of stated laws.
1st Time, the Companies Act, 2013 gives statutory recognitions to the
Secretarial Audit. As per section 204 of the Companies Act, 2013, every
listed company and other class of companies as notified have to annex
a Secretarial Audit Report.
Applicability of Secretarial Audit : The following companies are required

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

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

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

with the Board‟s report of the company. 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 big companies.
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 work among themselves in terms
of audit of identifiable units or specified areas. If due to the nature of
the business of the entity under audit, such a division of work may not
be possible the division of work may be with reference to items of
assets or liabilities or income or expenditure or with reference to
periods of time. The division of work among joint auditors as well as
the areas of work to be covered by all of them should be adequately
documented and preferably communicated to the entity.
Coordination - Where, in the course of his work, a joint auditor comes

across matters which are relevant to the areas of responsibility of other
joint auditors and which deserve their attention, or which require
disclosure or require discussion with, or application of judgement by,
other joint auditors, he should communicate the same to all the other
joint auditors in writing. Thus should be done by the submission of a
report or note prior to the finalisation of the audit.
Relationship among joint auditors - In respect of audit work divided

among the joint auditors, each joint auditor is responsible only for the
work allocated to him, whether or not he has prepared as separate
report on the work performed by him. On the other hand, all the joint
auditors are jointly and severally responsible:
(a) In respect of the audit work which is not divided among the joint
auditors and is carried out by all of them;
(b) In respect of decisions taken by all the joint auditors concerning the
nature, timing or extent of the audit procedures 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 on which there is an agreement
among the joint auditors;
(d) For examining that the financial statements of the entity comply
with the disclosure requirements of the relevant 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 an auditor after the audit report
has been submitted, the other joint auditors would not be responsible
for those matters. 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 issues such as appropriateness of using test
checks or sampling should be decided by each joint auditor in relation
to his 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 prevailing system of internal control relating
to the work allocated to him. Similarly, the nature, timing and extent of
the enquiries to be made in the course of audit as well as the other
audit procedures to be applied are solely the responsibility of each joint
auditor. In the case of audit of a large entity with several branches,
including those required to be audited by branch auditors, the branch
audit reports/returns may be required to be scrutinised by different
joint auditors in accordance with the allocation of work. In such cases,
it is the specific and separate responsibility of each joint auditor to
review the audit reports/returns of the divisions/branches allocated to
him and to ensure that they are properly incorporated into the
accounts of the entity. In respect of the branches which do not fall
within any divisions or zones which are separately assigned to the
various joint auditors, they may 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 the necessity of visiting such
divisions/branches in respect of which the work is allocated to him. A
significant part of the audit work involves obtaining and evaluating
information and explanations from the management. This
responsibility is shared by all the joint auditors unless they agree upon
a specific pattern of distribution of this responsibility. In cases where
specific responsibility of each joint auditor to obtain appropriate
information and explanations from the management in respect of such
divisions/zones/units and to evaluate the information and
explanations so obtained by him.
Each joint auditor is entitled to assume that the other joint auditors
have carried out their part of the audit work in accordance with the
generally accepted audit procedures. It is not necessary for a joint
auditor to review the work performed by other joint auditors or perform
any tests in order to ascertain whether the work has actually been
performed in such a manner. Each joint auditor is entitled to rely upon
the other joint auditors for bringing to 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 are entitled to proceed on the
basis that such financial statements comply with all the legal and
professional requirements regarding the disclosures to be made and
present a true and fair view of the state of affairs and of the working
results of the division/branch concerned, subject to such observations
as may be communicated by the joint auditor concerned.
Reporting Responsibilities - Normally, the joint auditors are able to

arrive at an agreed report. However, where the joint auditors are in
disagreement with regard to any matters to be covered by the report,
each one of them should express his own opinion through a separate
report. A joint auditor is not bound by the view of the majority of the
joint auditors regarding matters to be covered in the report and should
express his opinion in a separate report in case of a disagreement. For
the purpose of computation of the number of company audits held by
an auditor pursuant to the ceiling rule introduced in the Companies
Act, 1956 each joint auditor ship in a company will be counted as one
unit.

CARO, 2016
Short title, (1) This Order may be called the Companies (Auditor’s Report) Order,
application and 2016.
commencement (2) It shall apply to every company including a foreign company as defined
in clause (42) of section 2 of the Companies Act, 2013 (18 of 2013)
[hereinafter referred to as the Companies Act], except–
(i) a banking company as defined in clause (c) of section 5 of the Banking
Regulation Act, 1949 (10 of 1949);
(ii) an insurance company as defined under the Insurance Act,1938 (4 of
1938);
(iii) a company licensed to operate under section 8 of the Companies Act;
(iv) a One Person Company as defined under clause (62) of section 2 of the
Companies Act and a small company as defined under clause (85) of
section 2 of the Companies Act; and
(v) a private limited company, not being a subsidiary or holding company
of a public company, having a paid up capital and reserves and surplus
not more than rupees one crore as on the balance sheet date and which
does not have total borrowings exceeding rupees one crore from any bank
or financial institution at any point of time during the financial year and
which does not have a total revenue as disclosed in Scheduled III to the
Companies Act, 2013 (including revenue from discontinuing operations)
exceeding rupees ten crore during the financial year as per the financial
statements.
Auditor’s report Every report made by the auditor under section 143 of the Companies Act,
to contain 2013 on the accounts of every company audited by him, to which this
matters Order applies, for the financial years commencing on or after 1st April,
specified in 2015, shall in addition, contain the matters specified in paragraphs 3 and
paragraphs 3 4, as may be applicable:
and 4 Provided the Order shall not apply to the auditor‟s report on consolidated
financial statements.
Matters to be The auditor‟s report on the accounts of a company to which this Order
included in the applies shall include a statement on the following matters, namely:-
auditor’s report (i) (a) whether the company is maintaining proper records showing full
particulars, including quantitative details and situation of fixed assets;
(b) whether these fixed assets have been physically verified by the
management at reasonable intervals; whether any material discrepancies
were noticed on such verification and if so, whether the same have been
properly dealt with in the books of account;
(c) whether the title deeds of immovable properties are held in the name of
the company. If not, provide the details thereof;
(ii) whether physical verification of inventory has been conducted at
reasonable intervals by the management and whether any material
discrepancies were noticed and if so, whether they have been properly
dealt with in the books of account;
(iii) whether the company has granted any loans, secured or unsecured to
companies, firms, Limited Liability Partnerships or other parties covered in
the register maintained under section 189 of the Companies Act, 2013. If
so,
(a) whether the terms and conditions of the grant of such loans are not
prejudicial to the company‟s interest;
(b) whether the schedule of repayment of principal and payment of interest
has been stipulated and whether the repayments or receipts are regular;
(c) if the amount is overdue, state the total amount overdue for more than
ninety days, and whether reasonable steps have been taken by the
company for recovery of the principal and interest;
(iv) in respect of loans, investments, guarantees, and security whether
provisions of section 185 and 186 of the Companies Act, 2013 have been
complied with. If not, provide the details thereof.
(v) in case, the company has accepted deposits, whether the directives
issued by the Reserve Bank of India and the provisions of sections 73 to 76
or any other relevant provisions of the Companies Act, 2013 and the rules
framed thereunder, where applicable, have been complied with? If not, the
nature of such contraventions be stated; If an order has been passed by
Company Law Board or National Company Law Tribunal or Reserve Bank
of India or any court or any other tribunal, whether the same has been
complied with or not?
(vi) whether maintenance of cost records has been specified by the Central
Government under sub-section (1) of section 148 of the Companies Act,
2013 and whether such accounts and records have been so made and
maintained.
(vii) (a) whether the company is regular in depositing undisputed statutory
dues including provident fund, employees‟ state insurance, income-tax,
sales-tax, service tax, duty of customs, duty of excise, value added tax,
cess and any other statutory dues to the appropriate authorities and if not,
the extent of the arrears of outstanding statutory dues as on the last day
of the financial year concerned for a period of more than six months from
the date they became payable, shall be indicated;
(b) where dues of income tax or sales tax or service tax or duty of customs
or duty of excise or value added tax have not been deposited on account of
any dispute, then the amounts involved and the forum where dispute is
pending shall be mentioned. (A mere representation to the concerned
Department shall not be treated as a dispute).
(viii) whether the company has defaulted in repayment of loans or
borrowing to a financial institution, bank, Government or dues to
debenture holders? If yes, the period and the amount of default to be
reported (in case of defaults to banks, financial institutions, and
Government, lender wise details to be provided).
(ix) whether moneys raised by way of initial public offer or further public
offer (including debt instruments) and term loans were applied for the
purposes for which those are raised. If not, the details together with delays
or default and subsequent rectification, if any, as may be applicable, be
reported;
(x) whether any fraud by the company or any fraud on the Company by its
officers or employees has been noticed or reported during the year; If yes,
the nature and the amount involved is to be indicated;
(xi) whether managerial remuneration has been paid or provided in
accordance with the requisite approvals mandated by the provisions of
section 197 read with Schedule V to the Companies Act? If not, state the
amount involved and steps taken by the company for securing refund of
the same;
(xii) whether the Nidhi Company has complied with the Net Owned Funds
to Deposits in the ratio of 1: 20 to meet out the liability and whether the
Nidhi Company is maintaining ten per cent unencumbered term deposits
as specified in the Nidhi Rules, 2014 to meet out the liability;
(xiii) whether all transactions with the related parties are in compliance
with sections 177 and 188 where applicable and the details have been
disclosed in the Financial Statements etc., as required by the applicable
accounting standards;
(xiv) whether the company has made any preferential allotment or private
placement of shares or fully or partly convertible debentures during the
year under review and if so, as to whether the requirement of section 42 of
the Companies Act, 2013 have been complied with and the amount raised
have been used for the purposes for which the funds were raised. If not,
provide the details in respect of the amount involved and nature of non-
compliance;
(xv) whether the company has entered into any non-cash transactions with
directors or persons connected with him and if so, whether the provisions
of section 192 have been complied with;
(xvi) whether the company is required to be registered under section 45-IA

of the Reserve Bank of India Act, 1934 and if so, whether the registration
has been obtained.
Reasons to be (1) Where, in the auditor‟s report, the answer to any of the questions
stated for referred to in paragraph 3 is unfavourable or qualified, the auditor‟s report
unfavourable or shall also state the basis for such unfavourable or qualified answer, as the
qualified case may be.
answers (2) Where the auditor is unable to express any opinion on any specified
matter, his report shall indicate such fact together with the reasons as to
why it is not possible for him to give his opinion on the same.

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

INTERNAL AUDIT Internal Audit is management tool performed by the employees of the
organisation or 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 reporting the 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 control mechanisms.
4. A Risk Management Tool:

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

Internal Audit 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.
 Risk management. The internal audit function may assist the

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

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

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

retirement and disposal of assets.
(4) To confirm that liabilities have been incurred only for the
legitimate activities of the organisation.
(5) To analyse and improve the system of internal check; in particular

to see (i) that it is working; (ii) that it is sound; and (iii) that it is
economical.
(6) To facilitate the prevention and detection of frauds.
(7) To examine the protection afforded to assets and the uses to

which they are put.
(8) To make special investigations for management.
(9) To provide a channel whereby new ideas can be brought to the

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

INTERNAL AUDIT 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

financial and operational data by conducting appraisal and review
from an independent angle.
6. Internal Audit is an integral part of “Management by System”.
7. Internal Audit can break through the power ego and personality
factors and possible conflicts of interest within the organization.
8. It ensures compliance of accounting procedures and accounting

policies.
9. Internal Auditor can be of valuable assistance to management in

acquiring new business, in promoting new products and in
launching new projects for expansion or diversification of business.
LIMITATIONS OF 1. The installation and operation of internal audit involve extra

INTERNAL AUDIT expenditure which cannot be met by many small 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 managers cannot accept the finding of internal
audit and take consequent actions. This defect arises mainly from
the deficiencies of the internal auditing staff, because of their
advisory staff position, unfamiliarity with operating aspects of work
and accounting bias, internal auditors fail to be of any real help to
the manager in many cases.
4. Internal audits are employed by the organization and this can be

impair their independence and objectivity and ability to report
fraud/error to senior management because of perceived threats to
their continued employment within the company to ensure the
transparency. Best practice indicates that the internal audit should
report both to management and those charged with governance
(audit committee).
5. Internal auditors are not required to be professionally qualified

and so there may be limitations in their knowledge and technical
expertise.
FUNCTIONS & Major roles and responsibilities of internal auditor are summarized
RESPONSIBILITIES below:
OF INTERNAL 1. To work with board and management to ensure that a system is in
AUDITOR place which ensures that all major risks are identified and analyzed.
Evaluate and provide reasonable assurance that risk management,
control, and governance systems are functioning as intended and will
enable the organisation‟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 committee and provide
recommendations for improving the organisation‟s operations, in
terms of both efficient and effective performance.
4. Evaluation of information security and associated risk exposures.

Evaluation of the organisation‟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 and external resources as
appropriate. Engage in continuous education and staff development.
To report to both the audit committee and management on the
policies, programmed and activities of the department.
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 the other‟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 and recommendations and monitor
management‟s response and implementation.
10. To review and report on the accuracy, timeliness and relevance of

the financial and other information that is provided for management.
ORGANISATION Where there is an internal audit function, its status is derived from
STRUCTION OF the needs of the organisation and should be set at the top of the
INTERNAL AUDIT organisation, i.e. by the board and the audit committee. There is no
FUNCTION single model for internal audit and each organisation will determine
what is appropriate to suit its requirements. In general, internal
audit could, if agreed by the audit committee, seek assurance that:
– The organisation has a formal governance process which is

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

controlled to an acceptable level as determined by the board.
In addition, internal audit can be used to facilitate the strengthening
of the governance and risk framework within the organisation.
The audit committee should consider the role that has been set for
internal audit within the organisation‟s overall assurance 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 has been set for internal audit
and question whether its scope, authority and resources are
adequate and consistent with the risks that the organisation faces
and the effectiveness of the internal controls that are in place to
address those risks.
ROLE OF The Internal auditor should examine and contribute to the ongoing
INTERNAL AUDIT effectiveness of the internal control system through evaluation and
IN INTERNAL recommendations. However, the internal auditor is not vested with
CONTROL management‟s primary responsibility for designing, implementing,
maintaining and documenting internal control. Internal audit
functions add value to an organization‟s internal control system by
bringing a systematic, disciplined approach to the evaluation 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 corporate governance. The
role of the internal auditor encompasses:
– Evaluation of the efficiency and effectiveness of controls
– Recommending new controls where needed or discontinuing
unnecessary controls
– Using control frameworks
– Developing Control self-assessment
ROLE OF Internal auditing professional standards require the function to

INTERNAL AUDIT monitor and evaluate the effectiveness of the organization‟s Risk
IN RISK management processes. Risk management relates to how an
MANAGEMENT organization sets objectives, then identifies, analyzes, and responds
to those risks that could potentially impact its ability to realize its
objectives.
Under the COSO Enterprise Risk Management (ERM) Framework,

risks fall under strategic, operational, financial reporting, and
legal/regulatory categories. Management performs risk assessment
activities as part of the ordinary course 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-Oxley regulations also require
extensive risk assessment of financial reporting processes. Corporate
legal counsel often prepares comprehensive assessments of the
current and potential litigation a company faces. Internal auditors
may evaluate each of these activities, or focus on the processes used
by management to report and monitor the risks identified. For
example, internal auditors can advise management regarding the
reporting of forward-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. As a member of senior
management, the Chief Audit Executive (CAE) may participate in
status updates on these major initiatives. This places the CAE in the
position to report on many of the major risks the organization faces
to the Audit Committee, or ensure management‟s reporting is
effective for that purpose.
ROLE OF Internal auditing activity as it relates to corporate governance is

INTERNAL AUDIT generally informal, accomplished primarily through participation in
IN CORPORATE meetings and discussions with members of the Board of Directors.
GOVERNANCE Corporate governance is 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 of the organizations
objectives. The internal auditor is often considered one of the “four
pillars” of corporate governance, 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 of the Board of Directors
(or equivalent) perform its responsibilities effectively. This may
include reporting critical internal control problems, informing the
Committee privately on the capabilities of key managers, suggesting
questions or topics for the Audit Committee‟s meeting agendas, and
coordinating carefully with the external auditor and management to
ensure the Committee receives effective information.
PROPRIETY AUDIT 1. Kohler has defined propriety as that which meets the test of public
interest, commonly accepted customs and standard of conduct and
particularly as applied to professional performance, requirements of
Government regulations and professional codes.
2. Propriety Audit carry out to check, mean whether the transactions

have been done in conformity with established rules, principles and
established standard.
3. The Propriety Audit means the verification of following main

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

companies, Government Department because public money and
public interest are involved therein.
5. It is an essential function of audit to bring to light not only cases
of clear irregularity but also every matter which in its judgement
appears to involve improper expenditure or waste of public money or
stores, even though the accounts themselves may be insufficient to
see that sundry rules or orders of competent authority have been
observed.
6. It is of equal importance to ensure that the broad principles of

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

AUDIT adherence to regulatory guidelines.
2. What, precisely, is examined in a compliance audit will vary

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

basis.
Control Meaning  Overall attitude

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

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

&access to assets are some functions regarding assets, which
should be segregated.

2. (a) Devising and maintaining I. C. System is responsibility of
Managem management.
ent
Supervisi (b) Management should review it periodically to ensure
on effectiveness.
(c) Management can establish a separate department called

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

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

experienced.
.
Inherent Meaning: Limitations which are inseparable from system of internal
Limitations of control.
Internal Control Effect: - due to limitations of I.C. System,
- 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

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

authority 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
management not be detected by control system.
 For example manipulation in estimates
appearing in financial statements.
6. No control for The fact that most controls do not tend to be

unusual transaction directed at transactions of unusual nature.
7. Inadequate The possibility that procedures may become
procedure inadequate due to changes in conditions and
compliance with procedures may deteriorate.
Accounting and Internal Control so far as Financial and Accounting aspects are
Financial concerned aims at:
Controls  Breaking the chain of the work in a manner so that no single person
can handle a transaction from the beginning to the end.
 Segregation of accounting and custodial functions.
 Securing proper documentation at each stage.
 Safeguarding of assets.
 Making errors and frauds difficult.
 Evolving standardized records.
 Preparation of periodical accounting and financial report.
 Employment of persons of quality.
 Formulating a cut-off procedure to separate transactions of two
consecutive years.
 Building up a system to locate the deviations and departures from
the prescribed procedures and to detect frauds and errors
automatically without much loss of time
 Fixing responsibility for the work and the responsibility for
deviations.
REVIEW OF INTERNAL CONTROL BY AUDITOR

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

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

(viii) The extent and the depth of the examination that he needs to carry
out in the different areas of accounting;
(ix) What would be appropriate audit technique and the audit procedure
in the given circumstances?
(x) What are the areas where control is weak and where it is excessive;
and
(xi) Whether some worthwhile suggestions can be given to improve the

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

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

RECORD 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.
2) CHECK LIST This is a series of instructions and/or questions which a member of the
auditing staff must follow and/or answer.
 When he completes instruction, he initials the space against the

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

 The complete check list is studied by the Principal/Manager/Senior
to ascertain existence of internal control and evaluate its
implementation and efficiency.
3) INTERNAL  This is a comprehensive series of questions concerning internal

CONTROL control. This is the most widely used form for collecting information
QUESTIONNAIRE 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.
4. FLOW CHART  It is a graphic presentation of each part of the company‟s system of

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

Objective  To prevent fraud/ error, &
 Early detection of fraud and error
Relation with I.C. Internal Check is part of overall Internal Control System & operates as a
System built in device.
General (1) No single person should have an independent control over any
considerations in important aspect of the business. All dealings and acts of every employee
framing a system should, in the ordinary course, come under the review of another.
of internal check
(2) The duties of members of the staff should be changed from time to
time without any previous notice so that the same officer or subordinate
does not, without a break, perform the same function for a considerable
length of time.
(3) Every member of the staff should be encouraged to go on leave at

least once in a year. Experience has shown that frauds successfully
concealed by employees are often unearthed when they are on leave.
(4) Persons having physical custody of assets must not be permitted to

have access to the books of account.
(5) There should exist an accounting control in respect of each important

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

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

between budgeted & actual figure is significant, it should be enquired
into.
(8) For inventory-taking, at the close of the year, trading activities

should, if possible, be suspended. The task of inventory-taking, and
evaluation should be done by staff belonging to several sections of
the organisation. It may prove dangerous to depend exclusively on the
inventory section staff for these tasks, since they may be tempted to
under or over-state the inventory.
(9) The financial and administrative powers should be distributed very

judiciously among different officers and the manner in which these are
actually exercised should be reviewed periodically.
(10) Procedures should be laid down for periodical verification and

testing of different sections of accounting records to ensure that they are
accurate.
AUDIT IN DEPTH Audit in depth as the name implies means checking a transaction
extensively from origin to end. It is an audit technique which is used to
evaluate the effectiveness of internal control system in an organisation.
It is used in investigation exercises whereby the objective is to thorough
examination of transactions or records. In this technique 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 transaction etc. It is
also called vertical vouching as against horizontal vouching.
For example, a purchase of goods may commence when a predetermined

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

are pre-printed, pre-numbered and authorized. See whether the
purchase requisition have been authorized by competent official.
2. Issue of Request for quotation: Check whether request for quotatio0n

have been issued or not. If not find the reasons of not issuing request for
quotation. Check whether the requests for quotation have been issued to
approved vendors.
3. Issue of Purchase order: Check whether purchase order have been

issued or not. If purchase order have been issued check whether it has
been issued from the competent authority. Check whether the purchase
order have been issued to the approved vendor who has given lowest
quote. If not check the reasons. Check whether the reasons of issuing
the purchase order to a vendor other than the lowest bidder 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 per specification given in the purchase order. If not
check whether the deviations have been recorded and the
communication has been made to the supplier or not. Check whether
the goods receipt have been properly recorded in store ledger or not.
5. Approval of payment of Supplier Invoice: Check whether the amount

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

or not. Check whether correct expenses code have been debited or not.
Check whether the applicable accounting standard have been complied
with or not.
It should be noted that the above list is not necessarily comprehensive,

nor does its constituent stages inevitably take place in the sequence
suggested.
INTER FIRM 1. It is technique of evaluating the performance, efficiency, costs and
COMPARISON 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.
ii. It helps a concern in knowing its strengths or weaknesses in relation
to others so that remedial measures may be taken.
iii. It ensures an unbiased specialized reporting on particular problems
of the concern.
iv. It develops cost consciousness among members of the industry.
v. It helps Government in effecting price regulation.
vi. It helps to improve the quality of products manufactured and to
reduce the cost of production. It is thus advantageous to the industry as
well as to the society.
4. Limitations of inter-firm comparison

The following are the limitations in the implementation of a scheme of
inter-firm comparison :
i. Top management feels that secrecy will be lost.
ii. Middle management is usually not convinced with the utility of such a
comparison.
iii. In the absence of a suitable Cost Accounting System, the figures
supplied may not be reliable for the purpose of comparison.
INTRA FIRM 1. Intra-firm comparison means comparison among different
COMPARISON units/products/strategic business unit (SBU) of a firm. This comparison
is possible only when uniform costing methods and practices are being
adopted by all units and SBUs.
2. Intra firm comparison helps the management in identifying the

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

1. Such a comparison gives an overall view of the firm as a whole to the
owner or stakeholders and gives a comparative view of different
product/different business of the firm.
2. It helps a SBU in knowing its strengths or weaknesses in relation to
others SBUs.
3. It develops cost consciousness among units of the firm.
SAMPLING IN Sampling is a process of selecting a subset of a population of items for
AUDIT TESTING the purpose of making inferences to the whole population. Accounting
populations usually consist of a large number of items (debtors,
creditors), often totalling millions of rupees, and a detailed examination
of all accounts is not possible. Audit sampling is defined as
“The application of audit procedures to less than 100% of the items
within an account balance or class of transactions to enable the auditor
to obtain and evaluate evidence about some characteristic of the items
selected in order to form or assist in forming a conclusion concerning
the population which makes up the account balance or class of
transactions”
A fundamental element of any audit programme will be the selection of

transactions to be tested as a sample of all available transactions.
Sampling is used in both compliance and substantive testing and is
described in numerous textbooks in auditing.
Need for Audit Sampling

Formalized audit sampling procedures offer innumerable benefits to all
auditors. These include:
1. Developing a consistent approach to audit areas;
2. Providing a framework within which sufficient audit evidence is
obtained;
3. Forcing clarification of audit thinking in determining how the audit
objectives will be met;
4. Minimising the risk of over-auditing; and
5. Facilitating more expeditious review of working papers
STATISTICAL Statistical sampling involves the random selection of a number of items

SAMPLING for inspection and is endorsed by the accountancy 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 professional judgement. While it is
true that statistical sampling uses statistical methods to determine the
sample size and to select and evaluate audit samples, it is the
responsibility of the auditor to consider and specify in advance factors
such as, materiality, the expected error rate or amount, the risk of over-
reliance or the risk of incorrect acceptance, audit risk, inherent risk,
control risk, standard deviation and population size, before the sample
size can be determined.
Statistical sampling allows an auditor‟s judgement to be concentrated on

those areas of the audit where it is most needed. It allows the
quantification of key factors and the risk of errors. This is not to suggest
that statistical sampling methods remove the need for professional
judgement, but rather that they allow elements of the 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 on demonstrable statistical principles.
2. The method provides a means of advance estimation of sample size on

an objective basis. The sample size 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 be validated in terms of how far the sample
projection might deviate from the value that could be obtained by 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 auditors to participate independently in the same
test and for the results to be combined as though accomplished by one
auditor.
5. Objective evaluation of test results is possible. Thus, all auditors

performing this audit would be able to reach the same conclusion about
the numerical extent of error in the population. While the impact of
these errors might be interpreted differently, there can be no question as
to the facts obtained, since the method of determining their frequency in
the population is objective.
APPROACHES Simple Random Sampling

TO STATISTICAL In auditing, this method uses sampling without replacement; that is,
SAMPLING once an item has been selected for testing it is removed from the
population and is not subject to re-selection. An auditor can implement
simple random sampling 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 between each 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 greater than dispersion among clusters. An example of cluster
sampling is the inclusion in the sample of all remittances or cash
disbursements for a particular month. If blocks of homogeneous samples
are selected, the sample will be biased.
Remember, an essential feature of probability sampling methods is that

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

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

REVIEW 1. Whether controls are in place in the process to ensure that
accountability is established as early as possible 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 the requisition and performance
expectations such as service level agreements, contract terms, and
vendor performance.
4. Whether transactions are properly verified before disbursement,

transactions and activities are properly authorized, 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 and state laws and other requirements such
as contract terms and conditions. Procurement records for
authorizations and transactions are maintained in accordance with
established requirements.
7. Whether accounting records are protected from theft, obsolescence, or

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

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

result into unauthorized or unnecessary purchases, improper charges to

department budgets, purchase of goods at excessive costs, use of goods
for personal purposes
ACCOUNTABILITY, In an efficient purchase system, the mechanism of authorization, review,

AUTHORIZATION and approval should exist. All purchases should 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 unnecessary purchases, purchases at
higher rate, misappropriation of funds.
PHYSICAL Once the purchases are done, it is necessary to secure the materials in a
CONTROL OVER safe location. To ensure that the resources are accounted for, it is
ASSETS necessary to periodically verify the inventory and compare the results
with the books.
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, additional costs incurred for replacement of
goods.
REVIEW & Review and reconciliation is a very important part of purchase internal
RECONCILIATION control system. Timely review of supplier‟s invoice, packing slips, and
purchase orders is very necessary to ensure accuracy of the information
for prior payment, 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 department budgets, Disallowances resulting
from costs charged to incorrect accounts/funds, payments made for
items or services not provided.
REVIEW OF Selling and distribution function are one of the most important function
SELLING & for an organisation. The survival of an organisation largely depends on
DISTRIBUTION the effectiveness of selling and distribution function. Management of
POLICY & distribution channels involves efficient channel design, conflict
PROGRAMS management and implementation of sophisticated channel information
systems which will enhance the process of making the products
available to the end consumer in a timely manner.
Review of sales and distribution function is very important from internal

control point of view and it requires a detailed 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 appropriate authority.
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 and implementation 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 possible at 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 transaction
processing (e.g., Discount approval, selection of mode of transportation.
Accounts receivable etc).
REVIEW OF In general parlance, Manufacturing means converting an input (Raw

MANUFACTURING material) into output (finished product) with the use of man, machines,
OPERATIONS material, power etc. Such finished goods may be used for manufacturing
other, more complex products, such as aircraft, household appliances or
automobiles, or sold to wholesalers, who in turn sell 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 on manufacturing process e.g. in buying machinery, raw
material, consumables, paying salary to workers etc. It is very important
to review the manufacturing operations in timely manner so that the
identified in-efficiency may be eliminated controlled on immediate basis.
Objectives of Review of Manufacturing Operations

1. Whether the organization have any manufacturing process
management system.
2. Whether the policies and procedures for production planning well
defined & well documented.
3. Whether the organisation have a quality management system in place.

If so, whether the organisation have 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 maintenance policy.
5. Whether the organization have a written scrap policy.
6. Whether security policies are documented or not.
APPRAISAL OF Management decision making

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

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

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

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

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

audit programme team jobs on the basis of their capability.
members
2. Instructions The audit programme specifies the extent and
for staff 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.
3. Ready It provides ready checklist of all the procedures

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

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

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

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

reporting conclusions chain, to enable the auditor to
express an opinion.

10. Future It serves as a guide for audits to be carried out in
audits succeeding years.
11. Safeguard Audit programme is a record of work done,

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

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

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

initiative may be restricted. It may frustrate talented and
efficient audit staff.
4. False sense Members of the audit team may feel that

of security everything is 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 redudant procedures may be

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

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

of entries to establish the arithmetic accuracy. 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 an act of examining
documentary evidence in order to ascertain the accuracy and
authenticity of the entries in the books of accounts.
According to Dicksee, “Vouching consists of comparing entries in the

books of accounts with documentary evidence in support thereof.”
According to Joseph Lancaster, “it is often thought that vouching

consists of the mere examination of the vouchers or documentary
evidence with the book entries. This is, however, quite wrong, for

vouching comprises such an examination of the ledger entries as will
satisfy the auditor, not only that the entry is supported by the
documentary 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 books of accounts. In short,
vouching means to examine the evidence in support of any
transaction or entry recorded in the books of accounts. Vouching
does not merely see that the entries and transactions are supported
by proper documentary evidence. The auditor should be satisfied that
they are properly maintained, they are supported by all evidence and
they are correctly recorded in the books of accounts.
VOUCHER Any documentary evidence supporting the entries in the records is

termed as a voucher. Any document, which supports the entries in
the books of accounts and establishes the arithmetical accuracy, is
called a voucher.
Examples Of Vouchers
A bill, a receipt, an invoice, goods received note, salaries and wages
sheets, goods inward and outward register, stores records, counterfoil
of a cheque book, counterfoil of pay-in-slip book, bank statement,
bank pass book, delivery challans, agreements, a material requisition
slip, copy of purchase order, minute book, memorandum and articles
of association, partnership deed, trust deed, prospectus etc. are the
examples of vouchers.
OBJECTIVES OF The basic objectives of vouching are as under:

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

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

course of vouching
 The date of the voucher falls within the accounting period;
 The name as recorded and as contained in voucher is same
 Voucher/transactions therein are duly and properly authorized by
the relevant signatory;
 The transaction for which payment have been made or amount
have been received relates to business.
 The transactions being examined belongs to the entity and took
place during the relevant period;
 Whether any alteration has been done in the voucher, if so
whether it has been duly recorded and authorized.
 Whether any control number maintained on voucher or not.
Whether there is any missing number or voucher.
 The transaction is recorded in the proper account and revenue or
expenses is properly allocated to the accounting period.
 All transactions which have actually occurred have been recorded.
 The posting from the voucher of the amount needs to be correctly
taken in the final accounts, disclosed in accordance with
recognized accounting policies and procedures.
VERIFICATION Spicer and Pegler have defined verification as, “it implies an inquiry
into the value, ownership and title, existence and possession and the
presence of any charge on the assets”. Verification is a process by
which an auditor satisfies himself about the accuracy of the assets
and liabilities appearing in the Balance Sheet by inspection of the
documentary evidence available. Verification means proving the truth,
or confirmation of the assets and liabilities 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 generally is 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 of balance sheet.
2. Possession: The auditor has to verify that the assets are in the
possession of the company on the date of 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 of account and there is no
omission of asset or liability.
6. Audit report: Under CARO the auditor has to report whether the
management has conducted physical verification of fixed assets and
stock and the difference, if any, between the physical inventory and
the
inventory as per the book.
7. Event after balance sheet date: The auditor should find out
whether any event after the date of balance sheet 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 disposal of assets.
7. To verify the arithmetic accuracy of the accounts.
8. To ensure that the assets have been recorded properly.
ADVANTAGES OF VERIFICATION
Advantages of verification are as under:-
1. It avoids manipulation of accounts.
2. It guards against improper use of assets.
3. It ensures proper recording and valuation of assets.
4. It exhibits true and fair view of the state of affairs of the company.
TECHNIQUES OF VERIFICATION:
1. Inspection: It means physical inspection of the assets i.e. company
cash in the cash box, physical inventory, inspection of shares
certificates, documents etc.
2. Observation: The auditor may observe or witness the inspection of
assets done by others.
3. Confirmation: It means obtaining written evidence from outside
parties regarding existence of assets.
VERIFICATION OF Points requiring auditor‟s attention for verification are as under:

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

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

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

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

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

VERFICATION difference
Meaning Examination of Examination whether
documentary evidence assets & liabilities are
in support of properly stated in B/s
transactions recorded and to some extent of P

in primary books of & L A/c
A/c‟s
Objective Establish authenticity To inquire and confirm
of transactions the ownership,
valuation, existence and
presentation of assets
and liabilities
Aspects Date of voucher As regards assets –

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

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

by the auditor and retained by him, in connection with the
performance of the audit.
FORM & The form and content of audit documentation should be designed to
CONTENT meet the circumstances of the particular audit. The information
contained in audit documentation constitutes the principal record of
the work that the auditors have performed in accordance with
standards and the conclusions that the auditors have reached. The
quantity, type, and content of audit documentation are a matter of
the auditors‟ professional judgment. The Audit documentation
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 supervise their work.
NEED OF The need for Working papers listed as follows:

WORKING (a) They aid in the planning and performance of the audit;
PAPERS (b) They aid in the supervision and review of the audit work and to
review the quality of work performed, in accordance with AAS 17
“Quality Control for Audit Work”;
(c) They provide evidence of the audit work performed to support the
auditor‟s opinion;
(d) They document clearly and logically the schedule, results of test,
etc.;
(e) The working papers should evidence compliance with technical
standards;
(f) They document that Internal control has been appropriately
studied and evaluated; and
(g) They document that the evidence obtained and procedures
performed afford a reasonable basis for an opinion;
(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 on Peer 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 those charged with governance, as
discussed in AAS 27, “Communication of Audit Matters with those
Charged with Governance.
PERIOD OF The auditor should retain the working papers for a period of time
RETENTION sufficient to meet the needs of his practice and satisfy any pertinent
legal or professional requirements of record retention.
OWNERSHIP & Working papers are the property of the auditor. The auditor may, at
CUSTODY his discretion, make portions of or extracts from his working papers
available to his client.
The auditor should adopt reasonable procedures for custody and

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

step back and read your work objectively. Would it be clear to another
auditor? Working papers should be clear and understandable without
supplementary oral explanations. With the information the working
papers reveal, a reviewer should be able to readily determine their
purpose, the nature and scope of the work done and the preparer‟s
conclusions.

2. Completeness and Accuracy – As a reviewer of documentation, if
you have to ask the audit staff basic questions about the audit, the
documentation probably does not really serve the purpose. Work
papers should 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 to support 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 as practical. Sloppy work papers may
lose their worth as evidence. Crowding and writing between lines
should 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 significance of any weaknesses or
exceptions found.

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

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

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

minutes relevant to the audit.
 A record of the study and the evaluation of the internal controls

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

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

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

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

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

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

audit reports.

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)

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

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)
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)

Auditing Concepts Explained

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Auditing Concepts Explained

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UNIT 1: AUDITING CONCEPTS

DEFINITION OF  Audit is an independent examination,

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

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

 He should not be influenced by client.

Financial  Auditors opinion is on financial statements

 The preparation of financial statements is the

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

 For this it is necessary that:

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

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

Responsibility  The management is responsible for maintaining an

Confidentiality  The auditor should respect the confidentiality of information acquired in

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Plans should be further developed and revised as necessary during the

Compliance procedures are tests designed to obtain reasonable assurance

Substantive procedures are designed to obtain evidence as to the

They are of two types:

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 The charge, if any, on assets are disclosed;

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

 Liabilities are neither undervalued nor overvalued and

Accounting  Accounting policies have been followed consistently.

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

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

Credit negotiation Financiers and Bankers use audited financial

Control over It helps in detection of wastages and losses and

Arbitration It is helpful in settling disputes by arbitration.

Assistance to Government may required audited and certified

Appraisal Audit reviews the existence and operations of

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Scope The scope of investigation The Scope of audit is wide

Nature Requires a detailed study Involves tests checking or

Inherent No inherent limitation Audit suffers from inherent

Evidences It seeks conclusive Audit is mainly concerned

Observance It is analytical in nature Is governed by compliance

Reporting The outcome is reported The outcome is reported to

 The auditors determination of materiality is a matter of professional

 Materiality could be either qualitative or quantitative.

 Auditor should consider materiality while-

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

Auditing standards help the auditor in proper and optimum discharge of

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

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

UNIT 2: TYPES OF COMPANY AUDIT

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QUALIFICATION & DISQUALIFICATION OF AUDITOR (SECTION 141)

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

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

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

OFFICER OR (b) An Officer Or Employee of the company;

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

Provided that the relative may hold security or interest

Provided that the condition of rupees one lakh shall,

Provided further that in the event of acquiring any

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

(iii) has given a GUARANTEE or provided any SECURITY

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

(ii) commercial transactions which are in the ordinary course

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

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

10 | P a g e CA. Amit Talda 9730768982 http://amittalada.webs.com/