Audit Sem 4 - Final Notes

SUBJECT: AUDIT & ASSURANCE
AUTHORED BY CA AAKASH PEDNEKAR
MODULE 3 – AUDIT OF ITEMS OF FINANCIAL STATEMENT (FULL CHP NOTES)
1) This chapter deals with different aspects to be verified while auditing financial items.
2) Auditor needs to obtain sufficient and appropriate audit evidence to verify

management’s assertions i.e. representations made by management regarding
financial items- transactions, balances and disclosures.
3) While verifying transactions auditor needs to consider following assertions:
→ Measurement: Transactions have been recorded accurately at their

appropriate amounts and further, transactions have been classified and
presented fairly in the financial statements.
→ Occurrence: Transactions recognized in the financial statements have
occurred and relate to the entity
→ Completeness: All transactions that were supposed to be recorded have been
recognized in the financial statements and further, transactions have been
recognized in the correct accounting periods
4) While verifying balances auditor needs to consider following assertions:
→ Existence: Assets, liabilities and equity balances exist as at the period end.
→ Valuation: Assets, liabilities and equity balances have been valued
appropriately.
→ Rights & Obligations: Entity has the right to ownership or use of the
recognized assets, and the liabilities recognized in the financial statements
represent the obligations of the entity
→ Completeness: All assets, liabilities and equity balances that were supposed to
be recorded have been recognized in the financial statements
5) While verifying presentation and disclosure auditor needs to consider the
following assertions
→ Occurrence and Existence: Transactions and events disclosed in the financial

statements have occurred and relate to the entity and further, the closing
balance does exist as at the period- end
→ Completeness: All transactions, balances, events and other matters that
should have been disclosed have been disclosed in the financial statements.
→ Measurement and Valuation : Transactions, events, balances and other
financial matters have been measured and disclosed correctly at their
appropriate values and in a manner that promotes the understandability of
information contained in the financial statements.
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Topics covered:
1. Share Capital
2. Reserves and Surplus
3. Borrowings
4. Trade receivables
5. Cash and Cash equivalents
6. Inventories
7. Fixed Assets (Property, Plant and Equipment)
8. Intangible assets
9. Trade Payables and Current Liabilities
10. Loans and advances
11. Provisions and Contingent Liability
12. Sale of product and service
13. Other Income Comprising interest Income, Dividend Income, Gain/ Loss
on Sale of Investments etc.
14. Purchases
15. Employee Benefit expenses
16. Depreciation / Amortization
17. Other Expenses like Power and Fuel, Rent, Repair to Building, Plant and
Machinery, Insurance, Travelling, Legal and Professional, Miscellaneous
Expenses
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Q.No Particulars
1 Share Capital
Existence
➢ It is the sum stated in the memorandum as the capital of the company with
which it is to be registered being the maximum amount which it is
authorised to raise by issuing shares, and upon which it pays the stamp
duty
Valuation
➢ Tally the period- end share capital balance- authorised, issued and paid
up, to the previous year audited financial statements
➢ In case there in no change during the year, obtain a written confirmation/
representation from the Company Secretary that there were no changes to
entity’s capital structure during the year.
➢ In case there is any change, obtain the certified copies of relevant
resolutions passed at the meetings of board of directors, shareholders
authorising the increase/ decrease in authorised and paid up share capital
➢ Verify whether the paid up capital as at the period- end is within the limits
of authorised capital
Completeness
➢ “issued capital” means that part of authorised capital which is o□ered by
the company for subscription and includes the shares allotted for
consideration other than cash.
Presentation and Disclosure
➢ It should be as per AS/IND AS as applicable to the entity and in
accordance with Schedule III of Companies Act, 2013
2 Reserves and Surplus
Existence/Valuation/Completeness
➢ Tally the opening balance of reserves and surplus to the previous year
audited financial statements.
➢ For addition/ utilisation in current year, in case of:
a. Profit and Loss balance- trace the movement as disclosed in Statement
of changes in Equity to Surplus/ Deficit as per Income Statement for the
year under audit
b. For adjustment related to dividend payment and the tax related thereto
i.e. dividend distribution tax, verify the resolution passed by the board of
directors regarding declaration of dividend
c. Students should note that as per Ind AS 10 and AS-4 (revised), if
dividends to holders of equity instruments are proposed or declared
after the balance sheet date, an entity should not recognize those
dividends as a liability as at the balance sheet date. It should, however,
disclose the amount of dividends that were proposed or declared after
the balance sheet date, but before the financial statements were
approved for issue.
d. Utilisation of share premium as discussed under topic 1
3 Borrowings
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Existence
➢ Review board minutes for approval of new lending agreements. During
review, make sure that any new loan agreements or bond issuances are
authorized. Ensure that significant debt commitments should be approved
by the board of directors.
➢ Agree details of loans recorded (interest rate, nature and repayment terms)
to the loan agreement. Verify that borrowing limits imposed by agreements
are not exceeded
➢ Agree overdrafts and loans recorded to bank confirmation / confirmation to
lenders
➢ Agree details of leases and hire purchase creditors recorded to underlying
agreement
➢ Examine trust deed for terms and dates of redemption, borrowing
restrictions and compliance with covenants
Valuation
➢ Determine that the accounting policies and methods of recording debt are
appropriate and applied consistently.
➢ Recalculate the interest accrual, and discount or premium on redemption
➢ For foreign current loans, agree the closing exchange rate(s) used and test
the translation calculations
➢ Check computation of the amortization of premium or discount.
Completeness
➢ Obtain a schedule of short term and long term borrowing (including debt
outstanding at the end of the prior year, as well as any new debt or
renewal of debt) showing beginning and ending balances and borrowings
and repayments during the year, and perform the following:
a. Consider any evidence of additional debt obtained through examination
of minutes of the board, significant contracts, confirmations of bank
accounts, support for subsequent cash disbursements (when testing
payables), and other documents.
b. Test the summarization and trace the ending balances to the general
ledger
➢ For each lender (or, in some circumstances, selected lenders) with which
the client had debt outstanding at the prior year end or during the current
year, prepare, or have the client prepare, a confirmation request for the
amount(s) owed to the lender
➢ Examine the due dates on loans for proper classification between long-
term and current. Analyse relevant details of interest rates, amounts due
(e.g. between current and non-current payables), dates and terms of
redemption or conversion
➢ Verify whether liabilities to bank towards bills discounted, bills negotiated,
cheques discounted, etc. are correctly reflected and disclosed in the
accounts
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Other Aspects:
➢ Verify that the company has not contravened the restrictions laid down by
Section 180 of the Companies Act, on the borrowings of the company.
Also, check compliance of section 185 and 186 of Companies Act, 2013.
➢ Check compliance of Section 2(22)(e) of Income Tax Act,1961 and ensure
that payment by way of advance or loan to a shareholder holding not less
than 10% of voting power or any concern in which such shareholder is a
member or a partner and in which he has substantial interest, shall be
treated as dividend
➢ Where the entity has accepted deposits, examine whether the directives
issued by the Reserve Bank of India or other appropriate authority have
been complied with.
4 Trade Receivables
Existence
➢ To ensure that trace receivables ledger reconciles to general ledger. Ask
for a period-end accounts receivable aging report and trace the grand total
to the amount in the accounts receivable account in the general ledger
➢ Calculate the receivable report total. Add up the invoices on the accounts
receivable aging report to verify that the total traced to the general ledger is
correct.
➢ Investigate reconciling items. If there are journal entries in the accounts
receivable account in the general ledger, review the justification for larger
amounts. This implies that these journal entries should be fully
documented.
➢ See whether realization is recorded invoice wise or not. If not, check that
money received from debtors is adjusted chronologically invoice wise and
on FIFO basis i.e. previous bill is adjusted first. If realization is made on
account, verify if the Company has obtained confirmations from debtors.
➢ A significant and important audit activity is to contact customers directly
and ask them to confirm the amounts of unpaid accounts receivable as of
the end of the reporting period under audit. This should necessarily be
done for all significant account balances as at the period- end while certain
random customers having smaller outstanding invoices should also be
selected.
➢ The trade receivables may be requested to confirm the balances either
(a) as at the date of the balance sheet, or
(b) as at any other selected date which is reasonably close to the date of
the balance sheet. The date should be decided by the auditor in
consultation with the Company.
➢ If there are any related party receivables, review them for collectability, as
well as whether they were properly authorized and the value of such
transactions were reasonable and at arm’s length.
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Valuation
➢ Assess the allowance for doubtful accounts. Review the process followed
by the Company to derive an allowance for doubtful accounts. This will
include a consistency comparison with the method used in the last year,
and a determination of whether the method is appropriate for the
underlying business environment.
➢ Obtain the ageing report of accounts receivable (both Dr/Cr balance), 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 (refer screenshot below).
Also, obtain the list of debtors under litigation and compare with previous
year.
➢ Assess bad debt write-offs. Prepare schedule of movements on Bad Debts
– Provision Accounts and Debts written off and compare the proportion of
bad debt expense to sales for the current year in comparison to prior
years, to see if the current expense appears reasonable.
➢ Check that write-offs or other reductions in the receivable balances have
been approved by an appropriate and authorised member of senior
management, for example the fi nancial controller or finance director.
Completeness
➢ The auditor needs to satisfy himself of correct and proper cut-offs. Without
a correct cut-o□ , sales could be understated or overstated, hence, the
need to perform the following cut-o□ tests:
a. For the invoices issued during the last few days (say 5 days) closer to
the reporting date/ cut-o□ date and which have been included in the
debtors; the goods should have been dispatched and not lying with the
Company and included in closing stock;
b. All good dispatched prior to the period/ year-end have been invoiced
and included in debtors;
c. No goods dispatched after the year- end have been invoiced and
included in debtors for the period under audit
➢ Study the system of giving discounts and check the following:
a. Whether the same is being given as per the Company policy/ general
industry trends;
b. Whether cash discount is given on the basis of date of realization of
cheque or on the basis of date of receipt of cheque. If the same is on the
basis of date of receipt of cheques, verify that the cheque has been
realized within a reasonable time.
accordance with Schedule III of Companies Act, 2013.
➢ Verify that the split between more than 6 months and less than 6 months
has been done from the due date instead of sales invoice date
5 Cash and Cash equivalents
Existence/Completeness/Valuation:
➢ Special care is necessary in regard to verification of cash balances for
unless they are checked by surprise, there can be no certainty that the
cash produced for inspection was in fact held by the custodian.
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➢ For this reason, the cash should be checked not only on the last day of the
year, but also checked again sometime after the close of the year without
giving notice of the auditor’s visit either to the client or to his staff
➢ If there are more than one cash balances, e.g., when there is a cashier, a
petty cashier, a branch cashier and, in addition, there are imprest balances
with employees, all of them should be checked simultaneously, as far as
practicable so that the shortage in one balance is not made good by
transfer of amount from the other.
➢ It is desirable for the cashier to be present while cash is being counted and
he should be made to sign the statement prepared containing details of the
cash balance counted.
➢ If the auditor is unable to check the cash balance on the date of the
Balance Sheet, he should arrange with his client for all the cash balance to
be banked and where this cannot conveniently be done on the evening of
the close of the financial year, it should be deposited the following morning.
➢ If there is any rough Cash Book or details of daily balance are separately
kept, the auditor should test entries from the rough Cash Book with those
in the Cash Book to prove that entries in the Cash Book are correct.
➢ The auditor should also perform a cash sensitivity analysis by compiling a
summary of total cash receipts and payments each month and analyse the
trends to see if there have been variations in any specific month and
request explanations from the management
➢ In addition to the procedures performed above, the auditor should ensure
that all bank account holding foreign currency have been restated at the
closing exchange rates.
6 Inventories
Existence
➢ Review client’s plan for performing inventory count. Plan should include
procedures relating to shipments and receipts during count and should
also allocate staff responsible for each class of inventory.
➢ Ensure that consigned goods have been segregated
➢ Evidence of appropriate supervision for those performing count should be
examined.
➢ Observe inventory being counted and personally perform test counts to
verify counts. Test counts by auditor should include:
{FURTHER CONSIDER SA 501}
Valuation
➢ Depending on how the business operates, the management may value
inventory using “first-in firstout,” “last-in first-out,” or a weighted average
system. First-in first-out, called FIFO, values inventory at close to its
current replacement cost. Last-in first-out, called LIFO, values inventory at
close to its original purchase cost. A weighted average system values
inventory according to an average cost of all inventory items bought during
the period.
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➢ Ascertain what elements of cost are included e.g. carriage in, duties etc
➢ If standard costs are used, enquire into basis of standards, how these are
compared with actual costs and how variances are analyzed and
accounted for/ treated in accounting records.
➢ Follow up valuation of all damaged or obsolete inventories noted during
observance of physical counting with a view to establishing a realistic net
realizable value.
➢ Ascertain how the various stages of production/ value add are measured
and in case estimates are made, understand the basis for such estimates.
➢ Ascertain what elements of cost are included. If overheads are included,
ascertain the basis on which they are included and compare such basis
with the available costing and financial data/ information maintained by the
entity.
➢ Ensure that material costs exclude any abnormal wastage factors
➢ Enquire into what costs are included, how these have been established
and ensure that the overheads included have been determined based on
normal costs and appear reasonable in relation to the information
disclosed in the draft financial statements
➢ Follow up for items that are obsolete, damaged, slow moving and ascertain
the possible realizable value of such items. For the purpose, request the
client to provide inventory ageing split between less than 30 days, 30-60
days old, 60- 90 days old, 90- 180 days old, 180- 385 days old and more
than 365 days old.
Rights and Obligation
➢ Evaluate the consigned goods. Examine client correspondence, sales and
receivables records, purchase documents.
➢ Determine existence of collateral agreements
➢ For instances of inventory held by third party, the auditor should insist on
obtaining declaration from the third party on its business letterhead and
signed by an authorized personnel of that third party confirming that the
items of inventory belong to the entity and are being held by such third
party on behalf of and for the benefit of the entity under audit
Completeness
➢ Perform purchase and sales cut-off tests. Trace shipping documents (bills
of lading and receiving reports, warehouse records, and inventory records)
to accounting records immediately before and after year-end.
➢ Reconcile physical inventory amounts with perpetual records.
7 Fixed Assets (Property, Plant and Equipment)
Existence
➢ Review client’s plan for performing physical verification of PPE i.e. whether
performed by own staff or by a third party and the policy regarding
periodicity i.e. whether physical verification shall be done on annual basis
or once in two years/ three years.
➢ Evidence of appropriate supervision of those performing physical
verification of PPE should be examined.
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➢ Assess if all items of PPE are properly tagged and carry identification
marks/ numbers and physical verification work papers do capture the asset
identification numbers for assets physically verified
➢ Verify the discrepancies noted, based on physical verification undertaken
and the manner in which such discrepancies have been dealt with in the
entity’s books and financial statements, for example any identified
shortages/ assets not in working condition and/ or active use should be
accounted for as deletions in the books of account post approvals by the
entity’s management
Valuation
➢ It is a common understanding that the value of fixed assets/ PPE
depreciates due to efflux of time, use and obsolescence. The diminution of
the value represents an item of cost to the entity for earning revenue
during a given period. Unless this cost in the form of depreciation is
charged to the accounts, the profit or loss would not be correctly
ascertained and the values of PPE would be shown at higher amounts.
➢ Verify that the entity has charged depreciation on all items of PPE unless
any item of PPE is non- depreciating like freehold land
➢ Verify that the depreciation method used reflects the pattern in which the
asset’s future economic benefits are expected to be consumed by the
entity
➢ The auditor should also verify if the management has undertaken an
impairment assessment to determine whether an item of property, plant
and equipment is impaired.
➢ In addition to the procedures undertaken for verifying completeness of
additions to PPE during the period under audit, the auditor while
performing testing of additions should also verify that all PPE purchase
invoices are in the name of the entity that entitles legal title of ownership to
the respective entity.
➢ For all additions to land, building in particular, the auditor should obtain
copies of conveyance deed/ sale deed to establish whether the entity is
mentioned to be the legal and valid owner.
➢ The auditor should insist and verify the original title deeds for all
immoveable properties held as at the balance sheet date
➢ In addition, the auditor should also verify the register of charges, available
with the entity to assess the PPE that has been given as security to any
third parties
Completeness
➢ Verify the movement in the PPE schedule (asset class wise like building,
P&M etc.) compiled by the management i.e. Opening + Additions -
Deletions= Closing and tally the closing balance to the entity’s books of
account.
➢ Check the arithmetical accuracy of the movement in PPE schedule; tally
the opening balances to the previous year audited financial statements.
It should be as per AS/IND AS as applicable to the entity and in accordance
with Schedule III of Companies Act, 2013.
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8 Intangible Asset
Existence
➢ Since an Intangible Asset is an identifiable non-monetary asset, without
physical substance, for establishing the existence of such assets, the
auditor should verify whether such intangible asset is in active use in the
production or supply of goods or services, for rental to others, or for
administrative purposes.
➢ In case any intangible asset is not in active use, deletion should have been
recorded in the books of account post approvals by the entity’s
management and amortization charge should have ceased to be charged
beyond the date of deletion.
Valuation
➢ Verify the movement in the Intangible assets schedule (asset class wise
like software, designs/ drawings, goodwill etc.) compiled by the
management i.e. Opening + Additions - Deletions= Closing and tally the
closing balance to the entity’s books of account.
➢ Check the arithmetical accuracy of the movement in intangible asset
schedule, tally the opening balances to the previous year audited financial
statements.
➢ For all material additions, verify if such expenditure meets the criterion for
recognition of an intangible asset.
➢ The value of intangible assets may diminish due to efflux of time, use and/
or obsolescence. The diminution of the value represents an item of cost to
the entity for earning revenue during a given period.
➢ Unless this cost in the form of amortization is charged to the accounts, the
profit or loss would not be correctly ascertained and the values of
intangible asset would be shown at higher amounts.
➢ Verify that the amortization method used reflects the pattern in which the
asset’s future economic benefits are expected to be consumed by the
entity
an intangible asset shall be recognised if, and only if:
a. the said asset is identifiable;
b. the entity controls the asset i.e. the entity has the power to obtain the
future economic benefits fl owing from the underlying resource and to
restrict the access of others to those benefits;
c. it is probable that future economic benefits associated with the asset will
flow to the entity;
d. the cost of the item can be measured reliably.
To assess whether an internally generated intangible asset meets the criteria
for recognition, an entity classifies the generation of the asset into:
a. research phase; and
b. a development phase
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9 Trade Payables and Current Liabilities
Existence
➢ Check whether there are controls in place to ensure that the same
purchase/ expense invoice cannot be recorded more than once and
payable balances are automatically recorded in the general ledger at the
time of recording of expense
➢ To ensure that trade payable ledger reconciles to general ledger, ask for a
period-end accounts payable aging report and trace the grand total to the
amount in the accounts payable account in the general ledger.
➢ Calculate the accounts payable report total. Add up the expense/ liability
items on the accounts payable aging report to verify that the total traced to
the general ledger is correct.
➢ Investigate reconciling items. If there are journal entries in the accounts
payable account in the general ledger, review the justification for larger
amounts. This implies that these journal entries should be fully
documented.
➢ An important audit activity is to contact vendors directly and ask them to
confirm the amounts of accounts payable as of the end of the reporting
period under audit. This should necessarily be done for all significant
account payable balances as at the period- end and for parties from whom
material purchases have been made during the period under audit even if
period- end balance of such parties is not significant.
➢ The trade creditors may be requested to confirm the balances either
(a) as at the date of the balance sheet, or
(b) as at any other selected date which is reasonably close to the date of
the balance sheet. The date should be decided by the auditor in
consultation with the Company.
Valuation
➢ Obtain the ageing of payable balances, split between current, less than 30
days old, 30-60 days old, 60-180 days old, 180- 365 days old and more
than 365 days old (refer screenshot below). Also, obtain the list of vendors
with whom the Company has disputes and any claims from customers,
under litigation and compare with previous year.
➢ Check that write backs in the liability balances assessed as no longer
payable have been approved by an appropriate and authorised member of
senior management, for example the financial controller or finance director.
➢ Check that the restatement of foreign currency trade payables has been
done properly
Completeness
➢ For the invoices received/ recorded during the last few days (say 5 days)
closer to the reporting date/ cut o□ date and which have been included in
the trade payables; the goods should have been received/ risk and
rewards of ownership in goods should have been transferred in favour of
the entity
➢ All good received prior to the period/ yearend should have been booked in
the form of purchases and included in trade creditors
➢ No goods received/ risk and rewards of ownership in goods transferred in
favour of the entity after the year- end should have been recorded as
purchases and included in trade creditors for the period under audit.
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10 Loans and Advances
Existence
➢ For establishing existence of loans and advances, direct confirmation
procedures, similar to those performed for ‘’Accounts receivable’’ balances
are undertaken with the only difference that while undertaking
circularisation of direct confirmations, in addition to the principal amount,
interest received/ receivable, if any, as per the agreed terms between the
parties, may also be included as part of the balance to be confirmed.
Valuation
➢ Assess the allowance for doubtful accounts. Review the process followed
by the Company to derive an allowance for doubtful accounts. This will
include a consistency comparison with the method used in the last year,
and a determination of whether the method is appropriate for the
underlying business environment
➢ 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. Also, obtain the list of loans and advances under
litigation and compare with previous year.
➢ Assess bad loans/ advances write-o□ s. Prepare schedule of movements
on Bad loans/ advances – Provision Accounts and loans/ advances written
o□ .
➢ Check that the restatement of foreign currency loans and advances/ other
current assets has been done properly.
Completeness
➢ Obtain a list of all advances and other current assets and compare them
with balances in the ledger
➢ Inspect loan agreements and acknowledgements of parties in respect of
outstanding loans
➢ Inspect the minutes of meeting of board of directors to confi rm if all
material loans and advances were approved by the board of directors
➢ Further, the auditor should obtain copies of statutory returns fi led with the
authorities like excise returns/ VAT returns etc. and verify whether the
amount recorded as per books of account tallies with the claim made with
the authorities
11 Provisions and Contingent Liability
Existence/Completeness/Valuation
➢ Obtain a list of all provisions and compare them with balances in the ledger
➢ Inspect the underlying arrangements like appointment agreement with
employees to understand the entity’s commitment towards defined
benefits, agreement with customers to assess warranty commitments, any
legal and other claims on the entity i.e. litigations
➢ Obtain the underlying working and the basis for each of the provisions
made, from the management and verify whether the same is complete and
accurate.
➢ Wherever required, obtain experts report, calculation and underlying
working for the provision amount, example for employee defined benefit
provision, the auditor may request the management to share the actuarial
valuation report and in case of any matter under legal dispute.
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12 Sale of Products and Services
Occurrence:
➢ Check whether a single sales invoice is recorded twice or a cancelled
sales invoice could also be recorded
➢ Whether any shipments were done without the consent and agreement of
the customer.
➢ Vouch from the sales journal to the supporting documents
➢ Check the sales return with sales invoice, challan, credit note, stock
register, reversal of excise duty and sales tax etc.
Measurement:
➢ If there are any export sales, consider calculating/reviewing “Exchange
gain/ loss” arising from the sales
➢ Recalculate prices and extensions on sales invoice
➢ Trace a few transactions from inception to completion
➢ Auditor must understand client’s operations and related GAAP issues e.g.
point of sale revenue recognition vs. percentage of completion
➢ Compare the rate of sales affected with related parties and review them for
collectability, as well as whether they were properly authorized and the
value of such transactions were reasonable and at arm’s length
Completeness
➢ Perform cut-off test to ensure that revenues are recognised in the current
accounting period and sales were not tampered towards the period end
➢ Auditors will also have to see “Credit notes” issued after the accounting
period. Sometimes sales team or sales personnel can make fictitious/
ghost sales before the year-end to meet performance target and cancel out
the sale with a post year end credit note.
13 Other Income Comprising interest Income, Dividend Income, Gain/ Loss
on Sale of Investments etc.
Occurrence/Completeness/Measurement
➢ For verifying interest income on Fixed deposit:
a) Obtain a listing of fixed deposits opened during the period under audit
along with the applicable interest rate and the number of days for which
the deposit was outstanding during the period. Verify the arithmetical
accuracy of the interest calculation made by the entity by multiplying the
deposit amount with the applicable rate and number of days during the
period under audit.
b) For deposits still outstanding as at the period- end, trace the same to the
direct confirmation obtained from the respective bank/ financial
institution
c) Obtain a confirmation of interest income from the bank and verify that
the interest income as per bank reconciles to the calculation shared by
the entity
d) Also, obtain a copy of Form 26AS (TDS withholding by the bank/
financial institution) and reconcile the interest reflected therein to the
calculation shared by client
➢ For Dividends, verify that the same are recognised in the statement of
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profit and loss only when the entity’s right to receive payment of the
dividend is established, provided it is probable that the economic benefits
associated with the dividend will flow to the entity and the amount of the
dividend can be measured reliably.
➢ Verify that Gain/(loss) on sale of investment in mutual funds is recorded
as other income only on transfer of title from the entity and is determined
as the difference between the redemption price and carrying value of the
investments. For the purpose, obtain the mutual fund statement and trace
the gain / loss as recorded in the books of account to the gain/ loss as
reflected in the statement.
14 Purchases
Occurrence:
➢ Whether any fictitious vendor and purchase has been recorded by
reviewing the vendor selection process followed by the entity and also
doing a search on web for ascertaining the existence of the vendor.
➢ Whether the goods were received at the factory gate and whether there
exists an entry in the security gate inward register
➢ Whether quality inspection of goods was done
➢ Whether a goods receipt note was prepared and signed by an appropriate
client personnel
➢ Whether stock record has been updated by the stores personnel
Measurement/Completeness:
➢ Perform cut-off test to ensure that purchases are recognised in the correct
accounting period. For the purpose, the auditor should examine material
inward records for few days say last 5 days prior to closing date to check
that all corresponding invoices have been duly entered in the Purchases
book and none have been omitted.
➢ Ensure correct accounting treatment of goods – in – transit as per the
agreed terms with the vendor regarding transfer of risk and reward of
ownership in goods.
➢ Perform analytical procedures to obtain audit evidence as to overall
reasonableness of purchase quantity and price which may include:
a. Consumption Analysis: Auditor should scrutinize raw material
consumed as per manufacturing account and compare the same with
previous years with closing stock and ask for the reasons from
Management If any significant variations found.
b. Stock Composition Analysis: Auditor to collect the reports from
management for composition of stock i.e. raw materials as a percentage
of total stock and compare the same with previous year and ask for
reasons from management in case of significant variations.
c. Ratios: Auditor should compare the creditors turnover ratios and stock
turnover ratios of the current year with previous years.
d. Auditor should review quantitative reconciliation of closing stocks with
opening stock, purchases and consumption
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15 Employee Benefit Expense
Occurrence/Completeness/Measurement:
➢ Understanding of entity’s process of capturing employee attendance.
➢ There is always a risk that an entity could record expense for fictitious
employees.
➢ To address this risk, the auditor may choose to be physically present at the
entry gate at any given date and himself count the employees entering the
premises and also, understand the manner of recording/ capturing their
time
➢ Obtain a list of employees as at the period- end along with a monthly
movement split between new hires, leavers and continuing employees
➢ For a sample (selected randomly) of resigned employees, obtain their full
and final computation and verify whether all their dues including post-
retirement benefits like gratuity, leave encashment have been paid and
whether the respective employee’s acknowledgement on final computation
has been obtained.
➢ Obtain the monthly salary registers for all 12 months. Compile monthly
payroll reasonability by calculating the average salary per employee per
month and compare with the previous year and preceding month and
analyse the reasons for variance which could be attributable to annual
increments, an employee at senior level joining/ leaving the entity, bonus
pay-out etc.
➢ In case provident fund (PF), employee state insurance (ESI) are applicable
to the entity, compile a reasonability by applying the rate to the basic
wages and comparing to the amount recorded in books and analyse
reasons for variance, if any. Also, obtain monthly deposit challans to verify
if the month on month liability was subsequently deposited with the
authorities and within the defined timelines.
16 Depreciation and Amortisation
➢ Obtain an understanding of entity’s process of charging depreciation and
amortization.
➢ Obtain the fixed asset register maintained by the entity.
➢ There is always a risk that an entity could capitalize expense of revenue
nature to increase its profit or charge capital expenditure directly in income
and expense statement to reduce its profit.
➢ Obtain a list of all additions/ deletions along with their proper approval from
the authorised person for the same.
➢ Select the sample of assets from the Fixed Assets Register, on materiality
considerations and verify the rates of depreciation, depreciation
calculation.
➢ Obtain the list of all the components identified by the management
➢ Ensure Intangible assets like patents, goodwill, copy rights have been
properly amortized over the period
➢ Ensure depreciation is charged on the assets from the date when it is
ready to use
➢ Ensure depreciation on revalued amount has been properly accounted
from revaluation reserve
➢ Depreciation computation as per Income tax Act, 1961- Ensure that
additions are tallying with the additions as per Companies Act and the
opening WDV to the Tax audit schedule for the assessment year preceding
the previous year under audit.
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17 Other Expenses like Power and Fuel, Rent, Repair to Building, Plant and
Machinery, Insurance, Travelling, Legal and Professional, Miscellaneous
Expenses
➢ Rent expense- Obtain a month wise expense schedule along with the rent
agreements. Verify if expense has been recorded for all 12 months and
whether the rent amount is as per the underlying agreement. Specific
consideration should be given to escalation clause in the agreement to verify if
the rent was to be increased/ adjusted during the period under audit. Also,
verify if the agreement is in the name of the entity and whether the expense
pertains to premises used for running business operations of the entity
➢ Power and fuel expense- Obtain a month wise expense schedule along with
the power bills. Verify if expense has been recorded for all 12 months. Also,
compile a month wise summary of power units consumed and the applicable
rate and check the arithmetical accuracy of the bill raised on monthly basis. In
relation to the units consumed, analyse the monthly power units consumed by
linking it to units of finished goods produced and investigate reasons for
variance in monthly trends
➢ Insurance expense- Obtain a summary of insurance policies taken along with
their validity period. Verify if the expense has been correctly classified
between prepaid and expense for the period based on number of days.
➢ Legal and professional expenses- Obtain a month wise and consultant wise
summary. In case of monthly retainer ship agreements, verify if the
expenditure for all 12 months has been recorded correctly. For non- recurring
expenses, select a sample and vouch for the attributes discussed above. The
auditor should be cautious while vouching for legal expenses as the same
may highlight a dispute for which the entity may not have made any provision
and the matter may also not have been discussed/ highlighted to the auditor
for his specific consideration.
➢ Travel, repair and maintenance, printing and stationery, miscellaneous
expenses – The auditor should select a sample and vouch for the attributes
discussed above. Wherever possible, the auditor and try and prepare a
summary of expenditure on monthly basis and then analytically compare the
trends
➢ Perform analytical procedures to obtain audit evidence as to overall
reasonableness of other expense which may include expenditure per unit
produced analysis. Auditor should analyse expense per unit produced and
compare the same with previous years and prevent industry trends and ask
for the reasons from Management If any significant variations are found.
➢ Ensure other expenses have been classified as follows in accordance
with AS/IND AS as applicable to the entity and Schedule III of Companies
Act, 2013:
a. Rent.
b. Insurance.
c. Power and fuel.
d. Repairs and maintenance- Building, Plant and machinery, others.
e. Legal and professional.
f. Printing and stationary.
g. Travel expenses.
h. Miscellaneous expenses
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Other Accounting and Company Law Concepts
1) Share issued at premium:

→ In case a company has issued shares at a premium, that is, at amount in
excess of the nominal value of the shares, whether for cash or otherwise,
section 52 of the Companies Act, 2013 provides that a Company shall transfer
the amount received by it as securities premium to securities premium account
and state the means in which the amount in the account can be applied
→ The securities premium account may be applied by the Company:
(a) Towards the issue of unissued shares of the company to the members of
the company as fully paid bonus shares;
(b) In writing of the preliminary expenses of the Company;
(c) In writing of the expenses of, or the commission paid or discount allowed
on, any issue of shares or debentures of the company;
(d) In providing for the premium payable on the redemption of any
redeemable preference shares or of any debentures of the company; or
(e) For the purchase of its own shares or other securities under section 68.
The auditor needs to verify whether the premium received on shares, if
any, has been transferred to a “securities premium account” and whether
the application of any amount out of the said “securities premium account”
is only for the purposes mentioned above.
2) Shares Issued at discount:

→ According to section 53 of the Companies Act, 2013, a company shall not issue
shares at a discount, except in the case of an issue of sweat equity shares
given under section 54 of the Companies Act, 2013.
→ Any share issued by a company at a discounted price shall be void
→ The auditor needs to verify that the Company has not issued any of its shares at
a discount by reading the minutes of meeting of its directors and shareholders
authorizing issue of share capital and the issue price.
3) Issue of Sweat Equity Shares:

→ According to section 54 of the Companies Act, 2013, the employees may be
compensated in the form of ‘Sweat Equity Shares”.
→ “Sweat Equity Shares” means equity shares issued by the company to
employees or directors at a discount or for consideration other than cash for
providing know-how or making available right in the nature of intellectual
property rights or value additions, by whatever name called
→ The auditor needs to verify that the Sweat Equity Shares issued by the
company are of a class of shares already issued and following conditions have
been complied with:
(a) The issue is authorised by a special resolution passed by the company;
(b) The resolution specifies the number of shares, the current market price,
consideration, if any, and the class or classes of directors or employees to
whom such equity shares are to be issued;
(c) Not less than one year has, at the date of such issue, elapsed since the
date on which the company had commenced business; and
(d) Where the equity shares of the company are listed on a recognised stock
exchange, the sweat equity shares are issued in accordance with the
regulations made by the Securities and Exchange Board in this behalf and
if they are not so listed, the sweat equity shares are issued in accordance
with such rules as may be prescribed.
56
4) Reduction of Capital
For verifying reduction of capital, the auditor needs to undertake the following
procedures:
(i) Verify that the meeting of the shareholder held to pass the special resolution
was properly convened and that the proposal was circularised in advance
among all the shareholders;
(ii) Verify that the Articles of Association authorises reduction of capital;
(iii) Examine the order of the Tribunal confirming the reduction and verify that a
copy of the order and the minutes have been registered and filed with the
Registrar of Companies;
(iv) Inspect the Registrar’s Certificate as regards to reduction of capital;
(v) Vouch the accounting entries recorded to reduce the capital and to write down
the assets by reference to the resolution of shareholders and other
documentary evidence; also check whether the requirements of Schedule III,
Part I, have been complied with;
(vi) Confirm whether the revaluation of assets has been properly disclosed in the
Balance Sheet;
(vii) Verify the adjustment made in the members’ accounts in the Register of
Members and confirm that either the paid up amount shown on the old share
certificates have been altered or new certificates have been issued in lieu of the
old, and the old ones have been cancelled;
(viii) Confirm that the words “and reduced”, if required by the order of the Tribunal,
have been added to the name of the company in the Balance Sheet.
(ix) Verify that the Memorandum of Association of the company has been suitably
amended.
5) Distinguish between reserves and provisions

→ Reserves are amounts appropriated out of profits that are not intended to meet any
liability, contingency, commitment or diminution in the value of assets known to exist
as at the date of the Balance Sheet
→ On the contrary, provisions are amounts charged against revenue to provide for:
(i) Renewal or diminution in the value of assets; or
(ii) a known liability, the amount whereof could only be estimated and cannot be
determined with accuracy; or
(iii) a claim which is disputed.
→ Provisions are normally charged to the Statement of Profit and Loss before arriving at
the amount of profit. Reserves are appropriations out of profits.
6) Revenue and Capital Reserve

→ Revenue reserves represent profits that are available for distribution to
shareholders held for the time being or any one or more purpose.
→ Capital Reserve, on the other hand represents a reserve which does not include
any amount regarded as free for distribution through the Statement of Profit and
Loss.
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7) Difference between Revenue and Capital Expenditure
→ Revenue Expenditure
An expenditure, the benefits of which shall get expended or exhausted in the
process of earning revenue within a short span of time, maximum period being
one year, for example on purchase of goods for sale, on their movement from
one place to another, on maintenance of assets, etc
→ Capital Expenditure
An expenditure incurred for the below mentioned purposes:
(i) Acquiring fixed assets, i.e., assets of a permanent or a semi-permanent
nature, which are held not for resale but for use within the business with a
view to earning profits and the benefit whereof is expected to last for more
than one year;
(ii) Making additions/ enhancements to the existing fixed assets with the intent
to increasing earning capacity of the business;
(iii) Minimising the cost of production;
(iv) Acquiring a benefit of enduring nature in the form of a valuable right like
patent, trademarks etc.
8) Expenses which are essentially of a revenue nature, if incurred for creating an

asset or adding to its value for achieving higher productivity, are also regarded
as expenditure of a capital nature. Examples.
Examples of such capital expenditure are:
(i) Material and wages- capital expenditure when expended on the construction of
a building or erection of machinery;
(ii) Legal expenses- capital expenditure when incurred in connection with the
purchase of land or building;
(iii) Freight- capital expenditure when incurred in respect of purchase of plant and
machinery;
(iv) Repair- Major repairs of a fixed asset that increases its productivity;
(v) Wages- Wages paid on installation costs incurred in Plant & machinery;
vi) Interest- Interest incurred during the eligible period as defi ned under AS 16
i.e. during the period of construction of the asset.
9) Note on other income

a) Dividend Income:
Dividends are recognised in the statement of profit and loss only when:
(i) The entity’s right to receive payment of the dividend is established;
(ii) It is probable that the economic benefits associated with the dividend will
flow to the entity; and
(iii) The amount of the dividend can be measured reliably.
b) Gain/(loss) on sale of investment in mutual funds is recorded as other
income on transfer of title from the entity and is determined as the
difference between the redemption price and carrying value of the
investments.
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10) Auditor needs to consider some attributes while verifying for depreciation and
amortisation expenses. List them.
• Obtain the understanding of entity’s accounting policy related to depreciation
and amortisation.
• Ensure the Company policy for charging depreciation and amortisation is as per
the relevant provisions of Companies Act, applicable accounting standards.
• Whether the depreciation has been calculated after making adjustment of
residual value from the cost of the assets.
• Whether depreciation and amortisation charges are valid.
• Whether depreciation and amortisation charges are accurately calculated and
recorded.
• Whether all depreciation and amortisation charges are recorded in the
appropriate period.
• Ensure the parts (components) of each item of property, plant and equipment
that are to be depreciated separately has been properly identified.
• Whether the most appropriate depreciation method for each separately
depreciable component has been used.
11) While the auditor may choose to analyse the monthly trends for expenses like
rent, power and fuel, an auditor generally prefers to vouch for other expenses
to verify certain attributes. List them.
➢ Whether the expenditure pertained to current period under audit
➢ Whether the expenditure qualified as a revenue and not capital expenditure
➢ Whether the expenditure had a valid supporting like travel tickets, insurance
policy, third party invoice etc.
➢ Whether the expenditure has been classified under the correct expense head
➢ Whether the expenditure was authorised as per the delegation of authority
matrix.
➢ Whether the expenditure was in relation to the entity’s business and not a
personal expenditure.
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Additional disclosures:
60
61
Authored by: CA Aakash Pednekar

MODULE 4 - AUDIT REPORT
Q1 In order to form the audit opinion as required by SA 700, the auditor shall conclude as to
whether the auditor has obtained reasonable assurance about whether the financial
statements as a whole are free from material misstatement, whether due to fraud or error.
Explain the conclusions that the auditor shall take into account. Also explain the objective of
auditor as per SA 700.
An auditor is required to make specific evaluations while forming an opinion in an audit

report." State them.
[Nov.18 (5 Marks)
Ans Forming an Opinion on the Financial Statements:
SA 700 "Forming an Opinion & Reporting on Financial Statements" requires that auditor shall
form an opinion on whether the Financial statements (F.S.) are prepared in all material respects
in accordance with the applicable financial reporting framework (FRF).
To form this opinion, auditor needs to conclude as to whether he has obtained reasonable
assurance that FS as a whole are free of material misstatements, whether due to fraud or error.
The conclusion shall take into account:
(a) The auditor's conclusion, in accordance with SA 330, whether sufficient appropriate audit
evidence has been obtained;
(b) The auditor's conclusion, in accordance with SA 450, whether uncorrected misstatements
are material, individually or in aggregate; and
(c) The evaluations mentioned below:

1. Whether the financial statements are prepared, in all material respects, in accordance with
the requirements of the applicable FRF. This evaluation shall Include consideration of the
qualitative aspects of the entity's accounting practices, including indicators of possible
bias in management's judgments.
2. Whether, in view of the requirements of the applicable FRF:
❖ The FS. adequately disclose the significant accounting policies selected and applied;
❖ The accounting policies selected and applied are consistent with the applicable FRF and
are appropriate;
❖ The accounting estimates made by management are reasonable:
❖ The information presented in the FS.is relevant, reliable ,comparable and understandable
❖ The FS provide adequate disclosures to enable the intended users to understand the
effect of material transactions and events on the Information conveyed in the FS, and
62
❖ The terminology used in the F.S., Including the title of each FS., is appropriate.
3. When the FS. are prepared in accordance with a fair presentation framework, auditor is
required to evaluate whether the FS achieve fair presentation by considering the following:
➢ The overall presentation, structure and content of the FS.; and
➢ Whether the F.S., including the related notes, represent the underlying transactions and
events in a manner that achieves fair presentation
➢ Whether the FS. adequately refer to or describe the applicable FRF.
Q2 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. (RTP-Nov. 18]
Ans: 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.
Q3 When does an auditor issue unqualified opinion and what does it indicate. [May 08(4 Marks)]
Ans Unqualified opinion:
SA 700 "Forming an opinion and Reporting on Financial Statements” requires the auditor
to express an unqualified opinion when he concludes that the financial statements give a true
and fair view in accordance with the financial reporting framework used for preparation and
presentation of the financial statements.
An unqualified opinion Indicates the following:
1. The financial statements have been prepared using the generally accepted accounting
principles and being constantly followed.
2. The financial statements comply with relevant statutory requirements and regulations.
3. All material matters relevant to proper presentation of the financial information, subject
statutory requirement, if applicable, have been adequately disclosed.
Q4 State any six elements of the Auditor's Report. (Nov. 12 (6 Marks)

And Basic Elements of the Auditor's Report:
63
As per SA 700 "Forming an Opinion and Reporting on Financial Statements", the auditor's report
includes the following basic elements:
1. Title: Audit Report should have a title clearly stating that it is a report of an independent
auditor
2. Addressee: Audit Report is normally addressed to those for whom Audit Report is
prepared, i.e. shareholders or TCWG.
3. Opinion Section: This section states the auditor's opinion on true and fair view of
financial statements. Opinion Section of the Auditor's Report shall also cover the
following:
• Identify the entity whose FS have been audited.
• State that Financial Statements have been audited.
• Identify title of each statement that comprises FS.
• Refer to the notes including the summary of significant accounting policies; and
• Specify date of period covered by each Financial Statement.
4. Basis for Opinion Section: The auditor's report shall include a section, directly following
the Opinion section, with the heading "Basis for Opinion", that:
(a) States that the audit was conducted in accordance with SA;
(b) Refers to the section of the auditor's report that describes the auditor's
responsibilities under the SAs;
(c)Includes a statement that the auditor is independent of the entity in accordance with
the 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
(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.
5. Going Concern: Where applicable, the auditor shall report in accordance with SA 570.
6. Key Audit matters: For audits of complete sets of general purpose FS. of listed entities,
the auditor shall communicate key audit matters in the auditor's report in accordance
with SA 701
7. Other Information: Where applicable auditor shall report in accordance with SA 720.
8. Management's Responsibility for the Financial Statements: Describe responsibility of
Management for preparation of Financial Statements in the manner in which
responsibility is described in Terms of Engagement.
9. Auditor's Responsibility Section: It shall state the auditor's objectives to obtain
reasonable assurance about whether the FS. as a whole are free from material
misstatement, whether due to fraud or error, and to Issue an auditor's report that
includes the auditor's opinion. This section also enumerates the auditor's responsibilities
as prescribed under different Standards on Auditing
10. Other Reporting responsibilities: This Section covers reporting over those additional matters on
which auditor is required to report under statutory requirements.
11. Signature of the Auditor: Audit report to be signed in auditor's personal name. Where firm
appointed as auditor, report signed in personal name & in name of audit firm.
12. Date of Auditor's Report: It should not be earlier than date on which auditor has obtained
Sufficient Appropriate Audit Evidence on which to base auditor's opinion.
13. Place of signature: It is ordinarily the city where audit report is signed.
.
Q5 Communicating Key Audit Matter is not a substitute for disclosure in the Financial
Statements rather Communicating key audit matters in the auditor's report is in the context of
the Auditor having formed an opinion on the financial statements as a whole. Analyse.
(RTP-May 18)
64
Ans: Scope of SA 701:
❖ This SA deals with the auditor's responsibility to communicate key audit matters in the
auditor's report.
❖ Communicating key audit matters in the auditor's report is not
✓ A substitute for disclosures in the FS. that the applicable FRF requires management
to make, or that are otherwise necessary to achieve fair presentation
✓ A substitute for the auditor expressing a modified opinion when required by the
circumstances of a specific audit engagement in accordance with SA 705;
✓ A substitute for reporting in accordance with SA 570 when a material uncertainty
exists relating to events or conditions that may cast significant doubt on an entity's
ability to continue as a going concern: or
✓ A separate opinion on individual matters
❖ SA 701 applies to audits of complete sets of general purpose FS.of listed entities and
circumstances when the auditor otherwise decides to communicate key audit matters in the
auditor's report.
❖ SA 701 also applies when the auditor is required by law or regulation to communicate key
audit matters in the auditor's report
❖ SA 705 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.
Q6 Explain clearly the purpose of communicating key audit matters. [RTP-Nov. 181
Ans Purpose of communicating key audit matters:
As per SA 701 "Communicating Key Audit matters in the Independent Auditor's Report" Key
Audit Matters are those matters that, in the auditor's professional judgment, were of most
significance in the audit of the FS. of the current period. Key audit matters are selected from
matters communicated with TCWG.
Various purposes of communicating Key Audit matters as per SA 701 are:

1. To enhance the communicative value of the auditor's report by providing greater
transparency about the audit that was performed.
2. To provide additional information to intended users of the financial statements to assist
them in understanding those matters that, in the auditor's professional judgment, were
of most significance in the audit of the F.S. of the current period.
3. To assist intended users in understanding the entity and areas of significant management
judgment in the audited FS.
4. To provide a basis to further engage with management and TCWG about certain matters
relating to the entity, the audited FS. or the audit that was performed
Q7 Mr. A was appointed as statutory auditor of X Ltd. While doing audit, Mr. A is required to
determine the key audit matters which are required to be mentioned in the audit report. You
are required to advise Mr. A about the considerations which Mr. A shall take into account
while determining key audit matters.
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Ans Considerations to determine Key Audit Matters:

As per SA 701 "Communicating Key Audit matters in the Independent Auditor's Report Key
Audit Matters are those matters that, in the auditor's professional judgment were of most
significance in the audit of the FS. of the current period. Key audit matters are selected from
matters communicated with TCWG
The auditor shall determine, from the matters communicated with TCWG, those matters that
required significant auditor attention in performing the audit. In making this determination,
the auditor shall consider the following:
✓ Areas of higher assessed RMM or significant risks identified in accordance with SA 315;
✓ Significant auditor judgments relating to areas in the FS that involved significant
management Judgment, including accounting estimates that have been identified as
having high estimation uncertainty.
✓ The effect on the audit of significant events or transactions that occurred during the
period
The auditor shall determine which of the matters so determined above were of most
significance in the audit of the FS. of the current period and therefore are the key audit
matters.
Q8 State the circumstances in which a matter determined to be a key audit matter is not required
to be communicated in the Auditor's Report
Ans Circumstances in which key audit matters not required to be communicated:
As per SA 701 "Communicating Key Audit matters in the Independent Auditor's Report” Key
Audit Matters are those matters that, In the auditor's professional judgment, were of most
significance in the audit of the F.S. of the current period. Key audit matters are selected from
matters communicated with TCWG
The auditor shall describe each key audit matter in the auditor's report unless:
✓ Law or regulation precludes public disclosure about the matter; or
✓ 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.
Q9 What is a qualified auditor report? Under what circumstances a qualified report is issued.
Ans: Qualified Opinion:
The auditor shall express a qualified opinion when
(a) The auditor, having obtained sufficient appropriate audit evidence, concludes that
misstatements, individually or in the aggregate, are material, but not pervasive, to the
financial statements; or
(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 financial statements of
undetected misstatements, if any, could be material but not pervasive.
SA 705 "Modification to the Opinion in the Independent Auditor's Report” requires the
auditor to add one more para named as "Basis for Qualified Opinion Para" in the audit
report immediately before the opinion para stating therein the reasons for the qualified
opinion.
The opinion para in case of qualified opinion will be worded as follow:
"Except for the effects of the matter(s) described In the Basis for Qualified Opinion paragraph,
the Financial statements gives a true and fair view in all material respects in accordance
66
With the applicable FRF”.
Q10 What is a qualified auditor report? Under what circumstances a qualified report is issued.
Ans The auditor shall express a qualified opinion when:
(a) The auditor, having obtained sufficient appropriate audit evidence , concludes that
misstatements, individually or in the aggregate, are material, but not pervasive, to the
financial statements,
or
(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 financial statements of
undetected misstatements, if any, could be material but not pervasive.
SA 705 "Modification to the Opinion in the Independent Auditor's Report" requires the auditor to
add one more para named as "Basis for Qualified Opinion Para" in the audit report immediately
before the opinion para stating therein the reasons for the qualified opinion.
The opinion para in case of qualified opinion will be worded as follow:
"Except for the effects of the matter(s) described in the Basis for Qualified Opinion paragraph.
the Financial statements gives a true and fair view in all material respects in accordance with the
applicable FRF"
Q11 Write short note on: Disclaimer of opinion. [Nov. 08 (5 Marks)]

Or
State briefly the circumstances when an auditor issues a disclaimer of opinion.
[Nov. 10 (4 Marks)]
Ans Disclaimer of Opinion:
SA 705 "Modification to the Opinion in the Independent Auditor's Report" requires the
auditor to disclaim an opinion
when the auditor is unable to obtain sufficient 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.
If auditor disclaims the opinion auditor is required to add a para in the audit report "Basis for
Disclaimer of Opinion Para" describing therein the auditor's inability to collect the sufficient
appropriate audit evidence.
Auditor is also required to amend the description of auditor's responsibility para as "Our
responsibility is to express an opinion on the financial statements based on conducting the audit
in accordance with Standards on Auditing issued by the ICAI. Because of the matter(s) described
in the Basis for Disclaimer of Opinion paragraph, however, we were not able to obtain sufficient
appropriate audit evidence to provide a basis for an audit opinion".
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Q12 Differentiate between 'Qualified Report' and 'Adverse Report'. [May 10 (5 Marks)]
Ans Distinction between Qualified Report and Adverse Report:

Qualified report Adverse report
Circumstan A qualified opinion should be An adverse opinion should be expressed
ces in which expressed when the auditor when the effect of a disagreement is so
it is issues concludes that an unqualified material and pervasive to the financial
opinion cannot be expressed statements that the auditor concludes
but that the effect of any that a qualification of the report is not
disagreement with adequate ,to disclose the misleading or
management is not so material incomplete nature of the financial
and pervasive as to require an statements.
adverse opinion, or limitation
on scope is not so material and
pervasive as to require a
disclaimer of opinion
Reporting In qualified report the auditor's In adverse report the auditor states that
reservation is generally written "the financial statements do not present a
as "subject to or except for, we true and fair view of the state of affairs
report that the Balance Sheet and working results"
shows a true and fair view
Q13 State the circumstances which could lead to any of the following in an Auditors Report:
(i) A modification of opinion

(ii) Disclaimer of opinion
(iii) Adverse opinion
(iv) Qualified opinion [May 13 (8 Marks)]
Ans 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.
(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.
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❖ 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.
Q14 Discuss the following: The Auditor's Report is considered to be modified under certain
circumstances.
Ans Same as Q
Q15 What is Emphasis of matter Paragraph? State the circumstances when EOM para can be
included in Auditor's report
Ans: 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 FRE
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.
Q16 What is Modified Reports? Discuss disclosure pattern when the auditor includes an Emphasis
of Matter Paragraph in the Auditor's Report. [May 14 (5 Marks)]
Ans Modified Reports: Refer Q 13
Disclosure pattern of EOM paragraph:
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
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(c) Indicate that the auditor's opinion is not modified in respect of the matter emphasized.
Q17 What is an Emphasis of Matter paragraph, when it is used and manner of its use in an audit
report? [May 17 (4 Marks)]
Or
Define emphasis of matter paragraph and how it should be disclosed in the independent
auditor's report? [ May 18 (5 Marks)]
Ans: 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 of Emphasis of Matter Paragraph in the 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.
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MODULE 5 – AUDIT OF VARIOUS ENTITIES
Sr. No Topic
1 Audit of Educational Institution
2 Audit of Hospital
3 Audit of Cinema Hall
4 Audit of Hotel
5 Audit of Club
6 Audit of NGO
7 Audit of Co op society
8 Audit of LLP
9 Audit of hire purchase & leasing company
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Audit of Educational Institution

❖ Examine the Trust Deed or Regulations, in the case of school or
college andnote all the provisions affecting accounts. In the case of a
university, refer to the Act of Legislature and the Regulation framed
thereunder.
❖ Read through the minutes of the meetings of the Managing Committee
or Governing Body, noting resolutions affecting accounts to see that
these have been duly complied with, specially the decisions as regards
the operation of bank accounts and sanctioning of expenditure.
❖ Check names entered in the Students Fee Register for each month or
term, with the respective Class Registers, showing names of students
on rolls and test amount of fees charged; and verify that there
operates a system of internal check which ensures that demands
against the students are properly raised.
❖ Check fees received by comparing counterfoils of receipts granted
with entries in the Cash Book and tracing the collections in the Fee
Register to confirm that the revenue from this source has been duly
accounted for.
❖ Total up the various columns of the Fees Register for each month or
term toascertain that fees paid in advance have been carried forward
and that the arrears that are irrecoverable have been written off under
the sanction of anappropriate authority.
❖ Check admission fees with admission slips signed by the head of the
institution and confirm that the amount has been credited to a Capital
fund, unless the Managing Committee has taken a decision to the
contrary.
❖ See that free studentship and concessions have been granted by a
person authorised to do so, having regard to the Rules prepared by
the ManagingCommittee.
❖ Confirm that fines for late payment or absence, etc. have been
either collected or remitted under proper authority.
❖ Confirm that hostel dues were recovered before student’s accounts
wereclosed and their deposits of caution money refunded.
❖ Verify rental income from landed property with the rent rolls, etc.
❖ Vouch income from endowments and legacies, as well as interest
and dividends from investment; also inspect the securities
in respect ofinvestments held.
❖ Verify any Government or local authority grant with the memo of grant.
If anyexpense has been disallowed for purposes of grant, ascertain
the reasons thereof
❖ Report any old heavy arrears on account of fees, dormitory rents, etc.
to theManaging Committee.
❖ Confirm that caution money and other deposits paid by students on
admission, have been shown as liability in the balance sheet not
transferredto revenue, unless they are not refundable.
❖ Vouch donations, if any with the list published with the annual report. If
some donations were meant for any specific purpose, see that the
money wasutilised for the purpose.
❖ Vouch, all capital expenditure in the usual way and verify the same
with the sanction for the Committee as contained in the minute book.
❖ Verify the inventories of furniture, stationery, clothing, provision and all
equipment etc. These should be checked by reference to Inventory
Register or corresponding inventories of the previous year and values
applied tovarious items should be test checked.
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Audit of Hospital
❖ 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
❖ 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.
❖ Income from Investments, Rent etc: See by reference to the
property and Investment Register that all income that should have been
received by way ofrent on properties, dividends, and interest on
securities have been collected.
❖ Legacies and Donations: Ascertain that legacies and donations
received for a specific purpose have been applied in the manner agreed
upon.
❖ 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).
❖ Authorisation and Sanctions: Vouch all purchases and expenses
and verifythat the capital expenditure was incurred only with the
prior sanction of the Trustees or the Managing Committee and that
appointments and incrementsto staff have been duly authorised.
❖ Grants and TDS: Verify that grants, if any, received from
Government or local authority has been duly accounted for. Also, that
refund in respect of taxes deducted at source has been claimed.
❖ Budgets: Compare the totals of various items of expenditure and
income with the amount budgeted for them and report to the Trustees
or theManaging Committee, significant variations which have taken
place.
❖ Internal Check: Examine the internal check as regards the receipt
and issue of stores; medicines, linen, apparatus, clothing, instruments,
etc. so as to insure that purchases have been properly recorded in
the Inventory Register and that issues have been made only against
proper authorisation.
❖ Depreciation: See that depreciation has been written off against
all the assets at the appropriate rates.
❖ Registers: Inspect the bonds, share scrips, title deeds of properties
and compare their particulars with those entered in the property and
Investment Registers
❖ Inventories: Obtain inventories, especially of stocks and stores as at
the endof the year and check a percentage of the items physic ally;
also compare their total values with respective ledger balances.
❖ Management Representation and Certificate: Get proper
ManagementRepresentation and Certificate with respect to various
aspects covered during the course of audit
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Audit of Cinema Hall

Verify the internal control mechanism
(a) that entrance to the cinema-hall during show is only through printed
tickets;
(b) that they are serially numbered and bound into books;
(c) that the number of tickets issued for each show and class, are different
though the numbers of the same class for the show on the same day, each
week, run serially;
(d) that for advance booking a separate series of tickets is issued; and
(e) that the inventory of tickets is kept in the custody of a responsible official.
Confirm that at the end of show, a statement of tickets sold is prepared and
cash collected is agreed with it.
Verify that a record is kept of the ‘free passes’ and that these are issued
under proper authority
Reconcile the amount of Entertainment Tax collected with the total number of
tickets issued for each class and vouch and verify the entertainment tax
returns fi led each month.
Vouch the entries in the Cash Book in respect of cash collected on sale of
tickets for different shows on a reference to Daily Statements which have
been test checked as aforementioned with record of tickets issued for the
different shows held.
Verify the charges collected for advertisement slides and shorts by reference
to the Register of Slides and Shorts Exhibited kept at the cinema as well with
the agreements, entered into with advertisers in this regard.
Vouch the expenditure incurred on advertisement, rep airs and maintenance.
No part of such expenditure should be capitalized.
Confirm that depreciation on machinery and furniture has been charged at an
appropriate rate.
Vouch payments on account of film hire with bills of distributors and in the
process, the agreements concerned should be referred to.
Examine unadjusted balance out of advance paid to the distributors against fi
lm hire contracts to see that they are good and recoverable. If any film in
respect of which an advance was paid has already run, it should be enquired
as to why the advance has not been adjusted. The management should be
asked to make a provision in respect of advances that are considered
irrecoverable.
The arrangement for collection of the share in the restaurant income should
be enquired into either a fixed sum or a fixed percentage of the taking may be
receivable annually. In case the restaurant is run by the Cinema, its accounts
should be checked. The audit should cover sale of various items of foods
tuffs, purchase of foodstuffs, cold drink, etc. as in the case of club
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Audit of Hotel
Internal Controls - Pilfering is one of the greatest problems in any hotel and
the importance of internal control cannot be undermined. It is the
responsibility of management to introduce controls which will minimise the
leakage as far as possible.
The auditor should obtain these regular trading accounts for the period under
review, examine them and obtain explanations for any apparent deviations.
Room Sales - The charge for room sales is normally posted to guest bills by
the receptionist/ front office or in the case of large hotels by the night auditor.
The source of these entries is invariably the guest register and audit tests
should be carried out to ensure that the correct numbers of guests are
charged for the correct period. Any difference between the charged rates
used on the guests’ bills and the standard room rate should be investigated to
ensure that they have been properly authorised.
Inventories - The inventories in any hotel are both readily portable and
saleable particularly the food and beverage inventories. It is therefore
extremely important that all movements and transfers of such inventories
should be properly documented to enable control to be exercised over each
individual stores areas and sales point. The auditor should carry out tests to
ensure that all such documentation is accurately processed.
Fixed Assets - The accounting policies for fixed assets of individual hotels
are likely to diff er. However, many hotels account for certain quasi-fixed
assets such as silver and cutlery on inventory basis. This can lead to
confusion between each inventory items and similar assets which are
accounted for on a more normal fixed assets basis. In such cases, it is
important that very detailed definitions of inventory items exist and the auditor
should carry out tests to ensure that the definitions have been closely
followed.
Casual Labour - The hotel trade operates to very large extent on casual
labour. The records maintained of such wage payments are frequently
inadequate. The auditor should ensure that defalcation on this account does
not take place by suggesting proper controls to the management.
For ledgers coming through travel agents or other booking agencies the bills
are usually made on the travel agents or booking agencies. The auditor
should ensure that money are recovered from the travel agents or booking
agencies as per the terms of credit allowed
Commission, if any, paid to travel agents or booking agents should be
checked by reference to the agreement on that behalf.
The auditor should verify a few restaurant bills by reference to K.O.T.s
(Kitchen Order Tickets) or basic record. This would enable the auditor to
ensure that controls regarding revenue cycle are in order
The auditor should ensure that proper valuation of occupancy-in-progress at
the balance sheet date is made and included in the accounts
The auditor should satisfy himself that all taxes collected from occupants on
food and occupation have been paid over to the proper authorities.
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The auditor should ensure that proper records re-maintained for booking of
halls and other premises for special parties and recovered on the basis of the
tariff
Audit of Club
❖ Vouch the receipt on account of entrance fees with members’
applications,counterfoils issued to them, as well as on a reference
to minutes of the Managing Committee.
❖ Vouch members’ subscriptions with the counterfoils of receipt issued to
them, trace receipts for a selected period to the Register of Members;
also reconcile the amount of total subscriptions due with the
amount collected and that outstanding.
❖ Ensure that arrears of subscriptions for the previous year have been
correctly brought over and arrears for the year under audit and
subscriptions receivedin advance have been correctly adjusted.
❖ Check totals of various columns of the Register of members and tally
them Across
❖ See the Register of Members to ascertain the Member’s dues which
are in arrear and enquire whether necessary steps have been taken
for their recovery; the amount considered irrecoverable should be
mentioned in the Audit Report.
❖ Verify the internal check as regards members being charged with the
price of foodstuff s and drinks provided to them and their guests, as
well as, with the fees chargeable for the special services rendered,
such as billiards, tennis, etc.
❖ Trace debits for a selected period from subsidiary registers
maintained inrespect of supplies and services to members to confirm
that the account of every member has been debited with amounts
recoverable from him.
❖ Vouch purchase of sports items, furniture, crockery, etc. and trace
their entries into the respective inventory registers.
❖ Vouch purchases of foodstuffs, cigars, wines, etc., and test their sale
price so as to confirm that the normal rates of gross profit have been
earned on their sales. The inventory of unsold provisions and
stores, at the end of year, should be verified physically and its
valuation checked.
❖ Check the inventory of furniture, sports material and other assets
physically with the respective inventory registers or inventories
prepared at the end ofthe year.
❖ Inspect the share scrips and bonds in respect of investments,
check theircurrent values for disclosure in final accounts; also
ascertain that the arrangements for their safe custody are satisfactory.
❖ Examine the financial powers of the secretary and, if these have
been exceeded, report specific case for confirmation by the Managing
Committee
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Audit of NGO
Regulatory Framework:
→ The auditors of an NGO registered under the Societies Registration Act,
1860 (or under any law corresponding to this Act, in force in any part of
India) or the Indian Trusts Act 1882 are normally appointed by the
Management of the Society or Trust.
→ The auditors of NGO registered under section 8 of the Companies Act,
2013 are appointed by the members of the company.
→ Some of the statues such as the Companies Act, 2013, Foreign
Contribution (Regulation) Act 1976, Income Tax Act 1961 required that
the accounts of the NGO be audited and submitted to the prescribed
authorities and failure to do so could lead to forfeiture of certain
exemptions and benefits
While planning the audit, the auditor may concentrate on the following:
(i) Knowledge of the NGO’s work, its mission and vision, areas of operations
and environment in which it operate.
(ii) Updating knowledge of relevant statutes especially with regard to recent
amendments, circulars, judicial decisions viz. Foreign Contribution
(Regulation) Act 1976, Societies Registration Act, 1860, Income Tax Act
1961 etc. and the Rules related to the statutes.
(iii) Reviewing the legal form of the Organisation and its Memorandum of
Association, Articles of Association, Rules and Regulations.
(iv) Study the accounting system, procedures, internal controls and internal
checks existing for the NGO and verify their applicability
❖ Corpus Fund: The contributions / grants received towards corpus be
vouched with special reference to the letters from the donor(s). The
interest income be checked with Investment Register and Physical
Investments in hand.
❖ Reserves: Vouch transfers from projects / programmes with donors

letters and board resolutions of NGO. Also check transfer of gross
value of assetsold from capital reserve to general reserve and
adjustments during the year.
❖ Ear-marked Funds: Check requirements of donors institutions,
board resolution of NGO, rules and regulations of the schemes of the
ear-markedfunds.
❖ Project / Agency Balances: Vouch disbursements and expenditure
as per agreements with donors for each of the balances.
❖ Programme and Project Expenses: Verify agreement with
donor/contributor(s) supporting the particular programme or project to
ascertain the conditions with respect to undertaking the
programme/project and accordingly, in the case of
programmes/projects involving contracts, ensure that income tax is
deducted, deposited and returns fi led and verify the terms of the
contract
❖ Membership Fees: Check fees received with Membership Register.
Ensure proper classification is made between entrance and annual
fees and life membership fees. Reconcile fees received with fees to
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be received during the year

❖ Subscriptions: Check with subscription register and receipts issued.
Reconcile subscription received with printing and dispatch of
corresponding magazine / circulars / periodicals. Check the receipts
with subscription rate schedule.
❖ Interest and Dividends: Check the interest and dividends received
and receivable with investments held during the year.
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79
Audit of Co-operative Society

Who can be appointed?
Apart from a chartered accountant within the meaning of the Chartered
Accountants Act, 1949, some of the State Co-operative Acts have permitted
persons holding a government diploma in co-operative accounts or in co-
operation and accountancy and also a person who has served as an auditor
in the co-operative department of a government to act as an auditor
Who appoints auditor?
An auditor of a co-operative society is appointed by the Registrar of Co-
operative Societies and the auditor so appointed conducts the audit on behalf
of the Registrar and submits his report to him as also to the society. The
audit fees are paid by the society on the basis of statutory scale of fees
prescribed by the Registrar, according to the category of the society audited.
Books of accounts of co-operative society
Under section 43(h) of the Central Act, a state government can frame rules
prescribing the books and accounts to be kept by a co-operative society.
Restriction on share-holdings
According to section 5 of the Central Act, in the case of a society where the
liability of a member of the society is limited, no member of a society other
than a registered society can hold such portion of the share capital of the
society as would exceed a maximum of twenty percent of the total number of
shares or of the value of shareholding to ` 1,000/-. The auditor of a co-
operative society will be concerned with this provision so as to watch any
breach relating to holding of shares. One should also watch whether any
provision in the bye-laws of the society is not contrary to this statutory
position. The State Acts may provide limits as to the shareholding, other than
that provided in the Central Act.
Restriction on loans
Section 29 of the Central Act puts restriction on loan. It states that a
registered society shall not make a loan to any person other than a member.
However, with the special sanction of the Registrar, a registered society may
make a loan to another registered society
Restriction on borrowings
Section 30 of the Central Act further puts restriction on borrowings. According
to this section, a registered society shall accept loans and deposits from
persons who are not members subject to the restrictions and limits of the bye-
laws of the society. The auditor will have to examine the bye-laws in this
respect.
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Investment of funds
According to section 32 of the Central Act, a society may invest its funds in
any one or more of the following:
a) In the Central or State Co-operative Bank
b) In any of the securities specified in section 20 of the Indian Trusts Act,
1882.
c) In the shares, securities, bonds or debentures of any other society with
limited liability.
d) In any co-operative bank, other than a Central or State co-operative bank,
as approved by the Registrar on specified terms and conditions.
e) In any other moneys permitted by the Central or State Government.
Reserve fund
According to section 33 of the Central Act, a prescribed percentage of the
profits should be transferred to Reserve Fund, before distribution as
dividends or bonus to members.
Contribution to charitable purposes
According to section 34, a registered society may, with the sanction of the
Registrar, contribute an amount not exceeding 10% of the net profits
remaining after the compulsory transfer to the reserve fund for any charitable
purpose as defined in section 2 of the Charitable Endowments Act, 1890.
Special features of Co-operative Society audit
a) Examination of overdue debts - Overdue debts for a period from 6
months to 5 years and more than 5 years will have to be classified and
shall have to be reported by an auditor. The auditor will have to ascertain
whether proper provisions for doubtful debts are made and whether the
same is satisfactory.
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b) Overdue Interest - Overdue interest should be excluded from interest

outstanding and accrued due while calculating profit. Overdue interest is
interest accrued or accruing in accounts, the amount of which the principal
is overdue. In practice an overdue interest reserve is created and the credit
of overdue interest credited to interest account is reduced.
c) Certification of Bad Debts - A peculiar feature regarding the writing off of
the bad debts as per Maharashtra State Co-operative Rules, 1961, is very
interesting to note. As per the said rules, bad debts can be written off only
when they are certified as bad by the auditor
d) Valuation of Assets and Liabilities - Regarding valuation of assets there
are no specific provisions or instructions under the Act and Rules and as
such due regard shall be had to the general principles of accounting and
auditing conventions and standards adopted.
e) Adherence to Co-operative Principles - The auditor will have to
ascertain in general, how far the objects, for which the co-operative
organisation is set up, have been achieved in the course of its working
f) Observations of the Provisions of the Act and Rules - An auditor of a
co-operative society is required to point out the infringement with the
provisions of Co-operative Societies Act and Rules and bye-laws.
g) Verification of Members’ Register and examination of their pass
books
h) Examination of entries in members pass books regarding the loan given
and its repayments, and confirmation of loan balances in person is very
much important in a co-operative organisation to assure that the entries in
the books of accounts are free from manipulation
i) Special report to the Registrar - During the course of audit, if the auditor
notices that there are some serious irregularities in the working of the
society he may report these special matters to the Registrar.
In the following cases, for instance, a special report may become
necessary:
(i) Personal profiteering by members of managing committee in
transactions of the society, which are ultimately detrimental to the
interest of the society.
(ii) Detection of fraud relating to expenses, purchases, property and
stores of the society.
(iii)Specific examples of mis-management. Decisions of management
against cooperative principles.
j) Audit classification of society - After a judgement of an overall
performance of the society, the auditor has to award a class to the society.
This judgement is to be based on the criteria specified by the Registrar
k) Discussion of draft audit report with managing committee - On
conclusion of the audit, the auditor should ask the Secretary of the society
to convene the managing committee meeting to discuss the audit draft
report.
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Audit report
➢ The form of the audit report to be submitted by the auditor, as prescribed in
various states, contains a number of matters which the auditor has to state
or comment upon
83
➢ In addition to the above, the auditor will have to attach schedules to the
report regarding the following information:
a) All transactions which appear to be contrary to the provisions of the
Act, the rules and bye-laws of the society
b) All sums, which ought to have been, but have not been brought into
account by the society.
c) Any material, or property belonging to society which appears to the
auditor to be bad or doubtful of recovery
d) Any material irregularity or impropriety in expenditure or in the
realisation or monies due to society.
e) e) Any other matters specified by the Registrar in this behalf.
Audit of Multi-State Co-operative Societies
The Multi-State Co-operative Societies Act, 2002, which came into force in
August, 2002 applies to co-operative societies whose objects are not
confined to one State. The Act contains detailed provisions regarding
registration, membership and management of such societies
Qualification of auditor
Section 72 of the Multi-State Co-operative Societies Act, 2002 states that a
person who is a Chartered Accountant within the meaning of the Chartered
Accountants Act, 1949 can only be appointed as auditor of Multi-State co-
operative society.
Disqualification of auditor
However the following persons are not eligible for appointment as auditors of
a Multistate co-operative society
a) A body corporate
b) An officer or employee of the Multi-State co-operative society
c) A person who is a member or who is in the employment, of an officer or
employee of the Multi-State co-operative society.
d) A person who is indebted to the Multi-State co-operative society or who
has given any guarantee or provided any security in connection with the
indebtedness of any third person to the Multi-State co-operative society for
an amount exceeding one thousand rupees.
If an auditor becomes subject, after his appointment, to any, of the
disqualifications specified above, he shall be deemed to have vacated his
office as such.
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Appointment
➢ Section 70 of the Multi-State Co-operative Societies Act, 2002 provides
that the first auditor or auditors of a Multi-State co-operative society shall
be appointed by the board within one month of the date of registration of
such society and the auditor or auditors so appointed shall hold office until
the conclusion of the first annual general meeting
➢ If the board fails to exercise its powers under this sub-section, the Multi-
State co-operative society in the general meeting may appoint the first
auditor or auditors.
➢ The subsequent auditor or auditors are appointed by Multi-State co-
operative society, at each annual general meeting.
➢ The auditor or auditors so appointed shall hold office from the conclusion
of that meeting until the conclusion of the next annual general meeting.
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Rights and Duties

➢ Section 73 of the Multi-State Co-operative Societies Act, 2002 discusses
the powers and duties of auditors. According to this, every auditor of a
Multi-State co-operative society shall have a right of access at all times to
the books accounts and vouchers of the Multi-State co-operative society
➢ As per section 73(2), the auditor shall make following inquiries:
a) Whether loans and advances made by the Multi-State co-operative
society on the basis of security have been properly secured and
whether the terms on which they have been made are not prejudicial to
the interests of the Multi-State cooperative society or its members,
b) Whether transactions of the Multi-State co-operative society which are
represented merely by book entries are not prejudicial to the interests of
the Multi-State co-operative society
c) Whether personal expenses have been charged to revenue account
d) Where it is Stated in the books and papers of the Multi-State co-
operative society that any shares have been allotted for cash, whether
cash has actually, been received in respect of such allotment, and if no
cash has actually been so received, whether the position as stated in
the account books and the balance sheet as correct regular and not
misleading.
Power of Central Government to direct special audit
➢ Under section 77 of the Multi-State Co-operative Societies Act, 2002,
where the Central Government is of the opinion:
(a) that the affairs of any Multi-State co-operative society are not being
managed in accordance with self-help and mutual deed and co-
operative principles or prudent commercial practices or with sound
business principles
(b) that any Multi-State co-operative society is being managed in a
manner likely to cause serious injury or damage to the interests of the
trade industry or business to which it pertains
(c) that the financial position of any Multi-State co-operative society is
such as to endanger its solvency
(d) The Central Government may at any time by order direct that a special
audit of the Multi-State co-operative society’s accounts for such period
or periods as may be specified in the order, shall be conducted and
appoint either a chartered accountant or the Multi-State co-operative
society’s auditor himself to conduct the special audit.
➢ However, Central Government shall order for special audit only if that
Government or the State Government either by itself or both hold fifty-one
percent or more of the paid-up share capital in such Multi-State co-
operative society.
86
Inquiry by Central Registrar

➢ The Central Registrar may, on a request from a
a. federal co-operative to which a Multi-State Co-operative society is
affiliated or
b. a creditor or
c. not less than one-third of the members of the board or
d. not less than one-fifth of the total number of members of a Multi-state
co-operative society, hold an inquiry or direct some person authorized
by him by order in writing in his behalf to hold an inquiry into the
constitutions, working and financial condition of a Multi-State Co-
operative society
87
➢ The Central Registrar shall authorized a person to conduct such inquiry.

➢ The Central Registrar shall, within a period of three months of the date of
receipt of the report, communicate the report of inquiry to the Multi-State
co-operative society, the financial institutions, if any, to which the society is
affiliated, and to the person or authority, if any at whose instance the
inquiry is needed.
Audit of LLP
Requirement of Audit:
→The accounts of every LLP shall be audited in accordance with Rule 24 of
LLP, Rules 2009.
→ Such rules, inter-alia, provides that any LLP, whose turnover does not
exceed, in any financial year, forty lakh rupees, or whose contribution
does not exceed twenty five lakh rupees, is not required to get its
accounts audited
→ However, if the partners of such limited liability partnership decide to get
the accounts of such LLP audited, the accounts shall be audited only in
accordance with such rule.
Regulatory filings:
→ An LLP shall be under obligation to maintain annual accounts reflecting
true and fair view of its state of aff airs. A “Statement of Accounts and
Solvency” in prescribed form shall be fi led by every LLP with the
Registrar every year
→ Every LLP would be required to fi le annual return in Form 11 with ROC
within 60 days of closer of financial year. The annual return will be
available for public inspection on payment of prescribed fees to Registrar.
→ Every LLP is also required to submit Statement of Account and Solvency
in Form 8 which shall be fi led within a period of thirty days from the end of
six months the financial year to which the Statement of Account and
Solvency relates
Appointment of Auditor: The auditor may be appointed by the
designated partners of the LLP –
1. At any time for the first financial year but before the end of first financial
year,
2. At least thirty days prior to the end of each financial year(other than the
first financial year),
3. To fill the causal vacancy in the office of auditor,
4. To fill the casual vacancy caused by removal of auditor.
The partners may appoint the auditors if the designated partners have failed
to appoint them.
Audit of Hire purchase and leasing Companies
Ans: Hire purchase agreement is in writing and is signed by all parties.
Hire purchase agreement specifies clearly-
(a) The hire-purchase price of the goods to which the agreement relates;
(b) The cash price of the goods, that is to say, the price at which the goods
may be purchased by the hirer for cash;
(c) The date on which the agreement shall be deemed to have commenced;
(d) The number of instalments by which the hire- purchase price is to be paid,
the amount of each of those instalments, and the date, or the mode of
determining the date, upon which it is payable, and the person to whom
and the place where it is payable; and
(e) The goods to which the agreement relates, in a manner sufficient to
identify them
88
Ensure that instalment payments are being received regularly as per the
agreement
In respect of leasing transaction entered into by the leasing company,
the following procedures may be adopted by the auditor:
The object clause of leasing company to see that the goods like capital
goods, consumer durables etc. in respect of which the company can
undertake such activities. Further, to ensure that whether company can
undertake financing activities or not.
Whether there exists a procedure to ascertain the credit analysis of lessee
like lessee’s ability to meet the commitment under lease, past credit record,
capital strength, availability of collateral security, etc
The lease agreement should be examined and the following points may
be noted:
(i) the description of the lessor, the lessee, the equipment and the location
where the equipment is to be installed.
(ii) the amount of tenure of lease, dates of payment, late charges, deposits or
advances etc. should be noted.
(iii) whether the equipment shall be returned to the lessor on termination of
the agreement and the cost shall be borne by the lessee.
(iv) whether the agreement prohibits the lessee from assigning the subletting
the equipment and authorises the lessor to do so.
89

Audit Sem 4 - Final Notes

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SUBJECT: AUDIT & ASSURANCE

AUTHORED BY CA AAKASH PEDNEKAR

MODULE 3 – AUDIT OF ITEMS OF FINANCIAL STATEMENT (FULL CHP NOTES)

2) Auditor needs to obtain sufficient and appropriate audit evidence to verify

3) While verifying transactions auditor needs to consider following assertions:

→ Measurement: Transactions have been recorded accurately at their

→ Occurrence and Existence: Transactions and events disclosed in the financial

1) Share issued at premium:

2) Shares Issued at discount:

3) Issue of Sweat Equity Shares:

5) Distinguish between reserves and provisions

6) Revenue and Capital Reserve

8) Expenses which are essentially of a revenue nature, if incurred for creating an

9) Note on other income

SUBJECT: AUDIT & ASSURANCE

An auditor is required to make specific evaluations while forming an opinion in an audit

Ans Forming an Opinion on the Financial Statements:

(c) The evaluations mentioned below:

2. Whether, in view of the requirements of the applicable FRF:

❖ The accounting estimates made by management are reasonable:

➢ The overall presentation, structure and content of the FS.; and

➢ Whether the FS. adequately refer to or describe the applicable FRF.

Ans: Responsibilities of Management for the Financial Statements:

An unqualified opinion Indicates the following:

Q4 State any six elements of the Auditor's Report. (Nov. 12 (6 Marks)

Ans: Scope of SA 701:

Various purposes of communicating Key Audit matters as per SA 701 are:

Ans Considerations to determine Key Audit Matters:

The opinion para in case of qualified opinion will be worded as follow:

With the applicable FRF”.

The opinion para in case of qualified opinion will be worded as follow:

Q11 Write short note on: Disclaimer of opinion. [Nov. 08 (5 Marks)]

Ans Distinction between Qualified Report and Adverse Report:

(i) A modification of opinion

Ans Circumstances in which a modified opinion may be issued:

❖ Inappropriate method of selection of Accounting Policies;

❖ Limitations Imposed by management

Types of Modified Opinion:

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

Ans: Emphasis of Matter Paragraph:

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

➢ An uncertainty relating to the future outcome of an exceptional litigation or regulatory

Ans Modified Reports: Refer Q 13

Disclosure pattern of EOM paragraph:

Ans: Emphasis of Matter Paragraph:

• SA 706 "Emphasis of matter Paragraph and Other Paragraphs in the Independent

Disclosure of Emphasis of Matter Paragraph in the Auditor's report:

SUBJECT: AUDIT & ASSURANCE

Audit of Educational Institution

Audit of Cinema Hall

❖ Reserves: Vouch transfers from projects / programmes with donors

be received during the year

Audit of Co-operative Society

b) Overdue Interest - Overdue interest should be excluded from interest

Rights and Duties

Inquiry by Central Registrar

➢ The Central Registrar shall authorized a person to conduct such inquiry.

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