CA SHANKAR LAKHWANI # Audit Made Easy

CA FINAL AUDIT MAGIC CHARTS VOLUME 1

By CA SHANKAR LAKHWANI
(All Non-Standard Chapters & Professional Ethics)

HELLO CHAMPIONS!!!!!
Important Points to Keep in Mind before Referring Magic Charts

• Magic Charts are to be referred for 1st

Reading as well as subsequent Revisions
• These Charts contain ICAI Keywords
• Covers 100% Syllabus
• No need to refer ICAI Module
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May 2025
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INDEX
Chapter Pg No.
Digital Audit 1
Group Audit 11
Bank Audit 15
NBFC Audit 22
PSU Audit 31
Internal Audit 37
Due Diligence 42
Investigation 44
Forensic Accounting 49
Emerging Areas (ESG & SDG Assurance) 52
Professional Ethics 57

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DIGITAL AUDITING & ASSURANCE

Q1) Meaning of Digital Audit

• Placing assurance on effectiveness of IT system of organization.

Q2) Features of Digital Audit

Standardized process Informed decisions More reliable audit report

Savings in time, cost & human effort End to end understanding Technology Advancement

Q3) Advantages of Digital Audit

Better Analytics Improved Risk Lower Costs Better Audit Enhanced effectiveness &
Assessment Quality efficiency

Q4) Challenges of Digital Audit

• Choosing right tool & automating right process

• Evaluating business benefits organization wants to achieve with automation
• Reluctance to change
• Challenges with data security & governance
• Ensuring standardization and correct configurations to avoid error & bias

Q5) Auditors will perform procedures to understand changes to company’s business, including
changes to IT Environment when they will understand management’s implementation of new
technology. What should be areas of focus for auditor?

Understanding-

• Changes in way entity’s systems developed & whether it results in new risks & controls.
• New activities/changes in existing process due to new technology (eg, new revenue streams).
• Impact of new technology on how organization obtain & use information to support internal
control functions.

Q6) Understanding IT Environment (IT Envt.)

(1) Stages

Understand Ways in which entity relies on IT & how IT Envt. supports business
Identify Controls on entity’s IT process
Assess Complexity of IT Environment to know whether to use IT experts for audit
(2) Auditor’s understanding of automated environment includes-

• Policies, procedures, processes followed

• Organization structure & governance
• Details of IT infrastructure components for each application
• Extent of IT integration, use of service organizations
• IT Risks & controls
• Applications used by company
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(3) Key Areas/Considerations for Auditor to understand IT Envt.-

• Identification of significant systems-

o Identify IT applications & infrastructure

o How CAD (class of transactions, A/c Balance & disclosures) flows into info system.
• Understand flow of transaction-

o Understand nature & no. of IT applications & other aspects of IT Envt.

o Processing of information in information system.
• Identification of manual & automated controls-

o Entity’s mix of manual & automated elements varies with nature of use of IT.
o It helps in identification & assessment of ROMM by auditor.
• Identification of technologies used-

o Understand technologies, their role, risks. Eg, AI, IOT, Robotics

• Assessing complexity of IT Envt.-Complexity is based on following factors-

Automation used Business model of entity Customization in Significant changes during

IT Applications year

Q7) Risks arising from use of IT

• Unauthorized changes to IT applications/other aspects of IT Envt.

• Inappropriate manual intervention
• Failure to make necessary update to IT Applications/other aspects of IT Envt.
• Risk of system downtime due to hardware failure/cyberattacks
• Possibility of IT Personnel gaining access privileges beyond necessary, breaking down
segregation of duties
• Data loss or data corruption

Q8) Scaling

Resources/hardware added to existing nodes to overcome performance issues of IT Systems.

Q9) IT Dependencies

Created when IT is used to initiate, authorize, record, process, report transactions.

(1) Importance of identifying & documenting IT Dependencies

Helps to-

• Identify entity’s reliance upon IT

• Identify IT risks
• Identify IT General controls
• Understand how IT is integrated into entity’s business model
• Develop effective & efficient audit approach

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(2) Types of IT Dependencies

• Automated Controls-Designed into IT Envt. to enforce business rules.

o Format checks (date), existence checks (Duplicate customer no.), reasonableness

checks (max payment amt)
• Interfaces-Programmed logic to transfer data from one IT System to another.

o From payroll sub ledger to general ledger

• Calculations-Accounting procedures performed by IT system instead of person.

o System will calculate depreciation by SLM

• Security- Includes segregation of duties. Helps to-

o Restrict access to information

o Determine separation of roles & responsibilities
• Reports-System generated reports by IT systems. Eg, Vendor master report. Uses are-

o Useful in entity’s execution of manual control

o Source of entity’s information when selecting items for testing
o Performing substantive Test of details (ToD) /Analytical procedures
(3) ITGCs

•Mgt implement ITGCs (Information Technology General Controls) to address risks of IT

Dependencies.
(4) Control objectives & controls for General IT Controls-

• DATA CENTRE & NETWORK OPERATIONS

• Objective - Ensure production systems are backed up to meet FR objectives

• Controls-
o Data is backed up & recoverable
o Policies & procedures for above maintained
• ACCESS SECURITY

• Objective-Ensure that access to programs is authenticated to meet FR objectives

• Controls-
o Access of terminated user is removed
o Security policies & procedures maintained
• PROGRAM CHANGE

Objective-Ensure modified systems continue to meet FR objectives

•
Controls-
•
o Changes are tracked & recorded
o Change management policies & procedures maintained
(Shortform-FR-Financial Reporting)

Q10) Meaning & types of Cyber Risk/Cyber Attack

Meaning & Types of cyber risk

• Unauthorized access to network with intent to damage/steal/destroy data.

• Types/Examples- malware, phishing, spoofing, DoS attack, Identity Based Attack, Insider
Threats, DNS Tunneling, IoT- Based attack

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1) Malware

• Program with intent to do harm to computer/network/server.

• Also called malicious software. Most common type of cyber attack.
• Types-
o Mobile Malware
▪ To target mobile devices
▪ Malicious downloads, phishing, unsecured Wi-Fi
o Ransomware
▪ Adversary encrypts victim’s data & provides decryption key for payment.
▪ Malicious links by phishing emails
o Fileless Malware
▪ Uses native, legitimate tools built into system for cyber attack.
▪ Doesn’t require attacker to install code on system. Thus difficult to detect.
o Trojan
▪ Appears legitimate software disguised as native OS program/free downloads.
▪ Installed by social engineering techniques like phishing/bait websites
2) Phishing

• Uses email, SMS, phone, social media, social engineering techniques to entice victim-
o To share sensitive information like password/account no.
o To download malicious file that will install viruses on system
• Types-
o Spear Phishing
▪ Targets specific individuals/organizations by malicious emails.
▪ To steal sensitive information like login details/infect device with malware.
o Smishing
▪ Sending text message pretending to be from reputable org.
▪ To induce people to reveal personal info-Password/credit card no.
o Vishing
▪ Voice phishing attack
▪ Fraudulent use of calls/voice msg. pretending to be from reputable org.
▪ To induce people to reveal personal info-Password/credit card no.
o Whaling
▪ Targets senior/C-level executive employees
▪ To steal money/info/access to computer to execute further cyberattacks.
3) Spoofing

• Cybercriminal disguised as known/trusted source

• To access system to steal info/extorting money/install malware
• Types-
o Domain spoofing
▪ Attacker impersonates known business with fake website/email to fool people.
▪ Domain appears legitimate at first, but closer look will reveal differences
o Email spoofing
▪ Targets business by emails with forged sender addresses.
▪ Recipient trusts sender & opens email-malicious link
4) Denial-of-Service (DoS) Attacks

• Floods network with false requests to disrupt business operations.

• Users unable to perform routine tasks like accessing emails, websites.

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• Generally, no data loss, no ransom but costs org. time & money to restore operations.
5) Identity Based Attacks

• User’s credentials compromised & adversary pretends to be that user.

• Eg, same user ID & password for multiple a/cs
• Possessing credentials of one will result in access of others.
6) Insider Threats

• Employees (current/past) have direct access to company network, sensitive data, policies
7) DNS Tunneling-

• Leverages domain name system (DNS) queries & responses to bypass security measures
• Hacker extract sensitive data by encoding it bit by bit in series of DNS responses.
8) IoT Based Attacks-

• Targets IoT (Internet of Things) device/network

• Hacker takes control of device & steal data.

Q11) Stages of Cyber Risk

Stage 1-Assessing Cyber Risk

• Every organization should consider common threats-

o Ransomware disabling their organization (including plants, mfg. facilities)
o Insiders committing malicious activities. Thus, unintended discourse of info & fraud
o Common criminals using email phishing & hacks for fraud & theft
Stage 2-Impact of Cyber Risk

• Varies from organization to organization & attack to attack. Some indicative areas-
o Ransomware
o Business interruptions causing operational challenge for organization
o Regulatory costs
o Data loss, reputational loss & litigation
o Fines & penalties
o Breach of privacy
Stage 3- Managing Cyber Risk

• Benefits-
o Understand accepted risks & documented compensating controls.
o Understand cyber risks, threats to org. & other financial institutions.
o Assess existing IT program & capabilities against regulatory requirements
o Align cybersecurity & IT transformation initiatives with strategic objectives & risks.

Q12) Cyber Security Framework

1) Identify Risk-

• Entity-
o Conduct periodic risk assessment & develop strategy to identify cybersecurity risks.
o Maintain & periodically reviews information assets- Asset Management (eg, patents)

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2) Protect risk-

• Entity monitors whether unauthorized access to electronic assets & impact on FR

• Formal training to make teams aware of risks of cyber attacks
• Entity implements controls for data security.
3) Detect risk-

• Entity should identify cybersecurity risks, its impact on business & significance
• Review entity’s process to monitor & detect security breaches.
• Mgt. implemented anti virus/firewall logs are monitored to detect repetitive tasks
4) Respond to risk

• In case of material cybersecurity, entity should have response planning to capture incident.
• Security incident response plan helps to analyse impact & severity of attack & take
appropriate actions.
5) Recover from risk

• Entity takes appropriate action to recover from attack & make sure business is running.
• Necessary improvements-patch upgrades, better controls, anti virus is implemented.

Q13) Control considerations for cyber risks/Internal controls-

1) Controls around vendor setup & modifications-

• Changes to vendor info by email phishing pretending to be from authorized vendor.

• Entity inappropriately dispersed funds & reduce liability owed to actual vendor.
• Thus, impacting financial statements.
• Check- (Shortcut-VMD-Vendor Master Data)
o Who is responsible to make change to VMD? Is process centralized/decentralized?
o What systems are used to initiate,authorize & process changes to VMD?
o Are authentication protocols defined to verify modifications to VMD?
2) Controls around electronic transfer of funds-

• Fraudulent request for wire t/f pretending from financial institutions.

o requesting disbursement from customer asset a/c
• Check-
o Are personnel responsible for wire t/f educated on threats/phishing scams/frauds?
o What systems are used to facilitate request,authorization & release of 0 wire t/f?
o Are authentication protocols defined to verify wire t/f requests?
3) Controls around patch management-

• Known security vulnerabilities caused by unapplied patches/upgrades

• Check-
o Does entity have patch mgt. program?
o Does entity runs periodic vulnerability scans to identify unapplied patches?
o How is entity notified of patches by external vendors? (Eg.- MS for Windows patch)

Q14) Meaning & Considerations for Remote Audit/Virtual Audit

• Auditor uses online/electronic means for audit. It can be partially/completely virtual.

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Considerations for Remote Audit

1) Feasibility & Planning-

• Agree on audit timeline, meeting platform(Zoom),data exchange mechanism,technology

• Execution phase involve video/tele conferencing with auditees
• Documentation for audit evidence t/f through document sharing platform(DSP)
2) Confidentiality, Security & Data Protection-

• Access to DSP restricted by encrypting data

• Info-reviewed by auditor is removed from platform & stored as per archiving standards
• Auditors consider agreements from both sides(eg, no recording, no screenshots by auditor
for audit evidence, unless authorized)
• In case of accessing auditee’s IT system,auditor should use VPN
3) Risk assessment

• Communication from auditor & auditee-clear & consistent

• Risks for achieving audit objectives-identified, assessed, managed
• Assessment if remote audit sufficient is done & documented for each audit

Q15) Advantages of Remote Audit

• Cost & time effective, no travel time & cost

• Comfort & flexibility to audit team since WFH( work from home)
• Auditor gets first hand evidence directly from IT system as direct access given
• Widens selection of auditors from global network of experts
• Time to gather evidence spread over weeks, instead of small period that takes personnel
from daily activities

Q16) Disadvantages of Remote Audit

• Interviews & meetings interrupted due to network issues

• Limited/no ability to visualize facility culture of org./body language of auditees
• Time zone issues can affect efficiency
• Opportunity of doctored docs/omitting info increases,thus additional audit procedure
• Security & confidentiality violation
• Remote access to sensitive IT Systems may not be allowed
• Cultural challenges for auditor. Lack of knowledge of local laws
• Audit procedures like physical ver. of assets/stock taking can’t be performed

Q17) Data Analytics

• Generating & preparing meaningful info from raw system data using processes, tools &
techniques is called Data Analytics.
• Audit Analytics/Audit data analytics involves-
o Analyzing large data for insights,trends,draw conclusions,informed decision making
• Audit analytics helps-
o To discover & analyze patterns
o Identifying anomalies
o Extract other useful information in data

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• Data analytics methods used in audit are called CAATs(Computer Assisted Auditing
Techniques)
• Popular tools used as part of CAATs/Examples of data analytics techniques-
o ACL (Audit Command Language)-
▪ Data extraction & analysis software for fraud detection, prevention & risk
mgt.
▪ Samples large data for pattern in transactions indicating fraud.
▪ Eg, Analyse data to perform trial balance reconciliation during audit.
o Alteryx-
▪ Consolidates financial/operational data to assess controls
▪ Audit trail is performed. No prior knowledge of coding/scripting needed
▪ Automates periodical procedures like reconciliations, [Link].
o Power BI-
▪ Business Intelligence (BI) platform providing nontechnical business users-
• tools for aggregating, analyzing, visualizing & sharing data
▪ Uses-
• To find outliers in population
• For reporting purpose (Audit report) in interactive dashboard to higher
mgt.
o CaseWare-
▪ Provide tools conducting audit & assurance quickly,accurately,consistently
▪ Better informed decisions
▪ Streamlines processes & eliminates routine tasks

Q18) Automated Tools in Audit

1) Internet of Things(IoT)

• Connecting any device (phone, washing machine) to internet

• Key components-data collection, analytics, connectivity, people & process
• Audit Implications-
o Auditors not able to rely on manual controls
o Audit firms train auditor to evaluate operating effectiveness of automated controls.
o Impact on flow of transaction & new risks for mgt. & auditors
• Risks-Device hijacking,data siphoning,denial of service attack,data breach,device theft
2) Artificial intelligence (AI)

• System that can think & learn

• Utilize data analysis/algorithm to make decision by predictive method/pattern learned
• Audit implications-
o Audits must focus on logical flow of processes
o Auditor assess effectiveness of algorithm & if output is properly reviewed/approved
o Impact on flow of transaction
o How risks (existing & new) addressed
• Risks-Security, inappropriate configuration, data privacy
3) Blockchain

• Based on decentralized & distributed ledger secured by encryption

• Each transaction validated by blockchain participants.
• All blocks sequenced so that modification of a block disqualifies information

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• Audit implications-
o Auditor consider governance,security since insecure APIs,data confidentiality issue
o Auditor consider issue of weak blockchain application development protocol
o Auditor consider data privacy law issues
• Risks-
o Need protocol,[Link],contingency plan as data can’t be accessed without key.
o Security-Cyberattack, data hacks
o Auditor ensure that org. has data mgt. process & complies with regulations
3.1) NFT (Non-Fungible Token)

• Token to represent ownership of unique items. Eg,digital assets (photo,video,artwork)

• Contains digital signature
• One official owner at a [Link] one can change record of ownership or copy/paste it
• Key features-
o Digital asset with certificate created by blockchain, underlying cryptocurrency
o Unique-Can’t be forged/manipulated
o NFT Exchange takes place with cryptocurrencies like bitcoin on specialist sites
• Challenges-Ownership & copyright concern,security risk,market is not that wide,online
fraud,data privacy,cyber threat
4) Robotic Process Automation (RPA)

• Automation of repetitive process of user by emulating human action.

• RPA software bots interact with system same way people do
• Work round the clock,nonstop,much faster,100% reliability
• Audit implications-
o Auditor to understand process(data extraction,aggregation,sanitization,cleansing)
o To perform substantive testing,auditor to understand tools used in RPA
• Risks-
o Operational & execution risks-
▪ Buying wrong tool,making wrong assumption,compromising security
▪ How to reduce risk- Assigning proper responsibility,training
o Change management risks-
▪ Not following change [Link] lifecycle,improper testing
o RPA Strategy risk-
▪ Wrong expectation,improper KPIs,unrealistic business goals

Q19) Control considerations/Objectives of Auditing Digitally

1) Control considerations to consider while assessing technology risk-

• Auditors should-
o Gain holistic understanding of changes in industry, IT Envt. to evaluate [Link]
for initiating,processing,recording transactions & design audit procedures
o Consider risk from new technology & how it differs from those of traditional system
o Consider if digital upskilling/specialists needed to determine impact of new
technology, assist in risk assessment, understanding controls. Eg,IT Specialists.
2) Technology Risks of Digital system – Same as risks arising from use of IT
3) Key steps for Auditors in Changing Technology Environment

As auditors obtain understanding of impact of technology on business,internal control,financial

reporting, these are some reminders- (Shortcut-RA-Risk assessment)
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• Maintain professional skepticism when reviewing mgt’s RA for new system
• Understand direct/indirect effect of new technology,how its use impact auditor’s RA
• Assess appropriateness of mgt.’s process to select, develop, maintain controls
• Understand how technology impact flow of transaction

Q20) Next Generation Audit

• Human-led, tech-powered, data-driven. Based on combining emerging technologies to

redefine how audits are performed.
Examples-
1) Drone Technology [Unmanned Aerial Vehicle (UAV)]
• For stock count in remote locations
• Great payload capacity to carry sensor/[Link] can photograph FA/inventory
• Combined with alternative source-QR code reader,manual count,consolidate audit info
2) Augmented Reality(AR)-
• Users view real world envt. with augmented elements,generated by digital devices
• Eg, Pokemon Go
3) Virtual Reality(VR)-
• Replace realworld with simulated envt by digitally generated image,sound,touch, smell
• Eg,custom headset -simulated experience like flying/skydiving
4)Metaverse-
• Emerging 3D Digital space that uses VR,AR,other advanced internet technology
• Allows people to have lifelike personal & business experiences online
• Represent convergence of digital technology to combine use of AI, AR, VR, crypto.
• Potential application of metaverse in financial domain-
o Virtual Banking & transactions
o Virtual financial education & training
o Virtual meetings & conferences
o Digital asset mgt.
o Data visualization & analytics
Risks of Next Generation Audit Technologies-
• Public safety,cybersecurity,data privacy,data protection,lack of std,technical challenge
• Taxation,jurisdiction,customer protection
• Governance

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GROUP AUDIT

Q1) Mandatory as per Companies Act, 2013

• Co. subsidiaries, AC, JV

Own FS + CFS
• CFS Approved by BoD
Laid before AGM
• Co. attach with FS - statement of salient features of FS of subsidiary in Form AOC 1.
• CFS as per Schedule III of COA & AS.
• Co. not required to prepare CFS as per AS – sufficient – comply with CFS provisions in
Schedule III.

Q2) No CFS

• WOS/POS of another company & all members (vote ) – written intimation + proof
of delivery - do not object.
• Co. - securities not listed / not in process of listing on stock exchange in India or outside
India.
• Ultimate / intermediate holding company files CFS with ROC.

Q3) Investment Entity- No CFS if it is required to measure all subsidiaries at FVTPL (Ind AS
110) Definition of Investment Entity –

• IE Investors

• Commits to investors - business purpose - invest funds - returns from capital appreciation or
investment income or both.
• Measures performance of substantially all investments on FV basis.
Parent of IE - Consolidate all entity it controls, including those controlled through IE subsidiary,
unless parent is IE.

Q4) Responsibility of parent - Responsibility of PPCFS is of parent. This includes-

1) identifying components and including financial information of components to be included in

CFS.
2) identifying reportable segments for segmental reporting.
3) identifying RP & RPT for reporting.
4) Obtaining accurate and complete FI from components.
5) Making appropriate consolidation adjustments.
6) Harmonisation of accounting policies and accounting framework.
7) GAAP Conversion, where applicable.

Q5) Responsibility of auditor of CFS / Auditor’s objective

1) To satisfy himself – CFS as per AFRF.

2) To enable himself to express opinion on T&F view of CFS.
3) To enquire into matters – 143 (1) of COA 2013.
4) To report on matters – 143 (3) of COA 2013.
5) To validate requirement of preparation of CFS as per AFRF

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Q6) Auditor’s Considerations for Materiality

SA 600 - Using the work of another auditor – Audit of SFS - materiality computation - component
wise on standalone basis.

Audit of CFS - consider following for materiality –

1) Auditor compute materiality for group as a whole to assess appropriateness of

consolidation adjustments made by management.
2) Parent auditor can also use materiality – group level – to determine whether compo’s FS are
material to group.
3) Principal auditor – compute materiality for each component & communicate to component
auditor if he believes – reqd. for T&F view on CFS.
4) Principal auditor obtain confirmation from component auditors like independence, code of
ethics, etc.
While considering observations (modification/EOM para) of compo auditor in his report on SFS –
consider SA 600.

Q7) Plan Before CFS Audit / Auditing Consolidation

1) Understanding group structure & group wide control including IT system.

2) Understanding a/cing policies of parent, components, consolidation process, including
translation of FS of foreign components.
3) Determining & programming NTE of AP based on ROMM.
4) Determining extent of use of other auditor’s work.
5) Coordinating work to be performed.

Q8) For Completeness of Info of Components, what Audit Procedures To Follow?

1) Review of WP of prior yrs for known components

2) Review parent’s procedures for identification of various components
3) Review joint ventures & joint arrangements.
4) Review investments of parent & components to determine shareholding in other entities.
5) Review other arrangements entered by parent, not included in CFS.
6) Review stat. records of parent eg, registers under COA.

Q9) Consolidation Adjustments – PCA & CPCA

1) Permanent Consolidation Adjustments (PCA)

• Made only on 1st occasion/subsequent occasions in which change in shareholding of
particular entity consolidated.
• Types-
o Determination of G/w or capital reserve as per AS.
o Determination of equity attributable to MI/NCI.
• Auditor verify above calculation – appropriately made.
a. Auditor – attention - Preacquisition reserves of compo & date of investment in compo
b. Auditor–preacq. reserves allocated appropriately b/w parent and MI/NCI.
c. Auditor – changes in PCA on a/c of subsequent acq of shares in compo, disposal of compo in
subsequent yrs.

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• One subsidiary – G/w, another – CR. Parent – net off if permitted by AFRF. Auditor verify –
Gross G/w & CR on acq of various subsidiaries disclosed in notes to CFS.

2) Current Period Consolidation Adjustments (CPCA)

• Made in a/cing period for which consolidation done.
• Examples-
a.
Intra-group interest paid, recd/mgt fees.
b.
Intra-group indebtedness.
c.
Unrealised intragroup profit on assets acquired from/tfd to other subsidiaries.
d.
Adjustments of harmonising diff a/cing policies of parent and compo.
e.
GAAP conversion, in case of foreign compo.
f.
Record deferred tax on unrealised inter co. profit elimination as per Ind AS 12.
g.
Adjustments to FS for subsequent events/trans. b/w B/S date & AR date.
h.
Adjustments for trans. b/w compo B/S date & date of AR on group’s CFS when FS of
compo not upto B/S date of parent.
i. Determination of movement in equity attributable to MI/NCI since date of acquisition of
subsidiary (Ind AS : NCI -ve balance if NW of subsidiary -ve)
j. Adj. of deferred tax on a/c of temporary diff due to elimination of intragroup P/L.
• FS of compo drawn upto same reporting date of parent.
• If not done – adj (h)
• Diff b/w reporting dates:max 6 mth – AS, max 3 mth – Ind AS.
• Verification- Review memorandum records +
a. Verify that intragroup transactions & a/c balances eliminated.
b. Verify - CFS prepared – uniform accounting policies.
c. Verify adj to harmonise diff a/cing policies incl. GAAP conversion.
d. Verify adj of deferred tax on a/c of temporary diff due to elimination of intergroup P&L.
e. Verify calculation of MI/NCI.
Q10) Info Disclosed in CFS Separately for Parent & Compo, including Foreign Compo

1) Amt of net assets & net assets as % of conso net assets.

2) Amt of share in P/L & % share in P/L as % of conso P/L.
3) Amt of OCI & % of OCI as % of conso OCI.

Q11) Info Given In Notes To SFS of Parent, Subsidiary, need not be included in CFS

1)
Source from which bonus shares issued eg, capitalisation of profit/ reserve/SP A/c.
2)
Disclosure of unutilised money from issue indicating form in which unutilised funds invested.
3)
Disclosure – MSMED Act, 2006.
4)
Exp in forex – royalty, knowhow, professional & consultation fee, interest.
5)
Earning in forex-
• Export of goods calculated on FOB basis
• Royalty, knowhow, professional & consultation fee
• Interest and dividend
• Other income, indicating nature
6) Value of imports on CIF basis-
• Raw materials
• Components & spare parts
• Capital goods
Q12) Mgt Representation / SA 580 -WR
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1) Completeness of compo in CFS.
2) Identification of reportable segment for segmental reporting.
3) Identification of RP & RPT for reporting.
4) Appropriateness & completeness of PCA & CPCA, incl. elimination of intragroup trans.
Q13) Reporting

1) When PA = Auditor of all components

Auditor report –

a) Procedures of PPCFS as per AS. Deviation – SA 705.

b) Auditor – audit report – opinion whether CFS – T&F view of SOA as on B/S date, T&F view
of conso P/L – conso P&L statement.
c) If cash flow statement, opinion – T&F view of cash flow statement in CFS.

2) When PA is not auditor of all components

a) Consider SA 600.
b) SA 706 – Auditor consider necessary to make reference to audit of other auditors – AR on
CFS – disclose magnitude of portion of FS audited by other auditor by stating ₹/% of total
asset/revenue/cash flow of compo not audited by PA.
c) Total asset/revenue/CF – before PCA & CPCA.
d) Reference that part audit by other auditor is not qualification of opinion but indication of
divided responsibility.

3) When component AR – A/cing framework different than parent (eg, foreign compo)
a) Parent’s mgt converts compo FS to parent’s framework. Conversion adj. audited by PA for
suitability & appropriateness.
b) Alternatively – Compo prepare FS on basis of parent’s a/cing policy, outlined in group
accounting manual (GAM). Local compo auditor – audit & issue AR on compo FS.

4) When compo AR – Auditing framework diff. than parent

a) Audit – Indian GAAS (Normally)
b) Compo FS audited under framework corresponding to Indian GAAS.

5) Components not audited

a) PA evaluate possible modification in AR on CFS.
b) Evaluation necessary because auditor not able to obtain SAAE for consolidated balances.
c) Auditor evaluate both qualitative and quantitative factors.
Q14) Conso of Subsidiaries as per Companies (Ind AS) Rules, 2015 – Accounting Treatment

1) FS of parent & subsidiaries combined on line by line basis by adding assets, liabilities,
income, expense, cash flows – Ind AS 110.
2) Goodwill/CR & NCI determined - Ind AS 103.
3) Business under common control – Pooling of interest method – Ind AS 103.
4) Elimination of intragroup transactions – Ind AS 110.
5) Investment in associates & JVs - equity method – Ind AS 28. Interest in assets, liabilities,
revenue, expense in joint operation accounted as part of separate FS – Ind AS 111.

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CA SHANKAR LAKHWANI # Audit Made Easy
BANK & NBFC AUDIT

UNIT 1 – BANK AUDIT

Q1) Special audit considerations/peculiarities.

Nature of risk of Development of new products & services Effect of stat. & regulatory
trans. & banking practices requirements
Dependence on IT Scale of banking operations & significant exposure in short time period
Q2) Important points for preparation and audit of FS

1. Banking Regulation Act, 1949 – Third Schedule

Form A – Balance Sheet Form B – P/L A/c

2. Private bank - no mandatory branch audit.
3. Public sector/Private banks – Listed on RSE & SEBI LODR.
4. Nationalised/PSU banks – 4 or more firms of CA jointly act as Statutory Central Auditors
SCAs.
• Contents of appointment letter

Period of appointment Particulars of other SCAs Particulars of previous

auditors
Scope of assignment – special report Statement of division of work & review & reporting
by SCA in addition to main report responsibilities b/w joint auditors (Nationalised banks)
5. Authority appointing auditor-

Banking co. – AGM Nationalised bank - Bank appoints through board of directors.
RBI approval in both cases.

Q3) What info should bank share with auditors, considering importance of IT in PPFS?

Data integrity & data security MIS report generation & Business continuity plans &
periodicity disaster control plans
Data processing & data interface Overall IT policy, structure & envt of bank’s IT system

Q4) Key security control aspects that auditor needs to address while doing audit in
computerised bank.

1. Ensure that authorised and complete data is available for processing.

2. Ensure that system prevent unauthorised amendments to programmes.
3. Verify that changes in parameters are authenticated.
4. Verify that charges calculated manually are authorised.
5. Verify that A/c master & balance A/c cannot be modified except by authorised personnel.
Q5) Risk based internal audit is conducted based upon risk assessment of business & control
risk of branches. What are components of risk assessment process?

Identification of Assessment of Overall business risk Drawing risk matrix,

inherent business effectiveness of control and control risk. taking into a/c factors
risk (Business risk) systems (Control risk) like risk of branch.

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CA SHANKAR LAKHWANI # Audit Made Easy
Q6) Internal control in diff. areas of bank.

Ans. (A) GENERAL

1. Staff shifted frequently/without prior notice.

2. Financial powers of officers of different grades – defined.
3. Work of one checked by other.
4. Arithmetical accuracy of books proved every day.
5. Signature book - access to authorised officers.
(B) CASH

1. Kept in joint custody of 2 responsible officers.

2. In addition to checking by chief cashier, test checked daily.
3. High value cash transactions verified by higher officer.
4. Payment made only after vouchers passed by authorised officer.
5. Cashier – no access to customer ledger a/cs & Day book.
(C) CLEARINGS-

1. Electronic image of cheque is transmitted through clearing house.

2. Branch either call or email customer for cheque received of 5 lakh & above for inward
clearing. Auditor – test check.
3. Auditor checks whether signature verified by staff.
4. Unpaid cheque in outward clearing sent to customer.
(D) LOANS & ADVANCES

1.
Necessary documents executed by parties.
2.
Operation reviewed at least once in a year.
3.
Satisfy as to creditworthiness of borrower.
4.
All securities – received & returned by responsible officer & kept in joint custody of 2
officers.
5. All a/cs kept in drawing power & sanctioned limit. Additional temporary limit – sanctioned
for max 20% of existing limit & 90 days max tenure.
(E) DEMAND DRAFT & INTER BRANCH A/CS

1. Check sign on DD with sign book.

2. DD issued by branch - confirmed by advice to paying branch.
3. If paying branch doesn’t receive confirmation - take steps to know reason.
(F) CREDIT CARD OPERATIONS

1. There should be effective screening of applications.

2. Strict control over storage and issue of cards.
3. System to monitor and follow up customer payments.
4. System to ensure statements are sent regularly to customers.
5. All reimbursement – immediately charged to customer a/c.
Q7) Compliance with CRR & SLR reqt.

Ans. SLR - Statutory Liquidity Ratio

• Liquid assets maintained like gold & cash.

• Verify compliance on 12 odd dates of different months, not Friday.
• Report sent to bank’s top mgt & RBI.
• Audit approach & procedures-

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CA SHANKAR LAKHWANI # Audit Made Easy
o obtain understanding of RBI circular for DTL (Demand & Time Liabilities)
o Request branch auditor to send weekly T/B as on Friday to be consolidated at HO
o Examine consolidations of DTL, on test basis.
o Items excluded from DTL-
1. Paid up capital, reserve, cr. bal. of P/L A/c, loan from RBI, refinance from EXIM Bank,
SIDBI, NHB, NABARD.
2. Bill discounted by bank with eligible financial institution
3. Net income tax provision
4. Amount recd from DICGC for claims held by bank pending adjustments
5. Amount recd from ECGC by invoking guarantee
6. Amount recd from insurance company for ad hoc settlement of claim pending court
judgment.
7. Amount recd from court receiver
8. Net unrealised gain/loss from derivative transaction under trading portfolio
9. Income flows recd in advance like non refundable annual fees & other charges
10. Liabilities due to utilisation of limit under Bankers’ Acceptance Facility (BAF)
11. Part amt of recovery from borrowers for bad & doubtful debts.
12. Amount in INR against import bill & held in sundry deposit pending receipt of final rates.
13. Unadjusted deposit/bal. in Link branch for agency business like dividend/interest warrant,
refund of application money for shares/debentures to extent of payment by other branch,
not adjusted by link branch
14. Margins in sundry deposits for funded facility.
o Items included in DTL-
1. Net credit balance in branch adjustment a/c. Credit entries in branch adj a/c o/s for >5 yrs
taken at gross.
2. Reconciliation of nostro a/c with Nostro Mirror a/c.
3. Borrowings from abroad by Indian banks=liabilities to other(Take at gross)
4. Interest accrued on deposits-calculated on each reporting fortnight, whether or not
interest accounted in BOA so that bank’s liability reflected in total NDTL of same
fortnightly return. Cash collateral recd under collateralised derivative transaction as it is in
nature of ‘outside liabilities’.
o While examining DTL computation – Exempted categories of items –
1. Minimum eligible credit (EC) & o/s long-term bonds (LB) to finance infra loan & affordable
housing loan.
2. Eligible incremental FCNR(B) & NRE deposits of maturities of 3 yrs & above. Auditor verify
loans out of FCNR(B) deposits & inter-bank foreign currency (IBFC) deposits for reporting
in Form A return. Banks convert forex assets/liabilities (including borrowing) in USD, GBP,
JPY, Euro to INR at RBI reference rate. For other currency consider New York rate for
conversion to USD.
3. For conversion of forex assets/liabilities, reference rate from FBIL to be taken. If not
available-New York closing rate for conversion of currency to USD.
• Auditor to examine whether balance in branch adj a/c of foreign branch taken to a/c to
arrive at net balance in branch adj a/c.
• Auditor to examine correctness of data in Form A return for CRR & return in Form VIII
for SLR purpose on sample basis.
• Relevant info of branches in region consolidated at regional level. Auditor of region to
verify & report. Consolidated statement counter-signed by regional manager. Central

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CA SHANKAR LAKHWANI # Audit Made Easy
auditor apply audit procedures to consolidation for bank as a whole. Where such procedure
is followed, SCA describe in certificate.

Q8) Audit procedures to verify balance with RBI.

Verify ledger balance Review following in reconciliation statement –

with bank • Unresponded cash transaction
confirmation • Revenue items requiring adjustments
certificate at yr end • Other Dr/Cr entries in RBI statement, unresponded for >15 days
Q9) Audit procedures to verify balance with other banks (other than RBI)
Examine

No dr. for charges / cr. for No cheque in clearing is Large transactions in inter-bank
interest is outstanding outstanding account
Q10) Audit procedures to verify money at call & short notice.

1. Call loans verified with certificates of borrowers.

2. Interest properly accounted on year end outstanding balance.
3. Repayment from borrowing bank (call loans made & recd can’t be net off)
Q11) Audit procedures to verify investments.

Physical verification Separation of investment functions Examination of –

Reconciliation, Documents, Valuation
Q12) Audit approach for NPA.

Both for sale/purchase of NPA

Policy by Only such NPA sold which remained NPA NPA sold on Asset sold/purchased
BoD in books of bank for atleast 2 years cash basis “w/o recourse” only
Bank hasn’t purchased NPA which it originally sold
Things to be ensured for sale of NPA-

On sale, NPA has been If sale price < Net book If sale price > NBV, excess provision - not
removed from books of a/c value (NBV), shortfall – reversed, but utilised to meet shortfall
of selling bank. Dr to P/L A/c. on a/c of sale of other NPA.

Things to be ensured for purchase of NPA-

NPA should be subjected to Any recovery of NPA purchased from For purpose of capital
provisioning relevant to other banks is first adjusted against adequacy, banks assigned
classification status in acq cost & only excess recovered amt 100% risk weights to NPAs
books of purchasing bank. = profit. purchased from other banks.
Q13) Read only-

1. A/cs with temporary deficiencies-

• Banks shouldn’t classify advance a/c as NPA merely due to temporary deficiency like non-
availability of drawing power based on latest available stock statement, balance o/s
exceeding limit temporarily & non-renewal of limits on due date.
• Stock statement relied upon by banks to determine drawing power should not be older than
3 months. Otherwise, it is considered irregular.
2. Accounts where regular/ad hoc limits are not reviewed within 180 days from due date are
NPA.
3. Asset classification = borrower wise & not facility wise.

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CA SHANKAR LAKHWANI # Audit Made Easy
All facilities granted by bank = treated as NPA and not particular facility, which has become
•
irregular.
Q14) Government guaranteed advances.

1. If government guaranteed advance becomes NPA, then for income recognition purpose,
interest on such advance should not be taken to income unless interest is realised.
2. For asset classification purpose, credit facility backed by CG guarantee, though overdue,
can be treated as NPA only when CG repudiates guarantee, when invoked.
3. This exception is NA for SG guaranteed advance, where advance is to be considered as NPA
if it remains overdue for > 90 days.
4. In case bank has not invoked CG guarantee, though amount is overdue for long, reasoning
for the same should be taken and reported in LFAR.
Q15) Agricultural advances.

1. Ensure that NPA norms have been applied as per crop season determined by State Level
Bankers’ Committee in each state.
2. Depending on duration of crops (short/long-term), NPA norms would also be made applicable
to agricultural term loans.
3. Ensure these norms are applicable to all direct agricultural advances listed in master
circular on lending to priority sector.
4. For agricultural loans, other than circular, ensure that identification of NPAs has been done
on same basis as non-agricultural advances.
Q16) Restructured advances.

• Restructuring is an act, in which lender, for economic/legal reasons wrt borrower’s financial
difficulty, grants concession to borrower.
• Eg, modification of terms, alteration of instalment/repayment period.
• Imp. Points –
Auditor has to verify compliance with RBI circular.
o
Banks may restructure a/cs classified under std, substd & doubtful.
o
Banks can’t restructure a/cs with retrospective effect.
o
If banks receive application for restructuring– implies that a/c is intrinsically weak.
o
Auditors need to consider whether provision reqd for a/cs for which pending
o
approval for restructuring.
o On restructuring, a/c will downgrade from std to substd. NPAs will remain in same
category.
Q17) Fixed assets and other assets.

• Verify opening balance – FA schedule.

• Check documents/title deed.
• Reconcile FA register with ledger.
• If premises under construction, show in separate heading “Premises under construction”
• For self constructed FA, check bills.
• Leased FA – AS 19/Ind AS 116 – Leases
Q18) Banking

• Keywords – Stress testing & Basel III Framework

• Tier I Capital-
o Share capital + disclosed reserves
o Bank’s highest quality capital because fully available to cover losses
• Tier II Capital-

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CA SHANKAR LAKHWANI # Audit Made Easy
o Certain reserves + subordinated debt
• Loss absorption capacity of Tier II capital is lower than Tier I capital.
• Capital Risk Adequacy Ratio (CRAR)=Eligible total capital funds x 100
Risk weighted assets & off B/S items
• RBI requires banks to maintain minimum CRAR of 9% on ongoing basis.
Eg, for secured housing loans,
• upto 75 lakh – Risk weight is 50%
• > 75 lakh – 75%
• > 75 lakh – 100% (Loans to commercial real estate)
• For house loan of 60 lakh, risk weighted asset is 50% i.e. 30 lakh for denominator in CRAR
formula.
Q19) Examples of contingent liability.

Claims against bank, not Liability for partly Liability for o/s forward exchange &
acknowledged as debt paid investments derivative contracts
Guarantee given on Acceptance, endorsements & other obligations
behalf of constituents

Q20) Audit approach for contingent liability.

Ans. Auditor should obtain representation from management that-

[Link] off B/S trans have been accounted in books as & when such trans has taken place.
[Link] off B/S trans have been entered after due procedure.
[Link] off B/S trans - supported by documents.
[Link] yr end contingent liabilities – disclosed.
[Link] CL do not include crystallised liabilities which are of nature of loss/expense &
requires creation of provision in FS.
Q21) Acceptance, endorsement & other obligations.

Evaluate adequacy of IC over Verify balance of LOC from Examine whether bank incurred
issuance of LOC. bank register. potential financial obligation.
Q22) Bills for collection - audit procedures.

Ensure that bills drawn on other Verify bills for collection wrt Examine procedure for crediting
branches of bank are not corresponding register. party on whose behalf bill
included in bills for collection. collected.
Q23) Audit report.

Ans. Nationalised bank Auditor gives report to CG

Content of audit report-

1. Whether B/S is full & fair, with necessary particulars & properly drawn to exhibit T&F view.
2. In case auditor had called explanation, whether given and satisfactory.
3. Whether or not transactions of bank are within powers.
4. Whether returns recd from offices and branches – adequate.
5. Whether P&L A/c shows T&F balance of P&L.
6. Other matters
Q24) LFAR – Long Form Audit Report

1. Given by statutory branch as well as statutory central auditors.

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CA SHANKAR LAKHWANI # Audit Made Easy
[Link] form.
[Link] on cash, bank balance, investments, advances, deposits.
[Link] branch auditor will submit to statutory central auditor.
[Link] at head office.
[Link] central auditor submits to management.
[Link] submit to ACB, along with action taken to rectify irregularities.
[Link] of LFAR & agenda note - submit to RBI within 60 days of submission of LFAR by stat
auditors.
Q25) Report and certificate content.

Ans. Statutory Central auditor provides report and certificate on-

LFAR Report on compliance Asset liability Certificate for custody of unused bank
with SLR requirements management receipt forms & utilisation.
Report on instances of adverse credit – deposit ratio in rural areas.
Q26) Concurrent audit

1. Verification of trans. concurrently as & when trans. takes place.

2. Done by internal staff, not involved in operations or external auditor.
3. Purpose – Deviation from laid down procedures noticed immediately & quick action can be
taken.
4. Scope of concurrent audit-
o Scope determined by Bank’s Central Inspection & Audit Dept in consultation with
ACB.
o Check high risk transactions with large financial implication.
o RBI guidelines to be followed.
o Areas/scope of concurrent audit – cash, deposits, advances, investments, foreign
exchange, housekeeping, other items.
5. Bank ki marzi – external auditor or internal staff.
6. If internal staff - independent of branch.
7. Tenure of external concurrent auditor with a bank– max 5 years on continuous basis.
Tenure with 1 branch – max 3 years.
8. If external auditor – serious omission/commission. Then, appointment cancelled & report to
RBI & ICAI.
9. Terms of appointment and remuneration – decided by ACB.
Q27) Concurrent audit reporting.

1. Every bank has structured format. Major deficiencies highlighted in special note & given to
bank’s controlling offices. Quarterly review placed before ACB.
2. Zone wise reporting of findings to ACB & annual report of audit system placed before ACB.
3. Auditor discuss issues with branch manager before submission of report.
4. Minor irregularities rectified timely. Serious irregularities–reported to HO.
5. Fraud – immediately report to Inspection & Audit Dept (HO), Chief Vigilance Officer,
Branch Manager, unless involved in fraud.
6. Follow up by inspection and audit department.
Q28) Steps in audit.

Ans. Stage I – Initial Considerations

Acceptance & Declaration of Internal assignment Terms of Audit Engagement

Continuance indebtedness by statutory
auditors

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CA SHANKAR LAKHWANI # Audit Made Easy
Communication with Planning Establish engagement team
previous auditor
Stage II – Understanding

Bank & envt, including IC Bank’s a/cing process Risk mgt process
Stage III – Risk assessment

Identify & Assess risk of fraud, Assess Risk of outsourcing of activities

assess ROMM including money laundering specific risk
Stage IV – Execution

Eng. Team Response to Establish overall Audit Planning Audit Going Concern
Discussion assessed risk audit strategy Memorandum Materiality
Stage V – Reporting

Q29) Legal framework (Laws applicable to banks)

Banking Regulation Act, 1949 RBI Act, 1934 SBI Act, 1955
IT Act, 2000 COA, 2013
Q30) MCQ

Bank ka half yearly review (30/09 & 31/03) of investment portfolio.

Q31) Bonus Answer – Blank in exam – Internal control/ Audit Procedures/ Audit approach-

Auditor will verify amount, docs, compliance with RBI guidelines, signature, policy of BoD, books
Periodical inspection, Internal control

BONUS TIP : ASSERTION 1 LINE EXPLANATION TECHNIQUE-

For P/L Items - occurrence, completeness, accuracy, classification, cut-off.

For B/S Items - existence, completeness, valuation, presentation, rights, and obligation.

UNIT 2 - NBFC AUDIT

Q1) Definition.

As per RBI (Amendment) Act, 1997, Non Banking Financial Company-

Financial institution Non-banking institution which is co & principal Other non-banking

which is co. business is receiving deposits/ lending institution, notified in
Official Gazette
Q2) Principal Business Criteria (50% criteria or 50-50 test)

1. Co. is treated as NBFC when company’s financial assets constitute >50% of total assets
(net off by intangible assets) & income from financial assets is >50% of gross income.
o See figures of last audited balance sheet
o Co. fulfilling both criteria is NBFC & requires to be registered as NBFC by RBI.
2. Registration & regulation of NBFC - No NBFC is allowed to commence/carry on business
without
o Obtaining certificate of registration by RBI.
o Net owned fund of …… crore

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CA SHANKAR LAKHWANI # Audit Made Easy
• 10 crore for NBFCs currently applying for registration-from 01/10/22 (2 crore for NBFC
P2P, AA & NBFCs with no public funds & no customer interface; 300 crore for NBFC-IFC &
IDF-NBFC)
• For existing NBFCs, NOF is 2 crore which is to be increased to 10 crore for certain
NBFCs in phased manner as follows –

Q3) Categories of NBFC.

Deposit accepting NBFCs Non deposit accepting NBFCs – BL,ML,UL,TL

Q4) Co. exempted from registration.

Housing finance institutions Merchant banking company Stock exchange

Stock broking/sub broking Venture capital fund company Nidhi company
company
Insurance company Chit company Micro finance company
Securitisation and Mutual benefit company Alternative investment fund
reconstruction company (AIF) company

Core investment company (CIC)

-CIC of asset less than 100 crore, & asset of 100 crore & above but not accessing public
funds are exempted.

Q5) Bank vs NBFC.

1. NBFC can’t accept demand deposit but some NBFC accept term deposits.
2. NBFC do not form part of payment & settlement system & cannot issue cheques drawn on
itself.
3. Deposit insurance facility of Deposit Insurance & Credit Guarantee Corporation (DICGC) is
not available to depositors of NBFC, unlike banks.
4. No minimum exposure to priority sector reqd. by NBFC.
Q6) Audit procedures.

1. Ascertaining business of co.

o MoA/AoA, minutes of Board meeting, discussion with mgt.
2. Evaluation of internal control system
o Maintenance of a/cing system + IC – Responsibility of mgt.
o Loopholes & fraud identification.
o Determine NTE of AP & whether IC – adequate.
3. Registration with RBI
o Check Ans. 2
4. NBFC Acceptance of Public Deposit Directions - NBFC Acceptance of Public Deposits
(Reserve Bank) Directions, 2016 – Check 6 things
o Check whether NBFC has filed returns timely.

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CA SHANKAR LAKHWANI # Audit Made Easy
o For NBFC not accepting public deposit, check whether Board resolution passed that it
has neither accepted PD nor would it accept any PD.
o Test check interest calculation to ascertain that NBFC hasn’t paid excess interest.
o Check whether investment in liquid assets by NBFC accepting public deposit lodged in
safe custody with SCB.
o Verify deposit register & test check particulars in it for each depositor.
o Obtain copy of credit rating assigned to NBFC & check if PD held are as per credit
rating.
If upgrading/downgrading credit rating, NBFC will have to increase/reduce PD & inform in writing
to RBI.
-In downgrading below minimum grade, NBFC shall regularise excess deposit-
i. With immediate effect, stop accepting fresh deposit & renewing existing.
ii. All existing deposit shall run off to maturity.
iii. Report position within 15 working days to regional office of RBI.
-No matured PD shall be renewed w/o express & voluntary consent of depositor.
5. NBFC Prudential Norms
o Check compliance with prudential norms of income recognition, income from
investment, AS, asset classification, etc.
o Auditor should assess whether NBFC is complying with Prudential norms. Verify that
advances are classified as standard/ sub standard/doubtful/loss & proper provision is
made.
o For NPA, auditor has to check whether unrealised income hasn’t been taken to P/L
account on accrual basis. Income from NPA has to be accounted on realisation basis.
o Check whether all accounts classified as NPA in PY, continue to be shown as NPA in
CY. If not, examine whether it is regular and can be treated as performing.
Q7) Classification of fraud by NBFC.

1. Misappropriation and criminal breach of trust.

2. Irregularities in foreign exchange transactions.
3. Cheating and forgery.
4. Any other fraud.
5. Fraudulent encashment through forged instruments, manipulation of BoA.
6. Unauthorised credit facilities extended for reward.
7. Negligence and cash shortages.
Point 2 & 7-reported as fraud if intention is suspected/proved. But following cases where intention
is not suspected/proved are fraud –

Cash shortage >10,000 Cash shortage > 5,000

Detected by mgt/auditor/officer & not reported
Q8) Audit checklist/verification procedures for all NBFC. Eg NBFC – ICC

1. Test check bills recd from brokers wrt prices vis-à-vis stock market quotations on
respective dates.
2. Verify whether NBFC hasn’t advanced any loan against security of own shares.
3. Verify charges recd/paid in respect of securities lend/borrowed.
4. Obtain balance confirmation from concerned parties.
5. Obtain confirmation from approved intermediary regarding securities deposited/ borrowed
from it as on year end.
6. In respect of securities held through depository, obtain confirmation from depository as to
securities held by it on behalf of NBFC.
Q9) Ind AS applicability – All NBFCs

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CA SHANKAR LAKHWANI # Audit Made Easy
Q10) Diff. b/w Div II (Ind AS-Other than NBFC) & Div III (Ind AS-NBFC) of Sch III.

1. NBFC are allowed to present items of B/S in liquidity order which is not allowed for Div II.

2. NBFC is required to separately disclose by way of note any item of ‘other income’ or ‘other
expenditure’ in excess of 1% of total income.
Div II requires disclosure for any item of income/exp. exceeding 1% of revenue from
operations or ₹10,00,000, whichever is higher.
3. NBFC are required to separately disclose under ‘receivables’, debts due from LLP in which its
director is partner/member.
4. NBFC are required to disclose items of ‘revenue from operations’ and ‘other comprehensive
income’ on face of statement of P/L instead of showing them as part of notes.
5. Separate disclosure of T/R, which have significant increase in credit risk & credit impaired.
6. Condition for distribution for statutory reserves have to be separately disclosed in notes.
Q11) Audit report to BoD/Auditor’s additional report to BoD/auditor’s duty to report/
auditor’s obligation-

Ans. (I) For all NBFCs-

Auditor has to Whether min NOF If obtained, ensure co. is entitled to continue hold
examine that CoR criteria is met certificate & whether Principal Business Criteria is
obtained from RBI fulfilled as on 31/03 of applicable year
NOTE-Every NBFC submit certificate from stat auditor that it is eligible to hold CoR to Regional
Office of Dept of Non-Banking Supervision under whose jurisdiction NBFC is regd, within 5
working days from date of signing AR, but not later than 31st December of same year.

(II) For NBFC accepting public deposit (PD)-

o Whether co. violated restriction on acceptance of PD.

o Whether co. defaulted in paying to depositors, interest/principal after it became due.
o Whether co. furnished to RBI, quarterly returns on Prudential norms.
o Whether co. furnished to RBI, return on deposits specified in DNBS 01.
o Whether PD are in excess of permissible limits.
o Whether NBFC is accepting PD w/o min. investment grade credit rating.

(III) For NBFC not accepting PD – Whether

Board has passed resolution for Company has Complied with Prudential norms for income
non-acceptance of public deposit accepted PD recognition, AS, asset classification, etc.

NBFC is correctly classified as Whether Capital adequacy ratio disclosed in form NBS-7 has
NBFC Micro Finance Institutions correctly arrived & whether it is in compliance with min CRAR.
(MFI)

(IV) NBFC which is not required to hold CoR – Auditor has to include statement that company is
complying with RBI directions.

IMP. POINTS-

1. If AR unfavourable/qualified statement is given - state reason.

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CA SHANKAR LAKHWANI # Audit Made Easy
2. Obligation of auditor to submit exception report to RBI.
o In case of NBFC, statement as to any items above is unfavourable/qualified/non-complaint
with

RBI Act, 1934. NBFC Acceptance of Public Deposits (RBI) Directions, 2016
Master Direction – Reserve Bank of India (NBFC-Scale Based Regulation) Directions, 2023
o It shall be obligation of auditor to make report containing details of unfavourable/qualified
statements to Regional office of Dept of Non-Banking Supervision of RBI.
o It shall be duty of auditor to report only contraventions of RBI Act, 1934 & directions &
such report shall not contain any statement of compliance with any provisions.

Q12) Prudential Norms

(I) Capital Requirements- Every NBFC shall maintain capital ratio of min. 15% of risk weighted
assets of which Tier I capital of NBFC (except NBFC-MFI) shall be 10% min. If lending against
gold jewellery (loan comprising 50% or more of financial assets), Tier I capital min 12%

Tier 1 capital for NBFCs (except NBFC-BL) is sum of –

1. Owned fund as reduced by investment in shares of other NBFCs, shares, debentures, bonds,
o/s loans & advances, including hire purchase & lease finance made to & deposits with
subsidiaries & companies in same group exceeding, in aggregate, 10% of owned fund.
2. Perpetual debt instrument issued by non-deposit taking NBFCs in each year to extent it
doesn’t exceed 15% of aggregate Tier 1 capital of such company as on 31st March of previous
accounting year.
NOTE–NBFC–BL aren’t eligible to include perpetual debt instrument in Tier 1 capital.

Tier 2 capital for NBFCs (except NBFC-BL) is sum of –

1. Preference shares except those which are compulsory convertible into equity.
2. Revaluation reserve at discounted rate of 55%
3. General provisions (including that for standard assets) & loss reserves to extent these
aren’t attributable to actual diminution in value or identifiable potential loss in any specific
asset & are available to meet unexpected loss to extent of one & one fourth % of risk
weighted assets.
4. Hybrid debt capital instruments
5. Subordinated debt
6. Perpetual debt instrument issued by non-deposit taking NBFC in excess of what qualifies for
Tier 1 capital.
to extent aggregate doesn’t exceed Tier 1 capital.
NOTE–NBFC–BL aren’t eligible to include perpetual debt instrument in Tier 2 capital.

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CA SHANKAR LAKHWANI # Audit Made Easy

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CA SHANKAR LAKHWANI # Audit Made Easy

(II) Income Recognition/Asset classification (except NBFC-MFI)– Every NBFC classify loans and
advances into standard /substandard/doubtful/loss assets.

“Standard asset” means asset in respect of which no default in repayment of principal/ interest.

“Sub std asset” – Asset classified as NPA for not exceeding 18 mth – NBFC-BL

for not exceeding 12 mth – NBFC-ML & above

Asset where terms for interest/principal are renegotiated until expiry of 1 year of satisfactory
performance.

“Doubtful asset” – Asset which remains sub std for >18 mth – NBFC-BL

for >12 mth – NBFC-ML & above

“Loss asset”-Asset identified as loss asset by NBFC to the extent it isn’t w/off or non
recoverability due to erosion in value of security.

“NPA” means overdue for >180 days. Classification – Borrower wise & not facility wise except
lease & hire purchase.

Period of >180 days-adjusted as per Glide Path: NPA classification norm stands changed to overdue
period of >90 days for applicable NBFCs.

NPA Norms Timeline

st
>150 days overdue By 31 March, 2024
>120 days overdue By 31st March, 2025
>90 days overdue By 31st March, 2026
Glide path NA to NBFCs which are already required to follow 90 day NPA norm.

Q13) Provisioning requirements (except NBFC-MFI)

1. Loss assets – 100% of outstanding (o/s) provided for.

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CA SHANKAR LAKHWANI # Audit Made Easy
2. Doubtful assets

Unsecured – 100% o/s provided for Secured

Period for which doubtful % of provision

Upto 1 year 20

1-3 years 30

>3 years 50

3. Substandard asset – 10% of total o/s

4. Standard asset – 0.25% for NBFC-BL & 0.40% for NBFC-ML. Provision for standard
assets–Don’t net from gross advances but shown separately as ‘Contingent provisions against
standard assets’ in B/S.

Q14) Types of NBFC (kind of activities)

Investment and credit company Infrastructure finance company Core investment company
(ICC) (IFC) (CIC)
Infrastructure debt fund NBFC NBFC – Micro Finance Institution NBFC – Factors
(IDF – NBFC) (NBFC – MFI)
NBFC – Non Operative Financial Asset finance co., Invst Co., Loan co., mortgage guarantee co.
Holding Co. (NOFHC)

Q15) CARO 2020 – Clause xvi

Report “whether co. is reqd to be regd u/s 45IA of RBI Act, 1934 & whether reg. obtained”
Check 50% criteria to know registration requirement and minimum NOF.
Eg, company with NOF 1.5 crore & not having reg. So report as per clause xvi.
PRO TIP -If question says about audit reporting & is confusing you, write any 5-6 points from
question 11.

Q16) NBFC classification as per scale-based regulation (SBR)

NBFC–Base Layer NBFC-Middle Layer NBFC-Upper Layer NBFC-Top Layer

(NBFC-BL) (NBFC-ML) (NBFC-UL) (NBFC-TL)

1. NBFC – BL :
A. Non-deposit taking NBFC below asset size of 1000 crore.
B. NBFC with following activities

NBFC-Peer to Peer NBFC-Account Non Operative NBFC not availing public

Lending Platform Aggregator Financial Holding Co. funds & not having
(NBFC-P2P) (NBFC-AA) (NOFHC) customer interface

2. NBFC – ML :
A. All deposit taking NBFCs, irrespective of asset size (NBFC -D)
B. Non-deposit taking NBFCs with asset size of 1000 crore & above.

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CA SHANKAR LAKHWANI # Audit Made Easy
C. NBFC with following activities-

Standalone Infrastructure Core investment Housing finance Infrastructure

Primary Dealers debt fund NBFCs Co. (CICs) co. (HFCs) finance co. (IFC)
(SPDs) (IDF-NBFCs)

3. NBFC -UL :
A. NBFC identified by RBI requiring enhanced regulatory requirement.
B. Top 10 eligible NBFCs in terms of asset size, irrespective of other factors.

4. NBFC – TL : Empty. Populated if RBI is of opinion that there is substantial increase in

potential systemic risk from specific NBFCs in Upper Layer. Move to TL from UL.

-Imp. Points – (Categorisation of NBFCs – specific activity)

SI-always in ML, CHI & NBFC-D:ML/UL, Govt owned NBFCs – BL/ML

IMM – Any Layer

NBFC-Invst & Credit Co. NBFC Micro Finance Institution NBFC Factors & Mortgage
(NBFC-ICC) (NBFC-MFI) Guarantee Co. (NBFC-MGC)

Yes, I will definitely clear my CA Exams 30

CA SHANKAR LAKHWANI # Audit Made Easy
PSU AUDIT

Q1) Framework for govt audit.

1. Performed by C&AG through IAAD.

2. Article 148-151 of Constitution – Role of C&AG.
o Article 148 –
i. Appointment of C&AG by President.
ii. Removal of C&AG - proven misbehaviour/incapacity.
iii. Salary / T&C – Parliament.
o Article 149 –
i. Functions & powers of C&AG as per C&AG’s (Duties, Powers & Conditions of
Service) Act, 1971.
o Article 150 –
i. President prescribe form of accounts.
o Article 151 –
i. Audit report of C&AG.
ii. CG submit President laid Parliament
iii. SG submit Governor laid Legislative Assembly
3. As per Act, C&AG hold office for 6 yrs or upto age of 65 years, whichever is earlier.
4. Resign to President.

Q2) Financial committees of Parliament.

1. Public Accounts Committee (PAC) – Duty to satisfy itself that –

o Money disbursed legally on purpose to which applied.
o Expenditure was authorised.
o Re- appropriation as per provisions.
o Examine C&AG report on a/cs of autonomous & semi autonomous bodies.

2. Estimates Committee (EC) -Examine estimates with view to -

o Report what economies, improvement in org., efficiency may be effected.
o Suggest alternative policies.
o Examine if money well laid out within limit.
o Suggest form in which estimates presented to Parliament.

3. Committee on Public Undertakings (COPU)

o To examine reports & accounts of PU.
o To examine reports of C&AG on PU.
o To examine autonomy & efficiency of PU & to see if they are managed as per sound business
principles & prudent commercial practices.
o To exercise other functions vested in PAC and EC, if allotted by speaker.

Q3) C&AG’s Role

Friend, philosopher, Guide of committees.

1. His reports are basis of committees’ working, although they are not precluded from
examining other issues.
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CA SHANKAR LAKHWANI # Audit Made Easy
2. He scrutinises notes – ministries submit committees & helps committees to check
correctness & facts in draft report.
3. Financial Committees report & recommendations Parliament/SL
Dept of Govt Recommendation Committees
Inform action taken
Action taken report

Parliament/SL
4. For AR, which couldn’t be discussed in detail by committees, written ans. obtained from
dept & sometimes incorporated in report to Parliament/SL.

Q4) Audit by C&AG

Financial Compliance Performance

Government audit - 2 elements

Fiscal accountability Managerial accountability

Audit of provision of funds, Audit of economy, efficiency & effectiveness
sanctions, compliance, propriety

-Managerial accountability= efficiency-cum-performance audit.

Q5) Elements of PSU audit.

Three parties SM, criteria, SMI Types of engagement

A. 3 Parties-

Auditor Responsible party (RP) Intended users

SAI, India Auditable entities & its Individuals/org./classes for whom
TCWG auditor prepares AR.

C&AG & IAAD constitute

SAI
Senior functionaries of
SAI representing C&AG in
state are called
Accountants General.

B. SM, criteria, SMI-

o SM (Subject matter) – ICA measured against criteria.
o Criteria – benchmarks
o SMI (Subject Matter Info) – Outcome of measuring SM against criteria

C. Types of engagement

Attestation engagement Direct reporting engagement

RP measures SM against criteria & Auditor measures SM against criteria. Eg,
presents SMI. Auditor gathers SAAE to performance & compliance audit.

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CA SHANKAR LAKHWANI # Audit Made Easy
provide reasonable basis for expressing
conclusion. Eg, financial audit.

Q6) Financial and compliance audit.

1. Financial Audit Conducted to express audit opinion on FS and

enhance confidence of intended users in FS.
2. Compliance audit Independent assessment of whether given SM is
in compliance with applicable criteria.
Compliance audit is concerned with –

A. Regularity – adherence of SM to formal criteria emanating from Laws/Reg./Agreements

B. Propriety – observance of general principles of sound FM & ethical conduct of public
officials.
Compliance audit is conducted–

i. with audit of FS.

ii. Separately as individual compliance audit.
iii. In combo with performance auditing.

Q7) Performance audit.

• Objective and systematic examination of evidence

• To provide independent assessment of performance of govt org/program /activity
• To provide info to improve public accountability & facilitate DM by parties with
responsibility to oversee corrective action.
• Performance audit address issues of economy, efficiency, & effectiveness

1. ECONOMY -Minimising cost of resources used – appropriate quantity, quality, best price.

2. EFFICIENCY – Input output ratio, min input – max output. Auditing efficiency embraces
aspects like whether –
o Sound procurement practices followed.
o Resources properly protected and maintained.
o Human/financial/other resources efficiently used.
o Optimum amount of resources used in producing appropriate quality/qty of G&S.
o Efficient operating procedures used.
o Objectives of public sector programmes met cost effectively.

3. EFFECTIVENESS -Extent to which objectives achieved and relation between intended

impact and actual impact of activity.
In auditing effectiveness, performance audit, may –
o Identify factors inhibiting satisfactory performance or goal fulfillment.
o Identify ways of making programmes work more effectively.
o Assess compliance with L/R applicable to program.
o Assess effectiveness of program and individual program components.
o Assess adequacy of mgt control system to measure, monitor & report programme’s
effectiveness.

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CA SHANKAR LAKHWANI # Audit Made Easy
Q8) Planning for performance audit/factors considered/steps.

1) Understanding entity/programme.
2) Defining objectives and scope of audit.
3) Determining audit criteria.
4) Deciding audit approach.
5) Developing audit questions.
6) Assessing audit team skills and whether outside expertise required.
7) Preparing audit design matrix.
8) Establishing time table and resources.
9) Intimation of audit programme to audit entities.

Q9) Understanding Entity/Programme - Sources

a) Docs of entity - Policy files, annual report, accounts.

b) Legislative docs – Legislation, Parliamentary questions & debates, report of PAC, EC, COPU,
letters from MP.
c) Policy docs – Docs of planning commission, MoF.
d) Special focus groups – Report of World Bank, RBI, NGOs.
e) Academic/special research – Independent evaluation, academic research by other govt and
other SAIs.
f) Past audits – Past financial and performance audit.
g) Media coverage – Print/electronic media.

Q10) Determining audit criteria. - Sources

a) Procedure manuals of entity.

b) Policies, standards, directives, guidelines.
c) Criteria used by same/other entity in similar activity.
d) Independent expert opinion and know how.
e) New/established scientific knowledge/other info.
f) General management and SM literature and research papers.

Q11) Deciding audit approach.

a) Analysis of procedures – Review of systems for planning, conducting, checking, monitoring

activity.
b) Analysis of results – Auditor – output input analysis to determine efficiency of program.
c) Quantitative analysis – Examination of available data of financials like earning, revenue or
data of program implementation like details of beneficiary.
d) Case studies – Descriptive analysis of entity, scheme, program. Analysis of particular issue
within context of whole area.
e) Use of existing data – Audit staff investigates data held by entity mgt + other sources.
f) Surveys – Collecting info from members of population to assess interrelation of events &
conditions.
• Audit Design Matrix (ADM) includes audit objective, audit questions, audit criteria,
evidence, data collection & analysis method.

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CA SHANKAR LAKHWANI # Audit Made Easy
Q12) Comprehensive audit.

C&AG conducts efficiency-cum-performance audit other than field already covered by IA of

individual concerns/professional auditors. He locates weak areas.

• Issues/matters in comprehensive audit to be examined –

1) Has planned rate of return been achieved?
2) Is there poor/inefficient project planning?
3) Are system of project formulation & execution sound? Are there inadequacies? What is
effect on capital cost?
4) If enterprise has adequate system of Repairs & Maintenance?
5) Are procedures effective & economical?
6) Does enterprise has R&D programmes? What is performance by adopting new process,
techno, profits & cost by technological progress?

Q13) Propriety audit.

1) Verification of trans. on tests of public interest, commonly accepted customs & std of
conduct.
2) Auditor bring out cases of improper, avoidable, infructuous exp., even if exp. is as per
rules.
-Principles of propriety audit –

1) Exp. is not prima facie more than occasion demands & every official exercise same degree
of vigilance for exp. as person of ordinary prudence would for own money.
2) Authority exercise power to sanction exp. to pass order – not directly/ indirectly accruing
to own advantage.
3) Funds not utilised for benefit of particular/group of persons.
4) Apart from agreed remuneration, no other avenue kept open to indirectly benefit mgt
personnel/employees/others.
-Functions of auditor in context of propriety audit-

1)
See that all exp. properly planned.
2)
See that size & channel of exp rightful & expected to give max results.
3)
See that substitute plan of action can bring improvement on current operation.
4)
Appraise whether exp. likely to give optimum result.
5)
Examine actions & decisions of mgt to see that they are conductive to public interests &
they meet std of conduct.
-Problems in propriety audit –

1) Distinct nature.
2) Formulation of auditing proposition.
3) Subjective – difficult to establish std of public interest, commonly accepted customs, std
for conduct. Solution – Norms of property laid by C&AG.
4) Auditor’s judgement – objective. Otherwise – Propriety audit – counterproductive.

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CA SHANKAR LAKHWANI # Audit Made Easy
Q14) Audit report of C&AG

Presented to Parliament in several parts consisting –

1) Intro - General review of working results of govt co., deemed govt co. & Corporations.
2) Results of comprehensive appraisal of selected undertakings conducted by Audit Board.
3) Resume of co. auditors’ report submitted by them under directions of C&AG.
4) Significant results of audit of undertakings not taken up for appraisal by Audit Board.
-For certain states, C&AG submit separate audit report (commercial) to legislature, while for
other states/UTs with legislature, there is commercial chapter in main auditor report.

Q15) Principles of PSU audit.

1) General principles –
• Quality control
• Audit risk
• Materiality
• Documentation
• Communication
• Ethics and independence
• Audit team management and skill
• Professional judgement, due care and skepticism

2) Principles related to audit process –

• Planning audit-
i. Establish terms of audit.
ii. Obtain understanding of entity.
iii. Conduct Risk assessment of problem analysis.
iv. Identify risk of fraud.
v. Develop audit plan.
• Conducting audit-
i. Perform planned AP to obtain AE.
ii. Evaluate AE and draw conclusions.
• Reporting and follow up –
i. Prepare report based on conclusions.
ii. Follow up on reported matters.

Yes, I will definitely clear my CA Exams 36

CA SHANKAR LAKHWANI # Audit Made Easy
INTERNAL AUDIT

Q1) Meaning of Internal Audit (IA)

IA provides independent assurance on effectiveness of internal control & risk mgt process to
enhance governance & achieve organizational objectives.

Q2) Objectives & scope of IA Function as per SA 610-’Using the work of Internal Auditor’

1. Examination of financial & operating info-

o Eg,IA of sales record, sales commission to identify correctness of revenue
2. Monitoring of Internal control-
o Eg,3 way match-purchase order,material receipt,vendor invoice
3. Review of compliance with law & regulations-
o Eg,New Tax Regime
4. Review of operating activities-
o Eg,Review inventory mgt activity & handling
5. Risk Management-
o Eg,Evaluation of risk exposure for complex financial instrument trans.
6. Governance
o Eg,Governance in accomplishment of objectives on ethics/values

Q3) Applicability of IA-Sec 138 of Companies Act,2013-(Comply any 1)

• listed company
• unlisted public company-
o PUSC 50cr or more in last FY,or
o turnover 200cr or more in last FY,or
o o/s loan from bank/public FI >100cr at any point of time in last FY,or
o o/s deposit 25cr or more at any point of time in last FY
• pvt. company-
o Turnover 200cr or more in last FY,or
o o/s loan from bank/public FI >100cr at any point of time in last FY
Comply within 6 months of applicability

Q4) Who formulates objectives of IA?

• Sec 138 of Companies Act -AC/BoD, with mgt & Chief of IA

• Other org.-Those who appoint IAr

Q5) Eligibility of Internal Auditor-

• Individual/firm/body corporate
• CA/CMA(whether in practice or not)/Decided by Board
• May/may not employee of co.
• Part of mgt & not merely assistant

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CA SHANKAR LAKHWANI # Audit Made Easy
Q6) Std on IA(SIA)210-Managing IA Function,IA Function does activities to achieve
objectives-

• Identify, source, engage & manage external expert & technical solution
• Define overall plan, scope & methodology of IA Function periodically
• Develop quality evaluation & improvement program
• Communicate & engage stakeholders about progress & objectives
• Monitor audit assignment, planning, execution, reporting of finding,closure of observation

Q7) Internal Auditor’s Responsibilities wrt accounting function & financial records-

• Internal auditor-independent status

• operate independently of a/cing staff & not divest with responsibility
• observe facts & report to authority
• Not perform executive function
• ascertain adequacy of internal control by exam. of a/cing procedures

Q8) Internal Audit Plan

Developed & documented by internal auditor, in consultation with TCWG, including AC.
Developed in way that all business processes of financial & operational activities are reviewed by
internal audit function within defined time & ensuring appropriate consideration made & balance
ensured to following-
• Risk underlying business process
• Risk appetite of organization
• Value that IA can provide to org.
• Effort involved to conduct IA for particular business process
• Coverage of all auditable areas within defined time range

Q9) Scope of Internal Auditor’s work-

• Review of Internal Control System & Procedures-

o Assessing design,operational efficiency & effectiveness of IC System
o Consider limitations of IC-cost benefit comparison,human error,collusion
• Review of Custodianship & safeguarding of Assets-
o Verify existence of asset
o Review segregation of duties is in place
o Ensure all assets accounted fully
o Review control system for intangible [Link] procedures related to credit control
• Review of Compliance with Policies,Plans,Procedures & Regulations-
o Examine system of periodical review of existing policies in case of change in method
& nature of operations.
o Point out specific weakness & suggest remedial action
• Review of Relevance & Reliability of Information-
o Review information system
o Examine if reporting by exception [Link] highlight significant & distinctive
features
• Review of Organisation Structure-
o Review manner in which activities of enterprise grouped for managerial control

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CA SHANKAR LAKHWANI # Audit Made Easy
o Examine reasonableness of span of control(no. of subordinates) of each executive
o Review SoD considered in org. structure
• Review of Utilisation of Resources-
o Check if proper operating std & norms established
o If wide divergence b/w actual & std performance, consider reason
• Review of Accomplishment of Goals & Objectives-
o Review objectives of enterprise to see if clearly stated & attainable
o Examine if objectives in precise quantifiable terms

Q10) Independence, Integrity & Objectivity of Internal Auditor-

• Free of undue influence/[Link] in mind+appearance

• Honest,truthful,high integrity,fair,avoid conflict of interest,no undue advantage
• Objective,No bias/prejudice

Q11) Qualities of Internal Auditor-

• Special expertise to evaluate mgt control system,specially financial & a/cing controls
• A/cing & financial expertise
• Knowledge of commerce,law,tax,cost a/cing,economics,quantitative method,EDP system
• Provide assurance to mgt that confidentiality of info maintained
• Understanding mgt principle, technique
• Understanding a/cing software,ERP system; knowldege of IT controls

Q12) Performing Internal Audit Engagement-

STEP 1-Obtain knowledge of business & Environment

• Meeting with stakeholders,BoD,KMP
• Understanding docs-SOPs,FS
STEP 2-Perform Audit Planning
• Plan audit engagement-SIA 310-Planning IA [Link] approved by AC/BoD
STEP 3-Gather required information
• Obtain info directly from source & check correctness & integrity
STEP 4-Perform audit checks
• Collate data & perform analytical procedures(AP) for key [Link] as per SIA 6
• SIA 5-Sampling (to select samples)
• SIA 330-IA Documentation (for IA work papers)
STEP 5-Reporting of Internal Audit Issues
• Draft report of IA issues covering business process reviewed as per scope,audit coverage,
exclusions,gaps,etc
• Review mgt action against those agreed in previous audit & report follow up in report
• IA circulate Final report & findings to AC.

Q13) Internal Audit Report

• If Internal auditor identifies fraud(actual/suspected)/misappropriation of asset-

Immediately report to mgt
• SIA 370-Reporting results,reporting of IA result in 2 stages-

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CA SHANKAR LAKHWANI # Audit Made Easy
o At end of assignment,IA Report covering area,function prepared by Internal auditor
highlighting key [Link] to auditee;copies shared to local/executive mgt
o Periodically,at close of plan period,comprehensive report of all IA activities covering
entity & plan period prepared by CIA (or EP in case of external service provider).
Reporting normally quarterly & submitted to generally [Link] part of IA Reports
may form part of periodic(Eg,Quarterly) report shared with AC.
SIA 370 deals with Internal auditor’s responsibility to issue only 1st type of report.

Q14) Elements in IA Report-

• Overview of objectives,scope & approach of assignment

• Fact that IA conducted as per SIA
• Executive summary of key observation of imp aspects,specific to scope of assignment
• Summary of corrective action for each observation
• Nature of assurance derived from observation

Q15) Form & content of Report-

Decided by internal auditor based on judgement,in consultation with [Link] IA report in final
form unless written draft previously shared with auditee.
Typical IA report includes-
• Audit scope
• Audit period
• Executive summary
• Summary of critical findings
• Detailed audit finding with elaboration on business impact & root cause of issues

Q16) Documentation-

• Copies of draft & final IA report,cross referenced to observations

• Mgt action plan counter signed by respective mgt personnel

Q17) Follow up-

• SIA 390-Monitoring & Reporting of Prior Audit Issues, CIA responsible for monitoring
closure of such issues by action plan.
• Responsibility to implement action plan is of mgt
• Internal auditor review if follow up by mgt on basis of [Link] no action taken in
reasonable time-draw mgt [Link] mgt not implemented recommendations, internal
auditor ascertain reasons
• If mgt accepted recommendation, internal auditor periodically review manner & extent of
implementation & report to mgt which recommendation not implemented fully/partly

Q18) Relation between Internal (IAr) & External Auditors (EAr)-

• Scope & objective of IA depends on size & structure of entity & mgt [Link]
auditor-areas like review of a/cing system & IC,exam. of financial & operating [Link] is
overlap b/w work of IAr &EAr

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CA SHANKAR LAKHWANI # Audit Made Easy
• Work of IAr has imp bearing on work of Ear.
• EAr-Examine scope & effectiveness of work of IAr.
• Independence of IAr & status in org. determine effectiveness of audit
• EAr evaluate IA function to determine NTE of compliance & substantive procedures.

Q19) Diff. b/w Internal & External Audit

BASIS INTERNAL AUDIT EXTERNAL AUDIT

Independent IA Function within org/external

Performed by Independent body,not part of org
body

Status of
Can be employee Not employee
auditor

Appointment IAr appointed by AC/BoD EAr appointed by members

Users of
Top mgt & referred by EAr Stakeholders
report

IAr examine adequacy of operational controls EAr examine accuracy & validity
Examination
of org of FS

Period Continuously throughout yr Once in yr

IA report-IC weakness & effectiveness of Opinion on truthfulness & fairness

Reporting
operational activities of FS

Q20) Audit Trail (Edit Log)

Visible trail of evidence to trace info in report back to original input [Link] is chronological
record of changes(creating new,updating,deleting data) to data
Records maintained as audit trail include following info-
• when changes made i.e., date & time
• who made change i.e, user ID
• what data was changed i.e., data/transaction reference
ICs to be implemented/IT Controls-
• Controls to ensure audit trail feature not disabled
• Controls to ensure User ID given to each individual/not shared
• Controls to ensure change to configuration of audit trail authorized & log maintained
• Controls to ensure periodic backup of audit trails taken+archived
• Controls to ensure access to audit trail disabled & access log maintained

Yes, I will definitely clear my CA Exams 41

CA SHANKAR LAKHWANI # Audit Made Easy
DUE DILIGENCE

Q1) Audit vs DD

Audit DD
Independent -examination of potential investment to confirm material facts of prospective
examination of business opportunity.
FS to express -Review of financial and non-financial records.
opinion. -Take care reasonable person would before entering into trans. with other party.

Q2) Importance of DD

To confirm that To identify potential To gain useful info for asset To verify that trans.
business is what ‘deal killer’ defects in valuation, defining complies with
it appears to be. target co. & avoid bad representation, warranties & invst/acq. criteria.
business transaction. negotiating price concession

Q3) Classification of DD

1) Personnel DD – Personnel policies in line & changed with restructuring.

2) Information systems DD – Computer system.
3) Commercial/Operational DD – Done by acquire enterprise. SOC evaluation (Strategic,
operational, commercial) Eg, whether merger will create operational synergy.
4) Legal DD – Legal aspects.
5) Environmental DD – Entity’s envt, flexibility & adaptiveness to acquirer entity.
6) Financial DD – Analysis of BoA & other fin. matters. Its performed after commercial DD.
7) Tax DD – Separate DD exercise but since its integral component of financial status of co.,
generally included in [Link] effect of M&A.

Q4) Mr. A wants to sell business. B ltd. wants to buy business. You are doing DD audit to
decide whether its worthwhile to buy business. What procedures to follow before advice? Or
DD process includes some objectives for verification areas. What are they?

Brief description of history of business Accounting policies & practices Mgt info system
Background and standing of promoters Trading results of both past A&L of latest B/S
and recent past
-SCOPE OF FINANCIAL DD-

A/cing policies Review of FS Financial projection Cash flow Taxation

Q5) DD for hidden liabilities

Co. may not show SCN which have not matured into demands as contingent liabilities – material &
imp.

Tax liability of DT/IDT.

Tax Long pending sales tax assessment.
Pending final assessment of custom duty where only provisional
assessment completed

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CA SHANKAR LAKHWANI # Audit Made Easy
Unresolved labour litigation.
Labour Unfunded gratuity/superannuation/leave salary liability.
Huge labour claims under negotiation since labour wage agreement
expired.

Q6) DD for over valued assets

Uncollected receivables Litigated assets and property Intangible assets of no value

Investment carried at cost Investment with very low Deferrred revenue expenditure
though realisable value is rate of return
much lower

Q7) DD for cash flow

1) Is co. able to honor commitments to T/P, banks, government, etc.?

2) How well is company able to turn its T/R and inventories?
3) How well does it deploy funds?
4) Are there idle funds lying/Is co. able to take max benefits out of available funds?
5) What is investment pattern of company and are they easily realisable?

Q8) Work approach to DD

Reviewing & reporting Assessing business Working through DD Helping prepare offer
on financials of target first hand by site Process with based on completion
co. visit. acquisitioning co. by of DD.
defining key areas.

Q9) How to conduct DD?

1) Start with open mind. Don’t assume that wrong will be found. Identify trouble spots & ask
for explanation.
2) Make best team - Internal/external experts – check experience
3) To get 360° view – get help in all areas like finance, tax, law.
4) Talk to suppliers, customers, employees, business partners.
5) Take risk management approach.
6) Prepare comprehensive report – compliance and substantive risk.

Q10) Contents of DD report/DD review report

EI Executive summary, Introduction

BOT Background of target co., objective of DD, Terms of reference & scope of verification
BSO Brief history of co., shareholding pattern, observations on review
AAA Assessment of mgt structure, financial liabilities & valuation of assets
Q11) Can non CA perform DD? – DD can be done by any person.

Q12) Areas where DD can be done?

Public offerings Venture capital financing Corporate restructuring Disinvestment

Note – SWOT analysis is part of DD.

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Q13) Mr X – credit manager of SBI. A ltd. wants 10 cr loan from SBI. Mr X checks past
history of A Ltd, background of promoters, shareholding pattern, nature of business, past
and future financial analysis, SWOT analysis, net worth of directors, CIBIL score,
creditworthiness of company and promoters. Identify activity done by Mr. X and discuss its
nature.

DD – Due Diligence. Prudence activity. Ans. 1 DD Part.

INVESTIGATION

Q1) Audit versus investigation.

Basis Investigation Audit

Objective -Establishing fact Whether FS gives T&F view of state of
-Assessing particular situation. affairs & working results .
Reporting Outcome reported to person on whose Outcome reported to owners of business
behalf investigation done. entity.
Evidence Conclusive evidence Prima-facie evidence
Appointing Even 3rd party can appoint investigator . Owners/shareholders of co. appoint
Agency auditor .
Inherent
limitations
Periodicity No rigid time frame. May take even year Quarterly/half yearly/ yearly

Q2) Steps in investigation.

1) Determination of objectives and establishment of scope of investigation.

2) Formulation of investigation programme – Investigation programme should be drawn up
having regard to –
• Nature of business.
• Instructions of client embodying objectives and scope of work.
• Necessity to extend investigation into books of others.
• Scope and depth of investigation.
• Structure of business organisation.
3) Collection of evidence
4) Analysis and interpretation of findings
5) Reporting of findings – Nature of report depends on client’s instructions & investigator’s
findings

Q3) Imp. issues to be kept in mind by investigator while preparing report.

Every word/expression should be Report should not Relevant facts should be linked
properly considered so that possibility contain anything which with evidence.
of different meaning is low. is not relevant.
Investigator’s opinion should appear in Report nature, objective, scope, limitations of
final para of report assignment

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Q4) Special issues in investigation

• Whether investigator reqd to undertake 100% verification approach or he can adopt

selective verification - Depends on circumstances of case. If cash defalcated by cashier,
examine all cash vouchers. In case of arriving at profitability, verify on selective basis.
• Whether investigator can put reliance on already audited statement of a/c - Entitled to
put reliance on audited FS unless he finds that audit done very casually. But if investigation
launched due to doubt in audited FS, no question of reliance arises.
• Whether investigator requires assistance of expert-Investigator may obtain views &
opinion of experts after obtaining written consent of client.
• Whether to retain working papers or not – Retain full notes of work & all working papers

Q5) What points to consider for studying economic & financial position of business?

What will be Whether business is Whether profit which Adequacy or otherwise

trend of sales & operating at 100% capacity/ business expected to of fixed & working
profit in future? improvements can be made? maintain in future would capital. Are these
yield adequate ROCE? sufficient for growth
of business?

Q6) How will you evaluate T/R as investigator?

1) Whether proper PFBD have been made in years in which relevant sales took place instead of
in the year in which they have been w/off.
2) Length of credit period allowed OR Excessive discounts allowed throughout period under
investigation.
3) Debtors should be classified as per age.
4) Determine debtors to sales ratio.

Q7) What factors you will take into a/c as investigator in assessing turnover?

1) Political & economic considerations - Are govt policies likely to promote extension of
market for goods to other countries?
2) Marketability – Is it possible to extend sales into new markets OR they have been fully
exploited?
3) Trend – Whether in past, sales have been increasing consistently OR fluctuating?
4) Competition – What is likely effect on business if other manufacturers enter same field OR
if products sell in competition are placed on market at cheaper price?

Q8) How will you evaluate working capital requirement as investigator?

1) Has ratio of inventory to turnover been increasing & if so, is it continuing or temporary
trend?
2) Are trade payables paid promptly or backlog?
3) What will be effect on inventory, T/R, T/P if turnover is increased OR if new products are
introduced?

Q9) Investigation on behalf of incoming partner.

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1) Ascertainment of history of inception and growth of firm.
2) Ascertain manner of g/w computation on admission/retirement.
3) Special clause in P/s deed to allow admission in future of new partner on concessional terms.
4) Position of orders at hand & range & quality of clientele of firm.
5) Composition & quality of key personnel of firm & likelihood of their leaving org. in near
future.
6) Firsthand knowledge of specialisation of firm in any activities.

Q10) Investigation for valuation of shares in pvt. Co.

Equity shares – 2 methods of valuation –

1st method - Value on basis of networth of co.

NW is divided by no. of shares comprising equity capital to arrive at value of 1 share. G/w & non
trading assets (like investment) based on estimated future maintainable profit is included among
assets to arrive at NW.
2nd method – Avg. profit of business of past 5 –7 years is computed.

Assuming that same will continue, value of business calculated by capitalising it at reasonable rate
of interest. If rate - high, value of business – smaller. If rate – low, value of business – high.
Provision of risk factor & restriction on t/f in value of shares made by varying rate of interest
applied.

Rate of return that investor expects to earn in business of type in which co. engaged is
ascertained from price of shares of co. engaged in similar business quoted on stock exchange.

Q11) Investigation on behalf of bank/FI proposing to give advance/loan to co.

1) Purpose of loan & manner in which borrower proposes to invest loan amt.
2) Financial standing & reputation for business integrity of directors /officers of co.
3) History of growth & development of co. & performance in past 5 years.
4) If loan application to other bank/FI was made & if yes, reason of rejection.
5) If company authorised by MoA/AoA to borrow money for purpose for which loan will be
used.
To investigate profitability of business for judging accuracy of repayment schedule furnished
by borrower, as well as value of security in form of assets of business already possessed and
those which will be created out of loan, investigating accountant shall take following steps –

• Prepare condensed income statement from P&L for past 5 years.

• Compute ratios separately – sales to avg inventories held, sales to fixed assets, equity to
fixed assets, current ratio, quick ratio, equity to long-term loans, sales to book debts &
return on capital employed.
• Enter breakup of annual sales product wise to show trend.

Q12) Investigation on behalf of individual/firm proposing to buy business.

-In case of proprietary concern/partnership-

1) Unexpired period of patent owned by vendors.

2) Reason of sale of business and effect on turnover and profit.

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CA SHANKAR LAKHWANI # Audit Made Easy
3) Length of lease under which premises held.
4) Age of staff and prospects of continuing.
5) Valuation of goodwill.
-If business belongs to ltd co.

1) Authorised & issued capital of company.

2) If there is uncalled liability on shares.
3) If capital divided into class of shares – rights of each class.
4) Particulars of dividend paid in past & arrear amt (on cum. pref. shares)
5) Mortgage/charge on assets – search in Register of charges.

Q13) Investigation in connection with review of profit/financial forecasts

There are many investigations involving examination of future profits like-

• Profit reports reqd as part of general investigation into purchase of business.

• By banks and FIs wrt project cash flow & profitability statements for appraisal of loan
applications submitted by intending borrowers.

Q14) Fraud diamond/4 elements of fraud/4 categories of indicators of fraud.

1) Incentive – I want to/have need to commit fraud.

2) Opportunity – There is weakness in system that right person could exploit. Fraud is possible.
3) Rationalisation – I have convinced myself that this fraudulent behaviour is worth risks.
4) Capability – I have necessary abilities to be right person to pull it off. I have recognised
fraud opportunity & can turn it into reality.

Q15) Indicators of fraud/possible frauds-

1) Discrepancies in a/cing records including incorrect/delayed recording of amount.

2) Conflicting/missing evidence including altered documents.
3) Unacceptable mgt response like denial of access to records, unusual delay in providing info.
4) Other indications like frequent change in a/cing estimates.

Q16) Factors affecting auditor’s ability to detect fraud

1) Skillfulness of perpetrator
2) Frequency and extent of manipulation
3) Degree of collusion
4) Relative size of individual amounts manipulated
5) Seniority of individuals involved

Q17) Investigation for cash receipts.

1) Showing larger cash discount than actually allowed.

2) Undercasting receipt side of cashbook/overcasting pyt. site.
3) Adjusting cash sale as credit sale & raising debit in a/c of customer.
4) Adjusting fictitious credit in a/c of customer for value of goods returned by him.
5) Writing of good debt as bad to cover up amt collected which has been misappropriated.

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Verification of cash receipts/audit procedures –

1) Carbon copies of receipts marked ‘duplicate’ should be scrutinised to confirm that they are
copies of receipts issued earlier.
2) Cash sales vouched in detail.
3) All withdrawals from Bank checked wrt entries in bank passbook.
4) Recovery from customer checked with receipts issued to them.
5) Evidence of income from diff sources [Link], sales summary.

Q18) Investigation for cash payments.

1) Making double payment of invoice/paying false invoice.

2) Paying personal exp from business by false [Link] showing betting loss as adv exp.
3) Withdrawing unclaimed cr. balance of customer or amt falsely credited in a/cs of parties.
4) Falsely adjusting refund in a/c of customer & withdrawing cr. balance.
5) Wrong totalling of wage sheet & misappropriating excess amt withdrawn from bank for pyt
of wages.
Verification of cash payment/audit procedures –

1) Evidence of cash payment – scrutinised.

2) Payment by bearer cheques – examined.
3) Petty cash book vouched & totalled.
4) Special attention – wage payment. Obtain confirmation of mgt that pyt. to actual persons.
5) Obtain confirmation from partners/directors for amt shown as paid to them.

Q19) Fraud through suppliers’ ledger.

1) Suppressing cr. notes issued by suppliers & withdrawing corresponding amt. not claimed by
them.
2) Withdrawing amt unclaimed by suppliers for any reason by showing that it has been paid to
them.
3) Accepting purchase invoice at price higher than market price & collecting excess amt paid in
cash from suppliers.
4) Adjusting fictitious invoice as purchase in a/cs of suppliers & subsequently misappropriating
amt when payment made to suppliers for invoice.
Verification of balance in suppliers’ ledger/audit procedures

1) Purchase journal vouched wrt entries in goods inward book.

2) All suppliers – furnish statements of a/cs.
3) Examine internal control system for purchase order issued & identify possibility of collusion
with suppliers.
4) Allowances and rebates - evaluated.

Q20) Fraud through customers’ ledger.

1) Teeming & lading.

2) Misappropriating amt collected from customer & adjusting his a/c by crediting amt on a/c of
allowance/rebate for excess price charged.
3) Crediting amt recd from customer to a/c of another customer & subsequently withdrawing
amt wrongly credited.

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CA SHANKAR LAKHWANI # Audit Made Easy
Verification of balance in customers’ ledger/audit procedures–

1) Special attention – allowance adjusted on a/c of goods returned/diff. in price.

2) Obtain confirmation of customer for amt standing in a/cs.
3) To confirm that a/cs of customers have been dr. for goods supplied to [Link] in order
book cross checked with those in sales day book.
4) Those with no balance in a/cs – requested to confirm statement of a/c for ascertaining that
entries shown were genuine.

Q21) Inventory frauds.

Employees remove goods from premises. Theft of goods – concealed by w/off as damaged goods.
Stock actually dispatched but not Inflating qty issued for production.
entered in sales a/c.
Inventory records manipulated by employees who committed theft so that book qty tally with
actual qty .
Verification for defalcation of inventory / Audit procedures

Entire system of receipt, storage, dispatch of Physical quantity in inventory & those shown by
goods reviewed to localise weakness. inventory books – reconciled
Take guidance from past records showing extent Check per hr capacity of m/c & time it took to
of wastage in production. complete 1 cycle of production.
FORENSIC ACCOUNTING

Q1) Definitions

Forensic A/cing Red Flag

Application of a/cing methods to tracking & • Indicator of danger/inappropriate
collection of forensic evidence for investigation behaviour.
& prosecution of criminal acts. • Not necessarily indicate fraud – but
caution.
• FP red flag, a/cing system red flag,
operational red flag, behavioral red
flag.
-Statutory audit : only by CA. Forensic : non-CAs permitted.

Q2) Difference between other audits and forensic accounting

Other audit Forensic a/cing

Objective Opinion – T&F If fraud actually in books.
Techniques Substantive and compliance. Sample Investigative, substantive, in depth
based checking.
Period Particular a/cing period No limitation
off B/S items Used to vouch arithmetic accuracy Regulatory & propriety of trans.
(contracts) & compliance with procedures. examined.
Adverse findings -ve/qualified opinion with/ without Legal determination of fraud impact &
quantification. identification of perpetrators.
Verification of Relies on mgt certificate/ Independent/verification of suspected
stock, estimation representation. items where misappropriation suspected.
realisable value

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CA SHANKAR LAKHWANI # Audit Made Easy
of assets,
provision, liability

Q3) Forensic Accountant Professional

1) Analyse, interpret, summarise & present complex financial & business issues.
2) Engaged in public practice/employed by insurance co, bank, police, govt agency.
3) Forensic accounting services –

FS manipulations Fund diversion/asset tracing Anti Money laundering

License fee/dues/tax evasion RPT/valuations Suspicious trans under IBC
4) Forensic Accountant Professional involved in –

Fraud detection Investigating financial evidence, detecting financial fraud.

Computer forensics Developing computerised application to assist in analysis & presentation of
financial evidence.
Fraud prevention Either reviewing IC to verify adequacy/ providing consultation in
development & implementation of IC framework.
Providing expert Assisting in legal proceedings, including testifying in court as expert
testimony witness & preparing visual aids.

Q4) Process of forensic a/cing

Step 1 - Initialization -Meet client to understand imp facts & issues

-Conflict check
-Preliminary investigation before detail plan
Step 2 – Develop Plan -Objectives & methodology by considering knowledge from
client meeting & initial investigation
Step 3 – Obtain Relevant Evidence -Locating docs, economic info, person/proof
-Gather detailed evidence – investigator understand type
of fraud & how committed.
-Investigator – alert – docs falsified, damaged by suspect.
Step 4 – Perform Analysis -calculating economic damages.
-performing tracing of assets.
-Summarising large number of transactions
-Regression/sensitivity analysis.
-Utilising charts & graphics to explain analysis.
-Performing PV calc. – disc. rate.
-Utilising computerised appl. – spreadsheet.
Step 5 – Reporting -Issue report.
-Client expect – findings of inv, summary of evidence, concl.
– loss & perpetrator.
-Report – nature & scope of investigation, approach,
limitation, findings, controls circumvent.
-Investigative team - recommend improvement – future
fraud
Step 6 – Court Proceedings -Investigation – legal proceedings.
-Evidence – presented in court & team called to court
describe evidence & how suspect identified.

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Q5) Forensic Accounting & Investigation report

FAIS 510 Professional report stakeholders

at conclusion of assignment
1 engagement - many assignments. Since many reports –1 for 1.
Report – written, addressed to primary stakeholders & shared with other SH.
Format not fixed – key elements

Q6) Key elements of report

1) Title, addressee, distribution list (if any)

2) Scope & objectives of assignment
3) Approach & broad work procedures
4) Executive summary of results – important aspects & findings
5) Reference to use of expert, if applicable
6) Fact – assignment – FAIS/material departure
7) List of finding supported by key evidence & source of evidence
8) Assumptions, limitations & disclaimer of assignment
9) Conclusion
Discussion of draft report -If discussion of finding with subject party, their response included in
report.

Assumptions and limitations –

• List down assumptions and [Link] of limitation -lack of mgt support, denied access to
records.
• Report won’t give opinion/judgement on guilt/innocence.
• Reporting timelines – reasonable, interim – standard

Q7) Framework Governing Forensic Accounting & Investigation -FAI (the Framework)

-Objectives –

1) Provide overall understanding of FAI & key components.

2) Outline manner in which components come together in interrelated cohesive manner.
3) Maintain & improve quality of FAI services.
-Key components/pillars of Framework –

Basic principles of FAI Key concepts Std on FAI Guidance

-All components mandatory but guidance recommended.

-Code of ethics – Foundation of Framework

-FAIS provide

1) Professionals with minimum std for FAI assignment.

2) Users of FAI services – indication – expected quality.
3) Regulator/govt agency – appreciation – what expected.
4) Everyone – guidance – matters of implementation + practical issues.
-If member depart from FAIS/conflict b/w FAIS & other mandate – FAI report draws attention
to material departure + explanation.

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EMERGING AREAS

Q1) What is sustainable development and its pillars of sustainability?

It addresses needs of present moment without compromising current & future generations to
meet sustainable lifestyles.
3 pillars of sustainability – Environment(E), Social (S), Governance(G) – ESG Reporting:

Environment(E) Climate policies, energy, waste, pollution, natural resources like electricity, water
Social(S) Relations with people & institutions like labour relations & value chain.
Governance(G) Internal practices to govern, make investment decisions & comply with law.
ESG reporting is about disclosure of information & can be quantitative & qualitative.

Q2) Name 17 SDGs –

United Nations members states adopted sustainable development to provide blueprint which
mentioned Sustainable Development Goals (SDGs). Corporates contribute to SDGs due to their
capacity to provide solutions necessary to meet SDGs. Companies lead in innovation and contribute
to achievement of SDGs.

C • Clean water and sanitisation

• Affordable and clean energy
• Sustainable cities and communities
• Responsible consumption and production
• Climate action
E • Quality education
• Gender equality
• Decent work and economic growth
P • No poverty
• Peace, justice and strong institutions
• Partnership for the Goals
H • Zero hunger
• Good health and well-being
I • Industry innovation & infrastructure.
• Reduced inequalities
L • Life below water
• Life on land

Q3) Global trends in sustainable reporting.

Most widely used framework in world is Global Reporting Initiative (GRI) Sustainability Reporting
Standards having 93% of world’s largest 250 corporations. It is used in over 100 countries & is
based in Amsterdam, Netherlands.

(I)Global Reporting Initiative (GRI) Helps org. to report on economic, environmental

& social impacts.
(II)Carbon Disclosure Project (CDP) GHG emissions, water, forest, supply chain

(III)International Integrated Reporting Principles to produce integrated reports.

Framework (IIRC) Governance structure, business model, risks &
opportunities, strategy.

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Q4) 6Cs of Integrated Reporting / 6 Capitals of Integrated Reporting

I) Financial capital • Pool of funds for use in production of G&S.

• Debt, equity
II) Manufactured capital • Human created equipment and tools.
• Available for use in production of G&S.
III) Natural capital • Input for production of G&S.
• Water, land, forest.
IV) Human capital • People’s skills and experience.
• Alignment with human rights.
• Ability to implement strategy
• Loyalties and motivation.
V) Social capital • Relations between each community.
• Values
• Social license
VI) Intellectual capital • Future earning potential
• Investment in R&D, innovation, human resources.
-Asia Pacific region – 60% companies reported in 2022. Integrated reporting is strong in Middle
East.

Q5) Global scenario in various countries.

(I) UNITED STATES- In March 2022, US Securities & Exchange Commission (SEC) proposed
climate risk disclosure requirements. Reporting includes-

Co’s climate risk mgt

How risks identified How risks are Scenario analysis, transition
processes impact financial managed & plans & publicly announced
performance mitigated climate goals.
(II) UNITED KINGDOM – UK ESG Disclosures is COA 2006. Rules apply to large companies that
are either listed, exceed £500 million in annual turnover or have more than 500 employees.
Matters covered-

Envt (incl. co’s Co’s employees Social matters Respect for Anti-corruption &
impact on envt) human rights anti-bribery

Q6) Integrated Reporting & BRSR.

(I) SEBI recommended Integrated Reporting for top 500 listed companies (voluntary)

(II) BUSINESS RESPONSIBILITY & SUSTAINABILITY REPORT (BRSR)

-SEBI – Top 1000 listed co. by market capitalization.

-Reporting under BRSR is mandatory from FY 2022-23. It was voluntary in FY 2021-22. 3 Sections

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Section A – General Disclosures -Details of listed companies, products, services,
operations, employees.
-Holding, subsidiary, associate companies.
Section B – Mgt Process & Disclosures -Policy & management processes.
-Governance, leadership, oversight.
Section C – Principle-wise Performance 2 categories of KPIs
Disclosures

Essential indicators (Mandatory disclosures) Leadership indicators (Optional disclosures)

Data on training programs, environmental data Life cycle assessments, conflict mgt policy,
on energy, emissions, water, waste mgt. additional data on biodiversity, energy
consumption, supply chain mgt.
9 Principles of BRSR –

Principle 1 – Ethics, Transparency & Accountability

-Business decisions - open to disclosure & accessible to interested parties.

1) Entities’ governing structure develop policies for offices ensuring-ethics not compromised.
2) Info wrt policies along with performance – made available to stakeholders.
3) In case of adverse effects, more care to be taken for transparent disclosures.
4) Entities in value chain – encouraged to adopt these principles.
5) Entities - proactively respond to outside entities that violate 9 principles of BRSR, Eg,
suppliers, distributors.
Principle 2 – Safe & Sustainable Goods & Service

-Entities - make sure that G&S result in better life for consumers.

1) Production method – devised to minimise resource usage to make it sustainable.

2) Educate & make aware consumers about their rights.
3) Measures to reduce over exploitation of natural resources – reduce, reuse, recycle.
Principle 3 - Promote well-being of all employees incl. those in value chain

1) Compliance with regulatory requirements.

2) Respect dignity of employee & shouldn’t restrict freedom of unions for collective bargaining
of rights & redressal of issues.
3) Prevent child labour, bonded labour, involuntary labour.
4) System in which work-life balance not compromised.
5) Timely payment of wages.
6) Payment of wages as per living wages that can take care of basic needs.
7) Safe, hygienic & comfortable work environment.
8) Skill development, career development, training.
9) Workplace free of harassment and violence.
Principle 4 – Respect for stakeholders’ interests & responsiveness

1) Transparent & communicate with stakeholders about impact of operations on people &
nature.
2) Determine context of operation & identify interested parties.
3) Fairly share benefits to stakeholders.
Principle 5 – Respect & promote human rights

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1) Understanding of human rights & ways by which human rights can be violated – Constitution,
laws, international bill of human rights.
2) Integrate human rights element into policies.
3) Respect human rights of all stakeholders.
Principle 6 – Protection & restoration of Environment

1) Policies to assess & rectify impacts to envt.

2) Use of natural & manmade resources in optimum manner to ensure sustainability.
3) Measure performance wrt prevention of pollution, destruction of forest, waste etc.
4) Contribute towards climate change resilience .
5) Comparison with industry best practices to reduce, reuse, recycle.
6) Look for avenues by which improve performance towards envt responsibilities.
Principle 7 – Influence on Public & Regulatory Policy

1) Core elements of BRSR are to have met when org. go ahead with contributions to policy
formulation & policy advocacy.
2) Trade groups & industry chambers utilised when moving ahead with policy advocacy &
formulation.
3) Role in policy advocacy in such a way that encourages fair competition & prevents human
rights abuses.
Principle 8 – Promote Inclusive Growth & equitable development

1) Identify & address impact of activities on social, cultural & economic aspects of people.
2) Track adverse impacts of activities on society & make plans to mitigate them.
3) Bring up creative products, techno. that help marginalised communities to have well-being.
4) When designing CSR activities – review local development priorities to help marginalised
groups.
5) Ensure relocation of communities doesn’t happen & in unavoidable cases, make sure fair
compensation provided.
6) Intellectual property & traditional knowledge get respect & benefits derived from
knowledge shared equitably.
Principle 9 – Provide value to consumers in a responsible manner

1) Reduce -ve impact of G&S on consumers & nature.

2) Shouldn’t prevent freedom of choice and fair competition.
3) Disclose adverse impacts to user from products.
4) Right to privacy of customer data.
5) Inform customers – ways of reduce, reduce, recycle & eliminate overconsumption.
6) No misleading & confusing info. in advertisement.
7) Grievance redressal & feedback management system.
8) Essential goods & services – universal access.

Q7) SSAE 3000.

Standard on Sustainability Assurance Engagements (SSAE) 3000 “Assurance Engagements on

Sustainability Information“- date of application –

• Voluntary -period ending on 31/03/23.

• Mandatory – period ending on or after 31/03/24.

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Q8) Methodology to provide assurance on BRSR.

Q9) Role of auditor – consideration of climate related risks in audit of FS.

1) Obtain RA – FS as whole free of MM – fraud or error, to enable auditor to report whether

FS as per AFRF.
2) Auditor include consideration of climate related risks and how are they relevant to audit.
3) Investors seek info from AR about how climate related risks addressed in audit.
4) Auditor’s responsibilities & matters of most significance in audit and how addressed.
5) EOM Para to draw attention to disclosures that are of fundamental importance to users’
understanding of FS.
6) Auditor determine whether entity appropriately disclosed climate related info in FS as per
AFRF.
7) Auditor read other information for consistency with FS (SA 720).

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PROFESSIONAL ETHICS

Q1) Code of ethics vs Law = Law prevails

Q2) Fundamental principles discussed in code of ethics of ICAI

Integrity Objectivity Confidentiality

Professional behaviour Professional competence & due care

-Accountant – straightforward & honest

Integrity -Not Knowingly associated with info containing materially
false/misleading statement.
Objectivity Accountant – not to compromise judgement because of bias,
conflict of interest, undue influence of others.
Professional competence & due care -Professional knowledge and skill .
-Act diligently as per technical & prof. std.
Professional behaviour Comply with L/R & avoid conduct discrediting profession.
Confidentiality – Respect confidentiality of info acquired as result of professional relations. But
following are circumstances where accountant reqd to disclose confidential info –

1) Disclosure required by law.

2) Disclosure permitted by law and authorised by client.
3) There is professional duty/right to disclose, when not prohibited by law :
a. To comply with requirement of Peer review or quality review of ICAI.
b. To respond to inquiry/investigation by professional body.
c. To protect professional interest of accountant in legal proceedings.
d. To comply with Technical & prof. std.
-In deciding whether to disclose confidential info, accountant should consider following –

• Whether interest of 3rd party – harmed.

• Whether all relevant info is known & substantiated.
• Type of communication and to whom it is addressed.
• Whether parties to whom communication is addressed are appropriate recipients.

Q3) Threats & safeguards.

Self – interest threat Financial or other interest – influence accountant’s judgement.

Self – review threat Accountant not appropriately evaluate result of judgement made/activity
performed by accountant.
Advocacy threat Promote client’s position to the point that accountant’s objectivity
compromised.
Familiarity threat Long/close relation with client – accountant too sympathetic to their
interests.
Intimidation threat Accountant deterred from acting objectively due to pressure.
Examples of threats

Self – interest threat -Accountant:direct financial interest in client.

-Accountant having close business relation with client.
-Accountant receive loan/guarantee from employer.
Self – review threat -Accountant issuing report on effectiveness of financial system after
implementing it.
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CA SHANKAR LAKHWANI # Audit Made Easy
-Accountant determining a/cing treatment for business combo after
performing feasibility study of purchase decision.
Advocacy threat -Accountant promoting interest of/shares in client.
-Accountant acting as advocate on behalf of client.
-Accountant lobbying in favour of legislation on behalf of client.
-Accountant manipulate info in prospectus to obtain favourable financing.
Familiarity threat -Accountant having close family member who is director/officer of client.
-Audit team member having long association with client.
-Accountant having long association with individuals influencing business
decisions.
Intimidation threat -Accountant threatened with dismissal/ replacement due to
disagreement.
-Accountant pressured to agree with judgment of client as client has
more expertise.
-Accountant: No promotion unless he agrees with wrong a/cing treatment.
-Accountant accepted gift from client & threatened that it will be made
public.
Safeguards to eliminate/reduce threats-

1) Assigning additional time & qualified personnel to tasks.

2) Having appropriate reviewer, who was not team member.
3) Using different partners & engagement teams for provision of non-assurance services to
assurance client.
4) Involving another firm to perform/reperform part of engagement.
5) Separating teams when dealing with confidential matters.

Q4) Non-Compliance with Laws & Regulations (NOCLAR)

• Omission/commission, intentional/unintentional, contrary to L/R committed by

client/employing organisation or mgt/TCWG of client/employing organisation or other
individuals working under direction of client/employing organisation.
• Doesn’t address personal misconduct & non-compliance by other parties.
Examples of NOCLAR-

Imp. Facts –

1) NOCLAR applicable if accountant encounters NC in course of service. Not required to

investigate, nor responsible to ensure complete compliance.
2) Accountant expected to exercise professional judgement. Not expected to have knowledge
of L/R greater than required.
3) Matters that are inconsequential/personal misconduct not covered.

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4) Disclosure of matter to authority – precluded, if contrary to L/R.
Applicability of NOCLAR in India:

Professional accountant Applicable to Senior professional accountants (KMP) in service, being

in service employees of listed entities.
Professional accountant Audit of entities, shares of which are listed on RSE in India & have
in public practice NW of 250 crores or more.
NOCLAR vs SA 250 –

1) SA 250-applicable only on audit & not on other assurance engagements. But NOCLAR
applicable on professional accountants in service & practice.
2) SA 250 – auditor’s responsibilities for law – direct effect & no direct effect. NOCLAR
takes into a/c NC that causes substantial harm resulting in serious consequences in
financial/non-financial terms.
3) SA 250 doesn’t define stakeholders. NOCLAR is related to affect of NC on investors,
creditors, employees, public.
4) NOCLAR– imminent breach of L/R – disclose matter immediately to authority to prevent
consequences. No such provision in SA 250.
Steps to be taken for responding to NOCLAR:

i)Obtaining understanding of matter ii)Addressing the matter iii)Seeking advice

iv)Determining whether further v)Imminent Breach vi)Determining whether to
action is needed disclose matter to
appropriate authority
vii) Documentation
Documentation requirements in NOCLAR:

• How mgt/TCWG have responded to matter.

• Course of action accountant considered.
• Public interest has been fulfilled.
Q5) Disabilities for purpose of membership.

Not 21 years Unsound Mind Undischarged insolvent Misconduct

Discharged insolvent, not obtained from court, certificate that insolvency caused by
misfortune without misconduct.
Convicted by court, within or o/s India for moral turpitude & imprisonment unless granted
pardon or on application made by him, CG removed a disability.
Failure to disclose that he suffers from disabilities – professional misconduct.

Q6) Types of members of ICAI.

1) Associate member – A.C.A after name.

2) Fellow member – F.C.A after name
a. Associate member – Continuous practice in India for at least 5 yrs.
b. Associate member – Qualification & experience = to 5 yrs continuous practice.
Q7) Removal of name from register & restoration.

Member –

Dead Request received to that effect Not paid prescribed fee Disabilities
rd
Restoration of membership only in 3 case – Appl. + arrears. Effective date of restoration of
cancelled membership-

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CA SHANKAR LAKHWANI # Audit Made Easy
Application & fees within same year of removal Restoration with effect from date on which it
was removed from register.
Removal of name under orders of board of Restoration as per orders.
discipline, disciplinary committee, appellate
Authority, High Court
Other cases Restoration with effect from date on which
application & fee received .

Q8) Penalty for falsely claiming to be member.

CA Act, 1949 – Any person who –

i. Not member of ICAI

a. Represents that he is member or
b. Uses designation chartered accountant.
ii. Being member, but not having COP represents that he is in practice.

1st conviction Fine upto ₹1000

Subsequent conviction Imprisonment upto 6 mth or fine upto ₹5000 or both

Q9) CA in practice

-Member not in practice precluded to render services of type prescribed for CA, even though he
doesn’t require special qualifications.
-Once person becomes member of Institute, he is bound by CA Act. If he appears before income
tax tribunal, he could appear only in his capacity as CA. He couldn’t set them at naught by
contending that even though he continues to be member of Institute & has been punished by
suspension from practice, he would be entitled to practice in other capacity.
-Member of Institute can have no other capacity in which he can take up such practice.
Summary – CA’s name removed from membership – During period of removal, won’t appear before
tax authorities.
Q10) Cancellation & restoration of COP

Name of COP holder COP issued on basis of Member ceased to Member not paid
removed from incorrect info/by practice. annual fee for COP
register. mistake. till 30/09.
• When COP is cancelled, holder surrender the same to Secretary.
• Appln + Fee = Restore COP with effect from date on which cancelled provided application
before expiry of year.

Q11) Members deemed to be in practice

Individually/partnership, for remuneration –

engages in Offers to perform/perform Assistance – financial Other services

practice of audit or verification of facts/data
accountancy financial trans
-Member: salaried employee of CA in practice -deemed in practice for purpose of training
articles.

Sec 2(2)(iv) of Act -permits practicing CA to render ‘management consultancy services’

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MCS excludes statutory/periodical audit, DT/IDT, representation/advice for tax matters or acting
as liquidator, trustee, executor, administrator, arbitrator, receiver, but includes-
• Financial mgt planning & financial policy determination.
• Capital structure planning & advice regarding raising finance.
• Working capital mgt.
• Preparing project reports & feasibility studies.
• Cash budget,cash flow statement,profitability statement,statement of source & application
of funds.
• Budgeting – capital & revenue budget.
• Inventory mgt, material handling and storage.
• Market research and demand studies.
• Price fixation & mgt decision making.
• Management accounting system, cost control, value analysis.
• Control methods, management information & reporting.
• Personnel recruitment and selection.
• Setting up executive incentive plan, wage incentive plan.
• Management and operational audit.
• Valuation of shares & business & advice regarding amalgamation, merger, acquisition.
Acting as regd valuer for securities/financial assets, not for plant & m/c.
• Business policy, corporate planning, org. development, growth & diversification.
• Org. structure & behaviour, development of HR, training program, work study, job
description, job evaluation, workload evaluation.
• System analysis/design & computer services, hardware, software, EDP.
• Acting as advisor/consultant to issue, including matters like-
o Drafting of prospectus, memorandum, listing agreement, completing formalities with
SEBI, ROC.
o Preparation of publicity budget, advice for selection of – ad-media, centres for
holding conferences of brokers & investors, bankers to issue, collection centres,
brokers to issue, underwriters & underwriting agreement, distribution of publicity &
issue material like application form, prospectus, brochure, deciding quantum of issue
material.
o Advice for selection of agencies. Eg, Registrars to issue, printer, ad – agencies.
o Advice on post issue activities like listing of instruments & dispatch of certificate &
refund.
IMP – PUB (Portfolio mgt,Underwriting,Broking) not permitted.
• Investment counselling for securities.
• Registrar to issue for transfer of securities.
• Quality audit.
• Environment audit.
• Energy audit.
• Recovery consultant in banking sector.
• Insurance Financial Advisory Services & insurance brokerage (IRDA)
• Insolvency professional (IBC)
• Administrative services – Assisting client with routine/mechanical task like word processing,
preparing & submitting admin form, monitoring filing dates & advising client of dates,
functions of GST practitioner.
-Member deemed in practice if he in professional capacity acts as liquidator, trustee, executor,
administrator, arbitrator, receiver, advisor, representative for costing/ financial/tax matters
or renders service with armed forces or take up appointment by CG/SG/court or act as secretary,
unless his employment is on salary-cum-full-time basis

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CA SHANKAR LAKHWANI # Audit Made Easy
-Not only when engaged in practice of accountancy but also when he offers, even though no client
served.
-Section 144 of COA 2013 -Services not to be rendered by auditor, directly/indirectly to
co./holding co./subsidiary co. –

A/cing & bookkeeping service Rendering of outsourced Design & implementation of fin.
financial services info system.
Actuarial services Internal audit Mgt services
Investment advisory service Investment banking service Any other services
Q12) Companies not to engage in accountancy.

1) No co. can practice as CA. Co. includes LLP, which has co. as its partner.
2) If co. contravene-every Director/officer knowingly a party – fine -

1st conviction – upto ₹1,000 Subsequent conv. – upto ₹5,000

Firm/LLP – auditor of co. - only CA partners act & sign on behalf of firm.

Q13) Maintenance of branch offices.

CA Firm > 1 office in India – each office in separate charge Failure – professional misconduct
of member of ICAI.
• Exemption to members practicing in hill areas. 5 conditions:
1) Firm allowed to open temporary offices in city in plains for period upto 3 months in a yr.
2) Regular office not closed during this period & correspondence made there.
3) Name board in temporary office not displayed at other times.
4) Temporary office not mentioned in letterhead/visiting card as place of business.
5) Before commencement of every winter, inform Institute that it is opening temporary office
from particular date & after office closed, intimation sent to Institute by regd post.
• CA in charge : partner/whole time employee

Member actively associated with office – Name board:No bar on putting in residence of
resides in place where office situated/ attends member with designation Chartered Accountant
office for atleast 182 days in yr. but NB of member & not firm.
• Exemption: 2nd office w/o separate charge of ICAI member – 2nd office in

same premises same city 50km from municipal limits of city in which 1st office
Declare main office.

Q14) KYC Norms for CA in Practice

Mandatory & all assignments & attestation functions.

Client – Proprietor
• General Info- Name & address, PAN/Aadhar, Business description, copy of last audited FS
• Engagement Info- Type of engagement

Client – Corporate Entity

• General Info-Same + Name of parent co. in case of subsidiary
• Engagement Info- Type of engagement
• Regulatory Info- co. PAN, CIN,DIN, Directors’ Names & addresses

Client - Non-corporate entity

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CA SHANKAR LAKHWANI # Audit Made Easy
• General info- Same + Partners’ Names & addresses (with PAN/Aadhar Card)
• Engagement Info-Type of engagement
Q15) Schedules to the act.

FIRST SCHEDULE –

PART 1 – Professional Misconduct + CA in practice

Common line - CA in practice is deemed to be guilty of PM if he: Partner

Cl 1: Allows anyone to practice in his name except practice Employee

Cl 12: Practice

Allows to sign – person not Partner on BS/P&L/Report/FS

• Power to sign routine docs – delegated in these cases-

Issue of audit queries during audit. Issue of memorandum of cash verification &
physical verification/recording results in books
of clients.
Asking for information or issue of questionnaire. Issuing acknowledgements for records produced.
Letter forwarding draft observations/FS. Raising of bills and issuing acknowledgements for
money receipts.
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CA SHANKAR LAKHWANI # Audit Made Easy
Initiating and stamping of vouchers & schedules Attending to routine matters in tax practice
prepared for audit. (Income tax Act)
Acknowledging and carrying on routine Office administration and routine work.
correspondence with clients.
-SPECIAL POINTS -

Authority delegated. Fact that not signed is not CA – reqd to disclose name-should disclose name.
defence. No reqt – sign in name of firm.

Cl 2 : Pay/agrees to pay – B/C/S in profit – except CA/partner/retired partner

Directly/indirectly LR of deceased partner

member

B/C/S – Brokerage/commission/share [Link] prescribed qual.

• Regulation 53A of CA Regulations, 1988

Related to CA – CS,CMA, lawyer, Science–engineering, AA–actuary, architect.

advocate, MBA BTech

Audit of state co-operative society- Nomenclature of office % of fees to poor article –

Audit fee to State treasury (SG) allowance – PM Not allowed

Cl 3: Accept/Agrees to accept – part of profit of prof. work from non CA.

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CA SHANKAR LAKHWANI # Audit Made Easy
• Reg. 53A allowed
• Referral fees amongst members: Allowed

Cl 4: Enters into p/s India except CA in Practice

Outside India member…….

NR entitled to register as CA

Recognised – CG & Council

Reg 53B : Allowed (Reg 53A – MBA) Members can’t form multi disciplinary
partnerships till Regulators permit.
Cl 5: Secures professional business from non employee/non partner/means not open.

CA wrote letter to officer of Army canteen giving details of experience & audit fees. Guilty – Cl 5 &
6.
Cl 6:Solicits prof work-CA PIA:Circular,Ad,Personal communication,Interview,any other means

Directly/Indirectly

• Nothing construed as prohibiting-

CA from securing work from practicing CA Member from responding to tenders/enquiries

• Services -

CA with min. Fee (audit/attestation) All (land revenue computerization)

1) Advertisement and note in the press -

Not permitted – letters to possible clients. Personal canvassing/canvassing for clients of previous
employer through help of employees – not permitted.
Exceptions-
• Request another practicing CA for work.
• Advertise changes in P/s/Dissolution/change in address/telephone no. Facts, area of
distribution, number of insertions.
• Classified Ad in journal/newsletter of ICAI for sharing professional work on assignment
basis/seeking p/s/employment of accountancy nature, provided it only contains name,
address, number, fax number, email, social networking site of member. Experience &
specialisation – permissible.
2) Application for empanelment for allotment of work-
• Free to write to place name on panel. Not proper – roving enquiries. Quote fees on
enquiries.
3) Responding to tenders, advertisement and circulars-
• refer above chart.
• EMD/security deposit – allowed to pay.
• Cost sheet maintained.
4) Publication of books, articles, presentation –
• Not permissible – professional attainment.
• Permissible – Designation “Chartered Accountant” & Name of firm.

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CA SHANKAR LAKHWANI # Audit Made Easy
5) Issue of greeting cards/invitation –
• Not approve greeting cards/personal invitation, indicating professional designation, status,
qualification.
• Designation “Chartered accountant” & name of firm can be used in greeting cards,
Invitation for Marriage, religious ceremony, inauguration of office, change in premises,
change in no. provided it’s sent only to clients, relatives, friends.
6) Advertisement for Silver, golden, platinum, Centenary celebrations-
• Not permitted to advertise events organised by firm but ad for silver, golden, diamond,
platinum, Centenary celebrations published in newspaper/newsletter.
7) Sponsoring activities-
• Not permitted to sponsor event but can sponsor event conducted by PoU of ICAI, provided
it has approval of CPE Directorate of ICAI.
• Members sponsoring activities related to CSR can mention their name with prefix CA but
firm name or CA logo not permitted.
8) Ad for teaching/coaching activities by members–Indirect solicitation/violative.
• Can put outside coaching premises, sign board mentioning name of Institute, contact details,
subjects. Sign board – Council guidelines.
9) Sharing firm profile with prospective client – not permitted, unless query.
10) Television/movie credits – Not differently.
11) Soliciting work by roving enquiries – Not permissible-letters,emails,circulars.
12) Seeking work from prof. Colleagues - letter to CA – pioneer in liaisoning with govt
department, expertise for getting clearance – not allowed.
13) Scope of representation-COA 2013-Not soliciting for continuance. Letter-acting
independently & willingness to continue.
14) Acceptance of original work by member emanating from client introduced to him by
another member-Not accept. Duty to ask client to come through other member.
15) Public interviews-Not publicity/professional attainments. Give response to question &
factual nature.
16) Advertisement under box number of newspaper – prohibited.
17) Educational videos-No reference to firm, contact, website.

Cl 7:

Advertise prof attainments/services uses designation other than CA on

Prof docs/visiting cards/letter heads

unless university degree (law)

Recognised by CG/Council

• Advertise through write up – allowed.

• CA prefix – allowed whether practice or not.
• Practice cannot use designation, other than chartered accountant, but not in practice and
doesn’t use the designation ‘Chartered Accountant’ may use other description.
• Merchant banker/Advisor to issue – Name & address of CA indicated under caption
“Advisor/Consultant to issue” but it shouldn’t appear prominently.
• Directors of companies, members of political parties, position in clubs-not permitted to
mention.
• CA+ CMA– Though member can’t designate himself as cost accountant, he can use letters
A.C.M.A / F.C.M.A after his name.

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CA SHANKAR LAKHWANI # Audit Made Easy
• Permitted to mention membership of foreign Institute – MoU
• Improper to state on professional docs that he is income tax consultant, CMA, CS, Cost
consultant, management consultant.
• Not entitled to use designation “corporate lawyer”
• Not permitted to use initials “CPA” on visiting cards.
• CA in practice can also practice as CS/CMA. Not use designations simultaneously.
• Not use designation, “Member of Parliament”, “Municipal Councilor”
• Can mention ‘Insolvency professional’/‘Regd valuer’ on visiting card & letterhead.
• Date of setting up practice on letterhead/professional docs shouldn’t be mentioned.
Website allowed.
• CA in practice can practice as advocate – not use designation “chartered accountant” for
matters involving practice as advocate. Not use designation “Chartered Accountant” &
“Advocate” simultaneously..
• COP of Sister Institute/Bar Council – treated as in full-time practice
• Not proper to use designation “chartered accountant” except on professional docs, visiting
cards, letterhead, sign board, Cl 6. Can use prefix CA.
• Notice in press for success in exam–Name of principal, firm, town – published.
• Report & certificate – Extent & manner of publication ltd. Use letterhead to issue R&C.
• Appearance on electronic media & Internet-Can give name & describe as CA. Special
qualifications/knowledge of subject matter can be given. Firm name can be mentioned but
exaggerated claim/comparison not permissible. Not promotional.
• Organising training courses, seminars-Can invite own staff + Staff of other CA + Clients.
Prominence shouldn’t be given to name of CA in booklet.
• Writing articles/letters to press-Can give name & description “Chartered Accountant”
• Glow sign/lights on large sized boards - not permissible.
• Prospectus/public announcements with CA as directors- Cl 6 & 7. Don’t advertise
professional attainments. Expression “Chartered Accountant” is permissible. Expertise,
specialisation, knowledge not published. Directorships held in other companies can be given
but name of CA firm shouldn’t be given.
• Logo unconnected with first letter/logo of any kind - not permitted.
• QR code on visiting card allowed if it contains visiting card info.
Cl 8: Accept position as auditor w/o communicating in writing with previous auditor

• Valid reasons – change of venue, retires, dies, clash.

• Reasons for not accepting audit –
o Non-compliance of section 139 and 140 of COA 2013.
o Non-payment of undisputed audit fee other than in case of Sick Units
o Issuance of qualified report.
1 2 cases -Auditor who accepts - guilty of PM but in last case, he can accept if satisfied that
st

attitude of retiring auditor wasn’t proper. If retiring auditor had valid reasons, he should refuse
to accept.
• Previous auditor not available for accepting payment – client to purchase demand draft &
duty of incoming auditor to ensure payment.
• Objective of incoming auditor – circumstances not to accept appointment.
• Previous auditor hurt – Auditor can act after waiting for reasonable time.

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CA SHANKAR LAKHWANI # Audit Made Easy
• Mere posting of letter “under certificate of posting” isn’t sufficient. Positive evidence of
delivery needed –
o Communication by letter sent through “Registered acknowledgement due “
o By hand against written acknowledgement.
o Acknowledgement of communication from retiring auditor’s email address, registered
with ICAI/last known official email address
o UDIN generated on UDIN Portal.
• Premises found locked – Deemed delivered.
• Firm not found at regd. Address – Address same as regd with ICAI on date of dispatch –
Deemed delivered unless retiring auditor proves that it wasn’t served & he wasn’t
responsible for non service.
• Joint auditor - Applicable
• Healthy practice if tax auditor communicates with statutory auditor.
• Applicable to all types of audit.
• Healthy practice if retiring auditor is not a CA.
• No communication for parallel positions. Eg SA & IA. Applies only for replacement.
• Lack of time in acceptance of audit of government co./bank-No time to wait for reply from
outgoing auditor. Conditional acceptance & commence work subject to objections from
previous auditor. Incoming auditor decides about final acceptance after taking into a/c info
from previous auditor.
Cl 9: Accept position as auditor of co. w/o ascertaining reqt complied
of Sec 139 & 140 of COA 2013

• Not sufficient to accept certificate of compliance from mgt.

• Necessary to verify records. If co. – not willing, auditor shouldn’t accept.
• Appointment of auditor for 1st time after incorporation of co.–Appointment by BoD within 30
days of registration of co.
• If BoD not appointed – Appointment by members in GM.
• If appointment to fill casual vacancy (CV) – BoD fill casual vacancy.
• If vacancy by resignation of auditor – members in GM.
• If vacancy due to removal of auditor before expiry of term – special resolution passed at GM
+ approval of CG.
• Applicable to joint auditor.
• AGM adjourned-Retiring auditor continue till adjourned meeting. New auditor assumes office
after adjourned meeting.
• AGM adjourned w/o appointing auditor – Special notice given to co. at least 14 days before
original meeting.
Board Guidelines for removal of auditors – All cases (govt + non govt)

• Auditor resigns – written communication to BoD + ICAI with reasons. It’s obligatory for
incoming auditor to obtain communication from BoD.
• Auditor willing for reappointment but not reappointed – File with ICAI statement & sent to
mgt. It’s obligatory for incoming auditor to obtain communication from co.
• ESB can call further info.
Cl 10: Charges/offer to charge for prof. employment fees based on % of profit/contingent
upon findings or results.

Exception: Reg 192 –

• Receiver/liquidator – Fees on % of realisation/disbursement of assets.

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CA SHANKAR LAKHWANI # Audit Made Easy
• Auditor of cooperative Society – Fees on % of paid up capital/working capital/ gross or net
income/profit.
• Valuer for direct tax/duties – Fees on % of property valued.
• Mgt consultancy service – Fees on % basis contingent on findings/results.
• Fund raising services – Fees on % of fund raised (Getting loan sanctioned is not fundraising)
• Debt recovery services – Fees on % of debt recovered.
• Cost optimisation service - Fees on % of benefit.
• Insolvency professional, non-assurance services to non-audit clients.

Cl 11: Engages in business/occupation other than CA prof. unless permitted by Council.

Nothing disentitle CA from being director of co.(Not MD/WTD) unless he/partners is
interested in such co. as auditor.

• Reg 190A -General Resolution – No specific permission from Council:

Employment under Practicing Pvt. tutorship Authorship of books & articles

CA
Holding of life insurance Attending classes & appearing Holding of public elective office
agency license for limited for exam like MP, MLA, MLC
purpose of getting renewal
commission
Honorary office leadership of Notary Public, Justice of Part Time tutorship under
charitable, educational/non- peace, special executive coaching Org. of ICAI,
commercial org. magistrate
Valuation of paper, paper, Editorship of professional Surveyor & loss assessor
setter, head examiner, journals
moderator of exam
Recovery consultant in banking Owning agricultural land & Trading in equity/currency
sector carrying agri. activity derivatives
• Specific resolution – Specific approval of council

Employment in business concern Employment in non-business MD/WTD provided that

provided that member/relative concern member/relative don’t hold
don’t hold substantial interest substantial interest
Interest in family business Interest in educational Part Time/full Time lectureship
provided no active part institution for other than ICAI courses
Part Time/full Time tutorship Editorship of journals, other Other business
under institution other than than professional journals
coaching org. of ICAI
Receiving royalty from sale of Trading in commodity derivatives
domain name/website

• Relative – husband, wife, brother, sister, lineal ascendant/descendant.

• Substantial interest = 20%
• Director Simplicitor -Simple director, not MD/WTD. Required only in BM & not paid
remuneration except sitting fees.
• Auditor of subsidiary company can’t be director of holding company.
• No bar for member to be promoter/signatory to MOA/AOA. No bar for promoter/signatory
to be director simplicitor.
• Give evidence that interest in family business due to inheritance and not actively engaged.
Yes, I will definitely clear my CA Exams 69
CA SHANKAR LAKHWANI # Audit Made Easy
• Karta of HUF- Makes investments from funds of HUF only.
• Teaching hrs shouldn’t exceed 25 hrs a week.

PART 2 – Professional Misconduct + Service (whole time/part time/COP with employment)

Common line - CA in service deemed to be guilty of PM if he being employee of co./firm/person:

Cl 1 : Pays/agrees to pay any share in emoluments of employment

Directly/indirectly

• Doesn’t restrict sharing among relatives, dependents, friends + not for job procurement/
retainership.

Cl 2 : Accept/agrees to accept F/P/G (Fees/ profit/ gains)

from ABC2L of co. Agent By commission/gratification

Broker

Customer/CA

Lawyer

PART 3 : Professional Misconduct + General

Common Line – CA in practice/not deemed to be guilty of PM if he –

Cl 1 : Not a fellow, act as fellow of Institute.

Cl 2 :

doesn’t supply info called for doesn’t comply reqt asked for

ICC, Discipline – 3, QRB, AA

Institute, Council, Committee, Director (Discipline), Board of Discipline, Disciplinary

Committee, Quality Review Board, Appellate Authority

• Not disclosed to ICAI- proprietor of non CA Firm.

• Not disclosed that director of co. despite letters of ICAI which remained unreplied.
• Continued to Train article though name removed from membership & failed to reply to ICAI
as to how he was training.
Cl 3: Inviting prof. work another CA

Tenders/write up gives info knowing it to be

Cl 6 & 7 of Sch I Part I false

PART 4 – Other Misconduct + General

Common line – CA in practice or not deemed to be guilty of OM if he –

Cl 1: guilty – civil/criminal court- offence: imprisonment – upto 6 mth.

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CA SHANKAR LAKHWANI # Audit Made Easy
Cl 2: in opinion of Council, disrepute – profession/Institute, whether/not related to prof.
work

SECOND SCHEDULE –

Part 1 – Professional Misconduct + Practice

Common line: CA in practice deemed to be guilty of PM if he –

Cl 1: Discloses info acquired in prof. eng. to anyone other than client, except

Consent of client Law

• SA 200 – Auditor respect confidentiality of info.

• Duty continues even after completion of assignment.
• Disclosure allowed if professional [Link], submitting info to exchange control authority.
• In other cases, consent of client given by competent person. Eg, sole proprietor-
proprietor/attorney. P/s-Any partner. Co. – MD if BoD powers delegated & if not delegated-
BoD Resolution.
• Diff. b/w sharing of working paper & info. Info can be provided to client/regulatory body
after obtaining consent of client.
• Report to CG within 60 days – Sec 143 (12) of COA 2013: Allowed
Cl 2 : Certifies report on examination of FS in his name/firm’s name unless examined by :

Himself partner employee Another CA in practice

Cl 3 : Permits his name to be used

firm’s name

with estimate of earnings contingent on manner – belief – he vouches

future trans. for accuracy of forecast

• SAE 3400 - CA can participate in preparation of profit/financial forecast & can review
them, provided he indicates source of info, basis of forecast, assumptions in arriving at
forecast & doesn’t vouch for accuracy of forecast.

Cl 4 : Express opinion on FS of enterprise in which he/firm/partner has substantial interest

(20%)

• FS includes report & certificate.

• Not to permit employee CA to certify FS of employer/concern under same mgt. Not accept
o Auditorship of college if part time lecturer in college
o Auditorship of trust if his partner is employee/trustee of trust.
• All audit/attest functions but NA to MCS like evaluating cost of product mfd.
• Other than co. – Substantial interest
• Member/partner/relative is DEO (Director/Employee/Officer) of co.
• Member/partner have security/interest in co.,H/S/A/subsidiary of holding co.
• Relative – Security of FV upto 1 lac allowed.
• Not permissible to undertake assignment if client is relative.
• Statutory auditor not to be internal auditor.

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• Internal auditor not to be tax auditor.
• Internal auditor not to be GST auditor.
• Member shouldn’t accept audit of co. for 2 yrs from completion of tenure/resignation as
director (Cooling period of 2 yrs)
Cl 5 : Fails to disclose material fact known to him Not disclosed in FS

Disclosure necessary in FS

He is concerned with FS in prof. capacity.

• SA 320
• Co. taken loan from EPF. Not reflected in BoA. Auditor ignored info.
• No disclosure of charge against guarantee in favour of group co.
Cl 6 : Fails to report material MST known to him in FS he is concerned in prof. capacity

• Represent co. before tax authorities & false info – No PM – Cl 5 & 6.

Cl 7 : Doesn’t exercise due diligence/grossly negligent in prof. duties

• Includes non submission on due dates.

Cl 8: Fails to obtain sufficient info OR Exceptions are sufficiently

necessary to express opinion material to negate opinion

• CA issued certi of circulation of periodical w/o going into details – Cl 7 & 8

• CA didn’t state limitations/assumptions in certificate – Cl 7 & 8
• Trans. B/w firm & developers entered in books of construction co. – Cl 6,7,8
• Issue certificate for exports w/o verifying docs – Cl 2,7,8
• Year 2 – Investment in B/S 12 lac. Same amt as yr 1. Later actual Invst = 25000 but value
inflated to obtain loan -Cl 2,7,8
Cl 9 : Fails to invite attention to material departure from generally accepted procedure of
audit

• Membership no., FRN in all reports & certificates

• Failure to perform duty not excused by qualification in AR. Eg, give reasons why failed to
verify cash.
Cl 10 : Fails to keep money of client in separate bank a/c OR

Use for intended purpose within reasonable time

Except Fees/remuneration

Money meant to be expended

• Advance recd by CA = Fees = Cl 10 NA

• Money meant to be expended eg, pyt of fees, stamp paper intended to be spent within
reasonably short time not to put in separate bank a/c.
• Money meant to be expended not intended to spent in reasonably short time put in separate
bank a/c.
• Money recd by CA in his capacity as trustee, executor, liquidator put in separate bank a/c.
Part II – Professional Misconduct + General

Common line – CA in practice or not deemed to be guilty of PM if he –

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Cl 1 : Contravenes provisions Act

Regulations issued by Council

Guidelines

• Council General Guidelines, 2008

• Engagement/Registration/termination/premium from/stipend to articled assistant
• Articled assistant not to engage in any other occupation
• Complaint against employer (from articled assistant)
• CA not to engage in any other business/occupation
• Restriction on fees
• Failed to generate UDIN
• Audit of listed company without peer review certificate
• Issued certificate/report w/o COP (eg, raw material consumption)

Cl 2: Being employee of Co. discloses conf. info acquired in employment

Firm

Person

Except employer & law

• Whole time/part time employee or employee with COP

Cl 3 : Includes in info/form/return/statement particulars submitted to ICC,
D3,QRB,AA knowing to be false

• Manager of CA Firm applied for fellow stating he is partner.

• Empanelment application for bank to ICAI – Gives name of CA who isn’t partner as partner
though he became partner after date of application. (Check as on date of application)
Cl 4 : Defalcates/embezzle money recd in prof. capacity

• SA 240

Part III – Other Misconduct + General

Common line – CA in practice or not deemed to be guilty of OM if he –

Cl 1: guilty – civil/criminal court – offence: imprisonment > 6 mth.

Q16) Council General Guidelines, 2008

Chapter V - Maintenance of books of accounts

• Practicing CA – keep proper BOA – Cash book & Ledger

Chapter VI – Tax audit assignments u/s 44AB of Income Tax Act, 1961

• Practicing CA shall not accept > than 60 tax audits in FY.

• CA Firm – 60 tax audits for each partner.
• 1 CA is partner of 2 firms/sole proprietor = Together shouldn’t exceed 60.
• Audits under 44AD/44ADA/44AE not taken into a/c.
• 10 partners. 10x60=[Link] in any manner.

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• Applicable to joint tax audit also.
• Audit of HO & branch = 1 tax audit
• Audit of 1 or more branch = 1 tax audit
• CA being part time practicing partner of firm not taken to a/c.
Chapter VII - Appointment of auditor in case of non-payment of undisputed fees

• Practicing CA not accept appointment as auditor of entity if undisputed audit fee of

another CA not paid.
• In case of sick unit, above prohibition doesn’t apply.
• Provision for audit fee – signed by both auditor & auditee = undisputed audit fee
• Sick unit = unit regd for not less than 5 years, accumulated losses equal to or exceeding
net worth.
Chapter VIII -specified number of audit assignments

• Practicing CA shall not hold at any time >30 audit assignments.

• CA Firm = 30 tax audits for each partner
• 1 CA is partner of 2 firms/sole proprietor = Together shouldn’t exceed 30.
• Pvt /other companies with exception of OPC & dormant companies.
• Also applicable on Joint audits.
• Audit of HO & branch = 1 audit assignment
• Audit of 1 or more branches = 1 audit assignment
• Number of partners of firm on date of acceptance are taken into a/c
• CA in practice in full time/part time employment – not counted.
• Part time Practicing partner not taken to a/c.
Chapter IX – Appointment as statutory auditor

• Practicing CA not to accept statutory audit of

o Public sector undertakings/government co./listed co.
o Public company with turnover of ₹ 50 crores or more in a year
Where he accepts other work for same undertaking/co. on remuneration exceeding statutory
audit fees.
• Applies to fees for “other work” payable to statutory auditors & associate concerns put
together.
• Other work means MCS but not includes CAR–
o Certification work done by statutory auditors,
o Audit under any other statute,
o Representation before Authority .
• Associate concern means corporate body/p.s firm rendering MCS where proprietor/partner
of statutory audit firm/their relatives are directors/partners & hold substantial interest in
corporate body/partnership.
Chapter X - Appointment of auditor when he is indebted to concern

• Practicing CA /partner/relative not to accept appointment while indebted/given guarantee

/provided security for limits fixed in statute & in other cases for > ₹1,00,000/-
• COA 2013 – Indebtedness >5 lac, Guarantee & security>1 lac.
• Progressive fees – No indebtedness
Chapter XI – Directions in Case of unjustified removal of auditors

• Incoming auditor not to accept

Chapter XIV - Unique Document Identification Number (UDIN) guidelines

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• Practicing CA for all certificates, GST & tax audit reports, audit/assurance & attestation
functions.
Chapter XV – Guidelines for Networking

• Firms form larger structures & share common brand name, quality control system,
resources, common ownership/control/mgt, business strategy, profit/cost.
• Professional resources = Common system, staff, dept, audit methodology, training courses.
Forms of network -

• Network constituted as mutual entity (Network won’t carry out professional practice )
• Network constituted as partnership firm (max 20 Partners)
• Network Constituted as LLP.
• Network constituted as Company (Mgt consultancy services co.)
• Network firms consist of proprietor, partnership.
• Firm is allowed to join only one network.
• Firms having common partners shall join only one network.

• “& Affiliates” after name & not “& Co./ & Associates”
o If network is mutual entity/p.s firm – AB & Affiliates
o If network is LLP – AB Affiliates LLP
o If network is ltd. Company – AB Affiliates [Link] / Limited
• Institute approve/reject name of network & intimate to Network within 30 days from
receipt of Form.
• Change in constitution due to entry/exit – Network communicate to Institute within 30
days from change.
Registration of network with entities in India –

• After name of network approved, Institute reserve for 3 mth.

• Network get regd within 3 months. Failing – name cancelled.
• Registration of network with Institute is mandatory.
Listing of network with entities outside India –

• Authorised representative of Indian firm file declaration with Institute within 30 days
from entering into network.
Ethical compliance –

• If one firm = Stat auditor, associate not to accept Sec 144 services.
• Guidelines of ceiling on non audit fees –
o Firm = stat auditor: Same
o Other firms collectively: 3 times stat audit fees
• Rotation of firms – no member firm can accept.
• Follow Advertisement guidelines.
• Permitted to use words “Network Firms” on prof. stationery.
Framework of Internal Byelaws of network – Clauses on which affiliates – written agreement:

• Appointment of managing committee/Engagement partner/technical director

• Administration of network
• Contribution of membership fees to meet administration cost
• Dispute settlement by arbitration and conciliation
• Development of training materials, Software, database
• Issue of newsletters

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• Library
• Determining methodology for drawing resources/compensation for resources drawn
• Peer review of member firms.
Chapter XVI -Logo Guidelines –

• Letter ‘CA’ (in blue) with tri colour tick mark (upside down) & white background.
• ‘India’ added in logo.
• Use logo as it is. Don’t change font, spacing, dimensions, design, colours, background.
• Refrain from rotating/tilting. Don’t shrink/distort.
• Transition time - 1 year
Chapter XVII – Guidelines for Corporate Form of Practice –

• Practicing CA holds office of MD/WTD/Manager of body corporate provided body

corporate is engaged exclusively in rendering MCS.
• Member can retain full Time COP.
• No restriction on equity holding of members, either individually/along with relatives in co.
• Can do attest function & train articled assistants.
• Name of mgt consultancy co. – approved by Institute & Co. regd with Institute.
Ethical compliance –

• If CA is stat auditor of entity, then management consultancy company shouldn’t accept Sec
144 services.
• Ceiling on non audit fees is applicable wrt Mgt consultancy company.
• Mgt consultancy co. comply with Cl 6 & 7 of Part I of First Schedule.
Q17) Council Guidelines for Advertisement, 2008

Write up shall comply with following conditions-

• Honest and truthful

• No exaggerated claims
• No disparaging references
• Shouldn’t bring disrepute to profession
• Not contain testimonial/endorsement about members/name of client/fees
• Not contain info of awards (except given by CG/SG/regulatory bodies)
• Monogram not permissible
• Membership number/FRN is mandatory
• Font size not exceeding 14
• Not violative of CA Act, 1949
Website of CA Firms –

• No standard format
• “Pull” model. Not “Push” model.
• No info in website be circulated on their own/email except on pull request.
• No Circular/ad to solicit people to visit website.
• Permitted to mention website in professional stationery & email.
• Info that can be displayed on website –
o Member/firm name
o Year of establishment
o Address, telephone number, fax number, email ID
o Nature of services (specific pull request)
o Partners’/Employees’ details (Area of experience on pull request)
o Job vacancies for CA & articles
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o No. Of articled assistants (pull request)
o Nature of assignment (pull request). Name of client & fee can’t be given but
Permissible if reqd by regulator-only to extent of reqt. Mention on website below disclosure that
“This disclosure is in terms of reqt of regulator having jurisdiction in”
• Passport photo allowed. Framed photo not allowed.
• Articles, educational videos are permissible.
• Chat rooms for CA & b/w firms & client permitted but confidentiality ensured. Document
mgt facility to client to access docs.
• Link of page on social networking site. Member shouldn’t solicit to visit/like.
• Online advice to client on request (free/paid)
• Secrecy of client data ensured
• No ad
• Befitting CA profession
• Link to website of ICAI, its regional council, branches & govt website.
• Website address as near as possible to firm name.
• Website should mention info, not at material variance from ICAI’s records.
Online third party platforms –

• No other service besides consultancy & advice. Contact address/prof. achievements/name

of firm not provided. Just statement that they are CA.
Publication of firm name in telephone/other directory –

• Entry shouldn’t appear in other section, except that of CA.

• Firm should belong to city in respect of which directory is being published.
• Order of entries – alphabetical
• Entry shouldn’t be made in prominent manner
• Entry – open to all CA
• Trade/social directory is also allowed
Application based service provider aggregator - Not permissible

Specialised directories for limited circulation-

• Entries alphabetically. Can mention directorships. Not mention client names.

Exemptions –

Press ad provided that ad isn’t prominent –

• Ad for recruiting staff/article in member’s own office.

o Avoid “well known firm”. No mention that services are superior to others.
• Ad for client requiring staff/wishing to acquire or dispose business/property.
• Ad for sale of business/property by member acting in prof. capacity as trustee, liquidator,
receiver.

Q18) Recommended Self – Regulatory Measures

Branch audit Branch audit of co. shouldn’t be conducted by stat auditors having 10
or more members but should be conducted by local CA firm having less
than 10 members. This restriction is NA –
• A/cing records of branches maintained at HO of co.
• Significant operations of co. are carried out at branch.
Joint audit Large co. – CA firm with less than 5 members

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Ratio b/w qualified & Atleast 1 member for 5 unqualified members of staff, excluding
unqualified staff articled & audit assistant, typist, peon, other persons not engaged
directly in prof. work
Disclosure of interest by Disclosure of payment received for other services through medium of
auditors in other firms different firm.
Recommended min. Scale For non-public interest entities (PIE) -Disclosure needed where for 2
of fees consecutive years, gross annual prof. fees from audit Client is more
than 40% of total fees of firm.

For public interest entities – Disclosure needed where for 2

consecutive years, gross annual prof. fees from audit client is more
than 20% of total fees of firm.

Exemption –
• total fees received by firm doesn’t exceed ₹20 lac.

• Audit of govt co., public undertakings, nationalised banks, public

financial institutions, regulators or where appointments of
auditors are made by govt.
-Excessive/low fees - Not misconduct

Q19) Recent decisions of ethical standards Board.

1. Not permissible for practicing CA being stat auditor to prepare BRSR study to audit clients
but can provide advisory services on same. Permissible to be “assurance provider of BRSR
core” for same client.
2. Stat auditor not permitted to engage in compilation eng (SRS 4410).
3. Permissible for practicing CA – Services assessment/performance audit of centres of skill
development council of Govt of India (MCS).
4. Permissible for practicing CA to accept Mystery audit.
5. Permissible for practicing CA to mention position as promoter/director on portal of co but
can’t mention prof. attainment/name of firm – No violation of Cl 6 & 7 Part I First Sch.
6. Permissible for practicing CA to become prof. director in Board of mgt of Co-operative
bank.
7. Permissible for CA to set up practice in IFSC/GIFT city.
8. Permissible for CA to render prof. service to IFSC units from offices o/s IFSC.
9. Not permitted to publish vision/mission statement on letterhead/visiting card/stationery.
It may be printed on firm profile & provided on request.
10. Not permissible for CA being stat auditor of bank to accept ASM of customer of same
bank simultaneously. He can accept either of assignments at one time.
11. Practicing CA can’t become internal auditor & procurement officer simultaneously.
12. Permissible for practicing CA to charge fee on % of utilization amt of education institute
to certify amt (utilization) spent by institute out of grant.
13. Practicing CA can be non-executive/independent director in cooperative bank provided he
isn’t involved in daily activity of org., nor he/partner are auditor.
14. Permissible for practicing CA to become member of ‘Board of Mgt’ in primary (urban)
cooperative bank. Role similar to Director simplicitor.
15. Practicing CA can’t act as trademark/patent attorney. But prof. advice wrt intellectual
property rights (IPR) is permissible.

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16. Not permissible to accept stat audit of society where immediate family member
(spouse/dependent) hold honorary position of managing committee of institute governed by
Society.
17. CA firm can register on Udyog Aadhar.
18. No prohibition for internal auditor of co. to purchase shares of co.
19. Not permissible for CA to send messages to make people aware of practice.
20. Practicing CA being director simplicitor in a co. can’t sign ROC forms of co.
21. Practicing CA can act as authorised representative of foreign co. provided he is not auditor
of the said co.
22. Permissible for practising CAs collectively to have joint training session on GST & share
fees.
23. Practicing CA can provide services through kiosk – only prof. activities.
24. CA in service can take e-return registration but can’t certify return.
25. If Practicing CA is non-executive director in a co., he shouldn’t accept appointment as stat
auditor of co., which is JV of original co.
26. Practicing CA may be equity research advisor but can’t publish retail report as it amounts
to other business.
27. Member of trust can’t become its auditor.
28. Practicing CA engage himself as registration authority (RA) to obtain digital sign for client.
29. CA can hold credit card of bank when he is auditor of bank, provided o/s balance doesn’t
exceed ₹1 lakh.
30. Practicing CA can act as mediator/arbitrator.
31. Practicing CA not permitted to accept audit of bank in which he has taken loan against FD.
32. Practicing CA can’t become financial advisor & receive fees/commission from financial
institutions like mutual funds, insurance, companies, NBFC.
33. CA can’t exercise lien over client docs for non payment of fee.
34. Not permissible to print vision & values behind visiting cards – solicitation as per Clause 6
of Part I of First Schedule.
35. Not permissible for practicing CA to take agencies of UTI, GIC, NSDL.
36. Can become settlor of trust.
37. Can’t hold Customs Brokers Licence.
38. CA in service can appear as tax representative on behalf of employer, not on behalf of
other employees of employer.
39. CA who is stat auditor of bank can’t accept stock/inspection audit of any branch of same
bank/sister concern of bank.
40. CA firm – internal auditor of PF trust can’t be appointed as a stat auditor.
41. Concurrent auditor of bank X can’t be appointed as stat auditor of bank Y, sponsored by
X.
42. CA can act as internal auditor of co. & stat auditor of EPF.
43. Director – COA 2013 – Reside in India for min 182 days (director simplicitor).
44. Law (Income tax) prohibits: stat/tax auditor can’t be valuer of unquoted eq shares of same
entity. If law doesn’t prohibit: Permissible.

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Q20) Disciplinary procedure

Disciplinary Directorate (DD) received against CA – complaint + fee

GUILTY

1st Schedule 2nd Schedule / Both

Board of Discipline Disciplinary Committee

Guilty Non guilty Guilty Non guilty

Reprimand Matter close Reprimand Matter close

Remove name upto 3 months Remove name permanently

Fine upto 1 lakh Fine upto 5 lakh

NON GUILTY – Board of Discipline

Accept Reject

Matter close

Advice DD for investigation Proceed (1st sch) Refer to DC

(2nd Sch/both)

• Member/Director (Discipline) aggrieved by Board/DC order

Appeal to Appellate Authority within 90 days

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CA FINAL AUDIT MAGIC CHARTS VOLUME 2

By CA SHANKAR LAKHWANI
(SA/SRS/SRE/SAE/CARO/Risk Assessment & Internal Control)

HELLO CHAMPIONS!!!!!
Important Points to Keep in Mind before Referring Magic Charts

• Magic Charts are to be referred for 1st

Reading as well as subsequent Revisions
• These Charts contain ICAI Keywords
• Covers 100% Syllabus
• No need to refer ICAI Module
Yes, you can & you will definitely clear your CA Exams in
May 2025
YouTube & Telegram Channel – CA SHANKAR LAKHWANI

INDEX
Chapter Pg No.
SA 200 81
SA 210 82
SQC-1 83
SA 220 87
SA 230 89
SA 240 90
SA 250 94
SA 260 96
SA 265 98
SA 299 99
SA 300 101
SA 315 104

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CA SHANKAR LAKHWANI # Audit Made Easy
SA 320 105
SA 330 106
Risk Assessment & Internal Control 107
SA 402 112
SA 450 114
SA 500 116
SA 501 118
SA 505 120
SA 510 123
SA 520 125
SA 530 126
SA 540 129
SA 550 132
SA 560 135
SA 570 137
SA 580 139
SA 600 140
SA 610 142
SA 620 144
SA 700 147
SA 701 149
SA 705 150
SA 706 153
SA 710 154
SA 720 155
Reporting Miscellaneous & Section 143 of Companies Act, 2013 157
CARO 160
SA 800 164
SA 805 166
SA 810 169
SRS 4400 174
SRS 4410 176
SRE 2400 179
SRE 2410 183
SAE 3400 185
SAE 3402 188
SAE 3420 190

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CA SHANKAR LAKHWANI # Audit Made Easy
SA 200 – Overall Objectives of Independent Auditor & Conduct of an Audit in accordance
with SAs

• Audit is a reasonable assurance engagement.

Q1) Inherent Limitations of Audit (ILA)

N • Nature of Financial Reporting

• Nature of Audit Procedures
• Not in nature of investigation
F • Timeliness of FR & decrease in relevance of information over time
• Future events

Q2) Is auditor correct when he argues that due to Inherent Limitations of Audit (ILA), he is
unable to get persuasive audit evidence and therefore fraud occurred?

No

Due to ILA, there is unavoidable risk that some Audit Evidence – Persuasive & not conclusive
MM can’t be detected even if audit as per (Auditor shouldn’t be satisfied with less than
SAs. persuasive audit evidence)
• ILA is not justification for auditor to be satisfied with less than persuasive AE.

Q3) Professional skepticism

• Questioning mind and being alert to conditions indicating possible misstatement (MST).
• Critical assessment of Audit evidence.

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SA 210 – Agreeing the terms of Audit Engagement

Q1) Factors where it is appropriate to revise terms of engagement / remind entity of

existing terms (Recurring Audits)

Change • Legal requirements

• Senior management
• Ownership
• Nature & size of business
• FRF
• Any revised / special terms of engagement
• Entity misunderstand objective and scope of audit

Q2) Auditor shall agree upon terms of engagement with management and these terms should
be recorded in audit engagement letter or other form of written agreement. What should be
included in Audit Engagement Letter?

Audit engagement letter is sent by auditor to client. Contents of audit engagement letter -

1) Objective and scope of audit

2) Responsibilities of auditor
3) Responsibilities of management
4) Identification of applicable FR framework for preparation of FS
5) Reference of expected form and content of audit report

Q3) Out of ORRFF, ORRF is there in engagement letter, then tell what is the discrepancy in
engagement letter?

F is missing (question may be framed where any component from ORRFF is missing. Identify &
answer it. All points to be written.)

Q4) Mgt has mentioned in audit terms that they will not be able to provide internal audit
report. They also imposed limitation on scope of audit work. Whether auditor should accept
audit engagement?

1) If management imposed limitation on scope and this results in auditor disclaiming opinion, then
auditor shall not accept engagement unless required by law.
2) If preconditions for audit not present, then auditor shall not accept engagement.
3) Conclusion - Auditor should not accept appointment due to limitation on scope of work.

Q5) Preconditions for audit

1) Determine whether FR framework is acceptable.

2) Management acknowledges & understands its responsibility -

For PPFS as per AFRF, including design, To provide auditor with –

implementation & maintenance of internal • All information
control • Additional information
• Unrestricted access to those within entity

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SQC 1 - Quality Control for Firms that perform Audits & Reviews of Historical Financial
Information & other Assurance and Related Services Engagements

Q1) Objective of SQC 1 & SA 220 – Most Important Line

Firms should establish quality control system to provide reasonable assurance that -

• Firm and personnel comply with PSRLR (Professional Std. & Regulatory & Legal Reqt.)
• Reports are appropriate

Q2) Elements of quality control system

• Human Resources
• Engagement Performance
• Monitoring
• Acceptance & continuance of client relations & specific engagements
• Leadership Responsibilities
• Ethical requirements
- SA 220 – same elements except HR — Assignment of engagement teams
- Firm Personnel

Q3) Leadership Responsibilities for Quality

• Managing partners: ultimate responsibility

• Inner culture, experience
• Quality: Paramount and non-negotiable
• Paisa, Log, Paisa
Paisa, Log, Paisa

Firm assigns mgt responsibilities so Firm’s policies for personnel Firm devotes sufficient
that commercial considerations do demonstrate overriding resources for
not override quality of work commitment to quality development of QCPP

Q4) Ethical requirements

(1) BCD In Out + Independence

• Professional behaviour
• Confidentiality
• Professional competence and due care
• Integrity
• Objectivity
• Independence
(2) Firm Independence requirements Personnel (SQC 1/SA 220)

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If threats,

Threat eliminate Khud hi eliminate (withdrawal from engagement)

(3) Personnel Firm

written confirmation of compliance with independence

At least annually

(4) Familiarity threat - same personnel for long time.

(5) Listed entities audit

EP to be rotated in at least 7 years Except sole practitioner

Q5) Acceptance & continuance of client relations and specific engagements

(1) Firm acquires vital info about client, before accepting engagement to decide about ICC.

• Integrity of client
• Competence to perform engagement
• Compliance with ethical requirements
(SA 220 – ICC + SM = Significant matters during current or previous engagement)

(2) Matters considered wrt integrity of client

• Identity and business reputation of client’s owners, management & TCWG

• Nature of client’s operations
• Info of attitude of client’s owners, mgt & TCWG towards aggressive interpretation of AS
• Whether client aggressively concerned with maintaining firm’s fees low
• Indications of inappropriate limitation on scope of work
• Reasons for appointment of firm and non-reappointment of previous firm
• Indications of money laundering and criminal activities
(3) Matters considered wrt firm’s capabilities, competence, time and resources-

• Firm personnel - knowledge of industry

• Firm personnel - experience - regulatory requirement
• Firm personnel - capabilities and competence
• Experts - available
• Individuals - eligibility requirement – EQCR - available
• Firm - complete engagement - reporting deadline
(4) Firm obtains info causing to decline eng. if obtainable earlier, policies on continuance
includes consideration of –

• Professional and legal responsibilities Possibility of withdrawing from –

• Whether firm to report to – • Engagement
1. Person who made appointment, OR • Both engagement and client relation
2. Regulatory Authorities
(5) Policies on withdrawal from eng. / both eng. & client relation address issues –

• Discussing with mgt and TCWG action firm might take.

• If appropriate to withdraw, discuss with mgt & TCWG, withdrawal & reasons.

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Consider PRL reqt. to remain in place or discuss with regulatory authorities, withdrawal &
•
reasons.
• Documenting significant -
o Issues
o Consultations
o Conclusions & its basis
Q6) Human Resources

Firm to establish policies requiring that-

Identity & role of EP Responsibilities of EP are EP has appropriate capabilities

communicated to client’s defined & communicated to him & time to perform role
mgt/TCWG

Q7) Engagement performance

(I) Consultation –

Difficult/contentious Within/outside firm TEO matters (Technical, Documentation

matters ethical, other matters)
(II) Engagement Quality Control Review (EQCR)

• Significant judgements reviewed by EQCRr (Engagement Quality Control Reviewer)

• It doesn’t reduce responsibilities of EP.
• Mandatory for audit of listed entities. Other – firm devise criteria.
• EQCR for audit of listed entities includes considering-
o Significance and disposition of corrected / uncorrected MST.
o Significant risks and responses.
o ET’s evaluation of independence.
o Whether WP reflect work performed & support conclusions.
o Appropriateness of report.
o Judgements made wrt materiality & significant risks.
• EQCRr

firm (ICAI Member) partner/employee of other firm

• EQCRr
o Objective
o No participation in decisions of engagement team.
o EP consult EQCRr so as not to compromise EQCRr’s objectivity.
o If objectivity impaired – EQCRr replaced
(III) Differences of opinion

Within engagement team Engagement team & consultant Engagement partner and EQCRr
• Report – after resolution of differences.
• Recommendations of EQCRr + Matter not resolved to
not accepted by Engagement partner EQCRr’s satisfaction

Established procedures - consulting

Another firm Professional/regulatory body

(IV) Engagement documentation
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Audit Other engagement
Engagement files to be completed in max 60 Appropriate time limit
days after AR date
• 2 reports on same subject matter – separate limit.
Eg, Component AR - consolidation purpose & legal purpose
• Engagement documentation – Firm’s property
Discretion – available to client provided it doesn’t undermine validity of work.
• Retention – minimum 7 years from AR date or if later, group AR date.

Q8) Monitoring

Quality control monitored considering following factors –

1. Taking remedial action against personnel who didn’t conform to quality control policies.
2. Taking action when –
a. deficiencies in design of quality control policies
b. non-compliance with quality control system.
3. Conducting monitoring by entrusting responsibility to partner/other persons with experience
& authority.
4. Dealing with complaints/allegations –
a. Non-compliance of PSRLR
b. Against firm/employees
c. By within/outside firm
5. Deciding whether quality control system properly designed and implemented.
6. Examining whether new developments in PSRLR reflected in quality control policies.

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SA 220 – Quality Control for Audit of Financial Statements

Q1) Leadership responsibilities

Importance to audit quality of – Fact – Quality is essential

• Performing work as per PSRLR
• Complying with quality control policies
• Issuing appropriate report
• Engagement team’s ability to raise
concerns without fear of reprisals

Q2) Engagement partner’s responsibility if EQCR

Determine – EQCRr appointed Discuss significant matters Not date AR until completion
with EQCRr of EQCR
• EQCRr’s objective evaluation of significant judgments involve –

Discussion of significant matters Review of audit Review of financial statements and

with engagement partner documentation audit report
Evaluation of conclusions reached in formulating AR

Q3) Documentation by engagement partner

Issues – Conclusion on compliance with Conclusion on acceptance and

• Compliance with ethical independence requirements continuance of client relation
requirements
• How resolved
Nature and scope of consultation

Q4) Documentation by EQCRr

Procedures on EQCR completed on/before Reviewer unaware of unresolved matters causing

EQCR performed AR date him to believe that significant
judgements/conclusions – inappropriate

Q5) SQC 1 v/s SA 220

SQC 1 SA 22O
Entire firm Audit
Responsibility – managing partner Responsibility – Engagement partner
Audit, review, assurance, related services Audit
Quality control policies – firm Quality control policies – audit
PSRLR + report SQC 1 is sine qua non for SA 220

Q6) Mechanism for review of quality control

(I) Peer Review Board

• Constituted by ICAI Council
• Objective of PR Board – Assurance assignments

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Technical, professional & ethical standards complied Proper system
• Quality enhancement by ICAI members.
• Check Karne wala – Peer Reviewer
Check Karwane wala – Practice Unit

Unqualified report – PR certificate Qualified report –

• No PR certificate
• Reasons
• Date for follow-on review
(II) Quality Review Board
• Set up by Central Government
• Members nominated by CG + ICAI Council
• Functions of Quality Review Board –

To make recommendations to To review quality To guide members to improve

Council as to quality quality
• Risk – Based Approach
• Review Karne wala – Technical Reviewer

(III) National Financial Reporting Authority (NFRA)

• Constituted under Companies Act 2013
• Duties

Monitor compliance with AS & Rule 3 of NFRA Rules, 2018 – Oversee quality
SA • Listed company
• Insurance/banking co.
• NFRA investigate auditors of companies specified in Rule 3
• QRB - other than Rule 3 + Referred by NFRA

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SA 230 – Audit Documentation

Q1) Meaning

Record of

Audit procedures Audit evidence Conclusions

Q2) Purpose

Engagement team to plan and Engagement team to supervise Engagement team is accountable
perform audit audit for its work
Continuing significance to EQCR/inspections (including external inspections)
future audit

Q3) Basics

1. More accurate

Documentation after audit work ❌ Documentation with audit work ✅

2. Auditor’s responsibility to provide access of audit documentation to regulators, not 3rd
party (after informing client).
3. Auditor’s discretion to make portions/extracts available to clients, provided it does not
undermine validity of work.

Q4) Form, content & extent of audit documentation depends on/Factors affecting amount of
working papers

Size and complexity of entity Nature of audit procedures Identified ROMM

Significance of audit evidence Audit methodology and tools

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SA 240 – The Auditor’s Responsibilities Relating to Fraud in Audit of Financial Statements

Q1) Fraud vs Error

1. Fraud –

Intentional act involving deception to obtain By mgt/employees/3rd party

unjust advantage
2. Misstatement may arise from fraud/error.
3. Fraud (2 types of intentional MST)

MST resulting from fraudulent financial MST resulting from misappropriation of assets
reporting

Q2) Fraudulent FR/ Source of fraudulent FR

1. Involves intentional MST including omission of amount/disclosures in FS to deceive FS

users.
2. Fraudulent FR accomplished by –

Manipulation, falsification, Misrepresentation/Intentional Intentional misapplication of

alteration of accounting omission of significant info in accounting principles wrt amt,
records FS classification & disclosures
3. Fraud by mgt overriding controls using techniques like –

Recording fictitious journal Inappropriately adjusting Omitting, advancing, delayed

entries (particularly period end) assumptions and changing recognition of transactions in
judgements FS
Concealing facts affecting FS Engaging in complex transactions to misrepresent financial
amount position

Q3) Misappropriation of assets

1. Theft of assets
2. By employees in small/immaterial amount.
3. Can also involve management who can conceal in ways difficult to detect.
4. It is accomplished by –

Embezzling receipts Stealing physical assets/intellectual Using entity’s assets for

(eg, Collection on property (eg, inventory for personal personal use (eg, as collateral
accounts receivable) use/sale, colluding with rival by disclosing for personal loan)
technological data)
Causing entity to pay for goods/services not received (eg, payment to fictitious vendors)

Q4) Responsibilities of management and auditor

1. Management/TCWG – Responsibility of prevention and detection of fraud.

2. Auditor –
• Obtain reasonable assurance – FS - free of material MST – fraud/error.
• Due to inherent limitations of audit, there is risk that some material MST may not be
detected, even if audit done as per SAs.
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• Risk of not detecting MM from fraud is higher than error, because fraud involves carefully
organised schemes to conceal it.
• Risk of not detecting MM from management fraud is higher than employee fraud, because
management is in position to manipulate accounting records.
• Auditor – Responsible for professional skepticism.
• Auditor identify and assess ROMM due to fraud and address ROMM by response.
• Auditor - report – COA 2013 & CARO 2020

Q5) Fraud risk factors

Events indicating incentive/pressure to commit fraud or provide opportunity to commit fraud.

A. Risk factors wrt MST arising from fraudulent FR

1. Incentives/Pressure
• High competition/market saturation, with declining margins.
• High vulnerability to rapid changes (eg, technology)
• Significant decline in demand
• Operating losses
• Recurring negative cash flows
• Rapid growth/unusual profitability than rivals
• New accounting, statutory, regulatory requirements
• Need to obtain additional debt/equity financing to stay competitive.
• Unrealistic expectation eg, over optimistic press release/annual report message.
• Ability to meet listing requirement/debt repayment/debt covenant requirement.
• Adverse effects of reporting poor financials on significant pending transactions like
business combination.
• Significant financial interest in entity.
• Compensation is contingent on aggressive targets.
• Personal guarantees of debts of entity.
• Excess pressure on management to meet targets.

2. Opportunities
• Significant related party transactions not in ordinary course of business.
• Significant unusual/complex transactions, especially at period end.
• Significant operations across international borders in jurisdictions where differing business
environment exist.
• Significant bank accounts/subsidiary/branch operations in tax haven jurisdictions.
• Strong financial presence/ability to dominate industry that allows entity to dictate T&C.
• Assets, liabilities, revenue, expenses based on significant estimates, involving subjective
judgements.
• Use of business intermediaries for which no business justification.

3. Attitudes/Rationalizations
• Communication of inappropriate values that are not effective.
• Non-financial management’s excess participation in selection of accounting policies.
• Known history of violation of L/R.
• Excess interest by mgt in maintaining/increasing entity’s stock price/earnings trend
• Management failing to remedy known significant deficiency in internal control.
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• Interest by mgt in employing inappropriate means to minimise earnings for tax saving.
• Low morale of senior management.
• Owner – manager makes no distinction between personal and business transactions.
• Dispute between shareholders in closely held entity.
• Recurring attempt by management to justify inappropriate accounting.
• Relation between management and auditor is strained due to –
Disputes Unreasonable demand on Restricted access to Dominant behaviour of
auditor eg Time constraint to auditor management
complete audit
B. Risk factors wrt MST from misappropriation of assets

1. Incentives/Pressure-
• Personal financial obligation may create pressure on management/employees to
misappropriate assets.
• Adverse relation between entity and employees due to following reasons –
Known/anticipated future Recent/anticipated change in Promotion/compensation,
layoffs employee compensation inconsistent with expectation

2. Opportunities –
• Large amount of cash on hand.
• Inventory items – small in size, high value, high demand.
• Easily convertible assets like bearer bonds, diamonds, computer chips.
• Fixed assets – small in size, marketable, lacking observable identification of ownership.
• Inadequate internal control over assets –
Inadequate segregation of Inadequate record keeping Lack of complete & timely
duties reconciliation of assets
Inadequate physical safeguards over cash, inventory, fixed assets

3. Attitudes/Rationalizations
• Changes in behaviour/lifestyle
• Behaviour indicating dissatisfaction with entity
• Tolerance of petty theft
• Disregard for need for monitoring/reducing risks related to misappropriation of assets.
• Disregard for internal control over appropriation of assets by –
o Overriding internal control
o Failing to take action on internal control deficiencies

Q6) Impossibility to continue audit/auditor unable to continue engagement

Determine professional/legal Consider If auditor withdraws –

responsibilities + Whether whether • Discuss with mgt/TCWG, withdrawal &
requirement to report to – appropriate to reasons
• Person who made withdraw from • Determine professional/legal
appointment or engagement, if responsibilities + Requirement to report
• Regulatory authorities legally permitted to –
o Person who made appointment or
o Regulatory authorities
withdrawal & reasons

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Q7) In determining responses to assessed ROMM due to fraud at FS level, auditor shall –

Assign and supervise personnel Evaluate whether selection & Incorporate unpredictability
on basis of Knowledge & skills application of a/cing policies are in selection of NTE of audit
& ROMM of engagement indicative of fraudulent FR procedures

Q8) Audit procedures responsive to risk of mgt override of controls

It is ROMM due to fraud + significant risk

Test appropriateness Review accounting For significant transactions outside normal course of
of journal estimates for business - Evaluate whether business rationale
entries/other biases suggest that they are entered for –
adjustments • Fraudulent FR
• Misappropriation of assets

Q9) Written representation from mgt/TCWG.

They acknowledge responsibility for They disclosed to They disclosed to auditor their
design, implementation, maintenance of auditor results of knowledge of fraud having
internal control to prevent/detect fraud mgt’s assessment of material effect on FS
ROMM due to fraud
They disclosed to auditor their knowledge of allegations of fraud communicated by employees

Q10) Communication Map

Auditor identified fraud –

Communicate to management If management involved Regulatory and enforcement authorities -

– communicate to communicate to 3rd parties (eg, RBI for
TCWG banks) when –
• Mgt/TCWG fails to take action OR
• There are provisions to do so
Q11) MCQ

If auditor concludes that no ROMM due to fraud wrt revenue recognition – Then auditor should
document reasons for it.

Q12) Documentation

1. Auditor’s documentation of understanding entity & envt. & assessment of ROMM includes –

Significant decisions reached during discussion Identified and assessed ROMM due to fraud at
among engagement team regarding susceptibility FS level and assertion level
of FS to MM due to fraud
2. Auditor’s documentation of responses to assessed ROMM includes –

Overall responses to assessed ROMM due to Results of audit procedures, including those
fraud at FS level & assertion level designed to address risk of mgt override of
controls

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CA SHANKAR LAKHWANI # Audit Made Easy
SA 250 – Consideration of Laws & Regulations in an Audit of Financial Statements

Q1) Responsibility of management

• Ensure that entity’s operations conducted as per L/R.

• Policies and procedures implemented by entity for prevention and detection of non-
compliance with L/R –

Monitoring legal requirement & ensuring Monitoring compliance with Developing, publicizing
that operating procedures are as per reqt. Code of Conduct (CoC) & following CoC
Maintain register of significant L/R & Ensuring employees – properly trained & understand
complaints CoC

Q2) Responsibility of auditor

1. Auditor is not responsible for preventing non-compliance and can’t be expected to detect
non-compliance with all L/R.
2. Auditor – obtain reasonable assurance that FS free from MM – fraud/error.
3. Auditor considers legal & regulatory framework.
4. For L/R, potential effects of inherent limitations on auditor’s ability to detect MM (SA
200) are greater because –
There are many L/R that Non-compliance may involve conduct Whether non compliance or
don’t affect FS & not designed to conceal it. Eg, collusion, not – matter of legal
captured by info system forgery, intentional determination by court of law
misrepresentation to auditor

Q3) 2 categories of L/R

L/R having direct effect on L/R not having direct effect on determination of amt &
determination of material amt & disclosures in FS but compliance is fundamental to –
disclosures in FS (eg, tax & labor law) • Operations
• Going concern
• Avoid material penalties
Non- compliance: material effect on FS

Q4) Auditor’s responsibilities

1. Common for A & B –

Auditor obtains general understanding of:

Legal & regulatory framework How entity is complying with framework

2. For A –

Auditor to obtain SAAE for compliance with L/R.

Eg, Law for form and content of FS/industry specific FR issues.
3. For B –

Auditor’s responsibility is limited to specified audit procedures to identify non-compliance with

L/R having material effect on FS -

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Inquiry of management/TCWG as to Inspecting correspondence with regulatory authorities
whether entity is complying with L/R
4. Auditor obtains written representation that known non-compliance are disclosed to auditor.

Q5) Audit procedures when non compliance identified/suspected.

1. Auditor to obtain –

Understanding of nature of act and Further information to evaluate possible effect on FS

circumstances in which it occurred
2. If auditor suspects non-compliance, he shall discuss with mgt/TCWG.
If mgt/TCWG don’t provide sufficient info and effect of non-compliance is material to
FS, auditor shall obtain legal advice.
3. If sufficient info can’t be obtained wrt suspected non-compliance – auditor shall evaluate
effect of lack of SAAE on opinion.
4. Auditor takes action.

Q6) Reporting of identified/suspected non-compliance.

1. Reporting to TCWG –
• Auditor communicates to TCWG matters of non-compliance coming to auditor’s attention,
other than inconsequential matters.
• Non-compliance – intentional & material
Auditor communicate TCWG
ASAP
• Auditor suspects that management/TCWG involved in non-compliance.
Auditor communicate Next higher level (eg, Audit Committee/Board)
If no higher authority /auditor believes communication may not be acted upon/unsure as to person
to whom to report – obtain legal advice.
2. Reporting in Audit Report

Non-compliance – Auditor precluded by Auditor unable to determine if

• material effect on FS mgt/TCWG from obtaining non-compliance occurred/not due
• not reflected in FS SAAE to evaluate if non- to limitations imposed by
compliance occurred/not circumstances

Qualified/adverse opinion Qualified/Disclaimer Give effect on opinion

3. Reporting to regulatory and enforcement authorities
• Auditor to determine if he has responsibility/not to report to parties outside entity.

Q7) Documentation

Non-compliance (Both - Results of discussion with –

identified and suspected) • Management/TCWG
• 3rd party

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SA 260 -Communication with TCWG

Q1) Basics

1. TCWG – Oversees (strategic direction & FR process) + Accountability

2. Significance of communication with TCWG – Two way communication
Helps in assisting

Auditor & TCWG Auditor to obtain info to TCWG to oversee FR process

• in understanding matters understand entity &
• in developing constructive environment
working relation

Q2) Matters communicated by auditor

Auditor’s responsibilities wrt FS Planned scope & timing of Significant findings from
audit audit audit
A. Auditor’s responsibilities wrt FS audit

To give opinion on FS prepared by Audit doesn’t relieve management/TCWG of their

management, with oversight of TCWG responsibilities
B. Planned scope & timing of audit

Overview of planned scope and timing of Effectiveness of audit shouldn’t be compromised (eg,
audit, including significant risks By making audit procedures too predictable)
identified by auditor
C. Significant findings from audit

Auditor’s views wrt significant qualitative aspects Significant Circumstances

of entity’s a/cing practices, policies & estimates difficulties affecting form and
+ encountered during content of audit
Why he considers a/cing practice audit report
• Acceptable – AFRF
• But not appropriate for entity
Other significant matters relevant to oversight of Unless all TCWG = mgt
FR process • Significant matters of audit
discussed with management
• Written representation auditor is
requesting

Q3) Explain significant difficulties during audit

Restriction on auditor by Unreasonably brief time to Mgt unwillingness to make going

management complete audit concern assessment
Extensive unexpected effort Unavailability of info
to obtain SAAE

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Q4) Significant matters of audit discussed with mgt

Significant transactions Business conditions affecting entity Concerns wrt mgt’s consultation
and business plans affecting ROMM with other accountants on -
• Accounting
• Auditing
matters
Discussion for Significant matters on which there was disagreement with mgt, except
appointment of auditor initial difference of opinion due to incomplete facts
for a/cing practices,
application of SAs

Q5) Communication of Auditor’s independence for listed entities

Auditor TCWG

Statement that engagement team • All relations & other matters between firm & entity
and others complied with ethical that has bear on independence, including total fees
requirements of independence for audit & non-audit services.
• Safeguards to reduce/eliminate threats to
independence.

Q6) MCQ

1. Auditor shall communicate in writing with TCWG regarding significant findings from audit,
if oral communication inadequate.
2. Auditor shall communicate in writing with TCWG regarding auditor independence in case of
listed entities.
3. Documentation

Oral Writing
Matter + when + to whom communicated Copy of communication

Q7) Circumstances in which auditor is required to include additional info in audit report as per
SAs & for which communication with TCWG is required –

1. Auditor expects to modify opinion (SA 705)

2. Material uncertainty related to going concern is reported (SA 570)
3. Key audit matters are communicated (SA 701)
4. EOM or OM para (SA 706)
5. Uncorrected material misstatement of other information (SA 720)
• Auditor provides TCWG – draft of auditor report to facilitate discussion of how such
matters will be addressed in audit report.

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SA 265 – Communicating Deficiencies in Internal Control to TCWG & Management

Q1) Auditor to communicate material weakness in internal control to management/audit

committee through letter of weakness/management letter OR Internal control weakness.

1. Letter Areas of weaknesses in system

Suggestions for improvement
2. It indicates that it discuss only weaknesses which came to auditor’s attention & it doesn’t
determine adequacy of internal control.
3. Letter – reference document for mgt for revising system & insisting on implementation.
4. Letter – minimize legal liability if major defalcation/loss due to internal control weakness.

• Auditor Communicate Management

In writing, significant Other deficiencies in internal control not communicated to mgt

deficiencies in internal control by other parties & auditor – professional judgement – sufficient
communicated to TCWG importance
• Auditor to include in written communication to TCWG of significant deficiencies in internal
control –
a. Description of deficiencies
Explanation of potential effects
b. Sufficient information to enable TCWG & mgt to understand context of
communication. Auditor explain that –

Purpose of audit Audit – consideration of IC relevant to Report – Deficiencies identified by

– opinion on FS PPFS to design audit procedures. Not auditor & auditor – sufficient
expressing opinion on effectiveness of IC importance for reporting to TCWG

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SA 299 – Joint Audit of Financial Statements

Q1) Responsibility & coordination among joint auditors.

1. Each joint auditor is responsible only for work allocated to him.

2. All joint auditors are jointly & severally responsible for –

Audit work not divided & Decision by all joint auditors wrt Matters brought to notice of
done by all joint auditorscommon areas concerning NTE of joint auditors by any one of
audit procedures to be performed them & on which there is
by each joint auditor agreement among joint auditors
Ensuring FS is as per Ensuring presentation & disclosure Ensuring audit report is as per
statutes of FS is as per AFRF statutes, SAs & pronouncements
3. If joint auditor comes across matters wrt responsibility of other joint auditor & which
deserve their attention
Said joint auditor communicate other joint auditor in writing
4. Responsibility of each joint auditor to determine NTE of audit procedures/study internal
controls & risks – for work allocated to him.
5. For pt. 2 – subpoint 2 above

All joint auditors responsible only for decisions Execution of audit procedures – individual
wrt NTE of audit procedures responsibility of joint auditor

Q2) Reporting

1. Normal case – common audit report

2. Disagreement by joint auditors – separate audit report by joint auditor who disagreed.
3.

Audit report of joint auditor makes reference Separate audit report of other joint auditor
to separate audit report of other joint auditor makes reference to audit report of joint auditor
Reference – OM para (SA 706)

Q3) In developing joint audit plan, what should joint auditors do?

Identify division of audit areas & Ascertain reporting Consider & communicate among all joint
common audit areas objectives auditors factors significant in
directing engagement team’s efforts
Consider results of preliminary
engagement activities & similar Ascertain NTE of resources
previous engagements.

Q4) Basic points

1. Each joint auditor assumes –

a. Other joint auditor done their work as per SAs & it’s not necessary to review
other’s work.
b. Other joint auditors have brought to said joint auditor’s notice any departure from
AFRF.

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2. Before finalizing report – joint auditors discuss & communicate respective conclusions with
each other.
3. Joint auditors obtain - common engagement letter & common written representation.
4. Work is divided among joint auditors by mutual discussion. Work allocation document -
signed by all joint auditors and communicated to TCWG.
5. If joint auditor expects to modify/include EOM or OM Para
Joint auditor communicate TCWG
Circumstances + wording of modification/para
6. Joint auditor document

NTE of audit procedures Division of work

7. When FS of branch/division audited by one of the joint auditors – other joint auditors
proceed on the basis that FS comply with AFRF & present T&F view.

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SA 300 – Planning an Audit of Financial Statements

Q1) Benefits/usefulness of planning audit of FS

Attention to important Timely resolution of potential Proper selection of engagement

areas problems team
Direction & supervision of Proper organisation & mgt of audit engagement
engagement team

Q2) Nature & extent of planning varies according to/Factors affecting nature & extent of
planning

Size & complexity of auditee Past experience and expertise Changes in circumstances

Q3) Planning is not discrete phase of audit but continual & iterative process.

1. Planning is not discrete phase of audit but continual & iterative process.
2. Begins after completion of previous audit & continues until completion of current audit.
3. Planning includes need to consider these matters –

Analytical procedures applied Obtaining general understanding of legal Determination of

as RAP & regulatory framework & its compliance materiality
Involvement of experts Performance of other RAP

Q4) Elements of planning

Preliminary engagement activities Planning activities

I. Preliminary engagement activities –
Performing procedures

Acceptance & continuance of client Compliance with ethical requirements, Understanding terms
relations & audit engagement including independence of engagement
II. Planning activities

Audit strategy (scope, timing, and direction) Audit plan (nature, timing, and extent)

Q5) Contents of audit plan

NTE of planned RAP NTE of planned FAP Other planned audit procedures

Q6) Changes in audit strategy and plan due to below factors

Unexpected events Changes in conditions Audit evidence Change in law

Q7) Factors while establishing audit strategy

Determination of characteristics of audit Reporting objectives Team’s efforts

Considering results of preliminary NTE of resources
engagement activities

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Q8) Benefits of overall audit strategy

Management of Allocation of quantity Timing of deployment Employment of

resources of resources of resources qualitative resources

Q9) Documentation

Audit strategy Audit plan Changes in both with reasons

(Record of key decisions) (Record of NTE of RAP)

Q10) Relation between audit strategy (AS) and audit plan (AP)

AS prepared before AP AP – More detailed. It gives NTE Change in one will result in
of audit procedures to obtain SAAE change in other
AS gives guidelines to make AP

Q11) Audit Programme

Allocates work to team members, including list of It also estimates duration to complete audit
procedures and instructions
A. Matters to be considered while preparing audit programme

Nature of business Overall plan Internal control system and

accounting procedures
Size of organisation & Information of organisation Accounting and management
management structure of business policies

B. Circumstances when audit programme altered –

If audit procedures designed It is discovered that internal Extraordinary increase in book

for certain volume of turnover control procedures were not debts/stock value compared to
and volume increased as effective as assumed when last year
substantially audit programme framed
Suspicion aroused/information received that assets are misappropriated
Audit plan and programme reconsidered as audit progresses.

C. Drawing up audit programme –

When auditor is appointed to audit accounts of entity for first time, audit programme should be
developed in 3 stages stated below –

1. Broad outline of audit programme should be drawn up.

2. After internal & a/cing procedures are reviewed, details should be filled up on a
consideration of deficiencies in internal control system.
3. After detailed checking procedure is over, extent to which special procedures that are
required to be applied should be determined. Eg, physical inspection of fixed assets.
At each subsequent engagement, programme should be reviewed and modified on account of –

Experience gained Important changes that have taken Evaluation of internal control
during previous audit place in business specially internal made for current year
control system & a/cing procedures

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Q12) Key phases in audit execution stage

Execution planning Risk & control evaluation Testing Reporting

Q13) Factors considered in development of audit plan

Terms of engagement Legal requirement Materiality

NTE of audit evidence NTE of report

Q14) Overall Audit Strategy & Audit Plan – Responsibility of Auditor

Audit strategy and audit plan is responsibility of auditor. When discussing matters with
management, care is required in order not to compromise effectiveness of audit. Eg, discussing
NTE of AP with management may compromise effectiveness of audit by making audit procedures
too predictable.

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SA 315 – Identifying & Assessing ROMM through understanding the entity & its environment

Q1) Assertions

Transactions and events Occurrence, completeness, accuracy, cut-off, classification

Account balance Existence, completeness, valuation, rights and obligation
Presentation & disclosure Occurrence, rights and obligation, completeness, classification, accuracy
and valuation

Q2) Significant risks/risks requiring special audit considerations/indications to judge that

risks are significant or not/factors to be considered while exercising judgement that risks are
significant or not.

Auditor has to consider

Risk of Risk related to significant Complexity of Significant Significant

fraud economic/accounting transactions transactions with transactions outside
development related parties normal course of
business

Q3) IT specific risks to internal control – Digital audit Ans. 7

Q4) Points to consider to evaluate ‘knowledge of business’ in conduct of audit/RAP to

understand entity, environment, internal control and obtain knowledge of business.

Understanding of

Industry Nature of entity – Entity’s selection Measurement Business

regulatory & • Operations & application of of entity’s risks
other external • Types of investments accounting financial
factors • Ownership & governance policies performance
structure
• Way in which entity is
structured & financed

Q5) Major sources to obtain info of client’s business.

Client’s policy and procedures manual Annual reports of client Discussion with client
Previous year’s audit working papers Visit to client premises

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SA 320 – Materiality in Planning & Performing Audit

Q1) Materiality

Benchmark x % (based on professional judgment)

Benchmark
Profit making entity Profit before tax
Loss making entity Revenue
Public utility program Total cost
% applied to PBT > % applied to revenue

Q2) Factors to identify benchmark

Elements of FS (Assets, Items of FS on which users’ Relative volatility of benchmark

liabilities, revenue, expenses) attention is focused (eg, for
profit oriented entity – profit)
Entity’s ownership structure Nature of entity & its industry & economic environment
and way it is financed

Q3) Re-evaluation of materiality/Revision of materiality

While establishing overall If any class of transaction, a/c balance Revision of materiality for
audit strategy – auditor or disclosure (CAD) for which MST of FS as whole takes place if
determines materiality less amount than overall materiality is auditor becomes aware of
for FS as a whole material, then auditor determines any info, which would have
materiality for that particular CAD caused auditor to determine
different amt. initially
If auditor concludes lower materiality for FS as a whole, auditor shall determine whether
necessary to revise performance materiality & whether nature, timing & extent of audit
procedures are appropriate

Q4) Meaning of performance materiality

Amount set by auditor at less than materiality to reduce probability to low level that aggregate of
uncorrected & undetected statements exceeds materiality for FS.

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SA 330 – The Auditor’s Responses to Assessed Risks

Q1) Considerations of auditor to assess ROMM & his response to such risks

SA 315 – IARC

1. Identify risk – by obtaining understanding of entity, environment and internal control.

2. Assess identified risks and evaluate whether they relate more pervasively to FS.
3. Relate identified risks to what can go wrong at assertion level.
4. Consider likelihood of misstatement & whether it is material misstatement.
SA 330 – “The Auditor’s Responses to Assessed Risks”

Consider reasons for assessment given to ROMM at assertion level, Obtain more persuasive
including audit evidence
• Likelihood of material misstatement
• Whether risk assessment takes controls into account, thereby
obtaining SAAE that whether controls are effective

Q2) Basics

Auditor’s responses to assessed risks

Test of Controls Substantive Procedures

Test of Details Substantive Analytical Procedures

Test of transactions Test of balances

(vouching) (verification)

• Auditor perform TOC when –

ROMM assessment at assertion level includes Substantive procedures alone can’t provide SAAE
expectation - controls operating effectively at assertion level

Auditor obtain more persuasive audit evidence – greater the reliance on operating effectiveness of
controls

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Risk Assessment & Internal Control

Q1) Audit risk components

A. Inherent Risk –
• Susceptibility of assertion to MST that could be material, assuming no controls.
• Arise from entity’s size, objectives, operations, complexity & regulatory environment.
• Eg, techno development making product obsolete.
B. Control Risk –
• Risk that internal control system will not prevent/detect/correct material MST.
• Internal control is missing.
• Some control risk always exists because of inherent limitations of internal control.
C. Detection Risk –
• Risk that auditor will not detect MM even if all audit procedures applied.
• Inverse relation to ROMM at assertion level.
AUDIT RISK = ROMM x Detection Risk

ROMM = Inherent Risk x Control Risk

• ROMM = Risk that MM may exist in FS before start of audit.

• Audit materiality has inverse relation with audit risk.

Q2) Steps for Risk Identification

1. Assess significance of assessed risk & impact of its occurrence

2. Determine likelihood of occurrence of assessed risk
3. Document assertions that are effected
4. Consider impact of risk on each assertions.
5. Identify degree of significant risks requiring separate attention by auditor
6. Enquire & document management’s response

Q3) Indicators of possible potential MST

Completeness Existence Recording Cut-off procedures

Q4) Risk-based audit (RBA) approach

1. Analyzes audit risks, set materiality thresholds based on audit risk analysis & develops audit
programmes that allocate large portion of audit resources to high risk areas.
2. Auditor doesn’t need to perform audit procedures on all areas of audit.
3. Steps/Phases

I. RISK ASSESSMENT
• Performing client acceptance or continuance procedures
• Planning overall engagement
• Performing RAP to understand business and identify inherent and control risks
• Assessing ROMM in FS
• Making informed assessment of ROMM at FS level and assertion level

II. RISK RESPONSE

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• Design and perform FAP that respond to ROMM and reduce it to acceptably low level.

III. REPORTING
• Issuing AR based on audit findings.

Q5) Internal control system meaning

All policies & procedures by management to assist in achieving management’s objective of ensuring-

• Efficient conduct of business

• Safeguarding of assets
• Prevention/detection of error/fraud
• Accuracy and completeness of accounting records
• Timely preparation of reliable financial information

Q6) Objectives of internal control wrt accounting system

1. Transactions are executed through management authorisation.

2. All transactions are promptly recorded in appropriate manner.
3. Assets and records – Safeguarded from unauthorised access, use, disposition.
4. Assets are verified at reasonable intervals & appropriate action is taken wrt discrepancies.

Q7) Basic accounting control objectives

Ensure all transactions are

Recorded Real Properly Recorded Properly Properly classified Properly

valued timely posted and disclosed summarised

Q8) Limitations of internal control

1. Management’s consideration that cost doesn’t exceed benefit.

2. Most internal control not directed at transaction of unusual nature. Potential of human
error due to carelessness, distraction, etc.
3. Possibility of circumvention of internal control by collusion with employees/with parties
outside entity.
4. Possibility that person responsible to exercise internal control could abuse that
responsibility.
5. Manipulations by management wrt judgements in preparation of FS.
Q9) Structure of internal control – Write answer 13

Q10) Components of internal control

I. CONTROL ENVIRONMENT

Communication and enforcement of Commitment to competence Participation by TCWG

integrity and ethical values
Mgt’s philosophy and operating style Organisational structure Assignment of authority
and responsibility
II. ENTITY’S RISK ASSESSMENT PROCESS

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Risks can arise/change due to circumstances –

New personnel - Different New/revamped info system New technology

understanding of IC
New business models, New accounting pronouncements
products, activities
III. CONTROL ACTIVITIES

Categorised as policies & procedures related to –

Performance reviews Information processing Physical controls Segregation of duties

Performance reviews - actual versus budget.

Physical controls –

Physical security of assets Authorisation for access to Periodic counting & comparison
computer programs with amount on control records
IV. INFORMATION SYSTEM & COMMUNICATION
• Consist of infrastructure (physical and hardware components), software, people,
procedures, data. Info system wrt FR objectives encompasses methods/records that –
Write basic accounting control objectives
V. MONITORING OF CONTROLS
• Whether controls operating as intended

Q11) Internal check system and its objectives

It implies organisation of overall system of book-keeping and arrangement of staff duties in such a
way that no one person can carry through a transaction and record every aspect thereof.

Objectives of internal check system-

1. To detect error and frauds with ease.

2. To increase efficiency of staff working within organisation.
3. To minimize possibility of commission of errors and fraud by any staff.
4. To locate responsibility area and stages where actual fraud/error occurs.
5. To prevent misappropriation of cash & falsification of accounts.

Q12) Effectiveness of efficient system of internal check depends on following

considerations/considerations on which effectiveness of internal check system depends –

Clarity of responsibility Division of work Standardization Appraisal

Q13) General conditions pertaining to internal check system

1. Staff duties – rotated from time to time.

2. No single person should have complete control over important aspect of business operation.
3. Every member of staff encouraged to go on leave at least once a year.
4. Persons – physical custody of assets – not permitted to have access to BoA.
5. Budgetary control exercised. Wide deviations – reconciled.

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Q14) Need for manual elements in internal control.

Manual elements in internal control - more suitable when judgement and discretion required.

1. Large, unusual, non-recurring transactions.

2. Circumstances where errors are difficult to define.
3. In circumstances requiring control response outside scope of existing automated control.
4. In monitoring effectiveness of automated controls.

Q15) Standard operating procedures

1. Enterprise risk management - Organisation – robust process to identify and mitigate risks.
2. Segregation of job responsibilities – Multiple activities should not be concentrated with one
individual.
3. Job rotation in sensitive areas – To avoid degeneration of controls.
4. Delegation of financial powers document – Organisation maintain clearly defined document
on delegation of powers.
5. Information technology based controls – It’s easier to embed controls through system
instead of being human dependent.

Q16) Techniques of evaluation of internal control.

1. Questionnaire
• Set of questions about each functional area.
• Filled by company executives.
• In use of internal control questionnaire, assumptions of elements of good control are –
Employees concerned with No single person has There should be evidence to
accounting function are not responsibility to complete identify person who has
assigned custodial function transaction all by himself done work
Work of one - expected to Proper documentation and recording of transactions
come under review of
another
2. Check List
• Series of instructions/questions on internal control which auditor must follow/answer.
• Distinction between internal control questionnaire and check list.
o ICQ - Large number of detailed questions
CL - Questions wrt main control objective with area under review
o ICQ – Answered by company executives
CL - Answered by auditor
o Significance of “NO” in ICQ indicate weakness but significance of that weakness is
not revealed automatically.
CL – Specific statement required when apparent weakness is material.
3. Flow Chart
• Graphic presentation of internal control in organisation.
• Comprehensive way to review internal control.
• Gives bird’s eye view of internal control.
• Provides neat picture of whole department. More specifically it can show –
o Number of copies in which document raised/received.
o At what point document

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▪ raised internally
▪ received from external sources
o Checking authorisation and matching at relevant stages
o Filing of documents
o Final disposal by sending out/destruction

Q17) International Internal Control Frameworks

A. Internal Control - Integrated Framework issued by Committee of Sponsoring

Organisations of Treadway Commission (COSO Framework)
- Introduced in 1992 as guidance on how to establish better controls.
- Components of COSO –
Control environment Risk assessment Control activities Information & Monitoring
communication
- Framework lists 3 categories of objectives –

a. Operations objectives - related to effectiveness and efficiency of operations.

b. Reporting objectives - related to financial and non-financial reporting to stakeholders.
c. Compliance objectives – related to compliance with L/R.
B. Guidance on Assessing Control published by Canadian Institute of Chartered
Accountants (CoCo)
- Outlines criteria for effective control in 4 areas –
Purpose Commitment Capability Monitoring &
learning
C. Control Objectives for Information & Related Technology (COBIT)
- Has 34 high level processes covering 210 control objectives
- Used globally by all managers responsible for IT business processes.
- Framework created by ISACA (Information Systems Audit & Control Association) for IT
governance & mgt.
- Categorised in 4 domains –
o Planning and organisation
o Acquisition and implementation
o Delivery and support
o Monitoring and evaluation
D. Internal Control : Guidance for Directors on Combined Code, published by Institute of
Chartered Accountants in England & Wales (Turnbull Report)
E. Sarbanes-Oxley Section 404 –

SEC rules & PCAOB (Public co. A/cing Oversight Board) std. require that –
- Management perform formal assessment of controls over FR including test that confirm
operating effectiveness of controls.
- Management includes in annual report ICFR assessment.
- External auditors provide 2 opinions as part of single integrated audit of company
o Independent opinion on effectiveness of ICFR system
o Traditional opinion on FS

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SA 402 – Audit Considerations relating to Entity using Service Organisation

Q1) A Ltd. gets its a/cing data processed by service organisation (SO). CA SRL is auditor of
A Ltd. He wants to obtain understanding of how A Ltd. is using SO’s services. What all
understanding to obtain? OR What are additional precautions CA SRL would consider?

Understanding

Nature & significance Nature and materiality Degree of interaction Nature of relation
of services & its effect of transactions between activities of between service
on user entity’s internal service organisation and organisation and
control user entity user entity

Q2) As an auditor of user entity, mention factors to be considered for financial reporting of
service organisation (SO) ? OR What services of SO are relevant to audit of user entity’s
FS?

Services of SO are relevant to audit of user entity’s FS when they are part of user entity’s info
system, relevant to FR i.e., when those services affect any of following –

Class of transactions in user Controls for journal entries, FR process to prepare user
entity’s operations, significant including non-standard journal entity’s FS, including a/cing
to user entity’s FS entries estimates
How user entity’s info system Procedures within IT & manual system by which user entity’s
captures events, significant to transactions – initiated, recorded & reported in FS.
FS

Q3) Type 1 Report

(I) Description by mgt of SO of (II) Report by service auditor to give

• System reasonable assurance, including his opinion on (I)
• Control objectives
• Controls
Designed and implemented as at specified date

Q4) Type 2 Report / report on description, design & operating effectiveness of controls of
service Organisation.

(I)Description by mgt of SO of (II) Report by service auditor to give

• System reasonable assurance, including -
• Control objectives • Service auditor’s opinion on (I)
• Controls • Description of service auditor’s TOC &
• Their design and implementation its results.
• Their operating effectiveness
throughout period

Q5) If user auditor is unable to obtain understanding from user entity, he will use these
procedures –

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Obtain Type 1/2 report Contacting SO to obtain Visit SO to perform
specific info procedures giving info of
controls at SO
Using another auditor to perform procedures giving info of controls at SO

Q6) Reporting by user auditor

1. User auditor – modifies opinion in user auditor’s report (SA 705), if user auditor unable to
obtain SAAE of SO’s services.
2. User auditor not to refer service auditor’s work in user auditor’s report containing
unmodified opinion, unless law/regulation says.
3.

If Law/regulation says Reference is relevant to understand modification

(unmodified opinion) (modified opinion)
Reference will come but state that it doesn’t diminish user auditor’s responsibility

Q7) Using type 1/2 Report

Supports user auditor’s To see if audit evidence is sufficient-appropriate (SAAE), check

understanding of controls at • Service auditor’s competence (except when ICAI member)
SO & independence from SO
• Adequacy of standard of report
User auditor shall –
• Check whether description of controls at SO is at date or for period.
• Check if audit evidence is SAAE.
• Check whether complementary user entity controls are relevant to user entity & if yes,
whether user entity implemented them.
Complementary user entity controls are controls that SO assumes, will be implemented by user
entity.

Q8) Test of controls

When user auditor expects controls at SO are effective, he obtains SAAE of operating
effectiveness by –

Type 2 report Performing test of controls Using another auditor to

(TOC) at SO perform TOC at SO
If type 2 report, user auditor to determine whether it provides SAAE of operating effectiveness
by –

Checking whether description, Checking adequacy of – Checking whether

design & operating • Time period of TOC complementary user entity
effectiveness of controls at • Time elapsed since TOC controls are relevant to user
SO is at date or for period entity & if yes, whether user
entity implemented them & if
yes, testing operating
effectiveness
Checking whether TOC by service auditor are relevant to assertions in user entity’s FS

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SA 450 – Evaluation of Misstatements Identified During the Audit

Q1) Definitions

Misstatement Difference b/w amount, classification, presentation, disclosure of

FS item & amount, classification, presentation, disclosure required
as per AFRF. Misstatements can arise from error/ fraud.

Uncorrected Misstatements Misstatements that auditor has accumulated during audit & that
have not been corrected.
Factual misstatements Misstatements about which there is no doubt.
Judgmental misstatements Differences arising from judgements of mgt concerning accounting
estimates that auditor considers unreasonable or selection or
application of accounting policies that auditor considers
inappropriate.
Projected misstatements Auditor’s best estimate of misstatements in populations, involving
projection of misstatements identified in audit samples to entire
populations from which samples were drawn.

Q2) Accumulation of identified MST

1. Auditor shall accumulate MST identified during audit, other than those that are clearly
trivial.
2. Accumulation of clearly trivial amounts would not have a material effect on FS.
3. When there is uncertainty about whether item is clearly trivial, it is considered not to
be clearly trivial.

Q3) Consideration of identified misstatements as audit progresses

Auditor shall determine whether overall audit strategy & audit plan need to be revised, if –

Nature of identified MST & circumstances of Aggregate of MST accumulated during audit
their occurrence indicate that other MST may approaches materiality determined as per SA
exist that, when aggregated with MST 320
accumulated during the audit, could be
material
If, at auditor’s request, mgt has examined CAD & corrected MST that were detected, auditor
shall perform additional audit procedures to determine whether MST remain.

Q4) Communication & Correction of MST

1. Auditor shall communicate all MST accumulated during audit with mgt, unless prohibited
by L/R.
2. Auditor shall request mgt to correct MST.
3. If mgt refuses to correct MST communicated by auditor, auditor shall obtain
understanding of mgt’s reasons for not making corrections & shall take that understanding
into account when evaluating whether FS as a whole are free of MM.

Q5) Evaluating effect of uncorrected MST

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1. Auditor shall reassess materiality determined as per SA 320 to confirm whether it
remains appropriate in context of entity’s actual financial results.
2. Auditor shall determine whether uncorrected MST are material, individually/in aggregate.
3. In making this determination, auditor shall consider –

Size & nature of MST, both in relation to CAD Effect of uncorrected MST related to prior
& FS as a whole & particular circumstances of periods on CAD & FS as a whole .
their occurrence

Q6) Communication with TCWG

1. As per SA 260, auditor shall communicate with TCWG – uncorrected MST & effect that
they, individually/in aggregate, may have on opinion in AR, unless prohibited by L/R.
2. Auditor’s communication shall identify material uncorrected MST individually.
3. Auditor shall request that uncorrected MST be corrected.
4. Auditor shall also communicate with TCWG – effect of uncorrected MST related to prior
periods on CAD/FS as a whole.

Q7) Written representation (WR)

Auditor shall request WR from mgt & TCWG, whether they believe effect of uncorrected MST are
immaterial, individually & in aggregate, to FS as a whole.

Q8) Audit documentation

1. Amount below which MST would be regarded as clearly trivial.

2. All MST accumulated during audit & whether they have been corrected.
3. Auditor’s conclusion as to whether uncorrected MST are material, individually/in aggregate,
& basis for that conclusion.

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SA 500 – Audit Evidence

Q1) Methods to obtain audit evidence in performing compliance and substantive procedures.

Inspection Examination of doc/assets. Eg, test of controls, doc. of shares.

Inquiry Info from knowledgeable person – financial/non financial,
within/outside entity, formal/informal, written/oral.
Analytical procedures Study relation between financial & non financial data to identify
fluctuations & significant deviation from predictions.
External confirmation Direct written response from confirming party.
Recalculation Checking arithmetical accuracy of records.
Reperformance Independent execution of procedures originally performed as
internal control.
Observation Looking at process performed by others. Eg, inventory counting
Limitation – limited to point of time of observation.

Q2) Factors affecting nature, timing & extent of audit procedures in case of mgt’s expert.

Ans. Same as SA 620. Ans. 4 – Part 2. Give reference of SA 500.

Q3) Using the work of mgt’s expert (eg, actuary)

ROLE OF AUDITOR

Evaluate competence, Understand his work Evaluate his appropriateness of

capability, objectivity of work
expert
How? How? How?
Personal experience with past See methods of work Relevance of work, assumptions,
work/discussion/books by source data
expert
Famous question - Variation in gratuity/salary benefits

Auditor satisfied Not satisfied

Use work of mgt expert Report in audit report

Q4) Basics

1. Audit evidence means info used by auditor

to arrive at conclusions to form opinion

It includes financial and non-financial info.

2. Audit Procedures

Risk Assessment Procedures Further Audit Procedures

(RAP) (FAP)

Compliance procedures Substantive procedures

(Test of controls) (Test of details)
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3. Selection of items to obtain audit evidence –

100% examination (all items) Specific items Audit sampling (SA 530)
4. Types of audit evidence
Depending on nature Visual, oral, documentary
Depending on source Internal and external
5. Reliability of audit evidence increases when –

Obtained from independent Obtained directly by auditor Obtained in documentary form

(external) sources
Controls are effective Provided by original documents

Q5) Factors affecting auditor’s judgements as to sufficiency of audit evidence (AE)

Materiality ROMM Size and characteristics of

population
Assertions – Assertions – Small and homogeneous
• less material • less ROMM population – less AE
• less AE • less AE
Large and heterogeneous
population – more AE

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SA 501 – Audit Evidence – Specific Considerations for Selected Items

Q1) Need for physical verification of inventory/When inventory is material to FS, auditor
obtains SAAE for existence and condition of inventory by attending physical inventory count.
Why?

Evaluate management Inspect inventory Perform test count Observe

instructions for performance of
recording results of management count
physical inventory count procedures
Audit procedures on final inventory records to determine whether reflect actual

Q2) Duty of auditor to ensure that 3rd party (who holds inventory) are not such with whom
stock shouldn’t be held & stock actually belongs to company.

Perform these procedures

Confirmation from 3rd party – Inspection/other audit procedures (eg, if doubt about
quantity and condition integrity of 3rd party)

• Attending/arranging another auditor to attend, 3rd

party’s physical counting of inventory
• Obtaining another auditor’s report/service auditor’s
report, on adequacy of 3rd party’s internal control to
ensure that inventory is properly counted &
safeguarded
• Inspecting documentation eg, warehouse receipts

Q3) Audit procedures if physical count other than FS date.

Ans 1 + Perform AP + Why? - For audit evidence about change between 2 dates– properly
recorded

Factors to be considered-

1. Whether perpetual inventory records - properly adjusted.

2. Reliability of perpetual inventory records.
3. Reasons for significant difference between info obtained in physical count and perpetual
inventory records.

Q4) How sufficient appropriate audit evidence obtained when auditor couldn’t attend physical
inventory count due to unforeseen circumstances - earthquake and protest?

Inventory count at alternative date Audit procedures on intervening transactions

Q5) Attendance at physical inventory count is impracticable/impractical.

1. Why impractical? – Nature and location of inventory.

2. Safety threat to auditor

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3. But

General inconvenience to auditor SA 200 - If difficulty/time/cost, it doesn’t

Impracticable mean that auditor will omit audit procedures.
4. Alternative audit procedures performed eg, inspection of documents of subsequent sale.
5. If alternative audit procedures impossible – modify (SA 705) due to scope limitation.

Q6) Auditor wants to ensure that method adopted by management to determine segment info
have resulted in disclosure as per AFRF. Guide auditor with examples of matters/presentation
and disclosure of segment information.

Examples of matters relevant when obtaining understanding of methods used by management in

determining segment info and whether such methods are likely to result in disclosure as per AFRF.

The allocation of assets and Comparison with budgets Eg, Consistency with prior periods
costs among segments. Operating profit as % of and adequacy of disclosure
sales wrt inconsistencies.
Sales, transfer, charges between segments and elimination of inter segment amount.

Q7) Audit procedures to identify litigation/claims resulting in ROMM.

Inquiry from Reviewing minutes of meeting Reviewing legal expense account

• Mgt of TCWG
• In-house legal counsel

Q8) Communication with external legal counsel.

When AP indicate Through letter of inquiry prepared by mgt & sent by auditor
• Material litigation requesting external legal counsel to communicate directly with
• ROMM auditor
Auditor directly communicates
with external legal counsel
1. If it is unlikely that external legal counsel will respond to letter of general inquiry.
Letter of specific inquiry
LoL (List of litigation) Mgt’s assessment of outcome Request to confirm
of litigation and estimate of reasonableness of mgt
financial implication assessment & provide further
info if incomplete
2. Auditor meets external legal counsel (ELC)

Significant risk wala matter Complex matter Disagreement between mgt &
ELC
3. Obtain WR – Litigation & claims – accounted & disclosed
4. Modify –

Mgt refuses auditor to ELC refuses to respond No SAAE

communicate with ELC

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SA 505 – External Confirmations

Q1) Basics

1. External Confirmation – Audit evidence obtained as direct written response from 3rd party
in paper/electronic/other medium.
2. Positive confirmation request –

Confirming party Direct response whether agrees/disagrees Auditor

3. Negative confirmation request –

Confirming party Direct response only if disagrees Auditor

4. Non – response

Confirming party didn’t respond to positive Confirmation request returned undelivered

confirmation request
5. Exception – Difference between

Info requested to be confirmed Info provided by confirming party

Q2) Situations when external confirmation can be used

Bank balance, accounts receivable/payable balance, inventory held by 3rd party, loan from lender.

Q3) External confirmation procedures/controls over external confirmation requests.

Determining info to be Selecting Designing confirmation request Sending request and

• confirmed confirming & determining that request is follow-up request
• requested party • properly addressed
• contain return info

Q4) Factors to be considered while designing confirmation request.

Assertions being addressed Specific identified ROMM, Layout & presentation of

including fraud risk confirmation request
Prior experience on audit Method of communication Ability of confirming party to
(paper/electronic form) confirm
Mgt’s authorisation to confirming party to respond to auditor

—Factors assisting auditor in determining whether external confirmation procedures are to be

performed as substantive audit procedures –

Confirming party’s knowledge of Ability/willingness of Objectivity of confirming party

subject matter confirming party to respond (if confirming party is related,
responses may be less reliable)

Q5) Positive confirmation request

1. Definition in ans 1
2. Effects of using positive confirmation request –

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Provide reliable audit Risk that confirming party may Solution of risk – Give blank conf.
evidence reply w/o verifying that info is request & ask to fill amt. But low
correct response rate due to high efforts

Q6) Negative confirmation request

1. Definition in ans 1
2. Provide less persuasive audit evidence
3. Factors to consider/auditor not to use negative confirmation request as sole substantive
audit procedure, unless all the following are present –

Very low Low ROMM & SAAE Auditor isn’t aware Population of items subject
exception rate obtained as to of circumstances to -ve conf. is large no. of
expected operating effectiveness causing recipients to small, homogeneous
of controls disregard request trans./account balance
4. Failure to receive response does not imply misstatement necessarily as negative
confirmation request is to respond only if confirming party disagrees.
5. Negative confirmation request to deposit holders of bank is useful to consider if balance is
understated and not overstated.

Q7) Mgt’s refusal to allow auditor to send confirmation request.

1. Auditor shall

Inquire reasons Evaluate implications on ROMM Alternative audit procedures

2. Auditor communicate TCWG

If refusal unreasonable Unable to obtain relevant/reliable audit evidence from

alternative audit procedures
3. Auditor determines impact on audit opinion (SA 705).

Q8) Alternative audit procedures.

Accounts receivable Accounts payable

Examining – Examining –
• subsequent cash receipts • subsequent cash disbursed
• shipping documents • correspondence from 3rd party
• goods received note.

Q9) Results of external confirmation requests

Response indicating agreement Unreliable Non response Response indicating

with info/providing info without response exception
exception

Q10) MCQ/small case study

1. Choosing debtors, designing request and receiving responses is duty of external auditor and not
internal auditor.

2. If management refuses to send confirmation request, then below reason is valid –

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“Legal dispute/ongoing negotiation with confirming party, resolution of which may be affected by
untimely confirmation request”

Eg, CFO refused auditor to send confirmation request. Matter is sub judice. Efforts are being
made for out of court settlement. No fraud risk factor. Is unwillingness of CFO justifiable?

Ans, YES, justifiable

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SA 510 – Initial Audit Engagements – Opening Balances

Q1) Meaning of Initial Audit Engagement

Engagement in which either –

FS for prior period were not FS for prior period audited by predecessor auditor
audited

Q2) Steps to ensure that closing balance of year 1 is b/f as opening balance of year 2 &
opening balance has no misstatement.

Auditor’s objective – To obtain SAAE

Whether opening balance has misstatements Whether appropriate accounting policies

that materially affect current period FS. reflected in opening balance are consistently
applied in current FS/ changes are accounted &
disclosed as per AFRF.
STEPS –

1. Peruse copies of audited FS.

2. For current assets & liability – collection/payment of opg. bal. of receivable/payable
provides evidence of existence, rights and obligation,completeness & valuation at year start.
3. For non current assets & liability – Examination of records/3rd party confirmation.

Q3) Procedures to follow when FS are audited for preceding period by another auditor.

To obtain SAAE for opg bal – Auditor will peruse Current auditor can place reliance on closing
copies of audited FS + other documents of balance of preceding period, except when
prior period FS like schedules of FS during performance of audit procedures for
current period, possibility of misstatements in
opening balance is indicated

Q4) Procedures to follow when FS are audited first time

Since opening balance represent effect of Auditor can obtain management representation
transactions of preceding period, auditor has to for opening balance
obtain evidence having regard to nature of
opening balance, materiality of opening balance
and accounting policy

Q5) If auditor not satisfied for correctness of opening balance, what approach to follow in
drafting report?

If auditor is unable to obtain SAAE for opening If objective 1, 2 not met -express
balance – express qualified opinion/disclaimer qualified/adverse opinion
of opinion.

Q6) CA SL – 1st audit assignment - KPP P. Ltd.

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• obtained audit evidence for P&L items
• But for balance sheet, he left out confirmation from debtor of 150 lacs, continued as
it is from last year.
• Management said that there are no receipts and further credits during this year.
• CA SL excluded from audit programme, audit of debtors on understanding that it is of
last year, so already audited by predecessor auditor. Comment.

-Write Ans 2 + 3

- SA 580 – “Written Representations” – Auditor may consider it necessary to request management

to provide WR about specific assertions in FS.

-CA SL should have requested mgt for WR for their views and he shouldn’t exclude from audit
programme.

-CA SL : professional misconduct, no due diligence, gross negligence as per Code of Ethics.

Q7) Auditor wants to be satisfied about sufficiency and appropriateness of opening balance
to ensure they are free of MM. Audit procedures to be followed in initial audit engagement?
OR Obtain SAAE whether opg balance has MST that materially affect current period FS.

Determine whether prior Determine whether opening Specific audit procedures

period closing balance balance reflect application of
correctly b/f appropriate accounting policies

Auditor communicate TCWG

If opening balance has MST which exist in current period FS

Q8) Inventory – Current period audit procedures on closing inventory – provide little audit
evidence of opening inventory. What additional audit procedures to be followed?

Observing current physical Performing audit procedures on Performing audit procedures on

inventory count and reconciling valuation of opening inventory gross profit and cut-off
to opening quantities

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SA 520 – Analytical Procedures

Q1) Considerations while performing analytical procedures/Designing and performing

substantive analytical procedures/Analytical procedures used as substantive procedures (tests)

Determine suitability of Evaluate reliability of data Develop expectation of ratios

particular substantive from which auditor’s and evaluate whether
analytical procedures for given expectation of ratio is expectation is precise.
assertions, taking into account developed.
ROMM & TOD.
Determine amount of difference of recorded amount from expected values that is acceptable
without further investigation.

Q2) In audit of X Ltd, auditor used analytical procedures. Results show inconsistency with
other relevant info. State course of action that auditor should take to ensure ROMM would
be contained to low level fixed as per materiality level.

If analytical procedures identify fluctuations, inconsistent with other relevant info, auditor shall
investigate differences by –

Inquiring mgt & obtaining audit evidence Performing other audit procedures
relevant to mgt responses

Q3) Factors to determine that data used for designing analytical procedures is reliable.

Source of info Nature and Comparability of info Controls over preparation of info
relevance of info

Q4) Analytical procedures for room rentals and payroll.

1. Payroll - When entity has known number of employees at fixed rate throughout period, he
can calculate estimated total payroll cost with accuracy.
2. Room rental - Room tariff, number of rooms, vacancy rates are to be considered first.
Then auditor calculates estimated rental income.

-Auditor finds persuasive audit evidence and may eliminate test of details for further verification.

Q5) Meaning (MCQ)

1. Use analytical procedures near end of audit.

2. Analytical procedures –
a. Evaluation of financial info
b. through analysis of relation among both financial & non-financial data.

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SA 530 – Audit Sampling

Q1) Basics

1. Sampling –

Application of audit procedures to less than 100% All sampling units have chance of selection
population
Auditor – reasonable conclusion of population

2. Population – all items

3. Sampling units – items in population
4.

Tolerable MST - For TOD Tolerable rate of deviation – For TOC

5. Sample – representative of population
6. Sample size – sufficient to reduce sampling risk.
7. Anomaly – MST not representative of MST in population.

Q2) Sampling risk and risk factors in sampling techniques.

Conclusion based on sample may be different from conclusion had the same audit procedures
been applied to population
JFU - Non-sampling risk – Risk – wrong conclusion & reason not related to sampling risk

Risk factors/types of erroneous conclusions –

1. TOC - Controls more effective than actual.

TOD – MM Doesn’t exist when it does-

Concerned with audit effectiveness Leads to inappropriate audit opinion

2. TOC – Controls less effective than actual.
TOD - MM exist when it doesn’t

Concerned with audit efficiency Leads to additional work to establish that initial
conclusions were incorrect

Q3) Approaches of sampling/types of sampling/statistical versus non-statistical sampling.

Statistical Non-statistical
Scientific rather than judgement based Personal experience and knowledge of auditor

Uses mathematical laws of probability Simple/judgement used

Wide application where population has large Element of surprise, no pattern

number of similar items 2023 - April, May, December
2024 -June, September, March (random testing)

Q4) Principal methods of sample selection

1. Random sampling – All items : known chance & random number tables.
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Simple random sampling Stratified sampling

- Each unit – equal chance Dividing heterogeneous population into strata
- Homogeneous population with similar range (Homogeneous sub population)
2. Interval/systematic sampling
Sampling units = sampling interval, example 50
Sample size

Determine start point from 1st 50 & each 50th • Ensure no pattern
unit is selected • Risk low - >1 start point
3. Monetary unit sampling –

Value weighted selection Monetary amount

4. Haphazard sampling –

No structured technique Not appropriate when using statistical sampling

5. Block sampling –

Selection of block of contiguous items Not appropriate as all items in block have similar
characteristics

Q5) Sample size and factors influencing sample size

Acceptable risk (willing to accept)

Sample size

Factors influencing sample size –

1. Expected rate of deviation/MST

Sample size

2. Assurance
Sample size

3. Reliance on OE of controls/TOC
Sample size

4. ROMM
Sample size

5. Tolerable rate of deviation/MST

Sample size

6. Stratification appropriate
Sample size

7. Sampling units
Sample size Negligible effect
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Q6) Guide auditor about his role if audit sampling doesn’t provide reasonable basis for
conclusion/ evaluating results of audit sampling.

As per SA 530 – Auditor evaluate –

Results of sample Whether audit sampling provided reasonable basis for

conclusion of population .

If no, auditor may –

• Request mgt to investigate MST & make adjustments.
• Tailor NTE of FAP to achieve assurance. Eg, TOC –
extend sample size.

Q7) Performing audit procedures

Each item NA – replacement item If unable – deviation/MST

Q8) Projecting MST

Exclude anomaly If uncorrected, Non- Anamalous MST + Anamalous MST

Q9) Meaning and uses of stratification

Meaning - Dividing population into sub population with similar characteristics.

Uses –

Sample size low without increasing Greater audit effort to MST projected for each strata
sampling risk. Therefore, audit larger value items
efficiency, high

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SA 540 – Auditing Accounting Estimates, including Fair Value Accounting Estimates & Related
Disclosures

Q1) Accounting estimates with low estimation uncertainty and low ROMM.

AE in entities having business AE frequently made wrt routine AE derived from readily
activities that are not complex transactions available (observable) data
Fair value AE where Fair value AE where measurement method as per AFRF is simple
measurement model is well
known (Inputs to model are
observable)

Q2) Accounting estimates with high estimation uncertainty, if based on significant

assumptions.

AE wrt outcome of litigations Fair value AE for derivative Fair value AE for which highly
financial instrument, not specialised entity developed
publicly traded model is used.(Inputs can’t be
observed)
AE for wage revision agreement if negotiation with trade union is on the way

Q3) Degree of estimation uncertainty varies based on

Nature of AE Extent to which there is Subjectivity of assumptions

generally accepted method to used to make AE
make AE

Q4) Situations where AE, other than fair value AE required.

Allowance for doubtful accounts Inventory obsolescence Warranty obligations

Outcome of long-term contracts Depreciation method/asset useful life

Q5) Situations where fair value AE required

Complex financial instruments Assets/liabilities acquired in Share based payments

not traded in open market business combination
Property held for disposal Exchange of assets/liabilities without monetary consideration

Q6) Audit reporting and disclosure.

I. Presentation of FS includes disclosure of material matters like

Assumptions used Method of estimation, Basis for selection of

including model estimation
Changes in method of
estimation from prior period Sources of estimation uncertainty
and its subsequent effect
II. For accounting estimates having significant risk, even where disclosures are as per
AFRF, auditor may conclude that disclosure of estimation uncertainty is inadequate.

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Q7) MCQ

1. Auditor to obtain WR from management/TCWG, whether they believe assumptions in

making accounting estimates are reasonable.
2. Documentation of accounting estimates

Basis of auditor’s conclusion of Indicators of possible management bias

reasonableness of accounting
estimates & their disclosure
that give rise to significant risk

Q8) Auditor’s responsibility/procedures

I. RISK ASSESSMENT PROCEDURES

SA 315 - While performing RAP – Auditor to understand 2 things :

Requirement of AFRF wrt AE, How management identifies transactions that need AE by
including disclosures making inquiries
II. OBTAINING UNDERSTANDING OF HOW MGT. IDENTIFIES NEED FOR AE

Inquiries of mgt about change in circumstances may include inquiries about whether –

Entity has engaged in new type Terms of transactions have Accounting policies related to
of transactions changed AE have changed
New conditions/events occurred Regulatory/other changes outside mgt control
III. HOW MANAGEMENT MAKES AE

Estimation making process of management –

Method, model used in making Relevant controls Whether mgt used expert?
AE
Assumptions underlying AE Whether change from prior period in methods for making AE &
if yes, why?
IV. ESTIMATION UNCERTAINTY

For AE with significant risks, in addition to other substantive procedures as per SA 330, auditor
shall evaluate following –

How management considered Whether significant Management’s intent and

alternative assumptions and assumptions by management ability to carry out specific
why it rejected them are reasonable course of action
- If mgt has not addressed effects of estimation uncertainty, auditor shall develop range to
evaluate reasonableness of AE.

Q9) Identify & address ROMM.

I. IDENTIFYING & ASSESSING ROMM (SA 315)

Auditor shall determine –

Estimation uncertainty Whether any AE with high estimation uncertainty has significant risk

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II. RESPONSE TO ASSESSED ROMM (SA 330)
A. Auditor determines –

Whether AFRF applied by mgt Whether methods to make AE Whether changes in AE from
are appropriate prior period appropriate
B. Auditor undertakes following –

Determine whether events up Test check data used by management to make AE

to date of audit report provide
SAAE wrt a/cing estimate
C. Auditor shall consider whether specialised skills wrt AE are required to obtain SAAE.

Q10) Review of prior period AE

1. Auditor review outcome of AE included in prior period FS and subsequent re-estimation

for current period.
2. Outcome of AE differs from AE in prior period FS. To identify reasons of difference,
auditor obtains –

Info as to effectiveness of Audit evidence pertinent to Audit evidence of matters

mgt’s prior period estimation re-estimation of prior period that may be required to be
process AE in current period disclosed in FS

3. Assist auditor to 4. Review is not intended to question judgements of prior

identify management period made on basis of info available at that time.
bias
ICAI QUESTION - Mgt cannot refuse to provide information.

Q11) Management bias

Management bias can be difficult to detect at account level.

1. It may only be identified when considered in aggregate of groups of AE or

2. All accounting estimates or
3. When observed over a number of accounting periods.

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SA 550 – Related Parties

Q1) How auditor can verify existence of related parties/RP relationships & transactions/
documents/records to gather RP info./Source of RP information.

IT Returns Internal audit reports Life insurance policies of entity

Shareholder registers (to identify Info supplied by entity to regulatory authority
entity’s principal shareholders)

Q2) Significant related party transactions outside normal course of business.

Complex equity transactions Transactions with offshore Transactions without

(corporate restructuring/ entities in jurisdictions with consideration (eg, leasing of
acquisition) weak corporate law premises)
Sales with large discount Sale & repurchase

Q3) Review of records and documentation of company for RP transactions in normal course of
business /Being alert for RP transactions

1. Auditor ko alert rehna hai, jab wo inspect karega records/docs for RP transactions that
mgt hasn’t previously disclosed to auditor.
2. Auditor has to inspect –

Bank, legal & 3rd party Minutes of meetings of Other records

confirmations shareholders and TCWG
3. Write answer 1.

Q4) Dealing with biased RP transaction/audit procedures for transactions outside normal
course of business.

Auditor shall –

1. Inspect contracts and evaluate

Business rationale of Terms of transactions are Transactions are accounted and

transaction suggest consistent with management disclosed as per AFRF
• Fraudulent financial explanation
reporting
• Misappropriation of
assets
2. Obtain audit evidence whether transactions are authorised.
3. Remain alert for unusual transactions.
4. Obtain written representation – accounted and disclosed

Q5) Meaning of RP

1. Party that is

Related party as per AFRF If AFRF establish no related party requirement

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• Person or entity that has control/significant influence
directly/indirectly over reporting entity
• Entity over which reporting entity has control/significant
influence directly/indirectly
• Another entity that is under common control with reporting
entity by
o Common controlling ownership
o Close family members
o Common key management
Parties under common control by state (national/regional/local
govt) are not related unless they engage in significant
transaction/share resources to a significant extent with one
another.

Q6) Tell disclosure/reporting requirements

1. Long-term borrowings from parent company has no written terms and neither interest nor
principal is repaid.
2. Computers received from parent co. free of cost of 23,000 & no disclosure is made in notes.
3. RPT of 325,000. But arm’s length price is only 300000. It is not disclosed in notes.
4. CFO refused to provide information of RPT of 47 lakhs since it is confidential.
- CFO is wrong as denying for details is imposing limitation on scope of auditor as per SA 705.
- Disclosure in FS as per Ind AS 24/AS 18.
- CARO 2020 - Whether Sec 177 & 188 of COA 2013 complied with.
- Reported to TCWG.

Q7) Engagement team’s discussion that SA 315 & SA 240 include specific consideration of
susceptibility of FS to material misstatement. What are matters to be addressed in
engagement team’s discussion?

Nature & extent of entity’s Emphasis on maintaining Records indicating RP

relations & transactions with professional skepticism transactions
RP
Circumstances indicating Consideration of how RP may involve in fraud. Eg –
existence of RP transactions • Fraudulent FR
that mgt hasn’t • Misappropriation of assets
identified/disclosed to auditor

Q8) Inquiry of management by auditor.

Identity of RP + changes from Nature of relation Whether trans b/w entity & RP & if
prior period between entity and RP yes, type & purpose of transaction

Q9) Communication with TCWG.

Auditor significant matters about RP TCWG

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For eg -

Non-disclosure by mgt Significant RPT Disagreement with mgt wrt Non-compliance with
of significant RPT not authorised a/cing of significant RPT as L/R
per AFRF

Q10) Identification of previously unidentified/undisclosed RPT (Mgt didn’t identified/

disclosed to auditor)

Auditor determine whether Communicate with Request mgt to identify all transactions
circumstances confirm team with newly identified RP
existence of transactions
Perform more substantive Reconsider risks wrt If non-disclosure by management
procedures other RP appears intentional, evaluate
implications for audit

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SA 560 – Subsequent Events

Q1) Meaning of Subsequent events

1. Events between date of FS and date of AR.

2. Facts that become known to auditor after date of AR.

Q2) Auditor’s responsibility/audit procedures for events between FS date and AR date.

1. Auditor – audit procedures – to obtain SAAE – all subsequent events that require disclosure
in FS are identified.
2. Auditor not expected to perform additional procedures if previous one gives satisfactory
conclusions.
3. Following procedures by auditor –
Obtain understanding of Inquiring mgt & TCWG Reading entity’s latest
management procedures subsequent interim FS
Reading minutes of meetings of owners, management & TCWG
4. Auditor obtain WR from management and TCWG that all SE which requires disclosure are
disclosed/adjusted.

Q3) Fire in April 2021. Material destroyed which was lying since March 2021. FS not
adopted till fire date.

SA 560 & AS 4 – Non adjusting event. No conditions exist at B/S date (31/03/21). Don’t create
provision but disclosure is needed.

Q4) Auditor wants to conduct inquiry of mgt as to whether any SE have occurred which might
affect FS. Guide him with matters where specific inquiry can be conducted to evaluate
subsequent events.

1. Whether new commitment, borrowings, guarantees are entered into.

2. Whether sales/acquisition of assets are planned.
3. Whether there are any developments in contingencies.
4. Whether unusual accounting adjustments made.
5. Whether any events wrt recoverability of assets.

Q5) X Limited hasn’t included in B/S (31/03/21) 1.5 crores (arrears of salary for two years)
as a result of negotiation. Negotiation concludes on 30/04/21. Audit report date 31/05/21.
Negotiation result become known to auditor on 15/05/21.

• SA 560 & AS 4 – 1.5 cr : material amount. It is the event after B/S date.
• Auditor – procedures – obtain SAAE – period from FS (31/03/21) to AR (31/05/21).
• Create provision for outstanding expenses
• Conclusion -Auditor should request mgt to adjust 1.5 crore by making provision for expense.
If management doesn’t accept, auditor should qualify auditor report.

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Q6) Year 2020-21. AR date 04/05/21. Incentive received from government in May 2021.
Amended accounts 08/05/21. Management requires auditor to issue fresh audit report of
2020-21 in which incentive from government is shown.

Facts which become known to auditor after date of AR but before FS are issued.

1. No obligation of auditor to perform procedure regarding FS after AR date.

2. But if a fact causes auditor to amend AR, he shall –

Discuss matter with mgt & Determine whether FS needs Inquire how mgt addresses
TCWG amendment matters in FS
3. Date of new AR shall not be earlier than date of approval of amended FS.
4. If management amends FS, auditor shall –

Carry out audit procedures on amendment Extend audit procedures to date of new report
5. If FS issued without necessary amendment, auditor shall take action to seek to prevent
reliance on AR.

CONCLUSION – Write summary of case + 1 std line - Date of new AR shall not be earlier than
date of approval of amended FS.

NOTE- Same answer if facts become known to auditor after FS issued.

Q7) FY 2020-21. AR 25/07/21. Case file against company on 04/08/21. Incident for which
case filed 17/01/21. Mgt decided to amend FS of FY 2020-21. Mgt decided to disclose
matter as contingent liability in notes with no additional disclosures. Auditor decides to
include this matter in EOM para. Mgt told auditor that disclosure as contingent liability is
enough as auditor would be including matter in EOM para.

(A) Whether auditor properly adhered to his responsibilities on becoming aware of

court case.

Ans. Yes, properly adhered. Write answer 6.

(B) Whether contention of management is valid wrt disclosure?

Ans. As per SA 706, EOM Para is not substitute for –

Modified opinion as per SA 705 Disclosures in FS Reporting as per SA 570

• Management feels that disclosure as contingent liability is enough and no further disclosure
is required since auditor is including matter in EOM Para.
• Mgt contention is invalid since EOM Para is not substitute of disclosures in FS that are
necessary to achieve fair presentation.

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SA 570 – Going Concern

Q1) Events casting significant doubt on going concern.

I. Financial Events

Net liability position Fixed term borrowings maturing Withdrawal of financial support
w/o prospects of repayment by creditors
-ve cash flows/substantial Adverse ratio Arrear of dividend
operating loss
Inability to pay creditors on Inability to comply with T&C of Change from credit to COD
due date loan transactions with suppliers
Inability to obtain finance for new product
II. Operating Events

Mgt intention to Loss of key mgt/customer/ Labour difficulties

liquidate/cease operations supplier/market/franchise/license
Shortage of important Emergence of highly successful competitor
supplies
III. Other Events

Non compliance with L/R Change in L/R/govt policy Pending legal/regulatory proceedings
adversely affecting entity resulting in claims unlikely to satisfy
Uninsured/underinsured catastrophe

Q2) MCQ

1. Going concern – Fundamental accounting assumption

2. If no GC – FS prepared on liquidation basis.
3. Auditor – SA 315 – Risk Assessment Procedures (RAP)
- Auditor checks whether events of Ans. 1 exist.
- Auditor checks whether mgt performed GC assessment.

Assessment done Assessment not done

Auditor discuss assessment with mgt & Auditor discuss with management basis of use of
mgt’s plans to address events, if any. GC basis of accounting
4. If normal FS – use GC basis of a/cing.
5. Preliminary going concern assessment – management.
Next going concern assessment – auditor.
6. Auditor will cover same period considered by management.
7. If management covers less than 12 months from FS date, auditor requests management to
cover at least 12 months.

Q3) Additional audit procedures when events cast significant doubt on GC to determine
whether material uncertainty exists.

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When management not Evaluating management plans When entity prepared cash
performed GC assessment – for future actions for GC flow forecast, evaluate-
request management to make assessment • Reliability of data
assessment • Determine whether
adequate support for
assumptions
Consider whether additional Requesting WR from management/TCWG for future plans and
info available feasibility.

Q4) Reporting

I. Use of GC basis of accounting – inappropriate – adverse opinion.

II. Management unwilling to make/extend assessment - consider implications on AR
(Qualified/Disclaimer)
III. Use of GC basis appropriate but material uncertainty (MU) exists –

MU Disclosed MU not disclosed

1. Unmodified opinion 1. Qualified/adverse opinion
2. Separate section – “MU related to GC” 2. Mention in basis of opinion para
NOTE - If use of GC basis appropriate – No para needed in AR mentioning it.

- If events casting significant doubt on GC are there but no MU exists - make disclosure in
FS about events.
- Auditor communicate with TCWG – events of Ans. 1

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SA 580 – Written Representation

Q1) Meaning

1. Written statement by management to auditor to confirm certain matters or to support

other audit evidence.
2. It is in the form of management representation letter.

Q2) Extent of reliance on WR/Reliability of WR/Doubt as to reliability of WR.

If auditor has concerns about If WR- inconsistent with other If WR not reliable – Auditor
integrity of mgt, he shall audit evidence – auditor take action, including
determine effect on reliability perform procedures to resolve determining effect on audit
of WR matter opinion.

Q3) If mgt refuse to provide WR, auditor shall

Discuss matter with Re-evaluate integrity of mgt Take action including

management and evaluate effect on determining effect on audit
reliability of WR and audit opinion (SA 705)
evidence

Q4) Reporting

Disclaimer of opinion
No WR WR not reliable (doubt about mgt’s integrity)

Q5) Date & period

Date - Near to but not after Period- Covers all FS & all WR are given by current mgt
date of audit report period referred to in AR

Q6) MCQ

WR do not provide WR are not substitute of other audit WR do not include –

SAAE (though they evidence • FS and its assertions
provide necessary • Books and records
audit evidence)
- What?

Preparation of FS All info provided All transactions recorded

(completeness of transactions)
Qualifying language - To the best of our knowledge and belief

- Why?

Those who signed terms Terms – last year Changes in circumstances Management
– no longer responsible misunderstanding
- If law – Written public statement, auditor may WR

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SA 600 – Using The Work of Another Auditor

Q1) Basics

1. When auditor delegates/uses work of another auditor, he will continue to be responsible for
opinion.
2. He will rely on work of others, provided he exercises skill and care and is unaware of reason
to believe that he should not have relied.
3. Audit report states fact of reliance.

Q2) Factors to consider before accepting work as principal auditor (PA)

Materiality of portion PA’s degree of ROMM in financial Performance of additional

of financial knowledge of info of procedures as per SAs regarding
information which PA business of components components audited by other
audits components audited by other auditors, resulting in PA’s
auditors. significant participation in audit

Q3) Principal auditor’s procedures

1. PA – right to visit & examine books of accounts of component.

2. PA to consider professional competence of OA if OA is not ICAI Member.
3. PA to perform following procedures to obtain SAAE that OA’s work is adequate

Advise OA of use of his work & report Advise OA of significant

• Accounting
& make arrangements for coordination at • Auditing
planning stage of audit • Reporting
Requirements and obtain representation of its
PA to inform OA of – compliance.
• Areas of special consideration
• Time table for completion of audit
• Procedures for identification of inter
component transactions
4. PA

Discuss with OA audit procedures applied Review written summary of OA’s procedures
5. PA to document in working papers
• Components audited by OA ❌
• Procedures and conclusions
• OA’s report – modified Reason of limiting procedures if OA complies
PA to document how he dealt with qualification quality control policies.
in OA’s report in framing own report.

Q4) Coordination between PA and OA.

1. Sufficient liaison between PA & OA.

2. PA written communication OA
3. OA to coordinate with PA by

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Bringing significant findings to Adhering to timetable Complying with statutory
PA’s attention requirement
4. PA to advice OA of matters having imp. bearing on OA’s work.
5. PA requires OA to answer detailed questionnaire.
6. OA should respond to questionnaire timely.

Q5) Reporting

PA - Qualified/disclaimer if If OA gives modified report – PA considers

• OA’s work can’t be used & whether modification required in PA’s report
• PA unable to perform sufficient
additional procedures for component

Q6) Division of responsibility

1. PA is not responsible for OA’s work except if suspicion of reliability of work.

2. PA’s report – Division of responsibility & shows extent of OA’s work.
3. But if PA notice material discrepancies, he should bring to OA’s knowledge + state in audit
report.

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SA 610 – Using the Work of Internal Auditor

Q1) Basics

1. External auditor – sole responsibility of audit & not reduced by use of IA’s work.
2. External auditor should be independent. No such requirement for internal auditor.
3. Using work of internal auditor

Using work of Internal Audit Function IAs provide direct assistance under direction,
(IAF) supervision, review of external auditors (EA)
4. Internal audit function – Perform assurance & consulting activities to improve entity’s
governance, risk management & internal control process.

Q2) Evaluating if work of internal audit function can be used OR Can stat auditor (external
auditor) rely on IA’s work?

EA shall evaluate OCD –

Extent to which IAF’s Level of competence of IAF Whether IAF applies systematic
organisational status & policies & disciplined approach, including
support objectivity of IAs quality control
- EA not to use IAF’s work if no OCD.

Q3) IAF’s work that can be used by EA

Testing operating Inventory count observation Substantive procedures with

effectiveness of controls limited judgement
Tracing transactions through Testing of compliance with Audit/review of insignificant
info system, relevant to FR regulatory requirements subsidiaries

Q4) When EA use less work of IAF and performs more work directly.

More judgement in Assessed ROMM is high at Less objectivity Less competence

planning and performing assertion level, with special
audit procedures and consideration to significant
evaluating audit evidence risks

Q5) What factors weigh considerations in opting to make use of direct assistance of IAs?

To determine nature and extent of work that can be assigned to IAs providing direct assistance,
EA shall consider

Judgement wrt planning and performing audit Assessed Evaluation of existence of

procedures and evaluating audit evidence ROMM threats to objectivity

Q6) Factors relevant in evaluating significance of threats to objectivity of internal auditor

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Extent of objectivity Family/personal Association with Significant financial interest
of internal auditor relation division other than remuneration

Q7) EA not to use IA to provide direct assistance to perform these procedures

Involving significant ROMM high & judgment more Relate to work with which IAs
judgements than limited involved & reported to
mgt/TCWG by IAF
Relates to decisions EA makes about IAF

Q8) Significant judgements

Assessing ROMM Evaluating sufficiency of test Evaluating appropriateness of

performed mgt’s use of GC assumption
Evaluating adequacy of Evaluating significant accounting estimates
disclosures in FS

Q9) Audit documentation by EA if EA uses IAs to provide direct assistance

Evaluation of significance of Written agreement from Work papers of IAs

threats to objectivity of IAs entity & IA
Who reviewed work
Date of review
Extent of review

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SA 620 – Using the Work of Auditor’s Expert

Q1) Basics

NA when auditor uses work of mgt expert (SA 500)

Auditor’s expert Mgt’s expert

Expertise in other than accounting, auditing Same
Whose work used by auditor Whose work used by entity in preparing FS
Internal/external expert
Auditor has sole responsibility for audit opinion and is not reduced by use of expert’s work.

Q2) Expertise in other than accounting, auditing includes expertise in/types of reports,
opinion, statements auditor can obtain from expert.

Valuation of complex financial Actuarial calculation of Estimation of oil and gas

instruments,L&B, P&M liabilities reserves
Interpretation of contracts, Analysis of complex tax compliance issues
law, regulation

Q3) Auditor’s expert to assist auditor in following

Understand entity, environment, Identifying and assessing Determining response to assessed

internal control (SA 315) ROMM (SA 315) risks at FS level (SA 330)
Designing further audit Evaluating if audit evidence is sufficient and appropriate (SA
procedures – TOC and 500)
substantive procedures (SA 330)

Q4) Considerations to decide whether to use auditor’s expert.

Whether management used Nature and significance of ROMM in matter

management’s expert matter, including complexity
Expected nature of procedures to respond to risks, auditor’s knowledge & experience with work of
experts & alternative source of audit evidence
• If management used mgt’s expert, also consider –

Nature, scope, objectives Mgt expert’s competence & Extent to which mgt can exercise
of mgt expert’s work capabilities control over mgt expert’s work
Controls in entity over mgt Whether mgt expert subject to technical performance standards
expert’s work

Q5) To determine NTE of auditor’s procedures, auditor shall consider these matters –

Nature of matter to which Significance of expert’s Auditor’s knowledge & experience

expert’s work relates work in context of audit of previous work of that expert
Whether expert is subject to audit firm’s quality control policies & procedures
• Factors suggesting need for different/more extensive procedures –

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Auditor’s expert’s work relates Auditor hasn’t previously used Auditor’s expert is performing
to significant matter – expert’s work & has no prior integral procedures, rather
subjective/complex judgement knowledge of expert’s than being consulted for advice
competence /capability on individual matter
External expert & thus not subject to firm’s quality control policies

Q6) Evaluating objectivity of auditor’s external expert

Inquire entity of interests and Discuss with experts about safeguards – Interest & relations –
relations with experts • Financial interest
• Business and personal relation
• Provision of other services by expert
• Auditor obtain WR from expert of interest/relation with
entity

Q7) Auditor shall agree in writing with auditor’s expert on-

Nature, scope, objectives of Roles and responsibilities of NTE of communication

expert’s work auditor and expert between auditor and expert
Need for expert to observe confidentiality requirements

Q8) Auditor shall evaluate adequacy of expert’s work/extent of rely on expert’s

work/evaluative or review procedures

Relevance & reasonableness of If expert’s work involves use of If expert’s work involves use of
expert’s findings/conclusions & significant source data, relevance,
their consistency with other assumptions/methods, completeness & accuracy of
audit evidence relevance & reasonableness of source data
assumptions and methods
• Specific procedures to evaluate adequacy of auditor’s expert’s work

Inquiries of auditor’s expert Reviewing auditor’s expert’s working

papers/reports
Corroborative procedures Discussion with another expert having
• Observing expert’s work expertise when findings of auditor’s expert are
• Examining published data Eg, statistical not consistent with other audit evidence
reports
• Confirming relevant matters with 3rd
parties
• Performing detailed analytical procedures
• Re-performing calculations
Discussing auditor’s expert’s report with management
• Factors relevant to auditor’s evaluation of assumptions and methods include whether
they are -

Generally accepted within Consistent with the Dependent on use of

auditor’s expert’s field requirements of AFRF specialised models
• Procedures to test source data

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Verifying origin of data & testing internal controls Reviewing data for completeness and internal
of data consistency

Q9) If auditor determines that auditor’s expert’s work is not adequate, he shall

Agree with expert on nature & extent of Perform further audit procedures
further work

Q10) Reporting

1. If auditor concludes –

Auditor’s expert’s work not adequate Auditor can’t resolve matter by additional audit
procedures (further work) by auditor & expert
Auditor – modified opinion (since no SAAE)

2. Auditor not to refer work of expert in audit report with unmodified opinion, unless
required by law/regulation.
3.

If required by L/R (unmodified opinion) If reference is relevant to understand

modification (modified opinion)
Auditor indicates that it doesn’t reduce auditor’s responsibility

Q11) Written agreement required when auditor and expert

1. Sensitive maamla - sensitive information

2. Complex maamla - complex matter
3. Naya maamla - auditor hasn’t previously used expert’s work
4. Bada maamla - greater extent of work

Q12) Auditor obtain understanding of other field by –

Experience in auditing entities that require such expertise in preparation of FS –

• Education in that field - courses, discussion with individuals having expertise in field
• Discussion with auditors who have performed similar engagements

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SA 700 - Forming an opinion & Reporting on Financial Statements

Q1) Basic elements of audit report

Title Addressee Auditor’s opinion

Basis for opinion Going concern (SA 570) KAM (SA 701)
Other info (SA 720) Responsibilities for FS (mgt’s Auditor’s responsibilities for
responsibility) audit of FS
Location of description of Other reporting Signature of auditor
auditor’s responsibilities for responsibilities (separate
audit of FS section)
Place of signature (City where Date of auditor’s report (not before SAAE)
audit report signed )

Q2) Title – Independent Auditor’s Report

Q3) Auditor’s Opinion

Opinion +

Entity State that FS has been audited Title of each statement of FS

Notes, including summary of Period of FS
significant accounting policies

Q4) Basis for opinion

Audit done as per SAs Refer to section of audit report State that auditor is
having auditor’s responsibilities independent
State whether auditor believes audit evidence to be sufficient and appropriate

Q5) Location of description of auditor’s responsibilities

Within body of auditor report Within appendix to AR AR has reference of website

Q6) Audit report if audit as per SAs & International SAs

Audit report will refer to both only if –

No conflict between both leading auditor

to –
• Form different opinion Audit report include all elements as per SAs
• Not include EOM/OM Para
If both referred in AR, it should identify jurisdiction of other SAs clearly

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Q7) Supplementary information presented with FS

Supplementary info not required by AFRF is presented with FS; auditor evaluate whether it is
integral part of FS

If yes If no, differentiate it from FS

Give opinion

If done If not differentiated

OK Auditor asks mgt to change

presentation of supple information

If mgt agrees If mgt refuses

OK Auditor identify supple info + explain in AR that it is not audited

Example 1 Notes to FS has explanation/reconciliation of compliance with another FRF – supple

info is not differentiated – thus, auditor will give opinion.

Example 2 Additional P/L A/c with specific expenditure or income is given in separate schedule
and is appendix to FS – Supple info is differentiated – thus, auditor will not give opinion.

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SA 701 – Communicating Key Audit Matters in the Independent Auditor’s Report

Q1) Definition

1. Matters, which in auditor’s professional judgement, are of most significance in audit of

current period.
2. These are selected from matters communicated with TCWG.
3. Purpose of communicating KAM

Communicative value of audit Additional info to Assist users in understanding entity and
report increases users significant management judgment
4. No KAM if

Law/regulation says Adverse Consequences > Benefits

Q2) Communicating KAM is not –

Substitute of Substitute of reporting when Substitute of Separate opinion

disclosures as per material uncertainty of events modified opinion on individual
AFRF that cast significant doubt on (SA 705) matters
GC (SA 570)

Q3) Applicability of SA 701

1. General purpose financial statements of

Listed entities Situation when auditor decides Required by law/regulation

to communicate KAM
2. SA 705 – If disclaimer of opinion is there, KAM is not communicated, unless reqd by L/R.
3. If there is no KAM, then also KAM Para is given in audit report. But mention in KAM Para
that there is no KAM.

Q4) Factors to consider in determining KAM

SA 315 – ROMM/Significant Significant auditor judgement Effect on audit of significant

risk high wrt areas with significant events/transactions
management judgement,
including a/cing estimates with
high estimation uncertainty
Matters not related to financials can be KAM if it requires significant attention of auditor and it
has impact on audit.

Eg, implementation of new IT system/significant changes in old systems

Q5) Examples of KAM

Impairment assessment Provision for loss & contingency Valuation of financial

instruments
Revenue recognition matters Tax matters

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SA 705 – Modifications to the Opinion in the Independent Auditor’s Report

Q1) Circumstances & types of modification

Circumstances –

When MM is there When SAAE not there

Types of modification –

Qualified opinion (Q) Adverse opinion (A) Disclaimer of opinion (DOO)

QO AO DOO
SAAE ✅ ❌ ✅ ❌
Material ✅ ✅ ✅ ✅
Pervasive ❌ ❌ ✅ ✅
Rare Case of disclaimer of opinion –

• Multiple uncertainties are there

• SAAE obtained
• But not possible to form opinion due to –

Interaction of uncertainties Cumulative effect on FS

Q2) Pervasive

Describes effect of misstatement on FS.

Not confined to specific If confined – represents Disclosures fundamental to

element substantial portion of FS users’ understanding

Q3) Decision as to which modified opinion is appropriate depends on –

Nature of matter giving rise to modification Auditor’s judgement about pervasiveness

Q4) Special considerations for modified opinion

I. QUALIFIED OPINION

Auditor states that except for effects of matter in Basis for Qualified opinion section:

Fair presentation framework Compliance framework

FS present fairly, in all material respects as per FS prepared, in all material respects, as per
AFRF AFRF
When inability to obtain SAAE – use phrase “except for possible effect of matter”

II. ADVERSE OPINION

Auditor state that due to significance of matter in Basis for Adverse opinion section –

Fair presentation framework Compliance framework

FS do not present fairly, as per AFRF FS not prepared, in all material respects, as per AFRF
III. DISCLAIMER OF OPINION

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Auditor shall –

State that no opinion State that due to significance of Amend statement in SA 700,
expressed matter in Basis for DOO section – indicating FS audited, to state that
he is unable to obtain SAAE auditor was engaged to audit

Q5) MCQ

1. Opinion section heading changed to “Qualified Opinion/Adverse Opinion/Disclaimer of

Opinion” in case of modified opinion.
2. Basis for Opinion section heading changed to “Basis for QO/AO/DOO”, in case of
modified opinion.
3. If MM is of non-disclosure of info, auditor shall –

Discuss with TCWG Describe omitted info in “Basis Include disclosure, if

for Opinion” practicable & if SAAE obtained
4. If auditor expects to modify opinion,

Auditor communicate TCWG

Circumstances of Wording of expected Audit findings Types of

expected modification modification misstatements

Q6) Inability to obtain SAAE due to management imposed limitation

Request mgt to remove limitation

Mgt removes limitation Mgt refuses

Proceed with audit procedures

Communicate with TCWG & perform alternative

procedures

Unable to obtain SAAE

Material ✅ Both material and pervasive

Pervasive ❌

Qualified opinion Withdraw from audit/DOO

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Q7) Withdrawal of auditor

1. Auditor before withdrawal communicate to TCWG

Misstatement that would have given rise to modification

2. Withdrawal not permitted without Audit/Review report –

Listing agreement and SEBI directive on resignation of auditor –

If auditor proposes to resign –

Within 45 days from end of After 45 days from end of If limited review report issued
any quarter, auditor before any quarter, auditor before for all 3 quarters, auditor
resignation – issue resignation – issue before resignation – issue audit
audit/Limited review report audit/Limited review report report for full year
of such quarter of such quarter and next
quarter
3. Auditor mentions reason of resignation in resignation letter to company.
4. Unlisted company’s auditor shall not mention “professional pre-occupation” as reason.

Q8) Disclaimer of opinion

When auditor disclaim opinion on FS, auditor’s report shall not include following elements –

1. Reference to section of AR where auditor’s responsibilities are described.

2. Statement about whether audit evidence obtained is sufficient and appropriate.
When auditor disclaims opinion due to inability to obtain SAAE, auditor shall amend description of
auditor’s responsibilities to include only following -

1. Statement that auditor’s responsibility is to conduct audit as per SAs.

2. Statement that auditor was unable to obtain SAAE.
3. Statement about auditor independence and other ethical responsibilities.

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SA 706 – Emphasis of Matter Paragraphs & Other Matter Paragraphs in Independent
Auditor’s Report

Q1) Meaning of EOM & OM Para

1. EOM Para - Emphasis of Matter Paragraph

Para in audit report Refers to matter Fundamental to users’ understanding

presented/disclosed in FS of FS, in auditor’s judgment
2. OM Para – Other Matter Paragraph

Para in audit report Refers to matter not Fundamental to users’ understanding

presented/disclosed in FS of audit, auditor’s responsibilities,
audit report
3. EOM & OM para are given in separate section of audit report with heading “EOM/OM”

Q2) EOM Para provided when

1.

No modification as a result of matter No KAM (SA 701)

2. These circumstances include –

FRF prescribed by L/R is To alert users – FS is Facts become known to auditor after
unacceptable but for fact that as per special purpose AR date & auditor provides new
it is prescribed by L/R framework auditor report (subsequent event)
3. Circumstances when auditor includes EOM Para

Uncertainty of future Early application of new AS, having material Significant subsequent
outcome of effect on FS event b/w FS date & AR
litigation/regulatory action date
Major catastrophe having significant effect on financial position

Q3) EOM Para is not substitute of

Disclosure in FS as per Modified opinion (SA 705) Reporting when material uncertainty
AFRF wrt events casting significant doubt
on going concern (SA 570)

Q4) OM para provided if –

Not prohibited by L/R No KAM

MCQ - If auditor expects to include EOM/OM, he shall communicate with TCWG – expectation and
wording

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SA 710 – Comparative Information – Corresponding Figures & Comparative FS

Q1) Basics

1. Corresponding Figures –

Amount/disclosures of prior period are integral part of current period FS Read only
2. Comparative FS – Amount/disclosures of prior period are included for comparison with
current period.
3. Difference

Corresponding figures Comparative FS

Audit opinion – only current period Audit opinion – each period

Q2) Auditor’s procedures/responsibilities wrt comparative information

1. To determine FS has appropriately classified comparative info, auditor should –

Ensure comparative info agrees Accounting policies are If change in application of

with amount/disclosure in prior consistent with current period a/cing policies, whether
period properly disclosed & presented
2. If Misstatement in comparative information,

Auditor perform audit procedures to obtain If auditor audited prior period FS, follow SA
SAAE 560
3. SA 580 - Auditor request WR for all periods in audit opinion + obtain specific WR for prior
period item disclosed in current year’s FS.

Q3) Corresponding figures -Audit reporting

Audit opinion not refer to corresponding figures, except in following circumstances –

Audit report of prior period has modified Auditor obtains SAAE that MM in prior period FS
opinion and matter is unresolved – Auditor on which unmodified opinion previously issued –
modifies current period FS. Auditor verify whether MST dealt as per AFRF & if
not – qualified/adverse opinion on current period FS

Q4) Comparative FS – Audit reporting

Audit opinion is of If opinion on prior period

MM affecting prior period FS on which
each period FS differs from previous
predecessor auditor reported without
opinion – auditor disclose
modification. Auditor report to mgt/TCWG &
reason in OM para request predecessor auditor be informed. If new
report, auditor report on only current period
Q5) Reporting common for both – corresponding figures and comparative FS

1. Prior period FS audited by predecessor auditor, auditor to state in OM Para

FS of prior period audited by Type of opinion by predecessor Date of audit report

predecessor auditor auditor
2. If prior period FS not audited – Report it in OM Para. But it won’t relieve auditor from
responsibility to obtain SAAE that opening balance do not have MM.

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SA 720 – The Auditor’s Responsibilities Relating to Other Information

Q1) Basics

1. Auditor reads other information (OI). If it is materially inconsistent with FS, it indicates
that there is MM in FS or OI.
2. Not applicable to –

Preliminary announcement of financial info Securities offering documents (eg, prospectus)

3. Other info in annual report - Financial & Non-financial (other than FS & audit report)

Q2) Responding when auditor concludes that MM of OI exists.

I. If auditor concludes that there is MM in OI –

Auditor Request Mgt

to correct OI

If mgt

Agrees Refuses
Auditor determines that Auditor Request TCWG
correction made to correct OI
II. If auditor concludes that there is MM in OI obtained prior to audit report (AR) &
OI not corrected after communicating with TCWG,

Auditor

• Consider implications on AR Withdraw from engagement, if

• Communicate with TCWG – plan to address MM in AR possible

III. If auditor concludes that there is MM in OI obtained after AR,

Auditor

If OI corrected If OI not corrected

Perform necessary procedures after communicating with TCWG, take action considering
auditor’s rights, to bring uncorrected MM to users’ attention

Q3) Reporting

AR has separate section with heading “Other Info”. This section includes –

Statement that management is Identification of No audit

responsible for OI • Other info obtained by auditor opinion/assurance on
prior to AR OI by auditor
• For listed entity –
OI expected to be obtained after AR
Auditor’s responsibilities of If OI obtained prior to AR, Either
reading, considering, • Statement that auditor has nothing to report, OR
reporting on OI as per SA 720 • Statement that describes uncorrected MM of OI, if any

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Q4) Obtaining, Reading & Considering Other Info (OI)

Obtaining Other Info (OI) –

Auditor shall –

• Determine, through discussion with management, which document comprises annual report &
manner & timing of issuance of such document.
• Make appropriate arrangements with mgt to obtain final version of document prior to AR
date.
• If document will not be available until after date of AR, request mgt to provide WR that
final version of document will be provided to auditor prior to its issuance by entity.
Reading and considering other info (OI) –

Auditor shall read OI and consider -

• Whether there is material inconsistency between OI & FS.

• Whether there is material inconsistency b/w OI & auditor’s knowledge obtained in audit.

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Reporting Miscellaneous

• In case of unmodified opinion, don’t use –

With the foregoing explanation Subject to

Q1) Certificate for special purpose versus audit report

Certificate Report
Auditor verify accuracy of facts Formal statement after inquiry, examination, review
No opinion Opinion
Eg, Certify import export value of Company Differs from one professional to other
No question of exactitude as judgements

Q2) Duties of auditor

1. Duty to Inquire
a. Whether loans and advances shown as deposits.
b. Whether personal expenses charged to revenue.
c. Whether shares, debentures sold at less than cost (Not investment or banking company)
d. Whether transactions which are book entries are prejudicial to interests of company.
e. Whether loans and advances made are properly secured and terms are prejudicial to
interest of company/members.
f. If shares allotted for cash, whether cash received and if no cash received – position in BoA
is not misleading.
Research Committee of ICAI

OK Adverse
Don’t Report Report
2. Duty to sign audit report.
3. Duty to comply with auditing standards.
4. Duty to audit report – Sec 143(3) of COA 2013
A. Whether obtained info necessary. If ❌- details and effect on FS.
B. Whether Proper books of accounts kept by Company
Proper returns received from unvisited branch
C. Whether report on a/cs of branch audited by other auditor – sent and manner of dealing.
D. Whether P/L & B/S as per books of accounts.
E. Whether financial statements comply with AS.
F. Comments on financial transactions having adverse effect.
G. Whether Director disqualified.
H. Qualification related to maintenance of accounts.
I. Whether internal financial controls wrt financial statements –

In place Operating effectiveness

Not applicable to private company –

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One person company or small Turnover < 50 crores
company &
Aggregate borrowings < 25 crores

Bank FI Body corporate

at any point of time

J. Other matters
o Whether co. disclosed impact of pending litigation on financial position.
o Whether provision for material foreseeable loss on long-term contracts, including
derivatives.
o Whether delay in transferring amount to Investor Education & Protection Fund.
o Whether dividend declared/paid as per section 123.
o Whether co. used a/cing software with feature of recording audit trail (edit log)

Operated throughout year Not tampered Preserved

o (i) Whether mgt represented – no funds – A/L/I/G/S
Company Intermediary Ultimate Beneficiary
(ii) Ultimate Beneficiary Company Funding Party
(iii) No material misstatement in (i) & (ii)

- Auditor states if excess remuneration paid to directors.

- Applicable for auditors of public companies in Audit Report section “Report on Other Legal &
Regulatory Requirements”.

5. Duty to report on frauds – Sec 143(12)

A. Individual fraud amt. 1 crore or above against co. by officers/employees.

Auditor Report CG

-Auditor Report Board/AC

immediately but not later than 2 Days of knowledge of fraud,

seeking reply within 45 Days

-Reply

Auditor Forward within 15 Days of receipt of reply CG

Report + Reply + Comments on reply

-Reply

Auditor Forward CG

Report + Note having report for which no reply

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-Report to Secretary, MCA RPAD/Speed post

Followed by email

Letterhead of auditor

Form ADT – 4

B. Fraud less than 1 crore

Auditor Report Board/AC

immediately but not later than 2 Days of knowledge of fraud

Report Board’s Report

Nature of fraud with description Same
Approx. amount Same
Parties Parties, if remedial action not taken
Remedial action
-No contravention if good faith.

-CA/CS (secretarial auditor) /CMA (cost auditor)

Penalty: 5 lakh – Listed co. & 1 lakh – other co.

-CAR0 2020

6. Duty to report on other matter specified by CG.

7. Branch auditor.

8. Duty to state reason for qualification/negative report.

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CARO 2020

Companies (Auditor’s Report) Order, 2020

Applicable Non applicable

All companies (including foreign co.) Banking co., insurance co., Section 8 co., One Person
co., Small co.

Private company, not subsidiary/holding of public co.

• PUSC & R/S upto 1 cr. as on B/S Date &
• Total borrowings upto 1 cr. from bank/FI at
any point of time &
• Total Revenue (including revenue from
discontinuing operations) upto 10 cr. during FY
Audit report on conso FS

21 Clauses –

1) Fixed Assets
• Tangible/Intangible
• Records – DQS (Details - Quantity/Situation)
• Physical verification ✅ / ❌
• Material discrepancy – Report
• Title deeds of immovable property – name of co. (If lessee – NA)
If title deeds not on company’s name –

Description Gross Held in the Whether promoter, Reason of not in Holding

carrying value name of director or their company’s name period
relative or employee
• Revaluation of PPE/intangible assets ✅ / ❌
Revaluation by registered valuer ✅ / ❌
• If revaluation – specify change amount, if change is 10% or more in aggregate of net
carrying value of each class of PPE/intangible assets.
• Proceedings initiated/pending – Benami Transactions (Prohibition) Act 1988
If yes – whether disclosed in FS

2) Inventories
• Physical verification ✅ / ❌
• Discrepancy 10% or more aggregate – each class of inventory. If yes – dealt in BoA.
• At any point of year - company has been sanctioned working capital limit > 5 crore from
banks/FI in aggregate on security of current assets.
• Quarterly returns – Co. files with bank/FI are in agreement of BoA. If not – details.

3) Company – Investment/Guarantee/Security/Loans & Advances – Company

Firm/LLP
Others

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• Not Applicable – Company principal business – Give loan.
• Total amount Subsidiaries, Associates, JV
Balance outstanding on B/S Date Other Parties
• Investment/guarantee/security/loans & advances – not prejudicial to interests of company.
• Repayment of principal and interest component – regular.
• If overdue, state amount overdue > 90 days.

Whether reasonable steps taken for recovery of principal and interest.

• Loans and advances – renewed/extended/fresh loan granted to settle overdue of existing

loan of same party.
If so - specify amount and % to total L&A granted.
• Company granted L&A Loan repayable on demand
without terms/period of repayment

If so – specify amount, % to total L&A granted & aggregate amount of loan to

Promoters/related parties.

4) Investment/guarantee/security/loans and advances – Section 185 & 186 of COA.

If not – details.

5) Deposits accepted by company/deemed deposits – Check DPO

• RBI ke Directives
• Companies Act ke Provisions complied
• NCLT ke Orders

6) Whether maintenance of cost records specified by CG under COA

& whether accounts & records made & maintained
(General review ✅ , Detailed examination ❌)

7) Co. – regular in depositing undisputed statutory dues (Eg, tax)

If no – outstanding > 6 months (Last day of FY) – Report
Disputed statutory dues – Amount & forum where dispute pending
(Mere representation to Department is not dispute)

8) Transaction not recorded in BoA – disclosed as income during the year in tax assessment
under Income Tax Act, 1961
If yes - previously unrecorded income – properly record in BoA.

9) Co. – default in repayment of loans/interest

If yes – period & amount
(ICAI Question – Report in case of reschedulement also)

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Nature of Name of lender Amt. unpaid on Principal/interest Delay Remarks
borrowing due date period
• Banks
• FI
• Govt
Lenderwise
details
• Company – wilful defaulter
• Term loan applied for authorised purpose.
If not – amount diverted and purpose
• Funds raised on short term basis utilised for long-term. If yes - nature and amount.
• Company – taken funds to meet obligation of subsidiaries, associates, joint ventures.
• Company raise loans on pledge of securities of subsidiaries, associates, joint ventures.

10) Money raised by IPO/FPO applied for authorised purpose.

If no Details
Default and subsequent rectification
• Company Preferential allotment
Private placement of shares/convertible debentures
If yes – funds used for authorised purpose

11) Fraud by/on company

If yes – Nature & amount
• Report section 143 (12) – Filed by auditor to CG in Form ADT – 4
• Auditor considered whistle-blower complaints.

12) Nidhi Company

• Net owned funds : Deposits
1 : 20 to meet out liability
• Maintain 10% unencumbered term deposits to meet out liability.
• Default in payment of interest on deposit/repayment.

13) Related Party Transactions – Section 177/188 of COA

AS ke hisaab se details in FS.

14) Company - internal audit system – size and nature of business

Internal audit report – considered by statutory auditor.

15) Non-cash transactions with directors/persons connected with him – Section 192 of COA.

16) Whether company is required to be registered under section 45-IA of RBI Act, 1934
& if yes - whether registration obtained.
• Company – conducted – Non-banking financial activity
Housing finance activity

without certificate of registration from RBI.

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CA SHANKAR LAKHWANI # Audit Made Easy
• Company – core investment company (CIC).
If yes - criteria of CIC ✅
If exempted/unregistered CIC – Criteria ✅
• Does group to which company belongs has > 1 CIC.
If yes – Number of CIC in group

17) Company incurred cash losses – in financial year

in immediately preceding FY

If yes – Amount

18) Resignation of statutory auditors

If yes – auditor consider – objections, concerns & issues of outgoing auditors.

19) Whether auditor – opinion – that no material uncertainty as on date of AR that co. is
capable to meet its liabilities as on B/S date as & when they fall due within 1 year from
B/S Date.

20)

Non-ongoing project Ongoing project

Company transfer unspent amt. to Sch VII Fund Unspent amount of CSR transfer to special a/c
within 6 months of expiry of FY u/s 135

21) Qualification/adverse remarks by respective auditors in CARO Report of company in

Consolidated FS.
If yes – details of company
Para Number of CARO Report – Qualification/Adverse remark

Question - Physical Verification 30% value inventory, 70% next year

1. Physical verification ✅ / ❌
2. Coverage and procedure of physical verification – appropriate or not.
3. Periodicity of physical verification depends on nature/location.
4. Management decides periodicity.
5. Normally, if practicable – all items – once/year.
6. Auditor examine – evidence/records of physical verification.
7. Here, 30 % due to lack of time and resources.
8. CARO requirement not fulfilled.
9. Auditor point out – areas where procedures are inadequate & unreasonable.
10. Auditor consider impact on FS and report accordingly.

Yes, I will definitely clear my CA Exams 163

CA SHANKAR LAKHWANI # Audit Made Easy
SA 800 – Special Considerations - Audits of Financial Statements prepared in accordance
with Special Purpose Frameworks

Q1) What is special purpose framework?

FRF to Specific FIN (Financial information needs)

meet of Specific users

FRF Fair presentation framework

Compliance framework

Cash basis of accounting & cash flow info for creditors

Examples FR provisions by regulator
FR provisions of contract (eg, bond indenture, loan agreement, project grant)

General purpose framework Special purpose framework

Common FIN of wide users Specific FIN of specific users

FS Complete set of SPFS with significant a/cing policies & other explanatory info

Q2) Considerations when accepting such engagement.

• Specific FIN of specific users - Key factor to determine acceptability of FRF.

• FRF encompass FR std. established by

Authorised org following established process L&R /Regulator Contract

• If c - consider whether framework exhibits attributes exhibited by FRF as per SA
210. It is a matter of professional judgement.
• SA 210 requires auditor to determine

whether conflicts b/w FR std & L/R reqt If yes – actions

Q3) MCQ

• To compute net assets, very prudent estimates of allowances for uncollectible debtors are
taken.
• It is not neutral when compared to general purpose framework.

Q4) Considerations when planning and performing such audit.

• SA 200 requires auditor to comply with

Relevant ethical reqt, including independence All SAs relevant to audit

• Auditor to comply with each reqt of SA, unless it is not relevant because it is conditional/
depart from reqt in SA by performing alternative audit procedures.

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CA SHANKAR LAKHWANI # Audit Made Easy
• SA 320 – Materiality depends on

Common FIN of wide users (General case) Specific FIN of specific users
• SA 315 – Obtain understanding of a/cing policies. If FS as per contract, auditor obtain
understanding of significant interpretations of contract made by mgt. Interpretation is
significant when adoption of other reasonable interpretation would have produced material
difference in info presented in FS.
• SA 450 – Mgt & specific users determine THRESHOLD below which MST not corrected.
Also, apply SA 320 (Auditor not relieved).
• SA 260 - Auditor to communicate with TCWG. When both GPFS + SPFS - Person
responsible for oversight of preparation of SPFS may not be same as TCWG Responsible
for oversight of preparation of GPFS.

Q5) Forming an opinion and reporting

• Consider SA 700
• Description of AFRF

SA 700 - Auditor to consider whether FS describe SA 700 deals with form & content of audit
AFRF. If FS is as per contract, whether FS report
describe significant interpretations of contract.
• In case of AR on SPFS,

Audit report describe If mgt – choice of FRF – Mgt responsibility-

➢ Purpose of SPFS & users OR makes reference – AFRF is acceptable
➢ Refer to note that contains purpose & users
• KAM in AR on SPFS – SA 701 applies.
• Report with SPFS to provide owners (or similar stakeholders) with info on matters
presented in SPFS - considered annual report for SA 720. “Similar stakeholders” =
specific users whose FIN met by SPFW. SA 720 applies.
• Refer in OM para in AR on SPFS, to AR on GPFS/to matter reported as per SA 706. Eg,
refer in AR on SPFS to MURG section in AR on GPFS.

Q6) Alerting readers and restricting distribution.

Auditor alerts users of AR by EOM Para (SA 706) Auditor indicates that AR is for specific
users
• FS as per SP F/w
• Not for other purpose • By restricting distribution or use of
(eg, if regulator to place SPFS on public record) AR
• Para alerting readers is expanded and
heading modified

Yes, I will definitely clear my CA Exams 165

CA SHANKAR LAKHWANI # Audit Made Easy
SA 805 -Special Considerations - Audits of Single Financial Statements and Specific
Elements, Accounts or Items of financial statement

Q1) Basics

• GP F/w – SA 805
• SP F/w – SA 800 + SA 805
• Doesn’t apply to report of component auditor, who works at request of principal auditor for
audit of conso FS.

Q2) Meaning

• Single FS - Cash flow statement

• Element, account, item – Trade receivable, cash and bank balance
• Includes notes + summary of significant accounting policies (SAP)

Q3) Considerations when accepting engagement

Ans. (I) APPLICATION OF SAs

1. SA 200 requires auditor to comply with

Relevant ethical reqt, including independence All SAs relevant to audit

2. Auditor to comply with each reqt of SA, unless it is not relevant because it is conditional/
depart from reqt in SA by performing alternative audit procedures.
3. Compliance with SAs for audit of single FS/specific element - Not practicable when
auditor not auditing complete FS
4. No same understanding of

Entity Environment Internal control

5. No audit evidence of quality of a/cing records. So further Audit evidence needed.
6. Some SAs require audit work, disproportionate to element being audited (SA 570)
7. If auditing as per SAs is impractical

Auditor discuss mgt

Other type of eng. more practicable

(II) ACCEPTABILITY OF AFRF

Auditor determines

Acceptability of FRF as per SA 210 Whether adequate disclosures are there for
users to understand information

Q4) Considerations when planning and performing audit.

1. Auditor shall adapt all SAs. Specific element–SA 240, SA 550, SA 570 are relevant as
element could be misstated.

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CA SHANKAR LAKHWANI # Audit Made Easy
2. SA 260 - Auditor to communicate with TCWG. When both complete FS + Single FS/element
- Person responsible for oversight of preparation of single FS/element may not be same as
TCWG Responsible for oversight of compete FS.
3. Audit of single FS/specific element + complete FS, auditor while auditing single FS /
specific element –
Use audit evidence of complete FS Plan and perform audit as per SAs to obtain SAAE
4. Auditor unable to consider FS or element in isolation - perform procedures for interrelated
items.
5. Materiality for single FS/specific element – lower than materiality for complete FS. This
will affect NTE of audit procedures.

Q5) Factors affecting auditor’s consideration as to whether to use “presents fairly in all
material respects” OR “Gives T&F view”

Factors

Whether AFRF restricted to whether single FS/specific element will –

preparation of complete FS • Comply fully with reqt of F/w relevant to
o single FS
o specific element
& presentation includes disclosures
• If necessary to achieve fair presentation,
o Provide extra disclosures OR
o Depart from reqt of AFRF
Auditor’s decision as to form of opinion - matter of professional judgement

Q6) Opinion

1. Going Concern (SA 570): Description in AR of mgt + auditor’s responsibilities wrt GC to be

adapted.
2. Report with single FS/element to provide owners (or similar stakeholders) with info on
matters presented in single FS/element - considered annual report for SA 720. SA 720
applies.
3. Sign of auditor: By auditor in personal name & firm name. Mention membership no.,
registration no. of firm.
4. Auditor to consider implications of matters in AR on complete FS for audit of single FS/
element. Involves prof. judgment.
Factors relevant to consider implications-
• Nature of matter & extent to which it relates to what is included in single FS/element.
• Pervasiveness of matter.
• Nature and extent of difference b/w AFRFs.
• Extent of diff. b/w period of complete FS & single FS/element.
• Time elapsed since date of AR on complete FS.
Eg, Qualification – Debtors in AR on complete FS & single FS/element – debtors. Implication
chances – high. Qualification – long term debt in AR on complete FS & single FS/ element- debtors.
Implication chances – low.

Yes, I will definitely clear my CA Exams 167

CA SHANKAR LAKHWANI # Audit Made Easy
If no implication, auditor refer in OM para in AR on single FS/element (SA 706) Eg, Refer in AR on
single FS/element, MURG section in AR on complete FS.

5. If auditor audits single FS/specific element + complete FS, he will give separate opinion.
6.
Audited single FS/ specific Auditor mgt Auditor will also differentiate
element may be published with opinion
audited complete FS Ask to rectify • Single FS/ specific
element
If no differentiation • Complete FS
7. Auditor shall not issue AR containing opinion on single FS/specific element until satisfied
with differentiation.
8. AR on Complete FS – modified opinion/EOM/OM Para/MURG section/statement describing
uncorrected material MST of other info (SA 720), auditor consider implications for audit
of single FS/element.
9. Very important for exam
Complete FS Single FS / specific element
Adverse opinion/disclaimer of opinion Unmodified opinion not allowed
Exception - Specific element but if 3 conditions are met

Auditor not prohibited by L/R Opinion expressed in AR not Element doesn’t constitute
published together with AR major portion of complete FS
having adverse/DOO
Not allowed for single FS as it is major portion.

10. Complete FS

Disclaimer on operations & cash flows Unmodified opinion – state of affairs

Permitted
Generally – Opinion on FS as a whole.

Yes, I will definitely clear my CA Exams 168

CA SHANKAR LAKHWANI # Audit Made Easy
SA 810 – Engagements to Report on Summary FS

Q1) Basics

Less detailed. Ordinarily, auditor should be auditor of FS.

Q2) Before accepting engagement to report on summary FS, auditor shall,

Determine whether applied Obtain agreement of mgt that Agree with mgt on form of
criteria - acceptable it acknowledges & understand opinion on summary FS
it’s responsibility

(A) Determine whether applied criteria - acceptable

1. Applied criteria - applied by mgt in preparation of SFS.
2. Factors affecting auditor’s determination of acceptability of applied criteria-

Nature of entity Purpose of SFS Info needs of intended Whether applied criteria
users of SFS result in SFS – not misleading
3. Criteria established by-
Authorised organisation L/R If no criteria, developed by mgt
4. Auditor concludes applied criteria

Unacceptable No agreement of mgt

• Auditor not accept engagement to report on SFS unless required by L/R.
• If reqd by L/R –
o SA 810 not complied
o AR on SFS not indicate eng. as per SA 810 + Reference in terms of eng. + Effect on
audit of FS

(B) Obtain agreement of mgt that it acknowledge and understand its responsibility

For preparation of SFS as per To make audited FS available to users of SFS without
applied criteria undue difficulty

(If L/R-Audited FS need not be made available +

Establishes criteria for SFS to describe L/R in SFS )
To include AR on SFS in document that contains SFS & that indicates auditor has reported on
them.
Factors affecting auditor’s evaluation of whether audited FS are available to users of SFS
without difficulty-

SFS describe clearly from Audited FS on public record Mgt established process by
whom/where audited FS which users of SFS can get
available ready access to audited FS

(C) Agree with mgt on form of opinion on SFS

Q3) Nature of procedures by auditor.

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CA SHANKAR LAKHWANI # Audit Made Easy
1. Evaluate SFS - as per AC (applied criteria).
2. Evaluate SFS - adequately disclose AC.
3. Evaluate SFS - adequately disclose summarised nature & identify audited FS.
4. Evaluate audited FS - available to users of SFS w/o difficulty, unless L/R.
5. Evaluate whether SFS
a. Has necessary info so as not to be misleading
b. Appropriate aggregation
6. Compare SFS with audited FS to determine SFS
a. agree from audited FS
b. recalculated
7. If SFS not accompanied by audited FS, evaluate whether they describe clearly-
a. From whom/where audited FS available.
b. L/R - Audited FS need not be made available + establish criteria for SFS.

Q4) Restriction on distribution / use / alerting readers.

• Distribution / use of AR on audited FS-restricted similar restriction/alert

• AR on audited FS alert readers about SP F/w in AR on SFS

Q5) Comparatives

Audited FS has comparatives but SFS do not. Auditor determine-

Is omission reasonable Effect of unreasonable omission on AR on SFS

If SFS contain comparatives reported on by other auditor, AR on SFS contain matters that SA
710 requires auditor to include in AR on audited FS.

Q6) Unaudited supplementary info with SFS.

Auditor evaluate whether unaudited supplementary info presented with SFS - clearly
differentiated?

If yes – OK If NO

Auditor ask mgt

To change presentation of supple info

If mgt agrees If mgt refuse

OK Auditor explain in AR on SFS

that supple info is not covered by AR

Q7) Other info in documents containing SFS.

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CA SHANKAR LAKHWANI # Audit Made Easy
1. Auditor read info in doc. having SFS
AR on SFS
to check material inconsistency b/w info
SFS
2. If material inconsistency – Auditor discuss with mgt & determine whether
• SFS or info needs to be revised.
• If info needs to be revised & mgt refuses to revise info- Take action including implications
on AR on SFS.

Q8) Timing of work and events subsequent to AR on audited FS.

1. AR on SFS state that SFS & audited FS don’t reflect events subsequent to AR on audited
FS.
2. Auditor – aware of facts existed at date of AR on audited FS but was previously unaware.
Not issue AR on SFS until consideration of facts wrt audited FS as per SA 560 completed.

3. Auditor reports on SFS after completion of audit of FS.

4. Since SFS derived from audited FS, auditor is not required to-
• Obtain additional audit evidence on audited FS.
• Report on events subsequent to AR on audited FS.

Q9) Auditor association.

1. Entity plans to state that auditor reported on SFS in doc. having SFS, but doesn’t plan to
include AR.

Auditor request to include AR in doc. Mgt

If mgt agrees – OK If mgt refuses

Auditor takes other action to prevent mgt from

inappropriately associating auditor

2. Auditor report on FS

not on SFS

• Entity plans to make statement in doc. that refers to auditor and fact that SFS derived
from FS.
• Auditor shall be satisfied that-
(a) Reference to auditor is in context of (b) Statement doesn’t give impression that
AR on audited FS auditor reported on SFS

3. If (a)/(b) not met

• Auditor request mgt to change statement to meet them OR
• Not to refer to auditor in doc.

4. Alternative 2 – Entity engage auditor to report on SFS

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CA SHANKAR LAKHWANI # Audit Made Easy
5. If mgt

Doesn’t change statement Doesn’t delete reference Doesn’t alternative 2

Auditor advise Mgt

that auditor disagrees with reference & auditor - other action to prevent mgt from
inappropriately referring to auditor

Q10) AR on SFS

• Title
• Addressee
• Identification of SFS, including title of statement- If SFS in doc containing other info,
auditor identifies page no. on which SFS presented
• Identification of audited FS
• Clear expression of opinion
• Statement-SFS don’t contain all disclosures as per AFRF + reading SFS & its AR is not
substitute of reading audited FS & its AR.
• Statement - SFS and audited FS don’t reflect events subsequent to AR on audited FS.
• Reference to AR on audited FS + date of that report + fact of unmodified opinion in that
report
• Description of management responsibility for SFS
• Statement - auditor responsible for opinion on SFS
• Auditor’s signature
• Date of AR (No earlier than SAAE date & AR on audited FS)
• Place of signature

Q11) Form of opinion.

1. If unmodified opinion on SFS, 1 of 2 phrases-

SFS consistent, in all material respects, with SFS - fair summary of audited FS as per AC
audited FS as per AC
2. If L/R prescribe different wording, auditor shall-

Apply procedures to enable Evaluate whether users of SFS – misunderstand auditor’s

auditor to express prescribed opinion on SFS
opinion
If yes -whether additional explanation can mitigate
misunderstanding

If yes – OK If NO – Not accept eng., unless L/R

If reqd by L/R SA 810 not complied

Auditor’s report on SFS not indicate eng. as per SA 810

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CA SHANKAR LAKHWANI # Audit Made Easy
Q12) Modification/EOM & OM Para

i.

AR on audited FS SFS – consistent, in all material respects, with

audited FS, as per AC
Qualified opinion, EOM/OM Para/MURG OR
section, KAM (SA 701), Statement describing SFS - fair summary of audited FS as per AC
uncorrected material MST of other info (SA
720) AR on SFS -
a. State that AR on audited FS includes……..
b. Describe :
• Basis of qualified opinion on audited FS &
effect on SFS
• Matter in EOM/OM para/MURG section
in AR on audited FS & effect on SFS
• Uncorrected material MST of other info
& effect on info included in doc.
containing SFS & AR on SFS
ii. AR on audited FS – Adverse opinion/disclaimer of opinion
Then, AR on SFS
State that AR on audited FS – Describe basis of Since adverse/DOO on audited FS
adverse/DOO adverse/ DOO
It is inappropriate to express opinion on
SFS
iii. SFS

Not consistent, in all material respects, Not fair summary of audited FS as per AC
with audited FS, as per AC
& mgt not agrees to make changes – Auditor - Adverse opinion on SFS

Yes, I will definitely clear my CA Exams 173

CA SHANKAR LAKHWANI # Audit Made Easy
SRS 4400 - Engagements to perform Agreed upon Procedures regarding Financial Information

Q1) Basics

• Individual items of financial data - accounts payable

• Related services – auditor – ✅/ ❌
• Objective-
o Auditor-procedures of audit nature + auditor & entity & 3rd parties – agree + Auditor
- report of FF
o Non assurance engagement. Users assess themselves factual findings of auditor and
draw own conclusions.
o Restricted report
• Eg-accounts payable
o Compare names & amount -TB
o SA 505
o Variations-report of Factual findings

Q2) General principles of AUP engagement.

• Code of Ethics (ICAI) – integrity, objectivity, professional competence & due care,
confidentiality, professional conduct & technical standards
• No Independence Terms/objective of engagement
Statement in report of FF

Q3) Matters to be agreed

1. Nature of engagement + fact – procedures –

Audit, review, assurance- ❌
2. Stated purpose of engagement
3. Identification of financial information
4. NTE of specific procedures
5. Limitation on distribution of report of FF. Limitation – conflict - legal reqt - auditor
won’t accept.

Q4) Matters included in engagement letter

• Listing of procedures to be performed as agreed upon b/w parties.

• Statement that distribution of report of FF would be restricted to specified parties who
have agreed to procedures to be performed.

Q5) Procedures

• Inquiry & analysis

• Recomputation, comparison & clerical accuracy checks
• Observation
• Inspection
• Obtaining confirmations

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CA SHANKAR LAKHWANI # Audit Made Easy
Q6) Reporting (Report of FF)

1. Title
2. Addressee (appointing Authority)
3. Identification - FI/NFI to which AUP applied.
4. Statement-procedures performed-AU with recipient.
5. Statement-engagement as per SRS.
6. Identification of purpose.
7. Listing of specific procedures.
8. Factual findings + details of Errors & exceptions
9. Statement - Audit, review, assurance- ❌
10. Statement-had auditor performed additional procedures/audit/review-other matters-light-
reported.
11. Statement - report restricted.
12. Statement only to elements/accounts/items/FI/NFI specified
FS as a whole ❌
13. Date of report
14. Place of signature
15. Auditor’s signature

Q7) Documentation

Imp. matters, evidence-engagement as per SRS, terms of engagement.

Q8) Audit vs AUP

Audit AUP
Opinion & assurance No [Link] of FF-Users draw own conclusions

Yes, I will definitely clear my CA Exams 175

CA SHANKAR LAKHWANI # Audit Made Easy
SRS 4410 – Compilation Engagements

Q1) Basics

• Applies to compilation engagement for historical financial information (HFI)

• FI other than HFI/NFI - after adaptation.
MEANING-

• Practitioner applies a/cing & FR expertise to assist mgt in PPFS as per AFRF & report.
• Assist in PPFS - professional accountant in public practice.
• Non-assurance engagement.
• Practitioner not reqd. to verify accuracy/completeness of FI/gather evidence to
express audit opinion or review.
• FI – subject of compilation eng – Purposes –
Comply with mandatory periodic FR requirement Other
(law) • For mgt/TCWG (particular purposes)
• For external parties (contract)
• Transactional purpose (change to
ownership)
• Responsibility of management for PPFS.
• Practitioner - ethical requirement - Code of ethics (ICAI)
• No independence – But L/R may specify independence reqt.

Q2) Engagement acceptance & continuance

Agreeing terms of engagement between practitioner and management.

• Intended use & distribution of FI & restriction on use or distribution.

• Identification of AFRF.
• Objective and scope of compilation engagement.
• Responsibilities of practitioner, including ethical requirements-comply
• Responsibilities of management
o PPFS as per AFRF.
o DIM of IC - Preparation of FS - Free of MM – Fraud/error.
o Accuracy & completeness of docs, other info provided by mgt.
o Judgements in PPFS, incl. those practitioner-provide assistance.
• Expected form & content of practitioner’s report.

Q3) MCQ

Ans. Practitioner mgt/TCWG

communicate all matters (prac. judgment)

sufficient importance

Q4) Engagement level quality control.

EP’s responsibility-

• Overall quality of CE to which he is assigned.

• Engagement-performed-firm’s QCPP.

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Q5) Documentation.

Practitioner include in engagement documentation-

• Significant matters and how addressed by practitioner.

• Record - How compiled FI reconciles with records, docs, other info provided by mgt.
• Copy of final version of compiled FI for which mgt/TCWG - acknowledged responsibility &
prac. report.
-May - copy of trial balance, summary of significant a/cing records/other info

Q6) Performing engagement.

1. Prac. obtain understanding-

Entity’s business & operations, a/cing system, AFRF, including application in entity’s industry
a/cing records
2. Prac. compile FI using records, docs, OI provided by mgt.
3. Prac. discuss with mgt/TCWG significant judgements (SJ) - prac. provided assistance.
4. Prac. read CFI in light of understanding of (1).
5. Prac. - aware - records, docs, OI, SJ provided by mgt -
incomplete/inaccurate/unsatisfactory – Prac. – attention of mgt & request
additional/corrected info.
6. Prac. – unable to complete engagement – mgt failed to provide records, docs, OI, SJ

Practitioner

Withdraw from eng. Inform mgt & TCWG reasons of withdrawing

7. Prac. – aware –

CFI – AFRF ❌ Amendments to CFI required for financial information, CFI- misleading
not to be materially misstated
Prac. – propose – amendments to management

8. Mgt Declines Amendments to CFI

Doesn’t permit practitioner

Practitioner

Withdraw from eng. Inform mgt & TCWG reasons of withdrawing

9. Withdrawal not possible. Prac. – Professional and legal responsibilities.
10. Prac. obtain acknowledgement from mgt/TCWG-Responsibility for final version of CFI.

Q7) Practitioner’s report.

1. Report title
2. Addressee
3. Statement - prac. compiled FI based on info provided by mgt.
4. Responsibility of mgt/TCWG.
5. Identification of AFRF (If SPFRF - description)
6. Identification of FI-
a. Title of each element
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CA SHANKAR LAKHWANI # Audit Made Easy
b. Date of FI or period
7. Prac. responsibility in compiling FI – comply SRS & ethical reqt.
8. Description of what CE entails – SRS.
9. Explanation-
a. Non-assurance engagement. Prac. - not reqd to verify accuracy/completeness.
b. Opinion, review – ❌ - AFRF
10. SPFRF, Explanatory para-
a. Purpose
Intended users
Refer to note that discloses both

b. Draw attention of readers of report-

SPFRF
Other purpose - not suitable
11. Date of practitioner’s report
12. Practitioner’s signature
13. Place of signature

Yes, I will definitely clear my CA Exams 178

CA SHANKAR LAKHWANI # Audit Made Easy
SRE 2400 – Engagements to Review Historical FS

Q1) Basics

Practitioner is not auditor of entity’s FS.

Q2) Factors affecting acceptance & continuance of client relations & review eng.

Practitioner - not accept RE if –

a) Practitioner not satisfied:

i. That there is rational purpose for eng.
No rational purpose if
Significant limitation on scope Association of practitioner’s L/R requires FS to be audited
name with FS inappropriately
ii. Review eng. would be appropriate in circumstances. If not, he may recommend
another type of eng.
b) Practitioner – RTB – ethical reqt, including independence will not satisfy.
c) Prac’s preliminary understanding indicates that info to perform RE likely to be
unavailable/unreliable.
d) Prac has cause to doubt mgt’s integrity.
e) Mgt/TCWG - limitation on scope such that prac believes - result in disclaiming conclusion.

Q3) Preconditions for accepting RE.

Practitioner –

(a) Determine whether FRF – prep. of FS – acceptable.

(b) Obtain agreement of mgt that it acknowledges & understand its responsibility
i. For prep. of FS – AFRF
ii. For IC – FS free of MM – Fraud/error
iii. To provide prac –
• Access to all info
• Additional info
• Unrestricted access to persons within entity

Q4) Performing RE

1. Materiality in review of FS
• Determine materiality for FS as a whole.
• Prac - revise materiality, if needed.

2. Obtain understanding of entity and AFRF

• To identify areas of possible material MST.

3. Design & perform “Inquiry” and “Analytical Procedures”

• Inquiry – seeking info from mgt & other persons within entity
• Analytical procedures
• Why inquiry & AP are important in review?/Benefits/importance/need

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CA SHANKAR LAKHWANI # Audit Made Easy
a) Evidence through inquiry is principal source of evidence of mgt intent. BUT info to
support mgt’s intent is limited. So, understanding –
Mgt’s history of carrying out Mgt’s reasons for choosing Mgt’s ability to pursue
intentions particular action specific action
provide relevant info to corroborate inquiry
b) Benefits of inquiry-understanding entity & envt to identify areas of possible MM.
c) Benefits of AP –
Understanding entity & envt to identify Providing corroborative evidence
areas of possible MM
Identifying inconsistencies from expected Serving as additional procedures when prac
trends in FS becomes aware that FS – MM

4. Perform procedures to address specific circumstances

• Related Parties - Prac remains alert for info indicating RP relations/trans. mgt hasn’t
previously disclosed to practitioner.
• Fraud and non-compliance with L/R – Indication - Fraud/NC or suspected fraud/NC –
Prac communicate to senior mgt/TCWG & request mgt’s assessment of effects on FS.
• Going concern - Review includes GC assessment of entity. Prac – event – significant
doubt – GC, prac shall,
o Inquire Mgt plans for future actions
Whether above - improve situation
o Evaluate results of inquiries of mgt.
o Consider mgt responses in light of all relevant info of which prac aware.
• Use of work performed by others – It may be necessary to use work of other
Prac/expert – check adequacy of work.

5. Perform additional procedures on becoming aware that FS may be MM

• Perform additional procedures to enable prac. to-

Conclude that matter is not likely to cause FS Determine that matter causes FS as a whole to
as a whole to be materially MM be MM
• Procedures may be –

Additional inquiry/AP (eg, greater Other types of procedures (eg,substantive

detail/focused on affected items) TOD/external conf.)

Q5) Subsequent events.

Ans. If prac – aware – events b/w FS date & report that require adj/disclosure in FS,

Prac. Request to adjust/disclose mgt

Q6) Written representation.

1. Prac request mgt to provide WR that-

Mgt has fulfilled responsibility for – All transactions recorded in FS

• PPFS-AFRF
• provided all info & access

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2. Prac also request WR that mgt disclosed to prac-
• Identity of RP & RP relations & trans. of which mgt aware.
• Significant facts - fraud/suspected frauds known to management.
• Known actual/possible non-compliance with L/R.
• All info wrt use of GC assumption in FS.
• Events subsequent to FS date requiring adj/disclosure have been adjusted/disclosed.

3. If no WR from mgt, Prac shall,

Discuss matter with Re-evaluate integrity of mgt & Take appropriate action, including
mgt/TCWG evaluate effect on reliability of effect on conclusion in report
representation.

4. Prac – disclaim conclusion on FS/withdraw from eng, if-

Prac. has sufficient doubt about integrity of Mgt doesn’t provide WR wrt responsibilities –
mgt, such that WR aren’t reliable PPFS & recording all transactions

Q7) Types of conclusion.

Unmodified Conclusion - If limited assurance to conclude that nothing came to attention that
causes to believe that FS not prepared as per AFRF.

Modified Conclusion –

Qualified conc. Adverse conc. Disclaimer of conc.

SAAE ✅ ❌ ✅ ❌
Material ✅ ✅ ✅ ✅
Pervasive ❌ ❌ ✅ ✅

Q8) Description of review of FS and limitations.

Limitations para-

• Limited assurance engagement.

• Procedures-inquiry and analytical procedures.
• Procedures substantially less than audit. No opinion.

Q9) Report.

1. Title
2. Addressee
3. Introductory para-
• Identifies – FS, title of each statement, date and period.
• Refers to summary of SAP.
• States FS reviewed.
4. Description of mgt responsibility for PPFS-AFRF & IC.
5. Description of prac. Responsibility-reference to SRE & L/R.
6. Date of report (Not earlier than SAE)

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7. Practitioner’s signature
8. Place of signature

• Prac’s report can include EOM/OM para.

Q10) Documentation.

(A) Practitioner shall document-

NTE of procedures to Results obtained from Significant matters arising during eng,
comply with SRE & L/R procedures + conclusion prac’s conclusions & significant
judgments made in reaching conclusions

(B) While documenting NTE of procedures, prac shall record –

Who performed work and date when work Who reviewed work and period and extent of
completed review

Q11) Difference b/w Audit & Review.

AUDIT REVIEW
1. Reasonable assurance eng- Provides RA. Limited assurance eng- Provides lower level of
assurance than audit.
2. Elaborate/extensive procedures - TOC & Fewer procedures - Inquiry & analytical
substantive procedures. procedures.
3. Reasonable conclusion Limited conclusion
4. Assurance opinion. Language of assurance Assurance conclusion. Language of assurance
opinion is positively worded. conclusion is negatively worded.

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SRE 2410 – Review of Interim Financial Information Performed by Independent Auditor of
Entity

Q1) Basics.

• Interim FI - FI for period shorter than FY eg, quarter.

• Audit and review by same person.

Q2) Procedures by auditor to update understanding of entity & envt including internal control.

1. Reading recent annual prior period Interim FI.

2. Inquiring mgt of effect of changes in business activities.
3. Considering results of audit procedures wrt current year’s FS.
4. Considering results of internal audit & subsequent actions by mgt.
5. Considering significant risks, including risk of mgt override of controls identified in audit of
prior year’s FS.

Q3) Inquiries, analytical & other review procedures.

Procedures performed by auditor-

1. Reading minutes of meetings of shareholders,TCWG to identify matters affecting interim

FI & inquiring about matters for which minutes not available.
2. Communicating with other auditors performing review of interim FI of entity’s significant
components.
3. Inquiring of mgt responsible for financial and a/cing matters about following-
a. Compliance with debt covenants.
b. Significant changes in commitments & contractual obligations.
c. Significant changes in contingent liabilities, incl. litigation/claims.
d. Whether interim FI contains uncorrected MST.
e. Whether new trans. necessitated application of new accounting principle.
4. Applying analytical procedures to interim FI to identify unusual relations.
5. Reading interim FI & considering whether anything came to auditor’s attention that causes
him to believe that it is not as per AFRF.

Q4) Management representations

Auditor obtains WR from mgt that-

1. It acknowledges responsibility for design/implementation of IC.

2. Interim FI – prepared and presented as per AFRF.
3. It disclosed to auditor significant facts – fraud/suspected fraud.
4. It disclosed to auditor actual/possible non-compliance with L/R.
5. It disclosed to auditor significant events subsequent to B/S date till date of review report
requiring adjustment in interim FI.

Q5) Communication.

1) When auditor believes it is necessary to make material adjustment to interim FI for it to be

prepared as per AFRF.
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Auditor communicate mgt.

If mgt doesn’t respond within time,then to TCWG.

2) If TCWG doesn’t respond within time, auditor consider-

• Whether to modify report or

• Whether to withdraw from engagement and
• Whether to resign from appointment to audit of annual FS.

Q6) Reporting.

1. Title
2. Addressee (Board of Directors)
3. Identification-
• Interim FI reviewed
• Title of each statement
• Date & period
4. Statement - mgt responsible for preparation & presentation of interim FI as per AFRF.
5. Statement auditor responsible – conclusion.
6. Date of report
7. Place of signature
8. Auditor’s signature
(UDIN – SRE 2400/2410)

Q7) Departure from AFRF.

1) Material adjustment needed in interim FI for it to be prepared as per AFRF- Qualified/Adverse

2) If no adequate disclosure in interim FI-

Qualified (Explanatory para to review report) Adverse

Material ✅, Pervasive ✅
Q8) Limitation on scope.

Limitation imposed by management – Auditor doesn’t accept eng.

• If after accepting eng.– limitation – auditor requests removal of limitation.

If mgt accepts If mgt refuses
NO PROBLEM Review ❌, Conclusion ❌
Auditor written communication mgt/TCWG
Reason why review can’t complete
• L/R reqt to issue report

If reqt If no reqt
Disclaimer of conclusion with reason NO PROBLEM
Q9) Going concern and significant uncertainties.

• MU – event - Significant doubt – Going concern + disclosure in interim FI = EOM Para.

• If auditor added EOM para in prior audit/review report &
If MU still exist + disclosure in interim FI
Adding para to highlight continued MU (modification)
• MU + No disclosure in interim FI = Qualified/adverse conclusion.
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SAE 3400 - The Examination of Prospective Financial Information

Q1) Basics

• Examination of PFI – not necessarily by statutory auditor.

Q2) What is PFI?

1. PFI is financial info based on-

• Assumptions about future events.
• Entity’s possible actions.
2. PFI can be in form of forecast, projection, combo.
3. Forecast-
• Assumptions as to future events mgt expects to take place
• Actions
• These are best estimate assumptions i.e. no provision for risk of adverse deviation.
4. Projection-
• Assumptions as to future events not expected to take place
• Actions
• Hypothetical assumptions - Entity in startup phase/major change in nature of
operations.
• Mixture of best estimate and hypothetical assumptions.

Q3) MCQ

1) This SAE doesn’t apply to examination of PFI expressed in general/narrative terms, found in
mgt’s discussion & analysis in annual report.
2) Opinion as to whether results in PFI will be achieved can’t be expressed.
3) Mgt is responsible for preparation & presentation of PFI, including assumptions.

Q4) Can professional accountants be associated with PFI?

Clause 3 – Second Schedule – CA Act, 1949

• Practicing CA-professional misconduct if permits his name to be used wrt estimate of

earnings contingent on future transactions in manner which may lead to belief that he
vouches for accuracy of forecast. But it doesn’t preclude CA from associating name with
PFI.
• CA can participate in preparation of financial forecasts & can review them, provided he
indicate in his report-
Source of info Basis of forecast Assumptions in arriving at
forecast
& doesn’t vouch for accuracy of forecast. Same applies to projections.

Q5) Duties of member examining PFI.

Auditor should obtain SAE as to whether-

1. Mgt’s best estimate assumptions are not unreasonable & hypothetical assumptions are
consistent with purpose of info.

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2. PFI - properly prepared on basis of assumptions.
3. PFI – properly presented & all material assumptions adequately disclosed (indicating best
estimate & hypothetical)
4. PFI – consistent basis with historical FS.

Q6) Precautions to be taken by auditor before accepting engagement.

(I) Before accepting eng. to examine PFI, auditor considers-

Intended use of info Nature of assumptions- Period covered

Best estimate/hypothetical
Whether info for general/ltd Elements in PFI
distribution
(II) Auditor – not accept/withdraw from eng. when

• Assumptions – unrealistic OR
• PFI inappropriate for intended use

Q7) When determining NTE of examination procedures, consider these matters-

Knowledge of previous Mgt’s competence as to Likelihood of MM

engagements preparation of PF
Extent to which PFI affected Stability of entity’s business Eng. Team’s experience with
by mgt’s judgment industry & reporting

Q8) Presentation and disclosure – P&D

While assessing P&D of PFI & assumptions, it is to be considered whether-

1. Presentation of PFI Informative

Not misleading
2. A/cing policies clearly disclosed in notes to PFI.
3. Assumptions adequately disclosed in notes to PFI–Best estimate & hypothetical.
4. Date as of which PFI prepared is disclosed.
5. Basis of establishing points in range – indicated & range not selected in biased manner.
6. If change in a/cing policy from recent historical FS, whether-
• Reason of change disclosed
• Effect on PFI

Q9) Report on examination of PFI.

1. Title
2. Addressee
3. Identification of PFI
4. Reference to SAs
5. Statement - mgt responsible for PFI.
6. Reference to purpose/restricted distribution of PFI.
7. Statement – examination procedures – test basis.
8. Statement of -ve assurance as to whether assumptions provide reasonable basis for PFI.

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9. Opinion - whether PFI as per – assumptions & FRF.
10. Caveats as to achievability of result.
11. Date of report (date procedures have been completed)
12. Place of signature
13. Signature

Q10) Reporting

1) P&D - Not adequate – qualified or adverse opinion /withdrawal from eng

Eg, when financial info doesn’t disclose consequences of highly sensitive assumptions.
2) Assumptions don’t provide reasonable basis for PFI – adverse opinion /withdrawal from eng.
3) Examination affected by conditions that prelude procedures (scope limitation) – disclaimer of
opinion /withdrawal from eng.

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SAE 3402 – Assurance Reports on Controls at Service Organisation

Q1) Objectives of service auditor

1) To obtain reasonable assurance about whether-

• Service org’s description of system presents system as designed & implemented
throughout specified period/as at specified date.
• Controls wrt control objectives stated in service org’s description of system were
suitably designed throughout specified period/as at specified date.
• Controls operated effectively to provide reasonable assurance that control objectives
achieved throughout specified period.

2) To report on above matters as per service auditor’s findings.

Q2) Type 1 & 2 report

Type 1 Report - Report on description & design of controls at service organisation on specified
date.
Type 2 report – Report on description, design & operating effectiveness of controls at service
organisation throughout specified period.

Q3) How such engagement is proceeded with?

1. Compliance with ethical requirements, including independence.

2. Determination of mgt & TCWG & communication with them.
3. Acceptance and changes in terms of engagement.
4. Assessing of suitability of criteria.
5. Determination of materiality.
6. Obtaining understanding of service organisation’s system.
7. Obtaining evidence regarding description.
8. Obtaining evidence regarding design of controls.
9. Obtaining evidence regarding operating effectiveness of controls (if type 2 report)
10. Understanding internal audit function.
11. Asking for written representation.
• Service auditor requests service organisation to provide WR-
o That reaffirm assertion accompanying description of system.
o That it has provided service auditor with all info & access.
o That it has disclosed to service auditor-
▪ NC with L/R, fraud attributable to service organisation affecting user
entities.
▪ Design deficiencies in controls.
▪ Instances where controls not operated as described.
▪ Subsequent events.
12. Subsequent events.

Q4) Elements of service auditor’s assurance report.

1. Title – Independent service auditor’s assurance report

2. Addressee

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3. Identification of service organisation’s description of system.
4. Statement - report only for user entities and their auditors.
5. Statement - SO responsible for –
Preparing description of Stating control objectives Providing services covered by
system SO’s description of system
Designing & implementing controls to achieve control objectives
6. Statement – service auditor’s responsibility – opinion on service org’s description, design &
operating effectiveness of controls (Type 2 report)
7. Statement-engagement as per SAE 3402.
8. Statement–No procedures on OE of controls–Type 1 report- So no opinion
9. Statement of limitations of controls.
10. Service auditor’s opinion – positive form.
11. Date of service auditor’s assurance report (Not earlier than SAE date)
12. Signature
13. Place of signature

Q5) Modified opinion.

If service auditor concludes that-

SO’s description doesn’t Controls wrt control Type 2 report – Service auditor
present system as objectives – not controls tested didn’t unable to obtain
designed & implemented suitably designed operate effectively SAE
Modify + Description of reasons of mod. in service auditor’s assurance report

Q6) Additional reporting in case of Type 2 Report

1. Type 2 report – service auditor’s assurance report – separate section describing TOC & its
results.
2. TOC – service auditor clearly state

Which controls tested Whether items tested Nature of test

represent all/selected items
3. Deviations- If deviations identified, service auditor include-

Extent of testing (including sample size) No. & nature of deviations

4. Service auditor report deviations even if control objective achieved.

Q7) Documentation by service auditor.

NTE of procedures Results of procedures Significant matters

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SAE 3420-Assurance Engagements to Report on Compilation of Pro Forma Financial
Information Included in a Prospectus

Q1) Basics

1. Reasonable assurance engagement.

2. Reporting required by securities law.
3. Pro forma FI – FI shown with adjustments to illustrate impact of trans., on unadjusted FI
as if transaction had been undertaken earlier.
4. Pro forma FI doesn’t show actual financial position.
5. Compilation of pro forma FI – Responsibility of responsible party (RP).
6. Report on whether pro forma FI – compiled as per applicable criteria (AC) – Responsibility of
practitioner.
7. Steps in process –
a. Identifying source of unadjusted FI (UFI) & extracting it.
b. Making pro forma adjustments to UFI.
c. Presenting pro forma FI with disclosures.

Q2) Factors to consider before accepting engagement/engagement acceptance

1. Determine prac. has capabilities & competence to perform eng.

2. Determine that applicable criteria – suitable & unlikely that pro forma FI is misleading.
3. Evaluate wording of opinion prescribed by L/R to determine that prac will be able to
express opinion.
4. Entity’s historical FI never 5. If acquisition – acquiree’s historical
audited/reviewed FI never audited/reviewed
Consider whether prac can obtain sufficient
understanding of – Same
• Entity
• A/cing & FR practice
6. Obtain agreement of RP that it acknowledge & understand its responsibility for-
i. Adequately disclosing AC to intended users.
ii. Compiling pro forma FI on basis of AC.
iii. Providing practitioner with-

Access to all info to Additional Access to those Access to individuals within acquiree
evaluate whether pro forma info within entity in business combination
FI compiled as per AC

Q3) Factors to consider in planning and performing engagement

1. Prac assess whether applicable criteria (AC) suitable.

2. Consider materiality to evaluate whether proforma FI compiled as per AC.
3. Understanding how RP compiled pro forma FI.
4. Obtain evidence of appropriateness of source of UFI.
5. If no audit/review report on source, perform procedures to be satisfied that source is
appropriate.
6. Determine whether RP appropriately extracted UFI from source.

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7. Obtain evidence about appropriateness of pro forma adjustments. Pro forma adjustments
include-
Adj. to UFI illustrating impact of significant Adj. to UFI necessary for pro forma FI to be
trans. as if occurred earlier compiled as per AFRF
8. Evaluate presentation of pro forma FI
9. Read other info in prospectus to identify material inconsistencies with pro forma FI.

Q4) Written representation

Practitioner request WR from RP that-

RP identified all pro forma adjustments to Pro forma FI compiled as per AC

illustrate impact of transaction

Q5) Opinion

1) Unmodified opinion: Pro forma FI compiled as per AC.

2) Modified opinion
CASE “A” - L/R preludes publication of prospectus containing modified opinion wrt pro forma
FI & prac concludes modified opinion – appropriate.
Prac discuss with RP
If RP agrees to make changes If RP doesn’t agree to make changes
OK Withdraw from eng. OR Legal advice
CASE “B” – L/R doesn’t prelude publication of prospectus containing modified opinion wrt pro
forma FI & prac concludes - modified opinion – appropriate.
3) EOM Para - Refers to info presented/disclosed in pro forma FI/notes. Included when as
per prac, matter is of such importance that it is fundamental to users‘ understanding of
whether pro forma FI compiled as per AC.

Q6) Report

1. Title - Indicates: Independent assurance report

2. Addressee
3. Introductory para-
Pro forma FI Source from which Period/date of pro Reference to AC
UFI extracted forma FI
4. Statement – RP is responsible for compiling pro forma FI as per AC.
5. Practitioner’s responsibilities-
Opinion – whether pro forma Prac not responsible for Purpose-Illustrate impact of
FI compiled as per AC updating/reissuing report or significant trans on UFI as if
opinion on HFI + Prac not occurred earlier. So no
performed audit/review of FI assurance that actual outcome =
used in compiling proforma FI as presented
6. Statement – engagement as per SAE 3420.
7. Practitioner’s opinion
8. Practitioner’s signature
9. Date of report
10. Place of signature

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