INDEX INDEX

Chapter No. Chapter Name Colour

10 Audit Report

11 Company Audit

12 Audit of items of FS

13 Audit of different types of entities

14 Bank Audit

15 CARO 2020
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CHAPTER 10 - AUDIT REPORT

SA 700 FORMING AN OPINION AND REPORTING ON THE FINANCIAL STATEMENTS SA 701 COMMUNICATING KEY AUDIT MATTERS (KAM) IN THE INDEPENDENT AUDITOR'S REPORT

FORMING AN OPINION EXPRESSION OF OPINION KAM: Matters that, in auditor's professional judgment, Purposes of KAM
"1) Auditor from opinion whether FS prepared in accordance with "Unmodied opinion When FS prepared in accordance with were of most signicance in audit FS. "- enhances communicative value of the report - provides addn info to users of FS
applicable FRF. To from opinion obtain reasonable assurance applicable FRF. Communicating KAM is not to assist them in understanding matters most signicance in audit.- assist users in
whether FS free from material misstatements. Modified opinion understanding entity & areas of signicant mgt judgment in the audited FS"
2) In forming such opinion he shall consider following: "❖ Substitute for disclosures in FS
❖ FS not free from material misstatements, or KAM to be selected to from matters communicated to TCWG - In making
• Sufciency & appropriateness of audit evidences ❖ Substitute for expressing a modied opinion determination auditor shall take into account the following:
❖ is unable to obtain sufcient & appropriate evidence to
• Materiality of uncorrected misstatements ❖ Substitute for reporting in under SA 570 when
conclude FS free from material misstatement "- Areas of higher assessed ROMM
• Adequacy of disclosures in FS material uncertainty exists relating to
events/conditions that may cast signicant doubt on - Signicant auditor judgments relating to areas that involved signicant mgt
• Consistency of accounting Policies with applicable FRF
entity's ability to continue as a going concern; or judgment
• Reasonableness of Accounting Estimate so Reliability & Supplementary info
relevance of nancial info ❖ Separate opinion on ind matters." - Effect on audit of signicant events/transactions"
Integral part of FS: Cover in opinion
• Adequacy of disclosure of material transactions & Event so Otherwise: Differentiate from FS: If not then ask mgt to
Appropriateness of Terminology used FS Matter Determined to be KAM, still Not Communicated in the Report
change way of presentation; If mgt refuse - mention in
3) Fair presentation framework, he shall consider: report such info not audited "Describe each KAM in the report unless:- Law/regulation precludes public disclosure; or- In rare circumstances, adverse consequences of
• Overall presentation, structure & content of FS, & communicating matter would reasonably be expected to outweigh public interest benets."
• Whether FS represent underlying transactions & events so as to
achieve fair presentation."
SA 705 MODIFICATIONS TO THE OPINION IN THE INDEPENDENT AUDITOR'S REPORT

CONTENT OF AUDITOR' REPORT

1. Title 2. Addressees - Members/TCWG 3. Auditor's opinion Types of modified opinion
4. Basis for opinion 5. Going concern 6. KAM 7. Mgt responsibilities for FS Nature of matter Material not pervasive Material and pervasive
8. Auditor's responsibilties for FS FS materially misstated Qualied Adverse
9. Other reporting Prepare FS in accordance with
responsibilties FRF; Exercise IC; Assess going Unable to obtain SAAE Qualied Disclaimer
Objectives of auditor; Meaning of
concern Disclaimer: In rare circumstances involving multiple uncertainties, auditor concludes, notwithstanding having obtained SAAE regarding each of
reasonable assurance; misstatements can 10. Sign of auditor
arise on account of fraud uncertainties, not possible to form opinion on FS due to the potential interaction of uncertainties & their possible cumulative effect on FS.
11. Place of sign 12. Date of report

Form and content of auditor's report in case of modified opinion

SA 706 EMPHASIS OF MATTER (EOM) AND OTHER MATTER (OM) 1. Use heading "Modied/Adverse/Disclaimer of opinion" and "Basis for modied/Adverse/Disclaimer of opinion.
PARAGRAPHS IN THE INDEPENDENT AUDITOR'S REPORT
SA 710 COMPARATIVE INFORMATION - CORRESSPONDING FIGURES AND COMPARATIVE FINANCIAL INFORMATION

EOM: refers to matter appropriately incorporated in FS of such OM: Para relating to matter other than those in FS which is
importance that it is fundamental to user's understanding of FS. relevant to user’s understanding or auditor's responsibility or his COMPARATIVE FINANCIAL STATEMENTS CORRESPONDING FIGURES
"Include EOM para in the report provided: report "Comparative info where amounts & other disclosures for prior Comparative info where amounts & other disclosures for prior
1. Auditor wouldn't be required to modify opinion in accordance Auditor include OM para in the report, not prohibited by period are included for comparison with FS but, if audited, are period, included as integral part of FS & intended to be read in
with SA 705 law/regulation; & matter not been determined to be a KAM referred to in the opinion." relation to amounts & other disclosure
2. Matter not been determined to be KAM" Examples of OM: Auditor's Opinion refers to each period for which FS are "Auditor's Opinion on FS refers to currentperiod only."
- Reporting on more than one set of FS presented
Examples of EOM :
"- Uncertainty relating to future outcome of exceptional litigation - Restriction on distribution/use of the report "Audit opinion not refer to corresponding gures, EXCEPT:(1) Auditor’s report in prior period FS modied & subject matter is still unresolved
- Signicant subsequent event occurs bw date of FS & date of Audit Procedures (2) Auditor obtains AE w.r.t. existence of material misstatement in prior period FS on which unmodied opinion was issued, & misstatement
auditor's report "- Comparative info agrees with other disclosures has not been dealt as required by applicable FRF."
- Early application of new A/c standard - A/c policies in comparative info are consistent with those
applied in the current period. Prior period FS
- Major catastrophe"
- Changes in A/c policies, if any, have been properly accounted AUDITED BY ANOTHER AUDITOR UNAUDITED
for & disclosed."
"Auditor shall state in OM Para: State in OM Para
that corresponding
• FS of prior period audited by predecessor auditor
UDIN FS are unaudited.
• Type of opinion expressed by him
Financial documents /certicates attested by third person misrepresenting themselves as CA were misleading Authorities & Stakeholders. ICAI
• Date of that report.
also received complaints of signs of CAs being forged by non CAs. To curb malpractices, ICAI implemented in phased manner as innovative
concept of UDIN . All Certicates were made mandatory with effect from 1st February, 2019. CAs having full-time COP can register on UDIN Prior period FS contain material misstatements:
Portal & generate UDIN by registering certicates attested/ certied by them. Accordingly, auditor is required to mention UDIN w.r.t each audit • Communicate misstatement to TCWG & Mgt
report being signed by him. • Request predecessor auditor be informed"

01
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CHAPTER 11 - COMPANY AUDIT

ELIGIBILITY QUALIFICATIONS AND DISQUALIFICATIONS OF AN AUDITOR (SEC 141) APPOINTMENT OF AUDITOR (SEC 139)

(1) Auditor to be CA only; rm where major partners are CA First Auditor Subsequent Auditor
(2) Firm appointed - CA Partners authorised to act & sign on behlaf of rm
(3) Person not eligible to be auditor:- Govt Co - Sec Others - Govt Co - Sec
Others - 139(6)
139(7) 139(1) 139(5)
a) Body corporate (Not LLP) c) Partner/employee of ofcer/employee
b) Ofce/employee of co d) Person/relative/partber holds: By CAG in 180
e) Person/rm having business (i) any security/interest in co/subsi/hold/asso/subs of holdco By BOD in 30 By CAG in 60 By Members days from
relationship with co/hold days from DOR days of DOR in AGM commencement
Relative may hold security/interest upto 1L (Face value) - of year
/subs/asso/subs of hold relative has shares above 1L -Corrective action in 60 days
In case of failure: Hold offc Hold offc till
f) Relative of director/KMP (ii) indebted to co/subs/hold/asso/subs of hold > 5L In case of failure:
Members in EGM from 1st AGM conclusion of
BOD in 30 days
"g) Person full time employment (iii) given guarantee/security to co/subs/hold/asso/subs of hold > 1L in 90 days to 6th AGM AGM
elsewhere or person appointed h) Person convicted of fraud & period of 10 yrs not elapsed
as auditor in more than 20 In case of failure: Where at any AGM, no auditor
cosother than OPC, dormant co, I) Person providing services u/s 144 Members in EGM appointed/re-appointed, existing auditor
small co & pvt co PUC<100cr" in 60 days continue to be the auditor
(4) Person incurs disqualication u/s - A/c and book keeping services - Internal Audit - Actuarial
Hold offc till conclusion of rst AGM
141(3) after appointment, vacate - Design & implementation of any nancial info system
ofce & deemed casual vacancy
- Investment advisory - Investment banking
(i) Written consent & certicate to be obtained from auditor.
- Outsourced nancial service - Mgt services - Others (ii) Under Rule 4, the certicate shall state following:-
'Retiring auditor re-appointed at AGM, if- (a) individual/rm is eligible for appointment
(i) Not disqualied for re-appointment; (b) proposed appointment as per the term provided under the Act;
(ii) Not given notice in writing (c) proposed appointment is within limits laid down by or under the Act;

(iii) SR not been passed at that meeting appointing some other FILLING OF A CASUAL VACANCY [Sec 139(8)] (d) list of proceedings against auditor/rm/any partner of rm pending w.r.t professional matters of
conduct, as disclosed in the certicate, is true & correct.
auditor/providing expressly that he shall not be re-appointed.
(iii) Company le a notice of appointment with Registrar within 15 days of meeting in which auditor is appointed.
Other Companies Govt Companies
To be led by BOD in 30 days To be led by CAG in 30 days
ROTATION OF AUDITOR (Sec 139(2)) AUDIT COMMITTEE (Sec 177)
In case of resignation, In case of failure: BOD shall ll
appointment by BOD to be in 30 days
Applicability of Sec 139(2) approved by Co. at AGM

In case of failure, auditor liable to a penalty of 50,000 or remuneration of auditor, Following classes of co's shall constitute an AC -
whichever is less, & in case of continuing failure, with further penalty of 500 each day
All listed co (Oher than OPC & small co) during which such failure continues, subject to a maximum of 5L Listed co

+ +
Manner of Rotation of auditors on expiry of their term (Rule 6) Public co loans/
Co borrowings
Unlisted "- AC recommend to BOD, name of individual auditor/rm Public co Public co borrowings/
from FI, banks, Pvt co
public co PUC PUC > turnover > debentures/
public deposit PUC > 50 cr - Where co required to constitute AC, BOD consider recommendation, & in other cases, BOD itself
> 10 cr = 10 cr = 100 cr deposits >
> 50 cr consider matter of rotation & make recommendation for appointment by members in AGM. = 50 cr
- in case of auditor, period for which individual/rm held ofce prior to commencement of Act taken
- Appoint individual more than 1 term of 5 yrs into account for calculating period of 5/10 yrs Manner of selection & appointment of auditors (Rule 3)
- Appoint rm more than 2 terms of 5 yrs - incoming auditor/rm not be eligible if such auditor/rm associated with outgoing auditor/rm "- In case of co required to constitute AC , AC, &, in cases where
under same network of audit rms. committee not required, BOD, take into consideration qualications &
Auditor not eligible for re appointment for 5 yrs
from completion of such term Explanation I - ""same network"" includes rms operating/functioning under same brand name, experience of individual/rm proposed to be considered for
trade name or common control. appointment as auditor
"(1) As on date of appointment, no rm having a
common partner to other rm, whose tenure Explanation II - (a) break in term for a continuous period of 5 yrs considered as fullling requirement - AC/BOD call for other info from the proposed auditor
expired in co preceding FY, appointed of rotation - Where co required to constitute AC, committee recommend name of
asauditor for a period of 5 years. (b) if partner, in charge of rm & also certies FS, retires from rm & joins another rm, other rm individual/rm to BOD for consideration & in other cases,BOD
(2) Right of co to remove auditor/right of auditor ineligible to be appointed for a period of 5 yrs." consider & recommend individual/rm to members in AGM
toresign not to be prejudiced. - If BOD agrees with recommendation of AC, further recommend
(3) Members of a co may resolve to provide appointment of individual/rm to members in AGM- If BOD disagrees
that- with AC, refer back recommendation to AC for reconsideration citing
reasons for such disagreement.
(I) Auditing partner & team rotated at intervals
- If AC decides not to reconsider its recommendation, BOD record
(ii) audit conducted by more than 1 auditor"
reasons for disagreement & send its own recommendation to
members; and if BOD agrees with recommendations of AC, it shall
place matter for consideration by members in AGM"
02
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REMOVAL OF AUDITORS AUDITOR’S REMUNERATION (Sec 142) COST AUDIT - Sec 148

Before expiry of term (Sec 140(1)): Remuneration of auditor xed in GM/in such manner as may be Applicability for Maintenance of Cost Records (Rule 3):
"- Board Resolution- Application to CG in Form ADT 2 in 30 days of BR determined. BOD x remuneration rst auditor appointed by it. Cos, engaged in production of goods/providing services, having overall turnover of Rs. 35 cr or more during preceding FY, required to include cost
Appointment of auditor other than retiring auditor - Sec 140(4) records. Including Foreign Cos but exclude co classied as MSME. Divide list of cos into (A) Regulated sectors and (B) Non-regulated sectors.
- Co hold GM in 60 days of receipt of approval of CG for passing SR
- Auditor given a reasonable opportunity of being heard." "- Special notice required for resolution at AGM appointing auditor a
person other than retiring auditor/providing expressly that retiring Maintenance of Cost Records (Rule 5):
"Direction by Tribunal - Auditor acted in Fraudulent Manner (Sec auditor not be re-appointed
140(5)): Tribunal suomotu/on application made by CG/any person "Every co required to maintain cost records in Form CRA-1. As per clause (vi) to Paragraph 3 of the CARO, auditor has to report whethermaintenance
concerned, satised auditor has acted in fraudulent manner, it may, by - On receipt of notice, Co send copy thereof to retiring auditor of cost records specied by CG & whether such accounts & records have been so made & maintained."
order, direct co to change its auditors.If application made by CG & - Where notice given & retiring auditor makes representation in
Tribunal satised that any change ofauditor required, it shall within 15 writing to co & requests its notication to members, Co shall, unless
days of such application, make an order that he shall not function as representation is received by it too late for it to do so,- Applicability of Cost Audit (Rule 4):
auditor & CG may appoint another auditor a) in notice of resolution state fact of representation made; and "- ""Regulated Sectors"" if overall annual turnover during immediately preceding FY is Rs. 50 cr or more & aggregate turnover of individual
Auditor against whom nal order passed under this section not be product/service for which cost records are required to be maintained is Rs. 25 crore or more.
b) send copy of representation to every member to whom notice is
eligible to be appointed as auditor of any co for a period of 5 yrs from dat sent & if a copy of representation not sent as aforesaid, auditor may - ""Non-Regulated Sectors"" if overall annual turnover during immediately preceding FY is Rs. 100 cr or more & aggregate turnover of individual
of passing of the order & also be liable for action u/s 447" require that representation read out at the meeting." product/ service for which cost records required to be maintained is Rs. 35 cr or more."

If Tribunal satised on application of co or other person the rights

conferred being abused by auditor, then, copy of representation may not Appointment of cost auditor (Rule 6):
be sent & need not be read out at the meeting.
"- Co to appoint auditor within 180 days of commencement of every FY. Before such appointment, written consent of cost auditor to appointment &
Punishment for non compliance - Sec 147 certicate shall be obtained. The certicate to be obtained from the cost auditor shall certify that the-
(a) individual/rm eligible for appointment
POWERS/RIGHTS OF AUDITOR - Sec 143 (b) individual/rm satises criteria provided in sec 141
On Company On Auditor ( c) proposed appointment within limits laid down by/under authority of the Companies Act, 2013; &
Sec 139 to 146 "Sec 139, 143, 144, 145 contravened, ne not less 1. Right of access to books etc (d) list of proceedings against auditor or any partner of rm pending w.r.t professional matters of conduct is true & correct.- Every co inform auditor of
contravened, co punishable than 25,000 may extend to 5L/4 times remuneration, his/its appointment & le notice of appointment with CG within 30 days of BM in which such appointment is made or within 180 days of he
2. Right to obtain info & expl from ofcers
with ne not be less than whichever is less.If provisions contravened knowingly, commencement of FY, whichever is earlier in Form CRA-2- The auditor appointed shall continue in such capacity till expiry of 180 days from
25,000 which may extend punishable with imprisonment which may extend to 1 3. Right to receive notice to attend AGM - Sec 146 closure of FY or till he submits cost audit report, for FY for which he has been appointed."
to 500,000 & every ofcer yr & with ne not less than 50,000 may extend to 25L 4. Right to report to members on the accounts examined by him
in default punishable with or 8 times remuneration, whichever is less."
5. Right to lien Submission of cost audit report :
imprisonment for term "Auditor convicted shall be liable to:
which may extend to 1 yr or - refund remuneration received All notices & other communications of any GM forwarded to "- To BOD - submit audit report along with his reservations in Form ORA-3 within 180 days from closure of FY
with ne not less than auditor & auditor attend either by himself/through authorised - To CG- Co within 30 days from date of receipt of copy of audit report in Form CRA-4 in XBRL format. If, after considering report, CG of opinion any
- pay damages for loss arising out of incorrect/
10,000 which may extend representative, who shall also be qualied to be auditor, any GM further info necessary, may call for such further info"
misleading statements of particulars made in his
to 100,000,or both & have right to be heard at such meeting.
audit report."

"Reporting requirement on adequacy of IFC not be applicable to a

AUDIT OF BRANCH OFFICE ACCOUNTS - Sec 128 Pvt co which is a -
- OPC; or
"- Where co has a branch ofce, accounts of that ofce audited either - Small co; or
by auditor appointed for co or by any other person qualied for
- turnover < 50 cr & borrowing from banks/Fis /any body
appointment as an auditor of co under this Act
corporate at any point of time during FY < 25 cr"
- Where branch ofce situated outside India, accounts of branch
ofce audited either by company's auditor or by accountant or by
any other person duly qualied to act as auditor of branch ofce in
accordance with laws of country
- Branch auditor prepare report on accounts of branch & send it to
auditor of co who shall deal with it in his report in such manner as he
considers necessary.
- Branch auditor submit his report to co's auditor & reporting of fraud
by auditor extend to such branch auditor"

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COST AUDIT - Sec 148 DUTIES OF AUDITOR - Sec 143

Applicability for Maintenance of Cost Records (Rule 3): 1. Duty to inquire on certain matters:
Cos, engaged in production of goods/providing services, having overall turnover of Rs. 35 cr or more during preceding FY, required to "a) whether loans & advances made by co on basis of security properly secured & whether terms are prejudicial;
include cost records. b) transactions of co represented merely by book entries prejudicial to interests of co;
Including Foreign Cos but exclude co classied as MSME. Divide list of cos into (A) Regulated sectors and (B) Non-regulated c) where co not being an investment/banking co so much of assets of co as consist of shares, debentures & other securities sold at a price less than
sectors. that at which they were purchased by the co;
d) loans & advances made by the co shown as deposits;
Maintenance of Cost Records (Rule 5): e) personal expenses charged to revenue account;
"Every co required to maintain cost records in Form CRA-1. f) it is stated in books & documents of the co any shares allotted for cash, whether cash has actually been received in respect of such allotment, & if
As per clause (vi) to Paragraph 3 of the CARO, auditor has to report whethermaintenance of cost records specied by CG & whether no cash has actually been so received, position as stated in books & BS is correct, regular & not misleading."
such accounts & records have been so made & maintained."

2. Duty to report - Sec 143(2) and (3): The auditor's report shall state:
Applicability of Cost Audit (Rule 4):
"a) sought & obtained all info & expl necessary for purpose of audit & if not, details & effect of such info on the FS;
"- ""Regulated Sectors"" if overall annual turnover during immediately preceding FY is Rs. 50 cr or more & aggregate turnover of
b) proper books of account as required by law kept by co
individual product/service for which cost records are required to be maintained is Rs. 25 crore or more.
c) report on accounts of any branch ofce of co audited by other person sent to him under proviso to that sub-section & manner in which he has dealt
- ""Non-Regulated Sectors"" if overall annual turnover during immediately preceding FY is Rs. 100 cr or more & aggregate
with it in preparing his report;
turnover of individual product/ service for which cost records required to be maintained is Rs. 35 cr or more."
d) BS & PL A/c are in agreement with books of account and returns;
e) FS comply with accounting standards;
Appointment of cost auditor (Rule 6):
f) observations of auditors on nancial transactions or matters which have any adverse effect on the functioning of the co;
"- Co to appoint auditor within 180 days of commencement of every FY. Before such appointment, written consent of cost auditor
to appointment & certicate shall be obtained. The certicate to be obtained from the cost auditor shall certify that the- g) any director disqualied from being appointed as director under sub-section (2) of the section 164;
(a) individual/rm eligible for appointment h) any qualication, reservation/adverse remark relating to maintenance of accounts & other matters connected therewith;
(b) individual/rm satises criteria provided in sec 141 I) co has adequate IFC with reference to FS in place & operating effectiveness of such controls;
( c) proposed appointment within limits laid down by/under authority of the Companies Act, 2013; &(d) list of proceedings against j) Other matters as prescribed"
auditor or any partner of rm pending w.r.t professional matters of conduct is true & correct.
- Every co inform auditor of his/its appointment & le notice of appointment with CG within 30 days of BM in which such "- Co disclosed impact of pending litigations in its FS;
appointment is made or within 180 days of he commencement of FY, whichever is earlier in Form CRA-2
- Co made provision, as required under any law/A/c standards, for material foreseeable losses, if any, on long term contracts including derivative
- The auditor appointed shall continue in such capacity till expiry of 180 days from closure of FY or till he submits cost audit report, contracts;
for FY for which he has been appointed."
- Any delay in transferring amts to IEPF
- a) Mgt represented that no funds advanced/loaned/invested by co to/in any other person/entity, Intermediary shall lend/invest in other
Submission of cost audit report: persons/entities or provide any guarantee, security/like on behalf of Ultimate Beneciaries;
"- To BOD - submit audit report along with his reservations in Form ORA-3 within 180 days from closure of FY b) Mgt represented that no funds received by co from any person co shall lend/invest in other persons or entities or provide any guarantee,
- To CG- Co within 30 days from date of receipt of copy of audit report in Form CRA-4 in XBRL format. If, after considering report, security/the like on behalf of Ultimate Beneciaries
CG of opinion any further info necessary, may call for such further info" c) Based on audit procedures nothing has come to notice that has caused auditor to believe that representations under above sub-clause
contain any material misstatement.
- Dividend declared/paid in compliance with section 123"

Removal of Cost Auditor: 3. Duty to sign audit report

"Auditor removed before expiry of term, through a BR after
giving reasonable opportunity of being heard & recording 4. Duty to comply with auditing standards
reasons for removal in writing. Form CRA-2 to be led with
CG for intimating appointment of another cost auditor 5. Duty to report frauds - Refer Ch 5
enclose relevant BR to effect. Above provisions not
6. Duty to report on other matters to CG
prejudice right of auditor to resign."

7. Duties and Powers of the company's auditor with reference to

Cost Audit not to apply in certain cases: the audit of branch and the branch auditor
"I) revenue from exports, in foreign exchange, exceeds
75% of its total revenue; or 8. Duty to state reason for qualification
ii) which is operating from a SEZ.
iii) engaged in generation of electricity for captive Who can be cost auditor
consumption" Cost Accountant appointed by BOD; no person appointed u/s 139 shall be
appointed for conducting audit of cost records; Auditor conducting cost
audit comply with cost AS.

04
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CHAPTER 12 - AUDIT OF ITEMS OF FINANCIAL STATEMENTS

Assertions AUDIT OF RESERVES & SURPLUS
"Special considerations in case of WIP
Representations by mgt embodied in FS, as used by auditor to Reserves Provisions
consider diff types of potential misstatements that may occur '- Auditor - examine production/costing records; hold discussions with personnel
concerned, and obtain expert opinion, where necessary. appropriation of prot charge against Prot.
Income Statement Balance Sheet Presentation & disclosure - If physical verication impracticable, auditor lay greater emphasis on ascertaining Not intended to meet any liability, Made to provide for depreciation, renewal or a known
Occurrence Existence Occurrence & existence whetherthe system, from which the WIP is ascertained, is reliable." contingency/diminution in value of assets liability or a disputed claim
Completeness Completeness Completeness Can't be created unless there is a prot except a few They must be created whether or not there
like revaluation reserves is prot
Measurement Valuation Measurement & Valuation "Verification of goods on consignment
Generally optional except few ones like CRR have to be made as per GAAP
Accuracy Rights & Obligations - Vouch Proforma invoice sent with goods to ascertain the quantity & value of goods
Classication sent.
Audit Procedures
- Freight evidences given by transporter like Challan, Bill, Receipt for freight charged.
Share Capital Issue if shares at premium "- Compare opening balance of reserves & surplus to the PY audited FS
- Insurance charge to be veried from cover note & premium paid receipt
"- Compare PY balance to CY "Verify premium transferred to a ""securities - For addition/utilisation in CY, in case of:
- Account sale sent by consignee, referring to sale price of the goods sold, expenses
- If no change, obtain WR there premium account"" and application of amount is a) P/L balance: Trace movement to Surplus/Decit as per SPL. For adjustment related to d/d payment, verify
incurred by him & stock remained unsold.
were nochanges during the only for the purposes mentioned u/s 52." relevant resolution regarding declaration of dividend.
- Obtain conrmation from consignee for goods held on consignment.
year. Issue if shares at discount b) Share Premium: Conrm co issued any shares during year at premium. Ensure any withdrawal from securities
- Unsold goods taken in cl stock valued properly inclusive of expenses incurred by
- If change, obtain copies of "- Co can't issue shares at discount as per Sec. 53. premium account is in compliance of Sec. 52.
consignee.
relevant resolutions. except in case of sweat equity shares u/s 54. c) Other Equity: Understand underlying reason for transaction."
- JEs relating to such transaction be veried from the books of the Company."
- Obtain copy of Form SH 7 & - Co contravenes provisions of sec 53, co
Form PAS 3 & verify no of punishable with ne 1L - 5L & Every ofcer is in Audit of Trade Receivables
securities issued along with the default punishable with imprisonment upto 6M Audit Procedures on Patent
issue price. or with ne 1L-5L, or with both. '- Carry out examination of relevant records
"- Obtain list of patents & verify ownership by inspection of certicate
- Verify paid-up capital within - Verify co not issued any of its shares at a - Check agreement of balances shown in TR schedule with those in ledger accounts.
- Examine agreement if it has been so as to nd out the total cost.
limits of authorised capital." discount by reading minutes of meeting" - in case of signicant TR, auditor examine correspondence/other documentary evidence to satisfy himself about
- In case of outright purchase, purchase consideration, legal fees & registration
their validity & accuracy.
charges in cluded in cost. When they are developed within org, all costs incurred on
Reduction of capital their development including legal & registration expenses for registration of patent - Inspect proper authorisation in respect of bad debts written off/excessive discounts or unusual allowances made.
should constitute cost. - Examine contingent liability is properly disclosed.
"- Verifying SR passed; Check AOA authorizes the reduction; Inspect ROC Certicate
- Check that the patent rights are alive and legally enforceable. - Direct conrmation procedure and analytical procedure
- Examine Tribunal Order for reduction & ensure copy of order & minutes led with ROC.
- Check that renewal fees paid on due dates & being charged to revenue.
- Vouching JE recorded Audit of Inventories
- Ascertain rate at which value of each patent is being written off is adequate
- Ensure requirements of Schedule III w.r.t. reduced capital have been complied with. Examination of records: Examine stock records w.r.t relevant basic documents like GRN, inspection reports,
- Ascertain only the actual cost incurred in the process has been capitalised."
- Conrming revaluation of assets properly disclosed in the BS. material issue notes etc. If entity not maintain detailed stock records, suitably extend extent of application of other
- Conrming words ""& reduced"" added to name of the co in the Balance Sheet." audit procedures.
Classification of liability
Audit of Borrowings "A liability classied as current when it satises any of the following criteria:
"Attendance at stock taking:
"-. Ensure that loans obtained are within the borrowing powers. - expected to be settled in the company’s normal operating cycle;
- Auditor attend stock taking, if inventory value is material in his opinion.
- Examine imp terms in agreements - held primarily for the purpose of being traded;
- Extent of participation in inventory taking depends upon the IC system prevailing, results of examination of
- Where entity accepted deposits, auditor examine directives issued by RBI or other - due to be settled within twelve months after the reporting date; or inventory records and analytical review procedures.
appropriate authority are complied with. - No unconditional right to defer settlement of liability for at least 12 months after - Test check few high value items by himself for their existence & quantum.
- Obtain certicate from bank showing balance in the accounts as at end of the year reporting date."
- Physical conditions of stock are looked into by auditor.
(Confirmation procedure) - Reviews stores records & notes down discrepancies for reconciling them
Audit of revenue
- Reconcile balances in overdraft/loan account with that shown in bank statements. - Cut off procedure to ensure that entity accounts for stock for which liability had been booked and excludes stick
"- Identify the control points over sales.
- Verify loan/draft raised by appropriate authority. which had been sold."
- Tests identied controls to determine how strong & reliable they are. If controls
- Conrm, in case of co, that conditions prescribed in Sec. 180 are complied with
assessed as strong, the auditor can reduce the amount of substantive testing.
- Ascertain purpose of loan raised & manner in which it has been utilised" "Analytical Procedures: Auditor may apply following analytical review procedures:
- Selects a random sample of transactions & examines related supportings
- Reconciliation of quantities of op stocks, purchases, production, sales & cl stocks
Audit of cash and cash equivalents - Performing substantive audit procedures like vouching and analytical procedure
- Comparison of cl stock quantities & amts with those of PY
"Cash balance: "Cash at Bank: - Examine basis of recognition of revenue is in accordance with AS 9, Revenue
Recognition. - Comparison of relationship of CY stock quantities & amts with CY sales & purchases, with corresponding gures
- Carry out physical verication of - Direct conrmation from bank
for PY
cash - Examine entity has instituted adequate cut-off procedures in relation to sales & sale
- Examine BRS to identify reconciling items
returns - Comparison of composition of cl stock with corresponding gures for PY
- Surprise verication of cash - Pay special attention to items in reconciliation
- Examine selected entries in sales return journal w.r.t receiving reports , CN etc - Comparison of CY GP ratio with GP ratio for PY
- Verify all cash balances in same statements which are o/s for unduly long period.
location simultaneously. - In respect of goods sent on approval, examine that revenue is not recognised until: - Comparison of actual stock, purchase & sales with corresponding budgeted gures
- Where large no of cheques issued/deposited in
goods formally accepted; buyer done an act adopting transaction; time period for - Comparison of yield with corresponding gure for the PY"
- If lOUs found, obtain explanations for last few days, & has remained unpaid/
rejection elapsed
such lOUs remaining pending. uncleared, may indicate intention of
understating creditors/ debtors or bank - In respect of sales to intermediate parties, examine revenue from such sales isn't
- Examine quantum of torn/mutilated
balances. recognised until signicant risks & rewards of ownership have passed."
notes
- If entity is maintaining unduly large - For FDs, relevant receipts/certicates, duly
balance of cash, carry out surprise supported by bank advices, should be examined.
verication of cash more frequently." - Where amts held in bank accounts blocked, the
auditor examine relevant facts suitably disclosed"
05
Page - 2

Audit of Tangible Fixed Assets Audit of provisions and contingent liabilities

Audit Procedures on Goodwill
"- Examine related records & perform physical verication. "- Obtain a list of all provisions and compare them with balances in the ledger.
"- Ensure that goodwill recognized in books in - Consider appropriateness of a/c policies - Inspect underlying arrangements
compliance of AS 26.
- Ensure entity capitalised assets as per component approach - Obtain underlying working & basis & verify whether same is complete and accurate.
- Examine vendors' agreement to ascertain the
- Opening balance to be reconciled with PY audited FS - Review minutes of meetings of the Board of Directors or other similar bodies.
amount of goodwill.
- Capital WIP veried w.r.t underlying contractor bills, work orders etc - Review list of pending law suits & obtain opinion of lawyer dealing with cases.
- Ensure business is acquired at a price in
- Acquisition of new PPE & improvements to existing ones should be veried w.r.t supporting documents such as - Review of records relating to contingent liabilities maintained by the company.
excess of value of net assets taken over, such
orders, invoices, receiving reports and title deeds etc. Due care to be taken when purchase from a related party." - Review of terms and condition of grants and subsidy availed."
excess amount is the goodwill.
- Only amt paid to vendors not represented by
tangible/intangible assets, value of which can Audit of Intangible Fixed Assets Audit of employee benefit expense
be measured reliably has been debited to "- Ensure intangible asset recognised only if "• Obtain understanding of process of recording employee attendance.
goodwill account. (a) probable future economic benets will ow to enterprise; & • Obtain list of employees along with a monthly movement
- Ensure goodwill not recognised in books by (b) cost of asset can be measured reliably. • In case of new employees, select few cases & obtain appointment letter & verify salary for rst month &
revaluation of assets/writing back amt - At initial stages, IA measured at cost. After initial recognition IA carried at its cost less any accumulated subsequent months was processed as per agreed terms
ofgoodwill earlier written off. amortisation & any impairment losses. • In case of employees resigned, select few cases & obtain their full & nal computation & verify all their dues
- Ensure goodwill not yet written off properly - Ensure if an item does not meet denition of IA, expenditure to acquire it orgenerate it internally is recognised as have been paid
disclosed as per Schedule III an expense when it is incurred. • Obtain monthly salary registers. Compile monthly payroll reasonability by calculating average salary per
- Ensure amortisation of goodwill over a - In some cases, asset may incorporate both intangible & tangible elements inseparable. Ensure that in employee per month & compare with PY & preceding month.
reasonable period" determining whether such an asset should be treated under AS 10 or AS 26 appropriate judgment taken • Verify provision made for all employee benets & obligations
- Ensure proper disclosure is made in the FS" • In case PF, ESIapplicable, determine reasonable amt by applying the rate to basic wages & comparing to
Audit Procedure on Trade Mark and Copyright amount recorded in books & analyse reasons for variance, if any."

"- Obtain signed schedule & conrm all of them Audit of Trade Payables and Other current liabilities
are shown in BS. "- Check adequacy of cut-off procedures adopted by the entity Audit of depreciation and amortization
- Examine agreement in case of assignment of - Examine correspondence & other relevant documentary evidence "- Understand & evaluate adequacy & effectiveness of IC regards accounting, maintenance & safeguarding of FA
Copyrights/transfer of trade marks - In case of any unusual payments around year-end, examine them thoroughly & proper distinction made bw capital & revenue expense

- Ensure trademarks & copyrights have been - Review subsequent transactions to identify/ conrm material liabilities o/s - Check the amt of depreciation accurately calculated
duly registered under respective laws. - Conrmation procedures and analytical procedures" - Ensure cocomplied with requirements of AS 10
- Verify existence of copyright by reference to - Ensure provisions of Section 123(1) complied with by the company.
contract bw author & entity Audit of loans and advances and other current assets - Perform analytical procedures to obtain audit evidence as to overall reasonableness of depreciation &
- See value determined properly & costs amortisation expense."
"- Examine entity is empowered to make loans
incurred for purpose of obtaining trademarks
- Examine loan document & other evidence to examine terms & conditions
& copyrights have been capitalised. Purpose of depreciation
- Ascertain parties complied with terms & conditions of loans & advances- In case of defaults, Consider these are
- Ascertain legal life of trademarks & indicative of unwillingness or inability of parties concerned to make payment. a) To provide funds for replacement of assets b) To determine true cost of goods
copyrights not expired. c) To determine the prot or loss for the year d) To show a true and fair value of entity's assets in
- Pay particular attention to loans & advances given to parties in whom directors/persons who are substantial
- Ensure amt paid for both IA properly owners of the entity are interested." the balance sheet
amortised"

Audit of Purchases Audit of Other expense

Audit of other income "- Identify control points over purchases. "1. Rent expense
"1. Interest on Fixed Deposits - Tests identied controls to determine how strong & reliable they are. If controls are assessed as strong, auditor • Obtain month wise schedule of rent payment along with rent agreements.
- Obtain list of FDs along with applicable reduce amount of substantive testing. • Examine rent expense recorded for all 12 months & rent paid is as per agreement.
interest rate & number of days - Selects random sample of transactions & examines related documents. • Examine agreement contains any escalation clause, if yes, verify rent increased/adjusted during period only
- Verify arithmetical accuracy of interest - Performing substantive audit procedures like vouching & analytical procedure" as per escalation clause.
calculation • Verify expense pertains to premises used for running business operations of the entity."
- For deposits o/s at year end, obtain "Analytical Procedures:- "2. Power and fuel expense
conrmation from bank/nancial institution Consumption Analysis: Examine consumption of RM & compare it with PY & ask for reasons for any signicant • Obtain month wise expense schedule of power & fuel along with power bills.
- Obtain conrmation of interest income from variations noticed. • Examine whether expenses have been recorded for all 12 months.
bank & verify that interest income as per bank - Stock Composition Analysis: Collect reports for composition of stock & compare it with PY & ask for reasons • Compile month wise summary of power units consumed & applicable rate & check arithmetical accuracy of
reconciles to calculation shared by entity. for any signicant variations noticed. the bill raised on monthly basis.
- Obtain copy of Form 26AS & reconcile - Ratios: Compare creditors & stock turnover ratios of CY with PY • Analyse monthly power units consumed by linking it to units of FG produced & investigate reasons for
interest reected to calculation - Quantitative Reconciliation: Review quantitative reconciliation of cl stocks with opening stock, purchases variance in monthly trends.
2. Dividend Verify dividend is recognised in and consumption." 3. Legal and professional expenses
SPL only when entity’s right to receive • Obtain a month wise and consultant wise summary.
payment of dividend established. Classification of assets • In case of monthly retainer ship agreements, verify whether expenditure for all 12 months recorded correctly.
3. Gain (Loss) on sale of investment in "Asset classied as current when it satises any of the following criteria: • For non-recurring expenses, select sample & vouch for assertions.
Mutual Funds
a] expected to be realized/intended for sale/consumption in co's normal operating cycle • Special focus given while vouching for legal expenses same may highlight dispute for which entity not made
- Verify that Gain/(loss) on sale of investment in b] held primarily for the purpose of being traded; any provision
MF recognised as other income only on 4. Travel, repair and maintenance, printing and stationery, miscellaneous expenses
c] expected to be realized within twelve months after the reporting date; or
transfer of title & determined as difference bw
d] cash/cash equivalent unless restricted from being exchanged/used to settle a liability for at least 12 months • Select sample & vouch for occurrence, completeness, measurement & disclosure
redemption price & carrying value
after reporting date. All other assets shall be classied as non-current." • Wherever possible, auditor prepare summary of expenditure on monthly basis & thenanalytically compare
- Obtain MF statement & trace gain/loss " trends.
• In addition, auditor perform analytical procedures
06 • Analyse expense per unit produced & compare same with PYs & ask for reasons from Management If any
signicant variations are found."
Page - 1

CHAPTER 13 - AUDIT OF DIFFERENT TYPES OF ENTITY

Government Audit Audit of local bodies Audit of NGO

Function of govt audit performed by CAG Financial admin and budgetary procedure Sources of Funds
Meaning : Objective, systematic, professional & independent
examination of nancial, admin & other operations of public entity Duties of CAG "Budget preparation determining levels of taxation, rates & ceilings "• Grants & donations, fund raising programmes, advertisements,
for evaluating & verifying them. on expense. Objectives of local bodies budgetary procedure are: subscriptions, gifts etc.
- Compile & submit accounts
• Financial Accountability. • Donations received in nature of capital receipts shown as liabilities
- Audit receipts & expense of entity substantially nanced from
Power of CAG • Control of expenditure, & • In the form of corpus contribution or contribution towards revolving
consolidated fund
"General powers: inspect any ofce of accounts under control of • Ensure funds raised & money spent in accordance with rules & fund."
- Audit grants & loans
Union/State Govt; require that any accounts, books, papers & other regulations."
documents sent to specied places; - Audit receipts/expense of consolidated fund
Objectives of audit of local bodies Audit Programme
can put such question as he may consider necessary; call for such - Audit accounts of govt co's & corporations
"- Reporting on fairness of content & presentation of FS "• Corpus Fund: The contributions/ grants examined w.r.t letters from
info as he may require " - Submission of accounts
the donor.
- Reporting upon strengths & weaknesses of systems
"Directions by CAG to Auditor [Sec 143(5)]: CAG direct auditor • Ear-marked Funds: Check requirements of donors, BR of NGO &
manner in which accounts required to be audited; Auditor submit Audit of Partnership firms - Reporting on adherence to legal & admin requirement rules & regulations of schemes of the funds.
copy of audit report to CAGReport include directions issued by CAG, Advantages - Reporting upon value being fully received on expense • Programme & Project Expenses. Verify agreement with
action taken & its impact on accounts and FS of the company." - Detection of error, fraud & misuse of resources." donor/contributor supporting particular programme / project.
"- Audited accounts reliable means of settling accounts bw partners
"Supplementary audit report [Sec 143(6)]: CAG within 60 days - Audited accounts accepted by IT Dept as basis for computing Audit consideration for audit of partnership firm • Contributions & Grants: Check agreements with donors & grants
from date of receipt of report, have following rights: assessable income letters
"- Conrming that letter of appointment clearly states nature &
- Order conduct of supplementary audit - Relied upon by banks when advancing loans. scope of audit. • Receipts from fund raising programmes: Verify in detail IC
system & obtain conrmations from persons responsible for
- Comment upon/supplement report - Helpful in negotiations to admit a partner. - Studying minute book. collection of funds & mode of receipt."
- Any comments/supplement sent by co to every person entitled to - Effective safeguard against undue advantage being taken by - Verifying that business is authorised by the deed"
copies of audited FS" working partner."
Test Audit [Sec 143(7)]: CAG cause test audit
Audit of LLP

Audit of various items under govt audit Applicability of audit (Rule 24) Annual Return

Expenditure Audit LLP, whose t/o doesn't exceed, in any FY, 40L or whose contribution LLP required to le AR in Form 11 with ROC within 60 days of
doesn't exceed 25L, isn't required get accounts audited. closer of FY.
Audit of rules & orders Audit of sanctions
"- To ensure expenditure is in accordance with: "- To ensure the expenditure is: Covered by a sanction and Appointment of auditor Appointment of designated partners
a) relevant provisions of Constitution & of laws & rules Sanctioned by appropriate authority
Appointed for each FY "- At any time for rst FY but before end of rst FY
b) Rules, regulations issued by CAG. - Thus auditor should consider following:
If designated partners failed to appoint - At least 30 days prior to end of each FY (other than rst FY),
c) Orders of, or rules made by, any higher authority." a) knowledge of sanctioning powers of various authorities
Partners may appoint auditor - To ll casual vacancy in ofce of auditor
b) Examine all sanctions adequately noted
Tenure of auditor - To ll up vacancy caused by removal of auditor."
Audit against provision of funds c) For petty expense, signature of competent authority on a bill can
be regarded as a sanction" "hold such ofce till the period —
"Ensure whether expense: a) New auditors are appointed, or
a) made for purpose to which grant has been provided. b) They are re-appointed."
Performance Audit
b) Does not exceed the appropriation made."
"- Ensure govt programmes achieved desired objectives at lowest
cost & given intended benets. Audit of Charitable Institution
Propriety Audit - Performance audit includes efciency, economy & effectiveness "- Examine donations received shown in cash book w.r.t copies of receipts issued.
"- Auditor examine cases of improper expense even though audit. - Check periodic internal report w.r.t. donations received during that period
expense incurred as per existing rules & regulations. - Efficiency Audit: Examine various schemes/projects executed, - Donation may also be received in kind, ensure their proper recognition in books of account.
- Auditor examine public nancial morality by looking in to the & operations carried out in efcient manner, & yielding expected
- If any grant received for some particular purpose, examine same has been utilised for designated use only.
wisdom, faithfulness & economy of transactions. results.
- Compare other expenses like stationery telephone etc. with those of previous year"
- No hard & fast rules laid down regarding standards of nancial - Economy Audit: Examine govt acquired nancial, human &
propriety- Auditor examine that :— physical resources in economical manner, & sanctioning &
spending authority have observed economy. Audit of educational institution
a) Authorities made expense with same degree of vigilance, as a
person of ordinary prudence would exercise in respect of his own - Effectiveness Audit: Examine programmes & projects "- Check admission fee amt credited to a separate account. Refundable money shown as liabilities.
money. performing well & Overall targeted objectives achieved." - Check demands for fee raised against all students.
b) Expense not prima facie more than occasion demands. - Ascertain amts demanded from student are as per rates specied according to their course.
c) No authority exercises its power of sanctioning expenditure which - Check authorization for fee concessions.
will accrue to its own advantage. - Ensure that in case of late payment of fee, ne properly imposed, collected & accounted for
d) Public money not utilised for benet of a particular person - Donations of two types - specic/general use. Check recording of such amt in separate accounts
/section of community."
- Verify grant from govt or any local authority with reference to sanction letter."
07
Page - 2

Audit of Club Audit of hospitals Audit of Cinema Hall

"- Entrance Fee: Vouch receipt with members’ applications, counterfoils issued to them "- Register of Patients : Vouch Register of patients with bills issued to them. "- Study minutes of meetings of governing body/trustee to gain knowledge of any imp decision
- Subscriptions: Vouch members' subscriptions with supportings issued - Collection of Cash: Check cash collections as entered in Cash Book with - Check tickets to be issued are serially numbered & kept in proper custody.
- Arrears of Subscriptions: Arrears of subscriptions for PY correctly brought over & arrears for receipts, counterfoils & other evidence - Perform compliance procedures to check there is strict IC on entry to cinema hall
CY correctly adjusted - Legacies and Donations: Ascertain legacies & donations received for - Check IC w.r.t. issuance of free passes.
- Irrecoverable Member Dues: See Register of Members to ascertain Member’s dues in arrear specic purpose applied in manner agreed
- Check internally generated daily report with no of tickets sold for each category
& enquire necessary steps taken for their recovery - Authorisation & Sanctions: Verify capital expense incurred only with
- Reconcile total entertainment tax collected with total no of tickets sold for each category.
- Pricing: Verify internal check regards members charged for foodstuffs & drinks provided and prior sanction of authorised person
- Study agreement entered into for advertisement
fees chargeable for special services rendered, such as billiards, tennis, etc. - Grants & TDS: Verify that grants duly accounted for. Refund in respect of
TDS claimed. - Ascertain whether income w.r.t slides shorts exhibited properly recognised & collected
- Member Accounts: Trace debits from subsidiary registers to members to conrm that
account of every member has been debited with amounts recoverable from him." - Budgets: Compare totals of various items of expense & income with - Study agreement entered into by cinema hall with restaurant run in the premises.
amount budgeted for them" - Check collection of share in restaurant income."
Audit of leasing companies
"• Ensure provisions of laws & regulations compiled with Audit of hire purchase companies Audit of Hotel
• Examine compliance with AS 19 "- Examine HP agreement in writing & signed by all parties. "- Study daily occupancy report prepared by mgt
• Study MOA & AOA of Co. - Hire purchase agreement species clearly - Ensure properness of billing. Also verify appropriate rates charged according to category of rooms
• Check BR authorizing lease agreement a) Hire-purchase price of goods to which agreement relates; - Check bills raised to all parties listed in guest register. In case it is not so, obtain Reconciliation.
• Examine lease proposal form submitted by lessee b) Cash price of goods - If receipts in foreign currency, ensure compliance with FEMA.
• Study lease agreements c) Date on which agreement deemed to have commenced; - Examine few bills issued to customers to ensure their correctness.
• Copies of insurance policies should also be examined. d) No of instalments & date - In case, hotel provides banquet hall for various functions, study tariff structure.
• Examine invoices for purchases of assets given on lease & check whether leasing company e) Goods to which agreement relates - Ensure correctness of billing for letting out banquet hall.
proper title over asset. - Ensure instalment payments received regularly" - In case spaces let out to shopkeepers/travel agencies, check agreement entered into with them.
• Examine lease-rentals properly accounted for. - Normally hotels pay commission to various travel agents. Inspect agreement entered into
• Ensure transaction in regard to 'Sale and Lease back' properly identied & disclosed in - Ensure appropriateness of accounting of commission in correct account & period.
accounts
- Ensure room addition expenses/major additions to hotel buildings properly capitalised.
• Ascertain adequacy of provisions for debts against lessees"
- However, redecoration & daily maintenance charged to revenue."

Appropriation of profit (Sec 33)

AUDIT OF CO-OPEARTIVE SOCIETIES "Prescribed % of protstransferred to Reserve Fund before distribution as
dividend/bonus to members"
Restrictions on shareholding (Sec 5) Appointment of Auditor
Where liability of member limited, no member of society other than registered society hold By Registrar
Investment of funds (Sec 32)
portion of share capital of society as would exceed a maximum of 20% of total no of shares or
"Society may invest its funds in any one or more of following:
of the value of shareholding to 1,000/-. Qualification of Auditor
a. In Central or State Co-operative Bank
CA + persons holding govt diploma in co-operative accounts/in co-operation & accountancy &
b. In any of securities specied in section 20 of Indian Trusts Act, 1882
Contribution to charitable purposes (Sec 34) also person served as an auditor in co-operative department of govt
c. In shares, securities, bonds or debentures of any other society with limited
Registered society may, with sanction of Registrar, contribute an amt not exceeding 10% of
liability.
net prots remaining after compulsory transfer to reserve fund for any charitable purpose Restriction on loans (Sec 29)
d. In any co-operative bank, other than Central/State co-operative bank, as
Registered society not make loan to any person other than member. With special sanction of approved by Registrar
Content of Audit report Registrar, registered society may make a loan to another registered society
e. In any other moneys permitted by Central or State Government."
"a. Whether he obtained all necessary info & explanations which were necessary for purpose
of audit. Examination of overdue debts Adherence to Co-opeartive principles
b. In his opinion & to best of his info & according to explains, said accounts give all info Overdue debts for period from 6 months to 5 years and more than 5 years to be classied & "Auditor ascertain in general, how far objects, for which organisation is set up,
required by Act. reported by an auditor. Auditor to ascertain proper provision for doubtful debts made achieved. Considered from viewpoint of social benets may be looked into how far
c. PL A/c gives true & fair view of Prot & Loss made sales could be affected at lower prices. While auditing expenses, auditor see that
d. BS gives true & fair view of state of affairs they are economically incurred & there is no wastage of funds."
Audit Questionnaires
e. Proper books of account as required properly maintained. "Auditor to answer 2 sets of questionnaires called as audit memos:-
Special report to registrar
f. Whether BS and PL A/c in agreement with books of account" • First set of general nature & applicable to all types of societies.
"If auditor notices some irregularities in working of society, report these to the
• Second set is specic for particular type Generally audit report as per convention divided Registrar. In following cases, a special report may become necessary:
"In addition, auditor attach schedules regards following info: into two parts styled as part I & part-II:-
- Personal proteering by members detrimental to interest of society.
1. All transactions which appear to be contrary to provisions of the Act, the rules and bye- • Part I throws light on comparative nancial position, capital structure, solvency position &
- Detection of fraud
laws of the society. protability. Contain comments on working of society & suggestions for future
improvements. - Specic examples of mis-management
2. All sums, which ought to have been, but have not been brought into account by the society.
• Part II points out observations of routine nature, which are nished products of routine - In case of urban co-operative banks, disproportionate advances to vested
3. Any material, or property belonging to society which appears to the auditor to be bad or
vouch & post audit such as missing vouchers, loan bonds, inadequacies of documents interest groups, & deliberate negligence about recovery thereof"
doubtful of recovery.
etc."
4. Any material irregularity or impropriety in expenditure or in the realisation or monies due to
society.
5. Any other matters specied by the Registrar in this behalf." 08
Page - 3

Multi State Co-operative Society (MSCS)

Content of Auditor's report [Sec 73(3) & (4)] Books of accounts Qualification of auditor (Sec 72)

"In his opinion & to best of his info & according to explanation given, said account give info "Every MSCS keep books of account with respect to- "CA. Persons not eligible for appointment as auditors:
required & give a true & fair view : a. all sum of money received & expended & matters in respect of which receipt & a. A body corporate
a. In case of BS, of state of society's affairs as at end of its FY; & expenditure take place; b. An ofcer/employee of the society
b. In case of PL, of PL for its FY. The report shall also state: b. all sale & purchase of goods; c. A person member/who is in employment, of an ofcer or employee of society
- He obtained all info & explanation necessary for audit c. the assets & liabilities; d. A person indebted to the society or has given any guarantee or provided any security of any
- Proper books of account kept by the society so far as appears from examination of books & d. in case of MSCS engaged in production, processing & manufacturing, third person to the society for an amount exceeding 1,000"
proper returns received from branches or ofces not visited by him. particulars relating to utilization of materials or labour or other items of cost"

- Report on accounts of any branch audited by person other than him forwarded to him & how Inquiries by auditor [Sec 73(2)]
he dealt with same Appointment of Auditor (Sec 70) "a. Loans & advances made on basis of security properly secured & terms not prejudicial to
- Society's BS & PL A/c in agreement with books of account & return "- First auditor: by BOD within 1 month of date of registration & hold ofce until interests of society
- Where any matters answered in negative, the auditor's report shall state reason" conclusion of rst AGM b. Transactions represented merely by book entries not prejudicial to interests of the society
- If BOD fails, society in GM may appoint rst auditor c. Personal expenses charged to revenue account, and
- Subsequent auditor appointed by society, at each AGM. Hold ofce from d. It is Stated in books & papers of the society any shares allotted for cash, cash has actually,
conclusion of that meeting until conclusion of next AGM." been received & if no cash received, position as stated in account is correct"

Powers of CG to direct special audit (Sec 77)

Affairs Not Managed in Accordance With, Financial Position its such as would Managed as it would Cause Injury to Interest
Prudent Commercial Practices endanger its Insolvency of Trade or Industry or Business

"1. CG at any time by order direct that a special audit of the society's accounts for such period as may be specied
2. CG order for special audit only if Govt hold 51% or more of paid-up share capital in such society.
3. Special auditor same powers & duties as an auditor has under section 73. Special auditor make report to CG.
4. On receipts of report CG take such action as it considers necessary. If CG does not take any action within 4 months, govt send to the society
copy of, or relevant extract from, there port with its comments thereon & require the society either to circulate that copy to members or to
have such copy or extracts read before the society at its next GM"

Basis Inquiry by central res=gistrar (Sec 78) Inspection of society (Sec 79)

On are quest from: federal co-operative to which society is afliated or a creditor or not less than 1/3 of members or
When
not less than 1/5 of total no of members

How Hold inquiry/inspection into constitutions, working & nancial condition of the society

Opportunity of
Before holding such inquiry/inspection 15 days notice must be given to the society
being Heard

"a. Access to books, accounts, documents, securities, cash "a. Access to all books, accounts, papers, vouchers,
& other properties & summon any person in securities, stock & other property of society & in event of
possession/responsible for custody of any such thing serious irregularities discovered take them into custody
b. Require ofcers to call GM by giving notice of not less & have power to verify cash balance & to call a meeting
Powers given than 7 days & place at head quarters to consider such where such GM is, in his opinion necessary.
matters as may be directed, and where ofcers refuse to b. Every ofcer or member shall furnish such info with
call such a meeting, he have power to call it himself. regard to working as the central registrar or the person
c. Summon any person reasonably believed to have any making such inspection may require."
knowledge of affairs of the society to appear before him"

Follow up: Central Registrar with in a period of 3 months Inspection Report: Copy of report of inspection
Others
communicate report of inquiry to the society communicated to the society within 3 months from date of
completion of such inspection.

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Page - 1

CHAPTER 14 - BANK AUDIT

Types of Banks

Commercial Banks: most wide spread banking institutions, that provide no of products & services. Two of its main functions are - accepting deposits and granting advances.

Regional Rural Bank: Banks set up in rural areas to cater to basic banking & nancial needs of rural communities.

Co-operative Bank: function like Commercial Banks but set up on basis of Cooperative Principles & registered under Cooperative Societies Act of the respective state or MSCS Act

Payments Bank: New type of banks. Allowed to accept restricted deposits but cannot issue loans & credit cards.

Development Banks: Conceptualized to provide funds for infrastructural facilities

Small nance Banks: Set up to make available basic nancial & banking facilities to unserved & unorganised sectors

Types of report to be issued Regulatory Authority - RBI Types of banks on basis of Engagement team (ET) discussion "ET discussion ordinarily includes a discussion of following matters:
a) Report on adequacy & operating effectiveness of ICFR "RBI is responsible for level of computerisation "ET hold discussions to gain better understanding of bank & its • Errors that may be more likely to occur;
b) LFAR • Development & supervision of 1. Non computerised environment, including IC & also to assess potential for material • Errors which have been identied in prior years;
constituents of Indian nancial misstatements of FS. The discussion provides:
c) Report on compliance with SLR 2. Partially computerised • Method by which fraud might be perpetrated
system • Opportunity for more experienced members to share their insights
d) Report on treasury operation of bank 3. Fully computerised • Audit responses to Engagement Risk, Pervasive Risks, & Specic Risks;
• Determining monetary & credit • Opportunity for members to exchange info about bank's business
e) Report on whether income recognition, asset classication & • Need to maintain professional skepticism throughout audit engagement;
policies keeping in with the need risks.
provisioning made as per guidelines issued by RBI • Need to alert for info/conditions indicates a material misstatement may have
of the hour. • An understanding amongst members about effect of results of RAP
f) Report on whether any serious irregularity noticed in working occurred"
• Regulating activities of banks" on other aspects of audit"

ET discussion ordinarily includes a discussion of following matters: Appointment of Auditor Content of Audit report Accounts where there is erosion in value of security
• Errors that may be more likely to occur; "• Auditor of banking co - appointed at AGM; of nationalised bank - "In case of nationalised "Not follow stages of asset classication. straight-away classied as doubtful/loss asset:
• Errors which have been identied in prior years; appointed by BOD. In either case approval of RBI is required bank, auditor required to I) Realisable value of security is less than 50% of value assessed by bank at time of last
• Method by which fraud might be perpetrated • Auditors of SBI appointed by CAG in consultation with CG make report to CG to state inspection - classied under doubtful category
• Audit responses to Engagement Risk, Pervasive Risks,& Specic Risks; following:
• Auditors of subsidiaries of SBI to be appointed by SBI ii) Realisable value of security, as assessed by bank less than 10% of o/s in borrowal accounts,-
• Need to maintain professional skepticism throughout audit engagement; a) whether BS is full & fair
• Auditors of RRB to be appointed by bank with the approval of CG" classied as loss asset. It may be either written off or fully provided for by the bank."
• Need to alert for info/conditions indicates a material misstatement may have occurred BS containing all
necessary particulars & Agriculture advances
Long Form Audit Report (LFAR) Initial consideration by stat auditors properly drawn & in For long duration crops For short duration crops
Declaration of indebtedness Planing case he called for any Instalment remains overdue for 1 crop season. Instalment remains overdue for 2 crop seasons
"Besides audit report as per statutory requirements, terms
of appointment require auditors to also furnish LFAR. Internal assignment by auditor Terms of engagement info whether given & Audit of Advances
Matters in the LFAR specied by RBI.LFAR to be satisfactory
Communication with previous auditor Initial engagement
submitted before 30th June every year. Format of LFAR "Auditor primarily concerned with obtaining evidence about following:(a) Amts included in BS are
b) Transactions within
doesn't require executive summary to be given, members Assessment of risk Establish engagement team o/s at date of BS(b) Advances represent amount due to bank.(c) Amts due to bank are
powers of
may consider providing same to bring out key Understanding Bank & its environment appropriately supported by Loan documents (d) There are no unrecorded advances.(e) Stated
observations." Mode of creation of security Prudential norms on income recognition, asset classification & provisioning c) Returns received from basis of valuation of advances is appropriate & properly applied(f) Advances disclosed, classied
branches found & described in accordance with accounting policies (g) Appropriate provisions towards advances
Understanding Risk Mgt Process Mortgage Set off NPA - An asset becomes NPA when it ceases to generate income for the Bank. adequate have been made as per the RBI norms"
a) Oversight & involvement in control process by TCWG Pledge Lien "Out of order - An account treated as 'out of order' if o/s bal remains continuouslyin d) Other matter which he Accounts regularized near about BS Date: should be handled with care & without scope for
b) Identication, measurement & monitoring of risks Hypothecation Assignment excess of sanctioned limit/drawing power. In cases there are no credits for90 days as considers should be subjectivity. Where account indicates inherent weakness - deemed as a NPA.
c) Control Activities d) Monitoring Activities on BS date, these accounts should be treated as 'out of order'." brought to notice of
Advances under Consortium: Based on record of recovery of respective individual member.
e) Reliable information system Overdue - Amt due to bank is 'overdue' if it isn't paid on due date xed by bank. CG"

Any income exceeds 1% of total income if the income is reckoned on a gross basis or one percent of the net prot before taxes if the income is reckoned net of costs, should be considered on accrual as per AS-9.

Audit of expenses Computation of drawing power (DP) Auditor can obtain SAAE Audit of revenue items Evaluation of IC over advances
"• Obtain analysis of deposits o/s at end of each quarter. Work out "- DP limit up to which a rm or co can withdraw from working capital limit sanctioned. about advances by: "• When credit facility classied as NPA "• Make advance only after satisfying
weighted avg int rate. Compare this rate with actual average rate of - Sanctioned limit is total exposure that bank can take on a particular client On the other hand, DP refers to amt • examining validity of for rst time, interest accrued & as to credit worthiness of borrower
interest paid as per annual accounts & enquire into diff, if material. calculated based on primary security less margin as on a particular date. recorded amts credited in PY not realized should be • All necessary documents executed
• Compare avg rate of int paid with corresponding gures for PYs & • examining loan reversed by parties before advances are
- All accounts kept within DP & sanctioned limit. Accounts exceed sanctioned limit/DP brought to notice of Mgt
analyse any material diff documents • Interest on advances against Term made.
- DP to be arrived based on current stock statement. Stock statements not be older than 3 months.
• On test check basis, verify calculation of int & satisfy himself that: • reviewing operation of Deposits, NSCs, KVPs taken to • Compliance with terms of sanction
- Stock statements, quarterly returns & other statements submitted by borrower to bank be scrutinized in detail. accounts income account on due date,
a] Int provided on all deposits up to BS date; & end use of funds should be
Audited Annual Report submitted by borrower should be scrutinized properly. provided adequate margin is
• examining existence, ensured.
b] Int rates in accordance with bank’s internal regulations - Ensured DP calculated as per guidelines formulated by BOD. Special consideration should be given to proper available
enforceability & • Sufcient margin kept against
c] In case of FDs examine Int rate are in accordance with Rate reporting of sundry creditors. valuation of security; • In case of bills purchased O/s at close securities taken
mentioned in FD Receipt/ Certicate. - Stock audit carried out by bank for all accounts having funded exposure of more than 5 crores." of year discount receivedshould be
• checking compliance • Securities requiring registration
d] Int on Savings Account checked on test check basis properly apportioned between the 2
with RBI norms registered in name of bank
years.
e] Int on inter-branch balances provided at rates prescribed by HO
• DP Register updated every month
10 • In case of bills for collection, auditor
f] Int on overdue/matured term deposits estimated & provided for." to record value of securities
examine procedure forcrediting party
hypothecated."
on whose behalf bill collected."
Page - 1

CHAPTER 15 - CARO 2020

APPLICABILITY

Every co including a foreign company as dened in clause (42) of section 2 of the Companies Act, 2013 except-
a) Banking co b) Insurance co c) Sec 8 co d) OPC & small co
e) Private co, not being subsidiary/holding co of a public co, having a paid up capital & reserves & surplus not more
than Rs. 1 crore as on BS date & which does not have total borrowings exceeding Rs. 1 crore from any bank/FI
at any point of time during FY & which doesn't have a total revenue exceeding Rs. 10 crore during FY

Para 3 of CARO 2020 (Reporting under CARO)

Clause Description

(i)(a) (A) whether co maintaining proper records showing full particulars, including quantitative details and situation of PPE; (B) whether the co maintaining proper records showing full particulars of intangible assets;

(i)(b) Whether these PPE physically veried by mgt at reasonable intervals; whether any material discrepancies were noticed on such verication and if so, whether same have been properly dealt with in books of account

(i)(c) Whether title deeds of all immovable properties disclosed in the FS held in the name of the co, if not, provide the details thereof as follows:- 1. Description of property 2. Gross Carrying Value 3. Held in the name of 4. Whether promoter, director or their relative
or employee 5. Period held–indicate range, where appropriate 6. Reason for not being held in name of co

(i)(d) Whether co revalued its PPE (including ROU assets) or intangible assets or both during the year and, if so, whether revaluation is based on valuation by a Registered Valuer; specify the amount of change, if change is 10% or more in the aggregate of the net
carrying value of each class of Property, Plant and Equipment or intangible assets;

(i)(e) Whether any proceedings initiated or pending against co for holding any benami property under Benami Transactions (Prohibition) Act, 1988 & rules made thereunder, if so, whether co appropriately disclosed the details in its nancial statements;

(ii)(a) Whether physical verication of inventory conducted at reasonable intervals by mgt & whether, in the opinion of auditor, the coverage & procedure of such verication by the management is appropriate; whether any discrepancies of 10% or more in the
aggregate for each class of inventory were noticed and if so, whether they have been properly dealt with in the books of account;

(ii)(b) Whether during any point of time of the year, the company has been sanctioned working capital limits in excess of ve crore rupees, in aggregate, from banks or nancial institutions on the basis of security of current assets; whether the quarterly returns or
statements led by the company with such banks or nancial institutions are in agreement with the books of account of the Company, if not, give details;

(iii) Whether during year the co made investments in, provided any guarantee or security or granted any loans or advances in nature of loans, secured or unsecured, to companies, rms, LLP or any other parties, if so ,-

(iii)(a) "Whether during the year the co provided loans/provided advances in nature of loans, or stood guarantee, or provided security to any other entity [not applicable to companies whose principal business is to give loans], if so, indicate- (A) aggregate amt during the
year, & balance outstanding at the BS date with respect to such loans or advances and guarantees or security to subsidiaries, joint ventures and associates;(B) aggregate amt during the year, & balance o/s at the balance sheet date with respect to such loans or
advances and guarantees or security to parties other than subsidiaries, joint ventures and associates;"

(iii)(b) Whether investments made, guarantees provided, security given & terms and conditions of grant of all loans & advances in the nature of loans and guarantees provided are not prejudicial to the company’s interest;

(iii)c) In respect of loans and advances in the nature of loans, whether the schedule of repayment of principal and payment of interest has been stipulated and whether the repayments or receipts are regular;

(iii)(d) If the amount is overdue, state the total amount overdue for more than ninety days, and whether reasonable steps have been taken by the company for recovery of the principal and interest;

(iii)(e) Whether any loan or advance in nature of loan granted which has fallen due during the year, has been renewed/extended /fresh loans granted to settle overdues of existing loans given to same parties, if so, specify aggregate amt of dues
renewed/extended/settled by fresh loans & percentage of aggregate to total loans or advances in nature of loans granted during year

(iii)(f) Whether the company has granted any loans or advances in the nature of loans either repayable on demand or without specifying any terms or period of repayment, if so, specify the aggregate amount, percentage thereof to the total loans granted, aggregate
amount of loans granted to Promoters, related parties as dened in clause (76) of section 2 of the Companies Act, 2013;

(iv) In respect of loans, investments, guarantees, and security, whether provisions of sections 185 and 186 of the Companies Act have been complied with, if not, provide the details thereof;

(v) In respect of deposits accepted by co or amts which are deemed to be deposits, whether the directives issued by RBI & provisions of sections 73 to 76 or any other relevant provisions of the Companies Act & rules made thereunder, where applicable, have been
complied with, if not, nature of such contraventions be stated; if an order has been passed by Company Law Board or NCLT or RBI or any court or any other tribunal, whether the same has been complied with or not;

(vi) Whether maintenance of cost records has been specied by CG under sub-section (1) of section 148 of the Companies Act and whether such accounts and records have been so made and maintained;

(vii)(a) Whether co regular in depositing undisputed statutory dues including GST, PF, ESI, IT, sales-tax, service tax, duty of customs, duty of excise, VAT, cess and any other statutory dues to the appropriate authorities and if not, the extent of the arrears of outstanding
statutory dues as on the last day of the nancial year concerned for a period of more than six months from the date they became payable, shall be indicated;

(vii)(b) Where statutory dues referred to in sub-clause (a) have not been deposited on account of any dispute, then amts involved & forum where dispute is pending shall be mentioned

(viii) Whether any transactions not recorded in the books of account have been surrendered or disclosed as income during the year in the tax assessments under the Income Tax Act, 1961 (43 of 1961), if so, whether the previously unrecorded income has been
properly recorded in the books of account during the year;

(ix)(a) "Whether the company has defaulted in repayment of loans or other borrowings or in the payment of interest thereon to any lender, if yes, the period and the amount of default to be reported as follows:-1. Nature of borrowing 2. Name of Lender 3. Amount not
paid on due date 4. Whether Principal or interest 5. No. of days delay or unpaid"

(ix)(b) Whether the company is a declared wilful defaulter by any bank or nancial institution or other lender;

(ix)c) Whether term loans were applied for the purpose for which the loans were obtained; if not, the amount of loan so diverted and the purpose for which it is used may be reported;

(ix)(d) Whether funds raised on short term basis have been utilised for long term purposes, if yes, the nature and amount to be indicated;

(ix)(e) Whether co taken any funds from any entity/person on account of/to meet obligations of its subsidiaries, associates or JVs, if so, details thereof with nature of such transactions and the amount in each case;

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Page - 2

Para 3 of CARO 2020 (Reporting under CARO)

Clause Description
(ix)(f) Whether co raised loans during the year on pledge of securities held in its subsidiaries, JVs or associate companies, if so, give details & also report if the company has defaulted in repayment of such loans raised;

(x)(a) Whether moneys raised by way of IPO/FPO (including debt instruments) during the year were applied for purposes for which those are raised, if not, the details together with delays or default and subsequent rectication, if any, as may be applicable,
be reported;

(x)(b) Whether co made any preferential allotment or private placement of shares or convertible debentures (fully, partially or optionally convertible) during the year & if so, whether requirements of section 42 & 62 of the Companies Act, 2013 complied with
and the funds raised have been used for the purposes for which the funds were raised, if not, provide details in respect of amount involved and nature of noncompliance;

(xi)(a) Whether any fraud by the company or any fraud on the company has been noticed or reported during the year, if yes, the nature and the amount involved is to be indicated;

(xi)(b) Whether any report under sub-section (12) of section 143 has been led by the auditors in Form ADT-4 as prescribed under rule 13 of Companies (Audit and Auditors) Rules, 2014 with the Central Government;

(xi)c) Whether the auditor has considered whistle-blower complaints, if any, received during the year by the company;

(xii)(a) Whether the Nidhi Company has complied with the Net Owned Funds to Deposits in the ratio of 1:20 to meet out the liability;

(xii)(b) Whether the Nidhi Company is maintaining ten per cent. unencumbered term deposits as specied in the Nidhi Rules, 2014 to meet out the liability;

(xii)c) Whether there has been any default in payment of interest on deposits or repayment thereof for any period and if so, the details thereof;

(xiii) Whether all transactions with the related parties are in compliance with sections 177 and 188 of Companies Act where applicable and the details have been disclosed in the nancial statements, etc., as required by the applicable accounting standards;

(xiv)(a) Whether the company has an internal audit system commensurate with the size and nature of its business;

(xiv)(b) Whether the reports of the Internal Auditors for the period under audit were considered by the statutory auditor;

(xv) Whether the company has entered into any non-cash transactions with directors or persons connected with him and if so, whether the provisions of section 192 of Companies Act have been complied with;

(xvi)(a) Whether the company is required to be registered under section 45-IA of the Reserve Bank of India Act, 1934 (2 of 1934) and if so, whether the registration has been obtained;

(xvi)(b) Whether company has conducted any Non-Banking Financial or Housing Finance activities without a valid Certicate of Registration (CoR) from the Reserve Bank of India as per the Reserve Bank of India Act, 1934;

(xvi)c) Whether the company is a Core Investment Company (CIC) as dened in the regulations made by the Reserve Bank of India, if so, whether it continues to full the criteria of a CIC, and in case the company is an exempted or unregistered CIC, whether
it continues to full such criteria;

(xvi)(d) Whether the Group has more than one CIC as part of the Group, if yes, indicate the number of CICs which are part of the Group;

(xvii) Whether the company has incurred cash losses in the nancial year and in the immediately preceding nancial year, if so, state the amount of cash losses;

(xviii) Whether there has been any resignation of the statutory auditors during the year, if so, whether the auditor has taken into consideration the issues, objections or concerns raised by the outgoing auditors;

(xix) On the basis of the nancial ratios, ageing and expected dates of realisation of nancial assets and payment of nancial liabilities, other information accompanying the nancial statements, the auditor’s knowledge of the Board of Directors and
management plans, whether the auditor is of the opinion that no material uncertainty exists as on the date of the audit report that company is capable of meeting its liabilities existing at the date of balance sheet as and when they fall due within a period
of one year from the balance sheet date;

(xx)(a) Whether, in respect of other than ongoing projects, the co transferred unspent amount to a Fund specied in Schedule VII within a period of 6 months of the expiry of FY in compliance with 2nd proviso to Sec 135(5)

(xx)(b) Whether any amount remaining unspent under subsection (5) of section 135 of the Companies Act, pursuant to any ongoing project, has been transferred to special account in compliance with the provision of sub- section (6) of section 135 of the said
Act;

(xxi) Whether there have been any qualications or adverse remarks by the respective auditors in the Companies (Auditor's Report) Order (CARO) reports of the companies included in the consolidated nancial statements, if yes, indicate the details of the
companies and the paragraph numbers of the CARO report containing the qualications or adverse remarks.

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