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CA: IPCC
Volume I
Coverage as per Study
Material of ICAI
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SYLLABUS
AUDITING AND ASSURANCE
(One Paper- Three hours -100 Marks)
Level of knowledge: Working Knowledge
Objective:
To understand objective and concept of auditing and gain working knowledge of generally
accepted auditing procedures and of techniques and skills needed to apply them in audit and
attestation engagements.
The Basis for the notes has been the Study Material and other guidelines issued by the Institute of
Chartered Accountants of India.
The notes have been updated as per Companies Act, 2013
Students can completely rely on these notes for exam preparation.
For practice purpose they may refer to the suggested, compliers and Revisionary Test Papers issued
by ICAI. Soft copies of all of these are available on website of ICAI. Following link may be helpful for
their download http://www.icai.org/post.html?post_id=10114
Chapter Title Question No. Page No.
Volume I
1 Nature of Auditing 1 - 18 1 - 12
4 Internal Control 38 - 52 26 - 35
5 Vouching 53 - 67 36 - 44
VOLUME II
(2) What are financial statements? Who are the users of financial statements?
Financial Statements
Financial statements is a set of documents which show the result of business operation during a
period, how the result was achieved & position of assets & liabilities on a given date.
They are ordinarily prepared and presented annually.
Financial Statements mainly includes the following:
Profit & Loss Account: It shows the results of the operations of an entity during a period, in
form of profit or loss.
Balance Sheet: It shows the position of assets & liabilities at a given date.
Cash / Fund Flow Statement: It shows the movement of cash/funds during a period.
Other statements and explanatory notes: which ordinarily comprise a summary of significant
accounting policies and other explanatory information.
Users of Financial Statements
(1) Management: To evaluate performances & profitability of business and to make decisions about
business.
(2) Owners: To get informed about the stewardship of management.
(3) Investors: To make decision on investment in a company.
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(4) Credit rating services: To decide about the credit worthiness of entities.
(5) Bankers: To determine financial position & strength of entity.
(6) Lenders / Creditors: To decide whether to lend money or not & to examine degree of safety of
their money.
(7) Government: To levy various taxes and regulate the socio-economic state of affairs.
(8) Financial analysts: To assess the performance of an entity.
(9) Employees: To raise demands for bonus and other performance incentives.
(8) What do you mean by the term Fraud and what are the types in which fraud
occurs ?
As per SA 240 The Auditors Responsibility to Consider Fraud and Error in an Audit of Financial
Statements, Fraud is:
an intentional act by one or more individuals among management, those charged with governance,
employees or third parties,
involving the use of deception
to obtain an unjust or illegal advantage.
Fraud involving one or more members of management or those charged with governance is referred to
as management fraud; fraud involving only employees of the entity is referred to as employee
(9) What do you mean by the term Fraud risk factors? Explain by giving
examples.
Events or conditions that indicate an incentive to commit fraud or provide an opportunity to commit
fraud are known as Fraud risk factors.
Eg: of Fraud risk factors relating to misstatements resulting from Fraudulent Financial Reporting:
Excessive interest by mgt. in maintaining or increasing the entitys stock price
No monitoring of significant controls by mgt. and no timely action on known material
weaknesses
History of non-compliance of laws & regulations
Significant related party transactions which are unusual & unaudited
Eg: of Fraud risk factors relating to misstatements resulting from misappropriation of assets:
Large amounts of cash on hand
Lack of appropriate management (Eg: inadequate monitoring of remote locations).
Lack of an appropriate system of authorization and approval of transactions
Poor physical safeguards over cash, investments, inventory or fixed assets.
(12) What are responsibilities of management & auditor as per SA200 on Overall
objectives of independent auditor and conduct of audit in accordance with
SAs.
Preparation of Financial Statements: The audit of financial statements does not relieve
management or those charged with governance of their responsibilities. They have
responsibility:
1. For preparation and presentation of financial statements as per the applicable financial
reporting framework including the design, implementation and maintenance of relevant
internal control.
2. To provide auditor with:
(1) Statutory / Mandatory Audit: It is an audit required under law. The organizations which
require such audit are:
S.No. Organization Governing Statute
1. Companies Companies Act, 2013
2. Co-operative Societies Co-operative Societies Act, 1912
3. Banking companies Banking Regulation Act, 1949
4. Electricity supply companies Electricity Supply Act, 1948
5. Public and charitable trusts Indian Trusts Act, 1882
6. Insurance Companies Insurance Act & Companies Act
7. Specified entities Income-tax Act, 1961
(2) Independent/Voluntary Audit: It includes all other audits which are not required under law and
performed at the discretion of the governing body. E.g. Audit of accounts of proprietary entities,
partnership firms, private trusts, Hindu undivided families, non-profit making institutions like
schools clubs and hospitals which are not governed by any statute or specific acts. They may opt
for an audit owing to various advantages of an independent audit.
(15) What do you mean by the term independent audit? What are the
advantages of independent audit?
Audit which is not a statutory audit may be termed as an independent audit. It is not compulsory by
law and is performed at the discretion of the governing body of the entity. It provides following
advantages:
1. Acts as a moral check on the employees from committing defalcations or embezzlement.
2. Helps to detect wastage/losses, especially that occurring from inappropriate internal controls.
3. Ascertains whether the books of accounts and records have been properly kept.
4. Helps in review of internal checks and internal controls.
5. Provides reliable financial statements to easily understand the state of affairs.
6. Helps in settlement of accounts at the time of admission or death of partner.
7. Helps in settling liability for taxes.
8. Helps in negotiating loans with the banks.
9. Helps in settling insurance claims in respect of damage suffered by property.
10. Helps in determining the purchase consideration for a business.
Question No. 1: The audit of Financial Statements relieves the management of its responsibilities.
Question No. 3: While doing physical verification of cash the auditor found that the balance shown in
books was Rs. 1 lakh and the actual currency in hand amounted to Rs. 40,000. The cashier agreed to
pay for the shortage of cash saying that he was in need of cash so he used it and requested for not
reporting for it. Should the auditor consider reporting for it? What if the cashier shows you a complete
voucher for cash issued, which he wrongly entered in bank account instead of cash book?
Question No. 4: Identify which of the following amounts to a fraud?
(a) Capital expense entered as revenue expense.
(b) Capital expense for Rs. 2 Lakhs entered in books as Rs. 3 Lakhs and cash amounting to Rs. 1
Lakh being misappropriated.
(c) Cash issued for payment to travel agent for Rs. 40,000 where no such services being used in
actual.
(d) Giving 20% discount on sales to Tony, where no such policy for discount exists in books.
(e) Wrong totalling of cash book.
(f) Sales to Tony entered in books as sales to Jonny.
Question No. 5: How will you classify the following errors?
(a) Capital expense entered as revenue expense.
(b) Goods received not being inspected by the inspector.
(c) Sales to Tony entered in books as sales to Jonny.
(d) Sales to Tony for Rs. 100 entered in correct accounts but with an amount of Rs. 200.
(e) Sales to Tony for Rs. 100 entered twice in books.
(f) Opening Stock for Rs. 10 lakhs brought forward with an amount of Rs. 1 Lakh.
(g) Sales to Tony for Rs. 100 entered correctly in sales account but no entry made in account of
Tony.
Question No. 6: Mr. Vyom is a sole proprietor with a medium sized business and is thinking whether
to get his books audited or not. How can you convince him to get his books audited?
Question No. 7: State whether true or false:
(a) Auditor is not an insurer.
(b) Unless an auditor is able to discover all frauds and errors, he has not performed its main function.
(c) Procedural errors arise as a result of transactions having been recorded in a fundamentally
incorrect manner.
(d) Auditor compares entries in books of account with vouchers; and, if the two agree, his work is
done.
(e) Financial Statements includes only P&L A/c and Balance Sheet.
(f) The auditor has to approach everyone with suspicion.
(19) What is Audit Evidence? How can auditor determine if the audit evidence is
sufficient & appropriate?
Audit evidence refers to the information used by auditor in arriving at the conclusions on which
auditors opinion is based.
Audit evidence includes both information contained in the accounting records underlying the
financial statements and other information.
TYPES OF AUDIT EVIDENCE
o External Eg: o Documentary Eg: Copy of loan o Persuasive, evidences which are
Bank statement agreement most likely to be true. Eg:
o Internal Eg: o Oral Eg: discussions with client management representations
Sales invoice o Visual Eg: Observing stock o Conclusive, evidences which
taking are only true. Eg: loan contracts.
As per SA-200, the auditor should obtain sufficient appropriate audit evidence through the
performance of compliance and substantive procedures to enable him to draw reasonable
conclusions there from on which to base his opinion on the financial information.
As per SA-200, sufficiency and appropriateness are inter-related. Sufficiency refers to the quantum
of audit evidence obtained while appropriateness relates to its quality i.e. relevance and reliability.
The quantity of audit evidence needed is affected by the following:
auditors assessment of risks of misstatement (higher the assessed risks, more evidence is
required), and
quality of such audit evidence (higher the quality, lesser evidence may be required).
Substantive Procedures
(Test of completeness, validity & accuracy of accounting data)
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:
1. tests of details of transactions and balances;
2. analysis of significant ratios & trends, including enquiry of unusual fluctuations & items.
Question No. 1: X Ltd holds 4 to 5 board meetings per year. The directors are reimbursed to the
extent of actual air fair, and in addition an allowance of Rs. 300 per day is paid for covering hotel bills
etc. Auditor of company seeks actual bills/vouchers as evidence in respect of stay charges. The
director contention is that board attendance register containing the signature of director is sufficient
evidence. Give your views as a Chartered Accountant.
Question No. 2: An assistant of X & Co., chartered accountants detected an error of Rs. 5 per interest
payment which recurred number of times. The General Manager (Finance) of T Ltd. advised him not
to request for passing any adjustment entry as individually the errors were of small amounts. The
company had 2000 deposit accounts and interest was paid quarterly. Give your views on the above.
(28) Describe Audit Programme along with its advantages & disadvantages.
MEANING: An audit programme is a detailed plan of applying the audit procedures, along with
the instructions for appropriate techniques to be adopted to obtain sufficient evidence to enable the
auditor to express opinion.
POINTS TO CONSIDER: Auditor should consider following points in making audit programme:
1. It should meet the objective & cover scope of audit.
2. It should be in writing & communicated properly to the assistants.
3. It should contain audit objectives for each area and a set of instructions to the assistants for
proper execution of work to complete audit efficiently, effectively and in time.
4. There should be co-ordination between the procedures to be applied to related items. In
assembling procedures & methods, if related items are grouped together, the programme
becomes purposeful and easy to coordinate.
5. Audit programme should be reviewed periodically so that inadequacies or redundancies may
be removed.
6. Every assistant should follow the instructions as stated in the programme, unless the
programme is not officially changed by the principal.
(34) What do you mean by Audit Sampling/Test Checking? What are the methods
to select sample?
As per SA 530, "Audit sampling" means the application of audit procedures to less than 100% of the
items within an account balance or class of transactions to enable auditor to obtain and evaluate audit
evidence in order to form a conclusion concerning the population. The auditor should select sample
items in such a way that the sample can be expected to be representative of the population.
There are two major methods which help in determining the size and components of the sample:
1) Judgmental sampling
2) Statistical sampling
1) JUDGMENTAL SAMPLING: Under this method, the sample size and its composition are
determined on the basis of the personal experience and knowledge of the auditor. It is a traditional
method of sampling. For e.g.: March & June may be selected in year one and different months would
be selected in the next year.
Advantages of Judgmental Sampling:
It is simple to operate.
Easy to understand.
Auditors past experience can help him to make better evaluation of sample.
Disadvantages of Judgmental Sampling:
It is neither objective nor scientific
The risk of personal bias in selection of sample items cannot be eliminated.
Sample may not truly represent population.
In case of a new audit the sample selection may be difficult for the auditor.
2) STATISTICAL SAMPLING: An approach to sampling that has the following characteristics:
(i) Random selection of the sample items; and
(ii) Use of probability theory to evaluate sample results
Under this method, the sample size and its composition are determined on the basis of
mathematical laws of probability. It has wide application in case of homogenous population.
CA. Poonam Madaan 22
Advantages of Statistical Sampling:
It is more scientific.
There is no personal bias.
It is more reliable due to use of mathematical & statistical tools.
Disadvantages of Statistical Sampling:
It is complex to operate.
Suitable in case of large organizations, where there is large number of homogenous
transactions.
It may be time consuming.
Not suitable when there are variety of transactions without any sequence.
Audit staff needs to be educated about the statistical techniques first.
Statistical Sampling Methods
Random
Defined block
selection of
Random Stratum Stratum of consecutive
items clusters
selection of
samples
Random Random
selection of selection of
samples samples
RANDOM SAMPLING
Random selection ensures that all items in the population or within each stratum have a known
chance of selection. It may involve use of random number tables. It is of two types:
1. Simple Random Sampling: Each unit of the whole population has an equal chance of being
selected. Selection may be made by choosing numbers from:
table of random numbers
by computers
picking up numbers randomly from a drum.
This method is appropriate in case of homogenous population consisting units falling
within a reasonable range. For e.g. debtors balances falling within the range of Rs. 5,000 to Rs.
25,000 and not in the range between Rs. 25 to Rs. 2,50,000.
2. Stratified Random Sampling: This method involves dividing the whole population into different
groups called strata. Each stratum is treated as if it was a separate population and sample is
selected from each of these stratums. The number of groups into which the whole population has
to be divided is determined on the basis of auditors judgment. For e.g. in the above case, debtors
balances may be divided into four groups as follows:-
Group1 : Debtors > Rs. 1,00,000
Group2 : Rs. 75,000 < Debtors < Rs. 1,00,000
Group3 : Rs. 25,000 < Debtors < Rs. 75,000
Group4 : Debtors < Rs. 25,000
From Group1 the auditor may examine all the items; from Group2: 25% of items; from
Group3: 10% of items and from Group4: 2% of items may be selected. It helps in focusing
attention on more material items. It is useful for heterogeneous or diversified population.
INTERVAL/SYSTEMATIC SAMPLING:
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Items are selected using a constant interval between selections, the first interval having a random
start. The interval might be based on:
Certain number of items (for e.g. every 20th voucher) or
Monetary totals (e.g. every increase of Rs. 1,000 in cumulative value of population).
When using systematic selection, the sampling interval should not follow a particular
pattern in the population. The multiple random starting points should be taken to minimise the risk
of interval sampling pattern with that of the population being sampled. It is of two types:
1. Block Sampling: Selection of a defined block of consecutive items. For e.g. first 200 sales
invoices in the month of September.
2. Cluster Sampling: Dividing the population into groups of items known as clusters. A number of
clusters are selected randomly. For e.g. 500 to 540, 2015 to 2055 etc. The first item i.e. 500, 2015
is randomly selected from random number tables. The items of selected cluster can either be
checked completely or a randomly selected proportion of them can be examined.
Sampling Risk The lower the sampling risk the auditor is willing to Inverse
accept, the greater the sample size will need to be.
Tolerable Error The smaller the tolerable error, the greater the Inverse
sample size will need to be
Expected Error If the error is expected to be present in the Direct
population, a larger sample is required.
Risk that material Risk that the clients Risk that any remaining
errors will occur system of internal control material errors will not
will not prevent or correct be detected by the
such errors auditor
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Basis Inherent Risk Control Risk Detection Risk
Definition Inherent risk is the Control risk is the risk that Detection risk is the
susceptibility of an misstatement that could risk that an auditors
account balance or class occur in an account procedures will not
of transactions to balance or class of detect a misstatement
misstatement that could transactions will not be that exists in an
be material. prevented or detected on a account balance or
timely basis by system of class of transactions.
internal control.
Type of risk Risk that material errors Risk that the clients Risk that any remaining
will occur system of internal control material errors will not
will not prevent or correct be detected by the
such errors auditor
Controllability It will always be present It will always be present It can be controlled by
in an audit and cant be in an audit and cant be following adequate
controlled by auditor controlled by auditor audit procedures
Existence It exist independently of It exist independently of There is no existence of
an audit of financial an audit of financial detection risk if no
information information audit is conducted
2. Check List: A series of instructions and/or questions which a member of the auditing staff must
follow and/or answer. On completion, he initials the space against the instruction. Answers to the
instructions are usually Yes, No or Not Applicable. The complete check list is studied by the
Principal/Manager/Senior to ascertain existence of internal control and evaluate its
implementation and efficiency.
A few examples of check list instructions are given here under:
o Are tenders called before placing orders?
o Are the purchases made on the basis of a written order?
o Is the purchase order form standardised?
o Are purchase order forms pre-numbered?
Advantages Disadvantages
Easy to fix responsibility for Time consuming
observations in the course of audit Requires skill to prepare proper checklist
Simple to use
Evaluation by the principal helps in
locating weaknesses
Advantages Disadvantages
Chances of oversight/omission is Time consuming
minimised Total dependency on response of client
Can be reviewed on interim basis
More systematic approach
Easy to locate weaknesses
4. Flowchart: A graphic presentation of each part of the companys system of internal control. It is
the most concise way of recording the auditors review of the system. It minimises the amount of
narrative explanation and gives birds eye view of the system.
CA. Poonam Madaan 28
Advantages Disadvantages
Most concise way of review Difficult to prepare flowchart with details
Gives birds eye view of the system of every aspect of the system
Detailed study may also be required in
various aspects/areas
(43) What factors should be considered while framing a system of internal check?
General considerations in framing a system of internal check are:
1. No independent control: No single person should have an independent control over any important
aspect of the business.
2. Job Rotation: Duties of the staff members should be changed from time to time without any
previous notice.
3. Leave policy: Staff members should be encouraged to go on leave at least once in a year.
4. Separation of custodial responsibilities: Persons having physical custody of assets must not be
permitted to have access to the books of account.
5. Control over assets: Accounting control should exist for each important class of assets; in
addition, these should be periodically inspected so as to establish their physical condition.
6. Mechanical devices: To prevent loss or misappropriation of cash, mechanical devices, such as the
automatic cash register, should be employed.
7. Budgetary controls: Budgetary controls should be devised and major variances should be
observed and reconciled.
8. Stock taking: For stock-taking, at the close of the year, trading activities should, if possible, be
suspended. The task of stock-taking and evaluation should be done by staff belonging to several
sections of the organisation and not only by stock section staff.
9. Division of powers: The financial and administrative powers should be distributed very
judiciously among different officers and be reviewed periodically.
10. Periodic review: There should be periodical verification and testing of different sections of
accounting records to ensure that they are accurate. Accounting procedures should be reviewed
periodically even if they are well-designed and carefully installed.
(46) What is the relationship between statutory & internal auditor? (SA 610)
Internal audit being an integral part of the system of internal control, it is obligatory for a statutory
auditor to examine the scope and effectiveness of work carried out by internal auditor.
COORDINATION:
2. CIS APPLICATION CONTROLS: It establishes specific control procedures over the accounting
applications to provide reasonable assurance that all transactions are authorized, recorded and
processed completely, accurately and on a timely basis. CIS application controls include:
Question No. 1: A senior assistant of X & Co. chartered accountants drew up his audit programme
without evaluating internal controls of T Ltd. When the partner asked him for the reason, he stated that
the controls were developed by the General Manager (Finance) of T Ltd. who is a chartered
accountant and had written a few books on Internal Control and therefore there was no need to review
the said area.
(57) How are the payments controlled by the Companies Act, 2013?
There are certain specific provisions relating to payments made as per Companies Act 2013, such as:
1. Reporting of personal expenses charged to companys revenue a/c as per Sec.143(1)(e)
2. Under Sec. 180, Board of Directors shall require consent of company by special resolution to:
i. Sell, lease or dispose of the whole, or substantially the whole of the undertaking of the co.
ii. Invest (except in trust securities), compensation received as a result of any merger or
amalgamation;
iii. Borrow monies, where the total borrowings including proposed borrowings (apart from
temporary loans) exceeds the aggregate of paid up capital & free reserves. Provided that the
acceptance by a banking company, in ordinary course of its business, of deposits from public,
repayable on demand and withdrawable by cheque, draft, etc. shall not be deemed to be a
borrowing of monies by banking company within the meaning of this clause.
iv. Remit/give time for re-payment of any debt due by directors.
3. Under section 181, Board of Directors can with prior permission of company in general meeting,
contribute to bonafide charitable and other funds any amount in any financial year, aggregate of
which exceeds 5% of its average net profits for three immediately preceding financial years.
4. As per Section 182, a government company or any other company which has been in existence for
less than three financial years cannot contribute any amount directly or indirectly to any political
party. In other cases, contribution in any financial year should not exceed 7 % of average net
profits during three immediately preceding financial years.
5. Section 183 permits the Board and other person to make contributions to the National Defence
Fund or any other Fund approved by Central Government for the purpose of National Defence to
any extent as it thinks fit.
(59) What are the general considerations for Audit of following Receipts?
A. INCOME FROM INVESTMENTS
1. In case of voluminous investments, the client generally would have an Investment Register or else
an investment schedule should be made.
2. Dividend income is first vouched by reference to the counterfoils of Dividend Warrants and
Interest on securities by reference to the tax-deduction certificates.
3. Trace the collection into the investment register and the cash book.
4. Examine the documents to ascertain if any income is unrealized and the reasons thereof.
5. Check if the entries are correctly reflected in the books, as the gross amount should be shown in the
P&L A/c and TDS amount debited to income tax account.
6. It should be checked that if investments are sold on ex-dividend basis or when purchase is on cum
dividend basis, the dividend has been received subsequently.
7. Ensure that the TDS certificates have been received and kept safely.
8. Check that an entry for accrued income has been appropriately made.
B. RENTAL RECEIPTS
1. Check the copies of bills issued to tenants by reference to copies of tenancy agreements and bills
of charges paid on behalf of the tenants, i.e., house tax, water tax, electricity bill, etc.
2. Study the terms & conditions in the tenancy agreement and ensure that rent received is as per the
agreement.
3. Check Rental Register for rent accrued & collection made by reference to rental bills copies.
4. Trace the entries into the cash book.
5. Scruitinise rental register to find amt. unrecovered & irrecoverable, so as to make provisions.
6. Check if any tax has been deducted at source & TDS certificates been received & kept safely.
7. It should be verified that every available accommodation has been let out and rental income has
been duly accounted for.
C. BANKRUPTCY DIVIDEND
(62) Which are the factors which increase the gross profit?
1. Undervaluation of opening stock.
2. Overvaluation of closing stock.
3. Change in basis of valuation of stock, like where opening stock was valued at cost or market rate
whichever was lower, valuing closing stock at market price which is higher than cost.
4. Inclusion of goods sold but not delivered in the closing stock.
5. Sales at close of previous year but invoices raised in current year, taken as current year sales.
6. Inclusion in closing stock of goods received for sale on approval or on a consignment basis.
7. Treatment of goods sent out for sale on consignment basis as regular sales.
8. No provision or under-provision in the expenses accounts included in the Trading Account.
9. Wrong allocations of expenses, e.g., carriage inwards wrongly taken to P&L A/c.
(63) Which are the factors which decrease the gross profit?
1. Over valuation of the opening stock or undervaluation of closing stock.
2. Alteration of the basis of valuation of stock, e.g., closing stock valued at cost, which is below the
market price, when the opening stock was valued at market price above cost.
3. Reversal of the fictitious sale entries recorded in the previous year to boost up profit.
4. Entry of sales returns twice/failure to account for purchase returns.
5. Excessive provisions made for wages or direct expenses.
6. Non-inclusion in closing stock of goods sent for sale on approval or on a consignment basis.
7. Inclusion in Trading Account of expenses which should have been included in P&L A/c.
8. Failure to take credit for insurance claim w.r.t. goods lost or destroyed by fire.
9. Failure to account for goods sold or destroyed or given away as samples.
Question No. 1: A loss of Rs. 2,00,000 on account of embezzlement of cash was suffered by the
company and it was debited to Salary Account. Comment.
Question No. 2: As an auditor comment on the following:
a) A sum of Rs. 15,000 p.m. has been paid as remuneration to a Director, who is not in the whole-
time employment of the company.
b) Travelling expenses of Rs. 2.25 lakhs shown in P&L A/c of X Ltd., including a sum of Rs. 1.10
lakhs spent by Director on his foreign travel for Companys business accompanied by his mother
for her medical treatment.
c) The sales proceeds from scrap which did not have a significant value need not be verified if the
company had a good accounting and costing system.
d) The surplus arising from sale of investments was set-off against a non-recurring loss and was not
disclosed separately.
e) Insurance claim of Rs. 2 lakhs received stands included under Miscellaneous Income.
Question No. 3: While auditing the accounts of a manufacturing company, you discover that the rate
of Gross Profit on sales has sharply risen in comparison to the previous year. State eight possible
causes of such increase and the steps you would take to satisfy yourself.
(69) What is the difference between Capital Reserve & Reserve Capital?
D. PATENT RIGHTS:
1. If a number of patents are held, a schedule thereof should be obtained.
2. Verify ownership of patent by inspection of certificate of grant of patent or agreement
surrendering it in favour of the client.
3. Check if the rights are alive and legally enforceable and renewal fees have been paid on due dates
by charging to revenue and Patent Account.
Contingent liabilities are continuously assessed and if it becomes probable that an outflow of future
economic benefit will be required to settle obligation which is previously assessed as contingent
liabilities, a provision is recognized.
(84) Write a note on events occurring after the balance sheet date / subsequent
events.
As per AS 4, events occurring after B/S date are those significant events, both favourable and
unfavourable, that occur between B/S date and date on which financial statements are approved by
Board of Directors in case of a company and in case of any other entity by the corresponding
approving authority. Some of such events may require adjustments to assets and liabilities as at the
balance sheet date or may require disclosure. These are classified as under:
1. Adjusting events are those significant events occurring after B/S date that provide additional
information materially affecting determination of amounts relating to conditions existing at B/S
date, e.g., an adjustment for loss on B/R confirmed by insolvency of customer which occurs after
B/S date.
2. Non-adjusting events are those events which do not relate to conditions existing at B/S date, e.g.,
decline in market value of investments. Disclosure of such events is made if they represent unusual
changes affecting existence of enterprise at B/S date. For e.g., destruction of a major production
plant by a fire after B/S date will not require any adjustment in B/S, but they may be disclosed in
report of approving authority. If disclosure of events occurring after B/S is required, the auditor
should see that the following information has been provided:
a. the nature of the events; and
b. an estimate of the financial effect or a statement that such an estimate cannot be made.
(b) B Ltd. acquired a car for Rs. 6.5 lacs on hire purchase basis. The interest payable as well as
penalty for late payment of installments was added to the cost of the car. During the year
the company paid Rs. 1.5 lacs as installments for the year and provided depreciation on the
said amount paid.
(c) Inventories of a car manufacturing company include the value of items required for
manufacture of a model which was removed from production 5 years back, at cost.
(d) A machine was purchased by 2 companies jointly. The price was shared equally. It was
agreed that they would use the machinery equally and show in their balance sheets, 50% of
the value of machinery and charge 50% of depreciation in their books.
(e) M/s Bonafide Ltd. has taken a Group Gratuity Policy from Insurance Company. During
accounting year 2004-05 it received a communication from the said Insurance Company
informing that premium amount for the accounting year 2003-04 was less charged by Rs.
75 lacs on account of arithmetical error on the part of Insurance Company. M/s Bonafide
Ltd. paid the said sum of Rs. 75 lacs during the accounting year 2004-05 by debiting the
same to Prior period expenses.
U/s 141(4) of Companies Act, 2013, Where a person appointed as an auditor of a company incurs
any of the disqualifications mentioned above 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.
As per Section 139(2), No listed company or a company as mentioned above, shall appoint/re-appoint:
a. an individual as auditor for more than one term of 5 consecutive years; after completion of his
term the individual auditor shall not be eligible for re-appointment as auditor in the same company
for 5 years from the completion of his term;
b. an audit firm as auditor for more than two terms of 5 consecutive years; after completion of the
term of the audit firm, it shall not be eligible for re-appointment as auditor in the same company
for 5 years from the completion of such term.
REMOVAL OF AUDITOR AFTER EXPIRY OF TERM i.e. conclusion of sixth AGM. [Sec. 140]
Section 140 lays down procedure to appoint an auditor other than retiring auditor who was
removed:
1. Special notice shall be required for a resolution at an annual general meeting appointing as auditor
a person other than a retiring auditor, or providing expressly that a retiring auditor shall not be re-
appointed, except where the retiring auditor has completed a consecutive tenure of five years or as
the case may be, ten years, as provided under subsection (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 filed with
the Registrar.
(101) What are the elements of the Audit Report? (SA 700)
Auditors report should contain a clear written expression of opinion on financial statements taken as a
whole. Components of Auditors Report are as under:
1. Title: The auditors report shall have a title that clearly indicates that it is the report of an
independent auditor.
2. Addressee: Law or regulation applicable to entity often specifies the addressee; normally auditors
report is addressed to those for whom it is prepared, often either to shareholders or to those
charged with governance.
3. Introductory paragraph: The introductory paragraph in the auditors report shall:
Identify the entity whose financial statements have been audited;
State that the financial statements have been audited;
AUDITORS REPORT
To,.. (Appropriate Addressee)
We have audited the attached Balance Sheet of. (Name of the entity) as at 31 st March 2XXX and
also the Profit and Loss Account for the year ended on that date annexed thereto. These financial
statements are the responsibility of the entitys management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in India.
Those Standards require that we plan and perform the audit to obtain reasonable assurance whether the
financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audit provides a reasonable
basis for our opinion.
In our opinion and to the best of our information and according to the explanations given to us, the
financial statements give a true and fair view in conformity with the accounting principles generally
accepted in India:
a) in the case of the Balance Sheet, of the state of affairs of..(Name of the entity) as at 31st March
2XXX; and
b) in the case of the Profit and Loss Account, of the profit/loss for the year ended on that date.
For ABC and Co.,
Chartered Accountants
(Firms Registration Number)
Auditors Signature
(Name of Member signing the Audit Report)
Place:
(Designation)
Date: (Membership
Number)
(102) What are different types of Audit Report? (SA 700, 705, 706)
The audit report may be classified as follows on the basis of the type of opinion of auditor:
Types of Audit Report
Unqualified Modified
Reports Reports
In exercise of the powers conferred by section 143 (11) of the Companies Act, 2013, the Central
Government, after consultation with the ICAI, hereby makes the following Order:
Reasons to be stated for unfavourable or qualified answers: Where, in the auditor's report, the
answer to any of the questions referred to in paragraph 4 is unfavourable or qualified, the auditor's
report shall also state the reasons for such unfavourable or qualified answer, as the case may be.
Where the auditor is unable to express any opinion in answer to a particular question, his report shall
indicate such fact together with the reasons why it is not possible for him to give an answer to such
question.
Reasons to be stated for unfavourable or qualified answers: Where, in the auditor's report, the
answer to any of the questions referred to in paragraph 3 is unfavourable or qualified, the auditor's
report shall also state the reasons for such unfavourable or qualified answer, as the case may be.
Where the auditor is unable to express any opinion in answer to a particular question, his report shall
indicate such fact together with the reasons why it is not possible for him to give an answer to such
question.
CA. Poonam Madaan 77
SUMMARY OF CARO, 2015
Para1: Non-applicability:
1. Banking Companies
2. Insurance Companies
3. Companies registered u/s 8
4. One person company & small company
5. Private Limited Company if at any point during the year its:
a) Paidup capital + Reserves Rs. 50 lakh
b) Loan o/s Rs. 25 lakh
c) Turnover Rs. 5 crs
a. Proper Records
i. Fixed Assets
b. Physical verification, Material Discrepancies
a. Physical Verification
ii. Inventory b. Adequacy of procedures for verification
c. Proper records, discrepancies in physical verification
TRUE OR FALSE
Q1.State with reasons (in short) whether the following statements are True or False:
(a) If the auditor appointed at the AGM refuses to accept the same, the Company can appoint
another person by holding General Meeting.
(b) The first auditor appointed by the board of directors can be removed by the board at its
subsequent meeting.
(c) The Auditors of a company is entitled to attend any General meeting of the company as his
duty.
QUALIFICATION & DISQUALIFICATION OF AUDITOR
Q2.State your comments on the following:
(a) An auditor purchased goods worth Rs.1,500 on credit from a company being audited by
him. The Company allowed him one months credit, which it normally allowed to all
known customers.
(b) Ram and Hanuman Associates, C.A. in practice have been appointed as Statutory Auditor
of Krishna Ltd. for the accounting year 2002-03. Mr. Hanuman holds 100 equity shares of
Shiva Ltd. a subsidiary company of Krishna Ltd.
APPOINTMENT OF AUDITOR
Q3.State your comments on the following:
(a) Due to resignation of the existing auditor(s) the Board of Directors of X Ltd. appointed Mr.
Hari as the auditor. Is the appointment of Hari as auditor valid?
(b) No AGM was held for the year ended 31st March, 05 in XYZ Ltd. Ninu is the auditor for
previous year, whether she is continuing to hold office for current year or not.
REMOVAL OF AUDITOR
Q4.State your comments on the following:
(a) X and Co. C.A. who were appointed as the first auditors of the company, were removed
without the prior approval of the Central Government before the expiry of their term, by
calling an Extra-ordinary General meeting.
(b) The Board of Directors removed first auditor before expiry of the term and appointed
another auditor in his place.
CEILING ON AUDITS
Q5.State your comments on the following:
(a) PSB & Associates, a C.A. firm has three partners P, B and S. The firm is already having
audit of 60 companies which includes 2 branch audits of a company. The firm was offered
3 company audits out of which one is a private company other is a foreign company and
the third one is a public company. Decide and advise whether PSB & Associates will
CA. Poonam Madaan 79
exceed the ceiling prescribed by companies act?
AUDIT REPORT
Q6.State your comments on the following:
(a) Mr. Rajendra a fellow member of ICAI, working as manager of Srivastava & Co. a
chartered accountant firm, signed the audit report of OMB Ltd. on behalf of Srivastava &
Co.
(105) What are the specific provisions regarding books of accounts in the Act?
U/s 128, the provisions in the matter of books of account are briefly summarised below:
Contents of books: Books of accounts should include records maintained in respect of:
a. all receipts and expenditure by company;
b. all sales and purchases of goods and services by the company;
c. the assets and liabilities of the company; and
d. the items of cost as may be prescribed u/s 148 in case of a company which belongs to any class
of companies specified under that section;
Such books of Accounts shall be kept on accrual basis and according to the double entry system of
accounting.
Place of books [Section 128(1)]: The books of account and other relevant papers are required to be
kept at the registered office of the company.
a. Books of account for transactions effected at branch offices shall be kept at that branch office.
b. Proper summarised returns periodically must be sent by branch office to the company at its
registered office or other place as decided by Board of directors.
Change in location of books: Board of directors may decide to keep books at any other place in
India. Company shall, within 7 days of decision, file with Registrar a notice in writing giving full
address of that other place.
Electronic form of Books of accounts:
a. The company may keep its books of account or other relevant papers in electronic mode.
b. The books of account and other relevant books and papers maintained in electronic mode shall:
1. remain accessible in India.
2. be retained completely in the original format and information contained in electronic
records shall remain complete and unaltered.
3. information received from branches shall not be altered and be kept in original format.
4. There shall be a proper system for storage, retrieval, display or printout of electronic
records and such records shall not be disposed of unless permitted by law.
5. back-up of books of account in electronic mode shall be kept in servers physically located
in india on a periodic basis.
CA. Poonam Madaan 81
c. Company shall intimate to Registrar on an annual basis during filing of financial statement:
1. The name of the service provider;
2. The internet protocol address of service provider;
3. The location of the service provider (wherever applicable);
4. Where books are maintained on cloud, such address as given by service provider.
Persons who can inspect [Section 128(3) and (4)]:
a. Books of account maintained within India shall be open for inspection by any director during
business hours.
b. For financial information maintained outside India, copies of such financial information shall
be maintained and produced for inspection by any director subject to following conditions:
1. Summarised returns of books kept outside India shall be sent to registered office at
quarterly intervals, it shall be kept at registered office and be open for inspection to
directors.
2. Where any other financial information maintained outside India is required by a director,
he shall furnish a request giving full details of such information sought.
3. Such information shall be given to director within 15 days of receipt of written request.
4. Such information shall be sought for by director himself.
c. Inspection in respect of any subsidiary shall be done only by a person authorised by a
resolution of Board of Directors.
d. Officers and other employees of company shall assist the person making such inspection.
Period of Maintenance [Section 128(5)]:
The books of account together with relevant vouchers shall be kept in order by company for a
minimum period of 8 financial years immediately preceding a financial year.
Persons responsible for Maintenance & Penalty [Section 128(6)]:
The following persons are responsible for maintenance of proper books of account:
1. Managing director, whole-time director in charge of finance, CFO; or
2. any other person of a company charged by Board.
(106) What are the provisions regarding Financial Statements in the Act?
Meaning: As per section 2 (40), Financial statement in relation to a company, includes
a. a balance sheet as at the end of the financial year;
b. a profit & loss account, for non-profit company, income & expenditure account for financial year;
c. cash flow statement for the financial year;
d. a statement of changes in equity, if applicable; and
e. any explanatory note annexed to or forming part of such financial statement
Provided that financial statement, of One Person Company, small company and dormant company,
may not include cash flow statement;
Form of Financial statements [Section 129(1)]:
a. The financial statements shall:
1. give a true and fair view of the state of affairs of the company or companies,
2. comply with the accounting standards notified under section 133 and
3. shall be in the form as provided in Schedule III
4. the items contained in financial statements shall be as per accounting standards.
b. The above provisions shall not apply to following companies:
G. CALLS IN ARREARS:
Amount due from shareholders for calls in arrears should be verified by reference to Share register.
If any calls are due from Directors, they should be shown separately in the balance sheet.
If AOA provides to charge interest on calls in arrears then interest in such a case should be verified.
(112) What are the provisions regarding Issue & Redemption of preference
shares?
Issue of Preference shares:
1. The explanatory statement annexed to notice of general meeting pursuant to section 102 shall,
provide complete details of issue of preference shares.
2. Register of Members shall contain particulars in respect of such preference share holder(s).
3. A company intending to list its preference shares on a recognized stock exchange shall issue such
shares as per the regulations made by SEBI.
4. A company may issue preference shares for a period exceeding 20 years for infrastructure projects,
subject to the redemption of such percentage of shares as may be prescribed on an annual basis at
the option of such preferential shareholders.
Redemption of Preference Shares:
1. Preference shares may be redeemed:-
a. at a fixed time or on the happening of a particular event;
b. any time at the companys option; or
c. any time at the shareholders option.
2. They shall be redeemed out of profits which are available for dividend or out of proceeds of a
fresh issue of shares made for the purposes of such redemption;
3. Such shares shall be fully paid;
4. Where such shares are redeemed out of profits, a sum equal to nominal amount of shares to be
redeemed shall be transferred to Capital Redemption Reserve Account.
5. Premium payable on redemption shall be provided for out of profits.
6. Where a company is not able to redeem any preference shares or to pay dividend on such
shares, it may, with consent of holders of 3/4th in value of such preference shares and with
approval of Tribunal on a petition made by it, issue further redeemable preference shares equal
to amount due including dividend and on issue of such further redeemable preference shares,
unredeemed preference shares shall be deemed to have been redeemed. Such issue shall not be
deemed to be an increase or reduction in share capital.
(121) What is the legal framework regarding Comptroller & Auditor General?
Appointment: He shall be appointed by the President of India.
Salary: He shall be paid salary equivalent to that of a Judge of Supreme Court. The Parliament can
make laws to determine salary and other conditions of service.
Tenure: He shall hold office for 6 years or up to the age of 65 years, whichever is earlier.
Removal: He shall not be removed from office except on the ground of proven misbehavior or
incapacity. He can be removed only when each House of Parliament decides to do so by a majority
of not less than 2/3rd of the members of the House present and voting.
Resignation: He can resign at any time through a resignation letter addressed to the President.
(122) What are the duties and powers of Comptroller and Auditor General?
The Comptroller & Auditor Generals (Duties, Powers and Conditions of Service) Act, 1971 defines
functions and powers in detail. The relevant provisions are discussed hereunder:
DUTIES OF THE C & AG:
1. Compile and submit Accounts of Union and States: CAG shall be responsible for compiling
accounts of the Union/State/Union Territory having a Legislative Assembly, and shall submit those
accounts to President/Governor of State/Administrator of the Union Territory, on or before such
dates as he may determine with concurrence of the Government concerned.
2. Audit of Receipts and Expenditure: He shall audit all receipts and expenditure of any body which
has been substantially financed by grants or loans from Consolidated Fund of India/State/Union
Territory. A body/authority shall be deemed to be substantially financed if:
- such grant/loan in a FY is not less than Rs. 25 lakhs, and
- amount of such grant/loan is not less than 75% of total expenditure of that authority/body.
3. Audit of Grants or Loans: Where any grant/loan is given for any specific purpose from the
Consolidated Fund of India/any State/any Union Territory to any authority/body other than a
foreign State or international organisation, he shall scrutinise the procedures by which the
sanctioning authority satisfies itself as to the fulfillment of conditions for giving such grants or
loans and may access books & accounts of that authority/body, after giving reasonable previous
notice.
4. Audit of Receipts of Union or States: He shall audit all receipts payable into the Consolidated
Fund of India/each State/each Union Territory and ensure existence of an effective check on
assessment, collection and proper allocation of revenue.
5. Audit of Accounts of Stores and Stock: He shall audit and report on the accounts of stores and
stock kept in any office or department of the Union or of a State.
6. Audit of Government Companies and Corporations: Duties and powers of CAG in relation to
the audit of government companies & corporations shall be performed and exercised by him in
accordance with the provisions of the Companies Act, 1956.
7. General Provisions Relating to Audit: It shall be the duty of the CAG to audit and report:
a. on all expenditure from the Consolidated Fund of India/each State/each Union Territory and to
ascertain whether sum disbursed was appropriately applied for the designated purpose and
whether expenditure conforms to the authority which governs it;
b. all transactions of the Union/States relating to Contingency Funds and Public Accounts;
c. on all trading, manufacturing P&L A/c, B/S and other subsidiary accounts kept in any
department of the Union or of a State.
(125) How does a Government auditor perform audit of stores & stocks?
Audit of the accounts of stores and stocks involves :
- Ascertaining whether Regulations governing purchase, receipt, issue, custody, sale and stock
taking of stores are well devised & properly carried out.
- Bringing to the notice of government any deficiencies in quantities of stores held or any defects
in the system of control.
Audit of purchase of stores is conducted to ensure that:
- these are properly sanctioned, made economical and as per the Rules laid down
- the prices paid are reasonable and as per the contract for supply of stores
- the certificates of quality and quantity are furnished by the inspecting and receiving units.
CA. Poonam Madaan 98
Cases of uneconomical purchase and losses due to inferior quality are specifically examined.
Any excess or idle stock is specifically mentioned in the report.
Periodical verification of stock is conducted to ensure their existence.
Valuation of stocks is examined.
(139) How will an auditor perform audit of Hire Purchase and Leasing
Companies?
LEASE:
1. Auditor should study object clause of leasing company to ascertain goods & activities in respect of
which the company can undertake leasing activities.
2. See if proper procedure exists to perform credit analysis of lessee like lessees ability to meet the
commitment under lease, past credit record, availability of collateral security, etc.
3. The lease agreement should be examined and the following points may be noted:
a. the description of lessor, lessee, equipment and location where equipment is to be installed.
b. agreement has been signed by the authorized persons.
c. the amount & tenure of lease, dates of payment, late charges, deposits or advances etc.
d. whether the equipment shall be returned to lessor on termination of agreement and cost shall be
borne by the lessee.
e. conditions in relation to subletting of property.
4. Examine the lease proposal form submitted by lessee requesting lessor to provide him the
equipment on lease.
5. Ensure that the invoice is retained safely as lease is a long-term contract.
6. Examine the acceptance letter obtained from lessee indicating that equipment has been received in
order and is acceptable to him.
7. See that the copies of the insurance policies have been obtained by lessor for his records.
Q1. Discuss the provision of the Constitution of India to safeguard the independence of the
Comptroller and Auditor general of India.
Q2. Mention the special points to be examined by the auditor in the audit of a charitable
institution running hostel for students pursuing chartered accountancy course and which
charges only Rs. 500 p.m. from a student for his lodging/boarding.
Q3. State with reasons whether true or false:
(a) CAG may be removed by President.
(b) A partnership firm must have a duly registered partnership agreement.
(c) Regularity audit refers to audit against rules & regulations.
(d) In a compilation engagement, member has to use auditing expertise.
(e) In a hotel sale is made through various sales points.
(f) Hire Purchase and Lease is one and the same thing.