GM TEST SERIES

Notes for Dec 2021 attempt

Top 50 Questions

Auditing & Assurance

Contact No. -9070800090 Email id – Info@gmtestseries.com

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 CA INTER NEW COURSE

AUDITING & ASSURANCE

Top 50 Questions

Questions

Q-1 State briefly six important aspects to be considered by an auditor while conducting an audit.

Q-2 As per SA 220, the engagement partner shall take responsibility for the overall quality on each audit
engagement to which that partner is assigned. While taking responsibility for the overall quality on each
audit engagement, analyze and explain the emphasis of the actions of the engagement partner and
appropriate messages to the other members of the engagement team. Also define engagement partner.

Q-3 The auditor should be straight forward, honest and sincere in his approach to his professional work. He
must be fair and must not allow prejudice or bias to override his objectivity. He should maintain an
impartial attitude and both be and appear to be free of any interest which might be regarded as being
incompatible with integrity and objectivity. Many different circumstances, or combination of circumstances,
may be relevant and accordingly it is impossible to define every situation that creates threats to
independence and specify the appropriate mitigating action that should be taken.

In addition, the nature of assurance engagements may differ and consequently different threats may exist
requiring the application of different safeguards.

Explain stating clearly the five types of threats as contained in Code of Ethics for Professional Accountants,
prepared by the International Federation of Accountants (IFAC).

Q-4 Indicate the factors which make it appropriate for an auditor to send a new engagement letter for a
recurring audit.

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Q-5 Discuss prerequisites and fundamental principles to be possessed by an auditor.

Q-6 “Determining materiality involves the exercise of professional judgment”. Discuss stating the factors
that may affect the identification of an appropriate benchmark. Also give example.

Q-7 Discuss the relationship between overall audit strategy and audit plan.

Q-8 State the matters to be considered for acquiring knowledge of the business of the client by the auditor.

Q-9 “The utility of the audit programme can be retained and enhanced only by keeping the programme and
also the client’s operations and internal control under periodic review so that inadequacies or redundancies
of the programme may be removed’. Discuss stating clearly the advantages of an audit programme.

Q-10 The nature of related party relationships and transactions may, in some circumstances, give rise to
higher risks of material misstatement of the financial statements than transactions with unrelated parties.
Explain with the help of at least three examples.

Q-11 what do you mean by sufficient appropriate audit evidence? State various factors that help the
auditor to ascertain as to what is sufficient appropriate audit evidence.

Q-12 Discuss with reference to SAs: Factors effecting form, contents and extent of audit documentation.

Q-13 “Although written representations provide necessary audit evidence yet they do not provide sufficient
appropriate audit evidence on their own about any of the matters with which they deal”. Discuss.

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Q-14 Write short note on: Reliability of external confirmations.

Q-15 Internal control over safeguarding of assets against unauthorized acquisition, use, or disposition may
include controls relating to both financial reporting and operations objectives. Explain stating clearly the
objectives of Internal Control.

Q-16 The auditor shall identify and assess the risks of material misstatement at both levels to provide a
basis for designing and performing further audit procedures, For the purpose of Identifying and assessing
the risks of material misstatement the auditor shall identify risks, assess the identified risks, relate the
identified risks and consider the likelihood of misstatement.

Explain the above in detail.

Q-17 Explain inherent limitations of Internal control system.

Q-18 Sweet Fruits Private Limited had a turnover of Rs 155 crore for the financial year 2019-20. Explain
whether during the financial year 2020-21, Sweet Fruits Private Limited would be required or not required
to appoint an internal auditor, keeping in view the provisions of Companies Act, 2013.

Q-19 Auditor's reporting on internal financial controls is a requirement specified in the Act and, therefore,
will apply only in case of reporting on financial statements prepared under the Act and reported under
section 143. Explain stating clearly the auditor's responsibility for reporting on internal financial controls
over financial reporting.

Q-20 Explain the manner of Reporting of fraud under Companies Act,2013.

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Q-21 Inadequate internal control over assets may increase the susceptibility of misappropriation of those
assets. Enlist some examples of such circumstances.

Q-22 You notice a misstatement resulting from fraud or suspected fraud during the audit and conclude that
it is not possible to continue the performance of audit. As a statutory Auditor, how would you deal?

Q-23 Fraud can be committed by management overriding controls using such techniques as engaging in
complex transactions that are structured to misrepresent the financial position or financial performance of
the entity. In view of the above-mentioned circumstances of management fraud, explain briefly duties and
responsibilities of an auditor in case of material misstatement resulting from such Management Fraud.

Q-24 There are many ways for cash defalcation, one of which is by suppressing cash receipts. List out few
techniques of how the receipts are suppressed.

Q-25 List any five points that an auditor should consider to obtain an understanding of the company's
automated environment.

Q-26 The auditor should understand and consider the risks that may arise from the use of Information
Technology (IT) Systems.

Q-27 Discuss the different ways testing is performed in an automated environment.

Q-28 Sampling risk can lead to erroneous conclusion". Justify.

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Q-29 Discuss the factors that should be considered for deciding upon the extent of checking on a sampling
plan.

Q-30 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.
Explain.

Q-31 While applying the Substantive Analytical Procedures what techniques can be used by the statutory
auditor of a company to obtain sufficient and appropriate audit evidence?

Q-32 What are the considerations to be kept in mind while performing analytical procedures on data
prepared by the client?

Q-33 Write the audit procedures to be performed as an auditor for valuation (assertion) of: Loans and
Advances and other current assets.

Q-34 Briefly discuss the provisions of the Companies Act, 2013 with regard to issue of shares at a discount

Q-35 On going through the financial statements of PQR Ltd., its auditors Kamal Gagan and Associates
observed that company has taken Loans from banks and financial institutions. Further, the audit team
discusses the following about Liabilities:

"Liabilities are the financial obligations of an enterprise other than owners' funds. Liabilities include
loans/borrowings, trade payables and other current liabilities, deferred payment credits and provisions.

Verification of liabilities is as important as that of assets, for, if any liability is omitted (or under- stated) or
over stated, the Balance Sheet would not show a true and fair view of the state of affairs of the company."

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Advice stating clearly the audit procedures generally required to be undertaken for verification of existence
of Borrowings.

Q-36 Discuss the following:

(a) Ceiling on number of audits in a company to be accepted by an auditor.

(b) Filling of a casual vacancy of auditor in respect of a company audit.
(c) In Joint Audit, "Each Joint Auditor is responsible only for the work allocated to him".

Q-37 Discuss which Class of companies are specifically exempt from the applicability of CARO, 2016

Q-38 Board of Directors of "XYZ Ltd." found the auditors of the Company acted in a fraudulent manner, and
decided to remove the auditors in board's meeting. Comment on the action of Board of Directors and
describe correct procedure to be followed for removal of auditors before expiry of their term.

Q-39 M/s RM & Co. is an audit firm having partners CA. R and CA. M. The firm has been offered the
appointment as an auditor of Enn Ltd. for the Financial Year 2019-20. Mr. Bee, the relative of CA. R, is
holding 5,000 shares (face value of Rs 10 each) in Enn Ltd. having market value of Rs 1,50,000. One of the
shareholders complains that the appointment of RM & Co. as an auditor is invalid because it incurred
disqualification u/s 141 of the Companies Act, 2013. Analyze and advise.

Q-40 CA. P is providing the services of investment banking to C Ltd. Later on, he was also offered to be
appointed as an auditor of the company for the current financial year. Advise.

Q-41 The first auditor of M/s Healthy Wealthy Ltd., a Government company, was appointed by the Board of
Directors.

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Q-42 Discuss the following: The Auditor's Report is considered to be modified under certain circumstances.

Q-43 What is an Emphasis of Matter paragraph, when it is used and manner of its use in an audit report?

Q-44 When corresponding figures are presented, the auditors' opinion shall not refer to the corresponding
figures. Discuss the exceptions of the above statement when the prior period financial statements are
audited.

Q-45 The auditor's report shall include a section with a heading "Responsibilities of Management for the
Financial Statements." SA 200 explains the premise, relating to the responsibilities of management and,
where appropriate, those charged with governance, on which an audit in accordance with SAs is conducted.
Explain.

Q-46 The engagement team of FRN & Co.- Auditors of Bank of Baroda held discussions to gain better
understanding of the bank and its environment, including internal control, and also to assess the potential
for material misstatements of the financial statements.

The discussion between the members of the engagement team and the audit engagement partner are
being done on the susceptibility of the bank's financial statements to material misstatements. These
discussions are ordinarily done at the planning stage of an audit.

Analyse and Advise the matters to be discussed in the engagement team discussion.

Q-47 "The Auditor should examine the efficiency of various internal controls over advances, to determine
the nature, timing and extent of his substantive procedures." Discuss briefly.

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Q-48 The general transactions of a hospital include patient treatment, collection of receipts, donations,
capital expenditures. You are required to mention special points of consideration while auditing such
transactions of a hospital?

Q-49 Write short short on: Powers of C & AG in connection with the performance of his duties.

Q-50 Mention important points which auditors will consider while conducting audit of accounts of a
partnership firm.

Suggested Answers

A-1 Aspects to be covered in Audit:

1. Examination of Accounting System & Internal Control

 To ascertain whether it is appropriate for the business and helps in proper recording of all the
transactions.
 To determine the Nature, Timing and Extent (NTE) of Audit Procedures to be performed.

2. Reviewing the system & procedures

 To find out whether they are adequate and comprehensive.

3. Vouching of the transactions

 To ensure authenticity and validity of transactions.

 To check the arithmetical accuracy of the books of account.
 To ascertain proper distinction into capital and revenue items.

4. Verification of Assets & Liabilities

 To ensure existence and valuation of the assets and liabilities appearing in the balance sheet.
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5. Statutory Compliances

 In case of entities governed by some law, rules or regulations, for example in case of audit of a
company incorporated under Companies Act, 2013.

6. Expression of Opinion

 On true and fair view of state of Affairs as reflected by Balance Sheet.

 On true and fair view of Financial Results as reflected by Statement of Profit and Loss
 On true and fair view of Cash Flows as reflected by Cash Flow Statement.

7. Reporting on Other matters

 As required by the law governing the entity.

A-2 Leadership Responsibilities for Quality on Audits:

As per SA 220 "Quality Control for an Audit of Financial Statements" the engagement partner shall take
responsibility for the overall quality on each audit engagement to which that partner is assigned.

As a part of this responsibility Engagement Partner should emphasizes the following to the Engagement
Team (ET):

 Compliance with professional Standards and legal requirements.

 Compliance with firm's Quality Control Policies and procedures as applicable.
 Issuance of appropriate audit report.
 Ability to raise concerns without fear.
 Quality is essential & indispensable in engagement performance.

Meaning of Engagement Partner:

The partner or other person in the firm who is a member of the Institute of Chartered Accountants of India
and is in full time practice and is responsible for the engagement and its performance, and for the report
that is issued on behalf of the firm, and who, where required, has the appropriate authority from a
professional, legal or regulatory body.

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A-3 Threats to Independence:

1. Self-interest threats

It may occur as a result of the financial or other interests of a professional accountant or of a relative.
Examples are:

 direct or indirect financial interest in a client,

 loan or guarantee to or from the concerned client,
 undue dependence on a client's fees,
 close business relationship with an audit client,
 potential employment with the client, and
 Contingent fees for the audit engagement.

2. Self-review threats

It may occur when a previous judgment needs to be re-evaluated by the professional accountant
responsible for that judgment. Instances where such threats may arise are:

a) When an auditor having recently been a director or senior officer of the company, and
b) When auditors perform services that are themselves subject matters of audit.

3. Advocacy threats

It may occur when a professional accountant promotes a position or opinion to the point that subsequent
objectivity may be compromised.

For example, an auditor dealing with shares or securities of the audited company, or becomes the client's
advocate in litigation and third-party disputes.

4. Familiarity threats

It may occur when, because of a relationship, a professional accountant becomes too sympathetic to the
interests of others. This can occur in many ways:

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 1. Close relative of the audit team working in a senior position in the client company,
2. Former partner of the audit firm being a director or senior employee of the client.
3. Long association between specific auditors and their specific client counterparts, and
4. Acceptance of significant gifts or hospitality from the client company, its directors or employees.

5. Intimidation threats

 It may occur when a professional accountant may be deterred from acting objectively by threats,
actual or perceived.

A-4 Engagement Letter in case of Recurring Audit:

SA 210 "Agreeing the Terms of Audit Engagement" provides that in case of recurring audits, the auditor
shall assess whether circumstances require revision in terms of the audit engagement 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:

1. Any indication that the entity misunderstands the objective and scope of the audit.
2. Any revised or special terms of the audit engagement.
3. A recent change of senior management.
4. A significant change in ownership.
5. A significant change in nature or size of the entity's business.
6. A change in legal or regulatory requirements.
7. A change in the financial reporting framework adopted in the preparation of the FS.
8. A change in other reporting requirements.

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A-5 Compliance of Ethical requirements:

(a) As per SA 200 "Overall Objectives of the Independent Auditor and Conduct of Audit in accordance
with SAs" the auditor shall comply with relevant ethical requirements, including independence.
(b) Relevant ethical requirements ordinarily comprise the Code of Ethics issued by the ICAI. The
fundamental principles are:
 Integrity;
 Objectivity;
 Professional competence and due care;
 Confidentiality; and
 Professional behavior.
(c) Independence comprises both independence of mind and independence of appearance.
(d) Independence enhances the auditor's ability to act with integrity to be objective and to maintain an
attitude of professional skepticism.

A-6 Use of Benchmarks in Determining Materiality for the Financial Statements as a Whole
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.
Factors that may affect the identification of an appropriate benchmark include the following:

 The elements of the financial statements

Example:-

Assets, liabilities, equity, revenue, expenses;

 Whether there are items on which the attention of the users of the particular entity’s financial
statements tends to be focused

Example:-

For the purpose of evaluating financial performance users may tend to focus on profit, revenue or net
assets
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 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 and

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;

 The relative volatility of the benchmark.

A-7 Relationship between the Overall Audit Strategy and the Audit Plan:

 Audit strategy and audit plan are inter-related to each other because change in one would result into
change in the other.
 The audit strategy is prepared before the audit plan. The audit plan contains more details than the
overall audit strategy.
 The audit strategy provides the guidelines for developing the audit plan. Once the overall audit
strategy has been established, an audit plan can be developed to address the various matters
identified in the overall audit strategy.
 Audit strategy establishes the scope, timing and direction of the audit and thereby works as basis for
developing a detailed audit plan.
 Detailed audit plan would include the nature, timing and extent of the audit procedures so as to obtain
sufficient appropriate audit evidence.

A-8 Knowledge of Client's Business:

Knowledge of client's business is one of the important principles in developing an overall audit plan. In fact,
without adequate knowledge of client's business, a proper audit is not possible.

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As per SA 315 "Identifying and Assessing the Risk of Material Misstatements through understanding the
entity and its environment" auditor is required to obtain an understating of following as a part of risk
assessment procedures:

(a) Industry, regulatory, and other external factors including applicable financial reporting framework.
(b) The nature of the entity, including:
 Its operations;
 Its ownership and governance structures;
 The types of investments that the entity is making and plan to make; &
 The way that the entity is structured and how it is financed;
(c) The entity's selection and application of accounting policies, including the reasons for changes
thereto.
(d) The entity's objectives and strategies, and those related business risks that may result in risks of
material misstatement.
(e) The measurement and review of the entity's financial performance.

A-9 Periodic Review of the Audit Programme

There should be periodic review of the audit programme to assess whether the same continues to be
adequate for obtaining requisite knowledge and evidence about the transactions. Unless this is done, any
change in the business policy of the client may not be adequately known, and consequently, audit work
may be carried on, on the basis of an obsolete programme and, for this negligence, the whole audit may be
held as negligently conducted and the auditor may have to face legal consequences.

Example
If the audit programme for the audit of a branch of a financing house, drawn up a number of years ago, fails
to take into consideration that the previous policy of financing of a vehicle has been changed to financing of
real estate acquisition, the whole audit conducted thereunder would be entirely misdirected and may even
result into nothing more than a farce. [Pacific Acceptance Corporation Ltd. v. Forsyth and Others]

The advantages of an audit programme are:

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a) It provides the assistant carrying out the audit with total and clear set of instructions of the work
generally to be done.
b) It is essential, particularly for major audits, to provide a total perspective of the work to be performed.
c) Selection of assistants for the jobs on the basis of capability becomes easier when the work is rationally
planned, defined and segregated.
d) 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, such danger is significantly less and the audit
can proceed systematically.
e) 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.
f) 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.
g) It serves as a guide for audits to be carried out in the succeeding year.
h) 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.

A-10 Many related party transactions are in the normal course of business. In such circumstances, they may
carry no higher risk of material misstatement of the financial statements than similar transactions with
unrelated parties. However, the nature of related party relationships and transactions may, in some
circumstances, give rise to higher risks of material misstatement of the financial statements than
transactions with unrelated parties.

Example

 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.
 Information systems may be ineffective at ide82e levant82g summarizing transactions and outstanding
balances between an entity and its related parties.

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 Related party transactions may not be conducted under normal market terms and conditions; for
example, some related party transactions may be conducted with no exchange of consideration.

A-11 sufficient appropriate audit evidence:

SA 500 defines audit evidence as information used by the auditor in arriving at the conclusions on which the
auditor's opinion is based. The auditor shall design and perform audit procedures that are appropriate in
the circumstances for the purpose of obtaining sufficient appropriate audit evidence.

Sufficiency: It refers to the quantity of audit evidence. It is affected by the auditor's assessment of the risks
of material misstatement and also by the quality of such audit evidence.

Appropriateness: It refers to the measure of the quality of audit evidence. That is its relevance and its
reliability in providing support for the conclusions on which the auditor's opinion is based.

Factors affecting Sufficiency and Appropriateness:

(a) The degree of risk of misstatement which may be affected by factors such as:
 The nature of the item;
 The adequacy of internal control;
 The nature or size of the business carried on by the entity;
 Situations which may exert an unusual influence on management;
 The financial position of the entity.
(b) The materiality of the Item.
(c) The experience gained during previous audits.
(d) The results of auditing procedures, Including fraud and errors which may have been found.
(e) The type of information available.
(f) The trend indicated by accounting ratios and analysis.

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A-12 Factors affecting form, content and extent of Audit Documentation:

SA 230"Audit Documentation" deals with the auditor's responsibility to prepare audit documentation for an
audit of financial statements. Accordingly, the various factors that may affect form, content and extent of
audit documentation are following-

1. The size and complexity of the entity.

2. The nature of the audit procedures to be performed.
3. The identified risks of material misstatement.
4. The significance of the audit evidence obtained.
5. The nature and extent of exceptions identified,
6. The need to document a conclusion or the basis for a conclusion not readily determinable from the
documentation of the work performed or audit evidence obtained.
7. The audit methodology and tools used.

A-13 Audit evidence is all the information used by the auditor in arriving at the conclusions on which the
audit opinion is based. Written representations are necessary information that the auditor requires in
connection with the audit of the entity’s financial statements. Accordingly, similar to responses to inquiries,
written representations are audit evidence.
Written representations are requested from those responsible for the preparation and presentation of the
financial statements.

Although written representations provide necessary audit evidence, they do not provide sufficient
appropriate audit evidence on their own about any of the matters with which they deal. 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 fulfillment of management’s responsibilities, or
about specific assertions.

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A-14 Reliability of external confirmations:

As per SA 505"External Confirmation", the reliability of external confirmations depends among other
factors, upon the application of appropriate procedures by the auditor in designing the external
confirmation request, performing the external confirmation procedures, and evaluating the results of the
external confirmation procedures. The factors that affect the reliability of confirmations include:

(a) The control which the auditor exercises over confirmation request and responses;
(b) The character of respondents; and
(c) Any restrictions included in the response or imposed by the management.

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.

A-15 Objectives of Internal Control

Internal control over safeguarding of assets against unauthorized acquisition, use, or disposition may
include controls relating to both financial reporting and operations objectives. The auditor’s consideration
of such controls is generally limited to those relevant to the reliability of
financial reporting. For example, use of access controls, such as passwords, that limit access to the data and
programs that process cash disbursements may be relevant to a financial statement audit. Conversely,
safeguarding controls relating to operations objectives, such as controls to prevent the excessive use of
materials in production, generally are not relevant to a financial statement audit.

Objectives of Internal Control are :

(i) Transactions are executed in accordance with managements general or specific authorization;
(ii) 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;

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 (iii) Assets are safeguarded from unauthorised access, use or disposition; and
(iv) The recorded assets are compared with the existing assets at reasonable intervals and appropriate
action is taken with regard to any differences.

A-16 Identifying and assessing the risks of material misstatement:

 The auditor shall identify and assess the risks of material misstatement at:
(A) The financial statement level –
(B) The assertion level for classes of transactions, account balances, and disclosures to provide a
basis for designing and performing further audit procedures
 For the purpose of Identifying and assessing the risks of material misstatement, the auditor shall:
(a) 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;
(b) Assess the identified risks, and evaluate whether they relate more pervasively to the financial
statements as a whole and potentially affect many assertions;
(c) 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
(d) 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.

A-17 Inherent Limitations of Internal Control:

(a) Management's consideration that a control should be cost-effective.

(b) The fact that the most controls do not tend to be directed at transactions of unusual nature.
(c) Potential for human error.
(d) Possibility of circumvention of controls through collusion with parties outside the entity or with
employees of entity.
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 (e) Possibility that a person responsible for exercising control could abuse that authority.
(f) Possibility that procedures may become inadequate due to changes in conditions and compliance with
procedures may deteriorate.
(g) Manipulations by management with respect to transactions or estimates and judgments required in
the preparation of financial statements.

A-18 During the financial year 2020-21, Sweet Fruits Private Limited would not be required to appoint an
internal auditor because according to Section 138 of the Companies Act, 2013 every private company
having a turnover of more than or equal to Rs 200 crore during the preceding financial year is required to
appoint an internal auditor.

It is given in the question that Sweet Fruits Private Limited during the financial year 2018-19 had a turnover
of Rs 155 crore which is less than Rs 200 crore. Therefore, during the financial year 2020-21, Sweet Fruits
Private Limited will not be required to appoint an internal auditor.

A-19 Auditors' Responsibility for Reporting on Internal Financial Controls over Financial Reporting in India

 Sec. 143(3)(i) of the Companies Act, 2013 requires the auditors' report to state whether the company
has adequate internal financial controls with reference to financial statements in place and the
operating effectiveness of such controls.
 It may be noted that auditor's reporting on internal financial controls is a requirement specified in the
Act and, therefore, will apply only in case of reporting on financial statements prepared under the Act
and reported under section 143. Accordingly, reporting on internal financial controls will not be
applicable with respect to interim financial statements, such as quarterly or half-yearly financial
statements, unless such reporting is required under any other law or regulation.

Objectives of an auditor in an audit of internal financial controls over financial reporting: The auditor's
objective in an audit of internal financial controls over financial reporting is, "to express an opinion on the

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effectiveness of the company's internal financial controls over financial reporting" It is carried out along
with an audit of the financial statements.

A-20 Manner of Reporting of Fraud:

Rule 13 of Companies (Audit and Auditors) Rules, 2014 prescribes the manner of Reporting of Frauds as
below:

1) If an auditor of a company, in the course of the performance of his duties as statutory auditor, has
reason to believe that an offence of fraud, which involves or is expected to involve individually an
amount of Rs 1 crore or above, is being or has been committed against the company by its officers or
employees, the auditor shall report the matter to the CG.
2) The auditor shall report the matter to the CG as under:
(a) The auditor shall report the matter to the Board or the Audit Committee, as the case may be,
immediately but not later than 2 days of his knowledge of the fraud, seeking their reply or
observations within 45 days;
(b) On receipt of such reply or observations, the auditor shall forward his report and the reply or
observations of the Board or the Audit Committee along with his comments (on such reply or
observations of the Board or the Audit Committee) to the CG within 15 days from the date of
receipt of such reply or observations;

A-21 Inadequate internal control over assets may increase the susceptibility of misappropriation of those
assets. For example, misappropriation of assets may occur because there is the following:

 Inadequate segregation of duties or independent checks.

 Inadequate oversight of senior management expenditures, such as travel and other reimbursements.
 Inadequate record keeping with respect to assets.
 Inadequate system of authorization and approval of transactions (for example, in purchasing).

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  Inadequate physical safeguards over cash, investments, inventory, or fixed assets.
 Lack of complete and timely reconciliations of assets.
 Lack of timely and appropriate documentation of transactions, for example, credits for merchandise
returns.
 Lack of mandatory vacations for employees performing key control functions.
 Inadequate management understanding of information technology, which enables information
technology employees to perpetrate a misappropriation.
 Inadequate access controls over automated records, including controls over and review of computer
systems event logs.

A-22 If, as a result of a misstatement resulting from fraud or suspected fraud, the auditor encounters
exceptional circumstances that bring into question the auditor’s ability to continue performing the audit,
the auditor shall:

(a) 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;
(b) Consider whether it is appropriate to withdraw from the engagement, where withdrawal is possible
under applicable law or regulation; and
(c) If the auditor withdraws:
(i) 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
(ii) 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.

A-23 Auditor's duties for prevention and detection of fraud:

 An auditor is responsible for obtaining reasonable assurance that the F.S. taken as a whole are free
from material misstatement, whether caused by fraud or error.

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 When obtaining reasonable assurance, the auditor is responsible for maintaining an attitude of
professional skepticism throughout the audit.
 The auditor should recognize the possibility that a material misstatement due to fraud could exist,
notwithstanding his past experience of the honesty and integrity of the entity's management and those
charged with governance.
 Unless doubtful situations are present, the auditor may accept records and documents as genuine.
 If conditions cause the auditor to believe that a document may not be authentic or that terms in a
document have been modified, the auditor shall investigate further.
 Where responses to inquiries of management or TCWG are inconsistent, the auditor shall investigate
the inconsistencies.

Procedures when Circumstances Indicate a Possible Misstatement

When the auditor encounters circumstances that may indicate that there is a material misstatement in the
financial statements resulting from fraud or error, the auditor should perform procedures to determine
whether the financial statements are materially misstated.

Considering whether an identified Misstatement may be Indicative of Fraud

When the auditor identifies a misstatement, the auditor should consider whether such a misstatement may
be indicative of fraud.

If there is such an indication, the auditor should consider the implications of the misstatement in relation to
other aspects of the audit, particularly the reliability of management representations.

Communication

 If the auditor has identified a fraud or has indication of fraud, the auditor should communicate that
information to management, TCWG and,
 In some circumstances, when so required by the laws and regulations, to regulatory and enforcement
authorities also.

A-24 Suppression of Cash Receipts:

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Cash receipts may be suppressed in following ways:

 Teeming and Lading

 Adjusting unauthorized rebates, allowances, discounts etc. to customer' accounts and
misappropriating amount paid by them.
 Writing off as debts in respect of balances against which cash has already been received but has been
misappropriated.
 Not accounting for cash sales fully.
 Not accounting for miscellaneous receipts e.g. sale of scrap etc.
 Writing down asset values in entirety, selling them subsequently and misappropriating the proceeds.

A-25 Understanding of Automated Environment:

As required by SA 315, auditor is required to obtain an understanding of the entity and its environment as a
part of Risk Assessment procedure to identify and assess Risk of Material Misstatements.

While obtain an understanding of the company's automated environment, auditor should consider the
following points:

 Information systems being used (one or more application systems and what they are).
 Their purpose (financial and non-financial).
 Location of IT systems - local v. global.
 Architecture (desktop based, client-server, web application, cloud based).
 Version (functions and risks could vary in different versions of same application).
 Interfaces within systems (in case multiple systems exist).
 In-house v. Packaged.
 Outsourced activities (IT maintenance and support).
 Key persons (CIO, CISO, Administrators).

As required by SA 230, auditor is required to document the understanding of a company automated

environment.

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A-26 Having obtained an understanding of the IT systems and the automated environment of a company,
the auditor should now understand the risks that arise from the use of IT systems.

Given below are some such risks that should be considered,

 Inaccurate processing of data, processing inaccurate data, or both

 Unauthorized access to data
 Direct data changes (backend changes)
 Excessive access / Privileged access (super users)
 Lack of adequate segregation of duties
 Unauthorized changes to systems or programs
 Failure to make necessary changes to systems or programs
 Loss of data

A-27 Commonly used methods for testing in an automated environment:

1. Obtain an understanding of how an automated transaction is processed by doing a walkthrough of

one end-to-end transaction using a combination of inquiry, observation and inspection.
2. Observe how a user processes transaction under different scenarios.
3. Inspect the configuration defined in an application.
4. Inspect the system logs to determine any changes made since last audit testing.
5. Inspect technical manual/user manual of systems and applications.
6. Carry out a test check and observe the error message displayed by the application.

A-28 Sampling Risk:

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SA 530"Audit Sampling" deals with auditor use of sampling in performing audit procedures. However, due
to application of sampling in audit procedures, there arise risk of sampling.

Sampling Risk may be defined as the risk that the auditor's conclusion based on a sample may be different
from the conclusion if the entire population were subjected to the same audit procedure.

Sampling risk can lead to two types of erroneous conclusions:

(i) In the case of a test of controls, that controls are more effective than they actually are, or in the case
of a test of details, that a material misstatement does not exist when in fact it does. The auditor is
primarily concerned with this type of erroneous conclusion because it affects audit effectiveness and
is more likely to lead to an inappropriate audit opinion.
(ii) In the case of a test of controls, that controls are less effective than they actually are, or in the case
of a test of details, that a material misstatement exists when in fact it does not. This type of
erroneous conclusion affects audit efficiency as it would usually lead to additional work to establish
that initial conclusions were incorrect.

A-29 Factors to be considered to decide extent of checking:

(A) Factors Influencing extent of checking for Tests of Controls:

(i) An increase in the extent to which the auditor's risk assessment takes into account relevant controls
will increase the sample size.
(ii) An increase in the tolerable rate of deviation, will decrease the sample size.
(iii) An increase in the expected rate of deviation of the population to be tested, will increase the sample
size.
(iv) An increase in the auditor's desired level of assurance that the tolerable rate of deviation is not
exceeded by the actual rate of deviation in the population will increase the sample size.

(B) Factors influencing extent of checking for Tests of Details:

(i) An increase in the auditor's assessment of the risk of material misstatement will increase the extent of
checking.
(ii) An increase in the use of other substantive procedures directed at the same assertion will decrease
the extent of checking.

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 (iii) An increase in the auditor's desired level of assurance that tolerable misstatement is not exceeded by
actual misstatement in the population will increase the extent of checking.
(iv) An increase in tolerable misstatement will decrease the extent of checking.
(v) An increase in the amount of misstatement the auditor expects to find in the population will increase
the extent of checking.
(vi) Stratification of the population when appropriate will decrease the extent of checking.

A-30 Projection of Misstatements:

 As per SA 530 "Audit Sampling", 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.
 For tests of details, the auditor shall project misstatements found in the sample to the population
whereas for tests of controls, no explicit projection of deviations is necessary since the sample
deviation rate is also the projected deviation rate for the population as a whole.

A-31 While applying the Substantive Analytical Procedures the statutory auditor of a company may use the
following techniques to obtain sufficient and appropriate audit evidence

Trend analysis – Trend analysis is a commonly used technique. It is the comparison of current data with the
prior period balance or with a trend in two or more prior period balances. We evaluate whether the current
balance of an account moves in line with the trend established with previous balances for that account, or
based on an understanding of factors that may cause the account to change.

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Ratio analysis – Ratio analysis is useful for analyzing asset and liability accounts as well as revenue and
expense accounts. An individual balance sheet account is difficult to predict on its own, but its relationship
to another account is often more predictable (e.g., the trade receivables balance related to sales). Ratios
can also be compared over time or to the ratios of separate entities within the group, or with the ratios of
other companies in the same industry.

Reasonableness tests – Unlike trend analysis, this analytical procedure does not rely on events of prior
periods, but upon non-financial data for the audit period under consideration (e.g., occupancy rates to
estimate rental income or interest rates to estimate interest income or expense). These tests are generally
more applicable to income statement accounts and certain accrual or prepayment accounts. In other words
these tests are made by reviewing the relationship of certain account balances to other balances for
reasonableness of amounts.

Structural modeling – A modeling tool constructs a statistical model from financial and/or non-financial
data of prior accounting periods to predict current account balances (e.g., linear regression).

The statutory auditor may use any of the above mentioned techniques while applying substantive analytical
procedures depending upon the availability of data and requirements of the case.

A-32 Factors determining extent of reliance on analytical procedures (SA-520)

The application of analytical procedures is based on the expectation that relationships among data exist
and continue in the absence of known conditions to the contrary. The presence of these relationships
provides audit evidence as to the completeness, accuracy and validity of the data produced by the
accounting system.

Factors affecting the Reliability of Data on which analytical procedures are to be performed:

As per SA 520 "Analytical Procedures" facts that may affect the reliability of data are:

1. Source of the information available. For example, information may be more reliable when it is
obtained from independent sources outside the entity;

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2. Comparability of the information available. For example, broad industry data may need to be
supplemented to be comparable to that of an entity that produces and sells specialized products;
3. Nature and relevance of the information available. For example, whether budgets have been
established as results to be expected rather than as goals to be achieved; and
4. Controls over the preparation of the information that are designed to ensure its completeness,
accuracy and validity. For example, controls over the preparation, review and maintenance of budgets.

A-33 Audit procedures to be performed for valuation of Loans and Advances and other current assets:

(i) Examine the provision made for doubtful accounts. For this purpose, auditor need to review the
process followed by the entity to derive an allowance for doubtful accounts. Compare the process
used in the last year and determine the appropriateness of method used.
(ii) Obtain the ageing report of loans and advances, split between not currently due, 30 days old, 30-60
days old, 60- 180 days old, 180- 365 days old and more than 365 days old.
(iii) Obtain list of loans and advances under dispute and compare with previous year.
(iv) Identify loans and advances that appear doubtful and check the respective provisions made. In case
provisions are not been made, inquire the reasons from management
(v) Examine bad loans/advances write-offs. Prepare schedule of movements on Bad loans/advances -
Provision Accounts and loans/advances written off.
(vi) Examine whether the write-offs or other reductions in the recoverable balances have been approved
by appropriate authority.
(vii) Examine whether the restatement of foreign currency loans and advances/other current assets has
been done properly.

A-34 Shares issued at a discount:

 Sec. 53 of the Companies Act, 2013 provides that a company cannot issue shares at discount. As per
Sec. 53, a company shall not issue shares at a discount, except in the case of an issue of sweat equity
shares given u/s 54 of the Companies Act, 2013.
 Any share issued by a company at a discounted price shall be void.

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  Where any company fails to comply with the provisions of this section, such company and every
officer who is in default shall be liable to a penalty which may extend to an amount equal to the
amount raised through the issue of shares at a discount or Rs 5 lakh, whichever is less, and the
company shall also be liable to refund all monies received with interest at the rate of 12% p.a. from
the date of issue of such shares to the persons to whom such shares have been issued.
 Auditor needs to verify that the company has not issued any of its shares at a discount. For this
purpose, he may read the minutes of meeting of its directors and shareholders authorizing issue of
share capital and the issue price.

A-35 Verification of Borrowings from Banks:

1. Ensure that the loans obtained are within the borrowing powers of the entity.
2. Examine the relevant records to judge the validity and accuracy of the loans.
3. Examine the important terms in the loan agreements and the documents, if any, evidencing charge in
respect of such loans and advances.
4. Where the entity has accepted deposits, the auditor should examine whether the directives issued by
the RBI or other appropriate authority are complied with.
5. Obtain a certificate from the bank showing the balance in the accounts as at the end of the year.
6. Certificate may also be obtained from the bank showing particulars of securities deposited with the
bank as security for the loans or of the charge created on an asset and confirm that the same has
been correctly disclosed and duly registered with ROC and recorded in the Register of charges.
7. Reconcile the balances in the overdraft or loan account with that shown in the bank statements.
8. Verify that the loan or draft has been raised by appropriate authority. In the case of a company, only
the BOD is authorized to raise a loan or borrow from a bank.
9. Confirm, in the case of a company, that the conditions prescribed in Sec. 180 of the Companies Act,
2013 as regards the maximum amount of loan that the company can raise has not been contravened.
10. Ascertain the purpose for which loan has been raised and the manner in which it has been utilized
and ensure that this has not prejudicially affected the entity.

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A-36

(a) Ceiling on number of Audits:- It has been mentioned earlier that before appointment is given to any
auditor, the company must obtain a certificate from him to the effect that the appointment, if made, will
not result in an excess holding of company audit by the auditor concerned over the limit laid down in
section 141(3)(g) of the Companies Act, 2013 which prescribes that a person who is in full time
employment elsewhere or a person or a partner of a firm holding appointment as its auditor, if such person
or partner is at the date of such appointment or reappointment holding appointment as auditor of more
than twenty companies other than one person companies, dormant companies, small companies and
private companies having paid-up share capital less than Rs 100 crore, shall not be eligible for appointment
as an Auditor of a Company.

In the case of a firm of auditors, it has been further provided that ‘specified number of companies’ shall be
construed as the number of companies specified for every partner of the firm who is not in full time
employment elsewhere.

(b) Filling of a Casual Vacancy

As per Section 139(8), any casual vacancy in the office of an auditor shall-

(i) In the case of a company other than a company whose accounts are subject to audit by an auditor
appointed by the Comptroller and Auditor-General of India, be filled by the Board of Directors within 30
days.

If such casual vacancy is as a result of the resignation of an auditor, such appointment shall also be
approved by the company at a general meeting convened within three months of the recommendation of
the Board and he shall hold the office till the conclusion of the next annual general meeting.

(ii) In the case of a company whose accounts are subject to audit by an auditor appointed by the
Comptroller and Auditor-General of India, be filled by the Comptroller and Auditor-General of India within
30 days.

It may be noted that in case the Comptroller and Auditor-General of India does not fill the vacancy within
the said period the Board of Directors shall fill the vacancy within next 30 days.

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(c) Joint Audit

The practice of appointing Chartered Accountants as joint auditors is quite widespread in big companies
and corporations. Joint audit basically implies pooling together the resources and expertise of more than
one firm of auditors to render an expert job in a given time period which may be difficult to accomplish
acting individually. It essentially involves sharing of the total work. This is by itself a great advantage.

A-37 Applicability of CARO, 2016:

CARO, 2016 shall apply to every company including a foreign company as defined in Sec. 2(42) of the
Companies Act, 2013, except:

(i) A banking company;

(ii) An insurance company;
(iii) A company licensed to operate u/s 8 of the Companies Act;
(iv) A One Person Company as defined in Sec. 2(62) of the Companies Act and a Small Company as defined
in Sec. 2(85) of the Companies Act; and
(v) A private limited company, not being a subsidiary or holding of a public company.
 Having a Paid up capital & Reserves & Surplus not more than 1 Cr. as on the balance sheet date, and
 Which does not have total borrowings exceeding 1 Cr. from any bank or financial institution at any
point of time during the financial year, and
 which does not have a total revenue as disclosed in Schedule III to the Companies Act, 2013
(including revenue from discontinuing operations) exceeding Rs 10 Cr. during the financial year as
per the financial statements.

The order would be applicable for unlimited companies irrespective of the size of their paid up capital and
reserves, turnover or borrowings.

The Order shall not apply to the auditor's report on consolidated financial statements.

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A-38 Removal of Auditor before expiry of term:

Sec. 140(1) of Companies Act, 2013 governs the provisions relating to removal of auditor before expiry of
term. The salient features of Sec. 140(1) in reading with Rule 7 of Companies (Audit and Auditors) Rules,
2014 are:

 The auditor appointed under section 139 may be removed from his office before the expiry of his
term only by a special resolution of the company and after obtaining the previous approval of the
Central Government by making an application in Form ADT-2 and shall be accompanied with the
prescribed fees.
 The application shall be made to the Central Government within 30 days of the resolution passed by
the Board.
 The Company shall hold the general meeting within 60 days of receipt of approval of the Central
Government for passing the special resolution.
 Before taking any action for removal of auditor before the expiry of his term, the auditor concerned
shall be given a reasonable opportunity of being heard.

Conclusion: Removal of auditor before expiry of tenure by ordinary resolution or Board resolution is not
valid.

A-39 Disqualification u/s 141(3)(d):

 Section 141(3)(d)(i) of Companies Act, 2013 provides that a person shall not be eligible for
appointment as an auditor of a company, who, or his relative or partner is holding any security of or
interest in the company or its subsidiary, or of its holding or associate company or a subsidiary of such
holding company. However, as per proviso to this section, the relative of the person may hold the
securities or interest in the company of face value not exceeding of Rs 1,00,000.
 In the instant case, M/s RM & Co. is an audit firm having partners CA. R and CA. M. Mr. Bee is a relative
of CA. R and he is holding shares of Enn Ltd. of face value of Rs 50,000 only (5,000 shares x Rs 10 per
share).

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Conclusion: M/s RM & Co. is not disqualified for appointment as an auditor of Enn Ltd. as the relative of CA.
R (i.e. partner of M/s RM & Co.) is holding the securities in Enn Ltd. which is within the limit mentioned in
proviso to section 141(3)(d)(i) of the Companies Act, 2013.

A-40 Services not to be rendered by the Auditor:

Section 144 of the Companies Act, 2013 prescribes certain services not to be rendered by the auditor. An
auditor appointed under this Act shall provide to the company only such other services as are approved by
the Board of Directors or the audit committee, as the case may be, but which shall not Include any of the
following services (whether such services are rendered directly or indirectly to the company or its holding
company or subsidiary company), namely:

1. accounting and book keeping services;

2. Internal audit;
3. design and implementation of any financial information system;
4. actuarial services;
5. investment advisory services;
6. investment banking services;
7. rendering of outsourced financial services;
8. management services; and
9. Any other kind of services as may be prescribed.

Further section 141(3)(i) of the Companies Act, 2013 also disqualify a person for appointment as an auditor
of a company who is engaged as on the date of appointment in consulting and specialized services as
provided in section 144.

In the given case, CA Innocent was appointed as an auditor of Contravene Ltd. He was offered additional
services of actuarial, investment advisory and investment banking which was also approved by the Board of
Directors.

Conclusion: The auditor is advised not to accept the services as these services are specifically notified in the
services not to be rendered by him as an auditor as per section 144 of the Act.
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A-41 Appointment of First Auditor of Govt. Company

 Section 139(7) of the Companies Act, 2013 lays down that in the case of a Government company or any
other company owned or controlled, directly or indirectly, by the Central Government, or by any State
Government, or State Governments, or partly by the Central Government and partly by one or more
State Governments, the first auditor shall be appointed by the CAG of India within 60 days of
registration of the company.
 In case the CAG of India does not appoint such auditor within the said period, the BOD of the company
shall appoint such auditor within the next 30 days.
 In the case of failure of the Board to appoint such auditor within the next 30 days, it shall inform the
members of the company who shall appoint such auditor within the 60 days at an EGM.
 Hence in the case of M/s Healthy Wealthy Ltd., being a government company, the first auditors shall
be appointed by the CAG of India.

Conclusion: The appointment of first auditors made by the Board of Directors of M/s Healthy Wealthy Ltd.,
is null and void.

A-42 Circumstances in which a modified opinion may be issued:

As per SA 705 "Modifications to the Opinion in the Independent Auditor's Report" a modified opinion may
be expressed in the following circumstances:

(a) The auditor concludes that, based on the audit evidence obtained, the F.S. as a whole are not free from
material misstatement, may be due to following reasons:
 Inappropriate method of selection of Accounting Policies;
 Accounting policies are not consistent with applicable FRF;
 Disclosures as required by FRF are not given.
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(b) The auditor is unable to obtain sufficient appropriate audit evidence to conclude that the financial
statements as a whole are free from material misstatement, may be due to following reasons:
 Limitations imposed by management
 Circumstances beyond entity control (For Ex.: Accounting records destroyed by fire)
 Circumstances related to Nature and Timing of auditor's work.

Types of Modified Opinion:

(a) Qualified opinion: It is issued under following circumstances:

 Financial statements are materially misstated which in the auditor's judgments are not pervasive.
 Auditor is unable to obtain Sufficient and appropriate audit evidence which in the auditor judgment
are not pervasive

(b) Adverse Opinion: It is issued when financial statements are materially misstated which in the auditor's
judgments is having pervasive effect.

(c) Disclaimer of Opinion: It is issued when auditor is unable to obtain Sufficient and appropriate audit
evidence which in the auditor judgment are having pervasive effect.

A-43 Emphasis of Matter Paragraph:

 SA 706 "Emphasis of matter Paragraph and Other Paragraphs in the Independent Auditor's Report"
defines Emphasis of Matter paragraph as Para included in Auditor's Report that refers to a matter
appropriately presented/ disclosed in financial statement that in the auditor's judgment is of such
importance that it is fundamental to users' understanding of financial statements.
 EOM paragraph is not a substitute for need for expression of qualified opinion, adverse opinion or
Disclaimer of opinion or the disclosures to be made by management in Financial statements as
required by applicable FRF.

Disclosure pattern of EOM paragraph:

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As per SA 706 "Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor's
Report", when the auditor includes an EOM 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
(c) Indicate that the auditor's opinion is not modified in respect of the matter emphasized.

Circumstances when EOM Para can be included in Auditor's Report:

 An uncertainty relating to the future outcome of an exceptional litigation or regulatory action.

 Early application (where permitted) of a new accounting standard that has a pervasive effect on the
financial statements in advance of its effective date.
 A major catastrophe that has had, or continues to have, a significant effect on the entity's financial
position.

A-44 Audit reporting on Corresponding Figures:

When corresponding figures are presented, the auditor's opinion shall not refer to the corresponding
figures except in the following circumstances.

1) If the auditor's report on the prior period, as previously issued, included a qualified opinion, a
disclaimer of opinion, or an adverse opinion and the matter which gave rise to the modification is
unresolved, the auditor shall modify the auditor's opinion on the current period's financial statements.
In the Basis for Modification paragraph in the auditor's report, the auditor shall either:
(a) Refer to both the current period's figures and the corresponding figures in the description of the
matter giving rise to the modification when the effects or possible effects of the matter on the
current period's figures are material; or

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 (b) In other cases, explain that the audit opinion has been modified because of the effects or possible
effects of the unresolved matter on the comparability of the current period's figures and the
corresponding figures.
2) If the auditor obtains audit evidence that a material misstatement exists in the prior period financial
statements on which an unmodified opinion has been previously issued, the auditor shall verify
whether the misstatement has been dealt with as required under the applicable financial reporting
framework and, if that is not the case, the auditor shall express a qualified opinion or an adverse
opinion in the auditor's report on the current period financial statements, modified.
3) Prior Period Financial Statements Not Audited: If the prior period financial statements were not
audited, the auditor shall state in an Other Matter paragraph in the auditor's report that the
corresponding figures are unaudited. Such a statement does not, however, relieve the auditor of the
requirement to obtain sufficient appropriate audit evidence that the opening balances.

A-45 Responsibilities of Management for the Financial Statements:

As per SA 700 "Forming an Opinion & Reporting on Financial Statements" the auditor's report shall include
a section with a heading "Responsibilities of Management for the Financial Statements."

This section of the auditor's report shall describe management's responsibility for:

(a) Preparing the F.S. in accordance with the applicable FRF, and for such internal control as management
determines is necessary to enable the preparation of F.S. that are free from material misstatement,
whether due to fraud or error; and
(b) 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.

A-46 Engagement Team Discussions:

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Engagement team should hold discussions to gain better understanding of banks and its environment,
including internal control, and also to assess the potential for material misstatements of the financial
statements. All these discussions should be appropriately documented for future reference. The discussion
should be done on the susceptibility of the bank's financial statements to material misstatements. These
discussions are ordinarily done at the planning stage of an audit.

Benefits of discussion:

 Opportunity for team members to share their insights based on their knowledge of the bank and its
environment.
 Opportunity for team members to exchange information about the bank's business risks.
 To make an understanding amongst the team members about effect of the results of the risk
assessment procedures on other aspects of the audit, including decisions about the NTE of further
audit procedures.

Matters to be discussed:

(a) Errors that may be more likely to occur;

(b) Errors which have been identified in prior years;
(c) Method by which fraud might be perpetrated by bank personnel or others within particular account
balances and/or disclosures;
(d) Audit responses to Engagement Risk, Pervasive Risks, and Specific Risks;
(e) Need to maintain professional skepticism throughout the audit engagement;
(f) Need to alert for information or other conditions that indicates that a material misstatement may
have occurred.

A-47 Aspects of Internal Control in the area of loans and advances:

To determine the nature, timing and extent of substantive procedures over advances, auditor should
examine the efficacy of various internal controls over advances.

1. Advances should be made only after evaluating creditworthiness of the borrowers and obtaining
sanction from the proper authorities of the bank.

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 2. All the loan documents like promissory notes, letters of hypothecation, guarantee letter, etc. should
be executed by the parties before advances are made.
3. While determining the loan amount to be sanctioned, sufficient margin should be kept against
securities taken so as to cover any decline in the value thereof and also to comply with RBI directives.
4. Securities should be received and returned by responsible officer and should be kept in the joint
custody of atleast two responsible officers.
5. Securities requiring registration should be registered in the name of the bank.
6. In the case of physical possession of goods as security, the goods should be test checked at the time of
receipts. In respect of hypothecated goods not in possession of the bank, surprise checks should be
made.
7. Personal inquiries should be made so as to determine market value of goods.
8. For any increase/decrease in the value of securities, drawing power should be adjusted. All the
accounts should be kept within both the drawing power and the sanctioned limit at all times.
9. All irregular accounts should be brought to the notice of the H.O. regularly.
10. The operation in each advance should be reviewed at least once every year.
11. There should exist a proper system for post disbursement supervision and follow-up.
12. Classification of advances should be made as per RBI Guidelines.
13. Ensure that the funds disbursed should be utilized only for the purpose for which advances has been
granted.

A-48 Special points of consideration while auditing certain transactions of a hospital are stated below-

(i) Register of Patients: Vouch the Register of patients with copies of bills issued to them. Verify bills for a
selected period with the patients’ attendance record to see that the bills have been correctly
prepared. Also see that bills have been issued to all patients from whom an amount was recoverable
according to the rules of the hospital.
(ii) Collection of Cash: Check cash collections as entered in the Cash Book with the receipts, counterfoils
and other evidence for example, copies of patients bills, counterfoils of dividend and other interest
warrants, copies of rent bills, etc.
(iii) Legacies and Donations: Ascertain that legacies and donations received for a specific purpose have
been applied in the manner agreed upon.

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 (iv) Reconciliation of Subscriptions: Trace all collections of subscription and donations from the Cash Book
to the respective Registers. Reconcile the total subscriptions due (as shown by the Subscription
Register and the amount collected and that still outstanding).
(v) Authorization and Sanctions: Vouch all purchases and expenses and verify that the capital expenditure
was incurred only with the prior sanction of the Trustees or the Managing Committee and that
appointments and increments to staff have been duly authorized.

A-49 Powers of C & AG in connection with the performance of his duties:

The Comptroller and Auditor General's (Duties, Powers and Conditions of Service) Act, 1971 gives the
following powers to the C & AG in connection with the performance of his duties:

(i) Inspection: To inspect any office of accounts under the control of the Union/State including office
responsible for the creation of the initial or subsidiary accounts.
(ii) Transmission: To require that any accounts, books, papers and other documents which deal with or
are otherwise relevant to the transactions under audit, be sent to specified places.
(iii) Inquiry: To put such questions or make such observations as he may consider necessary to the
preparation of any account or report which it is his duty to prepare.

A-50 Points to be considered in Audit of Partnership Firms:

(i) Confirming that the letter of appointment, signed by a partner, duly authorized, clearly states nature
& scope of audit contemplated by the partners, specially limitation, if any.
(ii) Examine the partnership deed to ensure that it had been signed by all partners & registered with the
registrar of firms. Ascertain from the partnership deed about capital contribution, profit sharing
ratios, interest on capital contribution, powers and responsibilities of the partners, etc.
(iii) Study the minute book, if any, maintained to record the policy decision taken by partners specially
the minutes relating to authorization of extraordinary and capital expenditure, raising of loans,
purchase of assets and other such matters which are not of a routine nature.
(iv) Verifying that the business in which the partnership is engaged is authorized by the partnership
agreement.

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 (v) Examining whether books of account appear to be reasonable and are considered adequate-in
relation to the nature of the business of the partnership.
(vi) Verifying that the profits/losses have been divided among partners in agreed profit-sharing ratio.
(vii) Confirming that a provision for the firm's tax payable by the partnership has been made in the
accounts before arriving at the amount of profit divisible among the partners.
(viii) Ensure that various requirements of legislations applicable to the partnership firm like Section 44AB
of the Income-tax Act, 1961 have been complied with.

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