Sa Notes

PREFACE
Hello Everyone
We understand that audit is voluminous subject and sometimes it can tiring to study so we
spend lot of time in designing our books and lectures. They are like babies to us. And we are
hopeful that they should make your study efforts comfortable, efficient and effective.
Important features:
All amendments from new study material issued by ICAI are incorporated.
Notes are in tabular form along with corresponding headings and standard indenting so that there
is ease to read and remember.
Cross referencing is given for questions and mcqs to respective books, so that students can practice
questions as they cover topics.
Questions and MCQs which doesn’t have direct connection to any topic in Chapter, SA are given at
the end of chapter as unique questions and mcqs.
Colorful charts, summaries, mnemonics, stories and logical flow of points are given to improve
retention.
Meaning of text color: Green color is for Examples, Blue is for summary, Brown is for recent
modifications, Pink for shortcuts
Following are some important points which students should follow.

Study Methodology
1. Watch videos and understand the concept. It is advised to watch 3-4 hours of lecture every day
on continuous basis.
2. Equal time or at least half of the time should be given for self study same day, time requirement
will depend upon comfort level in audit subject. Lectures will be of no use if they are not backed
with self study.
3. Understanding concept and answering questions are two different things. Understanding is first
step, retention is second and then understanding pattern of what to write in which question is
final step.
4. Use study plan, practice papers and revision audios given on telegram channel to increase grip
over subject.
5. It is important for students to do writing practice of 50 to100 questions from different chapters
and standards.
6. Keep revising headings of the chapters covered earlier every time you start your study, just
headings.
7. Ask each and every doubt in discussion point given on website www.auditguru.in.
Doubt Solving
It is very important to clear each and every doubt of yours. In this world of technology, you can post
all your doubts anytime from anywhere, simply login to Auditguru.in go to discussion point area and
post all your doubts chapter wise. You can also search and read doubts of other students. I answer
doubts continuously on website. You will get email as your doubt will be solved. You can take photos
of any content where you have doubt, upload on google drive and share link in questions or
comments, it will make doubt solving further easy.
You can Connect with Ravi sir @ 9096000033, 7020699683 he is generally available between 4 to 4.30
PM except on Sundays. Timings may change, you will get Auto SMS when you call, about new timings
in such case.
OLD vs New Course
Old and new course have majority of content same. We have included all topics of new course in this
book, old course students can get PDF of extra notes, make mail to support@auditguru.in.
Suggestions
Any suggestions, mistakes, errors or discrepancy noted may be kindly brought to the notice shall be
dealt with suitably.
For Administrative purpose contact @ 09322011915

E-mail @ support@auditguru.in
Connect with Ravi sir @9096000033 / 7020699683
CA RAVI TAORI
May/Nov 2021 Edition
Special Thanks to Snehal Taori Ma’am for her important contribution in making this
book.
INDEX VOL - 1
SR.NO TOPICS PAGE NO
Chapter-1 Professional Ethics 1.01-1.92
Chapter-2 CARO 2016 2.01-2.25
Chapter-3 STANDARDS ON AUDITING
Core Audit Process 3.01
Introduction 3.02-3.06
Overall Objectives of Independent Auditor and Conduct
SA 200 3.07-3.12
of an Audit as per Standards on Auditing
SA 210 Agreeing to terms of Audit Engagement 3.13-3.16
SA 220 Quality Control for Audit of Financial Statement 3.17-3.20
SA 230 Audit Documentation 3.21-3.23
The Responsibility Relating to Fraud in an Audit of

SA 240 3.24-3.36
Financial Statements
Considerations of Law and Regulation in Audit of
SA 250 3.37-3.40
Financial Statements
Communication with Those Charged with Governance
SA 260 3.41-3.44
(TCWG) (Revised)
Communicating Deficiency in Internal Control to Those
SA 265 3.45-3.47
Charged with Governance
SA 299 Responsibility of Joint Auditors (Revised) 3.48-3.51
SA 300 Planning an Audit of Financial Statements 3.52-3.57
SA 315 Identifying and Assessing Risk of Material Misstatement
3.58-3.67
(PART-1) through Understanding Entity and its Environment
SA 315
Internal Control System 3.68-3.76
(PART-2)
SA 320 Materiality in Planning and Performing Audit 3.77-3.81
SA 330 The Auditor's Responses to Assessed Risks 3.82-3.87
Audit Considerations Relating to An Entity Using a
SA 402 3.88-3.92
Service Organization
SA 450 Evaluation of Misstatement Identified during Audit 3.93-3.94
SA 500 Audit Evidence 3.95-3.99
SA 501 Audit Evidence—Special Considerations for Specific Items 3.100-3.103
SA 505 External Confirmations 3.104-3.107
SA 510 Initial Audit Engagements-Opening Balances 3.108-3.110
SA 520 Analytical Procedures 3.111-3.116
SA 530 Audit Sampling 3.117-3.127

Auditing Accounting Estimates, Including Fair Value
SA 540 3.128-3.133
Estimates and Other Related Disclosures
SA 550 Related Parties 3.134-3.136
SA 560 Subsequent Events 3.137-3.141
SA 570 Going Concern (Revised) 3.142-3.146
SA 580 Written Representations 3.147-3.148
SA 600 Using the Work of Another Auditor 3.149-3.152
SA 610 Using the Work of An Internal Auditor (Revised) 3.153-3.158
SA 620 Using the Work of An Auditor's Expert 3.159-3.166
Forming an Opinion and Reporting on Financial
SA 700 3.167-3.176
Statements (Revised)
Communicating Key Audit Matters in The Independent
SA 701 3.177-3.180
Auditor's Report (New)
Modification to Opinion on Financial Statements
SA 705 3.181-3.194
(Revised)
Emphasis of Matter Paragraphs & Other Matter Paragraphs

SA 706 3.195-3.198
in the Independent Auditor's Report (Revised)
Comparative Information—Corresponding Figures and

SA 710 3.199-3.201
Comparative Financial Statements
Auditor Responsibility in Relation to Other Information

SA 720 3.202-3.205
in Document containing Other Information (Revised)
Quality Control for Firms that perform Audit and Reviews

SQC 1 of Historical Information and other Assurance and Related 3.206-3.207
Services Engagements (Revised)
CA Ravi Taori
CHAPTER
1 PROFESSIONAL ETHICS
-
CONTENT
 ZONE-1 INTRODUCTION
 ZONE-2 CHAPTERS OF CA ACT 1949
 ZONE-3 FIRST SCHEDULE
 ZONE-4 SECOND SCHEDULE
 ZONE-5 MISCELLANEOUS
ZONE-1: - INTRODUCTION
 Why
Professional
Ethics
 Composition
of
Professional
Ethics
www.auditguru.in 1.1
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 Fundamental Fundamental Principles Governing Professional Ethics
Principles (Same as ethical requirements as per SA 200)
(CNO- Shortcut – “C2BI-Office explains ethics to court”
780.000)
Integrity - A professional accountant should be straightforward and honest in all
professional and business relationships. (Be truthful)
Objectivity - A professional accountant should not allow bias, conflict of interest or
undue influence of others to override professional judgments. (Irrespective of past
conduct, personal relationships or any other association be professional in making
judgments)
Professional Competence and Due Care - A professional accountant has a continuing
duty to maintain professional knowledge based on current developments and should act
in accordance with applicable technical and professional standards while providing
professional services.
Professional Behaviour - A professional accountant should comply with relevant laws
and regulations and should avoid any action that discredits the profession.
Confidentiality - A professional accountant should respect the confidentiality of
information acquired as a result of professional and employment relationships. The
acquired information should not be disclosed to third parties without specific authority
unless there is a legal or professional duty to disclose and should also not be used for
personal advantage of any person.
ZONE-2: - CHAPTERS OF CA ACT 1949
 Chapters of
CA Act 1949
CHAPTER-1:- APPLICABILITY & DEFINITION

 Section 1 Applicability: -
It is applicable to whole of India, Notified from 1st July 1949
(Including Jammu & Kashmir from 15th Aug 1968)
(Geographically Applicable to all people/work within Indian territory including J&K)
(Persons—Majority of provisions are for conduct of CA’s registered with ICAI whether working
in India or Outside as prescribed.
 Section 2 Important Definition: - Sec 2(2) Members Deemed to be in Practice
(CNO-
CA will be deemed to be in practice if he is doing activities given in: -
Section 2(2) (i) / (ii) / (iii)
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654.000/ Clause (iv) gives power to ICAI to issue list of services
655.000/ Regulation 191 [Covered under clause (iv)]
655.050) List of Management Consultancy Services [Covered under clause (iv)]
 Combined CA will be deemed to be in practice, if for remuneration (received or receivable) and in
Interpretation professional capacity (Not personal capacity or capacity of employee) whether individually or in
of Clauses of partnership with CA/Specified Professional
Sec 2(2)
Practice Related
(CNO-
Describes himself as PUBLIC ACCOUNTANT (Provider of Accountancy Services)
654.000/
Sets up OFFICE FOR PRACTICE
655.000/
655.050)
OFFERS to perform or performs any work (including advisory) related to ACCOUNTING
OR AUDITING (including any verification / certification)
Become advisor or representative for TAX, COSTING or FINANCIAL matters
Regulation 191 –
 Becomes ADMINISTRATOR, LIQUIDATOR, RECEIVER, TRUSTEE, ARBITRATOR,
EXECUTOR, (Trust aur paise wale kaam)
 SECRETARY to central or state government (Not covered if, SALARY CUM FULL
TIME basis)
Service Related
Salaried CA employee of individual CA or Firm in practice (FOR LIMITED PURPOSE OF
TRAINING ARTICLES)
CA in service with ARMED FORCES
List Extended by ICAI
Performing MANAGEMENT CONSULTANCY SERVICES (See next point)
 Management Implications of management consultancy services
Consultancy  People rendering such services will be deemed to be in practice.
Services  Existing practicing-chartered accountants can provide such services.
 We can create MCS (Management Consultancy Services) for such services.
 MCC cannot provide Accounting (Sec 25) / Stat & Periodic Audits / Tax /
Liquidation etc.
Management Consultancy Services
MCS excludes statutory or periodic AUDIT, TAX representation or advisory or acting as
Executor, Liquidator, Administrator, Arbitrator, Trustee or Receiver.
It includes many services, best way to remember is in sequence of incorporation of
company to its growth. (Please see below)
CA Ravi Taori
MCS, JUST REMEMBER SIMPLE LIFE CYCLE OF COMPANY
Content in Brown is recently added or modified as per new ICAI Study Material or Statutory Amendments.
Administrative Services.
Administrative services involve assisting clients with their routine or mechanical tasks within the normal
course of operations. Such services require little to no professional judgment and are clerical in nature.
Examples of administrative services include:
 Word processing services.
 Preparing administrative or statutory forms for client approval.
 Monitoring statutory filing dates and advising an audit client of those dates.
 Submitting such forms as instructed by the client.
 For example, the functions of a GST practitioner as specified under Rule 83(8) of Central Goods and
Services Tax Rules, 2017
Valuation of Shares will include following:- Acting as Registered Valuer under the Companies Act, 2013 read
with, The Companies (Registered Valuers and Valuation) Rules, 2017.
Insolvency Professional
Acting as Insolvency Professional in terms of Insolvency and Bankruptcy Code, 2016
CHAPTER II (Section 3 to 8)
 Section 3 All those have name in register will be called members
Incorporation Features are just like any other artificial legal entity
of Institute
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 Section 4 As per Sec 4(1) Cl (ii) passed such examination & passed such training
Who can As per Sec 4(1) Cl (V) passed such examination & passed such training without India as
become recognized by Central Government or Council being equivalent
member (Concept Direct of Membership & MOU based Memberships)
Membership registration fees should not exceed 3000, if prior approval from CG it may
go up to 6000.
 Section 5 Associate Member

Associate V/s As soon as name is entered in register, person become associate member.
Fellow
Fellow Member
Associate member has to apply become fellow member. Fees should not exceed 5000, if
prior approval from CG it may go up to 10,000.
Who can apply?
The name of following types of members shall be entered into the Register as a Fellow
of the Institute, on payment of such fees along with the application made and granted in
the prescribed manner-
 An associate member who has been in continuous practice in India for at least
5 years, (foreign practice will not be counted)
 A member who has been an associate for a continuous period of not less than 5
years and who possess such qualifications as may be prescribed by the Council
with a view to ensuring that he has experience equivalent to the experience
normally acquired as a result of continuous practice for a period of 5 years as
a Chartered Accountant.
The abovementioned members shall be entitled to use the letters F.C.A. after his name
to indicate that he is a Fellow Member of the Institute.
As per ICAI announcement in Dec 2014: - If CA is in job with govt entities, commercial
entities, statutory authorities or local bodies with continuous work in accounts, cost, tax,
company law or secretarial employment for 5 year or full-time paid assistant of CA for 5
years. He can apply for FCA. (Break of one year can be condoned / experience can be
partly in practice and partly in job as specified above)
 Section 6 No member of the Institute shall be entitled to practise whether in India or elsewhere
Certificate of unless he has obtained from the Council a certificate of practice.
Practice
The Code of Ethics of the Institute is applicable to all the members, even outside India.
(CNO-
So even if he has to practice outside India, he should take COP from ICAI (and have ethical
655.100/
conduct as his work affects name of ICAI), further his duties outside India will be
655.200
governed by law of the concerned country, if there is conflict, he should get clarity form
/655.300)
ICAI.
CA Ravi Taori
SIGNIFICANCE OF COP (Text)

A member who is not in practice is precluded from accepting engagement to render
services of any of the types normally prescribed for a Chartered Accountant, even
though for doing so, he does not require special qualifications. The Council of the
institute is of view that –
 Once the person concerned becomes a member of the Institute, he is bound
by the provisions of the Chartered Accountants Act and its Regulations. If
and when he appears before the Income-tax Tribunal as an Income-tax
representative after having become a member of the Institute, he could so
appear only in his capacity as a Chartered Accountant and a member of the
Institute. Having, as it were, brought himself within the jurisdiction of the
Chartered Accountants Act and its Regulations, he could not set them at
naught by contending that even though he continues to be a member of the
Institute and has been punished by suspension from practice as a member,
he would be entitled, in substance, to practice in some other capacity.
 A member of the Institute can have no other capacity in which he can take
up such practice, separable from his capacity to practice as a member of the
Institute.”
Therefore, in nutshell, a Chartered Accountant whose name has been removed from
the membership for professional and/or other misconduct, during such period of
removal, will not appear before the various tax authorities or other bodies before
whom he could have appeared in his capacity as a member of this Institute.
Case
A Chartered accountant in service may appear as tax representative before tax
authorities on behalf of his employer, but not on behalf of other employees of the
employer.
Dual COP
Concept of dual COP is allowed by ICAI only for having COP of ICAI & BAR council of
India at same time, but both designations should not be used together.
 Regulation 10 Regulation 10 provides that a Certificate of Practice (COP) shall be liable for
& cancellation, if:
Regulation 11  the name of the holder of the certificate is removed from the Register; or
Cancellation  the Council is satisfied, after giving an opportunity of being heard to the
and person concerned, that such certificate was issued on the basis of incorrect,
Restoration of misleading or false information, or by mistake or inadvertence; or
 a member has not paid annual fee for certificate of practice till 30th day of
Certificate of
September of the relevant year.
Practice
 a member has ceased to practise; or Where a COP is cancelled, the holder
shall surrender the same to the Secretary.
Further, Regulation 11 on restoration of COP states that, on an application made in
the approved Form and on payment of such fee, the Council may restore the COP with
effect from the date on which it was cancelled, to a member whose certificate has been
cancelled due to non-payment of the annual fee for the COP and whose application,
complete in all respects, together with the fee, is received by the Secretary before the
expiry of the relevant year.
 Section 7 PREFIX
Designation  Allowed
That Can Be o USAGE: Person who has acquired membership of ICAI, can use prefix
Used by CA, irrespective of whether in practice or not
CA Ravi Taori
Chartered- o DR: The use of "Dr" with the Prefix "CA" may be left to discretion of
Accountants member (i.e. whether use "CA" First or "Dr" First or use only "Dr" only)
 Not Allowed
o CA Students: "A person who has passed the Final Examination of the
Institute and complied with other requirements or not but has
enrolled himself as a member of the Institute is not entitled to use the
designation of Chartered Accountant nor the designatory letters as
CA. as a prefix to his name."
Designation
 Not Allowed
o Modifications: Industrial Accountant / Corporate Accountant / CA (1st
Attempt) / Income-tax Consultant / Cost Accountant / Company
Secretary / Cost Consultant / Management Consultant.
o Merchant Banker: CA or Firm can get registered in Category IV
Merchant Banker to act as “Advisor to Issue” covered under MCS,
details of firm can be given under caption “Advisor to Issue” (Not
Merchant Banker) but it should not be prominent. So, they can denote
themselves as “Advisor to issue” in prospectus but it should not be
written on their letter head or visiting card. (Such Registration is not
allowed from Dec 1997)
Other Descriptions or Letters
 Indicating member ship of “OTHER ACCOUNTANCY BODIES” whether in India
or outside only if recognized by council on this behalf
o Allowed
◊ CMA: Though a member cannot designate himself as a Cost
Accountant, he can use the letters A.C.M.A (Associate) or
F.C.M.A (Fellow) after his name, when he is a member of that
Institute.
◊ Permission to mention qualifications of certain Institutions:
The members are permitted to mention membership of a
foreign Institute of Accountancy, which has been recognized
by the Council through a Memorandum of Understanding
(MoU) / Mutual Recognition Agreement (MRA) with the said
Institute.
◊ DESIGNATION DUAL COP: "Members of the Institute in
practice who are otherwise eligible may also practice as
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Company Secretaries and/or Cost Accountants / Lawyers.
Such members shall, however, not use designation/s of the
aforesaid Institute/s simultaneously with the designation
"Chartered Accountant".
o Not Allowed
◊ CPA: Further, the members are not permitted to use the
initials ‘CPA’ (standing for Certified Public Accountant) on
their visiting cards.
◊ CFA: Not allowed as per supreme court judgment as ICFAI is
considered accountancy institute and it is not recognised by
ICAI for members to use letters showing its qualification or
membership
◊ Directors of Companies, Members of political parties,
position in clubs, etc.: The members of the Institute who are
also Directors in Companies, members of Political parties or
Chartered Accountants Cells in the political parties, holding
different positions in clubs or other organizations are not
permitted to mention these positions as these would be
violative of the provisions of Section 7 of the Act.
 Any other qualification as he may possess (“OTHER THAN QUALIFICATIONS
FROM ACCOUNTANCY BODIES”)
o Allowed
◊ Qualifications other than accountancy bodies: LLB, BCom,
MBA and other qualifications
◊ Insolvency Professional: A member in practice empanelled
as Insolvency Professional can mention "Insolvency
Professional" on his visiting cards, letter heads and other
communication, as this is recognized by the Central
Government. Mention of any other
nomenclatures/designations, including membership of any
Insolvency Professional Agency (Eg CS / CMA) is not
permissible.
◊ Registered Valuer: Rules on insolvency provide that the
Insolvency and Bankruptcy Board of India ("IBBI") should be
established to be the "Authority" which will hold
examinations and grant certifications of the designation of a
"Registered Valuer"
Designation for CA Firm
CA Firm can use designation “Chartered Accountants” if all the partners of which are
members of the Institute and are in practice.
 Section 8 Not attained age of 21
Disqualification Adjudged by court “unsound mind”
for ICAI Undischarged Insolvent
Membership Discharged Insolvent but not having “certificate stating misfortune and not
misconduct”
Convicted + by Court + in or outside INDIA + for moral turpitude + punishable with
transportation or imprisonment + not of technical nature + committed in professional
capacity unless granted pardon or Central Government removed disability.
(E.g. Assisting in Drug Smuggling or Terrorism )
If CA fails to inform ICAI about disqualifications he will be guilty of professional misconduct.

It may be noted that a person who has been removed from membership for a specified period,
shall not be entitled to have his name entered in the Register until the expiry of such period
Form 2 is for membership registration
First Line of Form 2
CA Ravi Taori
“I [beg to] apply that my name be entered in the Register. I hereby declare that I am not subject
to any of the disabilities stated in Section 8 of the Chartered Accountants Act, 1949”
CHAPTER III (Section 9 to 18)

 Council & Its
Committees
Aggrieved by Elections
If any person is aggrieved of election, he should make application within 30 Days
Resignation & Deemed Removal of Member
 Council member can resign which will come in force once printed in official
gazette
 Council member will automatically vacate the office if absent for 3 consecutive
meetings /guilty of professional or other misconduct / covered under section
20
Council Can Constitute 2 Types of Committees
 Standing Committee (Mandatory)
o Executive Committee Sec 17(1)
o Examination Committee Sec 17(1)
o Finance Committee. Sec 17(1)
o Disciplinary Committee Sec 21D
 Members of Standing Committee
o The President, ICAI (ex-officio member)
o The Vice President, ICAI (ex-officio member)
o 3-5 members to be elected by the Council from amongst its members
The President is the Chairman and Vice-President is the Vice-Chairman of the
Standing Committees.
 Non-Standing Committee
(As per requirement, around 35
Committees are constituted)
 Members of Non-Standing Committee
Authorized to co-opt such other members of the Institute not exceeding one-
third of the members of the committee
CA Ravi Taori
 Audit of ICAI
(Section 18)
CHAPTER IV (Section 19 to 20)

 Register of Council has duty to maintain register of members.
Members Following Details are required:
(Section 19) Name / DOB /Domicile / Residential & Professional Address / Date of entry / Qualification
/ COP Status.
 Removal of Council may remove name of member from register if
name from Disqualified under Sec 8. 2
Register Not paid prescribed fees. 3
(Section 20) Request to remove name. 4
Person is Dead. 5
If order is passed for removal, its compulsory for council to remove name. 1
 Restoration Restoration of Membership

of In addition to the provisions of the section 20 of the Chartered Accountants Act, 1949 (as discussed
Membership in above Para), Regulation 19 of the Chartered Accountants Regulations, 1988, as well states that
the name of the member may be restored by the Council in the Register on an application, in the
(Section 20
appropriate Form, received in this behalf whose name has been removed from the Register for
& Regulation non-payment of prescribed fee as required to be paid by him, if he is otherwise eligible to such
19) membership, on his paying the arrears of annual membership fee, entrance fee and additional
fee determined by the Council under the Act.
However, the effective date in case of restoration of cancelled membership, in different
situations, shall be in the following manner:
Application for restoration and requisite fees are made within the same year of
Removal:- Restoration shall be with effect from the date on which it was removed from
the Register
Removal of name under the orders of the Board of Discipline or the Disciplinary
Committee or the Appellate Authority or the High Court:- Restoration shall be in
accordance with such orders.
In other cases:-Restoration shall be with effect from the date on which the application
and fee are received.
CA Ravi Taori
CHAPTER V SECTION 21-22G
Sec 21 explains process to be followed in case of misconducts. Sec 22 explains this that ICAI can go beyond misconducts
defined in schedules to CA Act and term activities as other misconduct.
 Other
Misconduct
as per past
decided
cases
(CNO-
656.000)
CA Ravi Taori
 Disciplinary
Proceedings
(CNO-
732.000/
733.000)
 BOD V/S
Disciplinary
Committee
 Withdrawal Matter pending before

of
Complaint
Director Board of Disciplinary
Discipline Discipline Committee
Disciplinary Committee
Board of Discipline will
will decide whether matter
decide whether matter
should be
should be
closed or
closed or
it should be continued
it should be continued
Extra Points
If similar complaints are received then they can club with existing complaints, separate
case can be registered or close matter (If order is already passed), this decision is taken by
BOD / DC as the case may be depending upon status.
If their time lag of 7 year or more, director discipline will confirm from BOD whether to go
ahead.
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 Appellate
Authority Order passed APPELLATE AUTHORITY
by Within 90 Chairman (Past High Court
APPELLATE
Board of Days Judge)
AUTHORITY
Discipline Aggrieved CA 2 Past Council Member
or or 2 Government Nominee
Disciplinary Director *All are part time
Committee (Discipline) if members
permitted by Term of Chairman
ICAI 3 years (Max age 65 years)
Term of Member
3 years (Max age 62 years)
Confirm / Modify / Set Aside order / penalty Or Remit
the case to BOD /DC Or Pass such order as deems fit
Authority should give opportunity of being heard to concerned parties.

Chairman or Member can resign, it will be effective from 3 months or new appointment
or expiry of term whichever earlier.
Chairman or Member can be removed - Proven misbehavior or incapacity + Inquiry by CG
+ Opportunity of being heard.
 Reference Disciplinary Directorate is formed under Sec 21

of Sections BOD under Sec 21A
DC under Sec 21B
Appalet Authority under 21C
CHAPTER VI - (Section 23)
 Regional Council of ICAI can create Regional council to assist Central Council to perform its functions.
Council There are 5 Regional Councils
CENTRAL INDIA REGIONAL COUNCIL
NORTHERN INDIA REGIONAL COUNCIL
EASTERN INDIA REGIONAL COUNCIL
WESTERN INDIA REGIONAL COUNCIL
SOUTHERN INDIA REGIONAL COUNCIL
CHAPTER VII - (Section 24-28D)
 Penalties 1)
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OPJC University in Rajasthan was punished because they were offering & conducting course under the
nomenclature “Master in C.A.” and “Bachelor in C.A.” (under the School of Chartered Accountant)
http://www.icai.org/new_post.html?post_id=11613
2)
Partners
In addition, as per section 141(2) of the Companies Act, 2013, where a firm (including a limited liability
partnership) is appointed as an auditor of a company, then, only the partners who are chartered
accountants shall be authorised to act and sign on behalf of the firm.
LLP + Co as Partners
On thoroughly studying the provisions of both the Acts, the LLPs, though allowed to be appointed as
an auditor in accordance with the Companies Act, 2013, however, it can’t be engaged into practice, if
it has company as its partner, as per the Chartered Accountants Act, 1949.
Therefore, in short, the LLP not having any company as its partner, can be engaged into practicing
and thus take audit assignments.
3)
 Member In
Charge
(Section
27)
(CNO-
657.000/
658.000/65
9.000/
660.000)
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However, a member can be in-charge of two offices if they are located in one and the same
Accommodation.
With regard to the use of the name-board, there will be no bar to the putting up of a
nameboard in the place of residence of a member with the designation of Chartered
Accountant, provided it is a name-plate or a name-board of an individual member and not of
the firm.
 Quality
Review
Board
CHAPTER VIII (Section 29-33) MISCELLANEOUS

 Section 29
Reciprocity
The Council is also empowered to prescribe the conditions subject to which foreign
qualifications relating to accountancy shall be recognised for the purposes of entry in the
Register.
MOUs
England & Wales / Australia / New Zealand / Ireland & others
Generally members of these institutes has to pass 4 papers to get ICAI membership.
 Section 29 A Central Government can make rules regarding ->
Elections / Presiding Officer / Nominations to Council / Disciplinary Committee / Investigations /
Quality Review Board.
 Section 30 Council has power to make regulations in specified areas. These areas are similar to functions of council
(Regulation) as discussed before.
These should be approved by central government and notified in official gazette.
 Section 30 A Central Government can direct to make or amend regulations.
 Section 30 B Rules, regulations and notifications to be laid before Parliament (30 Days)
 Section 30 C Central Government can give directions to council / dissolve council / appoint temporary council
member’s / conduct elections for new council.
 Section 31 are not that relevant

/32 /33
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STRUCTURAL OVERVIEW OF ZONE-3 – FIRST SCHEDULE & ZONE-4- SECOND SCHEDULE
ZONE-3 :- FIRST SCHEDULE
IMAGE RECOGNITION MEMORY TECHNIQUE OF FIRST SCHEDULE
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FIRST SCHEDULE- PART I
CLAUSE 1 -WHO CAN PRACTICE IN NAME OF CA IN PRACTICE? (CNO-660.100)
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 Clause 1 The above clause is intended to safeguard the public against unqualified accountant practicing under
Cases & the cover of qualified accountants. It ensures that the work of the accountant will be carried out by a
Remarks Chartered Accountant who may be his partner, or his employee and would work under his control and
supervision
 Clause 1 (Try to write all the contents as given in below clause, to cram language is difficult for few, its not
From Bare necessary to write each word as it is but content and its meaning should be same with all points
Act covered)
A Chartered Accountant in practice is deemed to be guilty of professional misconduct if he:
allows any person to practice in his name as a chartered accountant unless such person is
also
 a chartered accountant in practice and
 is in partnership with or employed by him.
CLAUSE 2 - (PAYING SHARE OF FEES / PROFITS) (CNO-660.000/662.000/662.010)
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 Clause 2
Cases &
Remarks
 Goodwill Transfer of Goodwill

(CNO-
661.000)
Procedure Of Transfer Of Goodwill
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 Cases &
Remarks
On transfer of
Goodwill
 Clause 2 (Try to write all the contents as given in below clause, to cram language is difficult for few, it’s not
from BARE necessary to write each word as it is but content and its meaning should be same with all points
ACT covered)
pays or allows or agrees to pay or allow, directly or indirectly,
any share, commission or brokerage in the fees or profits of his professional business,
to any person other than
 a member of the Institute or
 a partner or
 a retired partner or
 the legal representative of a deceased partner, or
 a member of any other professional body or
 with such other persons having such qualification as may be prescribed, for the
purpose of rendering such professional services from time to time in or outside
India.
Explanation - In this item, “partner” includes a person residing outside India with whom a
chartered accountant in practice has entered into partnership which is not in contravention of
clause (4) of this Part.
CLAUSE 3 - (CAN CA ACCEPT SHARE OF FEES / PROFITS?) (CNO-662.010)
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 Clause 3 Such clause is must so that CAs don’t share fees or profits of persons who are not professionals.
Cases & Remarks
 Referal Fees Referral fees amongst members: It is not prohibited for a member in practice to charge Referral Fees,
being the fees obtained by a member in practice from another member in practice in relation to
referring a client to him.
 Clause 3 From (Try to write all the contents as given in below clause, to cram language is difficult for few, it’s not
Bare Act necessary to write each word as it is but content and its meaning should be same with all points
covered)
accepts or agrees to accept
any part of the profits of the professional work of a person
who is not a member of the Institute.
Provided that nothing herein contained shall be construed as prohibiting a member ‘from entering
into profit sharing or other similar arrangements, including receiving any share commission or
brokerage in the fees, with a member of such professional body or other person having
qualifications, as is referred to in Clause (2) of this part.
CLAUSE 4 (PARTNERSHIP) (CNO-664.000/665.000/666.000/711.000) (MCQ- Incs.04.5)
 Direct Section (4) (1) (v) was framed so that ICAI can give direct membership to some members of foreign
Membership/ bodies who wants to come to India and do practise here. But from 1997 all such permissions were
MOU Route
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cancelled and as on today there is no direct membership for foreign professionals. (England /
Scotland / Ireland / Burma / Cyelon / Pakistan / SouthAfrica) etc.
Foreign professionals can use MOU route as discussed earlier to become ICAI member.
 Partnership ICAI has not issued list of foreign professional bodies with whom membership can be done. So as on
with foreign today no partnership is possible with foreign professionals. If they use MOU route become ICAI
professional member then we can do partnership.
(In India or
Outside India)
 Multi- A Chartered Accountant in practice is not permitted to enter into partnership with any person other
Disciplinary than a Chartered Accountant in practice or such other persons as may be prescribed by the Council
Partnerships from time to time. The members may however take note of the fact that they cannot form Multi-
Disciplinary partnerships till such time that Regulators of such other professionals also permit
partnership with chartered accountants, and guidelines in this regard are issued by the Council.
 Partnership Regulation 53A gives to lists
with MBA List of Professional Bodies
List of Qualifications (Includes MBA)
(So people covered here (Including MBA) eligible under clause 2 (paying) / 3 (accepting) / 5 (securing
work)
Regulation 53B gives list of professional bodies (Doesn’t Include MBA) with whom CA in practice can
do partnership under clause 4
So it is clear from above that we can share fees and work but cannot do partnership with MBA.
Now there is drafting error, in Regulation 53A is written that it is for cl 2 / 3 / 4 / 5 now 4 should not
be there, module and many authors has ignored this point and stick to point that strictly only
Regulation 53B is relevant for partnership.
 Number of Section 464 of Companies Act 2013

Partners Prohibition of association or partnership of persons exceeding certain number.
(1) No association or partnership consisting of more than such number of persons as may be
prescribed (As on today prescribed limit is 50 people) shall be formed for the purpose of
carrying on any business that has for its object the acquisition of gain by the association or
partnership or by the individual members thereof, unless it is registered as a company under
this Act or is formed under any other law for the time being in force:
Provided that the number of persons which may be prescribed under this sub-section shall
not exceed one hundred (Maximum Limit which Government can prescribe).
(2) Nothing in sub-section (1) shall apply to—
 a Hindu undivided family carrying on any business; or
 an association or partnership, if it is formed by professionals who are governed by
special Acts. (CA’s are governed by special act (ca act), so no limit is applicable to
them)
(3) Every member of an association or partnership carrying on business in contravention of sub-
section (1) shall be punishable with fine which may extend to one lakh rupees and shall also
be personally liable for all liabilities incurred in such business.
Such clause is must so that CAs should be associated with only professionals which are also
governed by ethics.
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 Clause 4
Cases &
Remarks
Not Allowed
covered)

enters into partnership, in or outside India,
with any person other than Chartered Accountant in practice or
such other person who is a member of any other professional body having such
qualifications as may be prescribed,
including a resident who but for his residence abroad would be entitled to be registered
as a member under clause (v) of sub-section (1) of section 4 or whose qualifications are
recognized by the Central Government or the Council for the purpose of permitting such
partnerships.
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CLAUSE 5 (Securing professional work ?)
He must seek work not through any agency, but by the respect, that he is able to command for his professional talent
and skill and by the confidence he is able to inspire by his reputation. All forms of canvassing on that account are
regarded unethical and are prohibited
 Cases
& Remarks
 Clause (Try to write all the contents as given in below clause, to cram language is difficult for few, it’s not
from Bare necessary to write each word as it is but content and its meaning should be same with all points
Act covered)
Secures either through the services of a person
who is not an employee of such Chartered Accountant or
who is not his partner or
by means which are not open to a Chartered Accountant, any professional business.
Provided that nothing herein contained shall be construed as prohibiting any agreement
permitted in terms of item (2), (3) and (4) of this part.
CLAUSE 6 (Soliciting Work Through Advertisement ?)

(CNO- 666.050 / 667.000 / 668.000 / 669.000 / 670.000 / 672.000 / 673.000 / 674.000 / 675.000 / 676.000 /
677.000 / 678.000 / 678.010 / 679.000/ 681.000 / 682.000 /683.000 /684.000 / 685.000 /686.000 /687.000
/688.000 /695.010 /666.050) (MCQ-PE.3)
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Such a restraint must be practised so that members may maintain their independence of judgement and may be able
to command the respect of their prospective clients. A public advertisement is likely to lead to an impression that the
professional person is over-anxious to win confidence which however will have the opposite effect. The satisfaction
of clients would be the best advertisement. Unabashed advertisement would affect the public esteem in which the
profession is held and would act to the disadvantage of its members.
 (Clarification
on applying
to tenders)
EMD/Security Deposit:
The Council is of the view that while interference with the practices prevailing
for requirement of EMD / Deposit is not required. However, on having received
complaint / instance of exorbitant EMD / Deposit, the Ethical Standards Board
may look into the matter on case to case basis.
Cost Sheet Maintenance:
A cost sheet be maintained by members of the Institute responding to tenders,
incorporating details of the costs being incurred therein having regard to
number of persons involved, hours to be spent, etc, so that the same may be
called for by the Institute for perusal.
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 Clarifications
issued by ICAI Advertisement  Press Advertisement
regarding  BOX Numbers
solicitation of  Articles & Books
Circulars  Roving inquiry circular
Work ?
 Circulation of Representation by
auditor
 Hand Bills
Personal Communication  Greeting Cards & Invitations.
 Seeking work from professional
colleague
Interview  Public Interview
Other Means  Telephone Directory
 Acceptance of work emanating
from client introduced by other
members
 Applying for empanelment circular
Advertisement & Related Points
This point mended see note below
Classfified Ad: A member is also permitted to issue a classified advertisement in

the journal / newsletter of the Institute intended to give information for sharing
professional work on assignment basis or for seeking partnership or salaried
employment of an accountancy nature, provided it only contains the
accountant’s name, address or telephone number, fax number, e-mail address
and address(es) of Social Networking sites of members. However, mere factual
position of experience and area of specialization, relevant to seek response to
the advertisement, are permissible.
Ariticles & Book: It is not permissible for a member to mention in a book or an
article published by him, or a presentation made by him, any professional
attainment(s), whether of the member or the firm of chartered accountants,
with which he is associated. However, he may indicate in a book, article or
presentation the designation “Chartered Accountant” as well as the name of
the firm.
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Circular & Related Points
Personal Communication
CA Designation and
Firm Name Allowed
Other Means
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 Website of Approval
Chartered Chartered Accountant are free have to there websites, no prior approval is required.
Accountants
Intimation
in Practice
The website address of the member be obtained on annual basis in the annual form
(Mcq -
required to be filed by the member while paying fee and the same be taken as entry on
Incs.06.5)
record & the website address of the member be provided to members as part of the
membership record. If the member chose not to give his website address, it did not
prevent the Institute to take suitable action against him in case his noncompliance with
the guidelines.
Name of Website
Name of the website can be different from firm name, it should be as near as possible
to members name / firm name / trade name in practice, it should not amount to soliciting
clients or advertisement professional achievements. ( Only CA Logo is allowed, other
logo are not allowed)
Format
There are no restrictions on Colour / Design / Format
Images
Images of non – personal items such as books etc. on the website of a CA Firm, are not
violative of website guidelines. As regard the use of images of people (Only Passport
Size), the images of the people who are not the members of the firm are not permissible.
Firm Details
Firm Name / Address / Phone Number /Email Id / Nature of services (On pull request) /
Year of establishment (On pull request this point is covered in clause 7)
Partner Details
Name / Photo (Passport Size) / Year of qualification / Other qualification / phone number
/ address / email id / AREA OF EXPERIENCE (On pull request)
Employee Details
Name / Designation / Area of experience (On pull request), Job Vacancies (Including
articles)
Article Details
Number of articled clerks (on pull request)
Assignments
Nature of assignments handled (to be displayable only on specific “pull” request).
Names of clients and fee charged cannot be given.
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Disclosure of names of clients and/or fees charged, on the website
is permissible only where it is required by a regulator, whether or not constituted under
a statute, in India or outside India, provided that such disclosure is only to the extent of
requirement of the regulator. Where such disclosure of names of clients and/or fees
charged is made on the website, the member/ firm shall ensure that it is mentioned on
the website [in italics], below such disclosure itself, that “This disclosure is in terms of
the requirement of [name of the regulator] having jurisdiction in [name of the
country/area where such regulator has jurisdiction] vide [Rule/ Directive etc. under
which the disclosure is required by the Regulator].
On pull request:- Year of Est / Area of Experience & Nature of Assignment / Number
Articles.
Other Information
 Articles / Professional Information / Updates
 Bulletin Board
 Chat Rooms (Maintain Confidentiality)
 No unwanted information (Like live cricket score / Horoscope etc.)
 Advertisement not allowed
 Mandatory Information on LAST UPDATED
Links of Other Websites
Can provide link
 ICAI / Regional Councils and Branches and also the
 Website of Govt./Govt. Departments/Regulatory authorities
 Other Professional Bodies, such as, American Institute of Certified Public
Accountants (AICPA), the Institute of Chartered Accountants of England & Wales
(ICAEW) and The Canadian Institute of Chartered Accountants (CICA)
 The Firm can provide link of its page on Social Networking site. However, the
members should not solicit people to visit or like their respective page(s) on such
social Networking site.
Link to CA Association / Rotary / Lions Club / Chamber of Commerce is not
allowed.
Official Stationery
Name can be mentioned on official stationary, but it should not lead direct or indirect
solicitation. No Circulation or Advertisement to promote website.
www.cafirm.in allowed
Visit www.cafirm.in  Not allowed (Solicitation)
Pull Basis
Name of firm should appear in search engines on “pull basis” and not “push basis”.
Listing on search engine allowed with tags “ Chartered Accountant / CA / Indian CA /
Indian CPA”
Content Promotion
The Chartered Accountants and/or Chartered Accountants’ Firms should ensure that
none of the information contained in the Website be circulated on their own or through
E-mail or by any other mode or technique except on a specific “pull” request.
Database Listing
A number of Chartered Accountants Societies or other bodies are creating databases of
Chartered Accountants or Chartered Accountants’ Firms and are offering listing to
Chartered Accountants. Such listing would be permitted with or without payment. In
case a Chartered Accountant or Chartered Accountants’ Firm is a member of a
professional body or association or Chamber of Commerce and they offer listing to the
members or firm, the same would be permitted
Services
CAs can give online services on there website for free or on payment basis.
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CA can provide services through websites of banks others etc provided address of CA, no
advertisement of CA, The name of Chartered Accountants’ firm with suffix “Chartered
Accountants” would not be permitted.
Secrecy
The Website should ensure adequate secrecy of the matters of the clients handled
through Website.
 Clause 6
Cases &
Remarks
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Amended See Note Below
 Sponsoring Activities
(a) A member in practice or a Firm of Chartered Accountants is not permitted to
sponsor an event. However, such member or Firm may sponsor an event
conducted by a Programme Organizing Unit (PoU) of the ICAI, provided such
event has the prior approval of Continuing Professional Education (CPE)
Directorate of the ICAI.
(b) Members sponsoring activities relating to Corporate Social Responsibility
may mention their individual name with the prefix “CA”. However, the mention
of Firm name or CA Logo is not permitted.
 Educational Videos: While the videos of educational nature may be uploaded

on the internet by members, no reference should be made to the Chartered
Accountants Firm wherein the member is a partner/ proprietor. Further, it
should not contain any contact details or website address.
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covered)
Solicits clients or professional work either directly or indirectly by
 circular,
 advertisement,
 personal communication or
 interview or
 by any other means.
Provided that nothing herein contained shall be construed as preventing or prohibiting
Any Chartered Accountant from applying or requesting for or inviting or securing
professional work from another chartered accountant in practice; or
A member from responding to tenders or enquiries issued by various users of
professional services or organizations from time to time and securing professional
work as a consequence.
CLAUSE 7 - DESIGNATION & ADVERTISING PROFESSIONAL ATTAINMENTS
(CNO-664.000/673.000/689.000/691.000/692.000/692.100/693.000/694.000/695.000/695.010) (MCQ-PE.11)
 Designation
Points are same as discussed for Section 7
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 Advertising
Professional
Attainments
WRITE-UP
The Member(s)/Firm(s) should ensure that the contents of the Write up are true to the
best of their knowledge and belief and are in conformity with these Guidelines and be
aware that the Institute of Chartered Accountants of India will neither approve a propose
write-up, nor owns any responsibility whatsoever for such contents or claims by the
writer Member(s)/ Firm(s). It shall be honest and truthful
Details
For Member (Individual) For Firm
Logo Yes Yes

Name / Photo / Yes, Membership Yes, Firm Registration
Age or Year of Registration Number Number (Mandatory)
Establishment / (Mandatory)
Registration Number
Date of becoming ACA Yes, for member / Yes, for partners /
/ FCA / COP + Other employees employees
Qualification +
Languages Known
Services Offered Yes (No name of clients) Yes (No name of clients)
Details of Employees Yes Yes
(Number)
Partners / CAs /
Articles / Other Prof /
Other Employees
Address / Working Yes Yes
Hours / Telephone /
Mobile / Fax / E-mail /
Website
Signature / Date / Yes Yes
Place
Shortcut:- CA’s should be FANDO2M2S2 about write up but take care of the following
 The write-up should not be of Font size exceeding 14.
The write-up should not violate the provisions of the 'Act', Rules / Regulation
(Example -Portfolio Management)
 The write-up should not include the Names of the clients (both past and present)
 The write-up should not contain any other representation(s) that may like to cause a
person to misunderstand and/or to be Deceived.
(Example -“Associate of Income Tax Department”)
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 The write-up should not contain any information Other than prescribed
herein.(Example- Caste)
 It must not make any disparaging references or unsubstantiated comparisons to the
work of Others.
 The write-up should not be
o false or
o Misleading (Example - 30 past & present employees)
o disrepute profession (Example - Come to us no need to pay taxes)
o indecent nature.( Example - We know price tag of all authorities)
 Monogram of any kind or use of any kind of catch words is not permissible
 The write-up should not claim Superiority over any other Member(s)/Firm(s) /
testimonials or endorsements concerning Member(s).
(Example - Padmbhushan Awardee)
 There shall be no exaggerated claims for the Services offered by the member or the
Firm, or the qualifications or experience of the member or any of the partners or any
other person associated with the Firm.
 Other
Clarifications
Under Clause
7
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 Some Recent CCM, RCM and Member of Managing Comm. of Branches may print either their
Clarification residential address, or office address including Tel. / Fax No. without mentioning the
firm’s name on the back of the visiting cards"
(CAR-KI
Associates of CA Firms: The Council has issued the following guidelines for use of
Clarifications)
expressions such as ‘Associates of ‘Correspondents of... etc. on letter heads, visiting
cards etc. of firms of Chartered Accountants:(Association etc)
The use of expressions / words ‘in Association with .... ‘Associates of ‘Correspondents
of.... etc., on the stationery letter heads, visiting cards and professional documents etc.
of firms of Chartered Accountants is not permissible in view of the provisions of clause
(7) of Part I of the First Schedule to the Chartered Accountants Act, 1949 irrespective of
whether the connection bearing name sought to be used was the name of an Indian firm
or a foreign firm. The Council has not barred entering into such association and the
restriction given under the above clause is to bar an advertisement appearing / derived
from such associations."
Rotary Visiting Card: Member who is in practice cannot use the designation of `District
Governor’ in his rotary visiting card along with the word `Chartered Accountant’ “
Knowledge Partner: Permitting the use of firm name by client, mentioning the firm as a
"Knowledge Partner" or in the "Thank You" advertisement, is not permissible, however
mention of name of an individual member with prefix/suffix “CA” as a “knowledge
partner “ is permissible.
ISO Certification: Whether the office of a CA is permitted to go in for ISO 9001:2000
certification or other similar certifications?
Yes, there is no bar for a member to go in for ISO9001:2000 certification or other similar
certifications.
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However, the member cannot use the expression like “ISO Certified” on his professional
documents, visiting cards, letterheads or sign boards etc."
Common CA Logo :
 Brand Promotion: To promote the brand of CA profession and responding to
the long felt need to have a symbol of CA Profession in India, ICAI came up with
a unique logo which could be used by all members, whether in practice or not.
Encapsulating the current beliefs, attitudes and values of the profession, the CA
Logo seeks to enhance the identity of the members.
 Significance of Colours: The logo consists of the letters ‘CA’ with a tick mark
(upside down) inside a rounded rectangle with white background. The letters
‘CA’ have been put in blue, the corporate colour which not only stands out on
any background but also denotes creativity, innovativeness , knowledge,
integrity, trust, truth, stability and depth. The upside down tick mark, typically
used by the chartered accountants, has been included to symbolize the wisdom
and value of the professional. The green colour in the tick mark signifies growth,
prosperity, harmony and freshness. Members are encouraged to use this logo.
The Council has decided that use of CA logo in the stamp is permissible, subject
to CA logo guidelines.
 Visiting Card
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 Clause 7
Cases &
Remarks
From Bare Act necessary to write each word as it is but content and its meaning should be same with all points
covered)
Advertises his professional attainments or services, or
uses any designation or expressions other than the Chartered Accountant on
professional documents, visiting cards, letter heads or sign boards unless it be a degree
of a University:-
 established by law in India or
 recognized by the Central Government or
 a title indicating membership of the Institute of Chartered Accountants or of
any other institution that has been recognized by the Central Government or
may be recognized by the Council.
Provided that a member in practice may advertise through a write up, setting out the
service provided by him or his firm and particulars of his firm subject to such guidelines
as may be issued by the Council.
 Cases where
both clause 6 1. The offer document of a listed The Council of the ICAI has in a communication
& clause 7 are company in which Mr. D, a to members stated that if a public company, in
applicable practising Chartered Accountant which a chartered accountant in practice is a
is a director mentions the name director, issues a prospectus or gives any
of Mr. D as a director along with announcement that gives descriptions about the
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(FB & his various professional Chartered Accountant’s expertise, specialisation
CHROMA) attainments and spheres of and knowledge in any particular field, it shall
specialisation. constitute a misconduct under Clauses (6) and (7)
of Part I of the First Schedule to the Chartered
Accountants Act, 1949. The Council has further
stated that in such cases the member concerned
has to take necessary steps to ensure that such
prospectus or public announcements or public
communications do not advertise his
professional attainments and also that such
prospectus or public announcements or public
communications do not directly or indirectly
amount to solicitation of clients for professional
work by the members. Thus in the instant case,
Mr. D would be held to be guilty of professional
misconduct and liable for disciplinary action
2. A Chartered Accountants firm Clause 6 - Circular
issued circulars to the non-
clients that a Chartered Clause 7 - Professional Attainments
Accountant who was the former
partner in-charge of Taxation of
one of the largest accounting
firms of the world, had joined
them as partner. Can they do it?
3. Mr. Nigal, a Chartered Solicitation under Clause (6)
Accountant in practice, delivered &
a speech in the national ‘Management Expert’ - Inappropriate
conference organized by the Designation under Clause (7)
Ministry of Textiles. While
delivering the speech, he told to
the audience that he is a
management expert and his firm
provides services of taxation and
audit at reasonable rates. He also
requested the audience to
approach his firm of chartered
accountants for these services
and at the request of audience he
also distributed his business cards
and telephone number of his firm
to those in the audience.
Comment.
4. Can a Chartered Accountants firm The advertisement for Silver, Diamond, Platinum
give advertisement in relation to and Centenary celebrations of the firms has been
Silver, Diamond, Platinum or permitted to be published in any newspaper or in
Centenary celebration of the the newsletters. It has been allowed after
firm? (Clarification issued by considering both requirements of clause 6 & 7
ICAI)
5. Ranking
It has been brought to the notice of some members that certain entities are seeking
details of the Chartered Accountants firms, for the purpose of making ranking of the
various Firms through comparison of different parameters.
In this regard, Members are hereby informed that sharing of details of their Chartered
Accountants firms in the aforesaid manner does not fall within the permitted
categories , and would therefore be violative of Clause 6 of Part-I of First Schedule to
The Chartered Accountants Act, 1949 .
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Further, as it is known beforehand that the information regarding firms would be used
for ranking purposes, the sharing of such details would tacitly result in claiming
superiority of one firm over other, which is prohibited in terms of the Advertisement
Guidelines of the ICAI under Clause 7 of Part –I of First Schedule to The Chartered
Accountants Act, 1949. Members are therefore advised to abstain from such sharing
of details of their Chartered Accountants Firms.
6. The use of banner with name of CA firm is not permissible in terms of provisions of
Items 6 and 7 of Part –I of First Schedule to The Chartered Accountants Act, 1949
7. Where a Chartered Accountant had addressed a letter to the Managing Director of a
company offering his services as a practicing chartered accountant and giving
impression that the letter had been addressed to more than one organization for the
above purpose, it was held that the member had contravened the provisions of
Clauses (6) & (7). [Yogesh Gupta (1996)]
8. Publishing a book by a firm containing its history for the purpose of distributing to
clients, associates, friends and well wishers And printing of the words ‘Celebrating 75
years in the Profession’ on special letterheads and envelopes of the firm will lead to
solicitation of professional work, hence not permissible as per the provisions of
Clauses (6) and (7) of Part I of the first Schedule to the C.A. Act, 1949.“
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CLAUSE 8 - COMMUNICATION WITH PREVIOUS AUDITOR BEFORE ACCEPTING AUDIT (CNO-696.000/ 696.100/
698.000/ 699.000/700.000/702.000/704.000) (MCQ - Incs.04.3/Incs.06.3)
 Applicability It is applicable to all audits (Previously held by Chartered Accountant)

of Clause 8  Voluntary Audit (Proprietorship Audit/ Partnership Audit)
 Statutory Audit (Company Audit /Trust Audit /Co-Operative Society Audit /Bank
Audit etc.)
 Cost Audit
 Internal Audit
 Concurrent Audit
 Government Company Audit
 Branch Audit
 Environment Audit
 Quality Audit etc.
 Not  Bookkeeping / Certification / Consultancy
applicable  Special Audit under Multi State Co-operative / Special Audit under Income Tax
to Act Under Section 142 (2A)
 Where earlier auditor was not CA.
 Steps Step 1 - Appointment Letter Received from Client
Whether entity has informed previous auditor, if not then enquire with entity regarding
reason for change of auditor, if there is no valid reason then it will be healthy practice
not to accept such audit.
Step 2 - Communication with previous auditor
 Communication should be prior to accepting audit.
 It should be in writing.
 By R.P.A.D (Registered Post Acknowledgement Due) or by hand against an
acknowledgement in writing. Not under; certificate of posting, speed post,
private courier etc
 Mode of Communication: Members should communicate with a retiring auditor
in such a manner as to retain in their hands positive evidence of the delivery of
the communication to the addressee. In the opinion of the Council, the following
would in the normal course provide such evidence:-
(a) Communication by a letter sent through “Registered Acknowledgement
due”, or
(b) By hand against a written acknowledgement, or
(c) Acknowledgement of the communication from retiring auditor’s vide email
address
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registered with the Institute or his last known official email address, or
(d) Unique Identification Number (UDIN) generated on UDIN portal (subject to
separate guidelines to be issued by the Council in this regard)
 Premises found Locked: The communication received back by the Incoming
Auditor with “Office found Locked” written on the Acknowledgement Due shall
be deemed as having been delivered to the retiring auditor.
 Firm not found at the given Registered address: If the Communication sent by
the Incoming auditor is received back with remarks “No such office exists at this
address”, and the address of communication is the same as registered with the
Institute on the date of dispatch, the letter will be deemed to be delivered,
unless the retiring auditor proves that it was not really served and that he was
not responsible for such non-service.
 Even if no tax audit was conducted in last year then also CA should communicate
with whoever was last auditor during previous years.
 No communication is required in case of death of previous auditor, However CA
may be required to get a letter from the entity to confirm the factum of death
of previous auditor.
 In case of companies as per company act 2013, concept of acceptance after
appointment is removed instead consent is taken before appointment in such
case now communication should take place before consent.
Step 3 - Reply of previous auditor
 It is responsibility of previous auditor to reply communication in writing.
 If he doesn’t reply, then we have to wait for reasonable time and then we can
go ahead with acceptance.
 If he has sent back objections, then we have to scrutinize reasons.
o Non-compliance of provisions of Section 139 (Previously Sec 224) &
Section 140 (Previously 225) of Companies Act.
o Non-payment of undisputed audit fee (except sick units)
Sick Companies means where liabilities are more than assets.
o Issuance of qualified report--CA may accept if he thinks that attitude of
retiring auditor wasn't proper & justified. However, if retiring auditor
qualified it for good & valid reasons, incoming should refuse.
Step 4 - Acceptance letter sent to client
 It is sent after analyzing reply or waiting for reasonable time schedule.
 In case there is tight time schedule, he may immediately accept audit on
conditional basis, subject to reply of previous auditor.
 Clause 8
Cases &
Remarks
Clause 8 From (Try to write all the contents as given in below clause, to cram language is difficult for few, it’s not
covered)
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accepts a position as auditor previously held by another chartered accountant or
a certified auditor who has been issued certificate under the Restricted Certificate
Rules, 1932
without first communicating with him in writing.
CLAUSE 9 - ASCERTAIN WHETHER REQUIREMENTS OF COMPANIES ACT ARE COMPLIED (CNO-705.000/706.000)
 Clause 9
Cases and
Remarks
 Clause 9 (Try to write all the contents as given in below clause, to cram language is difficult for few, it’s not
Act covered)
Accepts an appointment as auditor of a company
without first ascertaining from it
whether the requirements of Section 225 of the Companies Act, 1956, in respect of such
appointment have been duly complied with (now Section 139, 140 and 142 read with
Section 141 of the Companies Act, 2013)
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CLAUSE 10 (Charging Fees? ) (CNO-707.000/707.020/709.000) (MCQ-Incs.01.4)
 Regulation No Chartered Accountant in practice shall charge or offer to charge, accept or offer to
192 accept, in respect of any professional work, fees which are based on a percentage of profits,
or which are contingent upon the findings or results of such work, provided that:
a) in the case of certain management consultancy services as may be decided by the
resolution of the Council from time to time, the fees may be based on percentage
basis which may be contingent upon the findings, or results of such work;
b) In the case of an auditor of a co-operative society, the fees may be based on a
percentage of the paid-up capital or the working capital or the gross or net income
or profits;
c) in the case of certain fund-raising services, the fees may be based on a percentage
of the fund raised;
d) in the case of services related to cost optimisation, the fees may be based on a
percentage of the benefit derived; and
e) in the case of debt recovery services, the fees may be based on a percentage of
the debt recovered;
f) In the case of a valuer for the purposes of direct taxes and duties, the fees may be
based on a percentage of the value of property valued
g) “In the case of a receiver or a liquidator, the fees may be based on a percentage
of the realization or disbursement of the assets.
h) any other service or audit as may be decided by the Council.
[Following activities have been decided by the Council under “h” above :-
(i) Acting as Insolvency Professional;
(ii) Non-Assurance Services to Non-Audit Clients]
Can CA in practice charge fees on percentage basis in case of recovery in banking
sector?
 Giving Service is Permissible
A question arises whether the Chartered Accountants in Practice acting as
Recovery Consultant for recovery of Non-Performing Assets (NPA) of Banks, the
service permitted to be rendered pursuant to Section 2(2)(iv), can charge fee on
percentage basis as is permitted under Regulation 192 for „receiver‟ or
„liquidator‟.
 Recent Amendment in Regulation 192
The Council of the Institute has framed Regulation 192 which exempts debt
recovery services where fees may be based on a percentage of the debt recovered.
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Hence, CA. will not be held guilty for professional misconduct, if he charges fees
on percentage basis in case of debt recovery services. Earlier ESB opinion which
prohibited it is overridden by amendment.
 Clause 10
Cases and
Remark
Act covered)
Charges or offers to charge, accepts or offers to accept
in respect of any professional employment fees which are based on a percentage of
profits or which are contingent upon the findings, or results of such employment,
except as permitted under any regulations made under this Act
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CLAUSE 11 - BUSINESS OR OCCUPATION
(CNO-666.000/ 668.100/ 711.000/ 712.000/ 713.000/ 714.000/ 715.000/ 716.000/ 717.000/ 719.000/
720.000/ 721.000) (MCQ- PE.1, Incs.06.2)
191
 Activities SERVE CAMEL in P2AIN

given in Acting as Surveyor/Loss Assessor under Insurance Act
General Employment under C.A./C.A. firm,
Permissions Recovery consultant (Banking Sector)
(No approval Valuation of paper, paper setter, head-examiner or moderator for any exam.
required) Editorship of professional journal. ,
Attending Class and appearing in any exams, (ARTICLESHIP OF CS)
Authorship of Books/Articles.
Holding public elective office (M.P., M.L.A.)
Honorary office of Charitable-Educational institute,
Holding Life Insurance Agency licence (only for limited purpose of getting Renewal
Commission.),
Private tutorship.
Part time tutorship under coaching organization of institute,
Owning Agricultural land and carrying agricultural activity.
Insurance brokerage.
Notary public, Justice of peace, Special Executive Magistrate.
 Activities ONE2 FEMALE
given in
Specific Any Other business or occupation for which the Executive Committee considers that
Permissions permission may be granted.
(Approval Full-time or part-time employment in Non-business concern.
Required) Full-time or part-time Employment in business concerns provided that the member
and/or his relatives do not hold “substantial interest” in such concerns”.
Part-time or full-time tutorship under any Educational institution other than the coaching
organization of the Institute.
Interest in Family business concerns or concerns in which interests has been acquired as
a result of relationships and in the management of which no active part is taken.
Interest in an Educational institution.
Office of Managing director or a whole-time director o a body corporate within the
meaning of the Companies Act, 2013 provided that the member and/or any of his
relatives do not hold substantial interest in such concern
Interest in Agricultural and allied activities carried on with the help, if required, of hired
labour.
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Part-time or full-time Lectureship for courses other than those relating to the Institute’s
examinations conducted under the auspices of the Institute or the Regional councils or
their branches.
Editorship of journals other than professional journals.
 Clarification Member in practice in a HUF doing business: “A member of the Institute can acquire
regarding interest in family business in any of the following manner:
interest in (i) as a proprietary firm
family (ii) as a partnership firm
bsuiness (iii) in the name and style of Hindu Undivided Family as its Karta or a member.
It would be necessary for the members to provide evidence that interest in the family
business concern devolved on him as a result of inheritance/succession/partition of
the family business. It is also necessary for the member to show that he was not
actively engaged in carrying on the said business and that the family business concern
in question was not created by himself.
To establish his case, the member should furnish a declaration in the prescribed
format and the documents evidencing above for consideration to the concerned
Decentralized Office.”
 Part Time CA who are pursuing following activities are deemed to be in part time practice
Practice (I-
 Insurance brokerage.
SEL)
 Performing any activity apart from above under specific permission by ICAI
except if permitted by executive committee.
 Employment under C.A./C.A. firm,
 Engagement as Lecturer in an University, affiliated college, educational
institution, coaching organisation, private tutorship, provided the direct teaching
hours devoted to such activities taken together exceed 25 hours a week
They cannot perform attest function & train articles.
 Clarifications Selling Agents
 Cannot become direct selling agent , can become credit card credentials verifier”
(General Permission)
 CA in practice can establish TIN-FC on its own or under franchisee (General
Permission)
 A chartered accountants in practice cannot become Financial Advisors and
receive fees/commission from Financial Institutions such as Mutual Funds,
Insurance Companies, NBFCs etc.
 It is not permissible for chartered accountants in practice to take agencies of UTI,
GIC or NSDL.
 A member in practice cannot hold Customs Brokers Licence under section 146 of
the Customs Act, 1962 read with Customs Brokers Licensing Regulations, 2013 in
terms of the provisions of Code of Ethics
Settler of Trust
 It is permissible for a member in practice to be a settler of a trust.
Directorship
 The Ethical Standards Board while noting that there is requirement for a Director
u/s 149(3) of the Companies Act, 2013 to reside in India for a minimum period of
182 days in the previous calendar year, decided that such a Director would be
within the scope of Director Simplicitor (which is generally permitted as per ICAI
norms), if he is non –executive director, required in the Board Meetings only ,
and not paid any remuneration except for attending such Board Meetings.
 As per Committee on Ethical Standards has decided director of holding should
not become auditor in subsidiary company, though it is not prohibited by
Company Act 2013.
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Act covered)
A Chartered Accountant in practice is deemed to be guilty of professional misconduct if he
Engages in any business or occupation other than the profession of chartered
accountant unless permitted by the Council so to engage.
Provided that nothing contained herein shall disentitle a chartered accountant from
being a director of a company (Not being managing director or a whole time director)
unless he or any of his partners is interested in such company as an auditor.
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CLAUSE 12 (CNO-722.000/723.000/724.000/724.500)
 Cases &
Remarks
Act covered)
Allows a person
not being
o a member of the institute in practice or
o a member not being his partner
to sign on his behalf or on behalf of his firm,
any balance sheet, profit and loss account, report or financial statements.
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FIRST SCHEDULE - PART II
CLAUSE 1
From necessary to write each word as it is but content and its meaning should be same with all points
Bare Act covered)
A member of the Institute (other than a member in practice) shall be deemed to be guilty of
professional misconduct, if
he being an employee of any company, firm or person
pays or allows or agrees to pay directly or indirectly to any person
any share in the emoluments of the employment undertaken by him.
Clause 2 (CNO-729.000)
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From necessary to write each word as it is but content and its meaning should be same with all points
Bare Act covered)
A member of the Institute (other than a member in practice) shall be deemed to be guilty of
professional misconduct, if
he being an employee of any company, firm or person
accepts or agrees to accept any part of fees, profits or gains
from a lawyer, a chartered accountant or broker engaged by such company, firm or person
or agent or customer of such company, firm or person by way of commission or gratification.
FIRST SCHEDULE - PART III
CLAUSE 1
from Bare necessary to write each word as it is but content and its meaning should be same with all points
Act covered)
A member of the Institute, whether in practice or not, shall be deemed to be guilty of professional
misconduct, if he
not being a fellow of the Institute, acts as a fellow of the Institute
CLAUSE 2 (CNO-730.000/731.000/731.100)
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 Case &
Remark
Act covered)
misconduct, if he –
does not supply the information called for, or does not comply with the requirements
asked for,
by the Institute, Council or any of its Committees, Director (Discipline), Board of Discipline,
Disciplinary Committee, Quality Review Board or the Appellate Authority.
Clause 3
Act covered)
misconduct, if he
while inviting professional work from another chartered accountant or
while responding to tenders or enquiries or
while advertising through a write up, or
anything as provided for in items (6) and (7) of Part I of this Schedule,
gives information knowing it to be false
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FIRST SCHEDULE - PART IV (CNO-656.000/737.010)
CLAUSE 1
Act covered)
A member of the Institute, whether in practice or not, shall be deemed to be guilty of other
misconduct, if he -
is held guilty by any civil or criminal court for an offence which is punishable with
imprisonment for a term not exceeding six months.
Clause 2 (CNO-732.000/733.000/735.000/736.000/737.000/754.000) (MCQ-PE.2)
 Clarification Sending malicious emails against the Institute or its members, spreading false, misleading or
defamatory statements brings disrepute to the profession or the Institute. And it is a misconduct
under First Schedule Part IV Clause 2
http://www.icai.org/new_post.html?post_id=11612&c_id=219
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 Case &
Remarks
Act covered)
misconduct, if he -
in the opinion of the Council, brings disrepute to the profession or the Institute as a result
of his action whether or not related to his professional work.
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ZONE-4: - SECOND SCHEDULE
PICTORIAL OVERVIEW OF SECOND SCHEDULE
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SECOND SCHEDULE- PART I
CLAUSE 1 (CNO-738.000/739.000)
 In Case of
Fraud
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 Cases &
Remarks
 Clause 1 A Chartered Accountant in practice shall be deemed to be guilty of professional misconduct, if he

From Bare Discloses Information acquired in the course of his professional engagement to any person
Act other than his client so engaging him.
without the consent of
o his client or
o otherwise than as required by any law for the time being in force.
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CLAUSE 2 (CNO-757.000/759.000)
 Clause 2 From (Try to write all the contents as given in below clause, to cram language is difficult for few, its
Bare Act not necessary to write each word as it is but content and its meaning should be same with all
points covered)
A Chartered Accountant in practice shall be deemed to be guilty of professional misconduct,
if he :-
If he certifies or submits in his name or in the name of his firm,
a report of an examination of financial statements
unless the examination of such statements and the related records has been made
o by him or
o by a partner or
o an employee In his firm or
o by another chartered accountant in practice.
CLAUSE 3 (CNO-740.000/741.000/742.000/743.000)
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 Cases &
Remarks
Act covered)
A Chartered Accountant in practice shall be deemed to be guilty of professional misconduct, if he :-
Permits his name or the name of his firm
to be used in connection with an estimate of earnings contingent upon future transactions
in manner which may lead to the belief that he vouches for the accuracy of the forecast.
CLAUSE 4 (CNO-744.000/745.000/746.000/747.000/747.050/747.070) (MCQ- PE.9, PE.10)
 Scope of The words “financial statements” used in this clause would cover both reports and certificates
Word usually given after an examination of the accounts or the financial statement or any attest
Financial function under any statutory enactment or for purposes of income-tax assessments.
Statement In
This would not, however, apply to cases where such statements are prepared by members in
Clause 4
employment purely for the information of their respective employers in the normal course of their
duties and not meant to be submitted to any outside authority. (Not applicable to report on MIS
as it is for internal purpose)
In my opinion it wont be applicable to internal auditor report, because of variety of reasons as
follows
Internal Audit Report is not for outsiders, not submitted to any authority.
It is not only on financial statements.
It is not necessary that internal audit should be independent as per SA 610 , he should be
objective (unbiased) in reporting.
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 Cases &
CA Part-time lecturer in a college He/ his firm not to accept auditor-ship of
Remarks
college.
If CA is employee of concern He cannot audit financial statements of
employer.
A partner of CA is employee/ trustee of trust CA/ his firm cannot audit financial
statements of trust.
CA is appointed as liquidator He cannot audit statements of Accounts U/s
348 (1) of the Companies Act 2013.
CA is writing books of accounts of the He can't audit the financial statements of
enterprise same enterprise.
CA is internal auditor of a concern He can't accept statutory auditor ship of
same concern.
 Some other
Cases &
Remarks
 Clarifications System Auditor

o Whether a statutory auditor can accept the system audit of same entity?
Yes, the statutory auditor can accept the assignment of a system audit of the
same entity, provided it do not involve any scrutiny/review of financial data and
information.
o A statutory auditor and tax auditor cannot be valuer of the unquoted equity
shares as it would create threats to independence of the auditor, which may not
possibly be reduced by application of safeguards.
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Internal Auditor related clarifications
o It is prohibitive to undertake the assignments of internal Audit of a client and
entry of the transaction for Accounting simultaneously being violative of the
provisions of the `Guidance Note on Independence of Auditors’."
o A CA/CA Firm can act as the internal auditor of a company & statutory auditor
of its employees PF Fund under the new Companies Act (2013).
o A CA Firm which has been appointed as the internal auditor of a PF Trust by a
Government Company cannot be appointed as its Statutory Auditor.
Bank Audit related clarifications
o Concurrent auditor of an entity cannot accept an assignment under any statute
o A concurrent auditor of a bank ‘X’ cannot be appointed as statutory auditor of
bank ‘Y’, which is sponsored by ‘X’. (Many RRBs are sponsored by Indian Banks)
o A chartered accountant who is the statutory auditor of a bank cannot for the
same financial year accept stock audit of the same branch of the bank or any of
the branches of the same bank or sister concern of the bank, for the same
financial year.
 Applicability Many new areas of professional work have been added, e.g., Tax Audit, GST Audit, Concurrent
to all attest Audit of Banks, Concurrent Audit of Borrowers of Financial institutions, Audit of non-corporate
functions borrowers of Banks and Financial Institutions, Audit of Stock Exchange, Brokers, etc. The Council
wishes to emphasize that the aforesaid requirement of Clause (4) are equally applicable while
performing all types of attest functions by the members.
 Applicability to It is not permissible for a member to undertake the assignment of certification, wherein the
certification client is relative of the member. The "relative" for this purpose would refer to the definition
work mentioned in Accounting Standard (AS)-18.
 Applicability to An accountant is expected to be no less independent in the discharge of his duties as a tax
Consuntancy & consultant or as a financial adviser than as auditor. In fact, it is necessary that he should bear the
Advisory same degree of integrity and independence of mind in all spheres of his work. Unless this is done,
the accounts of entities audited by Chartered Accountants or statements made by them during
the course of assessment proceedings would not be relied upon as correct by the authorities.
 Guidance for Some of the situations which may arise in the applicability of Clause (4) read with the definition
cases of of “Substantial Interest” (see Clause 11 of Part I of First Schedule).and other statutory prohibitions
substantial are discussed below for the guidance of members:-
interest
For Audits of entities not being company
Where the member, his firm or his partner or his relative has substantial interest in the
business or enterprise (not being a company). The independence of mind is a
fundamental concept of audit and/or expression of opinion on the financial statements
in any form and, therefore, must always be maintained. Nothing can substitute for the
essential and fundamental requirements of independence. Therefore, the Council’s views
are clarified in the following circumstances.
 An enterprise / concern (not being company) of which a member is either an
owner or a partner
The holding of interest in the business or enterprise (not being a company) by a
member himself whether as sole-proprietor or partner in a firm, in the opinion
of the Council, would affect his independence of mind in the performance of
professional duties in conducting the audit and/or expressing an opinion on
financial statements of such enterprise. Therefore, a member shall not audit
financial statements of such business or enterprise.
 Where the partner or relative of a member has substantial interest (not being
company)
The holding of substantial interest by the partner or relative of the member in
the business or enterprise (not being a company) of which the audit is to be
carried out and opinion is to be expressed on the financial statement, may also
affect the independence of mind of the member, in the opinion of Council, in the
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performance of professional duties. Therefore, the member may, for the same
reasons as not to compromise his independence, desist from undertaking the
audit of financial statements of such business or enterprise.
For Audits of Companies – Same as disqualifications given in Sec 141(3) of companies
act
Act covered)
A Chartered Accountant in practice shall be deemed to be guilty of professional misconduct, if
he :-
Expresses his opinion on financial statements of any business or enterprise in which he,
his firm, or a partner in his firm has a substantial interest.
CLAUSE 5 TO CLAUSE 9
CLAUSE 5 (CNO-748.000/749.000/750.000/751.000/753.000)
CLAUSE 6 (CNO-753.000)
CLAUSE 7 (CNO-754.000/755.000/756.000/757.000/759.000)
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CLAUSE 8 (CNO-758.000/759.000)
CLAUSE 9
 Cases Clause 5 Cases

 Non creation of sinking fund as debenture trust deed.
 Loan taken from employee provident fund not disclosed
 Material Claim against company not disclosed.
Clause 6 Cases
 Under statement of Liability / Provision.
 Statement and certificate submitted to tax authority are misleading and incorrect.
 Issuing wrong certificate for end use of fund for bank.
Clause 7 Cases
 Repeated to failure to appear before tax authority .
 If auditor fails to detect fraud. Which were apparent, big or where they were
indication he will be guilty for not exercising due Professional care.
 Not able to complete Audit as per giving time schedule and statutory requirement.
 Signing B/S and P&L a/c before approval from BOD.
 Signing two B/S by applying different judgments for same company same period.
 Giving opinion subjected to separate notes but such notes did not exit.
 Sending Audit report through value paid post.
Clause 8 Cases
In following case CA is consider as guilty of professional misconduct.
 Blind reliance on internal audit report in some arrears. (Clause 8 is appropriate can
refer at the end that clause 7 can also be applied)
 Z, a practicing Chartered Accountant issued a certificate of circulation of a
periodical without going into the most elementary details of how the circulation
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of a periodical was being maintained i.e. by not looking into the financial records,
bank statements or bank pass books, by not examining evidence of actual payment
of printers bills and by not caring to ascertain how many copies were sold and paid
for. (Clause 8 is appropriate can refer at the end that clause 7 can also be applied)
 Mr. A, a Chartered Accountant was the auditor of 'A Limited'. During the financial
year 2007-08, the investment appeared in the Balance Sheet of the company of
`10 lakhs and was the same amount as in the last year. Later on, it was found that
the company‘s investments were only Rs 25,000, but the value of investments was
inflated for the purpose of obtaining higher amount of Bank loan. (Clause 8 is
appropriate can refer at the end that clause 7 can also be applied)
Clause 9 Cases
In following case CA is consider as guilty of professional misconduct. SAs not followed by
CA and not reported.
 Clauses (Try to write all the contents as given in below clause, to cram language is difficult for few, its not
Act covered)
Clause 5
A Chartered Accountant in practice shall be deemed to be guilty of professional
misconduct, if he
 fails to disclose a material fact known to him which is not disclosed in a financial
statement,
 but disclosure of which is necessary in making such financial statement not
misleading
 where he is concerned with that financial statement in a professional capacity.
Clause 6
misconduct, if he
 Fails to report a material misstatement known to him to appear in a financial
statement
 with which he is concerned in a professional capacity.
Clause 7
misconduct, if
 he does not exercise due diligence, or is grossly negligent in the conduct of his
professional duties.
 Clauses (Try to write all the contents as given in below clause, to cram language is difficult for few, its not
Act covered)
Clause 8
misconduct, if he
 Fails to obtain sufficient information which is necessary for expression of an
opinion or its exceptions are sufficiently material to negate the expression of an
opinion.
Clause 9
misconduct, if he
 Fails to invite attention to any material departure from the generally accepted
procedure of audit applicable to the circumstances.
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CLAUSE 10 (CNO-760.000/761.000/762.000/763.000/764.000)
Money Received
Fees or Remunerations For expenses Other

(Including Advance)
Separate Bank Account
No Restrictions Intended to
be spent in Other
short time ***If received in capacity
of liquidator, trustee etc
No Separate put in separate a/c
Restrictions bank account Immediately
Should be used Within

reasonable time
 Clarifications In this connection the Council has considered some practical difficulties of the members and the
By ICAI following suggestions have been made to remove these difficulties:
An advance received by a Chartered Accountant against services to be rendered does not
fall under Clause (10) of Part I of the Second Schedule. (No need to keep in separate bank
account)
Moneys received for expenses to be incurred, for example, payment of prescribed
statutory fees, purchase of stamp paper etc., which are intended to be spent within a
reasonably short time need not be put in a separate bank account. For this purpose, the
expression; “reasonably time”, would depend upon the circumstances of each case.-
Moneys received for expenses to be incurred which are not intended to be spent within
a reasonably short time as aforesaid, should be put in a separate bank account
immediately.
Moneys received by a Chartered Accountant, in his capacity as trustee, executor
liquidator, etc. must be put in a separate bank account immediately.
 Cases &
Remarks
Act covered)
A Chartered Accountant in practice shall be deemed to be guilty of professional misconduct, if
he :-
fails to keep moneys of his client other than fees or remuneration or money meant to
be expended in a separate banking account or to use such moneys for purposes for
which they are intended within a reasonable time.
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SECOND SCHEDULE - PART - II
CLAUSE 1 (CNO-655.100/724.000/731.000/765.000/766.000/768.000/769.000) (MCQ – PE.4)
 Regulations Registeration
Related To Principal should not ask for premium to provide Articleship.
Articles Principal should not take security deposit from article’s father for Articleship.
Principal should not loan from article’s family business for granting Articleship.
Principal should not register article without COP or beyond vacancy available.
The facility of allowing flexible office hours stands withdrawn.
Working hours
The normal working hours for the articled assistants shall not start after 11.00 A.M. or end
before 5.00 P.M.
The office hours of the Principal for providing article training to the articled assistants shall
not be generally before 9.00 A.M. or after 7.00 P.M.
The working hours for the articled assistants shall be 35 hours in a week excluding the
lunch break.
In case of the exigencies of work with the Principal, an articled assistant may be required
to work beyond his/her normal working hours. However, under such circumstances, the
aggregate number of working hours shall not exceed 45 hours per week. The requirement
to work beyond 35 hours in a week should not be a practice but only in exceptional
circumstances. Further, where the articled assistant is required to work beyond normal
working hours, and aggregate of such hours exceed 35 hours per week, he/she shall be
entitled to compensatory leave calculated with reference to number of completed
working hours, over and above, 35 hours per week.
Other Work
During the working hours, the articled assistant is not permitted to attend college/other
institutions for pursuing any course including graduation. Accordingly, college timings of
such course should not be such (after taking into account the time required to commute)
which clashes with the normal working hours of the article training.
Without the previous permission of the Council, obtained on application made in the
approved form, no articled clerk shall, during the period of his service as an articled clerk,
take any other course of study or training, whether academic or professional, or engage
in any business or occupation.
Stipend
The stipend under this regulation shall be paid by the principal to the articled assistant
either (a) by a crossed account payee cheque every month against a stamped receipt to
be obtained from the articled assistant; or (b) by depositing the amount every month in
an account opened by the articled assistant in his own name with a branch of the bank to
be specified by the principal.
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 Number of
Articles
 Some There is Statement on CPE hours under which ICAI keeps announcing requirement for
Important number of hours of continuing professional education required for CAs in practice & those
Regulations who are not in practice even taking into consideration age and other factors. If this is not
Related To complied ICAI can give advance notice and take action against members and this will also
CA’s a professional misconduct under Schedule 2 Part 2 Clause 1
"Audit of listed companies shall now be carried out only by the auditors who have
undergone Peer Review Process
 And have obtained Peer Review Certificate from the Peer Review Board.
 This decision is effective for accounting periods commencing on or after 1st April,
2009."
Members of the Institute who are engaged in coaching be advised not to undertake
coaching between 9.30 AM and 5.30 PM
FRN and Membership No. : The members are required to mention the Membership
number and Firm registration number to all reports issued pursuant to any attestation
engagements, including certificates, issued by them as proprietor of/ partner in the said
firm.
Unique Document Identification Number (UDIN) : The members may note that UDIN is
mandatory from 1st July, 2019 on all Corporate/ Non- Corporate Audit, Attest and
Assurance Functions. Thus, a member of the Institute in practice shall generate Unique
Document Identification Number (UDIN) for all kinds of the certification, GST and Tax Audit
Reports and other Audit, Assurance and Attestation functions undertaken/signed by him.
Act covered)
misconduct, if he -
contravenes any of the provisions of this Act or the regulations made there under or any
guidelines issued by the Council.
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CLAUSE 2
Act covered)
misconduct, if he -
being an employee of any company, firm or person,
discloses confidential information acquired in the course of his employment except
as and when required by any law for the time being in force or except as permitted by
the employer.
CLAUSE 3 (CNO-768.000/769.000/770.000)
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Act covered)
misconduct, if he -
Includes in any information, statement, return or form to be submitted to the Institute,
Council or any of its Committees, Director (Discipline), Board of Discipline. Disciplinary
Committee, Quality Review Board or the Appellate Authority any particulars knowing
them to be false.
CLAUSE 4
Act covered)
misconduct, if he -
Defalcates or embezzles money received in his professional capacity.
SCHEDULE II - PART – III (CNO-656.000/737.000/774.000/774.010/776.000)

CLAUSE 1
Act covered)
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misconduct, if he
is held guilty by any civil or criminal court for an offence which is punishable with
imprisonment for a term exceeding six months.
COUNCIL GENERAL GUIDELINES, 2008. (CNO-771.000/772.000/773.000/779.000)
 Shortcut C-BU3NT2LINES to remember council guidelines 2008
 Guidelines for Name Approval: The name of the Management Consultancy Company is required to be
Corporate approved by the Institute and such Company has to be registered with the Institute. The
Form of guidelines alongwith the prescribed application forms for approval of name and
Practice registration, provisions of ethical compliance and other details have been issued and the
same will come into force w.e.f 1.10.2006.
Object of Management Consultancy Company: The Management Consultancy Company
shall engage itself only in Management Consultancy & Other Services. The Management
Consultancy Company shall give an undertaking that it shall render only Management
Consultancy & Other Services prescribed by the Council pursuant to powers under
section 2 (2)(iv) of the Chartered Accountants Act, 1949.
One more mode of practice:The consultancy practice hitherto done in Individual or Firm
Status alone is now intended to be permitted in Corporate Form also.
No Audit: On abundant caution, it may be clarified that no audit practice can be done in
Corporate Form.
No restriction on equity: There will be no restriction on the quantum of the equity
holding of the members, either individually and/ or along with the relatives, in such
Company.
Permission to become MD, WTD, Manager of Body Corporate: The Council decided to
allow members in practice to hold the office of Managing Director, Whole-time Director
or Manager of a body corporate within the meaning of the Companies Act provided that
the body corporate is engaged exclusively in rendering Management Consultancy and
Other Services permitted by the Council in pursuant to Section 2(2)(iv) of the Chartered
Accountants Act, 1949 and complies with the conditions(s) as specified by the Council
from time to time in this regard.The members can retain full time Certificate of Practice
besides being the Managing Director, Whole-time Director or Manager of such
Management Consultancy Company. Such members shall be regarded as being in full-
time practice and therefore can continue to do attest function either in individual
capacity or in Proprietorship/Partnership firm in which capacity they practice and
wherein they are also entitled to train articled/audit assistants.
Ethical Compliance:
 Compliance: (i)Once the Management Consultancy Company is Registered with
the Institute as per the Guidelines, it will be necessary for such a Company to
comply with the following requirements: -
o Prohibited Services: (a)If the individual practitioner / sole-
proprietorship firm / partnership firm is the statutory auditor of an
entity then the Management Consultancy Company should not accept
the internal audit or book-keeping or such other professional
assignments, which are prohibited for the statutory auditor firm.
o Non Audit Fees: (b) The Notification No. 1-CA(7)/60/2002 dated 8th
March, 2002 (enclosed) in respect of ceiling on Non-audit fees is
applicable in relation to a Management Consultancy Company.
o Advertisment & Achievements: (c) The Management Consultancy
Company shall comply with clauses (6) & (7) of Part-I of the First
Schedule to the Chartered Accountants Act, 1949 and such other
directives as may be issued by the Institute from time to time.
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 Undertaking: (ii) The Management Consultancy Company shall give an
undertaking that it shall comply with clauses (6) & (7) of Part-I of the First
Schedule to the Chartered Accountants Act, 1949 and such other directives as
may be issued by the Institute from time to time.
 Maintenance Maintain Cash Book & Ledger: A member of the Institute in practice or the firm of Chartered
of Books of Accountants of which he is a partner, shall maintain and keep in respect of his / its
account professional practice, proper books of account including the following-
(i) a Cash Book;
(ii) a Ledger
 Appointment Don’t Accept Assignment: A member of the Institute in practice shall not accept the appointment
of an Auditor as auditor of an entity in case the undisputed audit fee of another Chartered Accountant for
in case of carrying out the statutory audit under the Companies Act, 2013 or various other statutes has not
non-payment been paid:
of undisputed
Exception Sick Unit: Provided that in the case of sick unit, the above prohibition of acceptance
fees
shall not apply.
Definition of Undisputed Audit Fees: Explanation 1: For this purpose, the provision for audit fee
in accounts signed by both - the auditee and the auditor along with other expenses, if any,
incurred by the auditor in connection with the audit, shall be considered as “undisputed audit
fees”.
Defnition of Sick Unit: Explanation 2: For this purpose, “sick unit” shall mean a unit registered for
not less than five years, which has at the end of any financial year accumulated losses equal to or
exceeding its entire net worth.
 Directions in Comply with Direction: A member of the Institute in practice shall follow the direction given, by
case of the Council or an appropriate Committee or on behalf of any of them, to him being the incoming
unjustified auditor(s) not to accept the appointment as auditor(s), in the case of unjustified removal of the
removal of earlier auditor(s).
auditors
 Unique Why UDIN ?: Whereas, to curb the malpractice of false certification / attestation by the
Document unauthorized persons & to eradicate the practice of bogus certificates and to save various
Identification regulators, banks, stakeholders etc. from being misled, the Council of the Institute decided to
Number implement an innovative concept to generate Unique Document Identification Number (UDIN)
(UDIN) mandatorily for all kinds of the certificates/GST and Tax Audit Reports and other attest function
Guidelines in phased manner, for which members of the ICAI were notified through the various
announcements published on the website of ICAI www.icai.org at the relevant times.
Applicability: A member of the Institute in practice shall generate Unique Document
Identification Number (UDIN) for all kinds of the certification, GST and Tax Audit Reports and
other Audit, Assurance and Attestation functions undertaken/signed by him which made
mandatory from the following dates through announcements published on the website of the
ICAI www.icai.org at the relevant time: -
• For all Certificates w.e.f. 1st February, 2019.
• For all GST and Tax Audit Reports w.e.f. 1st April, 2019.
• For all other Audit, Assurance and Attestation functions w.e.f. 1st July, 2019
 A member of Restriction to go beyond SNA: A member of the Institute in practice shall not hold at any
the Institute time appointment of more than the “specified number of audit assignments” (SNA) of
in practice Companies under Section 141 of the Companies Act 2013.
shall not hold
SNA for FIRM: Provided that in the case of a firm of Chartered Accountants in practice,
at any time
the “specified number of audit assignments” shall be construed as the specific number
appointment
of audit assignments for every partner of the firm.
of more than
the “specified SNA if CA is Partner in Multiple Firms:
number of Provided further that where any partner of the firm of Chartered Accountants in practice
audit is also a partner of any other firm or firms of Chartered Accountants in practice, the
assignments” number of audit assignments which may be taken for all the firms together in relation to
of Companies such partner shall not exceed the “specified number of audit assignments” in the
under Section aggregate.
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141 of the Provided further where any partner of a firm or firms of Chartered Accountants in
Companies practice accepts one or more audit of Companies in his individual capacity, or in the name
Act 2013. of his proprietary firm, the total number of such assignments which may be accepted by
all firms in relation to such Chartered Accountant and by him shall not exceed the
“specified number of audit assignments” in the aggregate.
Explanation of SNA:
1. For the above purpose, the “specified number of audit assignments” means –
 For Individual / Proprietor:
(a) in the case of a Chartered Accountant in practice or a proprietary firm of
Chartered Accountant, 30 audit assignments whether in respect of private
Companies or other Companies, with the exception of one person Companies
and dormant companies.
 For Partnership Firm:
(b) in the case of Chartered Accountants in practice, 30 audit assignments per
partner in the firm, whether in respect of private Companies or other
Companies, with the exception of One person Companies and dormant
companies.
Counting of SNA:
2. In computing the “specified number of audit assignments”-
 Joint Audits: (a) the number of audit of such Companies, which he or any partner
of his firm has accepted whether singly or in combination with any other
Chartered Accountant in practice or firm of such Chartered Accountants, shall be
taken into account.
 Head Office & Branch: (b) the audit of the head office and branch offices of a
Company by one Chartered Accountant or firm of such Chartered Accountants
in practice shall be regarded as one audit assignment.
 One or more branches: (c) the audit of one or more branches of the same
Company by one Chartered Accountant in practice or by firm of Chartered
Accountants in practice in which he is a partner shall be construed as one audit
assignment only.
 Time of Counting Partners:(d) the number of partners of a firm on the date of
acceptance of audit assignment shall be taken into account.
CA in Employment: A Chartered Accountant in practice, whether in full-time or part time
employment elsewhere, shall not be counted for the purpose of determination of
“specified number of audit of Companies” by firms of Chartered Accountants.
CA in Part Time Practice: A Chartered Accountant being a part time practicing partner of
a firm shall not be taken into account for the purpose of reckoning the audit assignments
of the firm.
Record of Assignments: A Chartered Accountant in practice as well as firm of Chartered
Accountants in practice shall maintain a record of the audit assignments accepted by him
or by the firm of Chartered Accountants, or by any of the partners of the firm in his
individual name or as a partner of any other firm, as far as possible in the prescribed
format.
 Tax Audit Maximum number of Tax Audits: A member of the Institute in practice shall not accept,
assignments in a financial year, more than the “specified number of tax audit assignments” under
under Section Section 44AB of the Income-tax Act, 1961.
44 AB of the
For Firm: Provided that in the case of a firm of Chartered Accountants in practice, the
Income-tax
“specified number of tax audit assignments” shall be construed as the specified number
Act, 1961
of tax audit assignments for every partner of the firm.
CA partner in Multiple Firms:
Provided further that where any partner of the firm is also a partner of any other firm or
firms of Chartered Accountants in practice, the number of tax audit assignments which
may be taken for all the firms together in relation to such partner shall not exceed the
“specified number of tax audit assignments” in the aggregate.
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Provided further that where any partner of a firm of Chartered Accountants in practice
accepts one or more tax audit assignments in his individual capacity, the total number of
such assignments which may be accepted by him shall not exceed the “specified number
of tax audit assignments” in the aggregate.
Exlusions from Counting:
Provided also that the audits conducted under Section 44AD, 44ADA1 and 44AE of the
Income Tax Act, 1961 shall not be taken into account for the purpose of reckoning the
“specified number of tax audit assignments”
Explanation Specified Number of Audits (SNA):
For the above purpose, “the specified number of tax audit assignments” means –
 For Individual or Proprietor : in the case of a Chartered Accountant in practice
or a proprietary firm of Chartered Accountant, **60 tax audit assignments, in a
financial year, whether in respect of corporate or non-corporate assesses.
 For Partnership Firm : (b) in the case of firm of Chartered Accountants in
practice, **60 tax audit assignments per partner in the firm, in a financial year,
whether in respect of corporate or non-corporate assesses.
 Clarification on utilisation of limit of partner by other partner: According to a
clarification on Tax Audit Assignments by Committee on Ethical Standards Board)
of the Institute, if there are 10 partners in a firm of Chartered Accountants in
practice, then all the partners of the firm can collectively sign 600 tax audit
reports. This maximum limit of 600 tax audit assignments may be distributed
between the partners in any manner whatsoever. For instance, 1 partner can
individually sign 600 tax audit reports in case remaining 9 partners are not
signing any tax audit report.
 Each year as separate assignment: In computing the “specified number of tax
audit assignments” each year’s audit would be taken as a separate assignment.
 Joint Audits: In computing the “specified number of tax audit assignments”, the
number of such assignments, which he or any partner of his firm has accepted
whether singly or in combination with any other Chartered Accountant in
practice or firm of such Chartered Accountants, shall be taken into account.
 Head Office & Branch Office: The audit of the head office and branch offices of
a concern shall be regarded as one tax audit assignment.
 One or Branches: The audit of one or more branches of the same concern by one
Chartered Accountant in practice shall be construed as only one tax audit
assignment.
 Part Time COP Holder: A Chartered Accountant being a part time practicing
partner of a firm shall not be taken into account for the purpose of reckoning the
tax audit assignments of the firm.
 Recaord: A Chartered Accountant in practice shall maintain a record of the tax
audit assignments accepted by him in each assessment year in the format as may
be prescribed by the Council.
 Distribution of Limit as per SQC 1: The limit on number of tax audit assignments
per partner in a CA Firm may be distributed between the partners in any manner
whatsoever. However, it should be in accordance with the Standard on Quality
Control (SQC) 1: Quality Control for Firms that Perform Audits and Reviews of
Historical Financial Information, and Other Assurance and Related Services
Engagements.
 Guidelines on A member of the Institute in practice shall not respond to any tender issued by an organization or
Tenders user of professional services in areas of services which are exclusively reserved for chartered
accountants, such as audit and attestation services. However, such restriction shall not be
applicable where minimum fee of the assignment is prescribed in the tender document itself or
where the areas are open to other professionals along with the Chartered Accountants.
 Logo The logo consists of letter ‘CA’ with a tick mark inside a rounded rectangle with white background.
Guidelines The letters CA have been put in blue, the corporate colour which not only stands out on the
background but also denotes creativity, innovativeness, knowledge, integrity, trust, truth, stability
and depth. The upside down tick mark typically used by Chartered Accountants, has been used to
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symbolize the wisdom and value of the professional. The green colour in the tick mark signifies
growth, prosperity, harmony and freshness.
Members are encouraged to use the new logo, as published here as it is. Do not change the design
and colours, including the white background. Refrain from rotating or tilting the logo.
The correct and incorrect usage of the logo is explained as under:
 Appointment A member of the Institute in practice or a partner of a firm in practice or a firm or a relative of
of an auditor such member or partner shall not accept appointment as auditor of a concern while indebted to
when he is the concern or given any guarantee or provided any security in connection with the indebtedness
indebted to a of any third person to the concern, for limits fixed in the statute and in other cases for amount
concern exceeding Rs 100,000/-
 Guidelines for Discussed Latter
Networking
 Conduct of a A member of the Institute who is an employee shall exercise due diligence and shall not be grossly
Member negligent in the conduct of his duties.
being an
Employee
 Appointment Applicability & Condition for Fees of Other Works, Assignements or Services: A member
as Statutory of the Institute in practice shall not accept the appointment as statutory auditor of Public
auditor Sector Undertaking(s) / Government Company(ies) / Listed Company(ies) and other
Public Company(ies) having turnover of Rs 50 crores or more in a year where he accepts
any other work(s) or assignment(s) or service(s) in regard to the same Undertaking(s) /
Company(ies) on a remuneration which in total exceeds the fee payable for carrying out
the statutory audit of the same Undertaking / company.
If any other stingent conditions they will prevail: Provided that in case appointing
authority(ies) / regulatory body(ies) specify(ies) more stringent condition(s) /
restriction(s), the same shall apply instead of the conditions / restrictions specified under
these Guidelines.
Fees of firm & associates put together: The above restrictions shall apply in respect of
fees for other work(s) or service(s) or assignment(s) payable to the statutory auditors and
their associate concern(s) put together.
Inclusion & Exclusions: For the above purpose,
(i) the term “other work(s)” or “service(s)” or “assignment(s)” shall include Management
Consultancy and all other professional services permitted by the Council pursuant to
Section 2(2)(iv) of the Chartered Accountants Act, 1949 but shall not include:-
(a) audit under any other statute;
(b) certification work required to be done by the statutory auditors; and
(c) any representation before an authority;
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Definition Associate Concern: (ii) the term “associate concern” means any corporate
body or partnership firm which renders the Management Consultancy and all other
professional services permitted by the Council wherein the proprietor and/or partner(s)
of the statutory auditor firm and/or their “relative(s)” is/are Director/s or partner/s
and/or jointly or severally hold “substantial interest” in the said corporate body or
partnership;
Definition Relative & Substantial Interest: (iii) the terms “relative” and “substantial
interest” shall have the same meaning as are assigned thereto under Appendix (9) to the
Chartered Accountants Regulations, 1988.
Manner of Comuptation on Aggregate Basis: In regard to taking up other work(s) or
service(s) or assignment(s) of the undertaking/company referred to above, it shall be
open to such associate concern or corporate body to render such work(s) or service(s) or
assignment(s) so long as aggregate remuneration for such other work(s) or service(s) or
assignment(s) payable to the statutory auditor/s together with fees payable to its
associate concern(s) or corporate body(ies) do/does not exceed the aggregate of fee p
ayable for carrying out the statutory audit.
COUNCIL GUIDELINES FOR ADVERTISEMENT, 2008
W2OADED with Advertisment Guidelines
 Write-Up Covered with Clause 7

 Website Covered with Clause 6
 Online Third A number of non-Chartered Accountants’ firms, corporates including banks, finance Companies
Party and newspapers have set up their own Websites providing advisory services on taxation and other
Platforms areas where Chartered Accountants are rendering professional service. Some of such Websites
may request Chartered Accountants or Chartered Accountants’ firms
to provide consultation and advice through their Websites. No other service, besides consultancy
and advice can be rendered through such websites, This would be permitted subject to the
condition that on the Website, contact address of the Chartered Accountant concerned is not
provided nor such Website will contain any material which advertises professional achievements
or status of such Chartered Accountant except making a statement that they are Chartered
Accountants. The name of Chartered Accountants’ firm with suffix “Chartered Accountants”
would not be permitted.
 Publication of Name or Firm Name Covered with Clause 6

by Chartered Accountants in the
Telephone or other Directories
published by Telephone Authorities
or Private Bodies
 Specialised The name, description and address of member (or firm) may appear in any directory or list of
Directories members of a particular body in which the names are listed alphabetically. For a specialised
for limited directory or a publication such as a “Who’s Who” (including those compiled on purely local basis),
circulation a member should use his discretion in supplying information, bearing in mind the nature and
purpose of the publications. In addition to his name, description and address and those of his firm,
a member may give where appropriate, directorships held and reasonable personal details and
may state his outside interests. He should not, however, give the names of any of his clients.
 Application It is not permissible for members to list themselves with online Application based service provider
based Aggregators, wherein other categories like businessmen, technicians, maintenance workers,
Service event organizers etc. are also listed.
provider
Aggregators
 Exemptions Covered in clause 7 (News paper advertisment & article assitant clearning exams)
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ZONE-5: - MISCELLANEOUS
KNOW YOUR CLIENT (KYC) NORMS (CNO-782.000/782.005)

The Council of ICAI approved the following KYC Norms which are mandatory in nature and shall apply in all
assignments pertaining to attest functions.
Explanation: “Attest Functions” for the purpose of this Announcement will include services pertaining to Audit,
Review, Agreed upon Procedures and Compilation of Financial Statements.
 Where General Information
Client Is An  Name of the Individual
Individual/  Business Description
Proprietor  Copy of last Audited Financial Statement
1  PAN No. or Aadhar Card No. of the Individual
Engagement Information
 Type of Engagement
Client Is A  Name and Address of the Entity
Corporate  Name of the Parent Company in case of Subsidiary
Entity  Business Description
3  Copy of last Audited Financial Statement
Regulatory Information
 Company PAN No.
 Company Identification No.
 Directors’ Names & Addresses
 Directors’ Identification No.
Client Is A  Name and Address of the Entity
Non-  Partner’s Names & Addresses (with their PAN/Aadhar Card/DIN No.)
Corporate  Business Description
Entity  Copy of last Audited Financial Statement
2  Copy of PAN No.
These KYC Norms shall be mandatorily applicable for engagements accepted on or after 1st January,
2017.
LLP RELATED CLARIFICATIONS

If the proposed name of LLP includes the words `Chartered Accountant’ or chartered Accountants, as the
case may be, as part of the proposed name, the same shall be referred to the Institute of Chartered
Accountants of India (ICAI) by the Registrar of LLP and it shall be allowed by the Registrar only if the
Secretary, ICAI approves it.
If the proposed name of LLP of CA firm resemble with any other non-CA entity as per the naming Guidelines
under LLP Act and its Rules, the proposed name of LLP of CA firms may include the word `Chartered
Accountant’ or `Chartered Accountants’ so as to avoid confusion.
The names of the CA firms registered with the ICAI shall remain reserved for the partners as one of the options
for LLP names.
Where two similar or identical or nearly similar firm names (whether the partners of such firms are same or
not) have been registered by ICAI, under the proposed LLP, only one such firm name shall be approved and
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remaining firm registered with ICAI, either desires to convert into LLP or not, a change in the firm name shall
be required.
The name of the LLP may be like `X & Co. LLP’ or `X & Associates LLP’ and no other suffix shall be approved
and registered by ICAI.
LLP shall be subject to the same regulations, as if they were in partnership firm. Mere conversion into LLP
does not give any privileges, which were not earlier with the CA firms.
Conversion or non conversion doesn't have any impact on CA firm with respect to CA Act, Rule and Regulation.
Once converted into LLP old firm will get dissolved.
(The registration number (with minimum 6 numbers) of LLP with ICAI, shall remain the same Firm Registration
Number (FRN) allotted to the firm before the conversion by ICAI with the Regional Code like `W’ for Western,
È’ for Eastern, `S’ for Southern, `N’ for Northern and `C’ for Central Region at the end.
GUIDELINES BY ETHICAL STANDARD BOARD REGARDING REMOVAL OF AUDITOR

The following guidelines have been issued for this Committee for looking into the cases of Removal of Auditors:
Where an auditor resigns his appointment as an auditor of a Company or does not offer himself for
reappointment as auditor of such company, he shall send a communication, in writing, to the Board of
Directors of the Company giving reasons therefore if he considers that there are professional reasons.
Therefore, if he considers that there are professional reasons connected with his resignation or not offering
him for reappointment which, in his opinion should be brought to the notice of the Board, and shall send
a copy of such communication to the Institute. It shall be obligatory on the incoming auditor, before
accepting appointment, to obtain a ‘copy of such communication, from the Board and consider the same
before accepting the appointment.
Where an auditor, though willing for reappointment has not been reappointed, he shall file with the Institute
a copy of the statement which he may have sent to the management of the company for circulation among
the shareholders. It shall be obligatory on the incoming auditor before accepting the appointment, to
obtain a copy of such a communication from the company and consider it, before accepting the
appointment.
The Committee, on a review of the communications referred to in above paras may call for such further
information as it may require from the incoming auditor, the outgoing auditor and the company and make
a report to the Council in cases where it considers necessary.
The above procedure is also followed in the case of removal of auditors by the government and other
statutory authorities.
RECOMMENDED SELF-REGULATORY MEASURES

The more important of these recommendations are as under:
Ratio Between Qualified and Unqualified Staff: In the Council’s view, a practicing firm of Chartered
Accountants engaged in audit work should have at least one member for every five non-qualified members
of the staff, excluding articled and audit clerks, typists, peons and other persons not engaged directly in such
professional work.
Joint Audit - In the case of large companies the practice of associating a practicing firm with less than five
members as Joint auditors should be encouraged. Where a client desires to appoint such a firm as joint
auditor, the senior firm should not object to the same.
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Disclosure of Interest by Auditors in other Firms - The Council has decided that as a good and healthy
practice, auditors should make a disclosure of the payments received by them for other services through the
medium of a different firm or firms in which the said auditor may be either a partner or proprietor.
Branch Audits - The branch audits of a company should not be conducted by its statutory auditors consisting
of ten or more members, but should be conducted by the local firms of auditors consisting of less than ten
members. This should not be understood to mean any restriction on the right of the statutory auditors to
have access over branch accounts conferred under the Companies Act, 1956 (now Companies Act, 2013). This
restriction may not apply in the following cases.
 where the accounting records of the branches are maintained at the head office of the respective
companies, and
 where significant operations of an undertaking or a company are carried out at its branch office.
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ADVERTISING BY MEMBERS IN PRACTICE ENGAGED IN COACHING/TEACHING

ACTIVITIES
 Regulation Regulation 190A of the Chartered Accountants Regulations, 1988 provides that a chartered
190A accountant in practice shall not engage in any business or occupation other than the
issued as profession of accountancy, except with the permission granted in accordance with a
per First resolution of the Council.
Schedule,
Part 1,
Clause 11
 Permission The Council has passed a Resolution under Regulation 190A granting general permission (for
for private tutorship, and part-time tutorship under Coaching organization of the Institute) and
Teaching specific permission (for part-time or full-time tutorship under any educational institution
other than Coaching organization of the Institute).
 Restrictions Such general and specific permission granted is subject to the condition that the direct
teaching hours devoted to such activities taken together should not exceed 25 hours a week
in order to be able to undertake attest functions.
 First Keeping in view the broad purview of Clause (6) of Part I of the First Schedule to the Chartered
Schedule, Accountants Act, 1949, an advertisement of Coaching /teaching activities by a member in
Part 1, practice may amount to indirect solicitation, as well as solicitation by any other means, and
Clause 6 may therefore be violative of the provisions of Clause (6) of Part I of the First Schedule to the
Chartered Accountants Act, 1949.
 Abstain In view of the above, such members are advised to abstain from advertising their association
from with Coaching /teaching activities through hoardings, posters, banners and by any other
Advertising means, failing which they may be liable for disciplinary action, as per the provisions of
Chartered Accountants Act, 1949 and Rules /Regulations framed thereunder.
 Sign Board Subject to the above prohibition, such members may put, outside their Coaching /teaching
Allowed premises, sign board mentioning the name of Coaching/teaching Institute, contact details and
subjects taught therein only. As regards the size and type of sign board, the Council Guidelines
as applicable to Firms of Chartered Accountants would apply.
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PROFESSIONAL ETHICS--NETWORK GUIDELINES
CONCEPT OF NETWORK
 Network is a To enhance their ability to provide professional services, firms frequently form
larger larger structures with other firms and entities. Whether these larger structures
structure, create a network depends on the particular facts and circumstances and does not
but all larger depend on whether the firms and entities are legally separate and distinct.
structures
may not be For example, a larger structure may be aimed only at facilitating the referral of
network work, which in itself does not meet the criteria necessary to constitute a network.
Alternatively, a larger structure might be such that it is aimed at co-operation and
the firms share a common brand name, a common system of quality control, or
significant professional resources and consequently is deemed to be a network.
 Further, an association between a firm and an otherwise unrelated entity
to jointly provide a service or develop a product does not in itself create a
network.
 The judgment as to whether the larger structure is a network shall be
made in light of whether a reasonable and informed third party would be
likely to conclude, weighing all the specific facts and circumstances, that
the entities are associated in such a way that a network exists. This
judgment shall be applied consistently throughout the network.
www.auditguru.in 1. 79
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Summary Chart
Concept of Network
To enhance ab ility to
provide professional
services, firms form
larger structures with
other firms and
entities.
Whether this creates a network depends on the p articular facts and

circumstances and d oes not d epend on whether the firms and entities are
legally separate and distinct.
Example
A larger structure may b e aimed

on ly at facilitatin g th e referral of A larger structure aimed at co-
work op eration and the firms share
Or profits, costs or significant
association between a firm and an profession al resources or common
otherwise unrelated entity to ownership or common strategy or
jointly provide a service or develop a common brand n ame, or a
a prod uct common system of quality con trol
It does not meet the criteria of

Deemed to be a network
network.
Judgmen t whether whether a that th e entities

larger structure is a reason able and are associated in
network shall be made in formed th ird party su ch a way that a
in light of would b e likely to network exists
conclude, weighing
all the specific facts
and circumstances
This judgement shall be applied

consistently throughout the
network
 Deemed Where the larger structure is aimed at co-operation and it is clearly aimed at profit
Network or cost sharing among the entities within the structure, it is deemed to be a
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network. However, the sharing of immaterial costs does not in itself create a
network. In addition, if the sharing of costs is limited only to those costs related to
the development of audit methodologies, manuals, or training courses, this would
not in itself create a network.
Where the larger structure is aimed at co-operation and the entities within the
structure share a significant part of professional resources, it is deemed to be a
network.
 Professional resources include:
o Partners and staff;
o Audit methodology or audit manuals; and Training courses and
facilities.
o Technical departments that consult on technical or industry specific
issues, transactions or events for assurance engagements;
o Common systems that enable firms to exchange information such
as client data, billing and time records;
 Significant part of professional services
The determination of whether the professional resources shared are significant,
and therefore the firms are network firms, shall be made based on the
relevant facts and circumstances. Where the shared resources are limited
to common audit methodology or audit manuals, with no exchange of
personnel or client or market information, it is unlikely that the shared
resources would be significant. The same applies to a common training
endeavour. Where, however, the shared resources involve the exchange of
people or information, such as where staff are drawn from a shared pool,
or a common technical department is created within the larger structure
to provide participating firms with technical advice that the firms are
required to follow, a reasonable and informed third party is more likely to
conclude that the shared resources are significant.
Where the larger structure is aimed at cooperation and the entities within the
structure share common ownership, control or management, it is deemed to be a
network. This could be achieved by contract or other means.
structure share a common business strategy, it is deemed to be a network. Sharing
a common business strategy involves an agreement by the entities to achieve
common strategic objectives. An entity is not deemed to be a network firm merely
because it co-operates with another entity solely to respond jointly to a request for
a proposal for the provision.
structure share common quality control policies and procedures, it is deemed to
be a network. For this purpose, common quality control policies and procedures are
those designed, implemented and monitored across the larger structure.
structure share the use of a common brand name, it is deemed to be a network. A
common brand name includes common initials or a common name. A firm is deemed
to be using a common brand name if it includes, for example, the common brand
name as part of, or along with, its firm name, when a partner of the firm signs an
audit report.
 Even though a firm does not belong to a network and does not use a
common brand name as part of its firm name, it may give the appearance
that it belongs to a network if it makes reference in its stationery or
promotional materials to being a member of an association of firms.
Accordingly, if care is not taken in how a firm describes such memberships,
a perception may be created that the firm belongs to a network.
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Summary (Deemed Network)
Deemed
Network
Large Structure
a) Aimed at co- & b) Aimed at

operation sharing of
profit or cost or a s ignificant or common or common common or the use of a

part of ownership, control business quality common
professional or management strategy control brand name
However, the resources
sharing does not achieved by
in itself create a It inv olves an It includes
contract or agreement by des igned, common initials
network , if other implemente
the entities to or a common
means achieve d and name. A firm is
common monitored deemed to be
sh aring across the
strategic using a common
or is of larger
limited only to objectives brand name if it
immateri structure
those costs includes the
al cos ts
related to the common brand
development o f Mere co- name as part o f,
audit operation or along with, its
methodologies, with another firm name, when
manuals, or a partner of the
entity solely
training co urse firm si gns an
to respond
audit report.
jointly to a
request for a
proposal for
the provision
would not
constitute
network
JOINING/ASSOCIATION WITH “NETWORKS” BY MEMBERS IN PRACTICE

It is hereby clarified that associations with “Network” as a medium of referral of professional work is
permissible only if the Network is registered with the Institute, comprising only of Chartered Accountants/
Chartered Accountant Firms, and governed by the Institute’s Network
Members attention is also drawn towards following provisions of Chartered Accountants Act, 1949
(hereinafter referred to as the “Act”):
Clause 2 / 3 / 4 / 5 / 6 Part I of First Schedule
In view of the above provisions, it is not permissible for members in practice to join Networks (by
whatever name called) other than the Networks registered with the Institute.
Members may note that joining such Networks as mentioned above may result in noncompliance of the above
stated provisions of the Act resulting in disciplinary proceedings in accordance with the provisions of the Act.
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Summary Chart
Association with “Networks”
Network is registered by Members in Practice &
YES Permissible
with the Institute. Medium of Referral of
(It can comprise only Professional Work
CAs or CA Firms) Non-compliance of Resulting in
Association with “Networks”
NO the above stated disciplinary
by Members in Practice
provisions of the Act proceedings
MEANING OF NETWORK & NETWORK FIRM

Network - A larger structure (a) That is aimed at co-operation; and (b) That is clearly aimed at profit or cost
sharing or shares common ownership, control or management, common quality control policies and
procedures, common business strategy, the use of a common brand name, or a significant part of
professional resources.
Summary Chart
a) Aimed at Co-operation
Meaning Of Network Large Structure &
b) Aimed at Sharing of
Profit
or
Cost
or
Significant part of
Professional
Resources
or
Common Common
Common Common
Ownership, Quality Control
Business Brand
Control or Policies and
Strategy Name
Management Procedures
Network Firm – “Network Firm” means a firm or Entity that belongs to a Network.
FORMS OF THE NETWORK
 The Types
different  A network can be constituted as a mutual entity which will act as a
forms of facilitator for the constituents of the Network. In such a case the Network
Network itself will not carry out any professional practice.
can be as  A network can be constituted as a partnership firm subject to the condition
under:- that the total number of partners does not exceed twenty.
 A network can be constituted as a Limited Liability Partnership subject to
the provision of the Chartered Accountant Act and Rules and such other
laws as may be applicable.
 A network can be constituted as company subject to the guidelines
prescribed by Institute for corporate form of practice and formation of
management consultancy services company.
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Summary Chart
Forms Of Network
Network can be
constituted as
A Mutual a Limited Co mpany

A Partnersh ip Liability
Entity -acting Firm
as a facilitato r Partnership
for the
Constituents subject to the
Con dition:
Total number gu idelines
Su bject to
of partners prescribed by
Network itself Provision of
does not Institute for
will not carry the Chartered
exceed 20 corporate form
out any Accountan t
of practice and
professio nal Act and Rules
formation of
practice. and such
man agement
other laws as
consultancy
applicable
services
company
Conditions
 Network Firms shall consist of sole Practitioner/proprietor, partnership or
any such entity of professional accountants as may be permitted by the
Act
 A firm is allowed to join only one network.
 Firms having common partners shall join only one Network.
APPROVAL OF NAME OF NETWORK AMONGST FIRMS REGISTERED WITH INSTITUTE
 Name of The Network may have distinct name which should be approved by the Institute.
Network
To distinguish a “Network” from a “firm” of Chartered Accountants, the words “&
Affiliates” shall be used after the name of the network and the words “& Co.” /
“& Associates” shall not be used.
Summary Chart
Approval of Name of Network amongst firms registered
with Institute
May Distinct Should be approved

But
have Name by institute
Name of
Network
Distinguish a “& Affiliates”
shall be used
“Network” from a and not the
after the name
“firm” of Ch artered words “& Co .” /
of the network
Accountants “& Associates”
 Approval of The prescribed format of application for approval of Name for Network is at Form
Name for ‘A’ (enclosed).
Network
Illustrative examples of names of Network: -
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 If the Network is a Mutual Entity or Partnership Firm: AB & Affiliates

 If the Network is a LLP: AB Affiliates LLP
 If the Network is a Limited Company: AB Affiliates P. Ltd/Limited
Summary Chart
format of
application for Form ‘A’
approval of Name
Approval of
Name of Network is a
Network AB &
Illustrative Mutual Entity or
Affiliates
examples of Partnership Firm
names of
Network AB Affiliates
Network is a LLP
LLP
AB Affiliates
Network is a
P. Ltd/
Limited Company
Limited
 Applicability Provisions of Regulation 190 of the Chartered Accountants Regulations, 1988
of shall be applicable to the name of Network.
Regulation  However, even if a name is approved and subsequently it is found that the
190 same is undesirable then, the said name may be withdrawn at any time
by the Institute.
 The Institute shall reject any undesirable name and the provisions in
respect of names of companies as prescribed in the Companies Act,
2013 shall be applicable in spirit.
Summary Chart
Regulation 190 of the if a name is approved name may be

Chartered Accountants and subsequently withdrawn at any
Regulations, 1988 shall found undesirable time by the Institute
be applicable to the Companies Act, 2013
name of Network if a name is rejected as
shall be applicable in
it is undesirable
spirit.
 Approval or The Institute shall approve or reject the name of the Network and intimate the
rejection of same to the Network at its address mentioned in Form ‘A’ within a period which
name within shall not be later than 30 days from the date of receipt of the said Form.
a time frame
 Approval Mere approval of the name of the Network shall not entitle the Network to carry
on practice in its own name
v/s
Entitlement
to practice in
its own
name
LISTING OF NETWORK WITH ENTITIES OUTSIDE INDIA
 Filing a The duly authorized representative(s) of the Indian Member firm (s)/Member constituting the
declaration Network with entities outside India shall file a declaration with the Institute in Form ‘D’ for
with the Listing of such Network within 30 days from the date of entering into the Network
Institute arrangement.
 Joining Proprietary/individual members, partnership firms as well as members in LLP or any such
network other entity of members as may be permitted by the Act, shall be permitted to join such
with network with entities outside India provided that the proprietary/individual members,
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entities partnership firms as well as members in LLP or any such other entity of members are allowed
outside to join only one network and firms having common partners shall join only one such
India- network.
Condition
CHANGE IN CONSTITUTION OF REGISTERED NETWORK
 Communication In case of change in the constitution of registered Network on account of any entry into
of entry or exit or exit from the Network, the network shall communicate the same to the Institute by
from network filing Form ‘C’ within a period of thirty (30) days from the date of change in the
to the Institute constitution.
ETHICAL COMPLIANCE:
Once the relationship of network arises, it will be necessary for such a network to comply with all applicable
ethical requirements prescribed by the Institute from time to time in general and the following
requirements in particular:
 Restrictions on If one firm of the network is the statutory auditor of an entity then the associate
network firm [including the networked firm(s)] or the said firm directly/indirectly shall not accept the
and internal audit or book-keeping or such other professional assignments which are
Compliances prohibited for the statutory auditor firm.
The guidelines of ceiling on Non-audit fees is applicable in relation to a Network as
follows:
 For a Network firm who is doing statutory audit (including its associate concern
and/or firm(s) having common partnership), it shall be the same as mentioned in
the said notification; and
 For other firms of the same Network collectively, it shall be 3 times of the fee
payable for carrying out the statutory audit of the same undertaking/company.
In those cases where rotation of firms is prescribed by any regulatory authority, no
member firm of the network can accept appointment as an auditor in place of any
member firm of the network which is retiring.
The Network may advertise the Network to the extent permitted by the Advertisement
Guidelines issued by Institute. The firms constituting the network are permitted to use
the words “Network Firms” on their professional stationery.
The constituent member firms of a Network and the Network shall comply with all the
Ethical Standards prescribed by the Council from time to time.
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Summary Chart
Requirements prescribed by the

Institute In particular
Restrictions on network firm and Compliances
If one firm of the The guidelines of ceiling Where rotation of firms Advertisement
network is the statutory on Non-audit fees is is prescribed by any
auditor of an entity applicable to a Network regulatory authority
Network may
then the associate
advertise to the
[including the
For a Network firm & extent permitted
networked firm(s)] or no member firm of
who is doing For other firms of by the
the said firm directly/ the network can
statutory audit the same Network Advertisement
indirectly shall not accept appointment
(including its collectively, it shall Guidelines issued
accept the internal as an auditor in
associate concern be 3 times of the by Institute
audit or book-keeping place of any member
and/or firm(s) fee payable for
or such other firm of the network
having common carrying out the firms in the
professional which is retiring
partnership), it statutory audit of network are
assignments which are
shall be the same the same permitted to use
prohibited for the
as mentioned in undertaking/ the words
statutory auditor firm.
the said company. “Network Firms”
notification on their
professional
stationery
CONSENT OF CLIENT:
 Consent The effect of registration of network with Institute will be deemed to be a
deemed to public notice of the network and therefore consent of client will be deemed to be obtained.
be
obtained
FRAMEWORK OF INTERNAL BYELAWS OF NETWORK

To streamline the networking, a network shall formulate operational bye-laws. Bye-laws may contain the
following clauses on which the affiliates of the network may enter into a written agreement among themselves:
 Clauses
CPL network bye laws by D2RAFT2SMEN
Bye-laws
Determining Compensation to member firms for resources to be drawn from them
may
Peer review of the member firms
contain
Library
Dispute settlement procedures through arbitration and conciliation
Development and maintenance of Data bases relevant for different types of
assignments
Determining the methodology for drawing Resources from each member firm
Administration of the network
Contribution of membership Fees to meet the cost of the administration of the
network.
Development of Training materials for members of the network
Appointment of a Technical director to whom references can be made
Development of Software for different types of assignments
Appointment of a Managing Committee, from among the managing partners of the
member firms of the network and the terms and conditions under which it should
function. The minimum and maximum number of members of the Managing
Committee shall also be agreed upon.
Identifying a partner of any of the member firms of the network to be responsible for
the assignment (Engagement partner)
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Issue of Newsletters for staff and clients
These clauses are illustrative.
REPEAL AND SAVING:
“Rules/ The erstwhile “Rules/Guidelines of Network” issued by the Institute
Guideline of stands repealed from the date of commencement of these Guidelines.
Network”  Provided that notwithstanding such repeal, anything done or any action
stands taken or purported to have been done or taken in respect of the
repealed & erstwhile Rules/Guidelines prior to the date of applicability of these
Proviso to it Guidelines shall be deemed to have been done or taken under the
corresponding provisions of these Guidelines
UNIQUE MCQS
MCQ No. Incs.01.3
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REVISED CODE OF ETHICS

The revised Code of Ethics contains the following material:
 Part 1 Complying with the Code, Fundamental Principles and Conceptual Framework, which includes
the fundamental principles and the conceptual framework and is applicable to all professional
accountants.
 Part 2 Professional Accountants in Service, which sets out additional material that applies to
professional accountants in service when performing professional activities. Professional
accountants in service include professional accountants employed, engaged or contracted in
an executive or non-executive capacity in, for example:
o Commerce, industry or service.
o The public sector.
o Education.
o The not-for-profit sector.
o Regulatory or professional bodies.
Part 2 is also applicable to individuals who are professional accountants in public practice when
performing professional activities pursuant to their relationship with the firm as an employee.
 Part 3 A number of non-Chartered Accountants’ firms, corporates including banks, finance
Companies and newspapers have set up their own Websites providing advisory services on
taxation and other areas where Chartered Accountants are rendering professional service.
Some of such Websites may request Chartered Accountants or Chartered Accountants’ firms
to provide consultation and advice through their Websites. No other service, besides
consultancy and advice can be rendered through such websites, This would be permitted
subject to the condition that on the Website, contact address of the Chartered Accountant
concerned is not provided nor such Website will contain any material which advertises
professional achievements or status of such Chartered Accountant except making a statement
that they are Chartered Accountants. The name of Chartered Accountants’ firm with suffix
“Chartered Accountants” would not be permitted.
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 Part 4 Independence Standards, which sets out additional material that applies to professional
accountants in public practice when providing assurance services, as follows:
o Part 4A – Independence for Audit and Review Engagements, which applies when performing
audit or review engagements.
o Part 4B – Independence for Assurance Engagements Other than Audit and Review
Engagements, which applies when performing assurance engagements that are not audit or
review engagements.
 Glossary Glossary, which contains defined terms (together with additional explanations where
appropriate) and described terms which have a specific meaning in certain parts of the Code.
For example, as noted in the Glossary, in Part 4A, the term “audit engagement” applies equally
to both audit and review engagements. The Glossary also includes lists of abbreviations that
are used in the Code and other standards to which the Code refers.
SECTIONS IN CODE
The Code contains sections which address specific topics. Some sections contain subsections dealing with specific
aspects of those topics.
Each section of the Code is structured, where appropriate, as follows:
Introduction – sets out the subject matter addressed within the section, and introduces the
requirements and application material in the context of the conceptual framework. Introductory
material contains information, including an explanation of terms used, which is important to the
understanding and application of each Part and its sections.
Requirements – establish general and specific obligations with respect to the subject matter addressed.
Application material – provides context, explanations, suggestions for actions or matters to consider,
illustrations and other guidance to assist in complying with the requirements.
A professional accountant shall comply with the Code. There might be circumstances where laws or regulations
preclude an accountant from complying with certain parts of the Code. In such circumstances, those laws and
regulations prevail, and the accountant shall comply with all other parts of the Code.
THREATS, EVALUATION OF THREATS AND SAFEGUARDS
The conceptual framework specifies an approach for a professional accountant to:
(i) Identify threats to compliance with the fundamental principles;
(ii) Evaluate the threats identified; and
(iii) Address the threats by eliminating or reducing them to an acceptable level.
A. THREATS
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 Circumstances A financial interest in a client or jointly holding a financial interest with a client.
that may A loan to or from an assurance client or any of its directors or officers
create self- Having a close business relationship with a client. Concern about the possibility of
interest losing a client.
threats Potential employment with a client.
(CNO- Undue dependence on total fees from a client.
780.010) Contingent fees relating to an assurance engagement.
 Circumstances Reporting on the operation of financial systems after being involved in their design
that may or implementation.
create self- Having prepared the original data used to generate records that are the subject
review matter of the engagement.
threats Performing a service for a client that directly affects the subject matter of the
(CNO- assurance engagement.
780.010) A member of the assurance team being, or having recently been, a director or
(MCQ- officer of that client.
PE.5/PE.8) A member of the assurance team being, or having recently been, employed by the
client in a position to exert direct and significant influence over the subject
matter of the engagement.
The discovery of a significant error during a re-evaluation of the work of the
professional accountant in public practice.
 Circumstances Promoting shares in a listed entity when that entity is a financial statement audit
that may client.
create Acting as an advocate on behalf of an assurance client in litigation or disputes with
advocacy third parties.
threats:
 Circumstances A member of the engagement team having a close or immediate family relationship
that may with a director or officer of the client.
create A member of the engagement team having a close or immediate family relationship
familiarity with an employee of the client who is in a position to exert direct and significant
threats influence over the subject matter of the engagement.
A former partner of the firm being a director or officer of the client or an employee
in a position to exert direct and significant influence over the subject matter of
the engagement.
Accepting gifts or preferential treatment from a client, unless the value is clearly
insignificant.
Long association of senior personnel with the assurance client.
 Circumstances Being threatened with dismissal or replacement in relation to a client engagement.
that may Being threatened with litigation.
create Being pressured to reduce inappropriately the extent of work performed in order
intimidation to reduce fees.
threats
Specific circumstances give rise to unique threats to compliance with one or more of the fundamental
principles. Such unique threats obviously cannot be categorized. In either professional or business
relationships, a professional accountant in public practice should always be on the alert for such circumstances
and threats.
B. EVALUATION OF THREATS:
The conditions, policies and procedures described above might impact the evaluation of whether a threat to
compliance with the fundamental principles is at an acceptable level.
(i) Acceptable level : An acceptable level is a level at which a professional accountant using the reasonable and
informed third party test would likely conclude that the accountant complies with the fundamental principles.
(ii) Reasonable and Informed Third Party : The reasonable and informed third party test is a consideration by the
professional accountant about whether the same conclusions would likely be reached by another party. Such
consideration is made from the perspective of a reasonable and informed third party, who weighs all the relevant
facts and circumstances that the accountant knows, or could reasonably be expected to know, at the time the
conclusions are made. The reasonable and informed third party does not need to be an accountant but would
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possess the relevant knowledge and experience to understand and evaluate the appropriateness of the
accountant’s conclusions in an impartial manner.
C. ADDRESSING THREATS
If the professional accountant determines that the identified threats to compliance with the fundamental
principles are not at an acceptable level, the accountant shall address the threats by eliminating them or reducing
them to an acceptable level. The accountant shall do so by:
(i). Eliminating the circumstances, including interests or relationships, that are creating the threats;
(ii). Applying safeguards, where available and capable of being applied, to reduce the threats to an
acceptable level; or
(iii). Declining or ending the specific professional activity.
Actions to Eliminate Threats:
Depending on the facts and circumstances, a threat might be addressed by eliminating the circumstance creating
the threat. However, there are some situations in which threats can only be addressed by declining or ending the
specific professional activity. This is because the circumstances that created the threats cannot be eliminated and
safeguards are not capable of being applied to reduce the threat to an acceptable level.
D. SAFEGUARDS:
Safeguards are actions individually or in combination that the accountant takes that effectively reduce threats to
an acceptable level. Safeguards vary depending on the facts and circumstances. Examples of actions that in
certain circumstances might be safeguards to address threats include:
 Assigning additional time and qualified personnel to required tasks when an engagement has been
accepted might address a self-interest threat.
 Having an appropriate reviewer, who was not a member of the team, review the work performed or
advise as necessary might address a self-review threat.
 Using different partners and engagement teams with separate reporting lines for the provision of non-
assurance services to an assurance client might address self-review, advocacy or familiarity threats.
 Involving another firm to perform or re-perform part of the engagement might address self-interest, self-
review, advocacy, familiarity or intimidation threats.
 Separating teams when dealing with matters of a confidential nature might address a self-interest threat
UNIQUE CNO
CNO - 780.050 Engagement specific safeguards for threats
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CHAPTER
2
CARO 2020
ORIGIN & PARAGRAPHS OF CARO REPORTING
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APPLICABILITY & EXEMPTIONS FROM CARO REPORTING
(CNO-379.000/380.000/381.000/382.000/382.010/383.000/385.000/386.000/386.010/406.010) (MCQ-CARO.06,
CARO.07, Incs.02.1/Incs.04.4)
 Applicability Applicable from Financial Year 21-22
lt shall apply to every company including a foreign company as defined under Sec 2 (42).
 Exemptions
Exemptions (IB-COPS) [Each exemption is discussed in detail along with

Cases]
 Insurance Company
 Banking Company
 Section 8 Company (Charitable Purpose)
 One Person Company
 Private Limited Company (All conditions below should be satisfied)
 Not Subsidiary or Holding of Public Company
(i.e. Holding or Subsidiary should not be public)
 Paid up capital + Reserves not exceeding 1 Crore B/S Date
 Loan from Banks & FIs not exceeding 1 Crore -- At any point of time during
the year
 Total Revenue not exceeding 10 crores -- During the Financial Year
(As disclosed in Schedule III)
 Small Company
 Definition of Small Company (Other than Public Company)

o Paid-up share capital of which does not exceed 50 Lakhs or such
higher amount as may be prescribed which shall not be more than
ten crore rupees.
o Turnover of which as per its last profit and loss account does not
exceed 2 crores or such higher amount as may be prescribed which
shall not exceeding 100 crore rupees
o Provided that nothing in this clause shall apply to: -
◊ A holding company or a subsidiary company; (In short there
should be no holding or subsidiary company)
◊ A company registered under section 8; or
◊ A company or body corporate governed by any special Act
(SBI / SIDBI etc)
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CASES ON APPLICABILITY OF CARO
CASE EXEMPTION
GENERAL CASES
This order is on the company or This order is issued by CG on the auditors of the company, which they
auditors of the company? have to follow while doing their audit and preparing audit report. It is
a reporting order. Company Auditor Report Order.
Is a consolidated financial statement This Order shall not apply to the auditor’s report on
exempt from CARO? consolidated financial statements except clause (xxi).
That means, in audit report of consolidated financial

statements, we will provide CARO report but only for Clause
(xxi), rest of the 20 clauses wont be applicable.
Are branch audit reports exempt from No, they are not exempt. It is applicable to branch auditors while
CARO? preparing their report. As their reports will be studied and merged to
make final audit report of the company.
INSURANCE COMPANIES
Is exemption available for both life Yes, exemption is for both.

insurance & general insurance?
BANKS
Will co-operative bank getYes, it is not a company not governed by company act, it is co-
exemption? operative society, so CARO is as such not applicable
Will Foreign Bank get exemption? Yes, As per Banking Regulation Act. Definition of bank covers foreign
bank also. * Similarly, exemption is available to payment bank also.
Will NBFC get exemption? No, Exemption is only to Banks.
In December NBFC was converted into Yes, we have to see status as on year end and it is a bank at year end.
Bank? Will it get exemption?
In December Bank was converted into No, we have to see status as on year end and it is a NBFC at year end.
NBFC? Will it get exemption?
SECTION 8
Company was licensed under Sec 25 Yes, they will get exemption as specified in Guidance Note on CARO
of company Act 1956, will it get 2016
exemption
When to check status of Insurance No specific instructions are provided in CARO,As per Guidance Note o
Company / Banking Company / CARO we have to check status of these companies at the year-end on
Section 8 Company / Small Company balance sheet date.
for exemption?
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PRIVATE COMPANY (CNO-383.0/385.0/386.0/386.01/406.01)
1ST CONDITION- HOLDING/SUBSIDIARY SHOULD NOT BE A PUBLIC COMPANY
2ND CONDITION- PAID UP CAPITAL & RESERVES SHOULD NOT EXCEEDS 1 CRORE AS ON BS DATE
3RD CONDITION LOAN FROM BONUS AND FT'S SHOULD NOT EXCEED 1 CRORE ANYTIME DURING THE YEAR
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4TH CONDITION TOTAL REVENUE SHOULD NOT EXCEED 10 CRORE
Private company satisfies all No, all conditions should be satisfied to get exemption.
conditions except one will they get
exemption?
75% equity shares of private company Yes, we have to see status as on balance sheet date, here as on
were held by public company till 15th balance sheet date percentage holding will be 45%, so it is not
Jan, on this date 30% were sold in subsidiary of public company, so they will get exemption.
open market, Will such private
company get exemption ?
Private unlimited company has paid Yes, it will get exemption, as per guidance note "Private Limited
up capital of 90 lakhs, outstanding Company" should be construed to mean a company registered as a
loans 85 lakhs, turnover of 7 crores “private company” {as defined in sub-section (68) of section 2 of the
and it is not subsidiary or holding of Act} which includes limited as well as unlimited.
public company. Will it get So, private limited as well as unlimited both will get exemption. This is
exemption? exactly opposite of the point of view taken by earlier Statement on
CARO. (Very important for exams)
Private company is subsidiary of Foreign companies are covered in definition of holding & subsidiary as
public foreign company or its holding they use word body corporate. But they cannot get status of public or
company of public foreign company, private as definition of public or private does not cover word “body
will they get exemption? corporate” On this basis MCA has clarified that foreign companies
even if public in their foreign country will not affect status of private
company in India, this is done to promote foreign companies to come
and open private companies in India with less compliances.
Conclusion
A public holding changes the status of private company to public
company however if such public holding is a foreign company the
status of private company remains unchanged.
if Pvt Ltd was a subsidiary of a public company incorporated in India
the status of Pvt Ltd would have got changed to public company and
exemption would have not been available ,however since the holding
company is a foreign company , status of private company remains
unchanged and exemption shall be available to Pvt Ltd.
Private limited company has equity Computation of paid up capital & reserves: - Eq 60 + Pref 10 + Gen
share capital of 60 lakhs, preference Res 30 – Debit bal of P&L (60) + Sec Premium 10 + Capital Reserve 15
share capital of 10 lakhs, general + Share Forfeiture 5 + Revaluation Reserve 8 + Capital Redemption
reserves of 30 lakhs, P&L debit Reserve 3 + Share Option Outstanding 6 = 87, As it is not crossing 1
balance (60) lakhs, Securities crore and if other conditions satisfied company can get exemption.
Premium of 10 lakhs, Capital Reserve
of 15 Lakhs, Share Application 20
lakhs, Share Forfeiture 5 lakhs,
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Revaluation Reserve 8 lakh, Capital
Redemption Reserve 3 lakhs, Share
Option Outstanding Account 6 lakhs
will this company get exemption?
Loan 40 lakhs, Interest Accrued as on In case of term loans, interest accrued and due is considered as a
balance sheet date 8 lakhs, Interest borrowing whereas interest accrued but not due is not considered as
due and unpaid 12 lakhs, how much a borrowing.
will be counted for the purpose of So 40 +12 = 52 lakhs will be counted.
exemption?
Fund based facilities from bank Rs 20 Non-fund-based credit facilities (E.g. Letter of Credit / Guarantee
lakhs and non-fund-based facilities Rs etc.), to the extent such facilities have devolved and have been
10 lakhs which are not yet devolved, converted into fund-based credit facilities, should also be considered
how much should be counted in as outstanding borrowings. That means 20 will be considered and 10
borrowings? will be left as no money is taken till date under it.
Out of loan 30 lakhs, 5 lakhs is due Current maturity of long term borrowings will also form part of
within 12 months from date of borrowings. Moreover, outstanding dues in respect of credit cards
balance sheet hence it is shown in would also be considered while calculating the limit of Rs. one crore;
current liability as current maturity of in respect of borrowings outstanding from a bank or financial
long term loan. So how much loan institution.
should be considered 30 lakhs or 25 So here we will consider 25+5=30 whole loan amount outstanding
lakhs? irrespective of where it is shown in balance sheet.
Will borrowing cover short term There is no stipulation in the Order that the borrowing should be a
loans? long-term borrowing or a short-term borrowing or that it should be a
secured borrowing or an unsecured borrowing. So it will be covered.
Overdraft facility fully covered by FD Notwithstanding the fact that the company has been granted an
will it be covered in borrowing? overdraft facility against, say, fixed deposits, of the company with the
concerned bank, we will include whole overdraft amount in
borrowing.
Private limited company has following We have to consider borrowings only from Banks & FIs so total is ICICI
borrowings from Mr Mukesh Ambani 5 + IFCI 10 = 15 lakhs, it is below 100 lakhs (1 cr.) so exemption is
80 lakhs, Mr Aziz Premji 10 lakhs, ICICI available.
Bank 5 lakhs, IFCI 10 lakhs is
exemption available?
Will loan from NBFC will be counted? Yes, the term “financial institution” shall also cover a non-banking
financial company (NBFC). No exemption to NBFC and NBFC loan will
also be counted.
Private Limited company has taken CC We don’t have to see limit, we have to see actual amount taken and
of 300 lakhs and balance outstanding outstanding any time during the year, it is not exceeding 100 lakhs (1
as on date is 80 lakhs? cr.), Exemption is available.
Loan during the year rose to 1.6 crore No, in case of loan outstanding we have to see balance during the
but it was repaid regularly and as on year and if any time it exceeds 1 crore condition required for
balance sheet date it has reduced to exemption will be broken.
nil, will such private company get
exemption?
Whether revenue will include other The term, “revenue”, has been defined by the Order as total revenue
income? disclosed in Schedule III of the Act.
Accordingly, the total revenue would include other income as per
Schedule III. Here revenue will also include revenue from
discontinuing operations as specified in the Order.
Private limited company has Sale of Computation of Turnover Sale (Petrol) 4 crore + Sale (Services) 2
petrol Rs 4 Crore, Sale of services Rs 2 Crore – Sales Return (1.5 Crore) – *Excise Duty 75 lakhs – *GST on
Crore, Sales return Rs 1.5 Crore Sales 20 lakhs + Interest on Investments 0.2 + Profit on sale of
(Including 0.5 Crore from previous Investments 0.3 + Scrap sales 0.4 = 4.45 Crores
year) Excise Duty included in sale of *If excise and GST are accounted separately then they will not be
petrol Rs 75 lakhs, Interest on included. We have assumed that accounting will be on separate basis
Investment 20 lakhs, Profit on sale on and hence they are excluded.
Investments 30 lakhs, Scrap Sales Rs *In problem, it is said that excise and gst amount are included in
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40 lakhs, GST on sales included above given sales they doesn't comment on method of accounting, so we
20 lakhs, is CARO applicable? have to take popular assumption and solve the case.
As Turnover is below 5 Crores CARO not applicable.
SMALL COMPANY
A Pvt Ltd is small company but it does Yes, such company will get exemption. It may also be noted that in
not fulfil all exemption conditions of case a company is covered under the definition of small company, it
private company? will remain exempted from the applicability of the Order even if it
doesn’t fulfil conditions of exemption for private company.
What is difference between In small company, there should not be holding or subsidiary but in
exemption of private company and private company holding or subsidiary should not be public company.
exemption of small company? In small company, we see only paid up capital but in private company
we see both paid up capital and reserves. In small company, we see
TURNOVER of last year, in private company we see TOTAL Revenue
during the year.
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21 CLAUSES OF CARO 2020
 Clause I
Reporting on
Property, Plant
and Equipment
and Intangible
Assets
(Flipkart)
(CNO-388.000/
389.000/391.000/
392.000/392.010)
(MCQ-CARO.02)
a) Whether the company is maintaining proper records showing full particulars

 including quantitative details and situation of Property, Plant and
Equipment;
 intangible assets;
b) whether these Property, Plant and Equipment 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 all the immovable properties (other than properties where
the company is the lessee and the lease agreements are duly executed in favour of
the lessee) disclosed in the financial statements are held in the name of the
company, if not, provide the following details:
 Description of property
 Gross carrying value
 Asset held in name of
 Whether held in name of promoter, director or their relative or employee
 Period during which it was not held in name of the Company
 Reason for not being held in name of company
 Where ownership of the Asset is in dispute, details of such dispute;
d) whether the company has revalued its Property, Plant and Equipment (including
Right of Use assets) or intangible assets or both during the year and, if so, whether
the revaluation is based on the valuation by a Registered Valuer; specify the amount
of change, if change is 10% or more in the aggregate of the net carrying value of each
class of Property, Plant and Equipment or intangible assets;
e) whether any proceedings have been initiated or are pending against the company for
holding any benami property under the Benami Transactions (Prohibition) Act, 1988
(45 of 1988) and rules made thereunder, if so, whether the company has
appropriately disclosed the details in its financial statements;
Some Key Points of Clause I
1st Maintenance
Maintenance of proper records including Quantity & Situation of FA
 Inclusion Cases
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o Record should be kept for all assets whether constructed or acquired
or taken on finance lease
o It should include fully depreciated, amortised, impaired assets
 Location Cases
o Location of moving assets can be kept in separate records, mention
this in report
o In case assets are located at home of staff then indicate name &
designation in location of field
2nd Physical verification

Reasonableness of physical verification & If there are material discrepancies, is it
properly adjusted in books of accounts
 Reasonable Interval of Time
o Annual verification is reasonable for Fixed Assets
o It can be extended up to 3 years but in such case, mention this in
report
3rd Title Deeds
 Whether title deed of immovable properties is in name of the company if not
details should be given
 Discrepancies generally arise in conversion from proprietor, partnership to
company or amalgamation
 If documents are lost see certified copies, FIR, take written representation
4th Revaluation
 Fair valuation of PPE upon first time adoption of Ind AS shall not be reported
under this clause
 Retain copy of valuation report of registered valuer, using such report will be
covered in SA 500 and not SA 620
5th Benami Transactions

 Clause Refers to Benami Transaction (Prohibition) Act (BTP Act) 1988 but this
act is renamed to Prohibition of Benami Property Transaction Act (PB-PT Act)
1988 in 2016 so while reporting refer to the amended name.
 Various Standards Applicable
o SA 250 – Apply if auditor comes to know that there is suspected or
actual non-compliance of Prohibition of Benami Property Transaction
Act 1988.
o SA 501 – Apply if auditor comes to know litigation related to PB-PT Act
1988
o SA 560 – Apply if order is initiated under PB-PT Act after year end
before financial statement finalisation
o SA 580 – Obtain written representation regarding details required for
reporting
 Clause II
Reporting on
Inventory
(Indian Airlines)
(CNO-393.000)
a) whether physical verification of inventory has been conducted at reasonable

intervals by the management and whether, in the opinion of the auditor, the
coverage and procedure of such verification by the management is appropriate;
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whether any discrepancies of 10% or more in the aggregate for each class of
inventory were noticed and if so, whether they have been properly dealt with in the
books of account.
b) whether during any point of time of the year, the company has been sanctioned
working capital limitsin excess of five crore rupees, in aggregate, from banks or
financial institutions on the basis of security of current assets; whether the quarterly
returns or statements filed by the company with such banks or financial institutions
are in agreement with the books of account of the Company, if not, give details;
Some Key Points of Clause II
Physical Verification
 Reasonableness
o Reasonableness of physical verification of inventory & If any material
discrepancies observed, then whether it is adjusted.
o Reasonable interval of time for inventory is generally 1 year
 Class of Inventory
o Common classification of Inventory as per AS 2 and IND AS 2 is raw
material, stores and spares , work in progress , finished goods and
merchandise (held for resale).
 Discrepancies
o It should be computed on net basis.
Working Capital Limits

 Exclusion
o However, this would exclude any working capital limits which are
sanctioned without the security of the company's current assets.
 Clause III
Reporting on
Loans,
Investments,
Guarantees,
Securities and
Advances in
nature of Loan:
(LinkedIn)
(CNO-397.000)
whether during the year the company has made investments in, provided any
guarantee or security or granted any loans or advances in the nature of loans,
secured or unsecured, to companies, firms, Limited Liability Partnerships or any
other parties, if so,-
a) whether during the year the company has provide loans or provided
advances in the nature of loans, or stood guarantee, or provided security to
any other entity [not applicable to companies whose principal business is to
give loans], if so, indicate
A. the aggregate amount during the year, and balance outstanding at
the balance sheet date with respect to such loans or advances and
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guarantees or security to subsidiaries, joint ventures and associates
B. the aggregate amount during the year, and balance outstanding at
the balance sheet date with respect to such loans or advances and
guarantees or security to parties other than subsidiaries, joint
ventures and associates;
b) whether the investments made, guarantees provided, security given and the
terms and conditions of the grant of all loans and advances in the nature of
loans and guarantees provided are not prejudicial to the company’s interest.
c) in respect of loans and advances in the nature of loans, whether the
schedule of repayment of principal and payment of interest has been
stipulated and whether the repayments or receipts are regular;
d) 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;
e) whether any loan or advance in the nature of loan granted which has fallen
due during the year, has been renewed or extended or fresh loans granted to
settle the overdues of existing loans given to the same parties, if so, specify
the aggregate amount of such dues renewed or extended or settled by fresh
loans and the percentage of the aggregate to the total loans or advances in
the nature of loans granted during the year [not applicable to companies
whose principal business is to give loans];
f) whether the company has granted any loans or advances in the nature of
loans either repayable on demand or without specifying any terms or period
of repayment, if so, specify the aggregate amount, percentage thereof to the
total loans granted, aggregate amount of loans granted to Promoters,
related parties as defined in clause (76) of section 2 of the Companies Act,
2013
Some Key Points of Clause III
Aggregate Amount, outstanding disclosure.
 Not Applicable to companies whose principal business is to give loans (FI’s,
NBFC’s etc)
 Guarantees will include those which are given to banks and financial
institutions on behalf of third party.
 Squared up loans should be counted for amount given .
Prejudicial
 Whether terms of condition are prejudicial
o Terms generally includes interest, security, repayment schedule,
restrictive covenants of agreement.
o Concessional rates of interest to its employees who are related to
directors as per policy of company are not prejudicial.
Repayment
 Whether schedule of repayment is specified & Whether repayment or receipt
is regular If there is no repayment schedule specify in report
Steps of Recovery
 Total amount overdue for more than 90 days then comment on
reasonableness of steps taken for recovery.
 Steps can be in the form of reminders, meetings, ceasing transactions, lawyers
notice, auction etc. they may not be only legal steps, legal steps are one of
steps expected
Loans fallen due during the year
 Not Applicable to companies whose principal business is to give loans (FI’s,
NBFC’s etc)
 This clause is inserted to identify instances of ‘evergreening of loans/advances
in nature of loans.
[Note: The term ‘evergreening’ is not defined in the Act. However, in general
parlance it implies an attempt to mask loan default by giving new loans to help
delinquent borrowers to repay/adjust principal or pay interest on old loans.
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 Example –
Company A has an opening loan of Rs. 100 and granted 3 more loans of Rs.
200, 300 and 400 during the year. Company extended tenure in respect of two
loans (Rs. 100 and Rs. 200) when fell due for payment. Percentage of the
aggregate to the total loans or advances in the nature of loans granted during
the year in the instant case would be 33%.
Loans repayable on demand or without repayment terms
AS 18 & SA 550
Whenever clause (iii) of Para 3 of CARO, 2020 is applicable, reporting under AS 18 (In
detail) will also be applicable and to do audit SA 550 shall also be applied.
 Clause IV
Reporting on
Compliance of
Section 185 and
186 w.r.t Loans
given:
(Live.Com)
(CNO-397.100)
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.
Some Key Points of Clause IV
Sec 185 & 186
 Loans, Investments, Guarantee & Security is in Compliance with Sec 185 & 186
o Sec 185 - Loan to directors
o Sec 186 - Loan and Investment by Company
 If non-compliance, then concerned details
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 Clause V
Deposits
(Dropbox)
in respect of deposits accepted by the company or amounts which are deemed to be

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 and the rules made
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;
 Clause VI
Cost Records
(CNN)
(CNO-399.000)
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.
 Clause VII / 7
Reporting on
statutory dues
(Spotify)
(CNO-400.000/
401.000/402.000)
(MCQ-CARO.03)
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Whether the company is regular in depositing undisputed statutory dues including
Goods and Services Tax, 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;
Where statutory dues referred to in subclause (a) 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).
Key Points of Clause VII
Statutory Dues
 Payment to government under agreement for goods and services purchased
won’t be covered. For Example – Electricity charges.
 Further only those statutory dues which are payable to authorities are covered
here. Payments to employees under payment of bonus act and payment of
dividend to shareholders under companies act are not considered statutory
dues, but when bonus ad dividend has to be transferred to authorities under
some circumstances it will become statutory due.
 Not restricted to list given in clause as it uses words “any other statutory dues”
at the end
1st Point Undisputed Dues -- Regularity
Regularity in depositing undisputed statutory dues including PF, ESIC, Direct Taxes,
Indirect Taxes etc.
 Such reporting is required where periodic payments are required i.e. monthly,
quarterly etc.
 For example, no need to comment on custom duty here but rent & interest to
be paid regularly under customs act will be covered
 Non-Payment of advance tax on due dates and later on paying it along with
interest because of windfall gain is not irregularity
 Paying all dues at year end with interest will be considered irregular
2nd Point Undisputed Dues – Outstanding Amount
Arrears of undisputed statutory dues outstanding more than 6 months as on balance
sheet date.
 Date till which we can pay amount without attracting penalties or interest
should be considered as due date
 if authority has granted additional time, stay then last date of such stay can be
considered as due date
3rd Point Dispute
Details of taxes not been deposited on account of any dispute, specify amount &forum
 Demand order from department is not dispute
 Company asking clarification on notice or orders will not be considered as
dispute
 Company appealing against demand order will be considered dispute Or there
should be positive evidence to prove that sustainable appeal can be made
 Application to rectify order passed u/s 154 is also considered as dispute as we

are going against order (Mistake apparent from records)
 Details of dispute should be given irrespective of whether provision is made in
books or not
 Report only if amount is not deposited
Amount
 All amounts disclosed should include penalty & interest amount.
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SA 250 (Refer if question is related to non-compliance of law)
 Responsibility of Management
Ensure that operations are as per Law & Regulations Including Law affecting
financial statements
 Responsibility of Auditor
o Overall Responsibility-
Obtain a reasonable assurance that FST as a whole are free from
material misstatement considering applicable legal and regulatory
framework.
o Non-Compliance
 During conduct of audit, audit procedures may bring
instances of non-compliance or suspected non-compliance.
Auditor shall remain alert to such instances and
 If found auditor shall discuss the matter with management
/TCWG. (In this case show cause notice may be an indication
of non-compliance)
 If Management/TCWG do not provide sufficient information
that supports compliance with laws and regulations and, if it
considered material to the FST, the auditor shall consider the
need to obtain legal advice.
 If non-compliance, has material effect on the FST, and has not
been adequately reflected in the financial statements express
a qualified or adverse opinion
AS 29 (Refer if question is related to non-compliance)
 Create provision of probable liability
 Remaining may be disclosed as the contingent liability
 Clause VIII / 8
Reporting on
unrecorded
transaction
(TATA Steel)
whether any transactions not recorded in the books of account have been surrendered or
disclosed as income during the year in the tax assessments under the Income Tax Act, 1961
(43 of 1961), if so, whether the previously unrecorded income has been properly recorded in
the books of account during the year;
Key Points of Clause VIII
 Transactions which are voluntarily reported (irrespective of before or after the raid),
are reported here. Additions made by income tax authorities on there own without any
admission by company is not to be reported.
 Such items are shown as extra ordinary in P&L as per AS 5 and IND AS 8.
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 Clause IX / 9
Reporting on
repayment and
usage of
Borrowings
(LIC)
(CNO-
382.010/403.000/
404.000)
(MCQ-CARO.05/
Incs.08.5)
whether the company has defaulted in repayment of loans or other borrowings or in

the payment of interest thereon to any lender, if yes, the period and the amount of
default to be reported as below:
 Nature of borrowing, including debt securities
 Name of lender (Lender wise details to be provided in case of defaults to
banks, financial institutions and Government)
 Amount not paid on due date
 Whether principal or interest
 No. of days delay or unpaid
 Remarks, if any
whether the company is a declared willful defaulter by any bank or financial
institution or other lender;
whether term loans were applied for the purpose for which the loans were obtained;
if not, the amount of loan so diverted and the purpose for which it is used may be
reported
whether funds raised on short term basis have been utilised for long term purposes,
if yes, the nature and amount to be indicated;
whether the company has taken any funds from any entity or person on account of
or to meet the obligations of its subsidiaries, associates or joint ventures, if so,
details thereof with nature of such transactions and the amount in each case;
whether the company has raised loans during the year on the pledge of securities
held in its subsidiaries, joint ventures or associate companies, if so, give details
thereof and also report if the company has defaulted in repayment of such loans
raised;
Some Key Points of Clause IX
Default
 Dispute - In case of disputes, present prevailing terms should be considered,
default should be reported & also explained dispute
 Rescheduling - All defaults should be reported even if later on reschedulement
or restructuring happens fact should be specified
 Declaration after balance sheet date - If company is declared wilful defaulter,
after balance sheet date till the date of audit report even that will be
considered for reporting in CARO, this is as per principles of SA 560 as
explained in GN on CARO.
 Show Cause Notice – As per GN of CARO, if company receives show cause
notice from RBI for wilful defaulter declaration, auditor may disclose this fact
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in this clause.
Usage
 One to One - It is not necessary to establish a one-to-one relationship with
the amount of term loan and its utilisation.
 Temporary Investment – Sometimes companies invest surplus funds
temporarily in mutual funds etc as funds were lying idle and then use it
ultimately for proper purpose, such fact should be disclosed in report and it is
not misutilisation of funds.
 Reporting –
A suggested reporting format under this clause is as follows:
In our opinion and according to the information and explanations given to us,
the company has utilized the money obtained by way of term loans during the
year for the purposes for which they were obtained, except for following
cases:
 Clause X
Reporting on
Application of
funds from IPO /
FPO/ Preferential
allotment or
private
placement
(Infosys)
whether moneys raised by way of initial public offer or further public offer (including
(CNO 406.000/
debt instruments) during the year were applied for the purposes for which those are
406.010/407.000)
raised, if not, the details together with delays or default and subsequent
rectification, if any, as may be applicable, be reported;
whether the company has made any preferential allotment or private placement of
shares or convertible debentures (fully, partially or optionally convertible) during the
year and if so, whether the requirements of section 42 and section 62 of the
Companies Act, 2013 have been complied with and the funds raised have been used
for the purposes for which the funds were raised, if not, provide details in respect of
amount involved and nature of non-compliance;
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Some Key Points of Clause X
IPO / FPO
 GDR, ADR are not covered here because they are not IPOs but offer for sale
 Fund Utilisation
o No need to see one to one relationship, its ok if money is deposited in
common account, overall receipts of fund and utilization should be
appropriate
o Spending on improved version of asset is proper application
o If loan is not yet utilised and kept in short term investments, then
such fact should be disclosed in report.
 Reporting
A suggested reporting format under this clause is as follows:
In our opinion and according to the information and explanations given to us,
the company has utilised the money raised by way of initial public offer/
further public offer (including debt instruments) for the purposes for which
they were raised, except for the following cases:
Preferential allotment or private placement of shares

 Overview of terminology
o Private placement means when any company offers shares to selected
group of persons. Such issue should be in accordance with Sec 42 of
Companies Act.
o Preferential Allotment is a specific type of private placement where
listed entity issues share to selected group of persons. Such issue is
principally governed by SEBI Regulations & Section 62 of Companies
Act.
 Clause XI / 11
Reporting on
Fraud
(Finolex Cable)
(CNO-407.010/
407.020)
whether any fraud by the company or any fraud on the company has been noticed or
reported during the year, if yes, the nature and the amount involved is to be
indicated;
whether any report under sub-section (12) of section 143 of the Companies Act has
been filed by the auditors in Form ADT-4 as prescribed under rule 13 of Companies
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(Audit and Auditors) Rules, 2014 with the Central Government;
whether the auditor has considered whistle-blower complaints, if any, received
during the year by the company;
Key Points of Clause XI
Frauds
 Term “Noticed or Reported” means either noticed by management or
reported to management by anyone including statutory auditor, internal
auditor etc. So basically, it means all the frauds known to management should
be reported in this clause.
 It should be noted that it covers all the frauds on the company and not just
frauds by officers or employees on the company.
Section 143(12)
 Reporting is required only when ADT-4 is filed by auditor.
Whistle Blower mechanism
 Auditor has to only comment about complaints received during the year.
 Clause XII /12
Reporting on
Nidhi Company
(Network 18)
(CNO-408.000)
whether the Nidhi Company has complied with the Net Owned Funds to Deposits in
the ratio of 1: 20 to meet out the liability;
whether the Nidhi Company is maintaining ten per cent unencumbered term
deposits as specified in the Nidhi Rules, 2014 to meet out the liability;
whether there has been any default in payment of interest on deposits or repayment
thereof for any period and if so, the details thereof;
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Key Points of Clause XII
Applicable only to Nidhi Company (mutual benefit company)
Ratio
 Maintaining Minimum Net Owned Funds: Deposits  1:20. Comment whether
it is maintained.
Deposits
 10% Unencumbered Term Deposits
 Term Deposits should be as outstanding on last working day of second
preceding month.
Default
 In case of default of either payment of interest on deposit or repayment
thereof or both, the auditor may report:
o Nature of default,
o Amount of default,
o Period of default,
o Number of persons to whom there was default in payment,
o Any other detail.
 Clause XIII /13
Reporting on
Related Party
Transactions
(Reliance)
(CNO-409.010/
409.020)
Whether all transactions with the related parties are in compliance with sections 177 and 188
of Companies Act, 2013 where applicable and the details have been disclosed in the Financial
Statements etc., as required by the applicable accounting standards.
Key Points of Clause XIV
Related Parties
Its only about transactions with related parties [Related Party means as defined under
Sec 2 (76)]
Compliance
 We have to comment on compliance with Sec 177 & Sec 188
 Sec 177—Approval of Audit Committee
 Sec 188—Approval of BOD / Ordinary Resolution if specific limit is crossed
Disclosure
We have to comment on disclosures of related party in financial statement.
Compliance of AS 18 disclosures.
 (Clause XIV / 14
Reporting on
Internal Audit
(Indian Oil)
whether the company has an internal audit system commensurate with the size and
nature of its business;
whether the reports of the Internal Auditors for the period under audit were
considered by the statutory auditor;
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 Clause XV / 15
Reporting on
Non-cash
transactions
with Directors
(Nuts)
(CNO-411.000)
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 of Companies Act, 2013
have been complied with.
Key Points of Clause XV
Non-Cash Transactions
Whether there are non-cash transactions with directors or persons connected with him
 Transactions for cash or cash equivalent are not covered
 Mergers not covered here subject to approval by court
Section 192
If answer to first question is yes, then whether there is compliance of section 192.
Non-Cash
Transaction
Director of C / H / S / A Director etc acquires assets or is to acquire

assets for consideration other than cash
Or Persons connected Company
with Such Directors Company acquires assets or is to acquire
assets for consideration other than cash
Above transactions / agreements are allowed only if there is prior approval by

shareholders in general meeting and if such director is director in holding company
then resolution will be required in holding company also.
 Clause XVI / 16
Reporting on
Registration u/s
45-IA of RBI Act
(Carrot)
(CNO-412.000)
(MCQ-CARO.01)
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.
whether the company has conducted any Non-Banking Financial or Housing Finance
activities without a valid Certificate of Registration (CoR) from the Reserve Bank of
India as per the Reserve Bank of India Act, 1934;
whether the company is a Core Investment Company (CIC) as defined in the
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regulations made by the Reserve Bank of India, if so, whether it continues to fulfil the
criteria of a CIC, and in case the company is an exempted or unregistered CIC, whether
it continues to fulfil such criteria;
whether the Group has more than one CIC as part of the Group, if yes, indicate the
number of CICs which are part of the Group;
Core Investment Company (CIC)
 It broadly means company formed for raising finance and investing in particular
business group companies.
 CIC having total assets 100 crores or more individually or in aggregate along
with other CIC investing in same group are called systematically important CIC.
 CIC are not required to get registered with RBI, only CIC which is systematically
important are required to get registered with RBI.
 Exempted CIC can continue to operate as unregistered CIC.
 Clause XVII / 17
Reporting on
Cash Losses
(Chikoo)
whether the company has incurred cash losses in the financial year and in the immediately
preceding financial year, if so, state the amount of cash losses;
What if Cash loss is only in one year out of current year and immediately preceding
year?
A situation may be there where the company has suffered cash losses in only one of the
years referred to in this clause. In such a situation, the auditor is well advised to
comment on the two years separately. Thus, for example, it would be proper to report
that the company has incurred cash losses only during the immediately preceding
financial year but has not incurred any cash losses during the current financial year.
 Clause XVIII / 18
Reporting on
Resignation of
statutory
auditors
(Rabdi)
whether there has been any resignation of the statutory auditors during the year, if so,
whether the auditor has taken into consideration the issues, objections or concerns raised by
the outgoing auditors;
Important Documents
Incoming auditor should obtain a copy of letter of resignation stating the reasons as
submitted to the management and copy of Form ADT 3 as submitted to ROC. In case of
listed companies, incoming auditor should also obtain copy of Annexure A(Submitted to
Stock Exchange as per SEBI circular on auditor resignation) from the listed company.
 Clause XIX / 19
Reporting on
Material
Uncertainty
(Madira)
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On the basis of the financial ratios, ageing and expected dates of realization of financial assets
and payment of financial liabilities, other information accompanying the financial statements,
the auditor’s knowledge of the Board of Directors and management plans, whether the
auditor is of the opinion that no material uncertainty exists as on the date of the audit report
that company is capable of meeting its liabilities existing at the date of balance sheet as and
when they fall due within a period of one year from the balance sheet date;
Material uncertainty
As per SA 570 it is uncertainty on going concern of company, which is significant enough
requiring disclosure to users of financial statement.
Ability to pay liabilities.
Auditor has to comment whether company will be able to pay its liabilities falling due
within 1 year from balance sheet.
 Clause XX / 20
Reporting on
CSR Compliance
(Chocolate)
Note: Treatment related to unspent amount as given in section 135(5) & (6) of
Companies Act is not yet notified till then auditor should simply this clause is not
applicable, he may explain reason also.
whether, in respect of other than ongoing projects, the company has transferred
unspent amount to a Fund specified in Schedule VII to the Companies Act within a
period of six months of the expiry of the financial year in compliance with second
proviso to sub-section (5) of section 135 of the said Act;
whether any amount remaining unspent under sub-section (5) of section 135 of the
Companies Act, pursuant to any ongoing project, has been transferred to special
account in compliance with the provision of sub-section (6) of section 135 of the said
Act;
 Clause XXI / 21
Reporting on
qualifications or
adverse remark
of Consolidated
entities.
(Avocado)
Whether there have been any qualifications or adverse remarks by the respective
auditors in the CARO reports of the companies included in the consolidated financial
statements, if yes,
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 indicate the details of the companies and
 the paragraph numbers of the CARO report containing the qualifications or
adverse remarks.
Qualification or Adverse remark
 No need to consider CARO report of Group companies which are not
consolidated.
 Even adverse remarks of parent company should be considered.
 No need to consider materiality such remarks from consolidation perspective,
all such adverse remarks should be considered.
 For the purpose of reporting the qualifications/adverse remarks, the principal
auditor may report in the following manner in the consolidated audit report–
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CHAPTER
ENGAGEMENT & QUALITY CONTROL STANDARDS
3
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INTRODUCTION TO STANDARDS ON AUDITING
TYPES OF STANDARDS
Types of Standards
Engagement Standards Standards on Quality Control
SQC
Assurance Related Services (1-99)
Services 1
SAs SREs SAEs SRSs

(100-999) (2000-2699) (3000-3699) (4000-4699)
37 2 3 2
The following Standards issued by the Auditing and Assurance Standards Board under the authority of the Council
are collectively known as the Engagement Standards:
Standards on Auditing (SAs), to be applied in the audit of historical financial information.
Standards on Review Engagements (SREs), to be applied in the review of historical financial information.
Standards on Assurance Engagements (SAEs), to be applied in assurance engagements, other than audits
and reviews of historical financial information.
Standards on Related Services (SRSs), to be applied to engagements involving application of agreed upon
procedures to information, compilation engagements, and other related services engagements, as may be
specified by the ICAI.
Standards on Quality Control (SQCs), issued by the AASB under the authority of the Council, are to be applied for all
services covered by the Engagement Standards as described in paragraph above.
AUDIT VS REVIEW
Audit (SAs) Review (SREs)
Time More Less
Audit Procedures All Types Inquiry & Analytical Procedure
Level of Assurance Reasonable (High) Moderate
Type of Opinion Positive Negative
Example Company Audit Quarterly Review of Interim, FST
WHAT IS THE PROCEDURE FOR ISSUING STANDARDS?
AASB identifies project/ area where standard is required

Constitutes study Group/ Task Force
*Conveyor is appointed who appoints 5-7 members
Study group submits preliminary draft to chairman.
Preliminary Draft is approved by chairman
Draft is hosted on AASB website for minimum 21 Days
Draft considered in meeting & Exposure draft is finalized
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Proposed exposure Draft sent to council members, minimum 10 days are provided for comments and
changes.
Exposure draft is issued to members & other public bodies and hosted on ICAI website for minimum 60
days.
Comments received up-to 10days prior to AASB meeting are hosted, AASB meeting is held and drafted is
finalized.
Proposed standard is placed before council & approved & issued.
DRAFTING OF SA
DRAFTING OF SA
Section I Section II
INTRODUCTION Application and Other Explanatory Material
DEFINITION APPENDICES
OBJECTIVES
REQUIREMENTS
Introduction: It includes the purpose, scope, and subject matter as well as the responsibilities of the auditor
and others in that context. (SA 250)
Objective: It includes the objective of the auditor in the audit area addressed by that particular SA.
Definitions: For higher understanding of the SAs, pertinent terms are delineated in each SA.
Requirements: Every objective is shored up by clearly stated requirements. Requirements are always
expressed by the phrase “the auditor shall.”
Application and Other Explanatory Material: The application and other explanatory material explains more exactly
what is meant by a requirement or is intended to cover or includes examples of procedures that can be appropriate
under certain circumstances.
APPLICABILITY OF ACCOUNTING STANDARDS TO CHARITABLE AND/OR RELIGIOUS ORGANISATION

 Query to The Accounting Standards Board has received a query as to whether the accounting standards
AASB formulated by it are applicable to organisation whose objects are charitable or religious. The
Board has considered this query and its views in the matter are set forth in the following
paragraphs. The Preface to the Statements of Accounting Standards states.
 Preface to “The Institute will issue Accounting Standards for use in the presentation of the general-purpose
AS financial statements issued to the public by such commercial, industrial or business enterprises
as may be specified by the Institute from time to time and subject to the attest function of its
members”.
 Applicability The reference to commercial, industrial or business enterprises in the aforesaid paragraph is in
Depends on the context of the nature of activities carried on by an enterprise rather than with reference to
Nature of its objects. It is quite possible that an enterprise has charitable objects, but it carries on, either
Activities wholly or in part, activities of a commercial, industrial or business nature in furtherance of its
objects. The Board believes that Accounting Standards apply in respect of commercial, industrial
or business activities of any enterprise, irrespective of whether it is profit oriented or is
established for charitable or religious purposes. Accounting Standards will not, however, apply
to those activities which are not of a commercial, industrial or business nature.
(an activity of collecting donations and giving them to flood affected people).
 Removal of It is also clarified that exclusion of an entity from the applicability of the Accounting Standards
Doubt would be permissible only if no part of the activity of such entity was commercial, industrial or
business in nature. For the removal of doubts, it is clarified that even if a very small proportion
of the activities of an entity were considered to be commercial, industrial or business in nature,
then it could not claim exemption from the application of Accounting Standards. The Accounting
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standards would apply to all its activities including those which were not commercial, industrial
or business in nature.
OBJECTIVES OF IAASB
Public Interest – High Quality Auditing Standards
The objective of the IAASB is to serve the public interest by setting high quality auditing standards and by facilitating
the convergence of international and national standards, thereby enhancing the quality and uniformity of practice
throughout the world and strengthening public confidence in the global auditing and assurance profession.
The IAASB achieves this objective by:
Establishing high quality auditing standards and guidance for financial statement audits that are generally
accepted and recognized by investors, auditors, governments, banking regulators, securities regulators and
other key stakeholders across the world;
Establishing high quality standards and guidance for other types of assurance services on both financial and
non-financial matters;
Establishing high quality standards and guidance for other related services;
Establishing high quality standards for quality control covering the scope of services addressed by the IAASB;
and
Publishing other pronouncements on auditing and assurance matters, thereby advancing public
understanding of the roles and responsibility of professional auditors and assurance service providers.
OBJECTIVES & FUNCTION OF AASB
Objectives and Functions of the Auditing and Assurance Standards Board: The following are the objectives and
functions of the Auditing and Assurance Standards Board-
To review the existing and emerging auditing practices worldwide and identify areas in which Standards on
Quality Control, Engagement Standards and Statements on Auditing need to be developed.
To formulate Engagement Standards, Standards on Quality Control and Statements on Auditing so that these
may be issued under the authority of the Council of the Institute.
To review the existing Standards and Statements on Auditing to assess their relevance in the changed
conditions and to undertake their revision, if necessary.
To develop Guidance Notes on issues arising out of any Standard, auditing issues pertaining to any specific
industry or on generic issues, so that those may be issued under the authority of the Council of the Institute.
To review the existing Guidance Notes to assess their relevance in the changed circumstances and to
undertake their revision, if necessary.
To formulate General Clarifications, where necessary, on issues arising from Standards.
To formulate and issue Technical Guides, Practice Manuals, Studies and other papers under its own authority
for guidance of professional accountants in the cases felt appropriate by the Board.
LIST OF SAs
Hello everyone, first of all let me clarify, I believe in 100% conceptual studies, where we know reasons & applications
through examples. If you do that, studying is fun & you remember things. But my crazy thought process came up with
something more to remember SA numbers in funny way. You may call it madness, you may laugh. But go through it
once imagine things given, I bet you will never do mistake with SA numbers. It is based on principles of memory
techniques. This is helpful when you get confused in exams. Read slowly one by one associate it with SA number, as
soon as you see number crazy logic should come up.
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“Remember correct SA number cannot give you full marks they can only improve marking by 1 mark & it matters”
200 Double “O” agent (James Bond) Objectives of Audit Overall Objectives of the Independent
ek teer se 2 shikar (objective) Auditor and the Conduct of an Audit in
fulfil karta hai Accordance with Standards on Auditing
210 2 logo ne milkar 1 LETTER Engagement Letter Agreeing the Terms of Audit
(ENGAGEMENT LETTER) sign Engagements
kiya
220 Jab 2 aur 2 kandhe se kandha Quality Control Quality Control for an Audit of Financial
milakar kaam karte hai toh Statements
QUALITY improve hoti hai
230 2nd Page ke baad 3rd Page aata Audit Documentation Audit Documentation
hai koi bhi DOCUMENTS mein
240 Jo log 2 ka 4 kartein hai wooh Frauds The Auditor’s Responsibilities Relating to
FRAUD haotein hai Fraud in an Audit of Financial Statements
250 Ambani sahab 2 se 5 relaince ka Law Consideration of Laws and Regulations in
LEGAL COMPLIANCE dekhtein an Audit of Financial Statements
hai
260 6 is 3 times BIGGER than 2: - Big Communication to Communication with Those Charged with
means TCWG TCWG Governance
265 6 ke baad 5 kaise aa sakta hai, Communication of Communicating Deficiencies in Internal
there is PROBLEM WITH Internal Control Control to Those Charged with
SYSTEM Deficiency Governance and Management
299 2 “9” SAATH(JOINTLY) mein Joint Auditors Joint Audit of Financial Statements
kaam kar rahe hai
300 Double “O” agent ke paas har Planning Planning an Audit of Financial Statements.
project kr liye 3 PLAN hotein hai
315 15 / 3 =5, agar ek jagah pe pe Risk Assessment Identifying and Assessing the Risks of
paanch raastein miltein ho toh Material Misstatement Through
that is extremely RISKY Understanding the Entity and Its
Environment
320 20/3 = 6.677 0.677 is Materiality Materiality in Planning and Performing an
IMMATERIAL Audit
330 30 / 3 = 10, Auditor should Response to Risk The Auditor’s Responses to Assessed Risks
atleast have 10 responsive
procedures for various risks
402 Chaar se do hojao aur aapna Service Organisation Audit Considerations Relating to an Entity
kaam outsource kardo Using a Service Organisation
450 4-5 badi galtiyaan toh har audit Material Misstatement Evaluation of Misstatements Identified
mein milhi jati hai During the Audit
500 Double “O” agent ke paas har Audit Evidence Audit Evidence
chiz ko prove karne ke liye 5
EVIDENCE hotein hai
501 1 number pe jo areas hotein hai Inventory / Litigation / Audit Evidence-Specific Considerations for
unko specific consideration Segment Reporting Selected Items
lagta hai
505 Ek 5 andar hai dusra bhar hai, External Communication External Confirmations
andar wala 5
BAHAR(EXTERNAL) WALE SE
COMMUNICATION kar raha hai
510 5 se 10 saal mein rotation Initial Audit Initial Audit Engagements – Opening
lagata hai aur new firm ke liye Engagements Balances
initial audit engagement ho
jaata hain
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520 20/5 =4, Humne isse ko charo Analytical Procedures Analytical Procedures
taraf se “ANALYSE” karna
chahiye
530 30/5 = 6, we cannot check Sampling Audit Sampling
everything at the max 6 items in
details so let’s do sampling
540 40/5 = 8, agar 8 ko kaatoge toh Estimates Auditing Accounting Estimates, Including
do ek E aur ek 3 banega and E Fair Value Accounting Estimates, and
for ESTIMATES (Highly Insane, I Related Disclosures
Know)
550 Yeh 5 aur 5 dono RELATIVES din Related Parties Related Parties
bhar aaps mein baat aur
transactions kartein hai
560 5-6 months are crucial after Subsequent Events Subsequent Events
balance Sheet date for
SUBSEQUENT EVENTS
570 5+7=12 aur agla number hai 13 Going Concern Going Concern
matlab khatra, NEXT YEAR IS
DARK (DOUBTFUL)
580 5+8=13 jab khatra bana hua ho, Written Representation Written Representations
saboot ki kaami mehsoos ho
toh support ke liye
management se WRITING MEIN
CONFIRMATION LENA
CHAHIYE
600 Double “O” always has 6 OTHER Other Auditors Using Work of Others
PEOPLE which help him
610 Companies generally have 1 Internal Auditor Using the Work of Internal Auditors
internal auditor
620 You should always have 2 Experts Using the Work of an Auditor’s Expert
EXPERTS for critical issues
700 Final work of Double” O” agent Audit Report Forming an Opinion and Reporting on
is to give 7 PARAGRAPH Financial Statements
REPORT
701 No 1 Secret to Success is Key Matter Communicating Key Audit Matters in the
Focusing on Key Matters Independent Auditor’s Report
705 7-5 = 2, 2 TYPES OF OPINION Types of Opinion Modifications to the Opinion in the
are possible “Unmodified & Independent Auditor’s Report
Modified” (again madness)
706 7-6=1, 1 hi jaise 2 para graph EMP / OMP Emphasis of Matter Paragraphs and Other
EMP / OMP Matter Paragraphs in the Independent
710 10-7=3, compare with atleast 3 Comparatives Comparative Information—Corresponding
other reports Figures and Comparative Financial
Statements
720 20-7=13, 13 different Other Information The Auditor’s Responsibilities Relating to
documents are presented in Other Information
annual report
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[SA 200]OVERALL OBJECTIVES OF THE INDEPENDENT AUDITOR AND THE CONDUCT OF

AN AUDIT IN ACCORDANCE WITH STANDARDS ON AUDITING
WHAT IS OVERALL OBJECTIVE OF AUDIT? (MCQ-200.2)

 Overall As per SA-200 “Overall Objectives of the Independent Auditor”, in conducting audit of financial
Objective statements, the overall objectives of the auditor are:
To obtain reasonable assurance about whether the financial statements as a whole are
free from material misstatement, whether due to fraud or error, thereby enabling the
auditor to express an opinion on whether the financial statements are prepared, in all
material respects, in accordance with an applicable financial reporting framework; and
To report on the financial statements, and communicate as required by the SAs, in
accordance with the auditor’s findings.
The purpose of an audit is to enhance the degree of confidence of intended users in the financial
statements. An audit conducted in accordance with SAs and relevant ethical requirements
enables the auditor to form that opinion.
In some cases, however, the applicable laws and regulations may require auditors to provide
opinions on other specific matters, such as the effectiveness of internal control, or the
consistency of a separate management report with the financial statements. While the SAs
include requirements and guidance in relation to such matters to the extent that they are
relevant to forming an opinion on the financial statements, the auditor would be required to
undertake further work if the auditor had additional responsibilities to provide such opinions.
 Not So, it follows from above that it is no part of the auditor’s duty to probe into the propriety of
Objective business conduct. This contention has been held perfectly valid as it has been asserted that the
conventional financial audit is concerned with examination of the transactions to ascertain the
true and fair nature of the financial statements. The auditor is merely concerned with evaluating
the evidence in support of transactions but need not examine the regularity and prudence of
various decisions taken by the management.
However, of late, this has undergone a change as some of the requirements of law introduced in
the past require the company auditor to go beyond the functions of reporting and express an
opinion about the propriety or prudence of certain transactions in certain specific areas.
Sections 143 of the Companies Act, 2013 contain various such matters. It may also be clarified
that the usage of words “true and fair” is restricted to certain countries such as U.K. while in
other countries like United States the expression “full and fair” is prevalent. However, both
expressions aim to convey same meaning.
On a consideration of what has been discussed, it may be summed up that auditing has the
principal objective of seeing whether or not the financial statements portray a true and fair state
of affair and of reporting accordingly. An incidental and secondary, but by no means an
insignificant audit objective, flowing from the former, is detection of errors and frauds and
making recommendations to prevent their occurrence.
If there remains a deep-laid fraud in the accounts, which in the normal course of examination of
accounts may not come to light, it will not be construed as failure of audit, provided the
auditor was not negligent in the carrying out his normal work. This principle was established as
early as in 1896 in the leading casein Re-Kingston Cotton Mills Co. (Re is Latin term, it means “in
the matter of”)
The nature of audit objectives was also highlighted in the leading case Re the London and
General Bank Ltd. [1895]. It was held that an auditor must ascertain that the books of account
show the true financial position of the company. For the first time, the duties of the company
auditor were spelled out in specific terms. Lord Justice Lindley observed, “It is no part of an
auditor’s duty to give advice either to directors or shareholders as to what they ought to do.
An auditor has nothing to do with the prudence or imprudence of making loans without
security. It is nothing to him whether the business of company is being conducted prudently or
imprudently, profitably or unprofitably; it is nothing to him whether dividends are properly or
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improperly declared, provided he discharges his own duty to the shareholders. His business is to
ascertain and state the true financial position of the company at the time of the audit and his
duty is confined to that.
 Reasonable Reasonable assurances a high level of assurance (Not 100%, absolute assurance) It is obtained
Assurance when the auditor has obtained sufficient appropriate audit evidence to reduce audit risk (i.e.,
the risk that the auditor expresses an inappropriate opinion when the financial statements are
materially misstated) to an acceptably low level. However, reasonable assurance is not an
absolute level of assurance, because there are inherent limitations of an audit which result in
most of the audit evidence on which the auditor draws conclusions and bases the auditor’s
opinion being persuasive rather than conclusive.
KEY TO REMEMBER
Primary  Obtain (Determine) REASONABL ASSURANCE whether financial Statements are

Objective of FREE FROM MATERIAL MISSTATEMENT whether due to fraud or error, as per
Audit APPLCIABLE FINANCIAL REPORTING FRAMEWORK
 FRAME OPINION on financial statement
 Make REPORT
Secondary  As material misstatement can be due to fraud or error, hence, to detect MATERIAL
Objective FRAUDS & ERROR with REASONABLE ASSURANCE is secondary or incidental
(Incidental objective.
Objective) (Not all frauds & errors – Material Frauds & Errors
Not Just Fraud – Fraud & Error Both
Guarantee to detect – No, Only Reasonable Assurance)
Not Objectives  Propriety of Business Decisions, Efficiency & Effectiveness and Future Viability or
give business advisory etc., we focus only on true (reliability) & fair (understandable/
comparable/ relevance as per Applicable FRF) opinion on financial statements.
 But certain rules regulations such as Sec 143(1) / CARO 2016 compels us to comment
on propriety of decisions also, so we have to do it as law overrides standards only in
these specific cases.
Extension of  Further Law may impose other responsibilities to give opinion on Internal Financial
Objectives Controls or to comment whether financial statements are consistent with
management report for example sec 143 asks to give opinion on internal financial
controls & SA 720 asks to comment if there is inconsistency between financial
statements & other documents in annual report.
The London and  “It is no part of an auditor’s duty to give advice either to directors or shareholders
General Bank as to what they ought to do. An auditor has nothing to do with the prudence or
Ltd imprudence of making loans without security. His business is to ascertain and state
the true financial position of the company at the time of the audit and his duty is
confined to that.
Case of  Deep-laid fraud in the accounts, will not be construed as failure of audit, provided
Kingston Cotton the auditor was not negligent in the carrying out his normal work.
Mills Co
WHAT ARE INHERENT LIMITATIONS OF AUDIT?

 Audit Risk The auditor is not expected to, and cannot, reduce audit risk to zero and cannot therefore
Cannot Be obtain absolute assurance that the financial statements are free from material misstatement
Reduced to due to fraud or error. This is because there are inherent limitations of an audit, which result in
most of the audit evidence on which the auditor draws conclusions and bases the auditor’s
Zero
opinion being persuasive rather than conclusive. The inherent limitations of an audit arise from:
The nature of financial reporting;
The nature of audit procedures;
The need for the audit to be conducted within a reasonable period of time and at a
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reasonable cost.
 The Nature Judgement Based: -
of Financial The preparation of financial statements involves judgment by management in applying
Reporting the requirements of the entity’s applicable financial reporting framework to the facts
and circumstances of the entity.
(E.g. Useful life of Fixed Assets & Residual Value / Valuation of Investments in
Artistic Items Like Painting / Costing of Inventory – FIFO, Weighted Average,
Standard Costing, Retail Costing)
Subjectivity / Range of Interpretations leads to Inherent Variability

In addition, many financial statement items involve subjective decisions or assessments
or a degree of uncertainty, and there may be a range of acceptable interpretations or
judgments that may be made. Consequently, some financial statement items are subject
to an inherent level of variability which cannot be eliminated by the application of
additional auditing procedures.
(E.g. Uncertainty -- Useful life of Fixed Assets & Residual Value
Subjectivity -- Valuation of Investments in Artistic Items Like Painting
Range of Interpretations -- Costing of Inventory – FIFO, Weighted Average,
Standard Costing, Retail Costing)
Estimates are most affected because of above: - Auditor should check Reasonableness
of Estimates & Qualitative Aspects of Accounting Practices (Including Management
Bias)
For example, this is often the case with respect to certain accounting estimates.
Nevertheless, the SAs require the auditor to give specific consideration to whether
accounting estimates are reasonable in the context of the applicable financial reporting
framework and related disclosures, and to the qualitative aspects of the entity’s
accounting practices, including indicators of possible bias in management’s judgments.
 The Nature There are practical and legal limitations on the auditor’s ability to obtain audit evidence. For
of Audit example:
Procedures Intentional or Unintentional Misinformation from Management:
There is the possibility that management or others may not provide, intentionally or
unintentionally, the information that is relevant to the preparation and presentation of
the financial statements or that has been requested by the auditor. Accordingly, the
auditor cannot be certain of the completeness of information, even though the auditor
has performed audit procedures to obtain assurance that all relevant information has
been obtained.
(E.g.- Management has entered in agreement to share revenue with Suppliers,
Provision remained unrecorded)
Sophisticatedly Designed Frauds: -
Fraud may involve sophisticated and carefully organised schemes designed to conceal
it. Therefore, audit procedures used to gather audit evidence may be ineffective for
detecting an intentional misstatement that involves, for example, collusion to falsify
documentation which may cause the auditor to believe that audit evidence is valid when
it is not. The auditor is neither trained as nor expected to be an expert in the
authentication of documents.
(E.g. Supplier, Store Manager, Quality Engineer, Accountant, MD all are
involved)
No powers of Investigation: -
An audit is not an official investigation into alleged wrongdoing. Accordingly, the
auditor is not given specific legal powers, such as the power of search, which may be
necessary for such an investigation.
Sampling & Persuasive Evidence (Extra Points)
 Timeliness of Difficulty, Time, or Cost Not Valid basis to Omit Audit Procedures in Some Cases
Financial The matter of difficulty, time, or cost involved is not in itself a valid basis for the auditor
Reporting to omit an audit procedure for which there is no alternative or to be satisfied with audit
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and the evidence that is less than persuasive. Appropriate planning assists in making sufficient
Balance time and resources available for the conduct of the audit.
between Delay reduces value of information: -
Benefit and Notwithstanding this, the relevance of information, and thereby its value, tends to
Cost diminish over time, and there is a balance to be struck between their liability of
information and its cost. This is recognised in certain financial reporting frameworks
(see, for example, the “Framework for the Preparation and Presentation of Financial
Statements” issued by the Institute of Chartered Accountants of India (ICAI)).
Expectations of Users: -
Therefore, there is an expectation by users off financial statements that the auditor will
form an opinion on the financial statements within a reasonable period of time and at a
reasonable cost, recognising that it is impracticable to address all information that may
exist or to pursue every matter exhaustively on the assumption that information is in
error or fraudulent until proved otherwise.
WHAT ARE ETHICAL REQUIREMENTS?

 Mandatory The auditor shall comply with relevant ethical requirements, including those pertaining to
independence, relating to financial statement audit engagements.
 Derived from Relevant ethical requirements ordinarily comprise the Code of Ethics issued by the Institute of
Code of Ethics Chartered Accountants of India.
The Code establishes the following as the fundamental principles of professional ethics relevant
to the auditor when conducting an audit of financial statements and provides a conceptual
framework for applying those principles; (C2BI-Office explains ethical requirements)
Confidentiality; and
Professional Competence and due care;
Professional Behaviour.
Integrity;
Objectivity;
 Independence In the case of an audit engagement it is in the public interest and, therefore, required by the
(MCQ – Code of Ethics, that the auditor be independent of the entity subject to the audit.
SA 200.1 ,
The Code describes independence as comprising both independence of mind and
SA 200.3)
independence in appearance. The auditor’s independence from the entity safeguards the
auditor’s ability to form an audit Overall Objectives of the Independent Auditor opinion without
being affected by influences that might compromise that opinion.
Independence enhances the auditor’s ability to act with integrity, to be objective and to
maintain an attitude of professional scepticism.
WHAT IS PROFESSIONAL SCEPTICISM?
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 Definition Professional scepticism: - An attitude that includes a questioning mind, being alert to
conditions which may indicate possible misstatement due to error or fraud, and a critical
assessment of audit evidence.
(Some examples which are against professional scepticism,
Only because last time there were no problems, blindly relying on management, internal
controls system.
Accepting oral justifications, Xerox copies is important matters.
Ignoring small, unusual things such as withdrawal of Rs 5 from bank or small errors such
as negative inventory balance of small item etc.)
 How to remain Questioning Mind
sceptical?  Reliability
Information that brings into question the reliability of documents and
responses to inquiries to be used as audit evidence.
(E.g. Figures are over written / 5-year-old document is appearing as if
just printed)
 Suspicion
Conditions that may indicate possible fraud.
(E.g. 20% increase in consumption of petrol while production increased
5%)
Critical Assessment
 Stop Blind Reliance
Also, don’t just rely blindly rely on past, current year evaluation is must
(E.g. Only because management is not involved in any fraud in past
doesn’t mean, financial statement manipulation is not possible)
 Contradiction
Audit evidence that contradicts other audit evidence obtained.
(E.g. Reconciliation given shows stock of 5,000 but insurance documents
show stock of 3,500)
 Beyond SAs
Circumstances that suggest the need for audit procedures in addition to those
required by the SAs.
(E.g. SA 402 says rely on report if it is from Chartered Accountant, but
we may not rely because of bad past experience in other assignment)
The auditor shall plan and perform an audit with professional scepticism recognising that
circumstances may exist that cause the financial statements to be materially misstated.
 What if PS is Maintaining professional scepticism throughout the audit is necessary if the auditor is, for
not followed? example, to reduce the risks of:
Overlooking unusual circumstances.
(E.g. % change in fuel consumption leads to discovery of fraud)
Over generalising when drawing conclusions from audit observations.

(E.g. Salary of one department was checked and it was declared salary of other
3 departments would be same)
Using inappropriate assumptions in determining the nature, timing, and extent of the
audit procedures and evaluating the results thereof.
(E.g. Assuming that employees with more than 10 years with company are
honest hence no need to check sales executed by them)
The auditor may accept records and documents as genuine unless the auditor has reason to
believe the contrary.
The auditor cannot be expected to disregard past experience of the honesty and integrity of
the entity’s management and those charged with governance.
Nevertheless, a belief that management and those charged with governance are honest and
have integrity does not relieve the auditor of the need to maintain professional scepticism or
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allow the auditor to be satisfied with less-than persuasive audit evidence when obtaining
reasonable assurance.
IS COMPLIANCE WITH SAs MUST?

 Understand The auditor shall have an understanding of the entire text of a SA, including its application and
other explanatory material, to understand its objectives and to apply its requirements
properly.
 Comply To achieve the overall objectives of the auditor, the auditor shall use the objectives stated in
relevant SAs in planning and performing the audit, having regard to the inter-relationships
among the SAs, to:
 Determine whether any audit procedures in addition to those required by the
SAs are necessary in pursuance of the objectives stated in the SAs; and
 Evaluate whether sufficient appropriate audit evidence has been obtained.
 Report The auditor shall not represent compliance with SAs in the auditor’s report unless the auditor
has complied with the requirements of this SA and all other SAs relevant to the audit.
(Understanding Compliance Achieve Objectives given in SAs Additional audit procedures
Sufficient & Appropriate EvidenceRepresent in Audit Report)
Exceptions
The auditor shall comply with each requirement of a SA unless, in the circumstances of
the audit:
 The entire SA is not relevant; or (No Summary Financial Statements SA 810 not
relevant)
 The requirement is not relevant because it is conditional, and the condition
does not exist.
(No need to apply SA 705 if there is no situation of modifying audit report)
 Departure In exceptional circumstances, the auditor may judge it necessary to depart from a relevant
requirement in a SA. In such circumstances, the auditor shall perform alternative audit
procedures to achieve the aim of that requirement. The need for the auditor to depart from a
relevant requirement is expected to arise only where the requirement is for a specific
procedure to be performed and, in the specific circumstances of the audit, that procedure
would be ineffective in achieving the aim of the requirement.
(E.g. SA 501 asks to meet lawyers of company but if these lawyers are not trustworthy
as per prior experience auditor may skip it and meet other reputed lawyers)
 Failure to If an objective in a relevant SA cannot be achieved, the auditor shall evaluate whether this
Achieve an prevents the auditor from achieving the overall objectives of the auditor and there by requires
Objective the auditor, in accordance with the SAs, to modify the auditor’s opinion or withdraw from the
engagement. Failure to achieve an objective represents a significant matter requiring
documentation in accordance with SA 230.
(E.g. SA 240 asks to withdraw in exceptional circumstances but it’s not possible in
government company)
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[SA 210] AGREEING THE TERMS OF AUDIT ENGAGEMENTS
WHAT ARE PRECONDITIONS OF AUDIT (CNO-3.050)

(Before asking any information & thinking about acceptance & continuance as per SQC 1 & SA 200, these conditions
should be satisfied)
 Preconditions Acceptable FRF:- The use by management of an acceptable financial reporting
of an audit framework (Exp:- Reliable / Relevant etc) in the preparation of the financial statements
and
Agreement:- the agreement of management and, where appropriate, those charged
with governance to the premise on which an audit is conducted.
(Exp:- Management should agree and take responsibility of financial reporting)
 Auditor’s In order to establish whether the preconditions for an audit are present, the auditor shall:
Responsibility
Acceptable FRF:- Determine whether the financial reporting framework to be applied
to Check 2
in the preparation of the financial statements is acceptable; and
Conditions
Agreement:- Obtain the agreement of management that it acknowledges and
understands its responsibility:
 Preparation of Financial Statements
For the preparation of the financial statements in accordance with the
applicable financial reporting framework, including where relevant their fair
presentation;
 Internal Control System
For such internal control as management determines is necessary to enable
the preparation of financial statements that are free from material
misstatement, whether due to fraud or error; and
 Information to Auditor
To provide the auditor with:
o Access to all information of which management is aware that is
relevant to the preparation of the financial statements such as
records, documentation and other matters;
o Additional information that the auditor may request from
management for the purpose of the audit; and
o Unrestricted access to persons within the entity from whom the
auditor determines it necessary to obtain audit evidence.
 Don’t Accept If the preconditions for an audit are not present, the auditor shall discuss the matter with
Assignment management.
Unless required by law or regulation to do so, the auditor shall not accept the proposed audit
engagement:
If the auditor has determined that the financial reporting framework to be applied in
the preparation of the financial statements is unacceptable; or
If the agreement as discussed above has not been obtained.
LIMITATION ON SCOPE PRIOR TO AUDIT ENGAGEMENT ACCEPTANCE (CNO-3.050) (MCQ-210.1)

If management or those charged with governance impose a limitation on the scope of the auditor’s work in the terms
of a proposed audit engagement such that the auditor believes the limitation will result in the auditor “disclaiming
an opinion” on the financial statements, the auditor shall not accept such a limited engagement as an audit
engagement, unless required by law or regulation to do so.
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IS ENGAGEMENT LETTER COMPULSORY? WHAT ARE ITS CONTENTS? (Mandatory Clauses) (MCQ-210.5)
 Compulsory The auditor shall agree the terms of the audit engagement with management or those charged
Engagement with governance, as appropriate.
Letter
 Mandatory The agreed terms of the audit engagement shall be recorded in an audit engagement letter or
Clauses other suitable form of written agreement and shall include:
The objective and scope of the audit; 1
(CNO 2.010) (E.g. Express Opinion on Financial Statements – Standalone, Consolidated,
(MCQ-210.2) Subsidiaries, Associates, Branches)
The responsibilities of the auditor; 4
(E.g. Conduct Audit as per SAs)
The responsibilities of management; 2

(E.g. Preparing Financial Statements etc)
Identification of the applicable financial reporting framework for the preparation of

the financial statements; and 3
(E.g. AS or Ind AS per Sec 133)
Reference to the expected form and content of any reports to be issued by the auditor
and a statement that there may be circumstances in which a report may differ from its
expected form and content. 5
(E.g. as per SA 700 series)
 Law If law or regulation prescribes in sufficient detail the terms of the audit engagement referred
prescribes to in above paragraph, the auditor need not record them in a written agreement, except for
terms the fact that such law or regulation applies, and that management acknowledges and
understands its responsibilities as set out in pre-conditions.
( E.g., IRDA may issue regulation covering all above matters between auditor & client
then no need of engagement letter just has simple letter to client that terms are as
per regulations, please sign and send back the letter)
IS ENGAGEMENT LETTER REQUIRED AT RECURRING AUDITS? (CNO 3.000)

On recurring audits, the auditor shall assess whether circumstances require the terms of the audit engagement to be
revised and whether there is a need to remind the entity of the existing terms of the audit engagement.
The auditor may decide not to send a new audit engagement letter or other written agreement each period.
However, the following factors may make it appropriate to revise the terms of the audit engagement or to remind
the entity of existing terms:
 External A change in legal or regulatory requirements. (E.g. New company act / GST)
Changes A change in the financial reporting framework
adopted in the preparation of the financial (E.g. Ind AS)
statements.
 Change form A significant change in ownership.
Management (E.g. Takeover from other business group, pantaloons taken from Biyani to Aditya
Side Birla Group)
A recent change of senior management.
(E.g. MD / CEO / CFO are replaced)
A significant change in nature or size of the entity’s business.

(E.g. Started manufacturing along with trading and now turnover has increased 3
times as compared to last year)
Any indication that the entity misunderstands the objective and scope of the audit.
(E.g. They ask for Fraud Report / Compliance Report / Tax Report / Fixed Asset
assessment report etc)
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 Change from A change in other reporting requirements. (E.g. Reporting on Internal
Auditors Side Financial Control)
Any revised or special terms of the audit
(E.g. Separate Branch Auditors
engagement.
/ Use of CAAT / Use of Expert
etc which are justified)
KEY TO REMEMBER
Change in  Legal Requirements / FRF Ownership / Senior Management / Nature & Size / Indication of
Misunderstanding  Change in reporting requirement / Terms of Engagement
WHAT IF THERE IS CHANGE IN TERMS? (MCQ-210.4)

 General A request from the client for the auditor to change the engagement may result from-
Reasons for a change in circumstances affecting the need for the service,
Change (E.g. Change in Law -- IFCR)
(Popular
a restriction on the scope of the engagement, whether imposed by management or
Reasons)
caused by circumstances.
(E.g. Visit to foreign branches restricted to cut costs or because of war)
An auditor who, before the completion of the engagement, is requested to
change the engagement to one which provides a lower level of assurance, should
consider the appropriateness of doing so.
a misunderstanding as to the nature of an audit or related service originally requested.
 Examine The auditor would consider carefully the reason given for the request, particularly the
reasons implications of a restriction on the scope of the engagement, especially any legal or contractual
implications.
The auditor shall not agree to a change in the terms of the audit engagement where there is
no reasonable justification for doing so.
(E.g. 3 months after appointment company plans to appoint separate branch
auditor for some branches, this is change in terms of engagement which said
all branches will be audited by principle auditor, auditor will have to determine
whether it is justified or not).
Justified
If the terms of the audit engagement are changed, the auditor and management
shall agree on and record the new terms of the engagement in an engagement letter
or other suitable form of written agreement.
(E.g. Continuing above example, if these are new branches with low turnover
located far away from offices from principal auditor, then such steps appear
justified as it will save time & cost of both principle auditor & company, in
such case sign revised engagement letter)
Unjustified
If the auditor is unable to agree to a change of the terms of the audit engagement
and is not permitted by management to continue the original audit engagement, the
auditor shall:
 Withdraw from the audit engagement where possible under applicable law
or regulation; and
 Determine whether there is any obligation, either contractual or otherwise,
to report the circumstances to other parties, such as those charged with
governance, owners or regulators.
(E.g. But if these branches are big branches of company contributing to
40% of revenue and complicated matters then it is not justified then we
will have to withdraw from assignments and inform TCWG, CAG if
required by law)
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Q “An auditor who before the completion of the engagement is requested to change the
engagement to one which provides a lower level of assurance should consider the
appropriateness of doing so.” Discuss.
Answer
Repeat all points of “Change in Terms” and also specify below content.
If the auditor concludes that there is reasonable justification to change the engagement and if
the audit work performed complied with the SAs applicable to the changed engagement, the
report issued would be appropriate for the revised terms of engagement. In order to avoid
confusion, the report would not include reference to-
the original engagement; or
any procedures that may have been performed in the original engagement, except where
the engagement is changed to an engagement to undertake agreed-upon procedures and
thus reference to the procedures performed is a normal part of the report.
(E.g. If it is justified because of lack of time and need of report to be
submitted to investor quickly, we can accept such review assignment, then it will
become purely review assignment and no reference to audit will be made.)
UNIQUE MCQS
 MCQ No. 210.6
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[SA 220] QUALITY CONTROL FOR AN AUDIT OF FINANCIAL STATEMENTS
FLOW CHART OF SA 220
WHAT DO YOU MEAN BY QUALITY OF AUDIT? WHAT IS FIRM LEVEL QUALITY & ENGAGEMENT LEVEL QUALITY?
We will say that quality is maintained at particular audit engagement if: -
If there is compliance with professional standards and regulatory and legal requirements.
(E.g. AS / SA / Co Act / Sch III / Sch II etc.)
The reports issued are appropriate in the circumstances.

(E.g. Clean / Qualified / Adverse / Disclaimer etc.)
.
SQC 1 says that audit firm is supposed to maintain systems at firm level to achieve quality in audit with above
things as ultimate objective. Such principles will be applicable to all assurance & related assignments of the
firm as per SQC1.
On the other hand, SA 220 deals with implementation of firm level quality control system to individual
engagement level. Is applicable only to audit of historical information. It casts responsibility on engagement
partner to implement quality control procedures.
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WHAT IS LEADERSHIP RESPONSIBILITY FOR QUALITY OF AUDIT? (Not Expected in Detail)
ASSIGNMENT OF TEAM (Not Expected in Detail)
ETHICAL REQUIREMENTS (Not Expected in Detail)

INDEPENDENCE (CNO-5.020)
The engagement partner shall form a conclusion on compliance with independence requirements that apply to the
audit engagement. In doing so, the engagement partner shall:
Obtain relevant information from the firm and, where applicable, network firms, to identify and evaluate
circumstances and relationships that create threats to independence;
(E.g. Shareholdings / relatives / business relationships of relatives / audit fees Vs non-audit fees etc.)
Evaluate information on identified breaches, if any, of the firm’s independence policies and procedures to
determine whether they create a threat to independence for the audit engagement; and
(E.g. Big or Small shareholding / distant, dependent relative / nature of business how old is business
/ audit fees etc. from whole group)
Take appropriate action to eliminate such threats or reduce them to an acceptable level by applying
safeguards, or, if considered appropriate, to withdraw from the audit engagement, where withdrawal is
permitted by law or regulation. The engagement partner shall promptly report to the firm any inability to
resolve the matter for appropriate action.
(Ask to sell shares, shift to other assignment / leave non-audit assignments or withdraw etc.)
WHAT ARE ACCEPTANCE & CONTINUANCE PROCEDURES? (MCQ-220.1)

The engagement partner shall be satisfied that appropriate procedures regarding the acceptance and continuance
of client relationships and audit engagements have been followed and shall determine that conclusions reached in
this regard are appropriate.
If the engagement partner obtains information that would have caused the firm to decline the audit engagement
had that information been available earlier, the engagement partner shall communicate that information promptly
to the firm, so that the firm and the engagement partner can take the necessary action.
Information such as the following assists the engagement partner in determining whether the conclusions reached
regarding the acceptance and continuance of client relationships and audit engagements are appropriate:
The integrity of the principal owners, key management and those charged with governance of the entity;
(E.g. Kingfisher / Essar / Toshiba / Satyam etc.)
Whether the engagement team is competent to perform the audit engagement and has the necessary
capabilities, including time and resources;
(E.g. Knowledge training for Insurance / Defence / Space etc.)
Whether the firm and the engagement team can comply with relevant ethical requirements; and
(E.g. Judgement will it be possible, afterwards it is throughout the audit)
Significant matters that have arisen during the current or previous audit engagement, and their implications
for continuing the relationship.
(E.g. Satyam & Toshiba)
KEY TO REMEMBER
4 pointsIntegrity of owners / Competence of Team / Ethical Requirements / Significant
Matters
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REQUIREMENT FOR ENGAGEMENT PERFORMANCE?
The engagement partner shall take responsibility for: (CNO-4.000)
 Direction
 Supervision
 Consultation
 Reviews
 Managing Difference of Opinion
Of assignment, to ensure engagement is as per regulatory and legal requirement and professional standards and
auditor’s report is appropriate in given circumstances.
 Reviews Engagement Partner Responsible: - The engagement partner shall take responsibility for
reviews being performed in accordance with the firm’s review policies and procedures. On
(CNO- 5.000) or before the date of the auditor’s report, the engagement partner shall, through a review
of the audit documentation and discussion with the engagement team, be satisfied that
sufficient appropriate audit evidence has been obtained to support the conclusions reached
and for the auditor’s report to be issued.
Review Responsibilities
Under SQC 1, the firm’s review responsibility policies and procedures are determined on the
basis that work of less experienced team members is reviewed by more experienced team
members.
A review consists of consideration whether, for example:
 The work has been performed in accordance with professional standards and
regulatory and legal requirements.
(E.g. Sec 143 / IRDA Regulations / SAs)
 Significant matters have been raised for further consideration.

(E.g. Accounting for demerger)
 Appropriate consultations have taken place and the resulting conclusions have
been documented and implemented;(Consult Mr A in firm who has audited many
such cases)
 The work performed supports the conclusions reached and is appropriately
documented.
(E.g. Check whether documents and explanation provide basis for
accounting done)
 The evidence obtained is sufficient and appropriate to support the auditor’s
report; and
(E.g. Check that all areas are appropriately covered)
 The objectives of the engagement procedures have been achieved. (We are able
to form opinion with reasonable assurance)
 There is a need to revise the nature, timing and extent of work performed; (E.g.
High Court should be obtained, also written representation of CFO on
accounting)
 Managing If differences of opinion arise within the engagement team, with those consulted or, where
Difference applicable, between the engagement partner and the engagement quality control reviewer, the
of Opinion engagement team shall follow the firm’s policies and procedures for dealing with and resolving
(CNO-4.000) differences of opinion.
(E.g. There is difference of opinion on whether to use services of expert for
determining useful life of plant & machinery between team member &
engineering advisor of firm as per firm’s policy matter was informed to all
partners and their opinions were taken in monthly meeting and as per view of
majority decision was taken and difference of opinion was resolved. This event
should be carefully resolved.)
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WHAT IS ENGAGEMENT QUALITY CONTROL REVIEW (EQCR)? (MCQ-220.2)

 Responsibility For audits of financial statements of listed entities, and those other audit engagements, if any,
of for which the firm has determined that an engagement quality control review is required.
Engagement (E.g. suppose they have decided all clients having turnover more than 100 cores
Partner EQCR is compulsory),
(CNO-5.010) The engagement partner shall:
Determine that an engagement quality control reviewer has been appointed;
Discuss significant matters arising during the audit engagement, including those
identified during the engagement quality control review, with the engagement
quality control reviewer; and
Not date the auditor’s report until the completion of the engagement quality control
review.
 Responsibility The engagement quality control reviewer shall perform an objective evaluation of the significant
of Reviewer judgments made by the engagement team, and the conclusions reached in formulating the
auditor’s report. This evaluation shall involve:
Discussion of significant matters with the engagement partner;
(E.g. Significant Risk / Significant Difficulty / Material Misstatements)
Review of selected audit documentation relating to the significant judgments the

engagement team made and the conclusions it reached; and
(E.g. Risk assessment, Materiality etc.)
Evaluation of the conclusions reached in formulating the auditor’s report and

consideration of whether the proposed auditor’s report is appropriate.
(E.g. whether qualified opinion was appropriate or adverse was required etc.)
Review of the financial statements and the proposed auditor’s report;
(E.g. For compliance of Sch III)
 Extra For audits of financial statements of listed entities, the engagement quality control reviewer, on
Requirements performing an engagement quality control review, shall also consider the following:
in Case of The engagement team’s evaluation of the firm’s independence in relation to the audit
Listed engagement;
Companies Whether appropriate consultation has taken place on matters involving differences
of opinion or other difficult or contentious matters, and the conclusions arising from
those consultations; and
Whether audit documentation selected for review reflects the work performed in
relation to the significant judgments made and supports the conclusions reached.
(Whether documents are reliable)
(Reviewer documents his work and at the end he states, “Not aware about unresolved issues”)
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[SA 230] AUDIT DOCUMENTATION
WHY WE NEED AUDIT DOCUMENTATION AND WHAT ARE ITS PURPOSES?

 Basic Audit documentation that meets the requirements of this SA and the specific documentation
Purpose requirements of other relevant SAs provides:
Evidence that the audit was planned and performed in accordance with SAs and applicable
legal and regulatory requirements.
Evidence of the auditor’s basis for a conclusion about the achievement of the overall
objectives of the auditor; and
 Additional Audit documentation serves a number of additional purposes, including the following:
Purpose Assisting the engagement team to plan and perform the audit.
Enabling the engagement team to be accountable for its work.
Assisting members of the engagement team responsible for supervision to direct and
supervise the audit work, and to discharge their review responsibilities in accordance with
SA 220.
Enabling the conduct of quality control reviews and inspections in accordance with SQC 1.
Enabling the conduct of external inspections in accordance with applicable legal, regulatory
or other requirements. (Like Peer Review & Review by Quality Review Board)
Retaining a record of matters of continuing significance to future audits.
WHAT ARE FACTORS AFFECTING FORM, CONTENT & EXTENT OF AUDIT DOCUMENTATION? (CNO-6.000)
The form, content and extent of audit documentation depend on factors such as:
Text Examples
The size and complexity of the entity. (↑Size ↑Extent, ↑Complexity ↑ Extent)
The identified risks of material misstatement. (↑Risk ↑Extent)
The nature of the audit procedures to be performed. (Test of controlsFlow Charts Content / Analytical
Procedures Graphs & Ratios)
The audit methodology and tools used. (Manual Inspection of RecordsPhysical Form /
CAATElectronic Form)
The significance of the audit evidence obtained. (High Court Order of AmalgamationPhoto Copy
Document Form / Regular Purchase
OrderInspection + recorded PO number)
The nature and extent of exceptions identified. (fraud + materialExtent ↑ / error +
materialExtent ↓)
The need to document a conclusion or the basis for a (Complex workingDetailed Calculation will be
conclusion not readily determinable from the covered in content / Simple Only references will be
documentation of the work performed or audit evidence given in content)
obtained.
KEY TO REMEMBER
It is in flow of audit process

(As auditor reaches premises of client he will know size & idea of complexityRisk Assessment
Audit Procedures Audit MethodologySignificance of Audit Evidence Exceptions Basis of
Conclusion)
WHAT IS ASSEMBLY OF AUDIT FILE?

 What is The completion of the assembly of the final audit file after the date of the auditor’s report is an
done in administrative process that does not involve the performance of new audit procedures or the
assembly? drawing of new conclusions. Changes may, however, be made to the audit documentation during
the final assembly process if they are administrative in nature. Examples of such changes include:
Deleting or discarding superseded documentation.
Sorting, collating and cross-referencing working papers.
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Signing off on completion checklists relating to the file assembly process.
Documenting audit evidence that the auditor has obtained, discussed and agreed with
the relevant members of the engagement team before the date of the auditor’s report.
 When to The auditor shall assemble the audit documentation in an audit file and complete the
assemble? administrative process of assembling the final audit file on a timely basis after the date of the
auditor’s report.
 Completion? SQC 1 requires firms to establish policies and procedures for the timely completion of the assembly
of audit files. An appropriate time limit within which to complete the assembly of the final audit
file is ordinarily not more than 60 days after the date of the auditor’s report.
 What after After the assembly of the final audit file has been completed, the auditor shall not delete or discard
assembly? audit documentation of any nature before the end of its retention period.
 Retention SQC 1 requires firms to establish policies and procedures for the retention of engagement
Period documentation. The retention period for audit engagements ordinarily is no shorter than seven
(MCQ-230.1) years from the date of the auditor’s report, or, if later, the date of the group auditor’s report.
 What if In circumstances, other than those “Matters arising after date of audit report” where the auditor
matters finds it necessary to modify existing audit documentation or add new audit documentation after
after AR? the assembly of the final audit file has been completed, the auditor shall, regardless of the nature
of the modifications or additions, document:
The specific reasons for making them; and
When and by whom they were made and reviewed.
An example of a circumstance in which the auditor may find it necessary to modify existing audit
documentation or add new audit documentation after file assembly has been completed is the
need to clarify existing audit documentation arising from comments received during monitoring
inspections performed by internal or external parties.
WHAT IS COMPLETION MEMORANDUM?

The auditor “may” consider it helpful to prepare and retain as part of the audit documentation a summary (sometimes
known as a completion memorandum) that describes the significant matters identified during the audit and how they
were addressed, or that includes cross- references to other relevant supporting audit documentation that provides
such information. Such a summary may facilitate effective and efficient reviews and inspections of the audit
documentation, particularly for large and complex audits. Further, the preparation of such a summary may assist the
auditor’s consideration of the significant matters. It may also help the auditor to consider whether, in light of the
audit procedures performed and conclusions reached, there is any individual relevant SA objective that the auditor
cannot achieve that would prevent the auditor from achieving the overall objectives of the auditor.
RIGHT TO LIEN (CNO-8.000)

 General Summary
Principles of Person with lawful possession of property and worked on it, can exercise lien for non-
Law payment of his dues – Same logic can be applied to Client Books
Detail Text
In terms of the general principles of law, any person having the lawful possession of somebody
else’s property, on which he has worked, may retain the property for non-payment of his dues on
account of the work done on the property. On this premise, auditor can exercise lien on books and
documents placed at his possession by the client for non-payment of fees, for work done on the
books and documents.
 ICAEW Summary
Conditions The Institute of Chartered Accountants in England and Wales has expressed a similar view
on the following conditions: –
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Auditor Can exercise lien subject to Conditions – Possession as per Authority of Client /
Documents belong to Client / Client Owes Money / Fees Money is Connected with Work on
those documents.
Detail Text
Auditor can exercise lien on books and documents placed at his possession by the client for non-
payment of fee for work done on the following conditions:
Documents retained must belong to the client who owes the money;
Documents must have come into possession of the auditor on the authority of the client;
The auditor can retain the documents only if he has done work on the documents
assigned to him;
Such documents can be retained which are connected with the work on which fees have
not been paid.
 Sec 128 of Summary
Company Books should be kept at registered, office / So it is impractical for auditor to keep
Act possession / Company has to allow access to auditor / directors / authorised persons.
Detail Text
Under section 128 of the Act, books of account of a company must be kept at the registered office.
These provisions ordinarily make it impracticable for the auditor to have possession of the books
and documents. The company provides reasonable facility to auditor for inspection of the books
of account by directors and others authorised to inspect under the Act.
 In Saxena Vs Supreme Court Said that professionals should not exercise line on client documents as it would
Sharma Case lead to a problem in running client business. ICAI ESB also said if CA exercises lien it will be
misconduct.
 Conclusion Summary
As per general principles & ICAEW exercising lean may seem logical but as per Sec 128 /
Supreme Court Judgement / ESB Announcement it is impractical to exercise lien and it will
lead to misconduct.
Detail Text
Taking an overall view of the matter, it seems that though legally, auditor may exercise right of
lien in cases of companies, it is mostly impracticable for legal and practicable constraints. His
working papers being his own property, the question of lien, on them does not arise.
OWNERSHIP OF AUDIT DOCUMENTS (MCQ-230.2)
UNIQUE QUESTIONS
 CNO 7.0 Access to Working Papers
UNIQUE MCQS
 MCQ No. 230.3
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[SA 240] THE AUDITOR’S RESPONSIBILITIES RELATING TO FRAUD IN AN AUDIT OF

FINANCIAL STATEMENTS
WHAT ARE FRAUDS & ITS TYPES?

 Definition An intentional act by one or more individuals among management, those charged with governance,
and Types employees, or third parties, to deceive, to mislead (Advance received from customer shown as sales)
of Fraud or at least to conceal the truth (Contingent Liability not disclosed) to obtain an unjust or illegal
advantage.
It follows that other things being equal, they are more serious than unintentional errors because of
the implication of dishonesty which accompanies them. Its auditor’s secondary / incidental objective
to find out with reasonable assurance whether material frauds & errors exists. He may suspect or
identify fraud and report it but it is not his responsibility to prove it in court of law.
Two types of intentional misstatements are relevant to the auditor–misstatements resulting from:
1. Fraudulent Financial Reporting (Window-dressing / Shenanigan)
2. Misappropriation of assets.
1. Fraudulent What is FFR?
Financial Fraudulent financial reporting involves intentional misstatements including omissions of
Reporting amounts or disclosures in “financial statements” to deceive financial statement users.
(CNO- Who does it? How it Starts? Why they do it?
10.000) It can be caused by the efforts of management to manage earnings in order to deceive
financial statement users by influencing their perceptions as to the entity’s performance
and profitability. Such earnings management may start out with small actions or
inappropriate adjustment of assumptions and changes in judgments by management.
Pressures and incentives may lead these actions to increase to the extent that they result in
fraudulent financial reporting. Such a situation could occur when, due to pressures to meet
market expectations or a desire to maximize compensation based on performance,
management intentionally takes positions that lead to fraudulent financial reporting by
materially misstating the financial statements. In some entities, management may be
motivated to reduce earnings by a material amount to minimize tax or to inflate earnings to
secure bank financing.
Techniques by which management override controls to commit fraudulent financial
reporting.
Fraudulent financial reporting often involves management override of controls that
otherwise may appear to be operating effectively. Fraud can be committed by management
overriding controls using such techniques as:-
 Omission
o Omitting, advancing or delaying recognition in the financial statements of
events and transactions that have occurred during the reporting period.
(E.g. delaying recording of claims paid to suppliers for late payment
etc)
o Concealing, or not disclosing, facts that could affect the amounts recorded
in the financial statements.
(E.g. Did not disclose that increase in share capital is through bonus
issue and not due to fundraising, did not disclose that increase in
fixed assets is due to upward revaluation)
 Manipulation
o Recording fictitious journal entries, particularly close to the end of an
accounting period, to manipulate operating results or achieve other
objectives.
(E.g. Passing accounting entry for payments to creditors to
improve current assets ratio, Recording fake sale entries etc)
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o Altering records and terms related to significant and unusual transactions
(E.g. Records related to MBA fees paid for children of directors
was shown as employee development expenses / Properties
were taken on rent by MD for personal purpose, but agreement
was altered to show it as business purpose)
 Misapplication
o Inappropriately adjusting assumptions and changing judgments used to
estimate account balances.
(E.g. Suddenly increasing useful life to reduce depreciation &
increase profits, Increasing % completion of WIP to increase
profits)
o Engaging in complex transactions that are structured to misrepresent the
financial position or financial performance of the entity.
(E.g. loan taken & repaid was structured into sale & repurchase,
loan taken was shown as lease (which is finance lease)
2. Misapprop What? Who? Why? How?
riation of Misappropriation of assets involves the theft of an entity’s assets and is often perpetrated
Assets by employees in relatively small and immaterial amounts. However, it can also involve
management who are usually more able to disguise or conceal misappropriations in ways
that are difficult to detect. Misappropriation of assets can be accomplished in a variety of
ways including:
 Embezzling receipts
(E.g. misappropriating collections on accounts receivable or diverting
receipts in respect of written-off accounts to personal bank accounts).
 Causing an entity to pay for goods and services not received
(for example, payments to fictitious vendors, kickbacks paid by vendors to
the entity’s purchasing agents in return for inflating prices, payments to
fictitious employees).
 Stealing physical assets or intellectual property
(for example, stealing inventory for personal use or for sale, stealing scrap
for resale, colluding with a competitor by disclosing technological data in
return for payment).
 Using an entity’s assets for personal use
(for example, using the entity’s assets as collateral for a personal loan or a
loan to a related party).
Misappropriation of assets is often accompanied by false or misleading records or documents in
order to conceal the fact that the assets are missing or have been pledged without proper
authorization.
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WHAT ARE FRAUD RISK FACTORS?

Fraud risk factors - Events or conditions that indicate an incentive or pressure to commit fraud or provide an
opportunity to commit fraud or rationalization.
Incentive or pressure to commit fraudulent financial reporting may exist when management is under
pressure, from sources outside or inside the entity, to achieve an expected (and perhaps unrealistic) earnings
target or financial outcome – particularly since the consequences to management for failing to meet financial
goals can be significant. Similarly, individuals may have an incentive to misappropriate assets, for example,
because the individuals are having habit of living beyond their means.
A perceived opportunity to commit fraud may exist when an individual believes internal control can be
overridden, for example, because the individual is in a position of trust or has knowledge of specific
deficiencies in internal control.
Individuals may be able to rationalize committing a fraudulent act. Some individuals possess an attitude,
character or set of ethical values that allow them knowingly and intentionally to commit a dishonest act.
However, even otherwise honest individuals can commit fraud in an environment that imposes sufficient
pressure on them.
Fraudulent Financial Reporting (FFR) Misappropriation of Assets (MAA)

 Pressure / Pressure Pressure
Incentive  Financial stability or profitability is  Personal financial obligation
threatened by economic, industry, or
entity operating conditions.
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(E.g. Failure in economy or
industry / Saturation / Rapid
changes /Competition /
Bankruptcy / Hostile takeover /
Negative cash flows)
 Excessive pressure exists for
management to meet the
requirements of expectations of third
parties.
(E.g. SEBI to comply with listing
agreement / investors / new debt
or equity / creditors / Analyst)
 Pressure from TCWG to achieve targets
Incentive
 Information available indicates that the
personal financial situation of
management or those charged with
governance"
(Significant financial interest /
big portion is variable
compensation / personal
guarantees)
 Opportunities Ability to dominate in industry (in Susceptibility of Assets
appropriate or non- arm’s length  FA or Inventory small in size/
transactions) movable/ marketable/ lacking
observable identification of
(E.g. Prices are hiked when sales
ownership
need boost and later on discounts
are given)  Easily convertible investments
such as bearer bonds / diamonds
Significant operations located across / computer chips
international borders  Large amount of cash in hand
(E.g. 30% sales are from Inadequate ICS
Australian & European branches,  Inadequate oversight of senior
it’s difficult to get information & management.
visit this branch)  Lack of understanding in
Use of business intermediaries with no management over IT.
justification  Lack of controls over automated
transactions.
(E.g. Sales to Russia are done
 Inadequate job application
through subsidiary in Dubai which
screening.
is not audited as audit is not
 No Segregation of duty.
compulsory in Dubai)
 Inadequate system of
Bank accounts & subsidiaries in tax haven. authorization.
(E.g. 5 bank accounts in  Inadequate record keeping of
Mauritius) assets.
 Lack of timely & appropriate
Complex or unstable organization reconciliation & documentation
structure.  Inadequate physical safeguards.
E.g. Unnecessary frequent  Lack of mandatory leave for
changes are made in managers and employees.
employees, before people become
comfortable in working transfers
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take place)
The monitoring of management is not
effective (Very short time is allocated for
supervision)
Many assets & liabilities depend on
subjective judgment
(E.g. In information technology/
industry data / software / website
are valued which involves
subjectivity)
Internal control components are deficient"
Significant related party transactions not in
ordinary course audited by other or not
audited.
(E.g. When sales need boost goods
many transactions with related
party are observed and they are
returned after few months)
 Attitude / "Attitude: - "Attitude”: -
Rationalization  Communication of Inappropriate (Form Management Side)
values or ethical standards, that are not  Disregard to ICS over MAA
effective.
(E.g. No interest in increasing
(E.g. Promoting performance over security and conducting
ethics) physical verification of stock)
 Known history of violations of
 Overriding existing controls
securities laws or other laws.
(E.g. Takes goods from godown
(E.g. Faced SEBI penalties many
without proper procedures)
time in past for insider trading)
 Non-financial management’s excessive  No action on existing deficiency
participation in or preoccupation in
(E.g. There is no supervision by
estimation process.
any manager on wellbeing of
(E.g. Sales Head is taking more Godown)
interest in financial statement
finalization & overstate sales as  Intolerance to petty theft
compared to CFO) Disregard to monitor / reduce
risk of MAA
 Excessive interest in increasing or
maintain earning trend / stock price. (E.g. Excess payment were not
identified & responsible
(E.g. Keeping overambitious
people were not
targets for share prices)
reprimanded)
 The relationship between management
and the current or predecessor auditor (Form Employee Side)
is strainedTime Constraint,  Changes in behaviour or lifestyle
Restrictions, Domineering, Frequent
E.g. Rolex watch of 50k and his
Disputes.
salary is 10k)
(E.g. this attitude towards
auditors indicates something is
wrong with financial statements)
Rationalization
 Low morale among senior
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management.
(E.g. Constant humiliations by
BOD, hence they resort to FFR)
 Dispute between shareholders in a Rationalization: -
closely held entity. (From Employee Side)
(E.g. One group manipulates to  Behaviour indicating displeasure
prove other group wrong) / dissatisfaction
(E.g. Other department gets
 Committing to achieve aggressive or
more bonus than us)
unrealistic forecasts
(E.g. Does press conference every  Adverse relationship between
quarter end makes tall claims to entity & employees (Anticipated
boosts share prices) / known layoffs or change in
 Inappropriate means to minimize compensation or promotion
Reported earnings for tax-motivated etc.)"
reasons
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EXAMPLES OF CIRCUMSTANCES THAT INDICATE THE POSSIBILITY OF FRAUD
Examples of circumstances that indicate the possibility of fraud: The following are examples of circumstances that
may indicate the possibility that the financial statements may contain a material misstatement resulting from fraud.
 Discrepancies (System Access / Transactions Recording / Unsupported or Unauthorised / Last Minute
in the Adjustments / Complaints)
accounting Evidence of employees’ access to systems and records inconsistent with that
records, necessary to perform their authorized duties.
including: (E.g. entries during odd time, post 9 PM or pre 9 AM)
Transactions that are not recorded in a complete or timely manner or are improperly
recorded as to amount, accounting period, classification, or entity policy.
(E.g. Some customer details such as PAN number, Addressee not recorded,
interest on working capital loan capitalised)
Unsupported or unauthorized balances or transactions.
(E.g. Office expenses debited as production expenses, transactions from
username which was not authorised)
Last-minute adjustments that significantly affect financial results.
(E.g. Adjustment to percentage completion of WIP)
Tips or complaints to the auditor about alleged fraud.

(E.g. Chits in suggestion box alleging fraud)
 Conflicting or
missing
evidence,
including:
Missing Evidence
 Inability to produce evidence of key systems development and program change
testing and implementation activities for current-year system changes and
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deployments.
(E.g. Inadequate justification for change in sales software)
 Unavailability of other than photocopied or electronically transmitted

documents when documents in original form are expected to exist.
(E.g. Transport bill is available in Xerox)
 Unavailable or missing electronic evidence, inconsistent with the entity’s record

retention practices or policies.
(E.g. Customer tax registration numbers missing)
 Missing or non-existent cancelled cheques in circumstances where cancelled

cheques are ordinarily returned to
 the entity with the bank statement.
 Missing documents.
(E.g. Transport agreement missing)
Conflicting Evidence
 Unusual balance sheet changes or changes in trends or important financial
statement ratios or relationships,
(E.g. receivables growing faster than revenues.)
 Inconsistent, vague, or implausible responses from management or
employees arising from inquiries or analytical procedures.
(E.g. Management unable to explain rapid growth in receivables)
 Unusual discrepancies between the entity's records and confirmation replies.

 Documents that appear to have been altered.
(E.g. Some customer orders have different format)
Conflicting Evidence (Inventory)

 Missing inventory or physical assets of significant magnitude.
 Significant unexplained items on reconciliations.
(E.g. Reconciliation of actual to system stock has long outstanding sales
return & GIT)
Conflicting Evidence (Accounts Receivable)
 Large numbers of credit entries and other adjustments made to accounts
receivable records.
(E.g. Many discounts, rebates etc in dealer schemes)
 Unexplained or inadequately explained differences between the accounts

receivable subledger and the control account, or between the customer
statements and the accounts receivable sub-ledger.
 Fewer responses to confirmations than anticipated or a greater number of
responses than anticipated.
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 Problematic
or unusual
relationships
between the
auditor and
management,
including:
Time
 Undue time pressures imposed by management to resolve complex or
contentious issues.
Denial
 Denial of access to key IT operations staff and facilities, including security,
operations, and systems development personnel.
 Unwillingness by management to permit the auditor to meet privately with those
charged with governance.
 Denial of access to records, facilities, certain employees, customers, vendors, or
others from whom audit evidence might be sought.
 Unwillingness to facilitate auditor access to key electronic files for testing
through the use of computer-assisted audit techniques.
Delay
 Unusual delays by the entity in providing requested information.
Management
 Complaints by management about the conduct of the audit or management
intimidation of engagement team members, particularly in connection with the
auditor’s critical assessment of audit evidence or in the resolution of potential
disagreements with management.
 An unwillingness to add or revise disclosures in the financial statements to make
them more complete and understandable.
 An unwillingness to address identified deficiencies in internal control on a timely
basis.
Other
 Accounting policies that appear to be at variance with industry norms.
 Frequent changes in accounting estimates that do not appear to result from
changed circumstances.
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WHAT ARE RISK ASSESSMENT PROCEDURES FOR FRAUD?
While performing risk assessment as per SA 315 obtain information for RMM due to fraud:- When performing risk
assessment procedures and related activities to obtain an understanding of the entity and its environment, including
the entity’s internal control, required by SA 315, the auditor shall perform the procedures given in following
paragraphs to obtain information for use in identifying the risks of material misstatement due to fraud.
 Inquiries of Summary
Management Inquiry of Management – Process of Identifying & Responding ROF / Assessment of
and Others Fraud ROF / Communication with TCWG / Communication with employees.
within the
Entity Detailed Text
The auditor shall make inquiries of management regarding:
Management’s process for identifying and responding to the risks of fraud in the
entity, including any specific risks of fraud that management has identified or that
have been brought to its attention, or classes of transactions, account balances, or
disclosures for which a risk of fraud is likely to exist;
(E.g. Management (MD/CFO/Executive Directors) determines chances of fraud
in all departments in quarterly meeting with department heads and significant
risks are discussed in detail along with how to compensate it through internal
control system)
Management’s assessment of the risk that the financial statements may be materially
misstated due to fraud, including the nature, extent and frequency of such
assessments;
(E.g. Sales targets are given excessive importance which puts loads of pressure
on sales executive to achieve targets and get variable component which
accounts for 80% of remuneration Hence daily sales monitoring report was
prepared to supervise sales activity )
Management’s communication, if any, to those charged with governance regarding its
processes for identifying and responding to the risks of fraud in the entity; and
(E.g. Management has sent a small presentation explaining situation to all board
of directors)
Management’s communication, if any, to employees regarding its views on business
practices and ethical behaviour.
(E.g. Management has issued advisory to all sales executive to stay away from
manipulating sales in any way)
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Summary
Inquires with Management / Internal Auditors / Employees – actual, suspected or alleged
fraud
Detailed Text
The auditor shall make inquiries of management, and others within the entity as appropriate, to
determine whether they have knowledge of any actual, suspected or alleged fraud affecting
the entity.
(E.g. There can be fraud in Sales from Baddi Plant in Himachal Pradesh as there is
unanticipated increase of 70% in past 6 months)
For those entities that have an internal audit function, the auditor shall make inquiries of
internal audit to determine whether it has knowledge of any actual, suspected or alleged fraud
affecting the entity, and to obtain its views about the risks of fraud.
(E.g. Internal auditor explained that this increase is after 3 new appointments were made
in sales team)
 Those Charged Summary
with Oversight of TCWG over Management & Internal Controls of Management over ROF
Governance
Detailed Text
Unless all of those charged with governance are involved in managing the entity, the auditor
shall obtain an understanding of how those charged with governance exercise oversight of
management’s processes for identifying and responding to the risks of fraud in the entity and
the internal control that management has established to mitigate these risks.
(E.g. BOD reviews significant fraud risks and their internal control systems semi-
annually)
Summary
Inquires with TCWG --- actual, suspected or alleged fraud
Detailed Text
The auditor shall make inquiries of those charged with governance to determine whether they
have knowledge of any actual, suspected or alleged fraud affecting the entity. These inquiries
are made in part to corroborate the responses to the inquiries of management.
(E.g. They said they feel out of 3 products (A, B, C) at Baddi plant, there is suspicion in
sale of product C)
 Unusual or The auditor shall evaluate whether unusual or unexpected relationships that have been
Unexpected identified in performing analytical procedures, including those related to revenue accounts,
Relationships may indicate risks of material misstatement due to fraud.
Identified (E.g. Recent increase in sale at Baddi plant is from sales to only 5 customers and they are
new registered few months back)
 Other The auditor shall consider whether other information obtained by the auditor indicates risks of
Information material misstatement due to fraud.
(E.g. Experience of previous assignments / similar assignments / review assignments)
(E.g. In one of the similar companies in same industry where we provide consultancy
services recently police complaint was filed for selling goods to fake clients and defaulting
money receivable)
 Evaluation of The auditor shall evaluate whether the information obtained from the other risk assessment
Fraud Risk procedures and related activities performed indicates that one or more fraud risk factors are
Factors present. While fraud risk factors may not necessarily indicate the existence of fraud, they have
often been present in circumstances where frauds have occurred and therefore may indicate
risks of material misstatement due to fraud.
IDENTIFICATION & ASSESSMENT OF FRAUD RISK? & FRAUD RISK IN REVENUE RECOGNITION?
In accordance with SA 315, the auditor shall identify and assess the risks of material misstatement due to fraud at the
financial statement level, and at the assertion level for classes of transactions, account balances and disclosures.
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When identifying and assessing the risks of material misstatement due to fraud, the auditor shall, based on a
presumption that there are risks of fraud in revenue recognition, evaluate which types of revenue, revenue
transactions or assertions give rise to such risks. Documentation required when the auditor concludes that the
presumption is not applicable in the circumstances of the engagement and, accordingly, has not identified revenue
recognition as a risk of material misstatement due to fraud.
The auditor shall treat those assessed risks of material misstatement due to fraud as significant risks and
accordingly, to the extent not already done so, the auditor shall obtain an understanding of the entity’s related
controls, including control activities, relevant to such risks.
KEY TO REMEMBER
Fraud Risk should be identified at financial statement level (E.g. Risk of management override
accounting controls) & assertion level (E.g. Risk that purchase price will be overstated by taking bribe
from supplier)Presume that there will be fraud risk in revenue recognition (E.g. Fictitious sales /
Premature revenue recognition etc. due to pressure or incentives)Document if such presumption is
not required (for example revenue comes only from rent of 5 buildings having stable contract of 10
years through online transfer, so this need to be documented)All the fraud risks should be treated
as significant risk so that test of controls & substantive procedures both are compulsory and hence
understand relevant controls.
SITUATION WHEN AUDITOR IS UNABLE TO CONTINUE ENGAGEMENT DUE TO FRAUD? (CNO 13.050)
 Exceptional If, as a result of a misstatement resulting from fraud or suspected fraud, the auditor
Circumstances encounters exceptional circumstances that bring into question the auditor’s ability to
(MCQ-240.1) continue performing the audit, the auditor shall:
Determine the professional and legal responsibilities applicable in the circumstances,
including whether there is a requirement for the auditor to report to the person or
persons who made the audit appointment or, in some cases, to regulatory authorities;
[E.g. Sec 143(12)]
Consider whether it is appropriate to withdraw from the engagement, where

withdrawal from the engagement is legally permitted; and
If the auditor withdraws:
 Discuss with the appropriate level of management and those charged with
governance, the auditor’s withdrawal from the engagement and the reasons for
the withdrawal; and Determine whether there is a professional or legal
requirement to report to the person or persons who made the audit
appointment or, in some cases, to regulatory authorities, the auditor’s
withdrawal from the engagement and the reasons for the withdrawal.
KEY TO REMEMBER
Ability to Continue as Auditor
Resulting from fraud or expected fraud – encounters exceptional circumstances – not able to
continue.
 Report Problem as per legal, professional requirements to appropriate person or
authorities
 Consider is it appropriate to withdraw
 If it is appropriate to with draw – inform, discuss with management & TCWG with
reasons / Report decision to persons, authorities as per legal & regulatory requirement
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UNIQUE MCQS
 MCQ No. 240.2
UNIQUE QUESTIONS
 CNO 12.0 Inquiry with Management (Fraud)
 CNO 13.0 Responsibility in Management Fraud
 CNO 14.0 Error in Valuation of Inventory ()
 CNO 15.0 Difference in Control Accounts
 CNO 16.0 IOU
 CNO 17.0 No Documentary or Other Evidence ONE COMMON ANSWER FOR ALL THESE QUESTIONS
 CNO 18.0 Special Audit Report Not Provided
 CNO 19.0 Not possible to continue.
 CNO 20.0 Teeming & Lading
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[SA 250]CONSIDERATION OF LAWS AND REGULATIONS IN AN AUDIT OF FINANCIAL

STATEMENTS
WHAT IS RESPONSIBILITY OF AUDITOR WITH RESPECT TO VARIOUS LAWS APPLICABLE TO AN ENTITY? / IS

AUDITOR SUPPOSED TO CHECK COMPLIANCE OF EACH AND EVERY LAW? (CNO-21.000)
 General As part of obtaining an understanding of the entity and its environment in accordance with
Understanding SA 315, the auditor shall obtain a general understanding of:
The legal and regulatory framework applicable to the entity and the industry or
sector in which the entity operates; and(Banking Regulation Act / RBI Circulars etc)
How the entity is complying with that framework?(Policies, Procedures, Registers,
monitoring etc as studied above)
 Direct Effect The auditor shall obtain sufficient appropriate audit evidence regarding compliance with the
provisions of those laws and regulations generally recognised to have a direct effect on the
determination of material amounts and disclosures in the financial statements.
(E.g. Banking Act, IRDA Regulations, Sch II, Sch III / Sections of Company Act for
loans, investments, expenses etc / Income Tax Act/ Payment of Gratuity /
Payment of Bonus etc: - Sit with detailed checklist of laws and check though
inquiry, observation & inspection whether compliance is done)
 Other Laws The auditor shall perform the following audit procedures to help identify instances of non-
(May have compliance with other laws and regulations that may have a material effect on the financial
Material Effect) statements:
(E.g. Factory Act, Industrial Dispute Act, Environment Act etc)
Inquiring of management and, where appropriate, those charged with governance,

as to whether the entity is in compliance with such laws and regulations; and
Inspecting correspondence, if any, with the relevant licensing or regulatory
authorities.
(E.g. Letters etc exchanged with ministry, collector office, trade unions etc)
 Laws other than In the absence of identified or suspected non-compliance, the auditor is not required to
discussed above perform audit procedures regarding the entity’s compliance with laws and regulations, other
than those set out in above paragraphs.
(E.g. Prevention of Terrorism Act / Defence Act etc)
 Alert During the audit, the auditor shall remain alert to the possibility that other audit procedures
applied may bring instances of non-compliance or suspected non-compliance with laws and
regulations to the auditor’s attention.
(E.g. Procedures which are generally performed for other audit aspect can also
tell you more about non-compliance for example correspondence with previous
auditor, reading board minutes, meeting with internal & external legal counsel
under SA 501, Substantive checking of legal expenses etc)
 Written The auditor shall request management and, where appropriate, those charged with
Representation governance to provide written representations that all known instances of non-compliance
or suspected non-compliance with laws and regulations whose effects should be considered
when preparing financial statements have been disclosed to the auditor.
KEY TO REMEMBER
Obtain General Understanding
 Legal Framework
 Compliance System
Direct EffectCheck Compliance
Other Laws where there may be material effectCheck Non-Compliance (Only 2 procedures)
 Inquiry
 Correspondence with authorities
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Don’t do anything which are not covered above.
Remain Alert while performing other audit procedures
Obtain Written Representation
INDICATORS OF NON-COMPLIANCE?
 Could be non- When the auditor becomes aware of the existence of, or information about, the following
compliance matters, it may be an indication of non-compliance with laws and regulations:
(C2-PUPATE)
Payments for goods or services made other than to the Country from which the goods
or services originated.
(E.g.Non-Compliance of Customs Act)
(CNO-22.000) Unusual Payments in Cash purchases in the form of cashiers’ cheques payable to bearer
or transfers to numbered bank accounts.
(E.g. May be bribe)
Payments for unspecified services or loans to consultants, related parties, employees or

government employees.
(E.g. Non-Compliance of Company Act)
Unauthorised transactions or improperly recorded transactions. (Secrets payments

against law
(E.g. No approval as per company law etc)
Purchasing at Prices significantly above or below market price.

(E.g.Non-Compliance of Income Tax Act)
Sales commissions or Agent’s fees that appear excessive in relation to those ordinarily
paid by the entity or in its industry or to the services actually received.
(E.g. Non-compliance of IRDA Regulations etc)
Unusual Transactions with companies registered in tax havens.

(E.g. Non-Compliance of Income Tax Act)
Payments without proper Exchange control documentation.

(E.g. Non-Compliance of FEMA)
 Post non- Investigations by regulatory organisations and government departments or payment of

compliance fines or penalties.
matters Unusual payments towards legal and retainer ship fees.
Existence of an information system which fails, whether by design or by accident, to
provide an adequate audit trail or sufficient evidence.
Adverse media comment.
KEY TO REMEMBER
Could be non-compliance (C2-PUPATE)

Payment to Country other than sourceUnusual Cash payment Unspecified Payments to
related party etc Unauthorised transactionIrrational Purchase price Agents Fees /
Commission Transactions in tax havenNo Exchange documents
Post Non-Compliance Matters
Investigations Unusual Legal FeesFails to provide audit trailAdverse Media Comment
WHAT AUDIT PROCEDURES SHOULD BE PERFORMED IF THERE IS NON-COMPLIANCE? (CNO-23.000)

(MCQ - Incs.08.4)
Information concerning instances of non-compliances or suspected non-complianceAuditor should
understand Nature of act & circumstancesPossible effect on financial statement
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If the auditor becomes aware of information concerning an instance of noncompliance or suspected non-
compliance with laws and regulations, the auditor shall obtain: (Children working in factory premises, could
be contravention of child labour act)
 An understanding of the nature of the act and the circumstances in which it has occurred (25
children were working in packing department under supervision of contractor without identity card
& age proof); and
 Further information to evaluate the possible effect on the financial statements. (Go through law,
amendments, rule to determine penalty, impact on production license etc.)
Discuss with managementif not satisfied obtain legal advice
If the auditor suspects there may be non-compliance, the auditor shall discuss the matter with
management and, where appropriate, those charged with governance. If management or, as appropriate,
those charged with governance do not provide sufficient information that supports that the entity is in
compliance with laws and regulations and, in the auditor’s judgment, the effect of the Suspected non-
compliance may be material to the financial statements, the auditor shall consider the need to obtain legal
advice. (Discuss with management if required obtain legal advice E.g. VODAFONE case).
If still not able obtain sufficient & appropriate evidenceModify as per SA 705
If sufficient information about suspected non-compliance cannot be obtained, the auditor shall evaluate
the effect of the lack of sufficient appropriate audit evidence on the auditor’s opinion. (Modify Opinion)
Impact on other areas
The auditor shall evaluate the implications of non-compliance in relation to other aspects of the audit,
including the auditor’s risk assessment and the reliability of written representations, and take
appropriate action. (MD / CFO both were aware & they also gave in writing there are no child labour in fire
cracker factory, affects reliability of WR)
REPORTING OF NON-COMPLIANCE? (CNO-23.100)(Incs.03.3)
 Reporting If the auditor has identified or suspects non-compliance with laws and regulations, the auditor
Non- shall determine whether the auditor has a responsibility to report the identified or
Compliance to suspected non-compliance to parties outside the entity.
Regulatory (No need to inform any authority unless required by law, in India there are few
and such laws E.g. Fraud Reporting by Auditor U/S 143(12) / FIR for fraud as per
Enforcement Maharashtra State Co-Operative Act)
Authorities
 Reporting When to give Qualified / Adverse
Non- If the auditor concludes that the non-compliance has a material effect on the
Compliance in financial statements and has not been adequately reflected in the financial
the Auditor’s statements, the auditor shall, in accordance with SA 705, express a qualified or
Report on the adverse opinion on the financial statements.
Financial (E.g. Solvency level (assets-liabilities) not maintained by Insurance company
Statements which affects going concern, management has not taken any effect, give
qualify or adverse opinion)
When to give Qualified / Disclaimer
If the auditor is precluded by management or those charged with governance from
obtaining sufficient appropriate audit evidence to evaluate whether non-compliance
that may be material to the financial statements has, or is likely to have, occurred, the
auditor shall express a qualified opinion or disclaiman opinion on the financial
statements on the basis of a limitation on the scope of the audit in accordance with
SA 705.
(E.g. Management not giving adequate information about asset & liability
valuation and compliance with solvency margin, qualify or disclaimer)
What to do id limitation imposed by the circumstances?
If the auditor is unable to determine whether non-compliance has occurred because
of limitations imposed by the circumstances rather than by management or those
charged with governance, the auditor shallevaluate the effect on the auditor’s
opinion in accordance with SA 705.
(Because of natural calamity it is not possible to determine solvency margin, if no
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appropriate disclosure in notes to accounts, may Qualify or Disclaimer, if there is
proper disclosure then Clean + EMP)
 Reporting Unless TCWG = Management, All Non-Compliances unless inconsequential
Non- Unless all of those charged with governance are involved in management of the
Compliance to entity, and therefore are aware of matters involving identified or suspected on-
Those Charged compliance already communicated by the auditor, the auditor shall communicate
with with those charged with governance matters involving noncompliance with laws
Governance and regulations that come to the auditor’s attention during the course of the audit,
(CNO-23.100) other than when the matters are clearly inconsequential
(E.g. Company failed to transfer unpaid dividend account to investor education
& protection fund inform TCWG about it in monthly communication)
If intentional and material – ASAP
If, in the auditor’s judgment, the non-compliance referred to in above is believed to
be intentional and material, the auditor shall communicate the matter to those
charged with governance as soon as practicable.
(if such amount is big & intentionally done inform TCWG immediately through
email or call)
What if Management or TCWG is involved?
If the auditor suspects that management or those charged with governance are
involved in non-compliance, the auditor shall communicate the matter to the next
higher level of authority at the entity, if it exists, such as an audit committee or
supervisory board. Where no higher authority exists, or if the auditor believes that
the communication may not be acted upon or is unsure as to the person to whom to
report, the auditor shall consider the need to obtain legal advice.
(if MD & audit committee members are involved then no need to inform them
and take legal advice what can be done, may be speak at AGM)
KEY TO REMEMBER
Reporting to Authorities
 Don’t inform unless required by Law otherwise misconduct under CA Act & Non-
Compliance of SA 250
Reporting through Audit Report
 No sufficient & appropriate information from managementQualify / Disclaimer
 No Sufficient & appropriate evidence due to circumstancesBecause of natural
calamity it is not possible to determine solvency margin, if no appropriate
disclosure in notes to accounts, may Qualify or Disclaimer, if there is proper
disclosure then Clean + EMP)
 No appropriate accounting of non-complianceQualify / Adverse
Reporting to TCWG
 If TCWG= Management, no need to communicate again
 All non-complianceInform TCWG unless inconsequential.
 If Material + IntentionalInform immediately
 TCWG involvedHigher AuthorityNo Higher AuthorityTake legal advice.
UNIQUE MCQS
 MCQ No. 250.1
UNIQUE QUESTIONS
 CNO No. 23.500 Policies and Procedures by management for prevention and detection of non-compliance
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[SA 260] COMMUNICATION WITH THOSE CHARGED WITH GOVERNANCE
HOW TO IDENTIFY TCWG?

TCWG is group of people who meet periodically to supervise overview current management’s performance,
take strategic long-term decisions and decide company’s policies. This includes overseeing the financial
reporting process.
Management is a group of people who are involved and take responsibility of day to day operations of the
company.
TCWG may be not be integral part of entity. (See table given below)
TCWG may be integral part of entity.
Members of TCWG may be completely different from management.
In some cases, TCWG members may be different
In some case all TCWG & management members may be same.
Entity Management TCWG Remarks
Government Entity like Directors appointed by Concerned Ministry Here TCWG is not legal part of
ISRO central government. company.
Company CEO & CFO (They are not Board of Directors Here TCWG is integral part of
directors) entity but none of the members
are common.
Co-Operative Society Chairman + Secretary Governing Body (Which So some members in management
includes Chairman & are common
Secretary)
Partnership Firm Partners Partners Here TCWG & Management are
same
The auditor shall determine the appropriate person(s) within the entity’s governance structure with whom
to communicate.
If their governance structure includes committees, auditor may communicate to committees instead of Board
of Directors. Such committees are called Sub-Groups.
He must identify appropriate committee which is responsible for overseeing financial reporting, which is
generally audit committee.
(Generally, communication is done to Audit Committee, sometimes he may have to communicate to
remuneration committee etc for matters relevant to them.)
If auditor is not satisfied with response of sub group or he feels it is appropriate, he may communicate to
governing body also.
WHEN ALL OF THOSE CHARGED WITH GOVERNANCE ARE INVOLVED IN MANAGING THE ENTITY.
In some cases, all of those charged with governance are involved in managing the entity, for example, a small business
where a single owner manages the entity and no one else has a governance role. In these cases, if matters required
by this SA are communicated with person(s) with management responsibilities, and those person(s) also have
governance responsibilities, the matters need not be communicated again with those same person(s) in their
governance role. The auditor shall nonetheless be satisfied that communication with person(s) with management
responsibilities adequately informs all of those with whom the auditor would otherwise communicate in their
governance capacity. (Such as Significant Matters & WR).
MATTERS TO BE COMMUNICATED TO TCWG? (CNO-24.000)

 Just After The Auditor’s Responsibilities in Relation to the Financial Statement Audit
Appointment The auditor shall communicate with those charged with governance the responsibilities
of the auditor in relation to the financial statement audit, including that:
 The auditor is responsible for forming and expressing an opinion on the financial
statements that have been prepared by management with the oversight of those
charged with governance; and
 The audit of the financial statements does not relieve management or those
charged with governance of their responsibilities.
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 Just before Planned Scope and Timing of the Audit
starting The auditor shall communicate with those charged with governance an overview of the
Audit work planned scope and timing of the audit, which includes communicating about the
significant risks identified by the auditor.
 During the Significant Findings from the Audit
Audit The auditor shall communicate with those charged with governance. Unless all of those
charged with governance are involved in managing the entity:-
 Significant difficulties, if any, encountered during the audit;
 Significant matters arising during the audit that were discussed, or subject to
correspondence, with management; and
 Written representations the auditor is requesting;
 The auditor’s views about significant qualitative aspects of the entity’s
accounting practices, including accounting policies, accounting estimates and
financial statement disclosures.
(E.g. Whether Accounting Policies Are Conservative or Aggressive, Are
they in line with industry practices etc)
When applicable, the auditor shall explain to those charged with governance
why the auditor considers a significant accounting practice, that is acceptable
under the applicable financial reporting framework, not to be most appropriate
to the particular circumstances of the entity;
(SLM & WDV are acceptable & popular in FRF but machine hour method
of depreciation is more appropriate);
 Before Circumstances that affect the form and content of the auditor’s report, if any; and
signing audit (Key Audit Matters under SA 701 / Modifications Under SA 705 / EMP or OMP
report under SA 706)
 Others Any other significant matters arising during the audit that, in the auditor’s professional
judgment, are relevant to the oversight of the financial reporting process.
(E.g. Safety & Security of financial data)
 Only in Auditor Independence

Listed In the case of listed entities, the auditor shall communicate with those charged with
Companies governance:
 A statement that the engagement team and others in the firm as appropriate,
the firm and, when applicable, network firms have complied with relevant
ethical requirements regarding independence; and
 All relationships and other matters between the firm, network firms, and the
entity that, in the auditor’s professional judgment, may reasonably be thought
to bear on independence. This shall include total fees charged during the period
covered by the financial statements for audit and non-audit services provided
by the firm and network firms to the entity and components controlled by the
entity. These fees shall be allocated to categories that are appropriate to assist
those charged with governance in assessing the effect of services on the
independence of the auditor; and
 The related safeguards that have been applied to eliminate identified threats to
independence or reduce them to an acceptable level.
SHORT NOTE ON SIGNIFICANT DIFFICULTIES TO BE COMMUNICATED TO TCWG

Text Examples
 Significant An unnecessarily brief time within which (Only 1 week given to finish work at client’s
difficulties, if to complete the audit. premises with availability of client staff)
any, Restrictions imposed on the auditor by (Cannot visit factory & godown)
encountered management.
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during the audit; The unavailability of expected (list of debtors & inventory is not available
information. instead hardcopy of register is given)
Significant delays in management (information being provided after 3 weeks)
providing required information.
Extensive unexpected effort required to (to get voucher audit team member has to walk
obtain sufficient appropriate audit a 2 km, reach go down and search out of 10,000
evidence. files)
Management’s unwillingness to make or (Even that bank balance has reduced to zero, OD
extend its assessment of the entity’s ability limit is exhausted not ready to prepare
to continue as a going concern when documents such as future cash to assess going
requested concern)
In some circumstances, such difficulties may constitute a scope limitation that leads to a
modification of the auditor’s opinion.
COMMUNICAITON RELATED TO KEY AUDIT MATTERS (CNO-24.100)
 Requirement of SA 260 (Revised) requires the auditor to communicate with those charged with governance on
SA 260 a timely basis.
 Timings of The appropriate timing for communications about key audit matters will vary with the
Communication circumstances of the engagement.
of KAM
 Preliminary However, the auditor may communicate preliminary views about key audit matters when
Views discussing the planned scope and timing of the audit and may further discuss such matters
Communication when communicating about audit findings.
Robust Communication
Doing so may help to alleviate the practical challenges of attempting to have a robust
two-way dialogue about key audit matters at the time the financial statements are
being finalized for issuance.
Opportunity to TCWG
Communication with those charged with governance enables them to be made aware
of the key audit matters that the auditor intends to communicate in the auditor’s
report and provides them with an opportunity to obtain further clarification where
necessary.
 Draft of The auditor may consider it useful to provide those charged with governance with a draft of
Auditor’s the auditor’s report to facilitate this discussion.
Report
 Conclusion Communication with those charged with governance recognizes their important role in
overseeing the financial reporting process and provides the opportunity for those charged with
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governance to understand the basis for the auditor’s decisions in relation to key audit matters
and how these matters will be described in the auditor’s report. It also enables those charged
with governance to consider whether new or enhanced disclosures may be useful in light of
the fact that these matters will be communicated in the auditor’s report.
UNIQUE QUESTIONS
 CNO 25.000 Communication to Shareholders Vs TCWG
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[SA 265] COMMUNICATING DEFICIENCIES IN INTERNALCONTROL TO THOSE CHARGED

WITH GOVERNANCE AND MANAGEMENT
DEFINITION OF INTERNAL CONTROL DEFICIENCY

Deficiency in internal control – This exists when:
 A control necessary to prevent, or detect and correct, misstatements in the financial statements on a
timely basis is missing.
(E.g. No one checks status of goods in transit before finalising financial statements)
 A control is designed, implemented or operated in such a way that it is unable to prevent, or detect and
correct, misstatements in the financial statements on a timely basis; or
(E.g. No prevention No approval required to place purchase order, E.g. No DetectionNo GRN
when goods received, E.g. No CorrectionNo physical verification to identify & return or write
off such stock)
WHAT IS RESPONSIBILITY OF AUDITOR IF HE IDENTIFIES INTERNAL CONTROL DEFICIENCY?

 Responsibility This Standard on Auditing (SA) deals with the auditor’s responsibility to communicate
to appropriately to those charged with governance and management deficiencies in internal control
Communicate that the auditor has identified in an audit of financial statements. The objective of the auditor is
Not to to communicate appropriately to those charged with governance and management deficiencies
Perform in internal control that the auditor has identified during the audit and that, in the auditor’s
additional professional judgment, are of sufficient importance to merit their respective attentions.
.
procedures
This SA does not impose additional responsibilities on the auditor regarding obtaining an
understanding of internal control and designing and performing tests of controls over and above
the requirements of SA 315 and SA 330.
 Step 1 The auditor shall determine whether, on the basis of the audit work performed, the auditor has
Identify identified one or more deficiencies in internal control.
Deficiency If the auditor has identified one or more deficiencies in internal control, the auditor shall
determine, on the basis of the audit work performed.
 Step 2 Whether, individually or in combination, they constitute significant deficiencies.
Is it (No approval before purchase is a significant deficiency as quantity / rate / quality /
Significant specification can go wrong having material impact on purchases, but not maintaining
Deficiency or records for drums received through purchases which are scrapped)
Other
Deficiency?
 Step 3 The auditor shall communicate in writing significant deficiencies in internal control identified
Communicate during the audit to those charged with governance on a timely basis.
to TCWG
(MCQ-265.2)
 Step 4 The auditor shall also communicate to management at an appropriate level of responsibility on
Communicate a timely basis:
to In writing, significant deficiencies in internal control that the auditor has communicated
Management or intends to communicate to those charged with governance, unless it would be
inappropriate to communicate directly to management in the circumstances; and
(Don’t inform if management is also involved)
Other deficiencies in internal control identified during the audit that have not been
communicated to management by other parties and that, in the auditor’s professional
judgment, are of sufficient importance to merit management’s attention. (if already
covered in internal auditor report then no need to communicate again)
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WHAT SHOULD BE CONTENTS OF LETTER EXPLAIN INTERNAL CONTROL DEFICIENCY? (CNO-26.000)
The auditor shall include in the written communication of significant deficiencies in internal control:
 A description of the deficiencies and an explanation of their potential effects; and
 Sufficient information to enable those charged with governance and management to understand the
context of the communication.
In particular, the auditor shall explain that:
 The purpose of the audit was for the auditor to express an opinion on the financial statements;
 The audit included consideration of internal control relevant to the preparation of the financial
statements in order to design audit procedures that are appropriate in the circumstances, but not for
the purpose of expressing an opinion on the effectiveness of internal control; and
 The matters being reported are limited to those deficiencies that the auditor has identified during the
audit and that the auditor has concluded are of sufficient importance to merit being reported to those
charged with governance.
KEY TO REMEMBER
Description of DeficiencyPotential EffectSufficient InformationCautionPurpose of

the AuditTest of controls is part of audit not purpose of auditThere can be other
deficiency also we are certifying your systemBut not as per Sec 143(3) we will have to give
opinion, again no certification or guarantee on Internal Financial Controls End conclusion we
are responsible for Financial Controls only for giving opinion.
FACTORS CONSIDERED WHILE DECIDING WHETHER DEFICIENCY IS SIGNIFICANT DEFICIENCY? (CNO-27.000)

 Misstatement The significance of a deficiency or a combination of deficiencies in internal control depends not
not necessary only on whether a misstatement has actually occurred, but also on the likelihood that a
misstatement could occur and the potential magnitude of the misstatement. Significant
deficiencies may therefore exist even though the auditor has not identified misstatements
during the audit.
 Examples Examples of matters that the auditor may consider in determining whether deficiency or
combination of deficiencies in internal control constitutes a significant deficiency
include:
Very Amazing FLOSS
 The Volume of activity that has (Coal is purchased 5 times in a week,

occurred or could occur in the account wooden blocks are purchased once a
balance or class of transactions exposed week)
to the deficiency or deficiencies.
 The financial statement Amounts (Coal accounts for 80% of fuel while
exposed to the deficiencies wooden blocks account for 5% of
fuel)
 The cause and Frequency of the (Many misstatements in past, with
exceptions detected as a result of the respect to coal)
deficiencies in the controls.
 The Likelihood of the deficiencies (if purchase system are weak
leading to material misstatements in the notorious employees will quickly
financial statements in the future. take advantage)
 The interaction of the deficiency with (There is no fixed policy of coal
Other deficiencies in internal control. quality assessment & there is no
experienced, knowledgeable
supervisor also)
 The Susceptibility to loss or fraud of the (Moisture level in coal has huge
related asset or liability. impact on coal weight as compared
to wooden blocks)
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 The Subjectivity and complexity of (Quality determination is difficult in
determining estimated amounts, such coal as compared to wooden blocks)
as fair value accounting estimates
The importance of the controls to the financial reporting process; for example:
 Controls over significant transactions with related parties.
 Controls over significant transactions outside the entity’s normal course of
business.
 Controls over the prevention and detection of fraud.
 Controls over the selection and application of significant accounting policies.
 Controls over the period-end financial reporting process (such as controls over non-
recurring journal entries).
 General monitoring controls (such as oversight of management).
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[SA 299] RESPONSIBILITY OF JOINT AUDITORS
AUDIT PLANNING, RISK ASSESSMENT AND ALLOCATION OF WORK
Details Text
1. The joint auditors shall obtain common engagement letter.
2. The engagement partner and other key members of the engagement team from each of the joint auditors
shall be involved in planning the audit.
3. The joint auditors shall jointly establish an overall audit strategy that sets the scope, timing and direction of
the audit, and that guides the development of the audit plan.
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4. Prior to the commencement of the audit, the joint auditors shall discuss and develop a joint audit plan. In
developing the joint audit plan, the joint auditors shall:
 Consider the results of preliminary engagement activities and, where applicable, whether
knowledge gained on other or similar engagements performed earlier by the respective
engagement partner(s) for the entity is relevant.
 Identify division of audit areas and common audit areas amongst the joint auditors that define the
scope of the work of each joint auditor;
 Ascertain the nature, timing and extent of resources necessary to perform the engagement.
 Consider and communicate among all joint auditors the factors that, in their professional judgment,
are significant in directing the engagement team’s efforts;
 Ascertain the reporting objectives of the engagement to plan the timing of the audit and the nature
of the communications required;
5. After identification and allocation of work among the joint auditors, the work allocation document shall be
signed by all the joint auditors and the same shall be communicated to those charged with governance of
the entity. (Ref: Note 1 Below)
6. At this stage, risks of material misstatement need to be considered and assessed by each of the joint
auditors and shall be communicated to other joint auditors, and documented, whether pertaining to the
overall financial statements level or to the area of allocation among the other joint auditors.
7. The joint auditors shall discuss and document the nature, timing, and the extent of the audit procedures
for common and specific allotted areas of audit to be performed by each of the joint auditors and the same
shall be communicated to those charged with governance.
8. The joint auditors shall obtain common management representation letter.
Note 1: Ref Point 5 above: Include if Question is specifically asked on Documentation
The documentation of allocation of work helps in avoiding any dispute or confusion which may arise among the joint
auditors regarding the scope of work to be carried out by them. Further, the communication of allocation of work to
the entity helps in avoiding any dispute or confusion which may arise between the entity and the joint auditors
RESPONSIBILITY AND CO-ORDINATION AMONG JOINT AUDITORS (CNO-28.100)
Responsibility
A B
Specific/Separate Responsibility Joint Responsiblity For:
For:
1 Work divided. 1 Work not divided.
2a Assessment of risk relating to the areas of work Decisions taken by all the J.A together w.r.t ,NTE of the
2
allocated . audit procedures for common audit areas .
Evaluation of internal control relating to the areas of Matters brought to the notice of the J.A by other J.A
2b work allocated . 3
and on which there is an agreement among the J.A.
N.T.E of the audit procedures for work allocated to said Examining whether the F.S of the entity comply with
joint auditor. 4 relevant statute.
2c
5 Presentation and disclosure Req of the F.S .
Ensuring that audit report complies with statutes, the app.

6
SA’s and the relevant pronouncements issued by ICAI.
 Part A . Specific 1. In respect of audit work divided among the joint auditors, each joint auditor shall be
Responsibilitie responsible only for the work allocated to such joint auditor including proper
s execution of the audit procedures.
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2a,2b,2c.
It shall be the responsibility of each joint auditor to determine the nature, timing and extent
of audit procedures to be applied in relation to the areas of work allocated to said joint
auditor. It is the individual responsibility of each joint auditor to study and evaluate the
prevailing system of internal control and assessment of risk relating to the areas of work
allocated to said joint auditor.
 Part B. Joint All the joint auditors shall be jointly and severally responsible for:
Responsibilitie 1. The audit work which is not divided among the joint auditors and is carried out by all
s joint auditors;
2. Decisions taken by all the joint auditors under audit planning in respect of common
audit areas concerning the nature, timing and extent of the audit procedures to be
performed by each of the joint auditors.
3. 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;
4. examining that the financial statements of the entity comply with the requirements
of the relevant statutes;
5. Presentation and disclosure of the financial statements as required by the applicable
financial reporting framework;
6. Ensuring that the audit report complies with the requirements of the relevant
statutes, the applicable Standards on Auditing and the other relevant pronouncements
issued by ICAI.
RELIANCE ON OTHER JOINT AUDITORS (CNO-28.200)
Reliance On Other Joint Auditors
1 2
J.A Is entitled To proceed
J.A Is Entitled to assume that (Where FST of division/branch are audited by one
of the J.A, the other J.A’s)
a
The other J.A’s have brought to the Notice of said On the basis that FST audited by other J.A’s:
joint auditor: a) Comply with the legal and regulatory requirements.
1.Any Departure from app. FRF or b) Present a true and fair view of affairs and operations of the
2.Sig. observations, division/branch concerned.
relevant to their responsibilities .
b
1.Other J.A’s have performed their part
of the audit worK.
2.Work has been performed as per
Relevant SA’s (ICAI).
c
Any Review/Tests by other
J.A to ascertain the Same
is NOT NECESSARY.
Detailed Text
1. Each joint auditor is entitled to assume that:
a. The other joint auditors have brought to said joint auditor’s notice any departure from applicable
financial reporting framework or significant observations that are relevant to their responsibilities
noticed in the course of the audit.
b. The other joint auditors have carried out their part of the audit work and the work has actually been
performed in accordance with the Standards on Auditing issued by the Institute of Chartered
Accountants of India.
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c. 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.
2. Where 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
regulatory requirements and present a true and fair view of the state of affairs and of the results of
operations of the division/branch concerned.
AUDIT CONCLUSION AND REPORTING (CNO-28.100,/28.200)
1
Before finalizing their Audit Report:
1a
J.A shall Discuss and

Communicate wit h other
J.A’s their respective
conclusions
2
Audit Report
3 4
Agreement with regard to the opinion: Disagreement with regard to the opinion:
4a JA is not bound by views of the majority regarding opinion or

matters to be covered in the audit report
Common audit report In case of disagreement in opinion or any matters to be covered

4b
by the audit report, they shall express their opinion in a
separate audit report.
Audit report by other J.As (Combined) shall make a reference to

4c the separate audit report,
Separate audit report shall also make reference to Audit report
by other J.As (Combined)
4d Such reference shall be made under the heading “Other Matter

Paragraph” as per Revised SA 706”.
Detailed Text
The joint auditors are required to issue common audit report, however, where the joint auditors are in disagreement
with regard to the opinion or any matters to be covered by the audit report, they shall express their opinion in a
separate audit report.
A joint auditor is not bound by the views of the majority of the joint auditors regarding the opinion or matters to
be covered in the audit report and shall express opinion formed by the said joint auditor in separate audit report
in case of disagreement. In such circumstances, the audit report(s) issued by the joint auditor(s) shall make a
reference to the separate audit report(s) issued by the other joint auditor(s). Further, separate audit report shall
also make reference to the audit report issued by other joint auditors.
Such reference shall be made under the heading “Other Matter Paragraph” as per Revised SA 706, “Emphasis of
Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report”.
Before finalizing their audit report, the joint auditors shall discuss and communicate with each other their respective
conclusions that would form the content of the audit report.
UNIQUE QUESTIONS
 CNO 27.100 No Division of Work
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[SA 300] PLANNING AN AUDIT OF FINANCIAL STATEMENTS
PRELIMINARY ENGAGEMENT ACTIVITIES (PEA)

The auditor shall undertake the following activities at the beginning of the current audit engagement:
Performing procedures required by SA 220, “Quality Control for an Audit of Financial Statements” regarding
the continuance of the client relationship and the specific audit engagement;
Evaluating compliance with ethical requirements, including independence, as required by SA 220; and
Establishing an understanding of the terms of the engagement, as required by SA 210.
Performing the preliminary engagement activities specified above at the beginning of the current audit engagement
assists the auditor in identifying and evaluating events or circumstances that may adversely affect the auditor’s
ability to plan and perform the audit engagement.
Performing these preliminary engagement activities enables the auditor to plan an audit engagement for which, for
example:
There are no issues with management integrity that may affect the auditor’s willingness to continue the
engagement.
The auditor maintains the necessary independence and ability to perform the engagement.
There is no misunderstanding with the client as to the terms of the engagement.
KEY TO REMEMBER
Preliminary Engagement Activities (PEA)

(Conducted before planning starts)
 Acceptance (If initial audit engagement covered in latter point) / Continuance (If it
is recurring audit) ->4 Points to be covered are given in SA 220.
 Understanding the terms of engagement (once it is signed study it and take steps
for implementation)
 Compliance with Ethical Requirements & Independence Requirement (Appropriate
decisions to ensure that team is ethical & independent)
When we perform above activities it helps in planning. Below are the examples for the
same.
 Acceptance / Continuance: - Integrity of Management: - Information from legal
head i not reliable as it is filtered and manipulated hence such information should be
always corroborated with external evidence.
 Engagement Letter: - New branches should be audited always by Principle Auditor
for first 2 years, so make appropriate arrangement in consultation with management.
 Independence: - Our team has past employees from northern office of company, so
they should not be sent to audit of northern region otherwise there will be Conflict
of interest.
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ESTABLISHING THE OVERALL AUDIT STRATEGY (CNO-30.100)
 Overall
Audit
Strategy
Identify the characteristics of the engagement that define its scope;

Ascertain the reporting objectives of the engagement to plan the timing of the audit and
the nature of the communications required;
Consider the factors that, in the auditor’s professional judgment, are significant in directing
the engagement team’s efforts;
Consider the results of preliminary engagement activities and, where applicable, whether
knowledge gained on other engagements performed by the engagement partner for the
entity is relevant; and
Ascertain the nature, timing and extent of resources necessary to perform the
engagement.
KEY TO REMEMBER
Establishing Overall Audit Strategy (Overall plan, first step in planning) (R-CRPF)
R-Resources (Nature / Timing & Extent)

C-Characteristics of Assignment
R-Reporting & Communication
P-Preliminary Engagement Activities Results
F-Significant Factors
Significant Factors & Preliminary Engagement Activities (CRIM)

 Changes
 Risk
 Internal Control System
 Materiality
DEVELOP AN AUDIT PLAN (CNO-30.200)

The auditor shall develop an audit plan that shall include a description of:
The nature, timing and extent of planned risk assessment procedures as determined under SA 315
“Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its
Environment”.
The nature, timing and extent of planned further audit procedures at the assertion level, as determined
under SA 330 “The Auditor’s Responses to Assessed Risks”.
Other planned audit procedures that are required to be carried out so that the engagement complies with
SAs.
The audit plan is more detailed than the overall audit strategy that includes the nature, timing and extent of audit
procedures to be performed by engagement team members. Planning for these audit procedures takes place over the
course of the audit as the audit plan for the engagement develops. For example, planning of the auditor's risk
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assessment procedures occurs early in the audit process. However, planning the nature, timing and extent of specific
further audit procedures depends on the outcome of those risk assessment procedures. In addition, the auditor may
begin the execution of further audit procedures for some classes of transactions, account balances and disclosures
before planning all remaining further audit procedures.
KEY TO REMEMBER
Develop an Audit Plan (It is a detailed step by step instruction for 3 areas)
NTE of planned risk assessment procedures
NTE of planned further audit procedures at the assertion level (Test of Controls &
Substantive Procedures)
Plan other audit procedures to comply with specific SAs (SA 550 / SA 560)
ADDITIONAL CONSIDERATIONS IN INITIAL AUDIT ENGAGEMENTS (CNO-30.000) (MCQ-300.4/300.9)
The auditor shall undertake the following activities prior to starting an initial audit:
Performing procedures required by SA 220 regarding the acceptance of the client relationship and the
specific audit engagement; and
Communicating with the predecessor auditor, where there has been a change of auditors, in compliance
with relevant ethical requirements.
For initial audits, additional matters the auditor may consider in establishing the overall audit strategy and audit plan
include the following:
Unless prohibited by law or regulation, arrangements to be made with the predecessor auditor, for example,
to review the predecessor auditor’s working papers. 4
Any major issues (including the application of accounting principles or of auditing and reporting standards)
discussed with management in connection with the initial selection as auditor, the communication of these
matters to those charged with governance and how these matters affect the overall audit strategy and audit
plan. 1
The audit procedures necessary to obtain sufficient appropriate audit evidence regarding opening balances
(SA 510) 2
Other procedures required by the firm’s system of quality control for initial audit engagements. 3
(for example, the firm’s system of quality control may require the involvement of another partner or
senior individual to review the overall audit strategy prior to commencing significant audit
procedures or to review reports prior to their issuance).
KEY TO REMEMBER
Additional Considerations in Initial Audit Engagements (2 extra points in first audit)

1st Carefully determine Acceptance & 2nd Communicate with previous auditor.
Auditor may consider following matters also

Discussion of major issues identified during acceptance procedures with management &
TCWG (Bribing practices in company & its impact on audit team)
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Arrangement with previous auditor like discussion / review of working papers if client
agree.
Evidence regarding opening balance
Compliance with firm’s policy w.r.t initial audit engagements
(For Example, requirement that audit strategy of first audit should be reviewed
by another partner or senior individual.)
CHANGES TO PLANNING DECISIONS (MCQ-300.1/300.3/300.6)

The auditor shall update and change the overall audit strategy and the audit plan as necessary during the
course of the audit.
The auditor may need to modify the overall audit strategy and audit plan due to below mentioned factors-
Eco. Growth - Recession - Change in FRF - Weak Control

Profit Making -Loss Making - Demerger - Frauds
Further, the auditor would also modify the nature, timing and extent of further audit procedures, based on
the revised consideration of assessed risks.
This may be the case when information coming to the auditor differs significantly from the information when
he planned the audit procedures. For example, audit evidence obtained through the performance of
substantive procedures may contradict the audit evidence obtained through tests of controls. In addition to
above, there may be a possibility of change in law notifications, Govt. policies which necessitates updation of
overall Audit strategy
ADVANTAGES & DISADVANTAGES OF PLANNING & HOW TO OVERCOME THEM

 Advantages It provides the assistant carrying out the audit with total and clear set of instructions
of the work generally to be done.
Selection of assistants for the jobs on the basis of capability becomes easier when the
work is rationally planned, defined and segregated.
Without a written and pre-determined programme, work is necessarily to be carried
out on the basis of some ‘mental’ plan. In such a situation, there is always a danger of
ignoring or overlooking certain books and records. Under a properly framed
programme, the danger is significantly less and the audit can proceed systematically.
The assistants, by putting their signature on programme, accept the responsibility for
the work carried out by them individually and, if necessary, the work done may be
traced back to the assistant.
Helping the auditor to devote appropriate attention to important areas of the audit.
Helping the auditor identify and resolve potential problems on a timely basis.
Assisting, where applicable, in coordination of work done by auditors of components
and experts.
The principal can control the progress of the various audits in hand by examination of
audit programmes initiated by the assistants deputed to the jobs for completed work.
It serves as a guide for audits to be carried out in the succeeding year.
A properly drawn up audit programme serves as evidence in the event of any charge
of negligence being brought against the auditor. It may be of considerable value in
establishing that he exercised reasonable skill and care that was expected of
professional auditor.
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 Disadvantages The work may become mechanical and particular parts of the programme may be
carried out without any understanding of the object of such parts in the whole audit
scheme.
The programme often tends to become rigid and inflexible following set grooves; the
business may change in its operation of conduct, but the old programme may still be
carried on. Changes in staff or internal control may render precaution necessary at
points different from those originally decided upon.
Inefficient assistants may take shelter behind the programme i.e. defend deficiencies
in their work on the ground that no instruction in the matter is contained therein.
A hard and fast audit programme may kill the initiative of efficient and enterprising
assistants.
Measures to Overcome Disadvantages of Audit Programme
Suitability While laying down the audit programme, the Auditor should consider
whether the same is commensurate with factors like –
 Nature of the entity's business.
 Scale of operations,
 Volume of transactions and
 The efficiency of internal controls.
Review of Internal Controls should be reviewed and evaluated to obtain
Internal knowledge of changes in the controls and systems and procedures. The
Controls Auditor can spot weaker aspects of the control and use his knowledge
in revising the audit programme.
Changed The Auditor should obtain information about new lines of business or
business new systems to carry on the old business. The audit programme should
operations be recast or modified to suit the changed business operations and
practices.
Participative approach
The Auditor should encourage his audit assistants to keep an open
mind and make suggestions for amending the programmes. The
persons doing the actual field work would be in a better position to
know the actual changes and requirements of the situation.
Flexibility The audit programme should not become stereotyped. There should
be revision from time to time according to circumstances even though
no material change has taken place in the client's business operations
and the business practice.
Minimum It should be impressed upon the audit assistants that the programme
Requirement provides for the minimum tests that should be carried out and they
should undertake tests and surprise checks, considered appropriate,
even though not provided in the programme.
KEY TO REMEMBER
Advantages & Disadvantages of planning & How to overcome them.
Advantages:- appropriate selection & assignment of work / responsibility & accountability of work
delegated improves / clear set of instructions to juniors / systematic plan with proper emphasis
on important areas / less chances of overlooking
e.g. EPS checking omitted / identify & resolve potential problems
e.g. need of expert in inventory determination & valuation / helps in co-ordination with
other auditors / helps in controlling / supervising audit work / serves as guide in succeeding years
/ serves as evidence in case of charge against negligence.
Disadvantages: -Fixed Pattern Not Applicable/ Rigid/ Mechanical / Good for inefficient
assistants /Bad for efficient assistants.
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Measures to overcome disadvantages of audit programme
Suitability/Review Internal Controls / Changes in Business / Participative / Flexibility / Minimum
Requirement
DOCUMENTATION OF AUDIT PLAN (CNO-30.310) (MCQ-300.8)

 What should The auditor shall document:
be  the overall audit strategy;
Documented?  the audit plan; and
 any significant changes made during the audit engagement to the overall audit
strategy or the audit plan, and the reasons for such changes.
 Further Overall Audit Strategy
Explanation The documentation of the overall audit strategy is a record of the key decisions
considered necessary to properly plan the audit and to communicate significant matters
to the engagement team.
Example The auditor may summarize the overall audit strategy in the form of a
memorandum that contains key decisions regarding the overall scope, timing and
conduct of the audit.
Audit Plan
The documentation of the audit plan is a record of the planned nature, timing and extent
of risk assessment procedures and further audit procedures at the assertion level in
response to the assessed risks. It also serves as a record of the proper planning of the
audit procedures that can be reviewed and approved prior to their performance. The
auditor may use standard audit programs and/or audit completion checklists, tailored
as needed to reflect the particular engagement circumstances.
Significant Changes
A record of the significant changes to the overall audit strategy and the audit plan, and
resulting changes to the planned nature, timing and extent of audit procedures, explains
why the significant changes were made, and the overall strategy and audit plan finally
adopted for the audit. It also reflects the appropriate response to the significant changes
occurring during the audit.
UNIQUE MCQ’s
 MCQ No 300.2
UNIQUE QUESTIONS
 CNO 29.000 Continuous Phase
 CNO 30.300 Audit Strategy & Audit Plan
 CNO 30.320 Benefits of Planning
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[SA 315] IDENTIFYING AND ASSESSING THE RISK OF MATERIAL MISSTATEMENT

THROUGH UNDERSTANDING THE ENTITY AND ITS ENVIRONMENT (PART-1)
AUDIT RISK & ITS COMPONENTS (CNO-31.000) (MCQ-315.14)

 Chart
(These points are explained in SA 200, but they are relevant while discussing SA 315. Give reference
of SA 200 while explaining definition and related points)
 Inherent Definition
Risk The susceptibility of an assertion about a class of transaction, account balance or disclosure
(MCQ-315.08) to a misstatement that could be material, either individually or when aggregated with other
misstatements, before consideration of any related controls.
(E.g. Retail, Jewellery, Telecom)
Examples of Higher Inherent Risk

It is higher for some assertions and related classes of transactions, account balances, and
disclosures than for others.
 Complexity: - For example, it may be higher for complex calculations or
(E.g. Cost computation of inventory in factory with multiple products)
 Estimates: - For accounts consisting of amounts derived from accounting

estimates that are subject to significant estimation uncertainty.
(E.g. Research & Development Expenditure)
 Business Risk: - External circumstances giving rise to business risks may also
influence inherent risk. For example, technological developments might make a
particular product obsolete, thereby causing inventory to be more susceptible to
overstatement.
(E.g. Fashion Industry, Mobile Industry)
 Factors in the entity and its environment that relate to several or all of the classes
of transactions, account balances, or disclosures may also influence the inherent
risk related to a specific assertion. Such factors may include, for example, a lack of
sufficient working capital to continue operations or a declining industry
characterised by a large number of business failures.
(E.g. They will affect going concern which will in turn affect valuation
assertion of many assets which are carried on historical basis)
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 Control Risk Definition
(MCQ-315.5) The risk that a misstatement that could occur in an assertion about a class of transaction,
account balance or disclosure and that could be material, either individually or when
aggregated with other misstatements, will not be prevented, or detected and corrected,
on a timely basis by the entity’s internal control.
It is a function of the effectiveness of the design, implementation and maintenance of
internal control by management to address identified risks that threaten the achievement
of the entity’s objectives relevant to preparation of the entity’s financial statements.
(Design Problem: - No monthly stock counting rule, Implementation Problem: - Rule exists
but not followed, Maintenance Problem:- Counting sheets and procedures not updated as
per new products)
100% Elimination Not Possible
However, internal control, no matter how well designed and operated, can only reduce, but
not eliminate, risks of material misstatement in the financial statements, because of the
inherent limitations of internal control. These include, for example, the possibility of
human errors or mistakes, or of controls being circumvented by collusion or inappropriate
management override. Accordingly, some control risk will always exist. The SAs provide the
conditions under which the auditor is required to, or may choose to, test the operating
effectiveness of controls in determining the nature, timing and extent of substantive
procedures to be performed.
Combined Vs Separate Assessment
The SAs do not ordinarily refer to inherent risk and control risk separately, but rather to a
combined assessment of the “risks of material misstatement”. However, the auditor may
make separate or combined assessments of inherent and control risk depending on
preferred audit techniques or methodologies and practical considerations. The assessment
of the risks of material misstatement may be expressed in quantitative terms, such as in
percentages, or in non-quantitative terms. In any case, the need for the auditor to make
appropriate risk assessments is more important than the different approaches by which
they may be made. (In big assignments go for separate analysis, further if auditor is
relying extensively on test of controls then separate analysis id preferred)
 Risk of Definition
Material The risk that the financial statements are materially misstated prior to audit.
Misstateme
Components
nt
As per SA 200, the risks of material misstatement at the assertion level consist of two
components: inherent risk and control risk. Inherent risk and control risk are the entity’s
risks; they exist independently of the audit of the financial statements. The nature of each
of these types of risk and their interrelationship is discussed below;
 Detection Meaning: -
Risk The risk that the procedures performed by the auditor to reduce audit risk to an acceptably
(MCQ-315.3) low level will not detect a misstatement that exists and that could be material, either
individually or when aggregated with other misstatements.
Factors affecting Detection Risk;
Detection risk relates to the nature, timing, and extent of the auditor’s procedures that are
determined by the auditor to reduce audit risk to an acceptably low level. It is therefore a
function of the effectiveness of an audit procedure and of its application by the auditor.
Matters such as:
 adequate planning;
 proper assignment of personnel to the engagement team;
 the application of professional scepticism; and
 supervision and review of the audit work performed, assist to enhance the
effectiveness of an audit procedure and of its application and reduce the possibility
that an auditor might select an inappropriate audit procedure, misapply an
appropriate audit procedure, or misinterpret the audit results.
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Interrelationship of the components of audit risk:
Inherent and control risks differ from detection risk in that they exist independently of an
audit of financial information. Inherent and control risks are functions of the entity’s
business and its environment and the nature of the account balances or classes of
transactions, regardless of whether an audit is conducted.
Even though inherent and control risks cannot be controlled by the auditor, the auditor
can assess them and design his substantive procedures to produce an acceptable level of
detection risk, thereby reducing audit risk to an acceptably low level.
For a given level of audit risk, the acceptable level of detection risk bears an inverse
relationship to the assessed risks of material misstatement at the assertion level. For
example, the greater the risks of material misstatement the auditor believes exists, the less
the detection risk that can be accepted and, accordingly, the more persuasive the audit
evidence required by the auditor.
 Audit risk The risk that the auditor expresses an inappropriate audit opinion when the financial statements
(CNO-36.500) are materially misstated. Audit risk is a function of the risks of material misstatement and detection
risk.
From the above, it is clear that –
Audit Risk = Risk of Material Misstatement x Detection Risk------(1)
Further Risk of Material Misstatement= Inherent Risk x Control Risk------(2)
From (1) and (2), we arrive at Audit Risk = Inherent Risk x Control Risk x Detection Risk
What is not included in Audit Risk?
 Audit risk does not include the risk that the auditor might express an opinion that
the financial statements are materially misstated when they are not. This risk is
ordinarily insignificant.
 Further, audit risk is a technical term related to the process of auditing; it does not
refer to the auditor’s business risks such as loss from litigation, adverse publicity,
or other events arising in connection with the audit of financial statements.
RISK ASSESSMENT PROCEDURE (How to collect information?) (MCQ-315.11/315.12)
 Definition The audit procedures performed to obtain an understanding of the entity and its environment,
including the entity’s internal control, to identify and assess the risks of material misstatement,
whether due to fraud or error, at the financial statement and assertion levels.
Risk assessment procedure - a basis for the identification and assessment of risks of
material misstatement at the financial statement and assertion levels
The auditor shall perform risk assessment procedures to provide a basis for the
identification and assessment of risks of material misstatement at the financial statement
and assertion levels. Risk assessment procedures by themselves, however, do not provide
sufficient appropriate audit evidence on which to base the audit opinion.
 What is The risk assessment procedures shall include the following:
included in Observation and inspection.
Risk Inquiries of management and of others within the entity who in the auditor’s judgment
Assessment may have information that is likely to assist in identifying risks of material misstatement
Procedures? due to fraud or error.
Analytical procedures.
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UNDERSTANDING OF THE ENTITY AND ITS ENVIRONMENT (Which basic information should be collected?)
(CNO-39.000/39.100)
 Chart
 Detailed The auditor shall obtain an understanding of the following:

Text Relevant industry, regulatory, and other external factors including the applicable financial
reporting framework.
The nature of the entity, including:
 its operations;
 its ownership and governance structures;
 The types of investments that the entity is making and plans to make, including
investments in special-purpose entities; and
 The way that the entity is structured and how it is financed; to enable the auditor
to understand the classes of transactions, account balances, and disclosures to be
expected in the financial statements.
The entity’s selection and application of accounting policies, including the reasons for
changes thereto. The auditor shall evaluate whether the entity’s accounting policies are
appropriate for its business and consistent with the applicable financial reporting
framework and accounting policies used in the relevant industry.
The entity’s objectives and strategies, and those related business risks that may result in
risks of material misstatement.
The measurement and review of the entity’s financial performance.
IDENTIFYING AND ASSESSING THE RISKS OF MATERIAL MISSTATEMENT (CNO-40.100)
 RMM at 2 The auditor shall identify and assess the risks of material misstatement at:
Levels The financial statement level; and
The assertion level for classes of transactions, account balances, and disclosures; to
provide a basis for designing and performing further audit procedures.
For this purpose, the auditor shall:
Identify risks throughout the process of obtaining an understanding of the entity and its
environment, including relevant controls that relate to the risks, and by considering the
classes of transactions, account balances, and disclosures in the financial statements;
(Har information collect karne ke baad risk ke baarein mein sochtein raho)
Relate the identified risks to what can go wrong at the assertion level, taking account
of relevant controls that the auditor intends to test; and
(Kahi assertion level pet oh nahi)
Assess the identified risks, and evaluate whether they relate more pervasively to the
financial statements as a whole and potentially affect many assertions;
(Ya financial statement level pet oh nahi)
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Consider the likelihood of misstatement, including the possibility of multiple
misstatements, and whether the potential misstatement is of a magnitude that could
result in a material misstatement.
(Badi risk toh nahi hai , with big amount and more probability)
Example only for reference no need to include in answer
Understanding State of Economy State of Ownership & Governance

Entity & Its (Down turn in Economy (80% of shares belong to
Environment Economy) (Down turn in one family + Family
(RAP) Economy) Management + Past
History of Manipulation)
Description of Risk Difficult to collect Inventory may There are chances that
(Identifying) Receivables remain unsold some related party
transactions are
manipulated to increase
profits.
Impact Valuation Valuation Anywhere in financial
(Assessing) statements
Probability 5 6 8
(Points)
Amount 2 4 5
(Points)
Combined Effect 10 24 40
Significant Risk No Yes Yes
(Above 20
Significant Risk)
 Financial
Statement
Level Assessment of Risks of Material Misstatement at the Financial Statement Level
(CNO-34.000)
Meaning
Risks of material misstatement at the financial statement level refer to risks that relate
pervasively to the financial statements as a whole and potentially affect many assertions.
Risks of this nature are not necessarily risks identifiable with specific assertions at the
class of transactions, account balance, or disclosure level. Rather, they represent
circumstances that may increase the risks of material misstatement at the assertion level,
for example, through management override of internal control. Financial statement level
risks may be especially relevant to the auditor’s consideration of the risks of material
misstatement arising from fraud.
Effect of Control Environment
Risks at the financial statement level may derive in particular from deficient control
environment (although these risks may also relate to other factors, such as declining
economic conditions). For example, deficiencies such as management’s lack of
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competence may have a more pervasive effect on the financial statements and may
require an overall response by the auditor.
Auditability of Financial Statements
Understanding of Internal Control System may result in following
 Concerns about the integrity of the entity’s management may be so serious as
to cause the auditor to conclude that the risk of management misrepresentation
in the financial statements is such that an audit cannot be conducted.
 Concerns about the condition and reliability of an entity’s records may cause
the auditor to conclude that it is unlikely that sufficient appropriate audit
evidence will be available to support an unqualified opinion on the financial
statements.
SA 705, “Modifications to the Opinion in the Independent Auditor’s Report” establishes
requirements and provides guidance in determining whether there is a need for the
auditor to consider a qualification or disclaimer of opinion or, as may be required in some
cases, to withdraw from the engagement where this is legally possible.
 Assessment
of Risks of
Material
Misstatement
at the
Assertion
Level
(CNO-33.000)
Risks of material misstatement at the assertion level for classes of transactions, account balances,
and disclosures need to be considered because such consideration directly assists in determining
the nature, timing, and extent of further audit procedures at the assertion level necessary to
obtain sufficient appropriate audit evidence. In identifying and assessing risks of material
misstatement at the assertion level, the auditor may conclude that the identified risks relate more
pervasively to the financial statements as a whole and potentially affect many assertions.
Assertions
In representing that the financial statements are in accordance with the applicable
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financial reporting framework, management implicitly or explicitly makes assertions
regarding the recognition, measurement, presentation and disclosure of the various
elements of financial statements and related disclosures.
Assertions used by the auditor to consider the different types of potential misstatements
that may occur fall into the following three categories and may take the following forms-
 Assertions about account balances at the period end:
o Existence—assets, liabilities, and equity interests exist.
o Completeness—all assets, liabilities and equity interests that should
have been recorded have been recorded.
o Valuation and allocation—assets, liabilities, and equity interests are
included in the financial statements at appropriate amounts and any
resulting valuation or allocation adjustments are appropriately
recorded.
o Rights and obligations—the entity holds or controls the rights to assets,
and liabilities are the obligations of the entity.
 Assertions about classes of transactions and events for the period under audit:
o Occurrence—transactions and events that have been recorded have
occurred and pertain to the entity.
o Completeness—all transactions and events that should have been
recorded have been recorded.
o Accuracy—amounts and other data relating to recorded transactions
and events have been recorded appropriately.
o Cut-off—transactions and events have been recorded in the correct
accounting period.
o Classification—transactions and events have been recorded in the
proper accounts.
 Assertions about presentation and disclosure:
o Occurrence and rights and obligations—disclosed events, transactions,
and other matters have occurred and pertain to the entity.
o Completeness—all disclosures that should have been included in the
financial statements have been included.
o Accuracy and valuation—financial and other information are disclosed
fairly and at appropriate amounts.
o Classification and understandability—financial information is
appropriately presented and described, and disclosures are clearly
expressed.
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RISKS THAT REQUIRE SPECIAL AUDIT CONSIDERATION (CNO-38.000)
As part of the risk assessment, the auditor shall determine whether any of the risks identified are, in the auditor’s
judgment, a significant risk. In exercising this judgment, the auditor shall exclude the effects of identified controls
related to the risk.
In exercising judgment, as to which risks are significant risks, the auditor shall consider at least the following:
(CFO-CSR)
Whether the risk is related to recent significant economic, accounting, or other developments like Changes in
regulatory environment, etc., and, therefore, requires specific attention;
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Whether the risk is a risk of Fraud;
Whether the risk involves significant transactions that are Outside the normal course of business for the
entity, or that otherwise appear to be unusual.
The Complexity of transactions;
The degree of Subjectivity in the measurement of financial information related to the risk, especially those
measurements involving a wide range of measurement uncertainty; and
Whether the risk involves significant transactions with Related parties;
When the auditor has determined that a significant risk exists, the auditor shall obtain an understanding of
the entity’s controls, including control activities, relevant to that risk.
DOCUMENTING THE RISK

The auditor shall document:
Key elements of the understanding obtained regarding each of the aspects of the entity and its environment
and of each of the internal control components, the sources of information from which the understanding
was obtained; and the risk assessment procedures performed;
The identified and assessed risks of material misstatement at the financial statement level and at the
assertion level ; and
The risks identified, and related controls about which the auditor has obtained an understanding.
The discussion among the engagement team and the significant decisions reached;
Appendix, only for reference not important for exams

 Understanding Examples Impact Assertion Level / Financial
Entity & Its Statement Level
Environment
 State of Downturn in economy Receivables may be difficult Can affect provision for doubtful
Economy to collect- debts Assertion Level Risk
Inventory write-downs may Can affect Inventory Valuation
be required Assertion Level Risk
 Nature of Fast changing technology Fixed Assets (Machines) Can affect valuation of fixed
Industry may become obsolete assets, can lead to impairment 
Assertion Level Risk (High
Likelihood & Impact Hence
Significant Risk)
 Regulatory Stringent rules of TRAI Can lead to heavy penalties. Provision for penalties can be
Requirement regarding call drops & inadequate (in
other matters complete)Assertion level risk
 Ownership & 80% of shares belong to Many related party There are chances that some
Governance one family and there are transactions take place related party transactions are not
multiple subsidiaries & identified or not properly recorded
associates it can affect many financial
itemsFinancial Statement Level
Risk
(High Likelihood & Impact Hence
Significant Risk)
 Financing & Heavy debt financing, with Management may resort to Can affect many items in financial
Structure stringent debt covenants manipulations to satisfy statements Financial Statement
regarding debt: equity, debt covenants Level Risk
inventory levels, cash flows
etc. Derivative Contracts
are also used
 Types of Invested huge amount in These are risky investments. Affects Investment Valuation
Investments African countries Assertion Level Risk
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 Nature of 30% Revenue from Government may not give Affects revenue recognition
Operations Government & 40% from money on time. Corporates Assertion Level Risk
Corporates may change contract (High Likelihood & Impact Hence
anytime Significant Risk)
 Financial Shift to Ind AS is required Many ambiguities in Can affect many items in financial
Reporting implementation statement Financial Statement
Framework Level Risk
(High Likelihood & Impact Hence
Significant Risk)
 Selection & Senior accountant Errors because of his Can affect many items in financial
Application not trained inexperience & others may statements  Financial Statement
of Accounting properly take advantage and fraud. Level Risk
Policies
 Financial Monthly sales are Managers will try to show Can affect revenue recognition
Performance compared to 3 competitors better picture. Assertion Level Risk
who are doing good.
 Objectives & Introduction of a new Errors in cost allocation and Can Affect Inventory Valuation 
Strategies product during the year inventory valuation. Assertion Level Risk
Management may be Can affect many items in financial
tempted to manipulate statements  Financial Statement
financial statements to Level Risk
ensure compliance with the
bank covenants.
UNIQUE QUESTIONS
 CNO 32.000 Inherent Risk (Identification)
 CNO 36.000 Reduction of Detection Risk
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[SA 315] INTERNAL CONTROL SYSTEM (PART-2)
DEFINITION & OBJECTIVES OF INTERNAL CONTROL (SA 315)

 Definition 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 (made), 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 :
(Mnemonic -LOAF)
safeguarding of Assets, (Insurance, Restricted Access, Approval before

Sale etc)
(use of the asset to achieve objectives of
effectiveness and efficiency of Operations,
production and sale)
compliance with applicable Laws and
(Environmental & Other approvals, Taxes etc)
regulations,
(books of accounts, trial balance, consolidations
reliability of Financial reporting
etc)
The term “controls” refers to any aspects of one or more of the components of internal control.
 Objectives Assets
of Internal  assets are safeguarded from unauthorized access, use or disposition; and
Control:  the recorded assets are compared with the existing assets at reasonable intervals
(Mere and appropriate action is taken with regard to any differences.
repetition &
Operations
elaboration)
 transactions are executed in accordance with managements general or specific
authorization;
 Transactions are efficient & effective
Law Compliance
 Rules & Regulations are followed while executing transactions
Financial Reporting
 all transactions are promptly recorded in the correct amount in the appropriate
accounts and in the accounting period in which executed so as to permit
preparation of financial information within a framework of recognized accounting
policies and practices and relevant statutory requirements, if any, and to maintain
accountability for assets;
COMPONENTS OF INTERNAL CONTROL (CNO-40.000)

 Division of
Internal
Control into
Components
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The division of internal control into the following five components provides a useful framework
for auditors to consider how different aspects of an entity’s internal control may affect the
audit:
The control environment;
The entity’s risk assessment process;
Control activities; and
The information system, including the related business processes, relevant to financial
reporting, and communication;
Monitoring of controls.
CONTROL ENVIRONMENT– COMPONENT OF INTERNAL CONTROL–

 Definition Control environment - Attitudes, awareness, ability and actions of those charged with
governance and management concerning the entity’s internal control and its importance in the
entity also includes the governance and management functions. The control environment is a
component of internal control.
Elements of the control environment that may be relevant when obtaining an understanding of the control
environment include the following:
 TCWG Related Participation by those charged with governance – Attributes of those charged with governance
such as:
Their independence from management.
Their experience and stature (Reputation).
The extent of their involvement and the information they receive, and the scrutiny of
activities.
The appropriateness of their actions, including the degree to which difficult questions
are raised and pursued with management, and their interaction with internal and
external auditors.
 Management Management’s philosophy and operating style – Characteristics such as management’s:
Related Approach to taking and managing business risks.
Attitudes toward information processing and accounting functions and personnel.
Attitudes and actions toward financial reporting.
 Human Human resource policies and practices – Policies and practices that relate to, for example,
Resource recruitment, orientation, training, evaluation, counselling, promotion, compensation, and
remedial actions.
 Competence Commitment to competence – Matters such as management’s consideration of the
competence levels for particular jobs and how those levels translate into requisite skills and
knowledge.
 Organisation Organisational structure – The framework within which an entity’s activities for achieving its
Structure objectives are planned, executed, controlled, and reviewed.
 Assignment of Assignment of authority and responsibility - Matters such as how authority and responsibility
Authority for operating activities are assigned and how reporting relationships and authorisation
hierarchies are established.
 Communication Communication and enforcement of integrity and ethical values – These are essential elements
that influence the effectiveness of the design, administration and monitoring of controls.
 Satisfactory The existence of a satisfactory control environment can be a positive factor when the auditor
Control assesses the risks of material misstatement. However, although it may help reduce the risk of
Environment - fraud, a satisfactory control environment is not an absolute deterrent to fraud.
not an absolute
Conversely, deficiencies in the control environment may undermine the effectiveness of
deterrent to
controls, in particular in relation to fraud.
fraud:
For example, management’s failure to commit sufficient resources to address IT security risks
may adversely affect internal control by allowing improper changes to be made to computer
programs or to data, or unauthorized transactions to be processed. As explained in SA 330, the
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control environment also influences the nature, timing, and extent of the auditor’s further
procedures.
The control environment in itself does not prevent, or detect and correct, a material
misstatement. It may, however, influence the auditor’s evaluation of the effectiveness of
other controls (for example, the monitoring of controls and the operation of specific control
activities) and thereby, the auditor’s assessment of the risks of material misstatement.
THE ENTITY’S RISK ASSESSMENT PROCESS– COMPONENT OF INTERNAL CONTROL (CNO-40.150)
Entity’s process from point of view of financial reporting—Business Risk—RMM
For financial reporting purposes, the entity’s risk assessment process includes how management
identifies business risks relevant to the preparation of financial statements in accordance with the
entity’s applicable financial reporting framework, estimates their significance, assesses the likelihood
of their occurrence, and decides upon actions to respond to and manage them and the results thereof.
For example, the entity’s risk assessment process may address how the entity considers the possibility
of unrecorded transactions or identifies and analyses significant estimates recorded in the financial
statements. (E.g., Business Risk of Product Warranties, Guarantees leading to RMM in Financial
Statements)
Can be internal or external / management’s plans to mitigate.
Risks relevant to reliable financial reporting include external and internal events, transactions or
circumstances that may occur and adversely affect an entity’s ability to initiate, record, process, and
report financial data consistent with the assertions of management in the financial statements.
Management may initiate plans, programs, or actions to address specific risks or it may decide to accept
a risk because of cost or other considerations.
Risks can arise or change due to circumstances such as the following:(Shortcut PFA – TRAGIC risk assessment)
(a) New Personnel. New personnel may have a different focus on or understanding of internal control.
(b) Expanded Foreign operations. The expansion or acquisition of foreign operations carries new and often
unique risks that may affect internal control, for example, additional or changed risks from foreign currency
transactions.
(c) New Accounting pronouncements. Adoption of new accounting principles or changing accounting principles
may affect risks in preparing financial statements
(d) New Technology. Incorporating new technologies into production processes or information systems may
change the risk associated with internal control.
(e) Changes in Regulatory or operating environment. Changes in the regulatory or operating environment can
result in changes in competitive pressures and significantly different risks. (E.g. Change in NPA Norms, Change
in Loan Processing System Etc)
(f) New business models, products, or Activities. Entering into business areas or transactions with which an
entity has little experience may introduce new risks associated with internal control.
(g) Rapid Growth. Significant and rapid expansion of operations can strain controls and increase the risk of a
breakdown in controls.
(h) New or revamped Information systems. Significant and rapid changes in information systems can change
the risk relating to internal control.
(i) Corporate restructurings. Restructurings may be accompanied by staff reductions and changes in supervision
and segregation of duties that may change the risk associated with internal control.
CONTROL ACTIVITIES– COMPONENT OF INTERNAL CONTROL (MCQ-315.1/315.4/315.6/315.7)

Generally, control activities that may be relevant to an audit may be categorised as policies and procedures that
pertain to the following:
(a) Segregation of duties:
Assigning different people, the responsibilities of authorising transactions, recording transactions, and maintaining
custody of assets. Segregation of duties is intended to reduce the opportunities to allow any person to be in a position
to both perpetrate and conceal errors or fraud in the normal course of the person’s duties.
(b) Physical controls:
Controls that encompass:
--The physical security of assets, including adequate safeguards such as secured facilities over
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access to assets and records.
--The authorisation for access to computer programs and data files.
--The periodic counting and comparison with amounts shown on control records (for example, comparing the results
of cash, security and inventory counts with accounting records). The extent to which physical controls intended to
prevent theft of assets are relevant to the reliability of financial statement preparation, and therefore the audit,
depends on circumstances such as when assets are highly susceptible to misappropriation.
(c) Performance reviews:
These control activities include reviews and analyses of actual performance versus budgets, forecasts, and prior period
performance; relating different sets of data – operating or financial – to one another, together with analyses of the
relationships and investigative and corrective actions; comparing internal data with external sources of information;
and review of functional or activity performance.
(d) Information processing:
The two broad groupings of information systems control activities are application controls, which apply to the
processing of individual applications, and general IT-controls, which are policies and procedures that relate to many
applications and support the effective functioning of application controls by helping to ensure the continued proper
operation of information systems. Examples of application controls include checking the arithmetical accuracy of
records, maintaining and reviewing accounts and trial balances, automated controls such as edit checks of input data
and numerical sequence checks, and manual follow-up of exception reports. Examples of general IT-controls are
program change controls, controls that restrict access to programs or data, controls over the implementation of new
releases of packaged software applications, and controls over system software that restrict access to or monitor the
use of system utilities that could change financial data or records without leaving an audit trails.
Certain control activities may depend on the existence of appropriate higher-level policies established by
management or those charged with governance. For example, authorisation controls may be delegated under
established guidelines, such as, investment criteria set by those charged with governance; alternatively, non-routine
transactions such as, major acquisitions or divestments may require specific high-level approval, including in some
cases that of shareholders.
THE INFORMATION SYSTEM, INCLUDING THE RELATED BUSINESS PROCESSES, RELEVANT TO FINANCIAL
REPORTING AND COMMUNICATION– COMPONENT OF CONTROL ENVIRONMENT
An information system consists of infrastructure (physical and hardware components), software, people,
procedures, and data. Many information systems make extensive use of information technology (IT).
The information system relevant to financial reporting objectives, which includes the financial reporting system,
encompasses methods and records that:
(a) Identify and record all valid transactions. (Completeness)
(b) Describe on a timely basis the transactions in sufficient detail to permit proper classification of transactions
for financial reporting. (Classification)
(c) Measure the value of transactions in a manner that permits recording their proper monetary value in the
financial statements. (Accuracy)
(d) Determine the time period in which transactions occurred to permit recording of transactions in the proper
accounting period. (Cut off)
(e) Present properly the transactions and related disclosures in the financial statements. (Presentation &
Disclosure)
The quality of system-generated information affects management’s ability to make appropriate decisions in
managing and controlling the entity’s activities and to prepare reliable financial reports.
Communication, which involves providing an understanding of individual roles and responsibilities pertaining
to internal control over financial reporting, may take such forms as policy manuals, accounting and financial
reporting manuals, and memoranda. Communication also can be made electronically, orally, and through the
actions of management.
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MONITORING OF CONTROLS – COMPONENT OF INTERNAL CONTROL
The auditor shall obtain an understanding of the major activities that the entity uses to monitor internal control
over financial reporting.
Monitoring of controls Defined: Monitoring of controls is a process to assess the effectiveness of internal
control performance over time.
Helps in assessing the effectiveness of controls on a timely basis: It involves assessing the effectiveness
of controls on a timely basis and taking necessary remedial actions.
Management accomplishes through ongoing activities, separate evaluations etc.: Management
accomplishes monitoring of controls through ongoing activities, separate evaluations, or a combination
of the two. Ongoing monitoring activities are often built into the normal recurring activities of an entity
and include regular management and supervisory activities.
Management’s monitoring activities include: Management’s monitoring activities may include using
information from communications from external parties such as customer complaints and regulator
comments that may indicate problems or highlight areas in need of improvement.
In case of Small Entities: Management’s monitoring of control is often accomplished by management’s
or the owner-manager’s close involvement in operations. This involvement often will identify significant
variances from expectations and inaccuracies in financial data leading to remedial action to the control.
TOOLS FOR INTERNAL CONTROL REVIEW

To facilitate the accumulation of the information necessary for the proper review and evaluation of internal controls,
the auditor can use one of the following to help him to know and assimilate the system and evaluate the same:
Narrative record;
Flow chart.
Check List;
Questionnaire;
THE NARRATIVE RECORD

This is a complete and exhaustive description of the system as found in operation by the auditor.
Actual testing and observation are necessary before such a record can be developed.
It may be recommended in cases where no formal control system is in operation and would be more suited
to small business.
 The basic To comprehend the system in operation is quite difficult.
disadvantages To identify weaknesses or gaps in the system.
of narrative To incorporate changes arising on account of reshuffling of manpower, etc.
records are:
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 Example of
Narrative
Records
FLOW CHART (CNO 168.000)

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 minimises 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.
Cheques
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.
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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 Are tenders called before placing orders?
examples of Are the purchases made on the basis of a written order?
check list Is the purchase order form standardised?
instructions Are purchase order forms pre-numbered?
are given Are the stock control accounts maintained by persons who have nothing to do with:
hereunder  custody of work;
 receipt of stock;
 inspection of stock; and
 Purchase of stock?
The complete check list is studied by the Principal/Manager/Senior to ascertain existence of
internal control and evaluate its implementation and efficiency.
Sr
No Question Not Applicable Yes No Weakness Remarks
Minor Major
Is standard procedure
designed for different mode of
1 collection? 
Are employees given
orientation before starting
2 job? 
3 Is there segregation of duties? 
Whether cheques received
4 records are maintained? 
Do they save scanned copy of
cheque received or cheque
5 number?  
Do they have standard
procedure for cheques
6 returned?  
Examples
INTERNAL CONTROL QUESTIONNAIRE

The questionnaire is usually issued to the client and the client is requested to get it filled by the concerned
executives and employees.
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.
This is a comprehensive series of questions concerning internal control.
This is the most widely used form for collecting information about the existence, operation and efficiency of
internal control in an organisation.
With a proper questionnaire, all internal control evaluation can be completed at one time or in sections.
It is the general practice to review the internal control system annually and record the review in detail.
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.
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Example
Sr Not
No Question Applicable Yes No Elaborate Remarks
Do you think your collection system is
1 deficiency free?
Whether all collections transactions are real
2 and they have occurred?
3 Whether transactions recorded promptly?
4 Whether transactions recorded accurately?
Whether transactions are recorded in current
5 account?
Whether transactions are recorded in current
6 period?
INTERNAL CONTROL IN SMALL BUSINESS

 Audit The auditor needs to obtain the same degree of assurance in order to give an unqualified opinion
objectives on the financial statements of both small and large entities.
are Same
 Controls in However, many controls which would be relevant to large entities are not practical in
Small & the small business
Large are
not Same
 Example: - For example, in small business, accounting work may be performed by only a few persons. These
Segregation persons may have both operating and custodial responsibilities, and segregation of functions may
of Duty be missing or severely limited. Inadequate segregation of duties may, in some cases, be offset by
owner/manager supervisory controls which may exist because of direct personal knowledge of the
business and involvement in the business transactions.
 Extensive In circumstances where segregation of duties is limited, or evidence of supervisory controls is
use of lacking, the evidence necessary to support the auditor’s opinion on the financial information may
substantive have to be obtained largely through the performance of substantive procedures
procedures
RISKS BECAUSE OF IT SYSTEMS (CNO-37.000)

IT system also poses specific risks to an entity’s Internal Control. They are–
(First Comes IT Personnel)
 IT Personnel gaining access, Privileges beyond necessary
The possibility of IT personnel gaining access privileges beyond those necessary to perform their
assigned duties thereby breaking down segregation of duties. (Approved Purchase & Payment)
(Then comes Data)
 Unauthorised Access to Data leading to destruction, unauthorised transaction, non-existent transaction /
Potential loss of Data
Unauthorised access to data that may result in destruction of data or improper changes to data,
including the recording of unauthorised or non-existent transactions, or inaccurate recording of
transactions. Particular risks may arise where multiple users access a common database.
Potential loss of data or inability to access data as required. (Ransomware)
(Then happened processing)
 Manual Intervention / Inaccurate Processing / Processing Inaccurate Data
Inappropriate manual intervention.
Reliance on systems or programs that are inaccurately processing data, processing inaccurate data,
or both. (TDS Calculator / NPA Calculator)
(If required Changes)
 Failure to make Changes / Unauthorised changes to systems / Unauthorised changes to Master Files
Failure to make necessary changes to systems or programs. (Boss shifted to Office 365, Rest of the
office on Office 2007)
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Unauthorised changes to systems or programs.
Unauthorised changes to data in master files.
LIMITATIONS OF INTERNAL CONTROL (CNO 170.000)

 Internal Internal control, no matter how effective, can provide an entity with only reasonable
control can assurance about achieving the entity’s financial reporting objectives. The likelihood of their
provide only achievement is affected by inherent limitations of internal control.
reasonable
assurance
 Judgements Further, in designing and implementing controls, management may make judgments on the
by nature and extent of the controls it chooses to implement, and the nature and extent of the
Management risks it chooses to assume.
(Top Level)
 Collusion Additionally, controls can be circumvented by the collusion of two or more people or
among People inappropriate management override of internal control. For example, management may enter
(Mid-Level) 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. Also, edit checks
in a software program that are designed to identify and report transactions that exceed
specified credit limits may be overridden or disabled.
 Human Realities that human judgment in decision-making can be faulty and that breakdowns in
judgment in internal control can occur because of human error
decision-
making
(Lower Level)
 Lack of Equally, the operation of a control may not be effective, such as where information produced for
understanding the purposes of internal control (for example, an exception report) is not effectively u
the purpose sed because the individual responsible for reviewing the information does not understand its
(Lower Level) purpose or fails to take appropriate action.
 Limitations in Smaller entities often have fewer employees due to which segregation of duties is not
case of Small practicable. However, in a small owner-managed entity, the owner-manager may be able to
Entities exercise more effective oversight than in a larger entity. This oversight may compensate for
the generally more limited opportunities for segregation of duties.
On the other hand, the owner-manager may be more able to override controls because the system
of internal control is less structured. This is taken into account by the auditor when identifying the
risks of material misstatement due to fraud.
UNIQUE MCQS
 MCQ No. 315.10
UNIQUE QUESTIONS
 CNO 40.010 Component (Control Environment-Communication of Integrity & Ethical Value)
 CNO 40.120 Internal Control Structure (Components)
 CNO 40.200 Policies and Procedures
 CNO 168.010 ICQ Assumptions
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[SA 320] MATERIALITY IN PLANNING AND PERFORMING AN AUDIT
BENCHMARKING (CNO-42.000)
Determining materiality involves the exercise of professional judgment. A percentage is often applied to a chosen
benchmark as a starting point in determining materiality for the financial statements as a whole.
KEY TO REMEMBER
Benchmarking
A percentage is often applied to a chosen benchmark as a starting point in determining materiality
for the financial statements as a whole.
Benchmark (Base) x Percentage = Materiality
E.g.
Profit x 5%
Total Assets x 1%
Total Turnover x 0.5%
 Step 1 Factors that may affect the identification of an appropriate benchmark include the following:
Decide The elements of the financial statements (for example, assets, liabilities, equity, revenue,
Benchmark expenses);
(Base) Whether there are items on which the attention of the users of the particular entity’s
financial statements tends to be focused (for example, for the purpose of evaluating
financial performance users may tend to focus on profit, revenue or net assets);
The nature of the entity, where the entity is at in its life cycle, and the industry and
economic environment in which the entity operates;
The entity’s ownership structure and the way it is financed (for example, if an entity is
financed solely by debt rather than equity, users may put more emphasis on assets, and
claims on them, than on the entity’s earnings); and
The relative volatility of the benchmark.
Examples of benchmarks that may be appropriate, depending on the circumstances of the entity,
include categories of reported income such as profit before tax, total revenue, gross profit and total
expenses, total equity or net asset value. Profit before tax from continuing operations is often used
for profit-oriented entities. When profit before tax from continuing operations is volatile, other
benchmarks may be more appropriate, such as gross profit or total revenues.
KEY TO REMEMBER
Step 1: - Decide Benchmark (Base)
Apple LOVE
A- Attention of the users (E.g. PVT Sector-Profit/PSUs -Turnover/Charity- Corpus)
L- Life Cycle & Industry & Economic Environment (E.g. Flipkart Vs Reliance)
O- Ownership Structure & Financing (E.g. Big Vs Small Shareholder / Debt Vs Equity)
V- Volatility
(E.g. Volatility may lead to big changes in materiality & all audit procedures, hence
less volatile is more preferred)
E- Elements of Financial Statements
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 Step 2
Normalization
(Adjusting
Base)
In relation to the chosen benchmark, relevant financial data ordinarily includes prior periods’
financial results and financial positions, the period to-date financial results and financial position,
and budgets or forecasts for the current period, adjusted for significant changes in the
circumstances of the entity (for example, a significant business acquisition) and relevant changes
of conditions in the industry or economic environment in which the entity operates. For example,
when, as a starting point, the materiality for the financial statements as a whole is
determined for a particular entity based on a percentage of profit before tax from
continuing operations, circumstances that give rise to an exceptional decrease or
increase in such profit may lead the auditor to conclude that the materiality for the
financial statements as a whole is more appropriately determined using a normalized profit
before tax from continuing operations figure based on past results.
Materiality relates to the financial statements on which the auditor is reporting. Where the
financial statements are prepared for a financial reporting period of more or less than twelve
months, such as may be the case for a new entity or a change in the financial reporting period,
materiality relates to the financial statements prepared for that financial reporting period.
KEY TO REMEMBER
Step 2: - Normalization (Adjusting Base)
Adjust for following factors
Time Period: - Previous Financial Period was 9 months which should be proportionately
increased to 12 months
Changes in Business Entity: - Acquisitions / Mergers / Demergers
Economic Environment: - If Boom  Increase / RecessionDecrease
Abnormal Items: - Should be excluded
 Step 3 Determine Percentage to be applied to a chosen benchmark involves the exercise of professional
Determine judgment. There is a relationship between the percentage and the chosen benchmark, such that
Percentage a percentage applied to profit before tax from continuing operations will normally be higher
than a percentage applied to total revenue.
For example, the auditor may Materiality in Planning and Performing an Audit
consider five percent of profit before tax from continuing operations to be
appropriate for a profit-oriented entity in a manufacturing industry, while the
auditor may consider one percent of total revenue or total expenses to be
appropriate for a not-for-profit entity. Higher or lower percentages, however, may
be deemed appropriate in different circumstances.
KEY TO REMEMBER
Step 3: - Determine Percentage
Generally, as benchmark quantum increases lower percentages are used, for example
percentage keeps reducing if we change base from Profits to Total Assets to Total
Turnover
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FINANCIAL STATEMENT LEVEL V/S SPECIFIC AREA LEVEL MATERIALITY (CNO-43.000)
When establishing the overall audit strategy, the auditor shall determine materiality for the financial statements as
a whole. If, in the specific circumstances of the entity, there is one or more particular classes of transactions, account
balances or disclosures for which misstatements of lesser amounts than the materiality for the financial statements as
a whole could reasonably be expected to influence the economic decisions of users taken on the basis of the financial
statements, the auditor shall also determine the materiality level or levels to be applied to those particular classes
of transactions, account balances or disclosures.
Factors that may indicate the existence of one or more particular classes of transactions, account balances or
disclosures for which misstatements of lesser amounts than materiality for the financial statements as a whole could
reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements
include the following:
Whether law, regulations or the applicable financial reporting framework affect users’ expectations
regarding the measurement or disclosure of certain items.
(for example, related party transactions, and the remuneration of management and those charged
with governance).
The key disclosures in relation to the industry in which the entity operates.
(for example, research and development costs for a pharmaceutical company).
Whether attention is focused on a particular aspect of the entity’s business that is separately disclosed in
the financial statements.
(for example, a newly acquired business).
In considering whether, in the specific circumstances of the entity, such classes of transactions, account balances or
disclosures exist, the auditor may find it useful to obtain an understanding of the views and expectations of those
charged with governance and management.
KEY TO REMEMBER
Financial Statement Level v/s Specific Area Level
Materiality is generally determined at financial statement level, if circumstances require we can

have LOWER materiality for specific area not higher, if users can get influenced even with
relatively smaller amounts.
Law / Regulation / FRF prescribes disclosure requirements and limits hence user carefully
analyses them hence lower specific materiality is required (E.g. Related party
transactions / Managerial Remuneration/ CSR Expenditure)
Key Disclosures Related to the Industry
(E.g. Research & Development Expense in Pharmaceuticals or Recall costs in
Automobile Industry)
Attention is focused on particular aspect of business.
(E.g. New acquired business or discontinuing operations as per AS 24)
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PERFORMANCE MATERIALITY
Performance materiality means the amount or amounts set by the auditor at less than materiality for the financial
statements as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and
undetected misstatements exceeds materiality for the financial statements as a whole. If applicable, performance
materiality also refers to the amount or amounts set by the auditor at less than the materiality level or levels for
particular classes of transactions, account balances or disclosures.
The auditor shall determine performance materiality for purposes of assessing the risks of material misstatement and
determining the nature, timing and extent of further audit procedures
Planning the audit solely to detect individually material misstatements overlooks the fact that the aggregate of
individually immaterial misstatements may cause the financial statements to be materially misstated and leaves no
margin for possible undetected misstatements.
Performance materiality (which, as defined, is one or more amounts) is set to reduce to an appropriately low level the
probability that the aggregate of uncorrected and undetected misstatements in the financial statements exceeds
materiality for the financial statements as a whole. Similarly, performance materiality relating to a materiality level
determined for a particular class of transactions, account balance or disclosure is set to reduce to an appropriately low
level the probability that the aggregate of uncorrected and undetected misstatements in that particular class of
transactions, account balance or disclosure exceeds the materiality level for that particular class of transactions,
account balance or disclosure.
The determination of performance materiality is not a simple mechanical calculation and involves the exercise of
professional judgment. It is affected by the auditor’s understanding of the entity, updated during the performance of
the risk assessment procedures; and the nature and extent of misstatements identified in previous audits and thereby
the auditor’s expectations in relation to misstatements in the current period.
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Performance Materiality
Auditor is aware that some misstatements remain uncorrected and some are undetected. Hence there should
be some margin for such misstatements while planning audit. Hence auditor shall determine performance
materiality which is less than materiality (50% to 90%) of materiality at financial statement level or specific
area level. It is used determining RMM, and NTE of further audit procedures.
Performance materiality is set to reduce to an appropriately low level the probability that the aggregate of
uncorrected and undetected misstatements in the financial statements exceeds materiality for the financial
statements as a whole.
REVISION OF MATERIALITY (CNO-43.000) (MCQ-320.1)

The auditor shall revise materiality for the financial statements as a whole (and, if applicable, the materiality level or
levels for particular classes of transactions, account balances or disclosures) in the event of becoming aware of
information during the audit that would have caused the auditor to have determined a different amount (or
amounts) initially.
If the auditor concludes that a lower materiality for the financial statements as a whole (and, if applicable, materiality
level or levels for particular classes of transactions, account balances or disclosures) than that initially determined is
appropriate, the auditor shall determine whether it is necessary to revise performance materiality, and whether the
nature, timing and extent of the further audit procedures remain appropriate.
Materiality for the financial statements as a whole (and, if applicable, the materiality level or levels for particular
classes of transactions, account balances or disclosures) may need to be revised as a result of a change in
circumstances that occurred during the audit.
(for example, a decision to dispose of a major part of the entity’s business), new information, or a change in
the auditor’s understanding of the entity and its operations as a result of performing further audit procedures.
For example, if during the audit it appears as though actual financial results are likely to be substantially
different from the anticipated period end financial results that were used initially to determine materiality
for the financial statements as a whole, the auditor revises that materiality.
KEY TO REMEMBER
Revision of Materiality
If auditor gets additional information then he should revise materiality, for example
Change in base Anticipated profit was taken as benchmark, but actual profits were significantly
higher so base was revised which lead to change in materiality
New discourse requirement of law / regulation / FRF E.g. Salient Features of Subsidiary.
New aspect of business E.g. New acquisition or disposal.
DOCUMENTING THE MATERIALITY

The audit documentation shall include the following amounts and the factors considered in their determination:
Materiality for the financial statements as a whole.
If applicable, the materiality level or levels for particular classes of transactions, account balances or
disclosures;
Performance materiality; and
Any revision of (a)-(c) as the audit progressed.
Unique Question
 CNO 45.000 Materiality (Aggregate of all Uncorrected / Special Answer )
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[SA 330] THE AUDITOR RESPONSE TO ASSESSED RISK
OVERALL RESPONSES
The auditor shall design and implement overall responses to address the assessed risks of material misstatement at
the financial statement level.
Overall responses to address the assessed risks of material misstatement at the financial statement level may include:
Emphasizing to the audit team the need to maintain professional scepticism.2
Assigning more experienced staff or those with special skills or using experts. 1
Providing more supervision. 5
Incorporating additional elements of unpredictability in the selection of further audit procedures to be
performed.3
Making general changes to the nature, timing or extent of audit procedures, for example: performing
substantive procedures at the period end instead of at an interim date; or modifying the nature of audit
procedures to obtain more persuasive audit evidence. 4 (Stock Count & External Conformation are more
effective if done at the year-end)
TESTS OF CONTROLS (CNO-47.000)

 Definition Test of Controls are performed to obtain audit evidence about effectiveness of
(a) design of the accounting and internal control systems, i.e., whether they are suitably designed
to prevent or detect and correct material misstatements; and
(b) operation of the internal controls throughout the period.
 Which The auditor shall design and perform tests of controls to obtain sufficient appropriate audit evidence
Controls as to the operating effectiveness of relevant controls when:
Should be The auditor’s assessment of risks of material misstatement at the assertion level includes
Tested an expectation that the controls are operating effectively
(E.g., the auditor intends to rely on the operating effectiveness of controls
in determining the nature, timing and extent of substantive procedures);
or (Rate of goods purchased is approved by purchase manager (who is
new to organisation), latter system checks it with rates in agreements
and average of past 3 / 6 months. Software based control is expected to
function effectively so let’s check it)
Substantive procedures alone cannot provide sufficient appropriate audit evidence
at the assertion level.
A higher level of assurance may be sought about the operating effectiveness of
controls when the approach adopted consists primarily of tests of controls, in particular
where it is not possible or practicable to obtain sufficient appropriate audit evidence
only from substantive procedures. (In banks interest and other charges are automated,
they are system generated entries in such situations test of controls are must they cannot
be ignored, in fact we will check them in greater details)
 Nature of In designing and performing tests of controls, the auditor shall:
test of Perform other audit procedures in combination with inquiry to obtain audit evidence about
controls the operating effectiveness of the controls, including:
(a) How the controls were applied at relevant times during the period under audit. 3
(Are there any changes during the year, if yes have separate evaluation)
(b) The consistency with which they were applied. 2 (Whether every transaction is
evaluated carefully, automated controls are consistent but human based controls
can be more or less depending on people or product involved, MD related
purchases may be compromised in rates)
(c) By whom or by what means they were applied. 1 (By Purchase Manager by Signing
PO, By Software by matching customer code and rejecting unregistered names)
Determine whether the controls to be tested depend upon other controls (indirect
controls), and if so, whether it is necessary to obtain audit evidence supporting the effective
operation of those indirect controls. 4 (Software based controls may depend on general IT
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/ EDP controls of access controls, development controls etc. so we will have to check them
also)
Further explanation of point (a) above Inquiry alone is not sufficient to test the operating
effectiveness of controls.
Accordingly, other audit procedures are performed in combination with inquiry. In this
regard, inquiry combined with inspection or reperformance may provide more assurance
than inquiry and observation, since an observation is pertinent only at the point in time at
which it is made.
The nature of the particular control influences the type of procedure required to obtain
audit evidence about whether the control was operating effectively. For example, if
operating effectiveness is evidenced by documentation, the auditor may decide to inspect
it to obtain audit evidence about operating effectiveness.
 Extent of
test of
controls
When more persuasive audit evidence is needed regarding the effectiveness of a control, it may be
appropriate to increase the extent of testing of the control as well as the degree of reliance on
controls. Matters the auditor may consider in determining the extent of tests of controls include the
following:
FLERT
The Frequency of the performance of the control by the entity during the period. (Stock
count is weekly Vs Fixed asset count is half yearly)
The Length of time during the audit period that the auditor is relying on the operating
effectiveness of the control. (More time more checking)
The Expected rate of deviation from a control. (If expected rate is very close to tolerable
rate of deviation then we have to check more of that control, to extra sure)
The Relevance and reliability of the audit evidence to be obtained regarding the operating
effectiveness of the control at the assertion level. (Double payment is big risk so software
feature to detect same number of PO is relevant, so check more)
The extent to which audit evidence is obtained from Tests of other controls related to the
assertion. (If other controls on that assertion are not effective do more checking here)
 Timing of The auditor shall test controls for the particular time, or throughout the period, for which the
Tests of auditor intends to rely on those controls in order to provide an appropriate basis for the auditor’s
Controls intended reliance. (Some controls are performed at year end so they should be checked at year end
example, cut off control etc.)
Audit evidence pertaining only to a point in time may be sufficient for the auditor’s purpose, for
example, when testing controls over the entity’s physical inventory counting at the period end. If,
on the other hand, the auditor intends to rely on a control over a period, tests that are capable of
providing audit evidence that the control operated effectively at relevant times during that period
are appropriate. Such tests may include tests of the entity’s monitoring of controls.
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USING AUDIT EVIDENCE OBTAINED IN PREVIOUS AUDITS (CNO 49.000 )
 Factors
In determining whether it is appropriate to use audit evidence about the operating effectiveness of
controls obtained in previous audits, and, if so, the length of the time period that may elapse before
retesting a control, the auditor shall consider the following:
CPM @ MCG
The effectiveness of other elements of internal control, including the Control
environment, the entity’s monitoring of controls, and the entity’s risk assessment process;
(Poor attitude of management towards internal control system is encouragement to
wrong doers)
The risks arising from the characteristics of the control, including whether it is Manual or
automated; (Quotation Selection & Issuing PO is subjective matter and depends on
approving authority, behaviour can change over period of time)
The effectiveness of General IT-controls; (Purchase entries are ID restricted, but people use
each other’s computer and they know username passwords)
The effectiveness of the control and its application by the entity, including the nature and
extent of deviations in the application of the control noted in previous audits, and whether
there have been Personnel changes that significantly affect the application of the control;
(Purchase & Store Manager Retired at the beginning of the year, they were replaced my
new comers)
Whether the lack of a change in a particular control poses a risk due to Changing
circumstances; and (GST)
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The risks of Material misstatement and the extent of reliance on the control. (Higher risk
less reliance on previous year evidence)
 Auditor If the auditor plans to use audit evidence from a previous audit about the operating effectiveness
plans to of specific controls, the auditor shall establish the continuing relevance of that evidence by
rely on obtaining audit evidence about whether significant changes in those controls have occurred
previous subsequent to the previous audit. The auditor shall obtain this evidence by performing inquiry
year combined with observation or inspection, to confirm the understanding of those specific controls,
evidence on and:
TOC
Changes in ICS
If there have been changes that affect the continuing relevance of the audit evidence from
the previous audit, the auditor shall test the controls in the current audit.
Frequency of TOC
If there have not been such changes, the auditor shall test the controls at least once in every
third audit, and shall test some controls each audit to avoid the possibility of testing all the
controls on which the auditor intends to rely in a single audit period with no testing of
controls in the subsequent two audit periods.
EVALUATING THE OPERATING EFFECTIVENESS OF CONTROLS (MCQ-330.8)

 Specific
inquiries by
auditor when
deviations
from controls
are detected.
When deviations from controls upon which the auditor intends to rely are detected, the auditor
shall make specific inquiries to understand these matters and their potential consequences, and
shall determine whether:
The tests of controls that have been performed provide an appropriate basis for reliance
on the controls; (Sample rate of deviation was 8% and tolerable rate is also 10%, so it is
appropriate basis to rely on controls, if sample rate of deviation would have been higher
than 10% then it would not be reliable control)
Additional tests of controls are necessary; or (If junior officers’ signature are obtained in
20% bills, check whether rate and quality was appropriate in such bills)
The potential risks of misstatement need to be addressed using substantive procedures.
(If controls are not reliable auditor will have to work on substantive procedures)
 Misstatement When evaluating the operating effectiveness of relevant controls, the auditor shall evaluate
Detected whether misstatements that have been detected by substantive procedures indicate that controls
are not operating effectively. The absence of misstatements detected by substantive procedures,
however, does not provide audit evidence that controls related to the assertion being tested are
effective.
A material misstatement detected by the auditor’s procedures is a strong indicator of the
existence of a significant deficiency in internal control. (Even tough purchase manager is honest
and approves purchase bill carefully, team detected over payment in 5 bills then rethink should
we rely on controls)
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DESIGNING AND PERFORMING SUBSTANTIVE PROCEDURES (CNO-50.000) (MCQ-330.1/ 330.2/ 330.3 /330.4
/330.5/330.6/330.7)
 Substantive Designing and Performing Substantive Procedures Irrespective of the assessed risks of material
Procedures misstatement, the auditor shall design and perform substantive procedures for each material class
for Material of transactions, account balance, and disclosure.
Items This requirement reflects the facts that:
The auditor’s assessment of risk is judgmental and so may not identify all risks of material
misstatement; and
There are inherent limitations to internal control, including management override.
 Effect of Test Because the assessment of the risk of material misstatement takes account of internal control, the
of Controls extent of substantive procedures may need to be increased when the results from tests of controls
are unsatisfactory. In designing tests of details, the extent of testing is ordinarily thought of in
terms of the sample size. However, other matters are also relevant, including whether it is more
effective to use other selective means of testing.
 Types of Depending on the circumstances, the auditor may determine that:

Substantive Performing only substantive analytical procedures will be sufficient to reduce audit risk
Tests to an acceptably low level. For example, where the auditor’s assessment of risk is
supported by audit evidence from tests of controls. (Electricity bills payments)
Only tests of details are appropriate. (Legal Expenses)
A combination of substantive analytical procedures and tests of details are most
responsive to the assessed risks (Salary)
 Substantive Substantive analytical procedures are generally more applicable to large volumes of transactions
Analytical that tend to be predictable over time. SA 520, “Analytical Procedures” establishes requirements
Procedures and provides guidance on the application of analytical procedures during an audit.
 Test of The nature of the risk and assertion is relevant to the design of tests of details. For example, tests
Details of details related to the existence or occurrence assertion may involve selecting from items
contained in a financial statement amount and obtaining the relevant audit evidence. On the other
hand, tests of details related to the completeness assertion may involve selecting from items that
are expected to be included in the relevant financial statement amount and investigating whether
they are included. (List to actual stock Existence and actual stock to list Completeness)
 External Other Points
Confirmation The auditor shall consider whether external confirmation procedures are to be performed as
substantive audit procedures.
 Closing The auditor’s substantive procedures shall include the following audit procedures related to the
Process financial statement closing process:
Agreeing or reconciling the financial statements with the underlying accounting records;
and
Examining material journal entries and other adjustments made during the course of
preparing the financial statements.
The nature, and also the extent, of the auditor’s examination of journal entries and other
adjustments depends on the nature and complexity of the entity’s financial reporting process and
the related risks of material misstatement.
CA Ravi Taori
Appendix, just for reference no need to include in answers for exams
Assertion Relevant Internal Controls Test of Controls Substantive Procedures
Occurrence 1.Purchases are approved by 1. Check whether all PRN Randomly select certain
(Risk is there is any Senior Manager are properly signed and purchase transactions.
fake purchase stamped, match Match them with GRN &
transaction) signatures from official Transporters Receipt.
records
Take confirmation from
2.Computer Accepts entry of 2. Try to enter name of supplier for significant
only authorized supplier unauthorized vendor transactions.
(Introduced from 1st January)
Accuracy Computer internally agrees Check whether prices in Compute price charged from
(Risk that prices are price given in agreement / system are as per purchase register; match it
overstated, to get quotations with purchase agreements. with Agreement /
kickbacks from order and purchase invoice. Try to enter different Quotations / PO / PI.
suppliers) prices in Quotations /PO
Check whether it is
/ PI
reasonable as compared to
market prices.
Scan for unusual prices.
Classification There is chart which clearly See whether there Is such Check whether purchases
(Risk that expenses of explains which material chart whether it is are classified as per its
one department are should be debited to which regularly updated, nature to proper
charged to other, department / store account. whether employee is department & cost centre.
leading to (Revised on monthly basis) trained.
inappropriate UniformHR Department
inventory valuation) OilProduction Department
PaperOffice Expenses
Completeness PRN / PO / GRN are Check system error Match total number of
(Risk that some prenumbered so that if any report. transactions purchase
transactions are left document is missing system Inquire and inspect register with stores ledger &
out, purchase are will show error. treatment of cancelled total purchases in TB.
understated, and bills.
profits are overstated)
Cut-off No specific control only No internal control Check last 20 transactions of
(Risk that purchase are supervisor instructs to ensure checking, control risk is the year under audit and first
adjusted by transferring everything is recorded. high for this assertion. 20 transactions of the next
current year to next and year.
vice-versa)
Unique Questions
 CNO 48.000 TOC (Interim Visit ).
 CNO 51.000 Surprise Check
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[SA 402] AUDIT CONSIDERATIONS RELATING TO AN ENTITY USING A SERVICE

ORGANISATION
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OBTAINING AN UNDERSTANDING OF THE SERVICES PROVIDED BY A SERVICE ORGANISATION, INCLUDING
INTERNAL CONTROL (REGULAR AUDIT PROCEDURES) (CNO-52.000)
 Obtaining
Understandi-
ng: -
Summary
Obtaining understanding of entity & its environment is covered under SA 315 / SA 402
further explains which information should be obtained if services of SO is used
Detailed Text
When obtaining an understanding of the user entity in accordance with SA 315, the user auditor
shall obtain an understanding of how a user entity uses the services of a service organisation in
the user entity’s operations, including.
 Four Summary
Information Nature of Services / Significance of Services / Effect of Services on ICS / Nature &
points are Materiality of TBD affected by Service
Related to
Services Detailed Text
The nature of the services provided by the service organisation and the significance of
those services to the user entity, including the effect thereof on the user entity’s internal
control;
The nature and materiality of the transactions processed, or accounts or financial
reporting processes affected by the service organisation;
 Four Summary
Information Nature of Relationships with SO / Contractual Terms / Degree of Interaction with SO
Points are / Relevant Controls applied on transactions processed by SO
Related to
SO Detailed Text
The nature of the relationship between the user entity and the service
Organisation, including the relevant contractual terms for the activities undertaken by
the service organisation.
The degree of interaction between the activities of the service organisation and those of
the user entity; and
When obtaining an understanding of internal control relevant to the audit in accordance
with SA 315, the user auditor shall evaluate the design and implementation of relevant
controls at the user entity that relate to the services provided by the service organisation,
including those that are applied to the transactions processed by the service organisation.
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UNABLE TO OBTAIN SUFFICIENT UNDERSTANDING FROM USER ENTITY (ADDITIONAL PROCEDURES)
(CNO-52.000)
If the user auditor is unable to obtain a sufficient understanding from the User entity, the user auditor shall obtain
that understanding from one or more of the following procedures: (Easy to Difficult Steps)
Contacting the service organisation, through the user entity, to obtain specific information;
Using another auditor to perform procedures that will provide the necessary information about the relevant
controls at the service organisation.
Obtaining a Type 1 or Type 2 report, if available;
Visiting the service organisation and performing procedures that will provide the necessary information
about the relevant controls at the service organisation;
FACTORS TO BE CONSIDERED TO UNDERSTAND RELEVANCE OF SERVICES TO FINANICAL REPORTING

(CNO-52.100)
Summary
Relevant for audit if it is part of information system, including business processes relevant to financial
reporting
Detailed Text
As per SA 402 “Audit Considerations relating to an Entity using a Service Organization”, services provided by a service
organisation are relevant to the audit of a user entity’s financial statements when those services, and the controls
over them, are part of the user entity’s information system, including related business processes, relevant to
financial reporting.
(E.g. Security, Cleaning services outsourcing may not be relevant for auditor)
Although most controls at the service organisation are likely to relate to financial reporting, there may be other
controls that may also be relevant to the audit, such as controls over the safeguarding of assets. A service
organisation’s services are part of a user entity’s information system, including related business processes, relevant
to financial reporting if these services affect any of the following:
No ESCAPE from relevant services.
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The financial reporting process used to prepare the user (E.g. Useful life of assets, inventory
entity’s financial statements, including significant accounting valuation etc)
Estimates and disclosures;
The classes of transactions in the user entity’s operations that (E.g. online sales occur from third party
are Significant to the user entity’s financial statements; websites like amazon / flipkart etc)
How the user entity’s information system Captures events (E.g. Events & Conditions of Impairment
and conditions, Other than transactions, that are significant testing of plant , goodwill, financial
to the financial statements; instruments is outsourced to ca firm)
The related Accounting records, either in electronic or (E.g. Creditor ledger accounting
manual form, supporting information and specific accounts in outsourced)
the user entity’s financial statements that are used to initiate,
record, process and report the user entity’s transactions; this
includes the correction of incorrect information and how
information is transferred to the general ledger;
The Procedures, within both information technology (IT) and E.g. Raw material price collection, party
manual systems, by which the user entity’s transactions are evaluation, quality check is outsourced)
initiated, recorded, processed, corrected as necessary,
transferred to the general ledger and reported in the financial
statements;
Controls surrounding journal Entries, including non-standard (E.g. Year end journal entries are passed
journal entries used to record non-recurring, unusual by specially hired CA Firm)
transactions or adjustments.
DEFINITION OF TYPE 1 & TYPE 2 (MCQ-402.1)
 Type 1 Report on the description and design of controls at a service organisation (referred to in this SA as
a Type 1 report) – A report that comprises:
A description, prepared by management of the service organisation, of the service
organisation’s system, control objectives and related controls that have been designed and
implemented as at a specified date; and
A report by the service auditor with the objective of conveying reasonable assurance that
includes the service auditor’s opinion on the description of the service organisation’s
system, control objectives and related controls and the suitability of the design of the
controls to achieve the specified control objectives.
 Type 2 Report on the description, design, and operating effectiveness of controls at a service organisation
(referred to in this SA as a Type 2 report) – A report that comprises:
A description, prepared by management of the service organisation, of the service
organisation’s system, control objectives and related controls, their design and
implementation as at a specified date or throughout a specified period and, in some cases,
their operating effectiveness throughout a specified period; and
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A report by the service auditor with the objective of conveying reasonable assurance that
includes:
 The service auditor’s opinion on the description of the service organisation’s
system, control objectives and related controls, the suitability of the design of the
controls to achieve the specified control objectives, and the operating
effectiveness of the controls; and
 A description of the service auditor’s tests of the controls and the results thereof.
TYPE 1 AND TYPE 2 REPORTS THAT EXCLUDE THE SERVICES OF A SUBSERVICE ORGANISATION (CNO 53.000)
 Use of It may happen that UE is taking services from, SO which are in turn given by SSO. SSO can be
Subservice related to SO or sperate entity all together.
Organisation
 Sufficient Nature of Services / Significance of Services / Effect of Services on ICS / Nature & Materiality of
Understanding Transactions in determining significance of SO & SSO controls.
If Sufficient understanding is not obtained from User Entity then Type 1 / Type 2 can give auditor
better understanding.
 Controls at Auditor needs to consider controls at SSO. One of the important aspects is regarding
SSO Interactions, It will include interaction between UE / SO / SSO.
 Two Methods SO Auditor may either include or exclude control objectives & controls of SSO. These 2 methods
of Reporting of reporting are called inclusive & carve out method respectively.
It is mandatory for SO to include description of controls at SSO in its description of controls. If
carve out method of reporting is used and controls at SSO are relevant, then auditor needs to
apply requirements of SA 402 in respect of SSO.
UNIQUE QUESTION
 CNO- 53.050 Giving Reference of Type 1 & Type 2 report
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[SA 450] EVALUATION OF MISSTATEMENT IDENTIFIED DURING AUDIT OF FINANCIAL STATEMENT
MISSTATEMENT & SOURCES (CNO-54.000)
Misstatement – A difference between the amounts, classification, presentation, or disclosure of a reported financial
statement item and the amount, classification, presentation, or disclosure that is required for the item to be in
accordance with the applicable financial reporting framework. Misstatements can arise from error or fraud.
Misstatements may result from:
An omission of an amount or disclosure;
An inaccuracy in gathering or processing data from which the financial statements are prepared;
An incorrect accounting estimate arising from overlooking, or clear misinterpretation of, facts; and
Selection or Application of accounting policies that the auditor considers inappropriate.
Judgments of management concerning accounting estimate that the auditor considers unreasonable.
Examples of misstatements arising from fraud are provided in SA 240.
KEY TO REMEMBER
Misstatement & Sources
Difference in what is done and what is expected as per FRF in amounts, classification,
presentation, or disclosure.
 Omission (Supplier didn’t send purchase bills on time so

some yearend bills were omitted)
 Inaccuracy in gathering or processing (batch number & expiry details were not
data properly recorded leading to error in
determining expired goods)
 Selection or Application of accounting (LIFO is selected which is not as per AS 2)
policies inappropriate
 Estimates that the auditor considers (Inventory will be sold at 0% selling cost)
unreasonable.
 Incorrect accounting estimate arising (just referred height of WIP & considered
out of clear misinterpretation of stage of completion without looking at weight &
facts or overlooking dimensions)
WHAT TO DO WHEN MISSTATEMENTS ARE DETECTED (EVALUATION)? (CNO-55.000)

1. The auditor shall accumulate misstatements identified during the audit, other than those that are clearly
trivial.
2. The auditor shall determine whether the overall audit strategy and audit plan need to be revised if:
 The nature of identified misstatements and the circumstances of their occurrence indicate that other
misstatements may exist that, when aggregated with misstatements accumulated during the audit,
could be material; or
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 The aggregate of misstatements accumulated during the audit approaches materiality determined
in accordance with SA 320.
3. The auditor shall communicate on a timely basis all misstatements accumulated during the audit with the
appropriate level of management, unless prohibited by law or regulation. The auditor shall request
management to correct those misstatements.
4. If, at the auditor’s request, management has examined a class of transactions, account balance or disclosure
and corrected misstatements that were detected, the auditor shall perform additional audit procedures to
determine whether misstatements remain.
5. If management refuses to correct some or all of the misstatements communicated by the auditor, the auditor
shall obtain an understanding of management’s reasons for not making the corrections and shall take that
understanding into account when evaluating whether the financial statements as a whole are free from
material misstatement.
6. Prior to evaluating the effect of uncorrected misstatements, the auditor shall reassess materiality
determined in accordance with SA 320 to confirm whether it remains appropriate in the context of the
entity’s actual financial results.
7. The auditor shall determine whether uncorrected misstatements are material, individually or in aggregate.
In making this determination, the auditor shall consider:
 The size and nature of the misstatements, both in relation to particular classes of transactions,
account balances or disclosures and the financial statements as a whole, and the particular
circumstances of their occurrence; and
 The effect of uncorrected misstatements related to prior periods on the relevant classes of
transactions, account balances or disclosures, and the financial statements as a whole.
8. The auditor shall communicate with those charged with governance uncorrected misstatements and the
effect that they, individually or in aggregate, may have on the opinion in the auditor’s report, unless
prohibited by law or regulation. The auditor’s communication shall identify material uncorrected
misstatements individually. The auditor shall request that uncorrected misstatements be corrected. The
auditor shall also communicate with those charged with governance the effect of uncorrected
misstatements related to prior periods on the relevant classes of transactions, account balances or
disclosures, and the financial statements as a whole.
9. The auditor shall request a written representation from management and, where appropriate, those
charged with governance whether they believe the effects of uncorrected misstatements are immaterial,
individually and in aggregate, to the financial statements as a whole. A summary of such items shall be
included in or attached to the written representation.
10. Consider effect of uncorrected misstatements on Audit Opinion as per SA 705.
KEY TO REMEMBER
What to do when misstatements are detected (Evaluation)?
1. Accumulate misstatements unless clearly trivial.
2. Revision of Overall Audit Strategy & Audit Plan: - if aggregate misstatement reaches
materiality or if aggregate misstatements & other misstatements which may exist together
reaches materiality.
3. Communicate on timely basis all misstatements and request to correct them.
4. Additional Audit Procedure to check corrections.
5. Mgt Refusal / Uncorrected Misstatement: - If Mgt refuses understand reasons & evaluate
whether FST are materially misstated
6. Reassesses materiality before evaluating impact of uncorrected misstatements.
7. While Evaluation impact of misstatements consider them individually or in aggregate.
Consider size as well as nature of misstatement at TBD level and FST level. Also consider
effect of uncorrected misstatements of prior periods while aggregating misstatements.
8. Communicate to TCWG all uncorrected misstatements. Identify material misstatements
individually, also uncorrected misstatements of previous period. Explain effect on opinion.
And request them to correct all misstatements.
9. WR from Mgt / TCWG on whether they believe effects of misstatements in individual or
aggregate is immaterial. WR should have attached list of such misstatements.
10. Consider effect on Audit Opinion as per SA 705
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[SA 500] AUDIT EVIDENCE
METHODS OF OBTAINING AUDIT EVIDENCE (CNO-56.000)
 Observation Observation consists of looking at a process or procedure being performed by others, for
example, the auditor’s observation of inventory counting by the entity’s personnel, or of the
performance of control activities. Observation provides audit evidence about the performance of
a process or procedure butis limited to the point in time at which the observation takes place,
and by the fact that the act of being observed may affect how the process or procedure is
performed.
 Inspection Inspection involves examining records or documents, whether internal or external, in paper
form, electronic form, or other media, or a physical examination of an asset.
 Inquiry Inquiry consists of seek information of knowledgeable persons, financial and non- financial,
within the entity or outside the entity. Inquiry is used extensively throughout the audit in
addition to other audit procedures.
 Recalculation Recalculation consists of checking the mathematical accuracy of documents or records.
Recalculation may be performed manually or electronically.
 Re- Re-performance involves the auditor’s independent execution of procedures or controls that
performance were originally performed as part of the entity’s internal control.
 Analytical Analytical procedures consist of evaluations of financial information made by a study of plausible
Procedures relationships among both financial and non-financial data.
Analytical procedures also encompass the investigation of identified fluctuations and
relationships that are inconsistent with other relevant information or deviate significantly from
predicted amounts.
 External An external confirmation represents audit evidence obtained by the auditor as a direct written
Confirmation response to the auditor from a third party (the confirming party), in paper form, or by electronic
or other medium.
 Written Written Statement by Management to confirm certain matters or to support other evidence.
Representati
-on
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INSPECTION & INQUIRY IN DETAILEVIDENCE (CNO-56.000)
 Inspection Definition
Inspection involves examining records or documents, whether internal or external, in
paper form, electronic form, or other media, or a physical examination of an asset.
Degree of Reliability
Inspection of records and documents provides audit evidence of varying degrees of
reliability, depending on their nature (Original Vs Duplicate) and source (Internal Vs
External) and, in the case of internal records and documents, on the effectiveness of the
controls over their production (Software/Register used).
Example of use in Test of Control
An example of inspection used as a test of controls is inspection of records for evidence
of authorization.
Example of use in Substantive testing (Test of Detail)
(Existence)
Some documents represent direct audit evidence of the existence of an asset, for
example, a document constituting a financial instrument such as a share certificate or
bond. Inspection of such documents may not necessarily provide audit evidence about
ownership or value.
(Revenue Recognition Policy) In addition, inspecting an executed contract may provide
audit evidence relevant to the entity’s application of accounting policies, such as
revenue recognition. (Not for Valuation & Rights & Obligation) Inspection of tangible
assets may provide reliable audit evidence with respect to their existence, but not
necessarily about the entity’s rights and obligations or the valuation of the assets.
Inspection of individual inventory items may accompany the observation of inventory
counting.
 Inquiry Definition
(CNO-57.000) Inquiry consists of seeking information of knowledgeable persons, both financial and
non- financial, within the entity or outside the entity.
Written or Oral
Inquiry is used extensively throughout the audit in addition to other audit procedures.
Inquiries may range from formal written inquiries to informal oral inquiries.
Responses
Evaluating responses to inquiries is an integral part of the inquiry process. Responses to
inquiries may provide the auditor with information not previously possessed or with
corroborative audit evidence. Alternatively, responses might provide information that
differs significantly from other information that the auditor has obtained, for example,
information regarding the possibility of management override of controls. In some
cases, responses to inquiries provide a basis for the auditor to modify or perform
additional audit procedures.
Evidence about Management’s Intent
Although corroboration of evidence obtained through inquiry is often of particular
importance, in the case of inquiries about management intent, the information available
to support management’s intent may be limited. In these cases, understanding
management’s past history of carrying out its stated intentions, management’s stated
reasons for choosing a particular course of action, and management’s ability to pursue a
specific course of action may provide relevant information to corroborate the evidence
obtained through inquiry. In respect of some matters, the auditor may consider it
necessary to obtain written representations from management and, where appropriate,
those charged with governance to confirm responses to oral inquiries.
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KEY TO REMEMBER
Definition: -
Seeking information from knowledgeable persons / financial or non-financial / within or
outside / Written or Oral.
Responses: -
Info not previously possessed / additional evidence: - differs significantly from other
info / corroborative evidence.
Evidence about Management’s Intent: -

Evidence form inquiry should be corroborated / difficult to corroborate response on Mgt
intent / so verify from past history, reasons, ability to pursue specific course of action /
obtain WR for Mgt intent
SUFFICIENCY AND APPROPRIATENESS OF AUDIT EVIDENCE

 Inter- Interrelationship Between Quantity & Quality
relationship
The sufficiency and appropriateness of audit evidence are interrelated.
The higher the quality, the less quantity may be required. Obtaining more audit evidence,
however, may not compensate for its poor quality.
 Sufficiency & More Evidence from Different Sources and in Bigger Size
Factors Sufficiency is the measure of the quantity of audit evidence.
Affecting
Auditor’s judgment as to sufficiency may be affected by the factors such
Sufficiency
as:(MRP)
(i) Materiality
(ii) Risk of material misstatement
(iii) Size and characteristics of the Population.
Materiality Direct Relationship
 Meaning of Materiality
Materiality may be defined as the significance of classes of transactions, account
balances and presentation and disclosures to the users of the financial
statements.
 Relationship
Less evidence would be required in case assertions are less material to users of
the financial statements. But on the other hand, if assertions are more material to
the users of the financial statements, more evidence would be required.
Risk Direct Relationship
 Meaning of RMM
Risk of material misstatement may be defined as the risk that the financial
statements are materially misstated prior to audit. This consists of two
components described as follows at the assertion level: -
o Inherent risk—The susceptibility of an assertion to a misstatement that
could be material before consideration of any related controls.
o Control risk—The risk that a misstatement that could occur in an
assertion that could be material will not be prevented or detected and
corrected on a timely basis by the entity’s internal control.
 Relationship
Less evidence would be required in case assertions that have a lower risk of
material misstatement. But on the other hand, if assertions have a higher risk of
material misstatement, more evidence would be required.
Size of Population Direct Relationship & Characteristic of Population Homogeneous –
Less Heterogeneous – More
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Size of a population refers to the number of items included in the population. Less
evidence would be required in case of smaller, more homogeneous population but on
the other hand in case of larger, more heterogeneous populations, more evidence
would be required.
RELIABLE & RELEVANT (MCQ-500.3)

When designing and performing audit procedures, the auditor shall consider the reliability & relevance of the
information to be used as audit evidence
 Reliability The reliability of information to be used as audit evidence, and therefore of the audit evidence
(MCQ-500.5) itself, is influenced by its source and its nature, and the circumstances under which it is obtained,
including the controls over its preparation and maintenance where relevant.
For example, information obtained from an independent external source may not be reliable if the
source is not knowledgeable, or a management’s expert may lack objectivity. While recognising
that exceptions may exist, the following generalisations about the reliability of audit evidence may
be useful:
The reliability of audit evidence is increased when it is obtained from independent
sources outsidethe entity.
Audit evidence in documentary form, whether paper, electronic, or other medium, is
more reliable than evidence obtained orally
(E.g. a contemporaneously written record of a meeting is more reliable than a
subsequent oral representation of the matters discussed).
Audit evidence provided by original documents is more reliable than audit evidence
provided by photocopies or facsimiles, or documents that have been filmed, digitised or
otherwise transformed into electronic form, the reliability of which may depend on the
controls over their preparation and maintenance.
Audit evidence obtained directly by the auditor
(E.g. observation of the application of a control) is more reliable than audit
evidence obtained indirectly or by inference (for example, inquiry about the
application of a control).
The reliability of audit evidence that is generated internally is increased when the related
controls, including those over its preparation and maintenance, imposed by the entity
are effective.
 Case on The auditor of a limited company has given a clean report on the financial statement on the
Reliability basis of xerox copies of the books of accounts, vouchers and other records which were taken
away by the Income Tax Department in search under section 132 of the I.T. Act, 1961. Comment.
Answer
First explain all above points and then write below discussion and conclusion.
Applying the above, the degree of reliance which can be placed by the auditor on the
documentary audit evidence available in the present case will be considerably increased
if the xerox copies of account books and vouchers are certified to be true copies by the
Income Tax Department. If the tax authorities refuse to certify the same, the auditor
should get the certificate to this effect from the management of the company.
The auditor should use procedure like confirmation of balances from third parties, inspection of
tangible assets, etc. and obtain evidence which corroborates the documentary evidence
available. In any case, the auditor has to satisfy himself that he has obtained sufficient and
appropriate audit evidence to support the figures contained in the financial statements and
formulate his opinion accordingly. Under such circumstances, the auditor should appropriately
report (EMP / OMP) and bring this fact to the attention of shareholders. In case he was satisfied,
a simple paragraph of information was enough but in case the auditor failed to establish the
reliability of evidence available, he would be required to a disclaimer of opinion.
USING THE WORK OF A MANAGEMENT’S EXPERT (CNO-58.000/58.500) (MCQ-500.6 )

 Steps before The auditor shall, to the extent necessary, having regard to the significance of that expert’s work
relying on for the auditor’s purposes, -
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Management’
Evaluate the competence, capabilities and objectivity of that expert;
s Expert.
Obtain an understanding of the work of that expert; and
Evaluate the appropriateness of that expert’s work as audit evidence for the relevant
assertion.
 Competence, The auditor may obtain information regarding the competence, capabilities and objectivity of a
Capabilities management’s expert from a variety of sources, such as: -
and knowledge of that expert’s qualifications;
Objectivity – published papers or books written by that expert.
Sources of personal experience with previous work of that expert;
Evidence discussions with that expert;
discussions with others who are familiar with that expert’s work;
 Understanding Aspects of the management’s expert’s field relevant to the auditor’s understanding may include
Work of what assumptions and methods are used by the management’s expert, and whether they are
Expert generally accepted within that expert’s field and appropriate for financial reporting purposes.
 Evaluating The auditor may also consider the following while evaluating the appropriateness of the
Work of management’s expert’s work as audit evidence for the relevant assertion:
Expert If that expert’s work involves significant use of source data, the relevance, completeness,
and accuracy of that source data.
If that expert’s work involves use of significant assumptions and methods, the relevance
and reasonableness of those assumptions and methods; and
The relevance and reasonableness of that expert’s findings or conclusions, their
consistency with other audit evidence, and whether they have been appropriately
reflected in the financial statements;
KEY TO REMEMBER
Three Steps before relying on Management’s Expert: - Evaluate Competence, Capabilities,
Objectivity/ Understand field of Expert/ Evaluate appropriateness of Work
Competence, Capabilities and Objectivity– Obtain information from sources / qualification,
published papers & books, previous work with expert, discussion with expert, discussion with
other who are familiar with expert
Understanding Work of Expert: - Understand aspects of expert’s field including assumption
and methods
Evaluating Work of Expert: -
Source
Data
+ Assumptions
+ Method = Report / Conclusion
Evaluate – Relevance, Evaluate – Relevance & Evaluate – Relevance,

Accuracy & Completeness Reasonableness Reasonableness & Consistency with
other audit evidence
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[SA 501] AUDIT EVIDENCE: - SPECIFIC CONSIDERATIONS FOR SELECTED ITEMS
OBJECTIVE AS PER SA 501

The objective of the auditor is to obtain sufficient appropriate audit evidence regarding the:
Existence and condition of inventory;
Completeness of litigation and claims involving the entity; and
Presentation and disclosure of segment information in accordance with the applicable financial reporting
framework.
PART 1: - INVENTORY
EXISTENCE & CONDITION OF INVENTORY (CNO-60.000)
When inventory is material to the financial statements, the auditor shall obtain sufficient appropriate audit evidence
regarding the existence and condition of inventory by:
Attendance at physical inventory counting, unless impracticable
 *Evaluate management’s instructions and procedures for recording and controlling the results of the
entity’s physical inventory counting; Obtaining audit evidence as to the reliability of management’s
count procedures
 Observe the performance of management’s count procedures;
 Inspect the inventory; and
 Perform test counts; and
Performing audit procedures over the entity’s final inventory records to determine whether they accurately
reflect actual inventory count results.
These procedures may serve as test of controls or substantive procedures depending on the auditor’s risk
assessment, planned approach and the specific procedures carried out.
Detailed Text
*Evaluate Management’s Instructions and Procedures
 Control over the movement of inventory
 Application of appropriate control activities
 Accurate identification of the stage of completion of work in progress, of slow moving, obsolete or
damaged items and of inventory owned by a third party
 Procedures used to estimate physical quantities
COUNTING IS CONDUCTED AT A DATE OTHER THAN YEAR END (CNO- 59.000)

If physical inventory counting is conducted at a date other than the date of the financial statements, the auditor
shall, in addition to the procedures discussed before, perform audit procedures to obtain audit evidence about whether
changes in inventory between the count date and the date of the financial statements are properly recorded.
COUNTING IS IMPRACTICABLE (CNO-60.000)

 Reasons for
Impractical
Inventory
Counting
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In some cases, attendance at physical inventory counting may be impracticable.
Nature & Location of Inventory
This may be due to factors such as the nature and location of the inventory, for example,
where inventory is held in a location that may pose threats to the safety of the auditor.
The matter of general inconvenience to the auditor, however, is not sufficient to support
a decision by the auditor that attendance is impracticable.
Difficulty / Time / Cost
Further, as explained in SA 200, the matter of difficulty, time, or cost involved is not in
itself a valid basis for the auditor to omit an audit procedure for which there is no
alternative or to be satisfied with audit evidence that is less than persuasive.
 Examples of In some cases where attendance is impracticable, alternative audit procedures, for example
Alternative inspection of documentation of the subsequent sale of specific inventory items acquired or
Procedures purchased prior to the physical inventory counting, may provide sufficient appropriate audit
evidence about the existence and condition of inventory.
 Alternative In other cases, however, it may not be possible to obtain sufficient appropriate audit evidence
Procedures regarding the existence and condition of inventory by performing alternative audit procedures. In
Doesn’t such cases, SA 705 requires the auditor to modify the opinion in the auditor’s report as a result of
Give the scope limitation.
Sufficient &
Appropriate
Evidence
 Conclusion If attendance at physical inventory counting is impracticable, the auditor shall perform alternative
& Basic audit procedures to obtain sufficient appropriate audit evidence regarding the existence and
Principle – condition of inventory. If it is not possible to do so, the auditor shall modify the opinion in the
If auditor’s report in accordance with SA 705.
impractical
Perform
Alternative
Procedures
CUSTODY AND CONTROL OF A THIRD PARTY (CNO-60.050) (MCQ-501.2)

 Basic Basic Principle – If Custody & Control of Third Party then Request Confirmation or Other Audit
Principle Procedures
When inventory under the custody and control of a third party is material to the financial
statements, the auditor shall obtain sufficient appropriate audit evidence regarding the existence
and condition of that inventory by performing one or both of the following:
Request confirmation from the third party as to the quantities and condition of inventory
held on behalf of the entity.
Perform inspection or other audit procedures appropriate in the circumstances.
 Confirmation SA 505 establishes requirements and provides guidance for performing external confirmation
procedures.
 Other Audit Depending on the circumstances, for example where information is obtained that raises doubt
Procedures about the integrity and objectivity of the third party, the auditor may consider it appropriate to
perform other audit procedures instead of, or in addition to, confirmation with the third party.
Examples of other audit procedures include:
Inspecting documentation regarding inventory held by third parties, for example,
warehouse receipts.
Requesting confirmation from other parties when inventory has been pledged as
collateral. (Warehouse Owner)
Obtaining another auditor’s report, or a service auditor’s report, on the adequacy of the
third party’s internal control for ensuring that inventory is properly counted and
adequately safeguarded.
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Attending, or arranging for another auditor to attend, the third party’s physical counting
of inventory, if practicable.
PART 2: - LITIGATIONS & CLAIMS
DESIGN & PERFORM PROCEDURES FOR COMPLETENESS LITIGATION AND CLAIMS WHICH MAY LEAD TO RMM
The auditor shall design and perform audit procedures in order to identify litigation and claims involving the entity
which may give rise to a risk of material misstatement, including:
 Step 1 Inquiry of management and, where applicable, others within the entity, including in-
house legal counsel;
Reviewing minutes of meetings of those charged with governance and
Correspondence between the entity and its external legal counsel; and
Reviewing legal expense accounts.
 Step 2 If risk of material misstatement, then direct communication with the entity’s external legal
counsel.
LETTER
 What if RMM exists? – Direct Communication with Lawyer
If the auditor assesses a risk of material misstatement regarding litigation or claims
that have been identified, or when audit procedures performed indicate that other
material litigation or claims may exist, the auditor shall, in addition to the
procedures required by other SAs, seek direct communication with the entity’s
external legal counsel.
The auditor shall do so through a letter of inquiry, prepared by management and
sent by the auditor, requesting the entity’s external legal counsel to communicate
directly with the auditor.
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 Prohibition
If law, regulation or the respective legal professional body prohibits the entity’s
external legal counsel from communicating directly with the auditor, the auditor
shall perform alternative audit procedures.
MEET
In Certain Cases – Complexity / Significant Risk / Disagreement between Client &
Management then – Meet External Legal Counsel
In certain circumstances, the auditor also may judge it necessary to meet with the entity’s
external legal counsel to discuss the likely outcome of the litigation or claims.
This may be the case, for example, where:
 The auditor determines that the matter is a significant risk.
 The matter is complex.
 There is disagreement between management and the entity’s external legal
counsel.
Ordinarily, such meetings require management’s permission and are held with a representative of
management in attendance.
 Step 3 Written Representations
The auditor shall request management and, where appropriate, those charged with
governance to provide written representations that all known actual or possible litigation
and claims whose effects should be considered when preparing the financial statements
have been disclosed to the auditor and appropriately accounted for and disclosed in
accordance with the applicable financial reporting framework.
PART-3 SEGMENT INFORMATION

 Chart
UNIQUE MCQS
 MCQ No. 501.1
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[SA 505] EXTERNAL CONFIRMATIONS
WHAT IS EXTERNAL CONFIRMATION? (MCQ-505.6)

1. External External confirmation– Audit evidence obtained as a direct written response to the auditor from
confirmation a third party (the confirming party), in paper form, or by electronic or other medium.
Audit evidence is more reliable when it is obtained from independent sources outside the
entity.
Audit evidence obtained directly by the auditor is more reliable than audit evidence
obtained indirectly or by inference.
Audit evidence is more reliable when it exists in documentary form, whether paper,
electronic or other medium.
Accordingly, depending on the circumstances of the audit, audit evidence in the form of external
confirmations received directly by the auditor from confirming parties may be more reliable than
evidence generated internally by the entity.
2. Examples Situations where External Confirmations may be used/parties to whom we are ask for
(CNO-61.000) conformation.
Debtor balances;
Creditor balances;
Terms of agreement or transactions with third parties;
Bank Balance and other information from bankers;
Stock held by third parties;
Property title deeds held by third parties;
Investments purchased but delivery not taken; &
Bank loans.
KEY TO REMEMBER
What is External Confirmation?

Direct written response to the auditor from a third party (the confirming party), in paper form,
or by electronic or other medium.
 It is more reliable because
o It comes from independent outside party
o It is from parties selected by auditor
o It is documentary form
o It comes directly to auditor
Situations where external confirmations can be obtained

(In sequence of balance sheet)
Property title deeds held by third parties | Investments purchased but delivery not taken |
Stock held by third parties | Debtor balances | Bank Balance and other information from bankers
| Bank loans | Creditor balances | Transactions & related details | Terms of agreement or
transactions with third parties.
EXTERNAL CONFIRMATION PROCEDURES

 Auditors When using external confirmation procedures, the auditor shall maintain control over external
Control over confirmation requests, including:
External 1. Determining the information to be confirmed or requested;
Confirmation 2. Selecting the appropriate confirming party;
s 3. Designing the confirmation requests, including determining that requests are properly
addressed and contain return information for responses to be sent directly to the auditor;
and
4. Sending the requests, including follow-up requests when applicable, to the confirming party.
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1. Determining External confirmation procedures frequently are performed to confirm or request information
the regarding account balances and their elements. They may also be used to confirm terms of
Information agreements, contracts, or transactions between an entity and other parties, or to confirm the
to be absence of certain conditions, such as a “side agreement”.
Confirmed or
Requested
2. Selecting the Responses to confirmation requests provide more relevant and reliable audit evidence when
Appropriate confirmation requests are sent to a confirming party the auditor believes is knowledgeable about
Confirming the information to be confirmed.
Party (E.g. a financial institution official who is knowledgeable about the transactions or
arrangements for which confirmation is requested may be the most appropriate person at
the financial institution from whom to request confirmation.)
3. Designing Directly affect the confirmation response rate, and the reliability and the nature of the audit
Confirmation evidence.
Requests
(CNO-
62.000/
62.100)
Factors to consider when designing confirmation requests include:
Letter Head of the Company 1.Layout & Presentation

Letter Head Vs Blank
Number of Paragraphs
To 2. Management Encouragement
More Encouragement—More Response
Customer
Address 3. Assertions
Existence – Debtor Balance (Ledger

Folio Number)
Subject:- Confirmation Request Occurrence-Transactions (Dates)
Completeness – Total Transactions

Our annual audit is being conducted by ABC & Associates; it’s their regular audit (Time Period)
procedure to call for confirmations. This time your account is selected for confirmation
process. This doesn’t change or has any impact on our legal understandings & balances. Cut off – Last Bill & Last Cheque
It has nothing to do with discounts and other issues. (Number)
4. Ability to Confirm
Balance / Transaction / Cheque / Agreement etc as per our records is……. Depending on Software & Its access:-
Invoice wise details Vs Balance O/S
Please write balance as per your records in cut out area given below 5. Management Authorization
Higher Authority—More Response
7.Method of Communication 8. Prior Experience 6. Risk of Material Misstatement
Paper Form / Electronic Form / When it should be sent / How many Low Risk—Negative Confirmation Request
Any Other Form should be selected
High Risk—Positive Confirmation Request
4. Sending Determining that requests are properly addressed, includes testing the validity of some or all of
Requests the addresses on confirmation requests before they are sent out.
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Follow-Up on Confirmation Requests
The auditor may send an additional confirmation request when a reply to a previous request has
not been received within a reasonable time.
(E.g. the auditor may, having re-verified the accuracy of the original address, send an
additional or follow-up request)
NEGATIVE CONFIRMATIONS (CNO-62.100)

 Definition Negative confirmation request – A request that the confirming party respond directly to the
auditor only if the confirming party disagrees with the information provided in the request.
 Situations Negative confirmations provide less persuasive audit evidence than positive confirmations.
Accordingly, the auditor shall not use negative confirmation requests as the sole substantive
audit procedure to address an assessed risk of material misstatement at the assertion level
unless all of the following are present:
The auditor has assessed the risk of material misstatement as low and has obtained
sufficient appropriate audit evidence regarding the operating effectiveness of controls
relevant to the assertion;
The population of items subject to negative confirmation procedures comprises a large
number of small, homogeneous, account balances, transactions or conditions;
A very low exception rate is expected; and
The auditor is not aware of circumstances or conditions that would cause recipients of
negative confirmation requests to disregard such requests.
KEY TO REMEMBER
NEGATIVE CONFIRMATION REQUEST

Definition
A request that the confirming party respond directly to the auditor only if the confirming
party disagrees with the information provided in the request.
 Situations where it should be used (E.g., Herbal Life Nutrition)

 Assessed the RMM is low (E.g., Each agent deposits 50,000 as
security)
 Controls relevant to assertion are (E.g., App based dealings & daily cash
operating effectively deposit)
 Comprises a large number of small, (E.g., Standard Protein Boxes)
homogeneous items
 Very low exception rate is expected (E.g., Past experience says generally no
mismatch)
 Not aware of circumstances or (E.g., Agents are prompt in replying to
conditions that would cause confirmation request)
recipients of negative confirmation
to disregard request
RELIABILITY OF RESPONSES
If the auditor identifies factors that give rise to doubts about the reliability of the response to a confirmation request,
the auditor shall obtain further audit evidence to resolve those doubts.
If the auditor determines that a response to a confirmation request is not reliable, the auditor shall evaluate the
implications on the assessment of the relevant risks of material misstatement, including the risk of fraud, and on
the related nature, timing and extent of other audit procedures.
(Factors that gives rise to doubt over reliability Perform further audit evidence for reliabilityIf
confirmation is not reliable Adjust RMM / ROF Perform other audit procedures to get S&A evidence)
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Following are factors affecting reliability
MANAGEMENT’S REFUSAL TO ALLOW THE AUDITOR TO SEND A CONFIRMATION REQUEST (CNO-65.000)

 Inquiry If management refuses to allow the auditor to send a confirmation request, the auditor shall:
Inquire as to management’s reasons for the refusal, and seek audit evidence as to their validity
and reasonableness;
 Evaluate Evaluate the implications of management’s refusal on the auditor’s assessment of the relevant
risks of material misstatement, including the risk of fraud, and on the nature, timing and extent
of other audit procedures; and
 Alternative Perform alternative audit procedures designed to obtain relevant and reliable audit evidence.
audit If the auditor concludes that management’s refusal to allow the auditor to send a confirmation
procedures request is unreasonable, or the auditor is unable to obtain relevant and reliable audit evidence
from alternative audit procedures, the auditor shall communicate with those charged with
governance in accordance with SA 260. The auditor also shall determine the implications for the
audit and the auditor’s opinion in accordance with SA 705.
 Chart
UNIQUE MCQS
 MCQ No. 505.1
 MCQ No. 505.2
 MCQ No. 505.3
 MCQ No. 505.4
UNIQUE Questions
 CNO 63.000 External Confirmation (Use of Negative Confirmation Request Inappropriate)
 CNO 64.000 External Confirmation (Very Old Credit Balance)
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[SA 510] INITIAL AUDIT ENGAGEMENTS OPENING BALANCES
APPLICABILITY & OBJECTIVES OF SA 510 (CNO-66.000/66.100)

Applicability
This Standard on Auditing (SA) deals with the auditor’s responsibilities relating to opening balances when
conducting an initial audit engagement.
Initial audit engagement – An engagement in which either:
 The financial statements for the prior period were not audited; or
 The financial statements for the prior period were audited by a predecessor auditor.
Objective
In conducting an initial audit engagement, the objective of the auditor with respect to opening balances is to
obtain sufficient appropriate audit evidence about whether:
 Opening balances contain misstatements that materially affect the current period’s financial
statements; and
 Appropriate accounting policies reflected in the opening balances have been consistently applied in
the current period’s financial statements or changes thereto are properly accounted for and
adequately presented and disclosed in accordance with the applicable financial reporting framework.
AUDIT PROCEDURES TO EXAMINE OPENING BALANCES (CNO-66.000) (MCQ-510.2)

 Chart
Check whether op bal is misstated Obtain S&A evidence whether there is consistency in
implementation of A/C policy, if there are changes
whether properly accounted presented,disclosed
Evidence from Last year Evidence from current year Misstatement Detected
1. Whether cl. Bal have been 1. Evaluate whether current 1.If misstatement is detected in
correctly brought forward year audit procedure provide op bal then perform
from LY ledger evidence relevant to op bal additional procedures
2. Agree op bal with the 2. Perform speci?c audit

2. If there is misstatement in
most recent FST procedure to obtain evidence
current year also follow SA 450
about op bal
3. Read predecessor AR, If any
modi?cation evaluate
whether it leads to RMM
4. If any prior period item then
trace it to previous
period documents
The auditor shall read the most recent financial statements, if any, and the predecessor auditor’s report thereon, if
any, for information relevant to opening balances, including disclosures.
The auditor shall obtain sufficient appropriate audit evidence about whether the opening balances contain
misstatements that materially affect the current period’s financial statements by:
Determining whether the prior period’s closing balances have been correctly brought forward to the current
period or, when appropriate, any adjustments have been disclosed as prior period items in the current year’s
Statement of Profit and Loss;
Determining whether the opening balances reflect the application of appropriate accounting policies; and
Performing one or more of the following:
 Where the prior year financial statements were audited, perusing the copies of the audited financial
statements including the other relevant documents relating to the prior period financial statements;
 Evaluating whether audit procedures performed in the current period provide evidence relevant to
the opening balances; or
 Performing specific audit procedures to obtain evidence regarding the opening balances.
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Relevant Information in the Predecessor Auditor’s Report
If the prior period’s financial statements were audited by a predecessor auditor and there was a modification
to the opinion, the auditor shall evaluate the effect of the matter giving rise to the modification in assessing
the risks of material misstatement in the current period’s financial statements in accordance with SA 315.
If the auditor obtains audit evidence that the opening balances contain misstatements that could materially
affect the current period’s financial statements, the auditor shall perform such additional audit procedures as
are appropriate in the circumstances to determine the effect on the current period’s financial statements. If
the auditor concludes that such misstatements exist in the current period’s financial statements, the auditor
shall communicate the misstatements with the appropriate level of management and those charged with
governance in accordance with SA 450.
Consistency of Accounting Policies
The auditor shall obtain sufficient appropriate audit evidence about whether the accounting policies reflected
in the opening balances have been consistently applied in the current period’s financial statements, and
whether changes in the accounting policies have been properly accounted for and adequately presented
and disclosed in accordance with the applicable financial reporting framework.
KEY TO REMEMBER
Audit Procedures to examine Opening Balances

Check whether opening balance is misstated
 Think about last Year

o Check whether closing balances have been correctly brought forward from last
year ledger. 1
o Agree opening balance with the most recent financial statements. 2
o If any adjustment is shown as prior period item, trace to previous period
documents. 4
o Read predecessor audit report if any. (If any modification it should be marked
as RMM as per SA 315). 3
 Think about Current Year

o Evaluate Whether audit procedures performed in the current period provide
evidence relevant to the opening balances
(While physical verification of fixed assets, we can see date of acquisition to
find out whether they existed in opening, same thing can be done for
investments, ask for confirmation for closing as well as opening balances for
debtors, Collection opening debtors & creditors while doing ledger scrutiny)
o Performing specific audit procedures to obtain evidence regarding the opening
balances. (Reconciliation of inventory Op (Bal fig) + Purchase – Sale = Closing /
Checking inventory valuation of opening inventory / Re computing last year
depreciation)
 Misstatement detected
o If misstatement is detected in opening balance, then perform additional audit
procedures. If there is misstatements exist in current also then follow SA 450
Consistency of Accounting Policy

 Read accounting policies of LY and determine whether they are consistently applied
in CY. Also check whether accounting policies are appropriate.
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AUDIT CONCLUSION & REPORTING
AUDIT CONCLUSION & REPORTING
Opening Balance Consistency of A/P Modi?cation in predecessor AR
Unable to obtain Contain material Not consistently If relevant & material

misstatement applied on Change not
S&A evidence properly in CY FST
(no proper A/C op bal
Express Quali?ed presentation,disclosed) Modify as per SA 705
opinion or disclaimer Accounted (Better explained in
as per SA 705 Express Quali?ed or SA 710)
adverse opinion as Presented
per SA 706
Disclosed
Express Quali?ed or
Adverse Opinion
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[SA 520] ANALYTICAL PROCEDURES
ANALYTICAL PROCEDURES (CNO-68.000)

 Definition The term “analytical procedures” means evaluation of financial information through analysis of
(MCQ-520.3) plausible relationships among both financial and non-financial data. Analytical procedures also
encompass such investigation as is necessary of identified fluctuations or relationships that are
inconsistent with other relevant information or that differ from expected values by a significant
amount.
Thus, analytical procedures include the consideration of comparisons of the entity’s financial
information with as well as consideration of relationships.
 Examples of Text Examples
Comparison Analytical procedures include the consideration of
of Financial comparisons of the entity’s financial information with, for
Data example:
Comparable information for prior periods. (Trend Analysis)
Anticipated results of the entity, such as budgets (Comparative Analysis)

or forecasts, or expectations of the auditor, such as
an estimation of depreciation.
Auditor’s own estimate
(Predictive Analysis)
Similar industry information, such as a comparison
of the entity’s ratio of sales to accounts receivable (Intern Firm Analysis)
with industry averages or with other entities of
comparable size in the same industry.
4 types of Comparisons as explained above

Thus, we can say that Analytical Procedures may be segregated into these major types as
comparison of client and industry data, comparison of client data with similar prior period data,
comparison of client data with client-determined expected results, comparison of client data with
auditor-determined expected results and comparison of client data with expected results, using
non-financial data.
 Simple Various methods may be used to perform analytical procedures. These methods range from
Comparisons performing simple comparisons to performing complex analyses using advanced statistical
to Complex techniques. (Correlation & Regression) Analytical procedures may be applied to consolidated
Analysis financial statements, components and individual elements of information.
 Examples of Analytical procedures also include consideration of relationships, for example:

Comparison Among elements of financial information that would be expected to conform to a
of predictable pattern based on the entity’s experience, such as gross margin percentages.
Relationships Between financial information and relevant non-financial information, such as payroll
costs to number of employees.
KEY TO REMEMBER
Definition: -
Evaluation of financial information (TBD)
Through analysis of plausible relationships among financial & non-financial data
 Step-1 Studying suitable plausible (probable) interrelationships in financial and non-
financial data,
 Step-2 Collecting reliable data
 Step-3 May or may not performing calculations, computing ratios percentages etc.
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 Step-4 Then comparing them with relevant data or expected values and investigating
unusual differences
Examples of Relationships – Among Elements of Financial Info / Between Elements of Financial

& Non-Financial Info
Simple Comparisons to Complex Analysis
Examples of various comparisons: - Prior Period, Trend Analysis / Budgets, Comparative

Analysis / Auditor’s Estimate, Predictive Analysis / Others in Industry, Inter Firm Analysis)
APPLICATION / PURPOSE OF ANALYTICAL PROCEDURES (CNO-68.000)
Analytical procedures are used for the following purposes:

To assist the auditor in planning the nature, timing and extent of other auditing procedures.
To obtain relevant and reliable audit evidence when using substantive analytical procedures; and
To design and perform analytical procedures near the end of the audit that assist the auditor when forming
an overall conclusion as to whether the financial statements are consistent with the auditor’s understanding
of the entity.
ANALYTICAL PROCEDURES IN PLANNING THE AUDIT
In the planning stage, analytical procedures assist the auditor in understanding the client’s business and in identifying
areas of potential risk by indicating aspects of and developments in the entity’s business of which he was previously
unaware. This information will assist the auditor in determining the nature, timing and extent of his other audit
procedures. Analytical procedures in planning the audit use both financial data and non-financial information, such as
number of employees, square feet of selling space, volume of goods produced and similar information.
ANALYTICAL PROCEDURES USED AS SUBSTANTIVE TESTS (CNO-71.000)

When designing and performing substantive analytical procedures, either alone or in combination with tests of details,
as substantive procedures in accordance with SA 330, the auditor shall:
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Determine the suitability of particular substantive analytical procedures for given assertions, taking account
of the assessed risks of material misstatement and tests of details, if any, for these assertions;
Evaluate the reliability of data from which the auditor’s expectation of recorded amounts or ratios is
developed, taking account of source, comparability, and nature and relevance of information available, and
controls over preparation;
Develop an expectation of recorded amounts or ratios and evaluate whether the expectation is sufficiently
precise to identify a misstatement that, individually or when aggregated with other misstatements, may cause
the financial statements to be materially misstated; and
Determine the amount of any difference of recorded amounts from expected values that is acceptable
without further investigation.
FACTORS AFFECTING SUITABILITY
First Summarized Table is given and then detailed theory: -

V-RAT is suitable for all formats of cricket
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 Table
Factors (Suitability) Impact Example
Volume of Large: - Suitable Interest Earned / Investments
Transactions. 1 Many: - Suitable (Do Analytical
Small: - Less Suitable Procedures)
Few:-Not Suitable ( Do Test of Details)
Also
Regular Vs New Product
Test of Details. 4 Gives S&A Evidence: - Less If adequate debtor’s confirmations are
Analytical Procedures (Vice received not need to perform extensive
Versa) analysis such as debtor turnover ratio,
debtor to current asset ratio, trend
analysis etc.
Risk of Material High: - Analytical + TOD For high risk areas we should use
Misstatement. 2 Low: - Analytical analytical procedures and test of details
both.
Level of Assurance High: - Suitable Using Monthly Graphs for Rent / Total
Obtained. 3 Rent Predictions / Occupancy Rate
Low: - Less Suitable Comparison may provide so much
(Predictable assurance that no need to perform test
Relationship) of details
Erratic changing maintenance cost / legal

expenses  less assurance
 DETAILED Volume of Transactions

THEORY Substantive analytical procedures are generally more applicable to large volumes of
(CNO 70.000) transactions that tend to be predictable over time. The application of planned analytical
procedures is based on the expectation that relationships among data exist and continue
in the absence of known conditions to the contrary. However, the suitability of a particular
analytical procedure will depend upon the auditor’s assessment of how effective it will be
in detecting a misstatement that, individually or when aggregated with other
misstatements, may cause the financial statements to be materially misstated.
In some cases, even an unsophisticated predictive model may be effective as an analytical

procedure.
(E.g. If an entity has a known number of employees at fixed rates of pay
throughout the period, it may be possible for the auditor to use this data to
estimate the total payroll costs for the period with a high degree of accuracy,
thereby providing audit evidence for a significant item in the financial statements
and reducing the need to perform tests of details on the payroll. The use of widely
recognized trade ratios (such as profit margins for different types of retail entities)
can often be used effectively in substantive analytical procedures to provide
evidence to support the reasonableness of recorded amounts.)
Risk of Material Misstatement

The determination of the suitability of particular substantive analytical procedure is
influenced by the nature of the assertion and the auditor’s assessment of the risk of
material misstatement. For example, if controls over sales order processing are weak, the
auditor may place more reliance on tests of details rather than on substantive analytical
procedures for assertions related to receivables.
Different Levels of Assurance

Different types of analytical procedures provide different levels of assurance. Analytical
procedures involving, for example, the prediction of total rental income on a building
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divided into apartments, taking the rental rates, the number of apartments and vacancy
rates into consideration, can provide persuasive evidence and may eliminate the need for
further verification by means of tests of details, provided the elements are appropriately
verified. In contrast, calculation and comparison of gross margin percentages as a means
of confirming a revenue figure may provide less persuasive evidence but may provide
useful corroboration if used in combination with other audit procedures.
Test of Details
Particular substantive analytical procedures may also be considered suitable when tests of
details are performed on the same assertion. For example, when obtaining audit evidence
regarding the valuation assertion for accounts receivable balances, the auditor may apply
analytical procedures to an aging of customers’ accounts in addition to performing tests of
details on subsequent cash receipts to determine the collectability of the receivables.
FACTORS AFFECTING RELIABILITY OF DATA / EXTENT OF RELIANCE ON ANALYTICAL PROCEDURES (CNO-73.000)

SA 520 on ‘Analytical Procedures’ provides that the reliability of data is influenced by its source and nature and is
dependent on the circumstances under which it is obtained. Accordingly, the following are relevant criteria when
determining whether data is reliable for purposes of designing substantive analytical procedures-
Source of the information available. E.g. information may be more reliable when it is
obtained from independent sources outside the entity;
Comparability of the information available. E.g. broad industry data may need to be supplemented
to be comparable to that of an entity that produces and
sells specialized products;
Nature and relevance of the information E.g. whether budgets have been established as results to
available. be expected rather than as goals to be achieved; and
Controls over the preparation of the E.g. controls over the preparation, review and
information that are designed to ensure its maintenance of budgets.
completeness, accuracy and validity.
KEY TO REMEMBER
Sr NCC cadets are reliable in event of war Criteria to determine reliability of data for
substantive analytical procedures: -
Source of Data / Nature & Relevance of Data / Comparability of Data / Controls over
Preparation of Information to ensure (Completeness / Accuracy / Validity)
INVESTIGATING RESULTS OF ANALYTICAL PROCEDURES (CNO-73.100) (MCQ-520.2/520.6)

If analytical procedures performed in accordance with this SA identify fluctuations or relationships that are
inconsistent with other relevant information or that differ from expected values by a significant amount, the auditor
shall investigate such differences by:
Inquiring of management and obtaining appropriate audit evidence relevant to management’s responses;
and
Audit evidence relevant to management’s responses may be obtained by evaluating those responses taking
into account the auditor’s understanding of the entity and its environment, and with other audit evidence
obtained during the course of the audit.
Performing other audit procedures as necessary in the circumstances.
The need to perform other audit procedures may arise when, for example, management is unable to provide
an explanation, or the explanation, together with the audit evidence obtained relevant to management’s
response, is not considered adequate.
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ANALYTICAL PROCEDURES THAT ASSIST WHEN FORMING AN OVERALL CONCLUSION (MCQ-520.5)

 Near End of
Audit
The auditor shall design and perform analytical procedures near the end of the audit that assist the
auditor when forming an overall conclusion as to whether the financial statements are consistent
with the auditor’s understanding of the entity.
 Corroborate The conclusions drawn from the results of analytical procedures designed and performed in
conclusions accordance with above paragraph intended to corroborate conclusions formed during the audit of
with individual components or elements of the financial statements. This assists the auditor to draw
evidence reasonable conclusions on which to base the auditor’s opinion.
during audit
 May modify The results of such analytical procedures may identify a previously unrecognised risk of material
RMM & misstatement. In such circumstances, SA 315 requires the auditor to revise the auditor’s
Further assessment of the risks of material misstatement and modify the further planned audit procedures
Audit accordingly.
Procedures
 Similar to The analytical procedures performed for overall conclusion may be similar to those that would be
procedures used as risk assessment procedures.
used during
planning
UNIQUE MCQS
 MCQ No. 520.1
 MCQ No. 520.4
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[SA 530] AUDIT SAMPLING
SAMPLING RISK & NON-SAMPLING RISK (CNO-74.000)

 SAMPLING The risk that the auditor’s conclusion based on a sample may be different from the conclusion if the
RISK entire population were subjected to the same audit procedure.
 NON- The risk that the auditor reaches an erroneous conclusion for any reason not related to sampling
SAMPLING risk.
RISK Examples of non-sampling risk include use of inappropriate audit procedures, or
misinterpretation of audit evidence and failure to recognise a misstatement or
deviation.
Inappropriate Audit Procedure: - Only cost of fixed assets was checked by tracing bills &
agreements with fixed asset register, no checking for depreciation, revaluation, AS
compliance, physical verification.
Failure to recognize a misstatement or deviation: - Customers were given discount at the
time recovery of credit sales without any authorization. Article failed to point it out as
irregularity as all details were on printed documents.
Misinterpretation of Audit Evidence: - Only 2 debtors out sample of 200 picked from 3000
debtors sent replies to positive confirmation request, stating that there was small
mismatch. Auditor concluded that in all other debtors’ balances match hence no material
misstatement exists in sample and population. It was case of inadequate evidence; he
should have performed alternative audit procedures.
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SAMPLING PROCESS
Sampling Process
It is preliminary sampling step. Suppose we have to examine sales. We have

1. Sample Designing to determine our objective (catch fake sales) , audit procedures (match with
despatch report) etc are decided in this step.
After analysis of various factors it was set as 200 units from each Of East /
2. Sample Size
West / South / North area so total 200 x 4 = 800 from population of 5000
3. Selection of Items
for Testing
Stratified Random Sampling
(Sampling Selection
Method)
4. Performing Audit
Inspection of documents & Inquiry from sales executive.
Procedures
5. Nature and Cause

Intentional or Unintentional
of Deviations and
Manual or Automated
Misstatements
6. Projecting
If there are fake sales in sample, then how much in whole population.
Misstatements
7. Evaluating Results
Whether misstatements are within tolerable limit? Whether further audit
of Audit Sampling &
procedures should be applied.
Taking Action
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SAMPLE DESIGN
Sampling Designing
Consider Purpose Examining Sales Transaction. Whether any of the transaction is fake.
Check sales transaction from customer order, gate pass, transporter report,
Consider Audit
delivery memo, confirmation.
Procedures
Inquire from sales executive and visit godown.
Nature of Audit
Documentary / Oral / Visual
Evidence
What Constitute If essential documents of transaction are missing it can be misstatement. Different
Misstatement dates in documents is fine if its within 3-4 days of sales transaction.
Define Population and

All sales transactions.
its Characteristics
Stratification Area wise bifurcation in East West South North
 Considerations (Consider Purpose / Audit Procedures / Nature of Audit Evidence Required / What Constitutes
Deviation or Misstatement then Define Population and Consider Characteristic of Population for
Stratification)
When designing an audit sample, the auditor’s consideration includes;
the specific purpose to be achieved
and the combination of audit procedures that is likely to best achieve that purpose.
Consideration of the nature of the audit evidence sought and
possible deviation or misstatement conditions or other characteristics relating to that
audit evidence will assist the auditor in defining what constitutes a deviation or
misstatement
and what population to use for sampling.
In fulfilling the requirement of SA 500 Audit Evidence, when performing audit sampling,
the auditor performs audit procedures to obtain evidence that the population from
which the audit sample is drawn is complete.
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SAMPLE SIZE (MCQ-530.3)
The auditor shall determine a sample size sufficient to reduce sampling risk to an acceptably low level.
The level of sampling risk that the auditor is willing to accept affects the sample size required. The lower the
risk the auditor is willing to accept, the greater the sample size will need to be.
The sample size can be determined by the application of a statistically based formula or through the exercise
of professional judgment.
Story Situation Impact on Sample Size
Auditor sent to An increase in the auditor’s The higher the auditor’s assessment of the risk of
Construction company assessment of the risk of material misstatement, the larger the sample size
for checking WAGES material Misstatement needs to be. The auditor’s assessment of the risk of
(High Inherent Risk) & material misstatement is affected by inherent risk and
preliminary assessment control risk.
shows no guidance or
training for payment
staff (High Control
Risk). So, resulting
RMM is High.
He gets call from Decrease in the use of other The less the auditor is relying on other substantive
colleague that he will substantive procedures procedures (tests of details or substantive the same
not be coming so no directed at the same assertion. assertion analytical procedures) to reduce to an
analytical procedures acceptable level the detection risk regarding a
and now things will be particular population, the more assurance the auditor
depending on his will require from sampling and, therefore, the larger the
checking only. sample size can be.
Last year file shows An increase in the amount of The greater the amount of misstatement the auditor
many misstatements. misstatement the auditor expects to find in the population, the larger the sample
Out of 3 supervisors 1 is expects to size needs to be in order to make a reasonable estimate
on leave & 1 is ill for find in the population of the actual amount of misstatement in the population.
past 9 months.
Factors relevant to the auditor’s consideration of the
After performing test of
expected misstatement amount include the extent, to
controls, he concluded
which item values are determined subjectively, the
that controls are weak.
results of risk assessment procedures, the results of
It appears expected
tests of control, the results of audit procedures applied
misstatement is high.
in prior periods, and the results of other substantive
procedures.
Senior Accountant Says Stratification of the population When there is a wide range (variability) in the monetary
that they cannot when appropriate Decrease size of items in the population, it may be useful to
generate list of workers’ stratify the population. When a population cannot be
areas wise or site-wise appropriately stratified, the sample size from the
or month-wise joining population generally will be Higher than the sample
so stratification is not size that would have been required to attain a given
possible.
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level of sampling risk, as compared to aggregate of
samples from strata.
His senior calls and says An increase in the auditor’s The greater the level of assurance that the auditor
he wants higher level of desired level of assurance that requires that the results of the sample are in fact
assurance & lower tolerable misstatement is not indicative of the actual amount of misstatement in the
tolerable misstatement exceeded by actual population, the larger the sample size needs to be.
misstatement in the Population
The lower the tolerable misstatement, the larger the
Decrease in tolerable sample size needs to be.
misstatement
Further he observes Change in the number of Negligible effect for large populations, the actual size of
number of workers has sampling units in the Population the population has little, if any, effect on sample size.
increased from 1000 to Thus, for small populations, audit sampling is often not
3000 as efficient as alternative means of obtaining sufficient
appropriate audit evidence.
However, when using monetary unit sampling, an
increase in the monetary value of the population
increases sample size, unless this is offset by a
proportional increase in Materiality.
In MUS
= )
From as Population Value increases and also Tolerable

Misstatement increases then effect will be nullified.
Present Population Size
BIG SMALL
10000 Labour 12000 Labour 10 Labour 500 Labour
500 Samples 505 Samples 4 Samples 100 Samples
If there is increase In If there is increase in

population size population size
Negligible effect on Sample size Increases

sample size
Efficiency Increase Less efficient
But there is proportionate increase in

materiality/tolerable misstatement level
then increase will get compensated
Similar points are there for sample size in case of test on control
ADVANTAGES OF STATISTICAL SAMPLING
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The advantages of statistical sampling may be summarized as follows –
It provides a means for deriving a “calculated risk” and corresponding precision (sampling error) i.e. the
probable difference in result due to the use of a sample in lieu of examining all the records in the group
(universe), using the same audit procedures.
The method provides a means of estimating the minimum sample size associated with a specified risk and
precision.
The amount of testing (sample size) does not increase in proportion to the increase in the size of the area
(universe) tested.
The sample selection is more objective and thereby more defensible.
It may provide a better description of a large mass of data than a complete examination of all the data,
since non-sampling errors such as processing and clerical mistakes are not as large.
SAMPLE SELECTION METHODS (CNO-75.100)

Sample should be selected in such a manner that it is representative of the population from which the sample is being
selected. It will necessitate that each item in the population has an equal chance of being included in the sample.
Some of the important methods of selecting the sample are discussed below
 Random Random selection ensures that all items in the population or within each stratum have a known
Sampling chance of selection. It may involve use of random number tables.
Random sampling includes two very popular methods which are discussed below: –
Simple random sampling: Under this method each unit of the whole population (E.g.
purchase, or sales invoice) has an equal chance of being selected. The mechanics of
selection of items may be by choosing numbers from table of random numbers by
computers or picking up numbers randomly from a drum.
It is considered that random number tables are simple and easy to use and also provide
assurance that the bias does not affect the selection. This method is considered
appropriate provided the population to be sampled consists of reasonably similar units
and fall within a reasonable range.
For example, the population can be considered homogeneous, if say, trade
receivables balances fall within the range of Rs 5,000 to Rs 25,000 and not in the
range between Rs 25 to Rs 2,50,000.
Stratified Sampling: This method involves dividing the whole population to be tested in a
few separate groups called strata and taking a sample from each of them. Each stratum
is treated as if it was a separate population and if proportionate of items are 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 auditor judgment.
For example, in the above case, trade receivables balances may be divided into four
groups as follows: -
 Balances in excess of Rs 1,00,000;
 Balances in the range of Rs 75,000 to Rs 1,00,000;
 Balances in the range of Rs 25,000 to Rs 75,000; and
 Balances below Rs 25,000.
From these above groups the auditor may pick up different percentage of items from each of the
group. From the top group i.e. balances in excess of Rs 1,00,000, the auditor may examine all the
items; from the second group 25 per cent of the items; from the third group 10 per cent of the
items; and from the lowest group 2 per cent of the items may be selected.
The reasoning behind the stratified sampling is that for a highly diversified population, weights
should be allocated to reflect these differences. This is achieved by selecting different proportions
from each stratum. It can be seen that the stratified sampling is simply an extension of simple
random sampling.
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 Interval It involves selecting items using a constant interval between selections, the first interval having a
sampling random start. The interval might be based on a certain number of items (for example every 20th
or voucher) or a monetary total (for example every Rs 1,000 in the cumulative value of the
systematic population). When using systematic selection, the auditor should determine that the population is
sampling not structured in such a manner that the sampling interval corresponds with a particular pattern
in the population.
For example, if in a population of branch sales, particular branch sales occur only as every
100th item and the sampling interval selected is 100. The result would be that either the
auditor would have selected all or none of the sales of that particular branch.
To minimise the effect of the possible known buyers through a pattern in the population, more
than one starting point may be taken. The multiple random starting points are taken because it
minimises the risk of interval sampling pattern with that of the population being sampled.
 Cluster This method involves dividing the population into groups of items known as clusters. A number of
sampling clusters are randomly selected from all the clusters rather than individual items of the population.
Cluster sampling can be used together with both unrestricted random and stratified sampling, for
example 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.
The cluster is less effective for a given sample size than unrestricted random and stratified
samples as items are not individually selected. However, the time saved can be utilised to have a
larger sample to make the sample results more reliable.
As per SA 530, the auditor shall determine a sample size sufficient to reduce sampling risk to an
acceptably low level.
 Monetary It is a type of value-weighted selection in which sample size, selection and evaluation results in a
Unit conclusion in monetary amounts.
Sampling
Example (Just for understanding no need to write in exams)
Total Sales 20,00,000 / Sample Size 5 / Monetary Interval between 2 bills should be 20,00,000
÷ 5 = 4,00,000 / Select Starting Point Randomly Between (1 – 4,00,000) is say 620 /
Selection will be 620 / 4,00,620 / 8,00,620 / 12,00,620 / 16,00,620
Bill No Bill Amount Cumulative Amount Selection Base
1 50,000 50,000 620

2 3,00,000 3,50,000
3 1,00,000 4,50,000 4,00,620
4 2,50,000 7,00,000
5 1,00,000 8,00,000
6 75,000 8,75,000 8,00,620
7 25000 9,00,000
8 40,000 9,40,000
9 60,000 10,00,000
10 1,50,000 11,50,000
11 85,000 12,35,000 12,00,620
12 60,000 12,95,000
13 90,000 13,85,000
14 15,000 14,00,000
15 45,000 14,45,000
16 95,000 15,40,000
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17 98,000 16,38,000 16,00,620
18 84,000 17,22,000
19 1,29,000 18,51,000
20 1,49,000 20,00,000
 Haphazard Haphazard selection, in which the auditor selects the sample without following a structured
selection technique. Although no structured technique is used, the auditor would nonetheless avoid any
(CNO- conscious bias or predictability (for example, avoiding difficult to locate items, or always choosing
75.200) or avoiding the first or last entries on a page) and thus attempt to ensure that all items in the
population have a chance of selection. Haphazard selection is not appropriate when using statistical
sampling.
 Block Block selection involves selection of a block(s) of contiguous items from within the population. Block
selection selection cannot ordinarily be used in audit sampling because most populations are structured such
that items in a sequence can be expected to have similar characteristics to each other, but different
characteristics from items elsewhere in the population. Although in some circumstances it may be
an appropriate audit procedure to examine a block of items, it would rarely be an appropriate
sample selection technique when the auditor intends to draw valid inferences about the entire
population based on the sample.
PERFORMING AUDIT PROCEDURES

The auditor shall perform audit procedures, appropriate to the purpose, on each item selected. If the audit
procedure is not applicable to the selected item, the auditor shall perform the procedure on a replacement item.
An example of when it is necessary to perform the procedure on a replacement item is when a cancelled cheque is
selected while testing for evidence of payment authorisation. If the auditor is satisfied that the cheque has been
properly cancelled such that it does not constitute a deviation, an appropriately chosen replacement is examined.
If the auditor is unable to apply the designed audit procedures, or suitable alternative procedures, to a selected
item, the auditor shall treat that item as a deviation from the prescribed control, in the case of tests of controls, or
a misstatement, in the case of tests of details.
An example of when the auditor is unable to apply the designed audit procedures to a selected item is when
documentation relating to that item has been lost.
An example of a suitable alternative procedure might be the examination of subsequent cash receipts together with
evidence of their source and the items they are intended to settle when no reply has been received in response to a
positive confirmation request.
KEY TO REMEMBER
Performing Audit Procedures

The auditor shall perform audit procedures, appropriate to the purpose, on each item selected.
Replacement
If the audit procedure is not applicable to the selected item, the auditor shall perform the
procedure on a replacement item.
Alternative Procedures
If the auditor is unable to apply the designed audit procedures, or suitable alternative
procedures, to a selected item, the auditor shall treat that item as a deviation from the
prescribed control, in the case of tests of controls, or a misstatement, in the case of tests
of details.
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NATURE & CAUSE OF DEVIATION AND MISSTATEMENTS (CNO-78.000) (MCQ-530.2)
“An auditor while analysing the errors in a sample need not consider the qualitative aspects of errors
Q detected.” Please comment)
Answer
The auditor shall investigate the nature and cause of any deviations or misstatements identified and evaluates their
possible effect on the purpose of the audit procedure and on other areas of the audit.
In the extremely rare circumstances when the auditor considers a misstatement or deviation discovered in a sample
to be an anomaly, the auditor shall obtain a high degree of certainty that such misstatement or deviation is not
representative of the population.
The auditor shall obtain this degree of certainty by performing additional audit procedures to obtain sufficient
appropriate audit evidence that the misstatement or deviation does not affect the remainder of the population.
In analysing the deviations and misstatements identified, the auditor may observe that many have a common feature,
for example, type of transaction (Sales vs Interest Income), location (Big Branch vs Small Branch), product
line (Old product vs New Product) or period of time (Peak Season vs Slack Season).
In such circumstances, the auditor may decide to identify all items in the population that possess the common feature
and extend audit procedures to those items. In addition, such deviations or misstatements may be intentional, and
may indicate the possibility of fraud.
KEY TO REMEMBER
Qualitative Aspects: - So auditor should go beyond detecting misstatement and deviations and
consider qualitative aspects
(Experienced employee, new improved system, old product, year-end etc.)
Nature & Cause: - Investigate deviations or misstatements and evaluate their possible effect on
the purpose of audit procedure and on to other areas of audit
Common Features: - Type of Transactions, Location, Product, Period of time / In such case auditor
may identify all items in population with common feature and extend audit procedures.
Anomaly: - Extremely rare circumstances misstatement or deviation can be anomaly / auditor
should obtain high degree of certainty that it is not representative of population / perform
additional procedures for the same.
Intentional: - If these are intentional then there is possibility of fraud.
PROJECTING MISSTATEMENT
 For tests of For tests of controls, no explicit projection of deviations is necessary since the sample deviation
controls rate is also the projected deviation rate for the population as a whole. SA 330 provides guidance
when deviations from controls upon which the auditor intends to rely are detected.
 For tests of For tests of details, the auditor shall project misstatements found in the sample to the population.
details The auditor is required to project misstatements for the population to obtain a broad view of the
scale of misstatement, but this projection may not be sufficient to determine an amount to be
recorded.
When a misstatement has been established as an anomaly, it may be excluded when projecting
misstatements to the population. However, the effect of any such misstatement, if uncorrected,
still needs to be considered in addition to the projection of the non-anomalous misstatements.
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EVALUATING SAMPLING RESULTS
 Evaluation The auditor shall evaluate-

The results of the sample; and
Whether the use of audit sampling has provided a reasonable basis for conclusions about
the population that has been tested.
For tests of controls, an unexpectedly high sample deviation rate may lead to an increase in the
assessed risk of material misstatement, unless further audit evidence substantiating the initial
assessment is obtained.
For tests of details, an unexpectedly high misstatement amount in a sample may cause the auditor
to believe that a class of transactions or account balance is materially misstated, in the absence of
further audit evidence that no material misstatement exists.
Considering the results of other audit procedures helps the auditor to assess the risk that actual
misstatement in the population exceeds tolerable misstatement, and the risk may be reduced if
additional audit evidence is obtained.
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 Special In the case of tests of details, the projected misstatement plus anomalous misstatement, if any, is
Case the auditor’s best estimate of misstatement in the population. When the projected misstatement
plus anomalous misstatement, if any, exceeds tolerable misstatement, the sample does not provide
a reasonable basis for conclusions about the population that has been tested. The closer the
projected misstatement plus anomalous misstatement is to tolerable misstatement, the more likely
that actual misstatement in the population may exceed tolerable misstatement.
Also, if the projected misstatement is greater than the auditor’s expectations of misstatement used
to determine the sample size, the auditor may conclude that there is an unacceptable sampling risk
that the actual misstatement in the population exceeds the tolerable misstatement.
 What if no In case the auditor concludes that audit sampling has not provided a reasonable basis for
reasonable conclusions about the population that has been tested, the auditor may request management to
Basis? investigate misstatements that have been identified and the potential for further misstatements
and to make any necessary adjustments; or tailor the nature, timing and extent of those further
audit procedures to best achieve the required assurance. For example, in the case of tests of
controls, the auditor might extend the sample size test an alternative control or modify related
substantive procedures.
UNIQUE MCQS
 MCQ No. 530.1
UNIQUE QUESTION
 CNO 75.000 Statistical Vs Non-Statistical
 CNO 77.000 Principal method of design of the samples
 CNO 79.000 Tolerable Misstatement
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[SA 540]AUDITING ACCOUNTING ESTIMATES, INCLUDING FAIR VALUE ACCOUNTING

ESTIMATES, AND RELATED DISCLOSURES
NATURE OF ACCOUNTING ESTIMATES

 Definition Some financial statement items cannot be measured precisely but can only be estimated. For
purposes of this SA, such financial statement items are referred to as accounting estimates.
 Why Because of the uncertainties inherent in business activities(Utilization of machines, continuity of
estimates departments), some financial statement items can only be estimated. Further, the specific
are characteristics of an asset, liability or component of equity,(investments, provisions for
litigations) or the basis of or method of measurement prescribed by the financial reporting
required? – 3
framework, (Value in use in AS 28, Fair Valuation in Ind AS may give rise to the need to estimate
Reasons a financial statement item. Some financial reporting frameworks prescribe specific methods of
measurement and the disclosures that are required to be made in the financial statements, while
other financial reporting frameworks are less specific.
 Evaluate Estimation involves judgments based on information available when the financial statements are
Judgements / prepared. For many accounting estimates, these include making assumptions about matters that
Assumptions are uncertain at the time of estimation. The auditor is not responsible for predicting future
But Not conditions, transactions or events that, if known at the time of the audit, might have
Responsible significantly affected management’s actions or the assumptions used by management.
Unknown
Events or
Conditions
 Types of This term (accounting estimate) is used for an amount measured at fair value where there is
Estimates estimation uncertainty, as well as for other amounts that require estimation. Where this SA
addresses only accounting estimates involving measurement at fair value, the term “fair value
accounting estimates” is used.
 Fair Value Fair value is a rational and unbiased estimate of the potential market price of asset / liability
Accounting Examples of situations where fair value accounting estimates may be required include:
Estimates (Use balance sheet sequence to remember below list of examples)
(Fixed Asset) (Old technology machine retired
RV value of fixed asset / Property or equipment from active use, kept in Godown)
held for disposal.
(Investment) (Investment in Convertible
Complex financial instruments, which are not Preference Shares / Debentures of
traded in an active and open market. Private Company in E Commerce
which is not listed like Flipkart)
(Liability) (Accounting for ESOPS etc.)
Share-based payments.
(Comm)
Certain assets or liabilities acquired in a (amalgamation, merger, demerger)
business combination including goodwill and intangible
assets.
Transactions involving the exchange of
assets or liabilities between independent (Patanjali gave its jeans
parties without monetary consideration, manufacturing plant to Raymond’s
for example, a nonmonetary exchange of and took its food research
plant facilities in different lines of laboratory)
business.
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 Other Estimates apart from fair value estimates.
Accounting Examples of situations where accounting estimates, other than fair value accounting estimates,
Estimates may be required include:
(Fixed Asset)
Depreciation method or asset useful life.
(Investment) (investment in Debentures, held to maturity
Provision against the carrying amount of an category, that company became insolvent,
investment where there is uncertainty as there is doubt over redemption amount,
regarding its recoverability. provision is made) (Some Investments are
not for sale but for redemption)
(Current Asset)
Allowance for doubtful accounts.
Inventory obsolescence.
(Liability)
Warranty obligations.
Financial Obligations / Costs arising (E.g. Settlement amount due for patent
from litigation settlements and infringement claim pending against
judgments company)
(P&L) (Profit / Loss on construction contracts,

Outcome of long-term contracts. Percentage Completion etc.)
STEP 1: - RISK ASSESSMENT PROCEDURES AND RELATED ACTIVITIES (CNO-81.000)

When performing risk assessment procedures and related activities to obtain an understanding of the entity and its
environment, including the entity’s internal control, as required by SA 315, the auditor shall obtain an
understanding of the following in order to provide a basis for the identification and assessment of the risks of
material misstatement for accounting estimates:
How management identifies those transactions, events and conditions that may give rise to the need for
accounting estimates to be recognized or disclosed in the financial statements. In obtaining this
understanding, the auditor shall make inquiries of management about changes in circumstances that may
give rise to new, or the need to revise existing, accounting estimates.
The requirements of the applicable financial reporting framework relevant to accounting estimates,
including related disclosures.
How management makes the accounting estimates, and an understanding of the data on which they are
based, including:
 Relevant controls;
 The method, including where applicable the model, used in making the accounting estimate;
 Whether there has been or ought to have been a change from the prior period in the methods for
making the accounting estimates, and if so, why; and
 The assumptions underlying the accounting estimates;
 Whether management has used an expert;
 Whether and, if so, how management has assessed the effect of estimation uncertainty.
The auditor shall review the outcome of accounting estimates included in the prior period financial statements,
or, where applicable, their subsequent re-estimation for the purpose of the current period. The nature and extent
of the auditor’s review takes account of the nature of the accounting estimates, and whether the information
obtained from the review would be relevant to identifying and assessing risks of material misstatement of
accounting estimates made in the current period financial statements. However, the review is not intended to call
into question the judgments made in the prior periods that were based on information available at that time.
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KEY TO REMEMBER
Risk Assessment Procedures and (Which information should be collected with respect
Related Activities to estimates?)
Relating to all estimates
How management identifies (CA for Financial Estimates, CS for Legal Estimates,
whether new estimates will be Engineer for Technical Estimates)
required, or existing estimates
need to be revised.
Specific points related to a (Let’s assume estimate of gratuity / pension / leave

particular estimate encashment etc.)
 Requirements of (AS 2 / 6 / 13 /15 / 22 / 26 / 28 / 29)

applicable FRF
 Relevant controls (Segregation of Duties, 2 CAs appointed, Monthly
Internal Analysis, CFO Presentation, Consultation with
Expert
 Data on which they are (Employee Data / Salary Data / Mortality & Health
based Data)
 Assumptions (Inflation Rate / Salary Rate etc.)
 Method, including where (Project Unit Method (AS 15) / Corridor Method)
applicable the model
 Use of expert (Actuarial Valuation Once in 3 Years)
 Assessed the effect of such as Interest Rate / Growth Rate of Salary etc.)
estimation uncertainty
Sensitivity to various
factors
 Review the outcome of (Whether gratuity / pension payments are as decided in
accounting estimates previous years)
included in the prior
period
STEP 2 - IDENTIFYING AND ASSESSING THE RISKS OF MATERIAL MISSTATEMENT

In identifying and assessing the risks of material misstatement, as required by SA 315, the auditor shall evaluate the
degree of estimation uncertainty associated with an accounting estimate.
The auditor shall determine whether, in the auditor’s judgment, any of those accounting estimates that have been
identified as having high estimation uncertainty give rise to significant risks.
FACTORS AFFECTING UNCERTAINTY

Factors on which depends estimation uncertainty (Brand Valuation Vs Construction Contract)
JST-OLD leads to uncertainty.
 Table Factor Brand Valuation Cost of Construction Contract
(High Uncertainty) (Low Uncertainty)
J-Judgment Depends on how people judge and Here Judgments are prepared as
give importance to brand. per well-established principle, so
*Similarly result of litigations subjectivity is reduced drastically.
depends a lot on judgment
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S-Sensitivity It’s highly sensitivity to performance If prices of cement or still changes
and image of other competitive as per past data, there will not be
brands. As people’s perception significant change in overall project
change brand value changes cost.
drastically.
T-Technique No accounting standard or guidance We have AS 7 which guides on how
note on brand valuation. to compute % completion.
O-Observable Input There is no proper source of There are cement, steel, labour
information for customer opinion markets from where we can have
and preferences and changes observable inputs for prices etc.
happening in them.
L-Length of time 10 years of forecast for brand 2 years of forecast in construction
period valuation on the basis of past 10 contract on the basis of 20 years
years of data in technology industry data
D-Data Market data collected and Market data collected and
maintained by company itself is less maintained by industry association
reliable. or authorities is more reliable.
 Detailed Text The degree of estimation uncertainty associated with an accounting estimate may influence the
estimate’s susceptibility to bias.
The degree of estimation uncertainty associated with an accounting estimate may be influenced
by factors such as:
The extent to which the accounting estimate depends on judgment.
The sensitivity of the accounting estimate to changes in assumptions.
The existence of recognised measurement techniques that may mitigate the estimation
uncertainty (though the subjectivity of the assumptions used as inputs may nevertheless
give rise to estimation uncertainty).
The extent to which the accounting estimate is based on observable or unobservable
inputs.
The length of the forecast period, and the relevance of data drawn from past events to
forecast future events.
The availability of reliable data from external sources.
The degree of estimation uncertainty associated with an accounting estimate may
influence the estimate’s susceptibility to bias.
EXAMPLES OF HIGH & LOW ESTIMATION UNCERTAINTY (CNO 80.000) (MCQ - Incs.08.2)
 Examples of
High Accounting estimates relating to the outcome of (Vodafone Case)
Estimation litigation.
Uncertainty Fair value accounting estimates for derivative (Dollar swap with euro after 7
(LSD) financial instruments not publicly traded. months)
Fair value accounting estimates for which a highly (Share valuation depending on
specialized entity-developed model is used or for internal assessment of new
which there are assumptions or inputs that cannot product and efficiency levels.)
be observed in the marketplace.
 Examples of FMCG ki Report mine bahut kam uncertainty hai
Low
Estimation Accounting estimates that are Frequently made and updated because they relate to
Uncertainty routine Transactions (Inventory Valuation)
(CNO-80.050) Fair value accounting estimates where the Method of measurement prescribed by the
applicable financial reporting framework is simple and applied easily to the asset or
liability requiring measurement at fair value.
(E.g. Ind AS 113 gives method of computing fair value, if this is used then it is
reliable)
Accounting estimates arising in entities that engage in business activities that are not
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Complex.
(E.g., Depreciation of furniture in trading entity) (Fixed Asset)
Fair value accounting estimates where the model used to measure the accounting
estimate is well known or Generally accepted, provided that the assumptions or inputs to
the model are observable.
(E.g., Equity share valuation through net asset method is very simple and well-
known method)
Accounting estimates derived from data that is Readily available, such as published
interest rate data or exchange-traded prices of securities. Such data may be referred to as
“observable” in the context of a fair value accounting estimate.
(E.g., Average PE ratio was computed for retail industry from share prices and
earnings of listed companies and same was used to value a private company
shares in retail industry) (Investment)
STEP -3: - RESPONSES TO THE ASSESSED RISKS OF MATERIAL MISSTATEMENT

 Mandatory Based on the assessed risks of material misstatement, the auditor shall determine:
a) Whether the methods for making the accounting estimates are appropriate and have been
applied consistently, and whether changes, if any, in accounting estimates or in the method
for making those from the prior period are appropriate in the circumstances.
b) Whether management has appropriately applied the requirements of the applicable financial
reporting framework relevant to the accounting estimate; and
 One or More In responding to the assessed risks of material misstatement, as required by SA 330, the auditor
as shall undertake one or more of the following, taking account of the nature of the accounting
Appropriate estimate:
Test the operating effectiveness of the controls over how management made the
accounting estimate, together with appropriate substantive procedures.
Test how management made the accounting estimate and the data on which it is based.
In doing so, the auditor shall evaluate whether:
 The method of measurement used is appropriate in the circumstances; and
 The assumptions used by management are reasonable in light of the
measurement objectives of the applicable financial reporting framework.
Develop a point estimate or a range to evaluate management’s point estimate. For this
purpose:
 When the auditor uses assumptions or methods that differ from management’s,
the auditor shall obtain an understanding of management’s assumptions or
methods sufficient to establish that the auditor’s point estimate or range takes
into account relevant variables and to evaluate any significant differences from
management’s point estimate.
 When the auditor concludes that it is appropriate to use a range, the auditor
shall narrow the range, based on audit evidence available, until all outcomes
within the range are considered reasonable.
Determine whether events occurring up to the date of the auditor’s report provide audit
evidence regarding the accounting estimate.
STEP 4:- DISCLOSURES RELATED TO ACCOUNTING ESTIMATES

 If no The auditor shall obtain sufficient appropriate audit evidence about whether the disclosures in
significant the financial statements related to accounting estimates are in accordance with the
risk -- S&A requirements of the applicable financial reporting framework.
evidence
whether as
per FRF
 If significant For accounting estimates that give rise to significant risks, the auditor shall also evaluate the
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risk adequacy of the disclosure of their estimation uncertainty in the financial statements in the
additional context of the applicable financial reporting framework.
requirement -
- evaluate
adequacy of
disclosures
 Disclosures in The presentation of financial statements in accordance with the applicable financial reporting
accordance framework includes adequate disclosure of material matters. The applicable financial reporting
with the framework may permit, or prescribe, disclosures related to accounting estimates, and some
Applicable entities may disclose voluntarily additional information in the notes to the financial statements.
Financial These disclosures may include, for example:
Reporting The assumptions used.
Framework The method of estimation used, including any applicable model.
 (Further The basis for the selection of the method of estimation.
Explanation If The effect of any changes to the method of estimation from the prior period.
No Significant The sources and implications of estimation uncertainty.
Risk)
Such disclosures are relevant to users in understanding the accounting estimates recognized or
disclosed in the financial statements, and sufficient appropriate audit evidence needs to be
obtained about whether the disclosures are in accordance with the requirements of the
applicable financial reporting framework.
 Disclosures of In relation to accounting estimates having significant risk, even where the disclosures are in
Estimation accordance with the applicable financial reporting framework, the auditor may conclude that the
Uncertainty disclosure of estimation uncertainty is inadequate in light of the circumstances and facts
for involved. The auditor’s evaluation of the adequacy of disclosure of estimation uncertainty
Accounting increases in importance the greater the range of possible outcomes of the accounting estimate is
Estimates in relation to materiality.
that give Rise
to Significant
Risks
(Further
Explanation If
there is
Significant
Risk)
STEP 5:- WRITTEN REPRESENTATIONS

The auditor shall obtain written representations from management and, where appropriate, those charged with
governance whether they believe significant assumptions used in making accounting estimates are reasonable.
DOCUMENTATION
The audit documentation shall include:
The basis for the auditor’s conclusions about the reasonableness of accounting estimates and their
disclosure that give rise to significant risks; and
Indicators of possible management bias, if any.
UNIQUE QUESTION
 CNO. 81.100 Content of WR, in case of estimates and consequences of refusal
 CNO. 81.200 Review of Prior period estimates
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[SA 550] RELATED PARTIES
NATURE OF RELATED PARTY RELATIONSHIPS AND TRANSACTIONS

 RPT in Many related party transactions are in the normal course of business. In such circumstances, they
normal may carry no higher risk of material misstatement of the financial statements than similar
course transactions with unrelated parties.
doesn’t lead
to higher
RMM
 Situation However, the nature of related party relationships and transactions may, in some circumstances,
when RPT give rise to higher risks of material misstatement of the financial statements than transactions
will lead to with unrelated parties. For example:
Related party transactions may not be conducted under normal market terms and
higher RMM
conditions; for example, some related party transactions may be conducted with no
exchange of consideration.
(Goods purchased at double the market price from MDs son proprietor firm or
goods sold to brother of MD at triple the market price)
Related parties may operate through an extensive and complex range of relationships
and structures, with a corresponding increase in the complexity of related party
transactions.
(Indian Company has subsidiary in Canada  Canadian subsidiary created trust
in MEXICO  Trust holds 100% shares of company in srilanka  MD of Indian
company earns 1 crore consultancy fees from such srilanka company)
Information systems may be ineffective at identifying or summarising transactions and
outstanding balances between an entity and its related parties.
(Where there are no appropriate employees / register / software (systems) to
identify, authorize, record, summaries and disclose related party transactions
which may lead to noncompliance of AS 18.)
UNDERSTANDING THE ENTITY’S RELATED PARTY RELATIONSHIPS & TRANSACTIONS

The engagement team discussion that SA 315 and SA 240 require, shall include specific consideration of the
susceptibility of the financial statements to material misstatement due to fraud or error that could result from the
entity’s related party relationships and transactions.
The auditor shall inquire of management regarding:
The identity of the entity’s related parties, including changes from the prior period;
The nature of the relationships between the entity and these related parties; and
Whether the entity entered into any transactions with these related parties during the period and, if so,
the type and purpose of the transactions.
MAINTAINING ALERTNESS FOR RELATED PARTY INFORMATION WHEN REVIEWING RECORDS OR DOCUMENTS
(CNO-82.000)
During the audit, the auditor shall remain alert, when inspecting records or documents, for arrangements or other
information that may indicate the existence of related party relationships or transactions that management has
not previously identified or disclosed to the auditor.
 Compulsory to In particular, the auditor shall inspect the following for indications of the existence of related
see following party relationships or transactions that management has not previously identified or disclosed
documents to the auditor:
Bank, legal and third-party

confirmations obtained as part of
the auditor’s procedures;
 Bank -- (For guarantees / securities given or taken,
arrangements such as minimum balance
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setoff arrangement / joint holders /
nominee)
(Contracts / MOUs etc.)
 Legal –
(From Directors / Subsidiaries)
 Third Party –
Confirmations --
Minutes of meetings of (Approvals under Sec 177 & Sec 188)
shareholders and of those charged
with governance; and
Such other records or documents (E.g. Company Restructuring Documents)
as the auditor considers necessary
in the circumstances of the entity.
 Documents Previous Year Records

which can give  AS 18 / Schedule III disclosures of Previous Years (Old Records)
information Control / SI on Company
about related  Shareholders register (Control / SI)
 Director’s register (SI)
parties
 Contracts with TCWG / Directors / KMP (SI)
 Life insurance policies (SI)
 Records of Entity’s pension plans (SI)
 Statements of Conflict of Interest (SI)
Control / SI by Company
 Investment Register (Control / SI)
Legal Documents
 Sec 189 Register
 Information supplied to Regulatory Authorities
o Filing with SEBI / SEC
o Tax Returns
Other Documents
 Internal Auditor’s Report
 Invoices & Correspondence with professional advisor
 Contracts not in ordinary course of business
 Contracts re-negotiated
IDENTIFICATION OF PREVIOUSLY UNIDENTIFIED OR UNDISCLOSED RELATED PARTIES OR SIGNIFICANT RELATED

PARTY TRANSACTIONS
 What if auditor If the auditor identifies arrangements or information that suggests the existence of related
identifies party relationships or transactions that management has not previously identified or
information disclosed to the auditor, the auditor shall determine whether the underlying circumstances
confirm the existence of those relationships or transactions.
suggesting
unidentified or
undisclosed RPR
or SRPT?
 What if auditor If the auditor identifies related parties or significant related party transactions that
confirms management has not previously identified or disclosed to the auditor, the auditor shall:
existence? (Communicate)
 Promptly communicate the relevant information to the other members of
the engagement team;
(Discuss 2 important things with management)
Where the applicable financial reporting framework establishes related party
requirements:
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 Request management to identify all transactions with the newly identified
related parties for the auditor’s further evaluation; and
 Inquire as to why the entity’s controls over related party relationships and
transactions failed to enable the identification or disclosure of the related
party relationships or transactions;
(Examine)
 Perform appropriate substantive audit procedures relating to such newly
identified related parties or significant related party transactions;
(Before you close issue think about 2 important things)
 Reconsider the risk that other related parties or significant related party
transactions may exist that management has not previously identified or
disclosed to the auditor, and perform additional audit procedures as
necessary; and
 If the non-disclosure by management appears intentional (and therefore
indicative of a risk of material misstatement due to fraud), evaluate the
implications for the audit.
IDENTIFIED SIGNIFICANT RELATED PARTY TRANSACTIONS OUTSIDE THE ENTITY’S NORMAL COURSE OF
BUSINESS
For identified significant related party transactions outside the entity’s normal course of business, the auditor shall:
(Sale to subsidiaries in Mauritius and Dubai then export to various countries for tax saving)
Obtain audit evidence that the transactions have been appropriately authorized and approved.
Inspect the underlying contracts or agreements, if any, and evaluate whether:

 The business rationale (or lack thereof) of the transactions suggests that they may have been
entered into to engage in fraudulent financial reporting or to conceal misappropriation of assets;
 The terms of the transactions are consistent with management’s explanations; and (But goods are
not exported but sold to local manufacturer)
 The transactions have been appropriately accounted for and disclosed in accordance with the
applicable financial reporting framework; and
UNIQUE MCQS
 MCQ No. 550.2
 MCQ-No. 550.1
 MCQ-No. 550.3
UNIQUE QUESTION
 CNO 83.000 Related Party (Biased )
 CNO 84.000 Related Party Case Study – Approach of Auditor
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[SA 560] SUBSEQUENT EVENTS
REQUIREMENT OF AS 4 (CNO-85.000)
Subsequent Event Definition: - All significant events / favourable or unfavorable / occur between balance
sheet date and date of approval by BOD
Types of Events: - Events giving evidence regarding conditions existing on balance sheet date / Events giving
evidence on conditions which arose after balance sheet date
3 Exceptions to above: - Events required to be adjusted by law or AS / Events affecting going concern / Events
which are significant, material but not requiring adjustment can be disclosed in BOD report
DEFINITION OF SUBSEQUENT EVENTS

SA 560 on “Subsequent Events”, defines the term “subsequent events” as events occurring between the date of the
financial statements and the date of the auditor’s report, and facts that become known to the auditor after the date
of the auditor’s report. Facts can be further divided in 2 parts facts till date of publishing and facts after date of
publishing.
SA 560-- Subsequent Events

31st Mar 10th June 20th June 15th July 20th Sept
B/S Approval Signing Publishing AGM

Date Date Date Date Date
Events Facts Which

Occurring Become Known Facts Which
Between the to the Auditor Become
Date of the After the Date Known to the
Financial of the Auditor’s Auditor After
Statements Report but the Financial
and Before the Date Statements
the Date of the the Financial have been
Auditor’s Statements are Issued
Report Issued
EVENTS OCCURRING BETWEEN THE DATE OF THE FINANCIAL STATEMENTS AND THE DATE OF THE AUDITOR’S
REPORT (CNO-85.000)
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 Duty of Auditor should examine whether all adjusting events should be identified
Auditor The auditor shall perform audit procedures designed to obtain sufficient appropriate
audit evidence that all events occurring between the date of the financial statements
and the date of the auditor’s report that require adjustment of, or disclosure in, the
financial statements have been identified. The auditor shall perform the procedures so
that they cover the period from the date of the financial statements to the date of the
auditor’s report, or as near as practicable thereto.
No need to check again is some areas are checked in regular audit procedures
The auditor is not, however, expected to perform additional audit procedures on matters
to which previously applied audit procedures have provided satisfactory conclusions.
Nature and extent depends on risk assessment
The auditor shall take into account the auditor’s risk assessment in determining the
nature and extent of such audit procedures, which shall include the following:
 Audit Summary
Procedures Understanding procedures, controls set by Mgt / Inquiry with Mgt, TCWG / Reading
minutes / Latest subsequent interim financial statements
Detailed Text
Obtaining an understanding of any procedures management has established to ensure
that subsequent events are identified.
Inquiring of management and, where appropriate, those charged with governance as to
whether any subsequent events have occurred which might affect the financial
statements.
Reading minutes, if any, of the meetings, of the entity’s owners, management and those
charged with governance, that have been held after the date of the financial statements
and inquiring about matters discussed at any such meetings for which minutes are not
yet available.
Reading the entity’s latest subsequent interim financial statements, if any.
 Adjusting Summary
Event If auditor identifies event requiring adjustment / see whether it is adjusted or disclosed
in FST / if not then modify the report.
Detailed Text
When, as a result of the procedures performed as explained above, the auditor identifies events
that require adjustment of, or disclosure in, the financial statements, the auditor shall determine
whether each such event is appropriately reflected in those financial statements.
 Written The auditor shall request management and, where appropriate, those charged with governance,
Representati- to provide a written representation in accordance with SA 580, “Written Representations” that
ons all events occurring subsequent to the date of the financial statements and for which the
applicable financial reporting framework requires adjustment or disclosure have been adjusted
or disclosed.
KEY TO REMEMBER
Duty of Auditor: - Auditor should obtain S&A evidence that all events between date of
financial statements and date of audit report that require adjustment or disclosure have been
identified and recorded in CY / No need to check again is some areas are checked in regular
audit procedures / nature and extent depends on risk assessment
Audit Procedures: - Understanding procedures, controls set by Mgt / Inquiry with Mgt, TCWG
/ Reading minutes / Latest subsequent interim financial statements.
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Adjusting Event: - If auditor identifies event requiring adjustment / see whether it is
adjusted or disclosed in FST / if not then modify the report.
Written Representation: - All adjustable events are recorded or disclosed in financial

statement as per applicable FRF
EXAMPLES OF INQUIRY FOR SUBSEQUENT EVENT (BASED ON IFRS / IND AS)

 Inquiry In inquiring of management and, where appropriate, those charged with governance, as to
About whether any subsequent events have occurred that might affect the financial statements, The
Uncertainties auditor may inquire as to the current status of items that were accounted for on the basis of
preliminary or inconclusive data and
 Specific May make specific inquiries about the following matters
Enquiries (Assets - 3)
(CNO-  Whether sales or acquisitions of assets have occurred or are planned.
85.050)  Whether any assets have been appropriated by government or destroyed, for
example, by fire or flood.
 Whether any events have occurred that is relevant to the recoverability of
assets. (E.g. Product Banned Etc)
(Capital & Liability -4)
 Whether there have been increases in capital or issuance of debt instruments,
such as the issue of new shares or debentures, or an agreement to merge or
liquidate has been made or is planned.
 Whether new commitments, borrowings or guarantees have been entered into.
 Whether there have been any developments regarding contingencies.
 Whether any events have occurred that is relevant to the measurement of
estimates or provisions made in the financial statements.
(E.g. Draft royalty rates)
(All items -2)

 Whether any unusual accounting adjustments have been made or are
contemplated.
(E.g. Heavy sales return)
 Whether any events have occurred or are likely to occur that will bring into
question the appropriateness of accounting policies used in the financial
statements, as would be the case, for example, if such events call into question
the validity of the going concern assumption.
(E.g. Sale of Long-term Investments)
FACTS WHICH BECOME KNOWN TO THE AUDITOR AFTER THE DATE OF THE AUDITOR’S REPORT BUT BEFORE
THE DATE THE FINANCIAL STATEMENTS ARE ISSUED (CNO-87.000)
 No No obligation to perform any audit procedures after date of AR / Facts becomes known
obligation to the auditor, had it been known to auditor at the at the date of AR, it may have
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changed audit report, then discuss with management / need for amendment in financial
statements / inquire managements intention
The auditor has no obligation to perform any audit procedures regarding the financial
statements after the date of the auditor’s report. However, when, after the date of the auditor’s
report but before the date the financial statements are issued, a fact becomes known to the
auditor that, had it been known to the auditor at the date of the auditor’s report, may have
caused the auditor to amend the auditor’s report, the auditor shall:
Discuss the matter with management and, where appropriate, those charged with
governance.
Determine whether the financial statements need amendment and, if so,
Inquire how management intends to address the matter in the financial statements.
 If If Management amends FST / carry audit procedures to examine amendment / extend
Management subsequent events audit procedures to new audit report date / provide new audit report
amends FST / date should after FST date
(CNO-85.100)
If management amends the financial statements, the auditor shall:
Carry out the audit procedures necessary in the circumstances on the amendment
Unless the restricted by LAW:
 Extend the audit procedures to the date of the new auditor’s report; and
 Provide a new auditor’s report on the amended financial statements. The new
auditor’s report shall not be dated earlier than the date of approval of the
amended financial statements.
 Mgt does not If audit report not provided, then modify it and then give it Mgt / if audit report is
amend FST provided then notify Mgt & TCWG / Ask them not to issue FST / If still FST are issued
(CNO-85.100) take appropriate action to seek to prevent reliance on Audit Report
In some entities, management may not be required by the applicable law, regulation or the
financial reporting framework to issue amended financial statements and, accordingly, the
auditor need not provide an amended or new auditor’s report. However, when management does
not amend the financial statements in circumstances where the auditor believes they need to be
amended, then:
If the auditor’s report has not yet been provided to the entity, the auditor shall modify
the opinion as required by SA 705 and then provide the auditor’s report; or
If the auditor’s report has already been provided to the entity, the auditor shall notify
management and, unless all of those charged with governance are involved in managing
the entity, those charged with governance, not to issue the financial statements to third
parties before the necessary amendments have been made. If the financial statements
are nevertheless subsequently issued without the necessary amendments, the auditor
shall take appropriate action, to seek to prevent reliance on the auditor’s report.
 Other If law doesn’t restrict Mgt to do other amendments, other than identified subsequent
Amendments events / auditor can restrict its checking only to subsequent events requiring amendments
/ in such scenario auditor shall do either of 2 options / Option 1 Include Additional Date
indicating that audit procedures were restricted / Option 2 Include EMP or OMP para
When law, regulation or the financial reporting framework does not prohibit management from
restricting the amendment of the financial statements to the effects of the subsequent events or
events causing that amendments and those responsible for approving the financial statements
are not prohibited from restricting their approval to that amendment, the auditor is permitted to
restrict the audit procedures on subsequent events required to that amendment. In such cases,
the auditor shall either:
Amend the auditor’s report to include an additional date restricted to that amendment
that thereby indicates that the auditor’s procedures on subsequent events are restricted
solely to the amendment of the financial statements described in the relevant note to
the financial statements; or
Provide a new or amended auditor’s report that includes a statement in an Emphasis of
Matter paragraph or Other Matter(s) paragraph3 that conveys that auditor’s procedures
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on subsequent events are restricted solely to the amendment of the financial statements
as described in the relevant note to the financial statements.
KEY TO REMEMBER
No Obligation but Facts matter: - No obligation to perform any audit procedures after date
of AR / Facts becomes known to the auditor, had it been known to auditor at the at the date of
AR, it may have changed audit report, then discuss with management / need for amendment in
financial statements / inquire managements intention.
Mgt Amends: - If Mgt amends FST / carry audit procedures to examine amendment / extend
subsequent events audit procedures to new audit report date / provide new audit report / date
should after FST date.
Mgt does not amend FST: - if audit report not provided then modify it and then give it Mgt /
if audit report is provided then notify Mgt / TCWG ask them not to issue FST / If still FST are
issued take appropriate action to seek to prevent reliance on Audit Report.
Other Amendments: - If law doesn’t restrict Mgt to do other amendments, other than identified
subsequent events / auditor can restrict its checking only to subsequent events requiring
amendments / in such scenario auditor shall do either of 2 options / Option 1 Include Additional
Date indicating that audit procedures were restricted / Option 2 Include EMP or OMP para.
FACTS WHICH BECOME KNOWN TO THE AUDITOR AFTER THE FINANCIAL STATEMENTS HAVE BEEN ISSUED.
All Steps of Earlier Point will apply Plus Following Additional Point will be Applicable
Review the steps taken by management to ensure that anyone in receipt of the previously issued financial statements
together with the auditor’s report thereon is informed of the situation.
UNIQUE QUESTION
 CNO 88.000 Subsequent Event (Salary Case )
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[SA 570]GOING CONCERN

STEP 1: - EVENTS OR CONDITIONS CREATING SIGNIFICANT DOUBT OVER GOING CONCERN? (CNO-89.000)
The following are examples of events or conditions that, individually or collectively, may cast significant doubt
about the going concern assumption. This listing is not all-inclusive nor does the existence of one or more of the
items always signify that a material uncertainty exists.
 Financial (In sequence of falling business)
 Substantial operating losses or significant deterioration in the value of assets used
to generate cash flows.
 Negative operating cash flows indicated by historical or prospective financial
statements.
 Arrears or discontinuance of dividends.
 Net liability or net current liability position.
 Adverse key financial ratios.
(Borrowing Related Points)
 Inability to comply with the terms of loan agreements.
(Maintaining Stock Levels, Margin Money)
 Fixed-term borrowings approaching maturity without realistic prospects of

renewal or repayment; or excessive reliance on short-term borrowings to finance
long-term assets.
(Kingfisher Airlines)
 Inability to obtain financing for essential new product development or other

essential investments.
(Satyam, Banks refused to give new loans)
(Creditor Related Points)

 Inability to pay creditors on due dates.
 Indications of withdrawal of financial support by creditors.
(No extension from creditors)
Change from credit to cash-on-delivery transactions with suppliers.

 Operating Management intentions to liquidate the entity or to cease operations.
(E.g. Start-up’s)
Loss of key management without replacement.

Shortages of important supplies.
(E.g.PowerGenerating Plants)
Labour difficulties.
Loss of a major market, key customer(s), franchise, license, or principal supplier(s).
Emergence of a highly successful competitor.
(E.g.Milk Butter Vs Peanut Butter)
 Other Uninsured or underinsured catastrophes when they occur.

(Law related matters)
Non-compliance with capital or other statutory requirements.
(E.g.CAR in Banks)
Changes in law or regulation or government policy expected to adversely affect the entity.
Pending legal or regulatory proceedings against the entity that may, if successful, result in
claims that the entity is unlikely to be able to satisfy.
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Step 2:- ADDITIONAL AUDIT PROCEDURES WHEN EVENTS OR CONDITIONS ARE IDENTIFIED (CNO-90.000) (MCQ-
570.1/570.3/ Incs.08.1)
If events or conditions have been identified that may cast significant doubt on the entity’s ability to continue as a
going concern, the auditor shall obtain sufficient appropriate audit evidence to determine whether or not a
material uncertainty exists related to events or conditions that may cast significant doubt on the entity’s ability to
continue as a going concern (hereinafter referred to as “material uncertainty”) through performing additional audit
procedures, including consideration of mitigating factors. These procedures shall include:
 Compulsory Management's Assessment if not prepared yet
(CNO- Where management has not yet performed an assessment of the entity’s ability to
90.050) continue as a going concern, requesting management to make its assessment.
Future Plan
Evaluating management’s plans for future actions(Introducing new products, cost
cutting, sale of assets, sale of investments, issue of shares, taking new loans etc.) in
relation to its going concern assessment, whether the outcome of these plans is likely to
improve the situation.
(E.g. Will such funds be sufficient to carry on business)and whether management’s plans
are feasible in the circumstances. (can they pull off such big changes in given short span)
Cash flow & forecast
Where the entity has prepared a cash flow forecast, and analysis of the forecast is a
significant factor in considering the future outcome of events or conditions in the
evaluation of management’s plans for future actions:
 Evaluating the reliability of the underlying data generated to prepare the
forecast; and
 Determining whether there is adequate support for the assumptions underlying
the forecast.
Events
Considering whether any additional facts or information have become available since
the date on which management made its assessment.
Written Representation
Requesting written representations from management and, where appropriate, those
charged with governance, regarding their plans for future actions and the feasibility of
these plans.
 Optional if Audit procedures that are relevant to the requirement may include the following:
required
Future Action Plans of Third Parties & Management
(In Sequence of Power)
 Obtaining and reviewing reports of regulatory actions.
 Inquiring of the entity’s legal counsel regarding the existence of litigation and
claims and the reasonableness of management’s assessments of their outcome
and the estimate of their financial implications.
 Reading minutes of the meetings of shareholders, those charged with
governance and relevant committees for reference to financing difficulties.
 Determining the adequacy of support for any planned disposals of assets.
 Reading the terms of debentures and loan agreements and determining whether
any have been breached.
 Evaluating the entity’s plans to deal with unfilled customer orders.(When there
is shortage of raw material)
Cash flow, forecast & interim financial statements
 Analyzing and discussing cash flow, profit and other relevant forecasts with
management.
 Analyzing and discussing the entity’s latest available interim financial
statements.
Subsequent Events
 Performing audit procedures regarding subsequent events to identify those that
either mitigate or otherwise affect the entity’s ability to continue as a going
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concern.
Written Representation of Third Parties
 Confirming the existence, legality and enforceability of arrangements to provide
or maintain financial support with related and third parties and assessing the
financial ability of such parties to provide additional funds.
 Confirming the existence, terms and adequacy of borrowing facilities.
Step 3 :- CONCLUSION & REPORTING (MCQ-570.2)
SA 570
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THEORY OF ABOVE CHART

 Auditor The auditor shall evaluate whether sufficient appropriate audit evidence has been obtained
Conclusions regarding, and shall conclude on, the appropriateness of management’s use of the going concern
(CNO- basis of accounting in the preparation of the financial statements.
90.050/ Based on the audit evidence obtained, the auditor shall conclude whether, in the auditor’s
91.000/ judgment, a material uncertainty exists related to events or conditions that, individually or
94.000/ collectively, may cast significant doubt on the entity’s ability to continue as a going concern. A
94.010) material uncertainty exists when the magnitude of its potential impact and likelihood of
occurrence is such that, in the auditor’s judgment, appropriate disclosure of the nature and
implications of the uncertainty is necessary for:
(a) In the case of a fair presentation financial reporting framework, the fair
presentation of the financial statements, or
(b) In the case of a compliance framework, the financial statements not to be
misleading.
Adequacy of Disclosures When Events or Conditions Have Been Identified and a
Material Uncertainty Exists.
If the auditor concludes that management’s use of the going concern basis of accounting
is appropriate in the circumstances but a material uncertainty exists, the auditor shall
determine whether the financial statements:
 Adequately disclose the principal events or conditions that may cast significant
doubt on the entity’s ability to continue as a going concern and management’s
plans to deal with these events or conditions; and
 Disclose clearly that there is a material uncertainty related to events or
conditions that may cast significant doubt on the entity’s ability to continue as a
going concern and, therefore, that it may be unable to realize its assets and
discharge its liabilities in the normal course of business.
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Adequacy of Disclosures When Events or Conditions Have Been Identified but No
Material Uncertainty Exists.
If events or conditions have been identified that may cast significant doubt on the
entity’s ability to continue as a going concern but, based on the audit evidence obtained
the auditor concludes that no material uncertainty exists, the auditor shall evaluate
whether, in view of the requirements of the applicable financial reporting framework,
the financial statements provide adequate disclosures about these events or conditions.
 Implications Use of Going Concern Basis of Accounting Is Inappropriate;
for the If the financial statements have been prepared using the going concern basis of
Auditor’s accounting but, in the auditor’s judgment, management’s use of the going concern basis
Report of accounting in the preparation of the financial statements is inappropriate, the auditor
(CNO- shall express an adverse opinion.
91.000/ Use of Going Concern Basis of Accounting Is Appropriate but a Material Uncertainty
94.000) Exists;
 Adequate Disclosure of a Material Uncertainty Is Made in the Financial
Statements;
If adequate disclosure about the material uncertainty is made in the financial
statements, the auditor shall express an unmodified opinion and the auditor’s
report shall include a separate section under the heading “Material Uncertainty
Related to Going Concern” to:
o Draw attention to the note in the financial statements that discloses
thematters related to going concern; and
o State that these events or conditions indicate that a material
uncertainty exists that may cast significant doubt on the entity’s ability
to continue as a going concern and that the auditor’s opinion is not
modified in respect of the matter.
 Adequate Disclosure of a Material Uncertainty Is Not Made in the Financial
Statements.
If adequate disclosure about the material uncertainty is not made in the
financial statements, the auditor shall:
o Express a qualified opinion or adverse opinion, as appropriate, in
accordance with SA 705 (Revised); and
o In the Basis for Qualified (Adverse) Opinion section of the auditor’s
report, state that a material uncertainty exists that may cast significant
doubt on the entity’s ability to continue as a going concern and that the
financial statements do not adequately disclose this matter.
Management Unwilling to Make or Extend Its Assessment.
If management is unwilling to make or extend its assessment when requested to do so
by the auditor, the auditor shall consider the implications for the auditor’s report.
UNIQUE QUESTION
 CNO 90.100 Going Concern (Mitigating Factor )
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[SA 580] WRITTEN REPRESENTATIONS
WRITTEN REPRESENTATION (CNO-96.000/99.000)

 Definition A written statement by management provided to the auditor to confirm certain matters or to
support other audit evidence.
(For example, to confirm things which were committed at the start of the audit
(preparation of financial statements, inform about all frauds & errors during the audit
etc.) or to support / corroborate other audit evidences said orally during the audit
(Scrap value is Rs 2 lakhs only).
 Enhances Further, a request for written, rather than oral, representations in many cases may prompt
Quality of management to consider such matters more rigorously, thereby enhancing the quality of the
Information representations.
from
Management
 Excludes Written representations in this context do not include financial statements, the assertions
therein, or supporting books and records.
For purposes of this SA, references to “management” should be read as “management and, where
appropriate, those charged with governance.”
 Types There are two types of written representations: -
Written Representations about Management’s Responsibilities (Compulsory)
Other Written Representations.
 Not a Although written representations provide necessary audit evidence, they do not provide
substitute of sufficient appropriate audit evidence on their own about any of the matters with which they
regular audit deal.
procedure
Furthermore, the fact that management has provided reliable written representations does not
affect the nature or extent of other audit evidence that the auditor obtains about the fulfilment
of management’s responsibilities, or about specific assertions.
It makes it absolutely clear that written representations cannot be a substitute for other evidence
that the auditor could expect to be reasonably available.
 Example For example, a representation by management as to the quantity, existence and cost of
inventories is no substitute for adopting normal audit procedures regarding verification and
valuation of inventories. If the auditor is unable to obtain sufficient appropriate audit evidence
that he believes would be available regarding a matter which has or may have a material effect
on the financial information, this will constitute a limitation on the scope of his examination even
if he has obtained a representation from management on the matter.
DATE OF AND PERIOD(S) COVERED BY WRITTEN REPRESENTATIONS

The date of the written representations shall be as near as practicable to, but not after, the date of the auditor’s
report on the financial statements. The written representations shall be for all financial statements and period(s)
referred to in the auditor’s report.
(Even if management has changed still they will have to provide WR for last year as whole FST is there responsibility
irrespective of change)
REQUESTED WRITTEN REPRESENTATIONS NOT PROVIDED (CNO-98.000) (MCQ-580.1)

If management does not provide one or more of the requested written representations, the auditor shall:
Discuss the matter with management;
Re-evaluate the integrity of management and evaluate the effect that this may have on the reliability of
representations and audit evidence in general; and
Take appropriate actions, including determining the possible effect on the opinion in the auditor’s report in
accordance with SA 705.
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DOUBT AS TO THE RELIABILITY OF WRITTEN REPRESENTATION (CNO-99.000)

 Concerns over If the auditor has concerns about the competence, integrity, ethical values or diligence of
Integrity, Ethics, management, or about its commitment to or enforcement of these, the auditor shall
Competence , determine the effect that such concerns may have on the reliability of representations (oral or
Diligence of written) and audit evidence in general.
Management
 Inconsistency In particular, if written representations are inconsistent with other audit evidence, the auditor
with other audit shall perform audit procedures to attempt to resolve the matter. If the matter remains
evidence unresolved, the auditor shall reconsider the assessment of the competence, integrity, ethical
values or diligence of management, or of its commitment to or enforcement of these, and shall
determine the effect that this may have on the reliability of representations (oral or written)
and audit evidence in general.
 Auditor If the auditor concludes that the written representations are not reliable, the auditor shall take
concludes WR appropriate actions, including determining the possible effect on the opinion in the auditor’s
not reliable report in accordance with SA 705.
UNIQUE QUESTION
 CNO 97.000 Misuse of WR
 CNO 97.100 Date of and period covered by written representation
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[SA 600] USING THE WORK OF ANOTHER AUDITOR
ACCEPTANCE AS PRINCIPAL AUDITOR
Ratan Tata Offers Audit of a TATA Company as

principal au ditor
CA becomes very
happy, he is
ready to meet for
terms of
engagement
CA goes for meeting with

Ratan Tata, He comes to know there
will be Branch au ditor.
CA is ok with it.
Can CA perform
Additional
Procedures?
What is TO of
Such Branches ? Knowledge of Business No not allowed
What is Conducted by Branches
75% RMM ? ?
Blank No Knowledge
Very High
Dhoka hai yeh I will not accept

position of principal auditor.
The auditor should consider whether the auditor's own participation is sufficient to be able to act as the principal
auditor. For this purpose, the auditor would consider:
The materiality of the portion of the financial information which the Principal auditor audits;
The risk of material misstatements in the financial information of the components audited by the other
auditor; and
The principal auditor's degree of knowledge regarding the business of the components;
The performance of additional procedures as set out in this SA regarding the components audited by other
auditor resulting in the principal auditor having significant participation in such audit.
THE PRINCIPAL AUDITOR’S PROCEDURES (MCQ-600.1)

 Salman Sufficient & Appropriate Evidence – Work of other auditor is sufficient
bhai calls The principal auditor should perform procedures to obtain sufficient appropriate audit
his evidence, that the work of the other auditor is adequate for the principal auditor's
purposes, in the context of the specific assignment.
assistant
Shera (2 Competence
things)  Professional Competence of other auditor – consider only if other than CA
When planning to use the work of another auditor, the principal auditor should
consider the professional competence of the other auditor in the context of
specific assignment if the other auditor is not a member of the Institute of
Chartered Accountants of India.
 Other Auditor Not Professionally Qualified – generally in case of foreign branch,

importance of audit procedures increases
In certain circumstances, the other auditor may happen to be a person other than
a professionally qualified auditor. This may happen, for instance, where a
component is situated in a foreign country and the applicable laws permit a person
other than a professionally qualified auditor to audit the financial statements of
such component. In such circumstances, the procedures outlined in this section
assume added importance.
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 Salman Mandatory Procedures
bhai meets arrangement for co-ordination / use of work of other auditor / areas requiring special
other consideration / intercomponent transactions / timetable --- advise & obtain
representation as to compliance to accounting, auditing and reporting requirements.
auditors (2
things) When using the work of another auditor, the principal auditor should ordinarily perform
(CNO- the following procedures:
100.500/  advise the other auditor of the use that is to be made of the other auditor's work
and report and make sufficient arrangements for coordination of their efforts at
103.050)
the planning stage of the audit. The principal auditor would inform the other
auditor of matters such as areas requiring special consideration, procedures for
(MCQ- the identification of intercomponent transactions that may require disclosure
600.2) and the time-table for completion of audit; and
 advise the other auditor of the significant accounting, auditing and reporting
requirements and obtain representation as to compliance with them.
Discretionary Procedures
 Discussion / Summary / Check List / Visit
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.
 Need not apply above 4 procedures – S&A evidence that acceptable quality
The principal auditor may conclude that it is not necessary to apply procedures
such as those described in above paragraph because sufficient appropriate audit
evidence previously obtained that acceptable quality control policies and
procedures are complied with in the conduct of other auditor's practice.
 NTE – Circumstances / Principal Auditor’s Knowledge & Professional Competence
of 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.
 Findings Audit findings or other matters affecting component – may lead to supplemental tests
during The principal auditor may consider it appropriate to discuss with the other auditor and the
audit management of the component, the audit findings or other matters affecting the financial
(2 things) information of the components. He may also decide that supplemental tests of the records
or the financial statements of the component are necessary. Such tests may, depending
upon the circumstances, be performed by the principal auditor or the other auditor.
Significant Findings of Other Auditor
The principal auditor should consider the significant findings of the other auditor.
 Salman Summary
bhai orders Documentation -- components / significance / name of other auditors / conclusions reached
final / no need to document why discretionary procedures were not applied / how modified reports
documenta are dealt
-tion
Detailed Text
The principal auditor should document in his working papers the components whose financial
information was audited by other auditors; their significance to the financial information of the
entity as a whole; the names of the other auditors; and any conclusions reached that individual
components are not material. The principal auditor should also document the procedures
performed and the conclusions reached. For example, the auditor would document the results of
discussions with the other auditor and review of the written summary of the other auditor's
procedures. However, the principal auditor need not document the reasons for limiting the
discretionary procedures, provided those reasons are summarised elsewhere in the documentation
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maintained by the principal auditor. Where the other auditor’s report is other than unmodified,
the principal auditor should also document how he has dealt with the qualifications or adverse
remarks contained in the other auditor’s report in framing his own report.
 Special Summary
circumstan Visit – law may give right to visit & examine books of account / principal auditor would
-ces – normally be entitled to rely upon the work of other auditor unless there are special
Action by circumstances requiring visit & examination of books
Salman Detailed Text
bhai In certain situations, the statute governing the entity may confer a right on the principal auditor to
(CNO- visit a component and examine the books of account and other records of the said component, if
100.500/ 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
103.050)
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.
CO-ORDINATION BETWEEN AUDITORS (CNO-101.000)

 Sufficient There should be sufficient liaison between the principal auditor and the other auditor. For this
Liaison / May purpose, the principal auditor may find it necessary to issue written communication(s) to the
issue written other auditor. (PB) (PB)
communication
to other
auditors
 Advise to other The principal auditor should advise the other auditor of any matters that come to his attention
auditors that he thinks may have an important bearing on the other auditor’s work. (PB)
 Significant The other auditor, knowing the context in which his work is to be used by the principal auditor,
findings from should co-ordinate with the principal auditor. For example, by bringing to the principal
other auditors auditor’s immediate attention any significant findings requiring to be dealt with at entity level,
adhering to the time-table for audit of the component, etc. He should ensure compliance with
the relevant statutory requirements. (PB)
 Questionnaire When considered necessary by him, the principal auditor may require the other auditor to
if required answer a detailed questionnaire regarding matters on which the principal auditor requires
information for discharging his duties. The other auditor should respond to such questionnaire
on a timely basis. (PB) (PB)
REPORTING CONSIDERATIONS (CNO-101.000)

Summary
Work of other auditor cannot be used & PA not able to perform additional procedures then give -- Qualified
or Disclaimer
Detailed Text
When the principal auditor concludes, based on his procedures, that the work of the other auditor cannot be used,
and the principal auditor has not been able to perform sufficient additional procedures regarding the financial
information of the component audited by the other auditor, the principal auditor should express a qualified opinion
or disclaimer of opinion because there is a limitation on the scope of audit.
Summary
Work of other auditor can be used & his report is modified – subject of modification significant then modify
PA’s report
Detailed Text
In all circumstances, if the other auditor issues, or intends to issue, a modified auditor's report, the principal auditor
should consider whether the subject of the modification is of such nature and significance, in relation to the financial
information of the entity on which the principal auditor is reporting that it requires a modification of the principal
auditor's report.
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DIVISION OF RESPONSIBILITY
Summary
PA not responsible for work of other auditor unless he has suspicion about reliability of work of OA
Detailed Text
The principal auditor would not be responsible in respect of the work entrusted to the other auditors, except in
circumstances which should have aroused his suspicion about the reliability of the work performed by the other
auditors.
Summary
PA’s report should state clearly division of responsibility, indicating extent of financial information of
components
Detailed Text
When the principal auditor has to base his opinion on the financial information of the entity as a whole relying upon
the statements and reports of the other auditors, his report should state clearly the division of responsibility for the
financial information of the entity by indicating the extent to which the financial information of components audited
by the other auditors have been included in the financial information of the entity,
E.g.., the number of divisions/ branches/ subsidiaries or other components audited by other auditors.
Summary
Auditor can delegate work but cannot delegate responsibility but in case of other auditor he won’t be
responsible if exercises adequate skill and care and is not aware of any reason to believe he should not be
relied
Detailed Text
“When the auditor delegates work to assistants or uses work performed by other auditors and experts, he will continue
to be responsible for forming and expressing his opinion on the financial information. However, he will be entitled to
rely on 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, such as in the case of the work of branch auditors appointed
under the Companies Act the auditor’s report should expressly state the fact of such reliance.”
UNIQUE QUESTION
 CNO 103.000 Branch Audit (Without Visiting )
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[SA 610] USING THE WORK OF INTERNAL AUDITORS
SCOPE AND OBJECTIVES OF THE INTERNAL AUDIT FUNCTION
 Definition Internal audit function – A function of an entity that performs Assurance and Consulting activities
designed to evaluate and improve the effectiveness of the entity’s governance, risk management
and internal control processes.
 Objective & The objectives and scope of internal audit functions typically include assurance and consulting
Scope activities designed to evaluate and improve the effectiveness of the entity’s governance
processes, risk management and internal control such as the following:
Activities Relating to Governance
The internal audit function may assess the governance process in its accomplishment of
objectives on 1 ethics and values, 2 performance management and accountability,
3 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.
Activities Relating to Risk Management
The internal audit function may assist the entity by identifying and evaluating significant
exposures to risk and contributing to the improvement of risk management and internal
control (including effectiveness of the financial reporting process).
The internal audit function may perform procedures to assist the entity in the detection
of fraud.
Activities Relating to Internal Control
1. Review of operating activities. The internal audit function may be assigned to
review the economy, efficiency and effectiveness of operating activities, including
nonfinancial activities of an entity.
2. Evaluation of internal control the internal audit function may be assigned specific
responsibility for reviewing controls, evaluating their operation and recommending
improvements thereto. In doing so, the internal audit function provides assurance
on the control. For example, the internal audit function might plan and perform
tests or other procedures to provide assurance to management and those charged
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with governance regarding the design, implementation and operating effectiveness
of internal control, including those controls that are relevant to the audit.
3. 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.
4. Examination of financial and operating information. The internal audit function
may be assigned to review the means used to identify, recognize, measure, classify
and report financial and operating information, and to make specific inquiry into
individual items, including detailed testing of transactions, balances and
procedures.
DIFFERENCE BETWEEN INTERNAL AUDIT & EXTERNAL AUDIT

Particulars Internal Audit External Audit
 Definition Assurance and Consulting activities designed Audit of financial or other quantitative
to evaluate and improve the effectiveness of information of any entity with a view to
the entity’s governance, risk management and express an opinion thereon.
internal control processes.
 Necessity It is voluntary. Compulsory to some It is normally compulsory. U/S 143
companies’ U/S 138
 Auditor CA / CWA / Such Other Professional  May or The External or Statutory Auditor is not part
May not be in Practice  May be employee of the organization.
 Appointmen By the Management (BOD) of the enterprise. By the owners (Shareholders) of the
t enterprise. (Generally)
 Scope It is determined by the Management and It arises from the responsibilities placed on
of work ranges from the pure review of accounting him by the statute or the terms of
functions to the review of various operational engagement.
services in the organization.
 Format of No format is prescribed. Guidelines in SIA 4 The aspects to be covered in the Report are
Report prescribed by law. SA 700
 Submission To the Management. To the Shareholders.
of Report
 Orientation Management Oriented. Oriented to the needs of the users of
Financial Statements and also
Management.
USING WORK OF INTERNAL AUDITOR

 STEP-1 -- Summary
Evaluating Statutory auditor shall determine can he rely on Internal Auditor. It depends on following:
the Internal - Level of Competence / Objectivity of Internal Auditor / Systematic & Disciplined
Audit Approach If any of above factor is not fulfilled, then he should not rely on internal
auditor.
Function
(CNO- Detailed Text
103.250) The external auditor shall determine whether the work of the internal audit function can be used
for purposes of the audit by evaluating the following:
The extent to which the internal audit function’s organizational status and relevant
policies and procedures support the objectivity of the internal auditors;
The level of competence of the internal audit function; and
Whether the internal audit function applies a systematic and disciplined approach,
including quality control.
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The external auditor shall not use the work of the internal audit function if the external auditor
determines that:
The function’s organizational status and relevant policies and procedures do not
adequately support the objectivity of internal auditors;
The function lacks sufficient competence; or
The function does not apply a systematic and disciplined approach, including quality
control.
 STEP-2 Summary
Determining Consider work of internal auditor & its relevance / Examples of work which can be used:
the Nature -
and Extent 1st two points as per flow of audit process Testing Controls, Then Substantive Procedures,
of Work of Next 3 points are as per relative importance -- Testing Compliance, Tracing transactions
the Internal to financial reporting & reviewing financial information of subsidiaries which are not
Audit significant, Observing Inventory Count
Function
that Can Be Detailed Text
Used As a basis for determining the areas and the extent to which the work of the internal audit function
(CNO- can be used, the external auditor shall consider the nature and scope of the work that has been
103.300) performed, or is planned to be performed, by the internal audit function and its relevance to the
external auditor’s overall audit strategy and audit plan.
Examples of work of the internal audit function that can be used by the external auditor include
the following:
Testing of the operating effectiveness of controls.
Substantive procedures involving limited judgment.
Testing of compliance with regulatory requirements.
Tracing transactions through the information system relevant to financial reporting.
In some circumstances, audits or reviews of the financial information of subsidiaries that
are not significant components to the group (where this does not conflict with the
requirements of SA 600)
Observations of inventory counts.
Summary
Significant Judgments by External Auditor only / Use less of internal auditor work and
more of work directly himself where: - More judgment is involved, higher RMM, Lower
objectivity, Lower competence
Detailed Text
The external auditor shall make all significant judgments in the audit engagement and, to prevent
undue use of the work of the internal audit function, shall plan to use less of the work of the
function and perform more of the work directly:
The more judgment is involved in:
 Planning and performing relevant audit procedures; and
 Evaluating the audit evidence gathered;
The higher the assessed risk of material misstatement at the assertion level, with special
consideration given to risks identified as significant;
The less the internal audit function’s organizational status and relevant policies and
procedures adequately support the objectivity of the internal auditors; and
The lower the level of competence of the internal audit function.
Summary
In aggregate external auditor should be sufficiently involved / Communicate to TCWG
planned use of work on internal auditor
Detailed Text
The external auditor shall also evaluate whether, in aggregate, using the work of the internal audit
function to the extent planned would still result in the external auditor being sufficiently involved
in the audit, given the external auditor’s sole responsibility for the audit opinion expressed.
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The external auditor shall, in communicating with those charged with governance an overview of
the planned scope and timing of the audit in accordance with SA 260, communicate how the
external auditor has planned to use the work of the internal audit function.
Significant Judgment is required while giving GRADES
Significant judgments include the following:
Evaluating the appropriateness of management’s use of the Going concern assumption;
Assessing the Risks of material misstatement;
Evaluating matters affecting the Auditor’s report.
Evaluating the adequacy of Disclosures in the financial statements, and
Evaluating significant accounting Estimates; and
Evaluating the Sufficiency of tests performed;
 STEP 3- Summary
Using the Discuss planned use & Co-ordinate Activities
Work of the (Auditor will not check salary till 30th May, he will check on 1st June)
Internal
Audit Read report to understand NTE and related findings
Function (1st Week Test of Controls, 2nd Week Substantive Testing 3rd Week rectifications
(CNO- & reporting)
103.100) Perform Audit Procedures on body of work of Internal Auditor to evaluate whether
work is planned / performed / supervised / reviewed / documented / S&A Evidence
to draw conclusions / conclusions drawn are consistent with evidence obtained.
(Read detailed plan, check sign of performer & reviewer, analyse misstatements
and conclusion)
His own audit procedures should be responsive depending on factors discussed
earlier Judgment / RMM / (Competence / Objectivity / Work Performed by IA)
and should always include reperformance of some work.
Evaluate whether his own conclusions regarding internal audit function and its uses
remain appropriate as per SAs
Detailed Text
If the external auditor plans to use the work of the internal audit function, the external
auditor shall discuss the planned use of its work with the function as a basis for
coordinating their respective activities.
The external auditor shall read the reports of the internal audit function relating to the
work of the function that the external auditor plans to use to obtain an understanding of
the nature and extent of audit procedures it performed and the related findings.
The external auditor shall perform sufficient audit procedures on the body of work of the
internal audit function as a whole that the external auditor plans to use to determine its
adequacy for purposes of the audit, including evaluating whether:
 The work of the function had been properly planned, performed, supervised,
reviewed and documented;
 Sufficient appropriate evidence had been obtained to enable the function to
draw reasonable conclusions; and
 Conclusions reached are appropriate in the circumstances and the reports
prepared by the function are consistent with the results of the work performed.
The nature and extent of the external auditor’s audit procedures shall be responsive to the
external auditor’s evaluation of:
 The amount of judgment involved;
 The assessed risk of material misstatement;
 The extent to which the internal audit function’s organizational status and
relevant policies and procedures support the objectivity of the internal auditors;
and
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 The level of competence of the function; and shall include reperformance of some
of the work.
The external auditor shall also evaluate whether the external auditor’s conclusions
regarding the evaluation of internal audit function as per this SA and the determination of
the nature and extent of use of the work of the function for purposes of the audit as per
this SA remain appropriate.
DIRECT ASSISTANCE
 Definition Direct assistance – The use of internal auditors to perform audit procedures under the direction,
supervision and review of the external auditor.
 STEP 1: - Summary
Determining Statutory auditor can take direct assistance depending on following: - It should not be
Whether prohibited by law / Significant threats to Level of Competence / Significant threats to
Internal Objectivity of Internal Auditor. If any of above factor is not fulfilled, then he should
Auditors Can not rely on internal auditor. Consider whether prohibition extends to component auditor
Be Used to and if yes, communicate to them.
Provide Direct
Assistance for Detailed Text
Purposes of The external auditor may be prohibited by law or regulation from obtaining direct
the Audit assistance from internal auditors. If so, then no need to check other factors
(CNO- If using internal auditors to provide direct assistance is not prohibited by law or
103.400) regulation, and the external auditor plans to use internal auditors to provide direct
assistance on the audit, the external auditor shall evaluate the existence and significance
of threats to objectivity and the level of competence of the internal auditors who will
be providing such assistance.
The external auditor’s evaluation of the existence and significance of threats to the
internal auditors’ objectivity shall include inquiry of the internal auditors regarding
interests and relationships that may create a threat to their objectivity.
The external auditor shall not use an internal auditor to provide direct assistance if:
 There are significant threats to the objectivity of the internal auditor; or
 The internal auditor lacks sufficient competence to perform the proposed work.
In case where the external auditor is prohibited by law or regulation from using internal
auditors to provide direct assistance, it is relevant for the principal auditors to consider
whether the prohibition also extends to component auditors and, if so, to address this
in the communication to the component auditors.
 STEP 2: - Summary
Determining While determining nature & extent of work to be assigned and NTE of DSR consider
the Nature following: - Judgment, RMM, Objectivity, Competence.
and Extent of
Work that Can Shall not take direct assistance if it involves significant judgement, higher risk of
Be Assigned material misstatement, where internal auditor is involved in the work, decision whether
to Internal
to take direct assistance from internal auditor.
Auditors
Providing Detailed Text
Direct In determining the nature and extent of work that may be assigned to internal auditors and the
Assistance nature, timing and extent of direction, supervision and review that is appropriate in the
(CNO- circumstances, the external auditor shall consider:
103.300/ The amount of judgment involved in:
103.400)  Planning and performing relevant audit procedures; and
(MCQ No-  Evaluating the audit evidence gathered;
Incs.06.1) The assessed risk of material misstatement; and
The external auditor’s evaluation of the existence and significance of threats to the
objectivity and level of competence of the internal auditors who will be providing such
assistance.
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The external auditor shall not use internal auditors to provide direct assistance to perform
procedures that:
Involve making significant judgments in the audit;
Relate to higher assessed risks of material misstatement where the judgment required
in performing the relevant audit procedures or evaluating the audit evidence gathered
is more than limited;
Relate to work with which the internal auditors have been involved and which has
already been, or will be, reported to management or those charged with governance by
the internal audit function; or
Relate to decisions the external auditor makes in accordance with this SA regarding
the internal audit function and the use of its work or direct assistance.
 STEP 3: - Using Summary
Internal Obtain written agreement from authorised representative of company that
Auditors to internal auditor will be allowed to follow external auditor’s instruction & that
Provide Direct entity will not intervene in his work
Assistance Obtain written agreement from internal auditor that he will keep confidential
specific matters as instructed by external auditor and they will inform any threat
(MCQ-610.1) to objectivity
External Auditor should direct / supervise and review work in internal auditor.
He should keep in mind that internal auditor is not independent. It should be
responsive of factors considered earlier.
External auditor should check back to the underlying audit evidence for some of
the work performed by the internal auditors.
Detailed Text
Prior to using internal auditors to provide direct assistance for purposes of the audit, the
external auditor shall:
 Obtain written agreement from an authorized representative of the entity
that the internal auditors will be allowed to follow the external auditor’s
instructions, and that the entity will not intervene in the work the internal
auditor performs for the external auditor; and
 Obtain written agreement from the internal auditors that they will keep
confidential specific matters as instructed by the external auditor and inform
the external auditor of any threat to their objectivity.
The external auditor shall direct, supervise and review the work performed by internal
auditors on the engagement in accordance with SA 220 In so doing:
 The nature, timing and extent of direction, supervision, and review shall
recognize that the internal auditors are not independent of the entity and be
responsive to the outcome of the evaluation of the factors in paragraph of this
SA; and
 The review procedures shall include the external auditor checking back to the
underlying audit evidence for some of the work performed by the internal
auditors.
DIRECT ASSISTANCE FROM INTERNAL AUDITOR IN CASE OF EXTERNAL CONFIRMATION PROCEDURES

SA 610 “Using the Work of Internal Auditor” provide relevant guidance in determining the nature and extent of work
that may be assigned to internal auditors. In determining the nature of work that may be assigned to internal auditors,
the external auditor is careful to limit such work to those areas that would be appropriate to be assigned.
Further, in accordance with SA 505, “External Confirmation” the external auditor is required to maintain control
over external confirmation requests and evaluate the results of external confirmation procedures, it would not be
appropriate to assign these responsibilities to internal auditors. However, internal auditors may assist in assembling
information necessary for the external auditor to resolve exceptions in confirmation responses.
UNIQUE QUESTION
 CNO 103.200 Evaluation of Internal Audit Function (Special)
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[SA 620] USING THE WORK OF AN AUDITOR’S EXPERT
EXPERTISE & EXPERTS (MCQ-620.2)
 Expertise Knowledge, Skills and experience in a particular field.

 Auditor’s An individual or organisation possessing expertise in a field other than accounting or auditing,
expert whose work in that field is used by the auditor to assist the auditor in obtaining sufficient
An auditor’s expert may be either an auditor’s internal expert (who is a partner or staff, including
temporary staff, of the auditor’s firm or a network firm), or an auditor’s external expert.
 Manageme An individual or organisation possessing expertise in a field other than accounting or auditing, whose
nt’s expert work in that field is used by the entity to assist the entity in preparing the financial statements.
 Some areas Expertise in a field other than accounting or auditing may include expertise in relation to such
of expertise matters as:
(CNO-
The valuation of complex (I1) financial instruments, (F1) land and buildings, (F2) plant and
104.000)
machinery, (I2) jewellery, (I3) works of art, antiques, (F4) intangible assets, assets
acquired, and liabilities assumed in (F5) business combinations and assets that may have
been (F6) impaired.
The actuarial calculation of liabilities associated with (L1) insurance contracts or (L2)
employee benefit plans.
The estimation of (F3) oil and gas reserves.
The valuation of (L3) environmental liabilities, and site clean-up costs.
The interpretation of (L4) contracts, laws and regulations.
The analysis of complex or unusual (L5) tax compliance issues.
SHORTCUT
Balance Sheet
L1 – Insurance F1 – L&B / F2 – P&M

L2 – Emp Ben Plan F3 – O&G / F4 – IA
L3 – Env Liab F5 – Business Comb / F6 – Impairment
L4 – Law, Contract
I1 – Fin Inst / I2 – Jewl / I3 – Art, Antiq
L5 -- Tax
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FACTOR AFFECTING NATURE, TIMING & EXTENT OF AUDITOR’S PROCEDURE
The nature, timing and extent of the auditor’s procedures will vary depending on the circumstances.
In determining the nature, timing and extent of those procedures, the auditor shall consider matters including:
(1) The significance of that expert’s work in the context of the audit;
(2) The nature of the matter to which that expert’s work relates;
(3) The risks of material misstatement in the matter to which that expert’s work relates;
(4) The auditor’s knowledge of and experience with previous work performed by that expert; and
(5) Whether that expert is subject to the auditor’s firm’s quality control policies and procedures.
Further explanation (when to have more extensive procedures)
The following factors may suggest the need for different or more extensive procedures than would otherwise be the
case:
The auditor’s expert is performing procedures that are integral to the audit, rather than being consulted to
provide advice on an individual matter. (1)
The work of the auditor’s expert relates to a significant matter that involves subjective and complex
judgments. (2 & 3)
The auditor has not previously used the work of the auditor’s expert, and has no prior knowledge of that
expert’s competence, capabilities and objectivity. (4)
The expert is an auditor’s external expert and is not, therefore, subject to the firm’s quality control policies
and procedures. (5)
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STEP 1: - DETERMINING THE NEED FOR AN AUDITOR’S EXPERT
 Need for If expertise in a field other than accounting or auditing is necessary to obtain sufficient appropriate
Auditor’s audit evidence, the auditor shall determine whether to use the work of an auditor’s expert.
Expert Considerations when deciding whether to use an auditor’s expert may include:
(MCQ- The nature and significance of the matter, including its complexity.
620.3) The risks of material misstatement in the matter.
The expected nature of procedures to respond to identified risks, including the auditor’s
knowledge of and experience with the work of experts in relation to such matters; and the
availability of alternative sources of audit evidence.
Whether management has used a management’s expert in preparing the financial
statements.
 Example of Summary
activities in It’s in flow of core audit process -- Understanding, Identifying & assessing risk, overall
which response, further audit procedures, sufficiency & appropriateness
auditor’s
help may Detailed Text
be required An auditor’s expert may be needed to assist the auditor in one or more of the following:
Obtaining an understanding of the entity and its environment, including its internal control.
Identifying and assessing the risks of material misstatement.
Determining and implementing overall responses to assessed risks at the financial
statement level.
Designing and performing further audit procedures to respond to assessed risks at the
assertion level, comprising tests of controls or substantive procedures.
Evaluating the sufficiency and appropriateness of audit evidence obtained in forming an
opinion on the financial statements.
 When Summary
manageme Competence & Capability / Employed or Engaged / Technical Standards / Nature, Scope &
nt has used Objectives / Controls / Management Influence
a
manageme Detailed Text
nt’s expert, When management has used a management’s expert in preparing the financial statements, the
whether to auditor’s decision on whether to use an auditor’s expert may also be influenced by such factors as:
use The management’s expert’s competence and capabilities.
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auditor’s Whether the management’s expert is employed by the entity, or is a party engaged by it
expert to provide relevant services.
The nature, scope and objectives of the management’s expert’s work.
Whether the management’s expert is subject to technical performance standards or other
professional or industry requirements.
Any controls within the entity over the management’s expert’s work.
The extent to which management can exercise control or influence over the work of the
management’s expert.
STEP 2: - OBTAINING AN UNDERSTANDING OF THE FIELD OF EXPERTISE OF THE AUDITOR’S EXPERT

The auditor shall obtain a sufficient understanding of the field of expertise of the auditor’s expert to enable
the auditor to:
 Determine the nature, scope and objectives of that expert’s work for the auditor’s purposes; and
 Evaluate the adequacy of that work for the auditor’s purposes,
An auditor who is not an expert in a relevant field other than accounting or auditing May nevertheless be able
to obtain a sufficient understanding of that field to perform the audit without an auditor’s expert. This
understanding may be obtained through, for example:
 Experience in auditing entities that require such expertise in the preparation of their financial
statements.
 Education or professional development in the particular field. This may include formal courses or
discussion with individuals possessing expertise in the relevant field for the purpose of enhancing the
auditor’s own capacity to deal with matters in that field. Such discussion differs from consultation
with an auditor’s expert regarding a specific set of circumstances encountered on the engagement
where that expert is given all the relevant facts that will enable the expert to provide informed advice
about the particular matter.
 Discussion with auditors who have performed similar engagements.
STEP 3: - THE COMPETENCE, CAPABILITIES AND OBJECTIVITY OF THE AUDITOR’S EXPERT
Competent
Capable
Objective
Auditor
Expert
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STEP 4: - AGREEMENT WITH THE AUDITOR EXPERT
 Chart
(CNO-
105.100)
 Matters to The auditor shall agree, in writing when appropriate, on the following matters with the auditor’s
be expert:
considered The nature, scope and objectives of that expert’s work;
The respective roles and responsibilities of the auditor and that expert;
in
The nature, timing and extent of communication between the auditor and that expert,
Agreement including the form of any report to be provided by that expert; and
(CNO- When the work of the auditor’s expert relates to the auditor’s conclusions regarding a
105.100) significant risk, both a formal written report at the conclusion of that expert’s work, and
oral reports as the work progresses, may be appropriate. Identification of specific
partners or staff who will liaise with the auditor’s expert, and procedures for
communication between that expert and the entity, assists timely and effective
communication, particularly on larger engagements.
The need for the auditor’s expert to observe confidentiality requirements.
It is necessary for the confidentiality provisions of relevant ethical requirements that
apply to the auditor also to apply to the auditor’s expert. Additional requirements may
be imposed by law or regulation. The entity may also have requested that specific
confidentiality provisions be agreed with auditor’s external experts.
 Circumstance As per SA 620, “Using the work of an Auditor’s Expert”, some of the matters may affect the level
s / Factors of detail and formality of the agreement between the auditor and the auditor’s expert, including
which may whether it is appropriate that the agreement be in writing. For example, the following factors may
lead to more suggest the need for more a detailed agreement than would otherwise be the case, or for the
detailed agreement to be set out in writing:
agreement
N-DEAL should have detailed agreement as they are Complex
(CNO-
The auditor has Not previously used work performed by that expert.
105.000)
The respective roles or responsibilities of the auditor and the auditor’s expert are
Different from those normally expected.
The greater the Extent of the auditor’s expert’s work, and its significance in the context
of the audit.
The auditor’s expert will have access to sensitive or confidential entity information.
Multi-jurisdictional Legal or regulatory requirements apply.
The matter to which the auditor’s expert’s work relates is highly Complex.
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STEP 5: - EVALUATING THE ADEQUACY OF THE AUDITOR’S EXPERT’S WORK (CNO-104.000/106.000)
(MCQ-620.4)
Source
Data Assumptions Method = Findings &
+ + + Conclusions
Evaluate – Relevance, Evaluate – Relevance & Evaluate – Relevance,

Accuracy & Completeness Reasonableness Reasonableness & Consistency with
other audit evidence
Procedures – Case 1: - Experts work is to
1. Verify Origin evaluate assumptions & method -
Specific Procedures – Similar to
2. Test ICS & Transmission - Adequate Review of
Assumptions & Review methods of collecting evidence in SA
3. Review for Completeness
500 Observation, Inspection, Inquiry,
& Internal Consistency
Case 2: - Experts work is to Recalculation, Reperformance,
develop point or range estimate Analytical Procedures, Confirmation,
for auditor – Evaluate WR with 2 extra statistical reports &
assumptions & methods used by another expert
expert / Use of SA 540 – Use it in
context of expert
Factors used for evaluation –

Compare with Generally Accepted
/ FRF / Management’s /
Specialised Models
If work not adequate – 1. Agree with that expert for further audit procedures OR 2. Perform further
audit procedures
If auditor concludes that work of expert is inadequate & he cannot resolve matter – express modified
opinion
 Source The auditor shall evaluate the adequacy of the auditor’s expert’s work for the auditor’s purposes,
Data including:
Source Data – Relevance, Accuracy & Completeness
 If that expert’s work involves the use of source data that is significant to that
expert’s work, the relevance, accuracy, and completeness of that source data.
Procedures for Source Data – Verify Origin & Internal Controls / Review Data
When an auditor’s expert’s work involves the use of source data that is significant to that
expert’s work, procedures such as the following may be used to test that data:
 Verifying the origin of the data, including obtaining an understanding of, and
where applicable testing, the internal controls over the data and, where relevant,
its transmission to the expert.
 Reviewing the data for completeness and internal consistency.
 Assumptio Assumptions & Methods – Relevance & Reasonableness
ns & If that expert’s work involves use of significant assumptions and methods, the relevance
Methods and reasonableness of those assumptions and methods in the circumstances; and
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Case 1: - Experts work is to evaluate assumptions & method -- Adequate Review of
Assumptions & Review
When the auditor’s expert’s work is to evaluate underlying assumptions and methods,
including models where applicable, used by management in developing an accounting
estimate, the auditor’s procedures are likely to be primarily directed to evaluating whether
the auditor’s expert has adequately reviewed those assumptions and methods.
Case 2: - Experts work is to develop point or range estimate for auditor – Evaluate
assumptions & methods used by auditor / Use of SA 540 – Use it in context of expert
When the auditor’s expert’s work is to develop an auditor’s point estimate or an auditor’s
range for comparison with management’s point estimate, the auditor’s procedures may
be primarily directed to evaluating the assumptions and methods, including models where
appropriate, used by the auditor’s expert.
SA 540 discusses the assumptions and methods used by management in making accounting
estimates, including the use in some cases of highly specialised, entity-developed models.
Although that discussion is written in the context of the auditor obtaining sufficient
appropriate audit evidence regarding management’s assumptions and methods, it may also
assist the auditor when evaluating an auditor’s expert’s assumptions and methods.
Factors used for evaluation – Compare with Generally Accepted / FRF / Management’s /
Specialised Models
When an auditor’s expert’s work involves the use of significant assumptions and methods,
factors relevant to the auditor’s evaluation of those assumptions and methods include
whether they are:
 Generally accepted within the auditor’s expert’s field
 Consistent with the requirements of the applicable financial reporting framework;
 Consistent with those of management, and if not, the reason for, and effects of,
the differences.
 Dependent on the use of specialised models; and
 Findings & Findings or Conclusions – Relevance, Reasonableness & Consistency with another audit
Conclusion evidence
 The relevance and reasonableness of that expert’s findings or conclusions, and
their consistency with another audit evidence;
Specific Procedures – Similar to methods of collecting evidence in SA 500 Observation,
Inspection, Inquiry, Recalculation, Reperformance, Analytical Procedures, Confirmation,
WR with 2 extra statistical reports & another experts.
Specific procedures to evaluate the adequacy of the auditor’s expert’s work for the
auditor’s purposes may include:
 Inquiries of the auditor’s expert. 3
 Reviewing the auditor’s expert’s working papers and reports. 2
 Corroborative procedures, such as:
o Observing the auditor’s expert’s work; 1
o Examining published data, such as statistical reports from reputable,
authoritative sources;
o Confirming relevant matters with third parties;7
o Performing detailed analytical procedures; and 6
o Re-performing calculations. 4/5
Discussing the auditor’s expert’s report with management. 8
Discussion with another expert with relevant expertise when, for example, the findings or
conclusions of the auditor’s expert are not consistent with other audit evidence.
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 Inadequate Summary
Work If work not adequate – 1. Agree with that expert for further audit procedures OR 2. Perform further
(CNO- audit procedures
106.100)
If auditor concludes that work of expert is inadequate & he cannot resolve matter – express modified
opinion
Detailed Text
If the auditor determines that the work of the auditor’s expert is not adequate for the auditor’s
purposes, the auditor shall:
Agree with that expert on the nature and extent of further work to be performed by that
expert; or
Perform further audit procedures appropriate to the circumstances.
If the auditor concludes that the work of the auditor’s expert is not adequate for the auditor’s
purposes and the auditor cannot resolve the matter through the additional audit procedures, which
may involve further work being performed by both the expert and the auditor, or include
employing or engaging another expert, it may be necessary to express a modified opinion in the
auditor’s report in accordance with SA 705 because the auditor has not obtained sufficient
STEP 6: - REFERENCE TO THE AUDITOR’S EXPERT IN THE AUDITOR’S REPORT (CNO-106.100) (MCQ-620.1)
 Unmodifie Unmodified Opinion -- No reference unless required by law, if referred explain no
d Opinion reduction in responsibility.
The auditor shall not refer to the work of an auditor’s expert in an auditor’s report
containing an unmodified opinion unless required by law or regulation to do so. If such
reference is required by law or regulation, the auditor shall indicate in the auditor’s report
that the reference does not reduce the auditor’s responsibility for the audit opinion.
 Modified Modified Opinion – Refer if its relevant for understanding if referred explain no reduction
Opinion in responsibility;
If the auditor makes reference to the work of an auditor’s expert in the auditor’s report
because such reference is relevant to an understanding of a modification to the auditor’s
opinion, the auditor shall indicate in the auditor’s report that such reference does not
reduce the auditor’s responsibility for that opinion.
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[SA 700 Revised] FORMING AN OPINION AND REPORTING ON FINANCIAL STATEMENTS
APPLICABILITY DEFERRED NOW APPLICABLE FROM FINANCIAL YEAR 2018-2019

TYPES OF FRF & ITS IMPACT ON AUDIT REPORT
 Unmodified The auditor shall express an unmodified opinion when the auditor concludes that the financial
statements are prepared, in all material respects, in accordance with the applicable financial
reporting framework.
 Modified If the auditor:

(a) concludes that, based on the audit evidence obtained, the financial statements as a whole
are not free from material misstatement; or
(b) is unable to obtain sufficient appropriate audit evidence to conclude that the financial
statements as a whole are free from material misstatement, the auditor shall modify the
opinion in the auditor’s report in accordance with SA 705(Revised).
 What if Fair If financial statements prepared in accordance with the requirements of a fair presentation
Presentation framework do not achieve fair presentation, the auditor shall discuss the matter with management
Framework? and, depending on the requirements of the applicable financial reporting framework and how the
matter is resolved, shall determine whether it is necessary to modify the opinion in the auditor’s
report in accordance with SA 705 (Revised).
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(For example, in notes to account, useful life is giving as 10 years and with star mark,
they have written that machine will work for 30 years as per past experience, no
such disclosure will confuse people and it is not fair presentation
Suppose company is incorporated in 15-16 and it is operating for 8 months but if
they simply write 15-16 in year then it won’t be fair)
 What is When the financial statements are prepared in accordance with a compliance framework, the
Compliance auditor is not required to evaluate whether the financial statements achieve fair presentation.
Framework? However, if in extremely rare circumstances the auditor concludes that such financial statements
are misleading, the auditor shall discuss the matter with management and, depending on how it
is resolved, shall determine whether, and how, to communicate it in the auditor’s report.
BASIC ELEMENTS OF THE AUDITOR REPORT (Refer Chart at the end) (CNO-108.000)
The auditor’s report shall be in writing.
Auditor’s Report for Audits Conducted in Accordance with Standards on Auditing. (Below are the basics elements as
Format of Audit Report)
 Title The auditor’s report shall have a title that clearly indicates that it is the report of an independent
auditor. (“Independent Auditor’s Report)
 Addressee The auditor’s report shall be addressed, as appropriate, based on the circumstances of the
engagement. (It may be prescribed in Law / Regulation / Terms of Engagement, if not it can be
addressed to TCWG or Shareholders)
 Auditor’s The first section of the auditor’s report shall include the auditor’s opinion and shall have the heading
Opinion “Opinion.”
The Opinion section of the auditor’s report shall also:
(a) State that the financial statements have been audited;
(b) Identify the entity whose financial statements have been audited;
(c) Identify the title of each statement comprising the financial statements;
(d) Refer to the notes, including the summary of significant accounting policies; and
(e) Specify the date of, or period covered by, each financial statement comprising the financial
statements.
WORDINGS
Fair Presentation Framework
When expressing an unmodified opinion on financial statements prepared in accordance
with a fair presentation framework, the auditor’s opinion shall, unless otherwise required
by law or regulation, use one of the following phrases, which are regarded as being
equivalent:
(a) In our opinion, the accompanying financial statements present fairly, in all
material respects, […] in accordance with [the applicable financial reporting
framework];
OR
(b) In our opinion, the accompanying financial statements give a true and fair view
of […] in accordance with [the applicable financial reporting framework].
Compliance Framework
When expressing an unmodified opinion on financial statements prepared in accordance
with a compliance framework, the auditor’s opinion shall be that the accompanying
financial statements are prepared, in all material respects, in accordance with [the
applicable financial reporting framework].
If the reference to the applicable financial reporting framework in the auditor’s opinion
is not to Accounting Standards, the auditor’s opinion shall identify the origin of such other
framework.
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 Basis for The auditor’s report shall include a section, directly following the Opinion section, with the heading
Opinion “Basis for Opinion”, that:
(MCQ- (a) Includes a statement that the auditor is independent of the entity in accordance with the
700.1) relevant ethical requirements relating to the audit and has fulfilled the auditor’s other
ethical responsibilities in accordance with these requirements. The statement shall refer
to the Code of Ethics issued by ICAI.
(b) States that the audit was conducted in accordance with Standards on Auditing;
(c) Refers to the section of the auditor’s report that describes the auditor’s responsibilities
under the SAs;
(d) States whether the auditor believes that the audit evidence the auditor has obtained is
sufficient and appropriate to provide a basis for the auditor’s opinion.
 Going Where applicable, the auditor shall report in accordance with SA 570 (Revised).
Concern
 Key Audit (a) For audits of complete sets of general-purpose financial statements of listed entities, the
Matters auditor shall communicate key audit matters in the auditor’s report in accordance with SA
(Please 701.
refer (b) When the auditor is otherwise required by law or regulation or decides to communicate
SA 701 for key audit matters in the auditor’s report, the auditor shall do so in accordance with SA 701.
detailed
discussion)
 Responsibi- The auditor’s report shall include a section with a heading “Responsibilities of Management for the
lities for Financial Statements.” The auditor’s report shall use the term that is appropriate in the context of
the the legal framework applicable to the entity and need not refer specifically to “management”. In
Financial some entities, the appropriate reference may be to those charged with governance. (For last line,
Statements it’s like saying audit committee is responsible for financial statements but in India responsibility lies
with BOD)
This section of the auditor’s report shall describe management’s responsibility for:
Preparing the financial statements in accordance with the applicable financial reporting
framework, and for such internal control as management determines is necessary to
enable the preparation of financial statements that are free from material misstatement,
whether due to fraud or error; and
When the financial statements are prepared in accordance with a fair presentation
framework, the description of responsibilities for the financial statements in the auditor’s
report shall refer to “the preparation and fair presentation of these financial statements”
or “the preparation of financial statements that give a true and fair view,” as appropriate
in the circumstances. (See third line of the paragraph)
Assessing the entity’s ability to continue as a going concern and whether the use of the
going concern basis of accounting is appropriate as well as disclosing, if applicable, matters
relating to going concern. The explanation of management’s responsibility for this
assessment shall include a description of when the use of the going concern basis of
accounting is appropriate.
This section of the auditor’s report shall also identify those responsible for the oversight
of the financial reporting process (See last line of management responsibility paragraph),
when those responsible for such oversight are different from those who fulfill the
responsibilities above. In this case, the heading of this section shall also refer to “Those
Charged with Governance” or such term that is appropriate in the context of the legal
framework applicable to entity.
(Four things Preparation of Financial Statements / Internal Control System / Going Concern
/ Oversight)
 Auditor’s This part focuses on objectives given in Paragraph 37
Responsibi- The auditor’s report shall include a section with the heading “Auditor’s Responsibilities for
lities for the Audit of the Financial Statements.”
the Audit of This section of the auditor’s report shall:
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the (a) State that the objectives of the auditor are to:
Financial (i) Obtain reasonable assurance about whether the financial statements as a
Statements whole are free from material misstatement, whether due to fraud or error;
(CNO- and
109.000) (ii) Issue an auditor’s report that includes the auditor’s opinion.
(b) State that reasonable assurance is a high level of assurance, but is not a
guarantee that an audit conducted in accordance with SAs will always detect a
material misstatement when it exists; and
(c) State that misstatements can arise from fraud or error, and either:
(i) Describe that they are considered material if, individually or in the aggregate,
they could reasonably be expected to influence the economic decisions of
users taken on the basis of these financial statements; or
(ii) Provide a definition or description of materiality in accordance with the
applicable financial reporting framework.
This part focuses on scope of audit, how audit was performed given in Paragraph 38.
The Auditor’s Responsibilities for the Audit of the Financial Statements section of the
auditor’s report shall further:
(a) State that, as part of an audit in accordance with SAs, the auditor exercises
professional judgment and maintains professional skepticism throughout the
audit; and
(b) Describe an audit by stating that the auditor’s responsibilities are:
(i) To identify and assess the risks of material misstatement of the financial
statements, whether due to fraud or error; to design and perform audit
procedures responsive to those risks; and to obtain audit evidence that is
sufficient and appropriate to provide a basis for the auditor’s opinion. The risk
of not detecting a material misstatement resulting from fraud is higher than
for one resulting from error, as fraud may involve collusion, forgery,
intentional omissions, misrepresentations, or the override of internal control.
(ii) To obtain an understanding of internal control relevant to the audit in order
to design audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the entity’s
internal control. In circumstances when the auditor also has a responsibility
to express an opinion on the effectiveness of internal control in conjunction
with the audit of the financial statements, the auditor shall omit the phrase
that the auditor’s consideration of internal control is not for the purpose of
expressing an opinion on the effectiveness of the entity’s internal control.
(iii) To evaluate the appropriateness of accounting policies used and the
reasonableness of accounting estimates and related disclosures made by
management.
(iv) To conclude on the appropriateness of management’s use of the going
concern basis of accounting and, based on the audit evidence obtained,
whether a material uncertainty exists related to events or conditions that may
cast significant doubt on the entity’s ability to continue as a going concern. If
the auditor concludes that a material uncertainty exists, the auditor is
required to draw attention in the auditor’s report to the related disclosures
in the financial statements or, if such disclosures are inadequate, to modify
the opinion. The auditor’s conclusions are based on the audit evidence
obtained up to the date of the auditor’s report. However, future events or
conditions may cause an entity to cease to continue as a going concern.
(v) When the financial statements are prepared in accordance with a fair
presentation framework, to evaluate the overall presentation, structure and
content of the financial statements, including the disclosures, and whether
the financial statements represent the underlying transactions and events in
a manner that achieves fair presentation.
(c) When SA 600 applies, further describe the auditor’s responsibilities in a group audit
engagement by stating: The division of responsibility for the financial information
of the entity by indicating the extent to which the financial information of
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components is audited by the other auditors have been included in the financial
information of the entity, e.g., the number of divisions/branches/subsidiaries or
other components audited by other auditor.
Other Matter Paragraph
This part focuses on Communication given in Paragraph 39
The Auditor’s Responsibilities for the Audit of the Financial Statements section of the
auditor’s report also shall:
(a) State that the auditor communicates with those charged with governance
regarding, among other matters, the planned scope and timing of the audit and
significant audit findings, including any significant deficiencies in internal control
that the auditor identifies during the audit;
(b) State that the auditor provides those charged with governance with a statement
that the auditor has complied with relevant ethical requirements regarding
independence and communicate with them all relationships and other matters
that may reasonably be thought to bear on the auditor’s independence, and where
applicable, related safeguards; and
(c) For audits of financial statements of all such entities for which key audit matters
are communicated in accordance with SA 701, state that, from the matters
communicated with those charged with governance, the auditor determines those
matters that were of most significance in the audit of the financial statements of
the current period and are therefore the key audit matters. In accordance with the
requirements of SA 701, the auditor describes these matters in the auditor’s report
unless law or regulation precludes public disclosure about the matter or when, in
extremely rare circumstances, the auditor determines that a matter should not be
communicated in the auditor’s report because the adverse consequences of doing
so would reasonably be expected to outweigh the public interest benefits of such
communication.
Only for Scope (Para 38) & Communication Responsibilities (Para 39) Above
Location of the description of the auditor’s responsibilities for the audit of the financial
statements.
The description of the auditor’s responsibilities for the audit of the financial statements
shall be included:
(a) Within the body of the auditor’s report;
(b) Within an appendix to the auditor’s report, in which case the auditor’s report shall
include a reference to the location of the appendix; or
(c) By a specific reference within the auditor’s report to the location of such a
description on a website of an appropriate authority, where law, regulation or the
auditing standards expressly permit the auditor to do so.
When the auditor refers to a description of the auditor’s responsibilities on a
website of an appropriate authority, the auditor shall determine that such
description addresses, and is not inconsistent with, the requirements of this SA.
 Other If the auditor addresses other reporting responsibilities in the auditor’s report on the financial
Reporting statements that are in addition to the auditor’s responsibilities under the SAs, these other reporting
Responsibi- responsibilities shall be addressed in a separate section in the auditor’s report with a heading titled
lities “Report on Other Legal and Regulatory Requirements” or otherwise as appropriate to the content
of the section, unless these other reporting responsibilities address the same topics as those
presented under the reporting responsibilities required by the SAs in which case the other
reporting responsibilities may be presented in the same section as the related report elements
required by the SAs.
If other reporting responsibilities are presented in the same section as the related report elements
required by the SAs, the auditor’s report shall clearly differentiate the other reporting
responsibilities from the reporting that is required by the SAs.
(E.g. Company Act 2013 requires auditor to comment whether financial
statements give true & fair view, so this comment is made in opinion paragraph
and reference to company act is made there itself)
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If the auditor’s report contains a separate section that addresses other reporting responsibilities,
the requirements all content till auditor’s responsibility of this SA shall be included under a section
with a heading “Report on the Audit of the Financial Statements.” The “Report on Other Legal and
Regulatory Requirements” shall follow the “Report on the Audit of the Financial Statements.”
 Signature The auditor’s report shall be signed. The report is signed by the auditor (i.e. the engagement
of the partner) in his personal name. Where the firm is appointed as the auditor, the report is signed in
Auditor the personal name of the auditor and in the name of the audit firm. The partner/proprietor signing
the audit report also needs to mention the membership number assigned by the Institute of
Chartered Accountants of India. They also include the registration number of the firm, wherever
applicable, as allotted by ICAI, in the audit reports signed by them.
 Place of The auditor’s report shall name specific location, which is ordinarily the city where the audit report
Signature is signed.
 Date of the The auditor’s report shall be dated no earlier than the date on which the auditor has obtained
Auditor’s sufficient appropriate audit evidence on which to base the auditor’s opinion on the financial
Report statements, including evidence that:
(a) All the statements that comprise the financial statements, including the related notes,
have been prepared; and
(b) Those with the recognized authority have asserted that they have taken responsibility for
those financial statements. (That means first management should sign and then auditor)
AUDITOR REPORT PRESCRIBED BY LAW OR REGULATION

{E.g. Format of tax audit report prescribed by law}
Refers to Standards on Auditing only if the auditor’s report includes, at a minimum, Basic Elements of Audit
Report, except that going concern / key audit matter / other reporting requirements only if required.
In India we don’t refer to SA 700 while preparing tax audit report because it is not having management responsibility
& auditor responsibility paragraph.
ICAI Clarification on tax audit report
http://www.icai.org/new_post.html?post_id=9687
STANDARDS AUDITING IN ONE AUDIT REPORT (CNO-111.050)

 Relevance An auditor may be required to conduct an audit in accordance with, in addition to the Standards on
to more Auditing issued by ICAI, the International Standards on Auditing or auditing standards of any other
than one jurisdiction. If this is the case, the auditor’s report may refer to Standards on Auditing in addition to
SA the International Standards on Auditing or auditing standards of such other jurisdiction, but the
auditor shall do so only if:
(a) There is no conflict between the requirements in the ISAs or such auditing standards of
other jurisdiction and those in SAs that would lead the auditor
i) to form a different opinion, or
ii) not to include an Emphasis of Matter paragraph or Other Matter paragraph that,
in the particular circumstances, is required by SAs; and
(b) The auditor’s report includes, at a minimum, each of the elements set out for audit report
as per law.
When the auditor’s report refers to both the ISAs or the auditing standards of a specific jurisdiction
and the Standards on Auditing issued by ICAI, the auditor’s report shall clearly identify the same
including the jurisdiction of origin of the other auditing standards.
 Further Entity may decide to present financial statement as per 2 FRF, for example as per AS & IFRS.
Reference So, description will contain both FRFs provided both the FRFs should be fully complied (i.e.
to More can’t use particular FRF only for one or two items of FST) &no need for reconciliation
than One between both.
Financial If only one FRF is followed & there is only reconciliation from FRF to another or just
Reporting disclosure how much other FRF is Compiled no need to refer both?
Framework
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SUPPLEMENTARY INFORMATION
 Chart
 Detailed If supplementary information that is not required by the applicable financial reporting framework
Text is:
presented with the audited financial statements, the auditor shall evaluate whether, in the
auditor’s professional judgment, supplementary information is nevertheless an integral
part of the financial statements due to its nature or how it is presented. When it is an
integral part of the financial statements, the supplementary information shall be covered
by the auditor’s opinion.
not considered an integral part of the audited financial statements, the auditor shall
evaluate whether such supplementary information is presented in a way that sufficiently
and clearly differentiates it from the audited financial statements. If this is not the case,
then the auditor shall ask management to change how the unaudited supplementary
information is presented. If management refuses to do so, the auditor shall identify the
unaudited supplementary information and explain in the auditor’s report that such
supplementary information has not been audited.
For Example
When the notes to the financial statements include an explanation or the reconciliation of
the extent to which the financial statements comply with another financial reporting
framework, the auditor may consider this to be supplementary information that cannot be
clearly differentiated from the financial statements. The auditor’s opinion would also cover
notes or supplementary schedules that are cross referenced from the financial statements.
When an additional profit and loss account that discloses specific items of expenditure is
disclosed as a separate schedule included as an appendix to the financial statements, the
auditor may consider this to be supplementary information that can be clearly
differentiated from the financial statements.
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CERTIFICATE FOR SPECIAL PURPOSE VS. AUDIT REPORT (CNO-110.100)
A certificate is a written confirmation of the accuracy of the facts stated therein and does not involve any estimate or
opinion. The term ‘certificate’ is, therefore, used where the auditor verifies the accuracy of facts. An auditor may thus,
certify the circulation figures of a newspaper or the value of imports or exports of a company. An auditor’s certificate
represents that he has verified certain figures and is in a position to vouch safe their accuracy as per his examination
of documents and books of account.
A report, on the other hand, is a formal statement usually made after an enquiry, examination or reviews of specified
matters under report and includes the reporting auditor’s opinion thereon. Thus, when a reporting auditor issues a
certificate, he is responsible for the factual accuracy of what is stated therein.
On the other hand, when a reporting auditor gives a report, he is responsible for ensuring that the report is based on
factual data, that his opinion is in due accordance with facts, and that it is arrived at by the application of due care and
skill. The ‘report’ involves expression of opinion which may differ from one professional to another.
There is no question of exactitude in case of a report since the information contained therein is based on estimates
and involves judgement element.
Presentation in Table Form
Audit Report Audit Certificate
 A report is a formal statement made after an  Certificate is a written confirmation of the
enquiry of matter specified. accuracy of the facts stated therein and does
not involve any estimate or opinion.
 The ‘report’ involves expression of opinion  The term ‘certificate’ is used where the auditor
which may differ from one professional to verifies the accuracy of facts stated therein.
another
 He is responsible for the factual accuracy of
 He is responsible for ensuring that the report is what is stated therein.
based on factual data. Example :
Example : As per Section 66 of the Companies Act, 2013,
However, the report under Section 143 of the an auditor is required to file a certificate in the
Companies Act, 2013, is an opinion-based tribunal where company is proposing for the
report and is not a certificate reduction of capital.
REPORTING TO SHAREHOLDERS V/S REPORTING TO TCWG (CNO-110.000)

Reporting to Shareholders Reporting to Those Charged with Governance.
Section 143 of the Companies Act, 2013 deals with the SA 260 deals with the provisions relating to reporting to
provisions relating to reporting to Shareholders. Thus, those Charged with Governance.
it is a Statutory Audit Report which is addressed to the
members.
Statutory Audit Report is on true and fair view and as It is a reporting on matters those charged with
per prescribed Format. governance like scope of audit, audit procedures, audit
modifications, etc.
Statutory Audit Reports are in public domain. Reporting to those Charged with Governance is an
internal document i.e. private report.
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ANNEXURE (CNO-108.000)
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[SA 701] COMMUNICATING KEY AUDIT MATTERS IN THE INDEPENDENT AUDITOR’S

REPORT
IN WHICH CIRCUMSTANCES, AUDITOR SHOULD THINK/CONSIDER ABOUT KEY AUDIT MATTER PARAGRAPH?
(Refer Chart at the end)
Answer: -
This point is explained in SA 700 and not SA 701, so be careful while quoting SA number
(a) For audits of complete sets of general-purpose financial statements of listed entities, the auditor shall
communicate key audit matters in the auditor’s report in accordance with SA 701. (So above 3 things are must
for compulsory consideration about KAM)
(b) When the auditor is otherwise required by law or regulation or decides to communicate key audit matters in
the auditor’s report, the auditor shall do so in accordance with SA 701.
Apart from compulsory consideration these two situations are possible;
1st if required by law for example if made mandatory TRAI or
2nd Auditor decides to communicate if entity is of significant public interest for example because they have a
large number and wide range of stakeholders and considering the nature and size of the business. Examples
of such entities may include financial institutions (such as banks, insurance companies, and pension funds),
and other entities such as charities.
Public sector entities, even where not listed, may be significant due to size, complexity or public interest
aspects. In such cases, an auditor of a public-sector entity may be required by law or regulation or may
otherwise decide to communicate key audit matters in the auditor’s report.
However, SA 705 (Revised) prohibits the auditor from communicating key audit matters when the auditor
disclaims an opinion on the financial statements, unless such reporting is required by law or regulation.
WHAT DO YOU MEAN BY KEY AUDIT MATTER (KAM) AND HOW TO DETERMINE KAM? (MCQ-701.3 / 701.1/
701.4)
 Key audit Those matters that, in the auditor’s professional judgment, were of most significance in the audit
matters of the financial statements of the current period. Key audit matters are selected from matters
communicated with those charged with governance.
1st It should from matters communicated to TCWG
2nd Required SIGNIFICANT AUDITOR ATTENTION
3rd It should be of MOST SIGNIFICANCE
4th It is should be from audit of CURRENT Period)
 Significant The auditor shall determine, from the matters communicated with those charged with governance,
Auditor those matters that required significant auditor attention in performing the audit.
Attention
In making this determination, the auditor shall take into account the following:
(CNO-
(It gives us guidance on matters where there is generally Significant Auditor Attention)
112.100)
(a) Areas of higher assessed risk of material misstatement, or significant risks identified in
accordance with SA 315.
(In case of higher RMM we take into consideration internal control system but still
conclude that chance of misstatement are high but in Significant risk we don’t take
into consideration internal control system. Some parallel example Dengue is
significant risk to life if I don’t consider medical facilities & cure available for it but
Blood Cancer in higher RMM even if I consider medical facilities available. Now
professional example valuation of closing stock in fast changing electronic industry is
significant risk even if controls are strong but complex ESOP scheme may be higher
RMM.
Now real-life example of Dominos, where E&Y UK as specified revenue recognition risk
as RMM specifically highlighting Cut Off as a big risk in audit report)
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(b) Significant auditor judgments relating to areas in the financial statements that involved
significant management judgment, including accounting estimates that have been
identified as having high estimation uncertainty.
(E.g. In Mondi Limited a South African Company auditor Deloitte has specified
Capitalization of Fixed Asset as Key audit matter as it involves significant
judgement by management regarding which expenses should be capitalized and
till what time and what should be economic useful life.)
(c) The effect on the audit of significant events or transactions that occurred during the period.
(E.g. In Philips Netherland KPMG has specified Separation of Health Tech
Business & Lighting Opportunities as separate company as Key Audit Matter,
Also Acquisition of Volcano Corporation)
 Most The auditor shall determine which of the matters determined in accordance with above points were
Significance of most significance in the audit of the financial statements of the current
(CNO- period and therefore are the key audit matters.
112.100) (Matters involving in-depth, frequent, robust interactions , important to users, complex,
subjective, material etc. For example, GST implementation may be of most significance
as compared to IDT cases pending against company)
HOW TO COMMUNICATE KAM IN AUDIT REPORT? (CNO-112.300)

 Introducto The auditor shall describe each key audit matter, using an appropriate subheading, in a separate
ry section of the auditor’s report under the heading “Key Audit Matters,”. The introductory language
Language in this section of the auditor’s report shall state that:
(a) Key audit matters are those matters that, in the auditor’s professional judgment, were of
(CNO-
most significance in the audit of the financial statements [of the current period]; and
112.000) (b) These matters were addressed in the context of the audit of the financial statements as a
whole, and in forming the auditor’s opinion thereon, and the auditor does not provide a
separate opinion on these matters.
(Above 2 are general statements, they should be specified at the start every time auditor
specifies KAM)
 Description Descriptions of Individual Key Audit Matters
s The description of each key audit matter in the Key Audit Matters section of the auditor’s report
shall include a reference to the related disclosure(s), if any, in the financial statements and shall
address:
(a) Why the matter was considered to be one of most significance in the audit and therefore
determined to be a key audit matter; and
(b) How the matter was addressed in the audit.
 Not Circumstances in Which a Matter Determined to Be a Key Audit Matter Is Not Communicated in
Communi- the Auditor’s Report
cated The auditor shall describe each key audit matter in the auditor’s report unless:
(a) Law or regulation precludes public disclosure about the matter;
(CNO-
(E.g. Suppose SFIO investigations are going against company for money laundering
112.000) and NCLT directs auditor not to disclose details as it may affect investigations
adversely, in such circumstances auditor will not disclose KAM) or
(b) In extremely rare circumstances, the auditor determines that the matter should not be
communicated in the auditor’s report because the adverse consequences of doing so would
reasonably be expected to outweigh the public interest benefits of such communication.
This shall not apply if the entity has publicly disclosed information about the matter.
(E.g. Cyrus Mistry was removed as chairman of TATA Sons and there will be
change in management along with legal tussle between Cyrus Mistry
(Shapoorji Pallonji Group) and Ratan Tata Group now this is big event and may
qualify for KAM but auditor may decide not to give details as it will lead to
speculations and tarnishing Tata group companies)
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 Other Form and Content of the Key Audit Matters Section in Other Circumstances
Circumstan If the auditor determines, depending on the facts and circumstances of the entity and the audit,
ces that there are no key audit matters to communicate or that the only key audit matters
communicated are those matters which are not to be communicated in audit report, the auditor
shall include a statement to this effect in a separate section of the auditor’s report under the
heading “Key Audit Matters.”
WHAT IS RELATIONSHIP BETWEEN KEY AUDIT MATTERS, THE AUDITOR’S OPINION AND OTHER ELEMENTS OF
THE AUDITOR’S REPORT? (MCQ-701.2)
Answer
Interaction between Descriptions of Key Audit Matters and Other Elements Required to Be Included in the
Auditor’s Report;
A matter giving rise to a modified opinion in accordance with SA 705 (Revised), or a material uncertainty
related to events or conditions that may cast significant doubt on the entity’s ability to continue as a going
concern in accordance with SA 570 (Revised), are by their nature key audit matters. However, in such
circumstances, these matters shall not be described in the Key Audit Matters section of the auditor’s report
and the requirements of specific disclosure as KAM. Rather, the auditor shall:
 Report on these matter(s) in accordance with the applicable SA(s); and
 Include a reference to the Basis for Qualified (Adverse) Opinion or the Material Uncertainty Related
to Going Concern section(s) in the Key Audit Matters section.
Key Audit Matters Not a Substitute for Expressing a Modified Opinion;
The auditor shall not communicate a matter in the Key Audit Matters section of the auditor’s report when the
auditor would be required to modify the opinion in accordance with SA 705 (Revised) as a result of the matter.
(Qualified under SA 705  Don’t include in KAM just give reference of Basis of Qualification in KAM para
Adverse under SA 705  Don’t include in KAM just give reference Basis of Qualification in KAM para
Disclaimer under SA 705  Don’t give KAM para as audit was not conducted.
EMP / OMP under SA 706  If matter of EMP / OMP is also KAM, include it in KAM you can highlight more by
putting it first in sequence and describing it more. then no need to put separate EMP / OMP. Apart from this
there can be separate matters where only EMP / OMP is required and no need to include them in KAM, this
concept is explained in detail in SA 706)
UNIQUE QUESTION
 CNO 111.100 Purpose of KAM
 CNO 112.200 Reporting of Key Audit Matters
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ANNEXURE
SA 701
1.Applicability i. Audit of “Complete Set” of “General Purpose FST” of “Listed Entities”
of KAM Para
ii. Required by Law / Regulations
(Given in SA
700) iii. Auditor decides to Communicate KAM (Eg Significant Public Interest Involved)
SA 705 Prohibits putting KAM if Opinion is Disclaimed, Unless required by Law / Regulation
Step 1 Step 2
Step 3 Step 4
2. Determining Make list of matters Identify matters which need
Identify items of Current Period
KAM items ? Communicated to Significant Auditor
Most Significance Item
TCWG Attentsion
List given in SA 260 Indepth, frequent,

robust interactions ,
efforts, time , resources
etc
Significant
Significant Risk or High Management Significant Event or
RMM Judgement Transactions
Eg Philips
Eg Mondi Ltd
(Netherland)
Eg Dominos UK AR (South Africa)
Separation of Health Tech &
Revenue Recognition Cut Off Because of huge expansion
Lighting Business as 2 sperate
is Highlighted as High RMM capitalisation of fixed asset
companies from across group
hence KAM needs significant judgement
companies is Significant Event or
hence KAM
Transaction Hence KAM
3. How to
communicate Heading Introductory Language Main Content of KAM
KAM ?
2 Standard Statements
Key Audit Matter  Description of KAM
 Reference to related Disclosure
1. Definition of KAM – Matters which
 Why matter is considered KAM?
in auditor’s professional judgement
How the matter was addressed?
were of Most Significance
2. Auditor is not providing sperate

opinion on these matter
No Communication of some KAM items
1. Law / Regulations Prohibits (Eg SFIO) 2. Adverse Consequences more than Public Interest (Eg Cyrus Mistry Vs TATA)
If there is No Key Audit Matter or Key Audit Matters Exist but not Reported as per reasons given above then include a
statement under heading “key Audit Matter” and explain this fact.
4. Relationship with Other paras

Matters
Modification Material Uncertainty EMP / OMP

Include in “Basis of Modification” Include in “Going Concern” Give If common, Include it in KAM. Such
Give Reference in KAM Reference in KAM items can be put first in KAM
sequence to highlight them
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[SA 705] MODIFICATIONS TO THE OPINION IN THE INDEPENDENT AUDITOR’S REPORT
WHEN TO MODIFY? TYPES OF MODIFICATIONS & OTHER CONSIDERATIONS (CNO-113.000) (MCQ-705.1)

 Circumstances The auditor shall modify the opinion in the auditor’s report when:
When a (a) The auditor concludes that, based on the audit evidence obtained, the financial
Modification statements as a whole are not free from material misstatement; or
to the (b) The auditor is unable to obtain sufficient appropriate audit evidence to
Auditor’s conclude that the financial statements as a whole are free from material
Opinion is misstatement.
Required
 Determining Qualified Opinion
the Type of The auditor shall express a qualified opinion when:
Modification (a) The auditor, having obtained sufficient appropriate audit evidence, concludes
to the that misstatements, individually or in the aggregate, are material, but not
Auditor’s pervasive, to the financial statements; or
Opinion (b) The auditor is unable to obtain sufficient appropriate audit evidence on which
to base the opinion, but the auditor concludes that the possible effects on the
(CNO- financial statements of undetected misstatements, if any, could be material
115.000/ but not pervasive.
113.030)
Adverse Opinion
The auditor shall express an adverse opinion when the auditor, having obtained
(MCQ-705.2/
sufficient appropriate audit evidence, concludes that misstatements, individually or in
705.3/ 705.7/
the aggregate, are both material and pervasive to the financial statements.
705.8/
Incs.03.2/ Disclaimer of Opinion
Incs.07.1/ The auditor shall disclaim an opinion when the auditor is unable to obtain sufficient
Incs.07.4) appropriate audit evidence on which to base the opinion, and the auditor concludes
that the possible effects on the financial statements of undetected misstatements, if
any, could be both material and pervasive.
The auditor shall disclaim an opinion when, in extremely rare circumstances involving
multiple uncertainties, the auditor concludes that, notwithstanding having obtained
sufficient appropriate audit evidence regarding each of the individual uncertainties, it
is not possible to form an opinion on the financial statements due to the potential
interaction of the uncertainties and their possible cumulative effect on the financial
statements.
(Example of Indosolar Ltd)
Nature of Matter giving rise to the Auditor’s Judgment about the Pervasiveness of the Effects. or
Modification Possible Effects on the Financial Statements
Material but Not Pervasive Material but Pervasive
Financial Statements are materially Qualified Opinion Adverse Opinion

misstated
Inability to obtain sufficient appropriate Qualified Opinion Disclaimer of Opinion '

audit evidence
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CONSEQUENCE OF AN INABILITY TO OBTAIN SUFFICIENT APPROPRIATE AUDIT EVIDENCE DUE TO A

MANAGEMENT-IMPOSED LIMITATION AFTER THE AUDITOR HAS ACCEPTED THE ENGAGEMENT (CNO-119.000)
(MCQ-705.5)
 Detailed If, after accepting the engagement, the auditor becomes aware that management has
Text imposed a limitation on the scope of the audit that the auditor considers likely to result in
the need to express a qualified opinion or to disclaim an opinion on the financial
statements, the auditor shall request that management remove the limitation.
If management refuses to remove the limitation referred to in above paragraph, the
auditor shall communicate the matter to those charged with governance, unless all of
those charged with governance are involved in managing the entity and determine
whether it is possible to perform alternative procedures to obtain sufficient appropriate
audit evidence.
If the auditor is unable to obtain sufficient appropriate audit evidence, the auditor shall
determine the implications as follows:
(a) If the auditor concludes that the possible effects on the financial statements of
undetected misstatements, if any, could be material but not pervasive, the
auditor shall qualify the opinion; or
(b) If the auditor concludes that the possible effects on the financial statements of
undetected misstatements, if any, could be both material and pervasive so that a
qualification of the opinion would be inadequate to communicate the gravity of
the situation, the auditor shall:
(i) Withdraw from the audit, where practicable and possible under
applicable law or regulation; or
(ii) If withdrawal from the audit before issuing the auditor’s report is not
practicable or possible, disclaim an opinion on the financial statements.
If the auditor withdraws as discussed above, before withdrawing, the
auditor shall communicate to those charged with governance any
matters regarding misstatements identified during the audit that would
have given rise to a modification of the opinion.
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Limitation of Scope Imposed After Acceptance

Likely to result in Qualification or Disclaimer
Request Management to Remove Limitation of Scope
If Management Refuses go to TCWG and Try to perform alternative

Audit Procedure
Not able to get Sufficient and Appropriate Audit Evidence
Not Pervasive Pervasive

Qualify Resign{ If at Early Stage}
OR Disclaimer
{If in Advance Stage}
FORM AND CONTENT OF THE AUDITOR’S REPORT WHEN THE OPINION IS MODIFIED
 Title (In exams express only those areas where there is change)
No Change
 Addressee No Change
 Auditor’s When the auditor modifies the audit opinion, the auditor shall use the heading “Qualified
 Opinion Opinion,” “Adverse Opinion,” or “Disclaimer of Opinion,” as appropriate, for the Opinion section.
(CNO- Qualified Opinion
113.010) When the auditor expresses a qualified opinion due to a material misstatement in the
financial statements, the auditor shall state that, in the auditor’s opinion, except for the
effects of the matter(s) described in the Basis for Qualified Opinion section:
(a) When reporting in accordance with a fair presentation framework, the
accompanying financial statements present fairly, in all material respects (or
give a true and fair view of) […] in accordance with [the applicable financial
reporting framework]; or
(b) When reporting in accordance with a compliance framework, the
accompanying financial statements have been prepared, in all material
respects, in accordance with [the applicable financial reporting framework].
(c) When the modification arises from an inability to obtain sufficient appropriate
audit evidence, the auditor shall use the corresponding phrase “except for the
possible effects of the matter(s) ...” for the modified opinion.
Adverse Opinion
When the auditor expresses an adverse opinion, the auditor shall state that, in the
auditor’s opinion, because of the significance of the matter(s) described in the Basis
for Adverse Opinion section:
(a) When reporting in accordance with a fair presentation framework, the
accompanying financial statements do not present fairly (or give a true and fair
view of) […] in accordance with [the applicable financial reporting framework];
or
(b) When reporting in accordance with a compliance framework, the
accompanying financial statements have not been prepared, in all material
respects, in accordance with [the applicable financial reporting framework].
Disclaimer of Opinion
When the auditor disclaims an opinion due to an inability to obtain sufficient
appropriate audit evidence, the auditor shall:
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(a) Amend the statement in Opinion paragraph, which indicates that the financial
statements have been audited, to state that the auditor was engaged to audit
the financial statements.
(b) State that, because of the significance of the matter(s) described in the Basis
for Disclaimer of Opinion section, the auditor has not been able to obtain
sufficient appropriate audit evidence to provide a basis for an audit opinion on
the financial statements; and
(c) State that the auditor does not express an opinion on the accompanying
financial statements;
 Basis for When the auditor modifies the opinion on the financial statements, the auditor shall, in addition
Opinion to the specific elements required by SA 700 (Revised):
(a) Amend the heading “Basis for Opinion” required by paragraph 28 of SA 700 (Revised) to
“Basis for Qualified Opinion,” “Basis for Adverse Opinion,” or “Basis for Disclaimer of
Opinion,” as appropriate; and
(b) Within this section, include a description of the matter giving rise to the modification.
MATERIAL MISSTATEMENT
Related to amount
If there is a material misstatement of the financial statements that relates to specific
amounts in the financial statements (including quantitative disclosures in the notes to
the financial statements), the auditor shall include in the Basis for Opinion section a
description and quantification of the financial effects of the misstatement,
(E.g. Depreciation under charged by 5 crores) unless impracticable. If it is not
practicable to quantify the financial effects, the auditor shall so state in
this section.
(E.g. Company as changed from FIFO to LIFO which is in appropriate but
there is no facility to quantify the change)
Related to Narrative Disclosures
If there is a material misstatement of the financial statements that relates to narrative
disclosures, the auditor shall include in the Basis for Opinion section an explanation of
how the disclosures are misstated.
(E.g. Company has disclosed that CY losses covers net worth, instead it should be
specified that CY losses are 3 times net worth of the company as on start of the
year)
Relates to non-disclosure
If there is a material misstatement of the financial statements that relates to the
nondisclosure of information required to be disclosed, the auditor shall:
(E.g. Contingent Liability Undisclosed)
(a) Discuss the non-disclosure with those charged with governance;

(b) Describe in the Basis for Opinion section the nature of the omitted information;
and
(c) Unless prohibited by law or regulation, include the omitted disclosures, provided
it is practicable to do so and the auditor has obtained sufficient appropriate audit
evidence about the omitted information.
(E.g. If it is related to terrorist attack, it may not be allowed, or it may not
be practical)
INABILITY TO OBTAIN SUFFICEINT & APPROPRIATE EVIDENCE

If the modification results from an inability to obtain sufficient appropriate audit evidence, the
auditor shall include in the Basis for Opinion section the reasons for that inability.
When the auditor expresses a qualified or adverse opinion, the auditor shall amend the
statement about whether the audit evidence obtained is sufficient and appropriate to provide
a basis for the auditor’s opinion to include the word “qualified” or “adverse”, as appropriate.
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When the auditor disclaims an opinion on the financial statements, the auditor’s report shall
not include the following
Those elements are:
(a) A reference to the section of the auditor’s report where the auditor’s responsibilities are
described; and
(b) A statement about whether the audit evidence obtained is sufficient and appropriate to
provide a basis for the auditor’s opinion.
(c) Even if the auditor has expressed an adverse opinion or disclaimed an opinion on the
financial statements, the auditor shall describe in the Basis for Opinion section the
reasons for any other matters of which the auditor is aware that would have required
a modification to the opinion, and the effects thereof.
 Going No Change
Concern
 Key Audit Considerations When the Auditor Disclaims an Opinion on the Financial Statements
Matter Unless required by law or regulation, when the auditor disclaims an opinion on the financial
statements, the auditor’s report shall not include a Key Audit Matters section in accordance with
SA 701.
 Management No Change
Responsibility
 Description When the auditor disclaims an opinion on the financial statements due to an inability to obtain
of Auditor’s sufficient appropriate audit evidence, the auditor shall amend the description of the auditor’s
Responsibi- responsibilities to include only the following:
lities for the (a) The statement about auditor independence and other ethical responsibilities required
Audit of the by SA 700 (Revised).
Financial (b) A statement that the auditor’s responsibility is to conduct an audit of the entity’s
Statements financial statements in accordance with Standards on Auditing and to issue an auditor’s
When the report;
Auditor (c) A statement that, however, because of the matter(s) described in the Basis for Disclaimer
Disclaims an of Opinion section, the auditor was not able to obtain sufficient appropriate audit
Opinion on evidence to provide a basis for an audit opinion on the financial statements; and
the Financial
Statements.
 Report on No Change
other legal &
regulatory
requirement
 Signature No Change
 Place No Change
 Date No Change
COMMUNICATION WITH THOSE CHARGED WITH GOVERNANCE

When the auditor expects to modify the opinion in the auditor’s report, the auditor shall communicate with those
charged with governance the circumstances that led to the expected modification and the wording of the
modification.
APPENDIX
LIST OF SITUATIONS / EXAMPLES
 Qualified QUALIFIED OPINION SHOULD BE GIVEN IN FOLLOWING SITUATIONS, PROVIDED THEY
Opinion ARE MATERIAL BUT NOT PERVASIVE
1. Depreciation is not charged.
2. Interest wrongly capitalized with fixed assets.
3. Long term investments are not properly valued as per FRF
4. Auditor not allowed to visit
5. Revenue expense shown as receivables
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 Adverse ADVERSE OPINION SHOULD BE GIVEN IN FOLLOWING SITUATIONS, PROVIDED THEY
Opinion ARE MATERIAL & PERVASIVE:
1. Going concern assumption is inappropriate but still it is followed, no adjustment
for historical cost to realizable and payable value
2. Contractor followed completion method but AS 7 specifies percentage
completion method.
3. Major subsidiary is not consolidated with holding company financial statements.
4. Company prepares financial statements as per cash basis, going against accrual
principle.
5. Combination of points mentioned in qualified affecting major part of financial
statements (pervasive)
 Disclaimer DISCLAIMER OPINION SHOULD BE GIVEN IN FOLLOWING SITUATIONS, PROVIDED THEY
Opinion ARE MATERIAL & PERVASIVE:
1. Multiple uncertainties exist and auditor is unable to determine possible effect
on financial statements
2. Books of accounts and related documents are seized by government authorities
and there is no other means to get them.
3. Going concern is doubtful and this information is not specified in notes to
accounts.
4. Only Xerox copies are available but o other reliable evidence to support it.
5. Limitation imposed by management has possible pervasive effect on financial
statements
 Multiple Can 1 Audit Report have all Qualified / Adverse / Disclaimer together?
Opinion
Answer: -
Yes, it is possible, for example we are doing audit of consolidated financial statement and
we come across following issues;
1. One subsidiary is not consolidated, and we don’t have any information about it,
there is sufficient and appropriate evidence and many elements in financial
statements may be affected but it may not be major portion of financial
statement. (So, this is material + Pervasive + Not a major part of financial
statement) Disclaimer for this point.
2. One subsidiary is not consolidated, and we have all information about it, there is
material misstatement and many elements in financial statements may be
affected but it may not be major portion of financial statement. (So, this is
material + Pervasive + Not a major part of financial statement) Adverse for this
point.
3. Inventory is overvalued  (Material + Not Pervasive + Not major part of financial
statements) Qualified opinion for this point.
ILLUSTRATIONS
MNO Ltd. is a power generating company having its plants in the north eastern states of the country. For
the FY 2020-21, M/s PRT & Associates are the statutory auditors of the company. During the course of
audit, the audit team was unable to obtain sufficient appropriate audit evidence About a single element
of the consolidated financial statements. That is, the auditor was also unable to obtain audit evidence
about the financial information of a joint venture investment (in XYZ Ltd.) that represents over 90% of the
entity’s net assets. What kind of opinion should the statutory auditors issue in such case?
Solution:
M/s PRT & Associates are unable to obtain sufficient appropriate audit evidence about the financial
information of a joint venture investment that represents over 90% of the entity’s net assets. The possible
effects of this inability to obtain sufficient appropriate audit evidence are both material and pervasive to the
consolidated financial statements.
Therefore, the statutory auditor should issue a disclaimer of opinion.
The relevant extract of the Disclaimer of Opinion Paragraph and Basis for Disclaimer of Opinion paragraph is
as under:
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We do not express an opinion on the accompanying financial statements of MNO Ltd. Because of the
significance of the matters described in the Basis for Disclaimer of Opinion section of our report, we have not
been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion on these
financial statements.
Basis for Disclaimer of Opinion
The Group’s investment in its joint venture XYZ Company is carried at ` 95 crores on the Group’s consolidated
balance sheet, which represents over 90% of the Group’s net assets as at March 31, 2021. We were not
allowed access to the management and the auditors of XYZ Company, including XYZ Company’s auditors’
audit documentation. As a result, we were unable to determine whether any adjustments were necessary in
respect of the Group’s proportional share of XYZ Company’s assets that it controls jointly, its proportional
share of XYZ Company’s liabilities for which it is jointly responsible, its proportional share of XYZ’s income and
expenses for the year, (and the elements making up the consolidated statement of changes in equity) and
the consolidated cash flow statement.
CA Yash is the statutory auditor of Laksmi Vardhan Limited for the FY 2020-21. In respect of loans and
advances of ` 55,00,000/- given to Sarvagya Private Limited, the Company has not furnished any agreement
to CA Yash and in absence of the same, he is unable to verify the terms of repayment, chargeability of
interest and other terms. What kind of opinion should CA Yash give in such situation?
Solution:
In the present case, with respect to loans and advances of ` 55,00,000/- given to Sarvagya Private Limited,
the Company has not furnished any agreement to CA Yash. In absence of such agreement, CA Yash is unable
to verify the terms of repayment, chargeability of interest and other terms. For an auditor, while verifying
any loans and advances, one of the most important audit evidences is the loan agreement. Therefore, the
absence of such document in the present case, tantamount to a material misstatement in the financial
statements of the company. However, the inability of CA Yash to obtain such audit evidence is though
material but not pervasive so as to require him to give a disclaimer of opinion.
Thus, in the present case, CA Yash should give a qualified opinion
The relevant extract of the Qualified Opinion Paragraph and Basis for Qualified Opinion paragraph is as under:
Qualified Opinion
In our opinion and to the best of our information and according to the explanations given to us, except for
the effects of the matter described in the Basis for Qualified Opinion section of our report, the financial
statements of Laksmi Vardhan Limited give a true and fair view in conformity with the accounting principles
generally accepted in India, of the state of affairs of the Company as on 31.03.2021 and profit/ loss for the
year ended on that date.
Basis for Qualified Opinion
The Company is unable to furnish the loan agreement with respect to loans and advances of `55,00,000/-
given to Sarvagya Private Limited. Consequently, in absence of such agreement, we are unable to verify the
terms of repayment, chargeability of interest and other terms.
CA Sameer is the statutory auditor of Tram Fram Ltd. for the FY 2020-21. While concluding the audit CA
Sameer decided to issue an unmodified opinion, though he also concluded that a material uncertainty
exists with respect to the company’s ability to continue as a going concern on account of a pending litigation
related to labour laws. He is of the view that the company has made appropriate disclosures with respect
to such pending litigation in the notes to accounts annexed to the financial statements of Tram Fram Ltd.
for the FY 2020-21. Explain how CA Sameer will deal with the above situation in his auditor’s report (draft
the relevant portion of the auditor’s report.)
Solution:
Material Uncertainty Related to Going Concern
We draw attention to Note 10 in the financial statements, which indicates that the outcome of a litigation on
account of labour laws is pending in case of the company during the year 31 March, 2021. As stated in Note
11, this event or condition, indicate that a material uncertainty exists that may cast significant doubt on the
Company’s ability to continue as a going concern. Our opinion is not modified in respect of this matter.
XYZ Ltd. is a company engaged in the manufacture of cranes. CA Sudhir is the statutory auditor of the
company for the FY 2020-21. The company has taken long term funding for fixed capital requirements and
CA Ravi Taori
short term funding for its working capital requirements. During the course of audit, CA Sudhir found that
the company’s financing arrangements are about to expire and the company is unable to re- negotiate or
obtain the replacement financing. As such the company may be unable to realize its assets and discharge
its liabilities in the normal course of business. Notes to accounts annexed to the financial statements
discuss the magnitude of financing arrangements, the expiration and the total financing arrangements;
however the financial statements do not include discussion on the impact or the availability of refinancing.
Thus, the financial statements (and notes thereto) do not fully disclose this fact. What kind of opinion
should CA Sudhir issue in case of XYZ Ltd.?
Solution:
In the present case, XYZ Ltd. is unable to re- negotiate or obtain the replacement financing for its long term
and short term funding requirements. This situation indicates the existence of a material uncertainty that
may cast significant doubt on the Company’s ability to continue as a going concern and therefore, XYZ Ltd.
may be unable to realize its assets and discharge its liabilities in the normal course of business. Further, the
financial statements of XYZ Ltd. do not disclose this fact adequately. Thus, the financial statements of XYZ Ltd.
are materially misstated due to the inadequate disclosure of the material uncertainty. CA Sudhir will express
a qualified opinion as the effects on the financial statements of this inadequate disclosure are material but
not pervasive to the financial statements. The relevant extract of the Qualified Opinion Paragraph and Basis
for Qualified Opinion paragraph is as under:
Qualified Opinion
the incomplete disclosure of the information referred to in the Basis for Qualified Opinion section of our
report, the aforesaid standalone financial statements give the information required by the Act in the manner
so required and give a true and fair view in conformity with the accounting principles generally accepted in
India, of the state of affairs of XYZ Ltd. as at March 31, 2021, and profit/loss, for the year ended on that date.
As discussed in Note 6, the Company’s financing arrangements are about to expire and the Company has been
unable to conclude renegotiations or obtain replacement financing. This situation indicates that a material
uncertainty exists that may cast significant doubt on the Company’s ability to continue as a going concern.
The financial statements do not adequately disclose this matter.
ABC Ltd. is a company engaged in the manufacture of iron and steel bars. PP & Associates are the statutory
auditors of ABC Ltd. for the FY 2020-21. During the course of audit, CA Prakash, the engagement partner,
found that the Company’s financing arrangements have expired and the amount outstanding was payable
on March 31, 2021. The Company has been unable to re-negotiate or obtain replacement financing and is
considering filing for bankruptcy. These events indicate a material uncertainty that may cast significant
doubt on the Company’s ability to continue as a going concern and therefore it may be unable to realize its
assets and discharge its liabilities in the normal course of business. The financial statements (and notes
thereto) do not disclose this fact. What opinion should CA Prakash express in case of ABC Ltd.?
Solution:
In the present case based on the audit evidence obtained, CA Prakash has concluded that a material
uncertainty exists related to events or conditions that may cast significant doubt on the entity’s ability to
continue as a going concern, and the entity is considering bankruptcy. The financial statements of ABC Ltd.
omit the required disclosures relating to the material uncertainty. In such circumstances, CA Prakash should
express an adverse opinion because the effects on the financial statements of such omission are material and
pervasive.
The relevant extract of the Adverse Opinion Paragraph and Basis for Adverse Opinion paragraph is as under:
Adverse Opinion
In our opinion, because of the omission of the information mentioned in the Basis for Adverse Opinion section
of our report, the accompanying financial statements do not present fairly, the financial position of the entity
as at March 31, 2021, and of its financial performance and its cash flows for the year then ended in accordance
with the Accounting Standards issued by the Institute of Chartered Accountants of India.
Basis for Adverse Opinion
The financing arrangements of ABC Ltd. has expired and the amount outstanding was payable on March 31,
2021. The entity has been unable to conclude re-negotiations or obtain replacement financing and is
considering filing for bankruptcy. This situation indicates that a material uncertainty exists that may cast
CA Ravi Taori
significant doubt on the Company’s ability to continue as a going concern. The financial statements do not
adequately disclose this fact.
CA Yash is the statutory auditor of Laksmi Vardhan Limited for the FY 2020-21. In respect of loans and
advances of ` 55,00,000/- given to Sarvagya Private Limited, the Company has not furnished any agreement
to CA Yash and in absence of the same, he is unable to verify the terms of repayment, chargeability of
interest and other terms.
What kind of opinion should CA Yash give in such situation?
Solution:
In the present case, with respect to loans and advances of ` 55,00,000/- given to Sarvagya Private Limited,
the Company has not furnished any agreement to CA Yash. In absence of such agreement, CA Yash is unable
to verify the terms of repayment, chargeability of interest and other terms. For an auditor, while verifying
any loans and advances, one of the most important audit evidences is the loan agreement. Therefore, the
absence of such document in the present case, tantamount to a material misstatement in the financial
statements of the company. However, the inability of CA Yash to obtain such audit evidence is though
material but not pervasive so as to require him to give a disclaimer of opinion.
Thus, in the present case, CA Yash should give a qualified opinion
The relevant extract of the Qualified Opinion Paragraph and Basis for Qualified Opinion paragraph is as under:
Qualified Opinion
the effects of the matter described in the Basis for Qualified Opinion section of our report, the financial
statements of Laksmi Vardhan Limited give a true and fair view in conformity with the accounting principles
generally accepted in India, of the state of affairs of the Company as on 31.03.2021 and profit/ loss for the
year ended on that date.
The Company is unable to furnish the loan agreement with respect to loans and advances of `55,00,000/-
given to Sarvagya Private Limited. Consequently, in absence of such agreement, we are unable to verify the
terms of repayment, chargeability of interest and other terms.
In the financial year 2020-21, MSD Ltd. faced an extraordinary event (earthquake), which destroyed a lot
of business activity of the company. These circumstances indicate material uncertainty on the company’s
ability to continue as going concern. Due to such event it may not be possible for the company to realize
its assets or pay off the liabilities during the regular course of its business. The financial statement and
notes to the financial statements of the company do not disclose this fact. What kind of opinion should the
statutory auditor of MSD Ltd. issue in such circumstances?
Solution:
In the present case, there exists a material uncertainty that cast a significant doubt on the company’s ability
to continue as going concern and the same is not disclosed in the financial statements of MSD Ltd. As such,
the financial statements of MSD Ltd. for the FY 2020-21 are materially misstated and the effect of the
misstatement is so material and pervasive on the financial statements that giving only a qualified opinion will
be insufficient and therefore the statutory auditor of MSD Ltd. Should issue an adverse opinion.
The relevant extract of the Adverse Opinion Paragraph and Basis for Adverse Opinion paragraph is as under:
Adverse Opinion
In our opinion, because of the omission of the information mentioned in the Basis for Adverse Opinion section
of our report, the accompanying financial statements do not present fairly, the financial position of MSD Ltd.
as at March 31, 2021, and of its financial performance and its cash flows for the year then ended in accordance
with the Accounting Standards issued by the Institute of Chartered Accountants of India.
Basis for Adverse Opinion
MSD Ltd. has faced an extraordinary event (earthquake), which destroyed a lot of business activity of the
company. Due to such event it may not be possible for the company to realize its assets or pay off the liabilities
during the regular course of its business. This situation indicates that a material uncertainty exists that may
cast significant doubt on the Company’s ability to continue as a going concern. The financial statement and
notes to the financial statements of the company do not disclose this fact.
CA Ravi Taori
CA Abhimanyu is the statutory auditor of PQR Ltd. for the FY 2020-21. During the course of audit CA
Abhimanyu noticed the following:
1. With respect to the debtors amounting to ` 150 crores, no balance confirmation was received by the
audit team. Further, there have been defaults on the payment obligations by debtors on the due dates
during the year under audit. The Company has created a provision for doubtful debts to the tune of `25 Cr.
during the year under audit. The Company has stated that the provision is based on receivables which are
older than 36 months, which according to the audit team is inadequate and as such the audit team is unable
to ascertain the carrying value of trade receivables.
2. Further, in respect of Inventories (which constitutes 40% of the total assets of the company), during the
reporting period, the management has not undertaken physical verification of inventories at periodic
intervals. Also, the Company has not maintained adequate inventory records at the factory. The audit team
was unable to undertake the physical inventory count as such the value of inventory could not be verified.
Under the above circumstances what kind of opinion should CA Abhimanyu give?
Solution:
In the present case, CA Abhimanyu is unable to obtain sufficient and appropriate audit evidence with respect
to the following:
1. The balance confirmation with respect to debtors amounting to ` 150 crores is not available. Further there
has been default in payment by the debtors and the provision so made is not adequate. The audit team is
also unable ascertain the carrying value of trade receivables.
2. With respect to 40% of the company’s inventory, neither the physical verification has been done by the
management nor are adequate inventory records maintained. The audit team is also unable to undertake the
physical inventory count as such the value of inventory could not be verified.
In the above two circumstances the auditor is unable to obtain sufficient appropriate audit evidence on which
to base the opinion, and the possible effects on the financial statements of undetected misstatements, if any,
could be both material and pervasive.
Thus, CA Abhimanyu should give a Disclaimer of Opinion.
The relevant extract of the Disclaimer of Opinion Paragraph and Basis for Disclaimer of Opinion paragraph is
as under:
We do not express an opinion on the accompanying financial statements of PQR Ltd. Because of the
significance of the matters described in the Basis for Disclaimer of Opinion section of our report, we have not
been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion on these
financial statements.
Basis for Disclaimer of Opinion
We are unable to obtain balance confirmation with respect to the debtors amounting to ` 150 crores. Further,
there have been defaults on the payment obligations by debtors on the due dates during the year under
audit. The Company has created a provision for doubtful debts to the tune of `25 Cr. during the year under
audit which is inadequate in the circumstances of the company. The carrying value of trade receivables could
not be ascertained.
Further, in respect of Inventories (which constitutes 40% of the total assets of the company), during the
reporting period, the management has not undertaken physical verification of inventories at periodic
intervals. Also, the Company has not maintained adequate inventory records at the factory. We were unable
to undertake the physical inventory count and as such the value of inventory could not be verified.
UNIQUE MCQS
 MCQ No. 705.6
UNIQUE QUESTIONS
 CNO 113.020 Reasons for No S&A Evidence
 CNO 114.000 Basis of Modification
 CNO 118.000 Q Vs E
 CNO 119.100 Drafting Disclaimer of opinion .
 CNO 119.200 Drafting Adverse opinion .
CA Ravi Taori SA 700 Series
Qualification Adverse Disclaimer
INDEPENDENT AUDITOR’S REPORT No Change
No Change
To the Members of ABC Company Limited
Report on the Audit of the Standalone Financial Statements
Qualified / Adverse / Disclaimer Opinion

Opinion
We have audited the standalone financial statements of ABC Company Limited (“the Compa- Auditor was engaged to
ny”), which comprise the balance sheet as at 31st March 20XX, and the statement of Profit and audit the FST
Loss, (statement of changes in equity) and statement of cash flows for the year then ended, and
notes to the financial statements, including a summary of significant accounting policies and
other explanatory information [in which are included the Returns for the year ended on that date (Misstatement) Because of the signifi- Because of the signifi-
audited by the branch auditors of the Company’s branches located at (location of branches)] Except for the effects of cance of the matter(s) cance of the matter(s)
the matter(s) described described in the Basis described in the Basis
In our opinion and to the best of our information and according to the explanations given to us, in the Basis for Qualified
the aforesaid standalone financial statements give the information required by the Act in the for Adverse Opinion for Disclaimer of Opin-
Opinion section
manner so required and give a true and fair view in conformity with the accounting principles section ion section, the auditor
generally accepted in India, of the state of affairs of the Company as at March 31, 20XX, and has not been able to
(No S&A Evidence)
profit/loss, (changes in equity)4 and its cash flows for the year ended on that date.
Except for the possible obtain sufficient appro-
effects of the matter priate audit evidence to
(s) ...” for the modified
provide a basis for an
opinion.
audit opinion on the
financial statements;
and
State that the auditor

does not express an
opinion on the accom-
panying financial state-
ments;
Basis for Opinion Basis of Qualification / Adverse / Disclaimer Opinion

We conducted our audit in accordance with the Standards on Auditing (SAs) specified under
section 143(10) of the Companies Act, 2013. Our responsibilities under those Standards are
further described in the Auditor’s Responsibilities for the Audit of the Financial Statements sec-
tion of our report.
auditguru.in
Continuation of Audit Report….. Depending on the reason of modification

We are independent of the Company in accordance with the Code of Ethics issued by the Insti-
tute of Chartered Accountants of India together with the ethical requirements that are relevant
to our audit of the financial statements under the provisions of the Companies Act, 2013 and
the Rules thereunder, and we have fulfilled our other ethical responsibilities in accordance with No Sufficient &
these requirements and the Code of Ethics. We believe that the audit evidence we have ob- Material Misstatement
Appropriate Evidence
tained is sufficient and appropriate to provide a basis for our opinion.
When the auditor expresses a qualified or adverse opinion, the auditor shall amend the statement
about whether the audit evidence obtained is sufficient and appropriate to provide a basis for the audi-
tor’s opinion to include the word “qualified” or “adverse”, as appropriate.
Related Related to Relates to non The auditor
When the auditor disclaims an opinion on the financial statements, the auditor’s report shall not in- to Amounts Narrative Disclosure shall include
clude the following Disclosures in the Basis
Those elements are: Description and (Eg Contingent for Opinion
(a) A reference to the section of the auditor’s report where the auditor’s responsibilities are described; quantification of An explana- Liability Undis- section the
and the financial tion of how closed) reasons for
(b) A statement about whether the audit evidence obtained is sufficient and appropriate to provide a effects of the the disclo- that inability.
basis for the auditor’s opinion. misstatement sures are mis- (a) Discuss the
(Eg Depreciation stated. non-disclosure
under charged by with TCWG;
5 crores) (Eg Company (b) The nature of
Even if the auditor has expressed an adverse opinion or disclaimed an opinion on the financial state- has disclosed the omitted infor-
ments, the auditor shall describe in the Basis for Opinion section the reasons for any other matters of & that CY losses mation; and
which the auditor is aware that would have required a modification to the opinion, and the effects If it is not practi- covers net (c) Unless prohib-
thereof. cable to quantify worth, in- ited by law or
the financial stead it regulation, in-
effects, the audi- should be clude the omitted
tor shall so state specified that disclosures, pro-
in this section. CY losses are vided it is practi-
3 times net cable and S&A
worth of the audit evidence
company as about the
on start of the omitted infor-
year) mation.
(Eg If it is related
to terrorist
attack, it may not
be allowed or it
may not be prac-
tical)
auditguru.in
Continuation of Audit Report…..
Material Uncertainty Related to Going Concern No Change
Key Audit Matters No Change
Responsibilities of Management and Those Charged with Governance for the Consolidated
Financial Statements …………………………………………….. No Change
Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole
are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report
that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee
that an audit conducted in accordance with SAs will always detect a material misstatement when it If there is disclaimer only following will be written
exists. Misstatements can arise from fraud or error and are considered material if, individually or in the
aggregate, they could reasonably be expected to influence the economic decisions of users taken on Our responsibility is to conduct an audit of the entity’s financial state-
the basis of these financial statements. ments in accordance with Standards on Auditing and to issue an audi-
tor’s report. However, because of the matters described in the Basis for
As part of an audit in accordance with SAs, we exercise professional judgment and maintain profession- Disclaimer of Opinion section of our report, we were not able to obtain
al skepticism throughout the audit. We also: sufficient appropriate audit evidence to provide a basis for an audit
• Identify and assess the risks of material misstatement of the financial statements, whether due
opinion on these financial statements.
to fraud or error, design and perform audit procedures responsive to those risks, and obtain
audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of
not detecting a material misstatement resulting from fraud is higher than for one resulting from
We are independent of the entity in accordance with the ethical re-
error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the
override of internal control. quirements in accordance with the requirements of the Code of Ethics
• Obtain an understanding of internal control relevant to the audit in order to design audit
procedures that are appropriate in the circumstances. Under section 143(3)(i) of the Companies
Act, 2013, we are also responsible for expressing our opinion on whether the company has
adequate internal financial controls system in place and the operating effectiveness of such
controls.
• Evaluate the appropriateness of accounting policies used and the reasonableness of
accounting estimates and related disclosures made by management.
• Conclude on the appropriateness of management’s use of the going concern basis of
accounting and, based on the audit evidence obtained, whether a material uncertainty exists
related to events or conditions that may cast significant doubt on the Company’s ability to
continue as a going concern. If we conclude that a material uncertainty exists, we are required
to draw attention in our auditor’s report to the related disclosures in the financial statements or,
if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the
audit evidence obtained up to the date of our auditor’s report. However, future events or
conditions may cause the Company to cease to continue as a going concern.
auditguru.in
• Evaluate the overall presentation, structure and content of the financial statements, including
the disclosures, and whether the financial statements represent the underlying transactions and
events in a manner that achieves fair presentation.
• We communicate with those charged with governance regarding, among other matters, the
planned scope and timing of the audit and significant audit findings, including any significant de-
ficiencies in internal control that we identify during our audit. We also provide those charged
with governance with a statement that we have complied with relevant ethical requirements re-
garding independence, and to communicate with them all relationships and other matters that
may reasonably be thought to bear on our independence, and where applicable, related safe-
guards. From the matters communicated with those charged with governance, we determine
those matters that were of most significance in the audit of the financial statements of the cur-
rent period and are therefore the key audit matters. We describe these matters in our auditor’s
report unless law or regulation precludes public disclosure about the matter or when, in ex-
tremely rare circumstances, we determine that a matter should not be communicated in our
report because the adverse consequences of doing so would reasonably be expected to out-
weigh the public interest benefits of such communication.
Other Matter No Change

• We did not audit the financial statements/ information of ………………. (number) branches includ-
ed in the stand alone financial statements of the Company whose financial statements/financial
information reflect total assets of Rs. ……………….. as at 31st March 20XX and the total revenue of
Rs.………………. for the year ended on that date, as considered in the standalone financial
statements/information of these branches have been audited by the branch auditors whose re-
ports have been furnished to us, and our opinion in so far as it relates to the amounts and disclo-
sures included in respect of branches, is based solely on the report of such branch auditors.
Our opinion is not modified in respect of these matters.
Report on Other Legal and Regulatory Requirements No Change
For XYZ & Co

Chartered Accountants No Change
(Firm’s Registration No.)
Signature
(Name of the Member Signing the Audit Report)
(Designation)
(Membership No. XXXXX)
Place of Signature:
Date:
auditguru.in
CA Ravi Taori
[SA 706]EMPHASIS OF MATTER PARAGRAPHS & OTHER MATTER PARAGRAPHS IN THE

INDEPENDENT AUDITOR’S REPORT
EMPHASIS OF MATTER PARAGRAPH (EMP) (MCQ-706.1/706.2/ Incs.08.3)

 Definition A paragraph included in the auditor’s report that refers to a matter appropriately presented or
(CNO- disclosed in the financial statements that, in the auditor’s judgment, is of such importance that
120.000) it is fundamental to users’ understanding of the financial statements.
(MCQ –
Incs.07.5)
 Examples Examples of circumstances where the auditor may consider it necessary to include an
(CNO- Emphasis of Matter paragraph are:
120.000/  Major prior period items.
122.050)  Major amalgamation during the year.
 A major catastrophe that has had, or continues to have, a significant effect on
the entity’s financial position.
 Early application (where permitted) of a new accounting standard that has a
material effect on the financial statements.
 An uncertainty relating to the future outcome of exceptional litigation or
regulatory action.
 A significant subsequent event that occurs between the date of the financial
 statements and the date of the auditor’s report
 Conditions If the auditor considers it necessary to draw users’ attention to a matter presented or disclosed
(CNO- in the financial statements that, in the auditor’s judgment, is of such importance that it is
120.000) fundamental to users’ understanding of the financial statements, the auditor shall include an
Emphasis of Matter paragraph in the auditor’s report provided:
(a) The auditor would not be required to modify the opinion in accordance with SA 705
(Revised) as a result of the matter; and
(b) When SA 701 applies, the matter has not been determined to be a key audit matter to
be communicated in the auditor’s report.
 Content When the auditor includes an Emphasis of Matter paragraph in the auditor’s report, the auditor
shall:
(a) Include the paragraph within a separate section of the auditor’s report with an
appropriate heading that includes the term “Emphasis of Matter”;
(b) Include in the paragraph a clear reference to the matter being emphasized and to
where relevant disclosures that fully describe the matter can be found in the financial
statements. The paragraph shall refer only to information presented or disclosed in the
financial statements; and (No need to give reference of BOD report, Annual Report etc.)
(c) Indicate that the auditor’s opinion is not modified in respect of the matter emphasized.
 Placement When the Emphasis of Matter paragraph relates to the applicable financial reporting
framework,
(For example, shift from AS to IND AS or new AS) including circumstances where
the auditor determines that the financial reporting framework prescribed by law
or regulation would otherwise be unacceptable, the auditor may consider it
necessary to place the paragraph immediately following the Basis of Opinion
section to provide appropriate context to the auditor’s opinion.
When a Key Audit Matters section is presented in the auditor’s report, an Emphasis of Matter
paragraph may be presented either directly before or after the Key Audit Matters section,
based on the auditor’s judgment as to the relative significance of the information included in
the Emphasis of Matter paragraph.
The auditor may also add further context to the heading “Emphasis of Matter”, such as
“Emphasis of Matter – Subsequent Event”, to differentiate the Emphasis of Matter paragraph
from the individual matters described in the Key Audit Matters section.
CA Ravi Taori
OTHER MATTER PARAGRAPH
 Definition A paragraph included in the auditor’s report that refers to a matter other than those
presented or disclosed in the financial statements that, in the auditor’s judgment, is relevant
to users’ understanding of the audit, the auditor’s responsibilities or the auditor’s report.
 Circumstances (a) Audit was not conducted in previous financial year
(b) Someone else did audit in previous financial year
(c) Audit of branches, subsidiaries etc is done by someone else
(d) Reporting on more than one set of financial statements
(e) Restriction on distribution or use of the auditor’s report
 Conditions If the auditor considers it necessary to communicate a matter other than those that are
presented or disclosed in the financial statements that, in the auditor’s judgment, is relevant to
users’ understanding of the audit, the auditor’s responsibilities or the auditor’s report, the
auditor shall include an Other Matter paragraph in the auditor’s report, provided:
(a) This is not prohibited by law or regulation; and
(E.g. No confidential information)
(b) When SA 701 applies, the matter has not been determined to be a key audit matter
to be communicated in the auditor’s report.
 Content When the auditor includes an Other Matter paragraph in the auditor’s report, the auditor shall
include the paragraph within a separate section with the heading “Other Matter,” or other
appropriate heading.
 Placement Other Matter Paragraphs
 When a Key Audit Matters section is presented in the auditor’s report and an
Other Matter paragraph is also considered necessary, the auditor may add
further context to the heading “Other Matter”, such as “Other Matter – Scope
of the Audit”, to differentiate the Other Matter paragraph from the individual
matters described in the Key Audit Matters section.
 When an Other Matter paragraph is included to draw users’ attention to a
matter relating to Other Reporting Responsibilities addressed in the auditor’s
report, the paragraph may be included in the Report on Other Legal and
Regulatory Requirements section.
(E.g. Relating to investor to education & protection fund etc)
 When relevant to all the auditor’s responsibilities or users’ understanding of
the auditor’s report, the Other Matter paragraph may be included as a
separate section following the Report on the Audit of the Financial
Statements and the Report on Other Legal and Regulatory
Requirements.(E.g. Revision in Financial Statements)
COMMUNICATION WITH THOSE CHARGED WITH GOVERNANCE

If the auditor expects to include an Emphasis of Matter or another Matter paragraph in the auditor’s report, the
auditor shall communicate with those charged with governance regarding this expectation and the proposed
wording of this paragraph.
Such communication enables those charged with governance to be made aware of the nature of any specific
matters that the auditor intends to highlight in the auditor’s report and provides them with an opportunity to obtain
further clarification from the auditor where necessary. Where the inclusion of another Matter paragraph on a
particular matter in the auditor’s report recurs on each successive engagement, the auditor may determine that it is
unnecessary to repeat the communication on each engagement.
DIFFERENCE BETWEEN KEY AUDIT MATTER AND EMPHASIS OF MATTER PARAGRAPH

Key audit matters— Those matters that, in Emphasis of Matter paragraph – A paragraph
the auditor’s professional judgment, were included in the auditor’s report that refers to a
of most significance in the audit of the matter appropriately presented or disclosed in the
CA Ravi Taori
financial statements of the current period. financial statements that, in the auditor’s judgment,
Key audit matters are selected from is of such importance that it is fundamental to users’
matters communicated with those charged understanding of the financial statements. [SA 706]
with governance. [SA 701]
Common Matter Should not be a KAM
Matters that are determined to be key There may be a matter that is not determined to be a
audit matters in accordance with SA 701 key audit matter in accordance with SA 701 (i.e.,
may also be, in the auditor’s judgment, because it did not require significant auditor
fundamental to users’ understanding of the attention), but which, in the auditor’s judgment, is
financial statements. In such cases, in fundamental to users’ understanding of the financial
communicating the matter as a key audit statements (e.g., a subsequent event). If the auditor
matter in accordance with SA 701, the considers it necessary to draw users’ attention to
auditor may wish to highlight or draw such a matter, the matter is included in an Emphasis
further attention to its relative importance. of Matter paragraph in the auditor’s report in
accordance with this SA.
Provides Additional Information
Communicating key audit matters provides Effect of Widespread
additional information to intended users of A widespread use of Emphasis of Matter paragraphs
the financial statements to assist them in may diminish the effectiveness of the auditor’s
understanding those matters that, in the communication about such matters.
auditor’s professional judgment, were of
Not a substitute
most significance in the audit and may also
Use of Emphasis of Matter paragraphs is not a
assist them in understanding the entity and
substitute for a description of individual key audit
areas of significant management judgment
matters where SA 701 is applicable.
in the audited financial statements.
Further Basis to Engage with Management More prominent than KAM
The communication of key audit matters in The auditor may do so by presenting the matter more
the auditor’s report may also provide prominently than other matters in the Key Audit
intended users a basis to further engage Matters section (e.g., as the first matter) or by
with management and those charged with including additional information in the description of
governance about certain matters relating the key audit matter to indicate the importance of
to the entity, the audited financial the matter to users’ understanding of the financial
statements, or the audit that was statements.
performed.
ILLUSTRATION
In respect of the audit of BDS Ltd., the statutory auditor of the company noticed some matters. The
statutory auditor wants to draw the user’s attention towards such matters, though his opinion is not
modified in respect of such matters. Draft the relevant paragraphs of the audit report for the following
matters:
i. The company has a plan to resume its construction activities with respect to one of its thermal power
project, The activity of such power plant was suspended in the FY 2018-19. The thermal power project
comprises of the plant and equipment amounting to ` 5.95 crore and capital work in progress of ` 147.50
crore.
ii. The financial statements of 5 branches are included in the Standalone Financial Statements of BDS Ltd.
whose financial statements reflect total assets of ` 90 crores as at 31.03.2021 and total revenue from
operations of ` 40 crores for the year ended on that date. The financial statements of these branches have
been audited by the branch auditors.
Solution:
Emphasis of Matter
We draw attention to the following note of the standalone financial statements: Note 27 regarding the
plans of the Company to resume construction/developmental activities of a thermal power project. The
carrying amounts related to the project as at 31st March, 2021 comprise of plant and equipment of ` 5.95
crore and capital work in progress of ` 147.50 crore.
Our opinion is not modified in respect of this matter.
Other Matter
We did not audit the financial statements of 5 branches included in the Standalone Financial Statements of
CA Ravi Taori
the company whose financial statements reflect total assets of ` 90 crores as at 31.03.2021 and total
revenue from operations of ` 40 crores for the year ended on that date. The financial statements of these
branches have been audited by the branch auditors whose reports have been furnished to us, and our
opinion in so far as it relates to the amounts and disclosures included in respect of these branches, is based
solely on the report of the branch auditors.
Our opinion is not modified in respect of this matter.
UNIQUE QUESTIONS
 CNO 121.000 EMP Case Study with Drafting (Income Tax)
 CNO 122.000 EMP Case Study with Drafting (Inventory)
 CNO 123.000 OMP (Report)
CA Ravi Taori
[SA 710] COMPARATIVE INFORMATION CORRESPONDING FIGURES & COMPARATIVE

FINANCIAL STATEMENTS
COMPARATIVES & AUDIT PROCEDURES (MCQ- Incs.07.2) (CNO-125.000)

 Comparative The amounts and disclosures included in the financial statements in
information respect of one or more prior periods in accordance with the applicable
financial reporting framework.
 Audit Basic Evaluation (a) The Auditor shall determine whether the Financial Statements
procedures of comparative include the Comparative Information required by the
information: Applicable Financial Reporting Framework and whether such
information is appropriately classified.
(b) For this Purpose, the Auditor shall evaluate whether
 The comparative Information agrees with the amounts
& other disclosures presented in the prior period, and
 The Accounting Policies reflected in the Comparative
Information are consistent with those applied in the
current period or, if there have been changes in
Accounting Policies, whether those changes have been
properly accounted for and adequately presented and
disclosed.
Additional (a) If the Auditor of becomes aware of a possible material
procedures in misstatement in the Comparative Information while performing
case of Material the current period audit, he shall perform such additional audit
Misstatement: procedures as are necessary in the Circumstances, to obtain
sufficient appropriate audit evidence to determine whether a
material misstatement exists.
(b) If the Auditor had audited the Prior Period’s Financial
Statements, he shall also follow the relevant requirements of
SA 560 on the effect of Subsequent Events.
Written (a) The Auditor shall
Representations:  Request Written Representations for all periods
referred to in the opinion.
 Obtain a specific Written Representation regarding any
Prior Period Item that is separately disclosed in the
current year’s Statement of Profit and Loss.
(b) In case of comparative financial statements
Written Representations are requested for all periods referred
to in the Auditor's Opinion because Management needs to
reaffirm that the Written Representations it previously made
with respect to the prior period remain appropriate.
(c) In case of corresponding figures
Written Representations are requested for the Financial
Statements of the current period only, because the Auditors
Opinion IS on those Financial Statements, which include the
Corresponding Figures.
CA Ravi Taori
APPROACHES TOWARDS COMPARATIVES
Approaches towards comparatives

Depends on LAW/FRF/Regulation
If Detailed Information of
If Detailed Information of
previous year is not given
Previous year is given
P.Y. not given equal
Importance given to P.Y. is
Importance
same as C.Y.
It is just for comparison
P.Y. is separate FST
integral part of C.Y.
Corresponding Figure
Comparative FST Approach
approach
C.Y. & P.Y. both are referred
Only C.Y. is referred in
in Intro. & opinion Para
Intro. & opinion Para
E.g. Prospect
E.g. company audit report
In Case of Comparative FST Approach
If Last Year Audit Is Not Performed OR

Someone else did it
Then, he Cannot Refer to P.Y.
REQUIREMENT OF OMP (MCQ-710.3/Incs.07.3)

OMP should be given if previous audit is done by someone else or audit has not been conducted both approaches.
Details such as;
1. Audit by predecessor auditor .
2. Type of opinion, if modified then the reason for the same should be given
3. Date of Report
CA Ravi Taori
MISSTATEMENT IN COMPARATIVES (CNO-126.000/127.000) (MCQ-710.1/710.2)
CHANGE IN OPINION
If Auditor is Changes his Opinion regarding P.Y. as Report Earlier
PUT OMP
CA Ravi Taori
[SA 720] THE AUDITOR’S RESPONSIBILITY IN RELATION TO OTHER INFORMATION IN

DOCUMENTS CONTAINING AUDITED FINANCIAL STATEMENTS
OTHER INFORMATION
Financial or non-financial information (other than financial statements and the auditor’s report thereon) included
in an entity’s annual report
OBTAINING THE OTHER INFORMATION (CNO-127.050)

The auditor shall:
(a) Determine, through discussion with management, which document(s) comprises the annual report, and the
entity’s planned manner and timing of the issuance of such document(s);
(b) Make appropriate arrangements with management to obtain in a timely manner and, if possible, prior to
the date of the auditor’s report, the final version of the document(s) comprising the annual report; and
(c) When some or all of the document(s) determined in (a) will not be available until after the date of the
auditor’s report, request management to provide a written representation that the final version of the
document(s) will be provided to the auditor when available, and prior to its issuance by the entity, such
that the auditor can complete the procedures required by this SA.
READING AND CONSIDERING THE OTHER INFORMATION (CNO-127.050)
The auditor shall read the other information and, in doing so shall:
(a) Consider whether there is a material inconsistency between the other information and the financial
statements. As the basis for this consideration, the auditor shall, to evaluate their consistency,
compare selected amounts or other items in the other information (that are intended to be the
same as, to summarize, or to provide greater detail about, the amounts or other items in the
financial statements) with such amounts or other items in the financial statements; and
(b) Consider whether there is a material inconsistency between the other information and the auditor’s
knowledge obtained in the audit, in the context of audit evidence obtained and conclusions reached
in the audit.
While reading the other information in accordance with above paragraphs, the auditor shall remain alert for
indications that the other information not related to the financial statements or the auditor’s knowledge
obtained in the audit appears to be materially misstated.
NATURE OF RELATED PARTY RELATIONSHIPS AND TRANSACTIONS
If the auditor identifies that a material inconsistency appears to exist (or becomes aware that the other
information appears to be materially misstated), the auditor shall discuss the matter with management
and, if necessary, perform other procedures to conclude whether:
(a) A material misstatement of the other information exists;
(b) A material misstatement of the financial statements exists; or
(c) The auditor’s understanding of the entity and its environment needs to be updated.
RESPONDING WHEN THE AUDITOR CONCLUDES THAT A MATERIAL MISSTATEMENT OF THE OTHER INFORMATION
EXISTS (CNO 127.200)
If the auditor concludes that a material misstatement of the other information exists, the auditor shall
request management to correct the other information. If management:
(a) Agrees to make the correction, the auditor shall determine that the correction has been made; or
(b) Refuses to make the correction, the auditor shall communicate the matter with those charged with
governance and request that the correction be made.
If the auditor concludes that a material misstatement exists in other information obtained prior to the date
of the auditor’s report, and the other information is not corrected after communicating with those charged
with governance, the auditor shall take appropriate action, including:
(a) Considering the implications for the auditor’s report and communicating with those charged with
governance about how the auditor plans to address the material misstatement in the auditor’s
report.
(b) Withdrawing from the engagement, where withdrawal is possible under applicable law or
regulation.
CA Ravi Taori
If the auditor concludes that a material misstatement exists in other information obtained after the date of
the auditor’s report, the auditor shall:
(a) If the other information is corrected, perform the procedures necessary in the circumstances; or
(b) If the other information is not corrected after communicating with those charged with governance,
take appropriate action considering the auditor’s legal rights and obligations, to seek to have the
uncorrected material misstatement appropriately brought to the attention of users for whom the
auditor’s report is prepared.
RESPONDING WHEN A MATERIAL MISSTATEMENT IN THE FINANCIAL STATEMENTS EXISTS OR THE AUDITOR’S
UNDERSTANDING OF THE ENTITY AND ITS ENVIRONMENT NEEDS TO BE UPDATED.
If, as a result of performing the procedures in paragraphs to “Reading & Consideration of Other Information”,
the auditor concludes that a material misstatement in the financial statements exists or the auditor’s
understanding of the entity and its environment needs to be updated, the auditor shall respond
appropriately in accordance with the other SAs.
The auditor’s report shall include a separate section with a heading “Other Information”, or other
appropriate heading, when, at the date of the auditor’s report:
(a) For an audit of financial statements of a listed entity, the auditor has obtained, or expects to
obtain, the other information; or
(b) For an audit of financial statements of an unlisted corporate entity, the auditor has obtained some
or all of the other information.
REPORTING
When the auditor’s report is required to include an Other Information section in accordance with paragraph
above para, this section shall include:
(a) A statement that management is responsible for the other information;
(b) An identification of:
 Other information, if any, obtained by the auditor prior to the date of the auditor’s report;
and
 For an audit of financial statements of a listed entity, other information, if any, expected to
be obtained after the date of the auditor’s report;
(c) A statement that the auditor’s opinion does not cover the other information and, accordingly, that
the auditor does not express (or will not express) an audit opinion or any form of assurance
conclusion thereon;
(d) A description of the auditor’s responsibilities relating to reading, considering and reporting on other
information as required by this SA; and
(e) When other information has been obtained prior to the date of the auditor’s report, either:
 A statement that the auditor has nothing to report; or
 If the auditor has concluded that there is an uncorrected material misstatement of the other
information, a statement that describes the uncorrected material misstatement of the other
information.
When the auditor expresses a qualified or adverse opinion in accordance with SA 705 (Revised),3 the auditor
shall consider the implications of the matter giving rise to the modification of opinion for the statement
required in above paragraph Point (e).
OBJECTIVE
The objectives of the auditor, having read the other information, are:
(a) To consider whether there is a material inconsistency between the other information and the financial
statements;
(b) To consider whether there is a material inconsistency between the other information and the auditor’s
knowledge obtained in the audit;
(c) To respond appropriately when the auditor identifies that such material inconsistencies appear to exist,
or when the auditor otherwise becomes aware that other information appears to be materially misstated;
and
(d) To report in accordance with this SA.
CA Ravi Taori
NOT APPLICABLE
This SA does not apply to:
(a) Preliminary announcements of financial information; or (Infosys use to give guidance about next
quarter)
(b) Securities offering documents, including prospectuses. (Red Hearing Prospectus)
(c) The auditor’s responsibilities under this SA do not constitute an assurance engagement on other
information or impose an obligation on the auditor to obtain assurance about the other
information.
Law or regulation may impose additional obligations on the auditor in relation to other information that are
beyond the scope of this SA. (Certificate on Corporate Governance Which involves examining CG report in
Annual Report)
ILLUSTRATIONS
Illustration 1 – An auditor’s report of a company, whether listed or unlisted, containing an unmodified opinion when
the auditor has obtained all of the other information prior to the date of the auditor's report and has not identified a
material misstatement of the other information.
Other Information [or another title if appropriate, such as “Information Other than the Financial
Statements and Auditor’s Report Thereon”]
The Company’s Board of Directors is responsible for the other information. The other information comprises
the [information included in the X report but does not include the financial statements and our auditor’s
report thereon.]
Our opinion on the financial statements does not cover the other information and we do not express any
form of assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information
and, in doing so, consider whether the other information is materially inconsistent with the financial
statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If,
based on the work we have performed, we conclude that there is a material misstatement of this other
information, we are required to report that fact.
We have nothing to report in this regard.
Illustration 2 – An auditor’s report of a listed company containing an unmodified opinion when the auditor has
obtained part of the other information prior to the date of the auditor’s report, has not identified a material
misstatement of the other information, and expects to obtain other information after the date of the auditor’s report.
Other Information [or another title if appropriate, such as “Information Other than the Financial
Statements and Auditor’s Report Thereon”]
The Company’s Board of Directors is responsible for the other information. The other information comprises
the X report (but does not include the financial statements and our auditor’s report thereon), which we
obtained prior to the date of this auditor’s report, and the Y report, which is expected to be made available
to us after that date. Our opinion on the financial statements does not cover the other information and we
do not and will not express any form of assurance conclusion thereon. In connection with our audit of the
financial statements, our responsibility is to read the other information identified above and, in doing so,
consider whether the other information is materially inconsistent with the financial statements or our
knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we
have performed on the other information that we obtained prior to the date of this auditor’s report, we
conclude that there is a material misstatement of this other information, we are required to report that fact.
We have nothing to report in this regard.
[When we read the Y report, if we conclude that there is a material misstatement therein, we are required
to communicate the matter to those charged with governance and [describe actions applicable under the
applicable laws and regulations]]
UNIQUE QUESTIONS
 CNO 127.100 Examples of “Amounts” or “other items” included in the “other information
CA Ravi Taori
SA 720 -- The Auditor’s Responsibilities Relating to Other Information
1
 Financial or Non-Financial information included in an entity’s annual report
Other Information
 Other than FST and Auditor’s Report
2  Discuss with Mgt – Which documents are included in Annual Report ? / Planned
manner and issuance of these documents.
Obtaining the Other  Appropriate Arrangements – To obtain in timely manner, if possible, before issuing
Information Audit Report Such Documents
 Documents not available till Date of AR – WR that final version will be available before
issuance so that auditor can perform procedures as required by SA.
3
Reading & Considering
the Other Information Material Inconsistency Material Inconsistency
Other Info
Other Info & Other Info &
Materially Misstated
Financial Statements Auditor’s Knowledge
(OI-MM)
(MI-OI&FS) (MI-OI&AK)
Consider whether there is Consider whether there is Remain alert info not related
MI-OI&FS / Evaluate MI-OI&AK which is obtained to FST or AK obtained during
4 Consistency by Comparing it in audit as audit evidence or audit appears to be
with FST conclusion reached materially misstated
Responding When a
Material Inconsistency The auditor shall
Appears to Exist or Other  Discuss the matter with Mgt
Information Appears to  Perform Other Audit Procedures
Be Materially Misstated  Conclude
5
Auditor’s Understanding of
Material Misstatement of Other Info Exists Material Misstatement of FST
Entity & Its Environment
Exists
Needs to be Updated
6
Further Response When Auditor Concludes that
Material Misstatement of Other Info Exists Further Response When Auditor Concludes that Material
Misstatement of FST or Auditor’s Understanding Needs to
be Updated
Request Mgt to Correct OI
If Mgt Agree – Check Correction is Made
Respond as per Other SAs
If Mgt Disagree – Communicate to TCWG & Request
 SA 315 Revise RMM
Correction
 SA 450 Effect of Uncorrected Misstatements
Other Info Still Not Corrected
 SA 560 Subsequent Events After Date of AR
7 Reporting on Other Information

Audit Report
Not Yet Issued Audit Report Required For
Already Issued  Listed Entities + Obtained or Expects to Obtain OI (Expectation Sufficient)
Take Appropriate  Unlisted Entities + Obtained Some or ALL OI (At least Something Required)
Action  Take Appropriate
Action Considering
 Implication on Audit Legal Rights & -- Include Separate Section “Other Information” below KAM / If
Report & Obligation Misstatements in OI or FST then above KAM
Communicate them to --Mgt responsible for OI
TCWG (If Doubt over  Bring uncorrected --Identify OI obtained and OI to be obtained for Listed Entity
integrity or reliability of misstatements to -- Auditor Opinion doesn’t cover OI / No Opinion & Assurance on OI
representations then attention of users of AR -- Auditor Responsibility read, consider, report on OI
Disclaimer of Opinon) -- OI obtained before audit report
(Speak at GM /
 Withdraw from Withdraw, Send Statement that Auditor has Nothing to Report / Statement that there is
engagement if possible Reasons to Regulator) Uncorrected MMST in OI
under law or regulation Consider effect of modifications while reporting on above point.
CA Ravi Taori
[SQC-1] STANDARDS ON QUALITY CONTROL
ELEMENTS OF A SYSTEM OF QUALITY CONTROL
 6 Elements The firm’s system of quality control should include policies and procedures addressing each of
the following elements:
1. Leadership responsibilities for quality within the firm.
2. Human resources.
3. Ethical requirements.
4. Acceptance and continuance of client relationships and specific engagements.
5. Engagement performance.
6. Monitoring.
 Documentation The quality control policies and procedures should be documented and communicated to the
/ firm’s personnel. Such communication describes the quality control policies and procedures
Communication and the objectives they are designed to achieve and includes the message that each individual
/Objectives / has a personal responsibility for quality and is expected to comply with these policies and
Personal procedures. In addition, the firm recognizes the importance of obtaining feedback on its quality
Responsibility / control system from its personnel. Therefore, the firm encourages its personnel to
Feedback communicate their views or concerns on quality control matters.
(E.g. 4 Volume Quality Controls Manual / Sent to Everyone Through Mail / Linked with
Audit Process / Oath / Feed Back – Simplification)
CA Ravi Taori
UNIQUE QUESTIONS
 CNO 127.500 Examples of the matters to be considered With regard to the integrity of a client by the firm
as per the requirements of SQC 1

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PREFACE

Following are some important points which students should follow.

For Administrative purpose contact @ 09322011915

The Responsibility Relating to Fraud in an Audit of

SA 530 Audit Sampling 3.117-3.127

Emphasis of Matter Paragraphs & Other Matter Paragraphs

Comparative Information—Corresponding Figures and

Auditor Responsibility in Relation to Other Information

Quality Control for Firms that perform Audit and Reviews

ZONE-2: - CHAPTERS OF CA ACT 1949

CHAPTER-1:- APPLICABILITY & DEFINITION

 Section 5 Associate Member

SIGNIFICANCE OF COP (Text)

If CA fails to inform ICAI about disqualifications he will be guilty of professional misconduct.

CHAPTER III (Section 9 to 18)

CHAPTER IV (Section 19 to 20)

 Restoration Restoration of Membership

 Withdrawal Matter pending before

Authority should give opportunity of being heard to concerned parties.

 Reference Disciplinary Directorate is formed under Sec 21

CHAPTER VIII (Section 29-33) MISCELLANEOUS

 Section 30 A Central Government can direct to make or amend regulations.

 Section 31 are not that relevant

ZONE-3 :- FIRST SCHEDULE

IMAGE RECOGNITION MEMORY TECHNIQUE OF FIRST SCHEDULE

FIRST SCHEDULE- PART I

CLAUSE 1 -WHO CAN PRACTICE IN NAME OF CA IN PRACTICE? (CNO-660.100)

 Goodwill Transfer of Goodwill

Procedure Of Transfer Of Goodwill

CLAUSE 3 - (CAN CA ACCEPT SHARE OF FEES / PROFITS?) (CNO-662.010)

CLAUSE 4 (PARTNERSHIP) (CNO-664.000/665.000/666.000/711.000) (MCQ- Incs.04.5)

 Number of Section 464 of Companies Act 2013

A Chartered Accountant in practice is deemed to be guilty of professional misconduct if he:

CLAUSE 6 (Soliciting Work Through Advertisement ?)

Advertisement & Related Points

This point mended see note below

Classfified Ad: A member is also permitted to issue a classified advertisement in

Amended See Note Below

 Educational Videos: While the videos of educational nature may be uploaded

Points are same as discussed for Section 7

Logo Yes Yes

 Applicability It is applicable to all audits (Previously held by Chartered Accountant)

CLAUSE 9 - ASCERTAIN WHETHER REQUIREMENTS OF COMPANIES ACT ARE COMPLIED (CNO-705.000/706.000)

CLAUSE 10 (Charging Fees? ) (CNO-707.000/707.020/709.000) (MCQ-Incs.01.4)

 Activities SERVE CAMEL in P2AIN

FIRST SCHEDULE - PART III

Clause 2 (CNO-732.000/733.000/735.000/736.000/737.000/754.000) (MCQ-PE.2)

PICTORIAL OVERVIEW OF SECOND SCHEDULE

 Clause 1 A Chartered Accountant in practice shall be deemed to be guilty of professional misconduct, if he

CLAUSE 4 (CNO-744.000/745.000/746.000/747.000/747.050/747.070) (MCQ- PE.9, PE.10)

 Clarifications System Auditor

 Cases Clause 5 Cases

Fees or Remunerations For expenses Other

Should be used Within

CLAUSE 1 (CNO-655.100/724.000/731.000/765.000/766.000/768.000/769.000) (MCQ – PE.4)

SCHEDULE II - PART – III (CNO-656.000/737.000/774.000/774.010/776.000)

 Write-Up Covered with Clause 7

 Publication of Name or Firm Name Covered with Clause 6

KNOW YOUR CLIENT (KYC) NORMS (CNO-782.000/782.005)