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AUDITING & ETHICS

,Mrugesh Madlani
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NATURE,O}JECTIVE t
SCOPE OF AUDIT
I
Advantages of Audit lnherent Limitations of Audh {FATO}
r lt safeguards the financial interest of 1. frlature of Financial Reporting -Judgement
the pers*n who are not associated by Managernent & many financial statements
with managemer* of entitY, be it
also involve subjective decisions which differs
shareholders 0r partners
. lt acts as a moral check on employees from diffe rent ma nagement perspective
from commifiing defalcations or 2. f{ature of Audit Procedures - Auditors job is
embezzlement
to do audit &,not do official inv€stiSation
r Audited statement of accounts are '
into alleged wrong doing. Fraud if done will
helpful in *ettling liability for tax*s,
negotiatlng loaus & determlning the always be carefu'lly organized to conceal it
purrhase considetatign lor husiness
3. Timeliness of finanrial Statements &
. They are helpful in settling trade
Balance ktween 8cnefit &Cost -We want
disputes for higher waBes or bonus as
well as insurance claims more informsthn tarly to get more benrfit ,
r They are sf help in settlement of but it may involve m{rrf, cost which we are
ac@unts at time of admission or i nnt ready to ineurand there is fixed deadline
death of partner ' of financial $tstements , 5o maintaining
r Audit ascertains whether netessary balance hetr#asn *enefit &cost isdifffcult
hooks of acccunts & allied records
have been kept , & any weakness in
, ' , aRd also completing audit in tirne
that regard 4.' Sther MEtt*rsThat A#ect timttation of

e Audit helps in detection of wastages Audit -
& lss:ec especially,thcse that occur
*uei*,inadsqu*t* :ir*ernaltheeks or , :r Fraud invoMng Senior Managementor
',
' . ' collusion
Exist€$cf, & .ermpleteneq$ of rel*ted party
relati,onshhs
','' ' i irlsn-compfiance with laws & regulation*- '
sudited& r F$turs euen$ sr corldltisnr that maY carlse
entity.:ts tease iontifl{re as going con*erh
Difference Between Audit & *eview
However, Review is a limited assurance €ngagement' lt

provides lourer level of assuran€e than audit' Further,
review involves fewer procedures and gathers sufficient
appropriate evidence on the basis of which limtted
conclusinns can be drawn uP.
However, both %udit" and "revierg" are related to

financialstatements prepared on the basis s{ historical
financial infnrmation
4 CA I,TRUSESH
'IAADLANI
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Audit Definition Auditor Should Keep in Mind Following Points tc Ensure

Financial Statements are not Misleading
An Audit is independent examination
of Financial lnformation of any entity, {Entries & Financial Statements}
whether profit oriented or not, and r Accounts have been drawn with reference to entries
irrespectirre of its size or legal form from Books of Accounts
when such an examination is . Entries are adequately supported by sufficient &
conducted with a view to expressing appropriate audit evidence
an opinion therecn r None of the entries have been omitted in prccess of
compilafion & nothing which is not in Books of account
Scope of Audit is included in Financial Statements
r lnformation Conveyed by Statements is clear &
r Audit should cover all aspects of
unambiguous
Enterprise relevant to financial
statements being audited
r Amounts in Financial Statements are properly classified ,
r described & disclosed as per AS
To form an opinion on Financial
Statements , auditor should be
r Statement of Accounts presents True & Fair picture of
reasona bly satisfi ed i nforrnation cperational results & Assets & Liabilities
contained in accounting records &
other source data is reliable &
Types of Audit
sufficient for preparation of
financial statements Audit required under law
r Auditor assess reliahility &
sufficiency of accounting reccrds & r Companies as required by Companies Act 2013
source data by o Banking Companies
1. Making a study & evaluation of r Electricity supply Companies
eccounting systems & internal r Cooperative Socities
control r Public & Charitable Trusts
2. Carrying out tests , enquiries &
e
other verifi caticn procedures Corporations set up under Act of Parliament or State
r Auditor should also decide whether Legislature like LIC
lnfcrmafion is properly disclased in r Specified Entities under various Section of lncome Tax
financial statements as per Act, 1961
statutory requirements
r Auditor determines lnformation is Voluntary audit
properly disclosed by
1, Comparing Financial Statements
e Proprietary Entities
with Accounting records & other r Partnership Firms
source data r Hindu Undivided Families
2. Considering judgements that
management has made in As per SA 200 Over-all Objectives of lndependent Auditor -
preparing fi nancial statements
r Auditor is not expected to perform To obtain Reasonable Assurance about whether
duties which fall outside the *cope financial statements as a whole are free from material
of his competence misstatement &
r Constraints on the sccBe of audit
should be set out in his rcport & a To report on Financial Statements & Communicate as
qualified or disclaimer of opinion required by Strs
should be expressed as appropriate
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gives Assurance to users of Non-Assurance - Practitioner does

Assurance - Practitioner
financial statements not give Assurance, but perform
agreed upon procedures regarding
Historical Financial Statements - Financial lnformation . Eg -
1. Absolute Assurance - Not Possible in Audit {lnherent Accounting, Compilation of
Limitafion of eudit) Consolidated Financial Statements,
2. Reasonable Assurance - High Level of Assurance - Tax Bepresentation, Designing &
Audit Assignment - Standards on Audit {Strs} 10O - lmplementing lnternal Controls
!
999
s
3. Umited Assurance - Lower Level of Assurance &
Performing Fewer Procedures as compared to Standards on Related Services
Reasonable Assurance Eg - LR * Standards on Review {sns} /t{r(F+69S
Engagement {SRPsl 2(nO- 2699
\tVhy Standards are Needed ??
Prospective Financial lnfurmation - lnformation based on
r Standards ensure carrying out
events may occur in future & possible actions. Eg * Report
of audit against established
on lnternal Controls, Budgets, Projected Financial
benchmarks at Par with global
Statements practices.
1. Umited Assurance - lt is moderate level of r lmprove quality of financial
assurance, because on future, we can never give reporting thereby helPing users
Reasonable Assurance --- to make diligent decisions.
Standards on Assurance Engagements (SE) - r Promote uniformity as audit of
financial statements is carried
3000 - 3599
out following these Standards
r EquipProfessional accountants
Standards on Quality Control (1 -99) - All Engagements
with Professional knowledge
follow System of Quality Control - Historical as well as and skill.
Assurante Engagements, so Reports are issued as r Ensure Audit Quality
appropriate
Relationship of Audit with Other Disciplines
Auditing and Accounting: Auditing rcviews the financial statements which are nothing but a result of the overall
accounting process.
Auditing and Law: An auditor should haw a good knowledge of business laws afhcting the entity.
Auditing and Economics: Auditor is expected to be familiar with the overall economk environment of the client.
Auditing and Behavioural Science: Knowledge of human behaviour is essential for an auditor to effectively
discharge his duties.
Auditing and Statistics & Mathematics: Auditor is also expected to hare the knowledge of statistical sampling for
meaningful concluslons and mathematics for verification of inventories-
Auditing and Data Processing: EDP auditing in itself is developing as a discipline in itself.
Auditing and Financial Management : Auditsr is expected to have knowledge about various financial techniques
such as working capital managem€nt, funds flow, ratio analysis, capital budgeting etc.
Auditing and Production: Good auditor is one who understands the client and his business functions such as
production, cost rystem, marketing etc.
6 CA I,TRUGESH AAADLANI

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I )
TS I CHAPTER 2
AUDTT STR.ATEGY , PLANNING t

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Establishment of Over-all Audit Strategy tAudit kiTRP)
. Determination Of Characteristics of Audit - ldentify the characteristics of
engagement that define its scoPe
. Team Efforts - Consider factors in auditors' judgement are significant in
Directing the Engagement Team's effort
. Reporting Objectiyes - Ascertain the reporting objectives to plan timing of
audit & nature of communication required
. Nature, Timing & Extent of Resources - Determine nature, timing & extent
of resources required to perform the Engagement
. Preliminary Work - Consider results of preliminary engagement activities &
where Applicable knowledge gai ned on other assignments
Documentation of Audit Plan Audit Strategy Assists Auditor in /

Auditor shall document: Benefits of Audit Strategy
Over-all Audit S*ategy- Over all Audit Strategy 1. Employment of Qualitative
includes record of key decisions considered Resources - Which Resource to
necessary to properly plan the audit & communicate Deploy. Eg - Exp member for
significant matters to engagement team High-Risk Areas
Audit Plan - Audit Plan is record of planned Nature, 2. Allotment of Quantity of
i fiming & Extent of Risk assessment procedures & Resources * Number of
fu rther asses$nsnt procedures Resources to be Allocated for
Changes made to Audit Strategy &Audit Plan - lnventory count
Changes in Plan & Strategy will also make changes in 3. Timing of Deplo'yment of
Nature, Timing & Extent of Audit Procedures Resources *When to DePloy,
lnterim Audit or cut-off dates
4. Management of Resources -
Over-all Audit Strategy & Plan is Auditor's Responsibility Resources ar€ managed, directed
Auditor may discuss elements of planning with & supervised, briefing &
management to facilitate the conduct & management of debriefing meeting are exPected
audit engagement
to be held
Although these discussions often occur, overall strategy &
plan rema in auditor's responsibility of Risk assessment procedures &
When discussing matters with management, care is furthe r assessment procedures
required not to tompromise effectiveness of audit Changes made to Audit StrategY &
Audit Plan - Changes in Plan & Strategy
Direction, Supervision & Review of Engagement Team will also make changes in Nature,
Members Depends on: {CARS} Timing & Extent of Audit Procedures
Capabilities & Competence of lndividualteam members
performing work
Area of the audit
Assessed risk of material misstatements
Size & Complexity ol entitY
8 CA AARUGESH ,IAADLANI
Any Audit Plan Should Cover: Planning is not a discrete phase of audit, rather
1. Knowledge of the client continual & iterative process that begins shortly
accounting system, after completion of previou$ engagement &
policies & internal continues tillcompleting of current audit
control procedures engagement
2. Establishing the expected Benefits of Planning in Audit of Financial Statement
degree of reliance to be
placed on lnternal
Controls
Ievels
4.
Following Audit Procedures need Planning Process - Elements of planning

to be Completed Prior to r Preliminery Engagement Activities
Performance of Further Audit L. Performing Procedures regarding
Procedures & inctude - Continuance of Client Relationships &
Audit Engagement - Appropriate
. Analytical Procedures to be Procedures regarding acceptance &
applied as RAP continuance are followed
. General Understanding of 2. Evaluating Compliance with Ethical
Legal & Regulatory Requirements including lndependence -
Engagement partner should see entire
Environment Applicable to
team has followed ethical requirements
the Entity including lndependence
r Determination of Materiality 3. Understanding Terms of Engagement *
. lnvolvement of Experts Auditor shoutd send Engag"*"nt letter to
. Performance of other Risk avoid confusion with client regarding
Assessment Procedures Terms of Engagement
o Planning Activities - lt involves

1. Establishment of Over-all Audit Strategy
2. Over*allAudit plan
9 CA ,I'IRUGESH AAADLANI
Audit kogramme
It is series of Verification
Proceduresto be applied to ltems
of linancial statements of
company to obtaining sufficient
evidence to snable auditor to
express an informed opiniou on
such statements
Business vary in sire , nature &
composition , work which is
suitable to one business maY not
be suitable to other llence one
Audit kogramme applicable to all
business under all circumstances
is not practicable
Constructing Audit Programme - Disadvantages of Audit Programme

(MAR|l
1. Wark can become mechanital &
While developing an audit programme, the auditor some stePs can be carried aut
may conf,lude that relYing on certain internal without understandi n g obiective
controls is an effe$ive and efficient way to condu{t of whole audit scheme
his audit. However, the auditor may dqcide not to 2" lnefficient *ssistan$ take
shelter behind Program
rely on internal controls when there are other more 3. Programilie can tend to be rigid
efficient ways of obtaining sufficient appropriate & inflerible following rules,
audit evidence business is changed, but stillold
programme is carried on.
FOttOWlftlG POINTS TO BE XIPT lil MlllD 4. Hard & Fast Audit Programme
. St?y within the $cope & Limitations of may kill initietiue ol efficient
Assignment assistants
. Consider all the Possibilities of Error Open Mind while Developing
. Detsrmine Evidence reasonably available & Prograrnme
Standard Programme * Having regard
identify kst evidence for deriving satisfaction to Nature, Si-e & CcmPosition of
business & lnternal Controls, we should
' Apply those $teps & protedures which are frame a programme u;ith minimum
useful in Verification Purpose in specific
essential work
situation Alterations - As experience is gained
. Coordinate the procedures to be applied to by carryingout the work, program rnay
related items be altered to take care sf situations
that lr,ere earller lefr out
10 CA i,TRU6E5H IAADLANI
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11 CA AAADLANI
'IARU6E5H
3A 3?0 requrres auditor should Determ ining Materiality & Performance Materiality
conslder Materiality is relationship urhile Planning the Audit
with audit risk while perforrning audit Materiality - While Establishing Audit Strategy, auditor
shalldetermine rnaterialhyfor finandal statements as a
When planning audit, auditsr should whole. lf in specific circumstances, there is one or more
partisular tlass of transastions, account balance or
distlosures far which misstatement of lesser amounts
than materiality could reasonably be expected to
influence economic decision of users taken on the basis
U:e of Senchmark in Detemtining MaterialitY for Revision ol Materiality

Financial Statements as Whole (NEUVI
1. Nature of Eatlfy, lifecycle, indus$y & economic
environment in which it oPerates Materiality fcr finarcial statemefits as
2. f,lements of finandel Stat€$ents {Turnover, Profk a whole may need to be r*Yised as
befnre Tax, 6ross Profit, Total Assett , Total result of change in circumstances that
Equity) occurred during audit, new
3. tntftt's Ownership Structurt & rr'ray it is financed information or change in auditor's
4. ltems where Userrs fcus on Financial Statements
understanding of entity & operations
5. Volatility of the Benchrnark
as a result of perfarming further audit
procedures
lf the auditor condudes that a lower

materhlity for the financial
stateEEftts whole than that
auditor
1a CA ,IARUGESH ,VIADLANI
Audit Risk (tR *cR *DR) - Risk of Material Misstatement at 2 levels *
It is a risk that Auditor gives inappropriate 1. Overall Financial Statement Level * That
relate pervasively to financial statements as a
opinion when the financialstatements are
whole & potentially affect many assertions
materially misstated 2. Assertion Level for class of transactions ,
It is risk that auditor may fail to express an account balances & disclosures - These risks
appropriate opinion in an audit assignment are assessed to determine nature , timing &
extent offurther audit procedures necessary
Risk of Material Misstatement consists of 2 to obtain sufficient appropriate audit evidence
components: {tR * CR} which enables auditsr to expre$s an opinion
on financial statements at an acceptably low
level of audit risk
1. lnherent Risk - Possibility of an assertion Auditsr fusesser Control Risk as to Rely or not rely
about class of transaction , account on controls
balance or disclosures to a material ' Control enviroflment's influence over lnternal
misstatement either individually or when Control . A favourable Environmant allonrr
greater reliability in internal controls ,
aggregated with other misstatement,
However it does not guarantee effectiveness
before consideration of any related of specific controls
controls . We therefore test operating effectiveness of
2. Csntrol Risk * Risk that there could be conilols over Significant Class of Transactions
material misstatement in class of {$COT,sl, when we plan a controle reliance
transaction, account balance or strategy
disclosures either individually or when
. When there are control defieiencies, auditor
identifies & ter6 more than on€ control for
aggregated with other misstatement
each releyant assertion
because failure of controls to preyent or
" lf auditor determines they support "rely on
detect & corrert risk ol nraterial controls" or if compeneatirg eontrols are
misstatement affectiye , still "rely on cgntrols" is effe*tiyE"
. Detection risk - lt is a risk that audit ' When there is only one control for that
procedures performed by the auditor acsertions, he revises risk assessrnent to "nst
reply on csntrolin
wil! not detect a misstatement that ldentfiing & As*essing ftisk of Material --I *fi''S1 €
or Misstatement Auditor shall
. Sbtain Undsrrtanding of antity , its
enyironment including relovant contrsl* that
. RoMM & Detection risk are relate to rirk
related
. Assess the identified risk & eyaluate whether
th*y related p*tvarively to financial
statEmfnt$ ar a xhole & affect many
tisk Assessment Procedures lnclude - assrGisng
1. lnquiries with management & other . R€late to idefltified risks to what can gg y'rrong
within Entity at as*fiior level , taking arc*unt of r*levant
2. Analytical Procedures contrgls that auditor ittelds to test
. Consider likelihood of mlsstaternent ,
3. Observation & lnspection including posribility of multiple mk$tatefient
& whether it can be material misstatern€nt
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t3 CA I,AqUOE5H AAADLANI
14 CA MADLANI
'iARU6E5H
lnternal Controls $tudy of Various Aspects of lnternal Control
As per SA 315 lnternal Control can be . Generdl Nature & Charocteristics af lnternal
defined as Control
"Process designed, implemented & . Co*trols Relevant to Audit
maintained by those charged wlth . Ncture & Extent o! ltnderstanding of Relevant
governance, management & other Controls
personnel to provide reasonable . Ccmponents al lnterncl Cantrol
assurance about achievement of entitls
obiectives with regards to (CARE)
. Compliance with applicable laws & General Nature & Characteristirs of lnternal Control
regulations
Purpose of lnternal Control
. Safeguarding of Assets
. Reliability of Financial reporting Internal controls are designed, implemented &
. Effectiveness & efficiency of rnaintained to achieve entity's objective that relates to
operations (CARE):
Objectives of lnternal Control

c Compliance with laws & regulations
1. Transactions are executed in e Safeguarding of Assets
accorda nce with management's r Reliability of Financial Reporting
general or specific authorization r Effectiveness & Efficlency of operations
2. All transactions are promptly
recorded in the ccrrect amount in Limitations of lnternal Control
the appropriate accounts & in the (.TUDGEMENT rN rrcl
accounting pericd
1. Human Judgernent in decision making * Human
3. Assets are safeguarded frorn Decision making can be faulty
unauthorized access, ure or
2. Judgements hy management - Nature & extent
disposition &
of controls it chooses to implement & nature &
4. Recorded assets are compared
extent of risk it assurnes
with existing assets at reascnabte
3. Lack of Understanding the purpose of control -
intervals & appropriate astion is
lndividualdoes not understand purpose of
taken with regard to differences
control
4. limttations in case of Small Entities * SOD is nat
possible due to fewer employees, and owner
rnanager is abte to exercise oversight
5. lnternal Csntrol can only provide reasonable
at$urance
6. Collusion amsng people - Controfs can he
misused by collusicn of 2 or more poeplr or
inappropriate management override of controls
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Nature & Extent of Understanding Controls Relevant to Audit -
of Relevant Controls Factors to be kept in mind for finding controls relevant to
audit
Evaluating the Design - lnvolves . Size of the entity
conside ring whether control . Nature of entity's business including its organisation &
individually or in combination can ownership characteristics
effectively prevent or detect & . Nature & Complexity of system
correct material misstatements . Diversity & Complexity of entity operations
lmplementation - Means controls ' Applicable legal& regulatory requirements
exists & tntity is using it. First ut e . Circumstance & applicable cornponent of internal
see design & only them control
implementation . Materiality
Rick Assessmtnt ktredures - . Significance of related risk
Proredurcs performed to obtain . Whether control individually or in combination with
audit evidente about Design & other prevents, detects or corrects material
lm plementation of rt leva nt misstatement
Controls include - Controls ouer f.ompleteness & Accuracy of information
. Control$ over Completeness & Accuracy of
1. lnquiring with entity
personnel lnfurraation - lt is relevant to audit if auditor intends
?. Ohserving application of to make use of information in designing & performing
specific co*trols fu rther audit procedures
3. lnspetting documents & . Contmls r+lating to Operations & Ccrnplianm
rcports Objecti*s * lt is rel*vant to audit if they relate to data
4. Tracing Transactions through auditor evaluates or uses in applying audit procedures
sltstern relerrant to financial lnter*al Controls oner Safuguarding of Assets
reporting . Financial ReB*rting -Aud:toCs consideration of such
Obtaining understanding of conYols is limited to thsse rtlevant to r"eliability of
entitys tontrol is not sufficient to financial reporting
tr$t opereting efftctivtness of ' Op*ra{ng Obje$irres * Saftguarding controls related
surh ronrols, unless they are to operating obiectives are not relevant to financial
automated controls statrment audit
Controls RelatinS to Obprtives that are not rel*vant to
Csm$oaer$ al lntemal f,oatrtl audit
. Controls relating to objectives that are not relevafit to
1. Conbd€avirtnrnent audit need notto be considered
2. fibfrAss€sstrrr.t Ststuta Ma; tequire Audltorto repoa on Compliance xith
i. tnformotion Slrstern tnduding
Certain Conrols -
Relsted Susiness Proress . lf Statute tells &uditor to report on ctrtain controls ,
4. ControrActivity
the auditor's review of internal control may be broader
5. Monitoriag aJContrds and more detailed and such controls are relevant to
audit
Dewnl+ad Mt:bile Fhane
16 CA ifiRU6E5H &IADLANI
Control Activities Monitoring of controls
. Auditor shall obtain an understanding of
Auditor shall obtain an understanding of
major activities entity uses to monitor
control activities relevant to audit
. Control Activities are policies & procedures internal controls over financial reporting
that help ensure that rnanagement directives 1. Monitoring of Controls Defined - tt is
are carrled out. prCIcess to assess effectiveness of
. Whether lT or manual systems have various internal control performance over
objectives and are applied at organisational & time
functional level 2. Helps in Ass*ssing of Controls on
Conffol Activities that are relevant to Audit are : Timely Basis - Assessing effectiveness
. That relate to significant risks & for which of controls on timely basis and taking
substantive procedures alone do not provide necessary remedial actions
sufficient appropriate evidence 3. Management accomplishes through
' Those that are considered to be relevant in ongoing activities, separflte
the judgment of the auditor evaluation - On going activities are
built into normal recurring activities
Auditor should consider following points in deciding of an entity and include regular
significant risks management & supervisory activities
. Whether risk is a risk of fraud
. Whether risk involves significant transaction 4. Management Monitoring includer -
lnformation from communication
with related party from external parties such as
' Whether risk involves slgnificant transactions customer complaints that indicate
that are outside the normal course of business areas of improvements
for the entity or that appear to be unusual
. Complexity of transactions 5. ln Case of Small Entitie$ -
. Degree of subjectivity in measurement of Management'$ monitoring of control
is often accomplished by
financial information related to the risk
. Whether risk is related to significant economic management's 0r owner-manger's
close involvement in operations" This
, accounting or other developrnent like
will identifu significant variances from
changes i n regulatory requi rernent
expectations , leading to remedial
ldentlfuing Significant Risks action to control
Following are always Significant Bisks -
1. Risk of material misstatement due to fraud
2. Significant transactions with related parties
that are outside normal course of business for
entity
3. Risk of Material Misstatement * Greater for
signifi cant non-routi ne transactions
4. Risk of Material Misstateme nt - Greater for
signifi cant Judgemental matters
17 CA ,IARUoESH /IAADLANT
l
,
Control Environment - Control Environment lntity's Risk Asressment Process
sets the tone of the organisation, influencing Auditor Shall obtain an understanding of whether entity
has process for -
the control consciousness of its people
Elements of Control fnvironment - Which
1. ldentifying Business risks relevant to financial
reporting objectives
helps us in understanding the Control ?. Estimating Significance of the risks
Environment are: {PC -COltilA} 3. Assessing likelihood of their occurrence
1". Participation by those Charged with 4. Deciding about actions to address those risks
Governanre - Their lndependence
from managernent, experience & lnformation system including related business process
stature, extent of their involvement relevant to financial reporting
Auditor Shall obtain understanding of lS including related
& information they receive &
businex process relevant to finoncial reparting inctuding
appropriat€ness 0f the ir actions
following areos:
2. Human Besoure Policies & . (lasses of transactions in entity's operations that
Practicgs - Policies regarding are significant to financial statements
recruitment, orientation, training, . Procedures by which those transactions are
eval uation, counselling, promotion, initiated, rerorded, processed, corrected as
compensation & remediel actions nscessary, transferred to general ledger
3. Communication & Enforcem€nt of . Related records, suppofting lnformation & specific
aGcounts in financial statements that are used to
lntegrify & Ethical Values - Will
record such transactions
lnfluence design, administration & . Controls surrounding iournal entries
monitoring of controls . Financial reporting process used to prepare
4. Commitment to Competence - financial statements
M a nagement's consideration of ' How lnformation System capture events &
competence levels for particular jobs conditions that are significant to financial
and how those levels translate into statements
requisite skills & knowledge
5. Organisational Structure * Points to be considered by auditor regarding
cornmunication of financial roles & responsibilities
Framework within which activities
1. Understanding of Roles & Responsibility -
are planned, executed, controlled & Communication by entity of roles &
review€d for achievi ng objectivities responsibilities pertaining to internal control oyer
6" Management Philosophy & financial reporting
Operating Style - Management's 2. Policy Manuals & Financial teporting Manuals -
approach to taking & managing Communication may take in the form of manuals
business risk, actions towards 3. Understanding regarding Relation of Activities -
Understanding by employees how their work is
fina ncial reporting, information
related with other & means of reporting
processing & accounting functicns &
exceptions to higher level
personnel 4. Open Communication Channels - Help to ensure
7. Assignm*nt of Authority & exceptions are reported & acted upon
ResponsibiliU - How operating 5. Less Structured & Earier for Smaller Entities - lt
activities are assigned, reporting is easier and less strudured in small entity due to
relationships & authorization fewer levels of responsibility & management's
h ierarchies are established
greater visibility & availability
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18 cA A,1RU6E5H
'IAADLANI
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Auditor needs reasonable assurance that Narrative record

accounting system is adequate and all accounting . lt is Complete & Exhaustive description
information which should be recorded has in fact of system as found in operation by
auditor
been recorded . Actual Testing & Operation are
necessary before such a record can be
Benefits of Evaluation of lnternalControlto the developed
Auditor . Good in cases when no formal control
system is in operation
. . More suited to small business
Whether adequate internal controlsystem
Flowchart
is in use & operating as planned 14 nrqr^& . lt is graphic presentation of each part of
. Whether effective internalauditin{ u company's system of internal control
depa rtment is operating . lt is most concise way of recording
. What are arees where controlis weak or auditor's review of system
. lt gives bird's eye yiew of system & flow
excessive
. Extent & depth of examination he needs to
of transactions and integration & in
documentation can be easily spotted
carry out in different areas of accounting and improvements can be suggested
. What would be appropriate audit . lt is also necessary for auditor to study
techniques & procedures in given the significant features of business
carried on by concern
circumstances
. Whether controls adequately safeguard the
Check List
. lt is series of questions or instructions
assets which mernber of audking staff must
. Whether errors & frauds are likely to be follow or answer
located in ordinary in course of husiness
. When he completes it he writes answers
. Whether worthwhile suggestions can be .
in Yes No or Not Applicable
lt is on Job Requirement & instruction
given to improve control system are framed having regard to desirable
elements of control
Formulate Audit Program After Understanding of INTERNAT CONTROT QUESTIONNAIRE
!nternal Controls . lt is comprehensive series of questions
concerning internal control
After understanding controls, we need to review & . lt is most widely used form for
evaluate internal controls , auditor can use any of the collecting information about existence,
following to help him to review & evaluate lnternal operation & efficiency of internal
control in organisation
Controls . lt is issued to client and client gets it
1. Narrative Record filled by executives & employees
. All inconsistencies are discussed by
2. F[ow chart
auditoy's staff with client,s employees
3. Check List to get clear picture
4. Questionnaire . Auditor then prepares report of
deficiencies & recommendations for
improvement
19 CA MRUoESH AAADLANI
I
,
Automated Environment Auditor should Understand risks that arise from
It basically refers tc business environment use of IT Systems
where {PIOAD}
l. Processes 1. Unauthorised arcessto data
2. Operations 2. Unauthorized changel to systems or
3. Accounting & proBrams
4. Decisions 3. Ercessive accers I privileged acc€ss {super
Are caried out by cCImputer sYstems also users)
knows as lnformation Systems or 4. lncorrect processing of data or processing
lnformation Technology Systems inaccurate data or both
5. Direct data changes {Backend changes)
l(cy Featurespf an Automated 6. Loss of Data
Environment 7. Failure to mak* nef*ssary changes to
system or programs
r Ability to procefr large volume of 8. Lack of adequate segregation of duties
transactions
r Enables Fatt€r business operations Understanding of lT EnYironment
r Accuracy in data processing &
computation Understanding involves How lT department is
r organized, lT activities & lT dependencies, relevant
lntegration between business
risks & control
operations
r Better Seeurity & Controls
1, lnforrnatior systems being used {One or
more Application system / Ols etc)
r Less prone to human errors
2. Their pilrpo* {Financial v/s Non-Financial)
o Provides latest information
3. Location of lT systems (local v/s global)
r Connectivity & netumrking capability 4. Architecture (client server, web applicatlon,
cloud )
5. Version {Features change with version}
5. lnterfaces within sYstem
7. lnhouse v/s Packaged
8. Outssurced activities (lT Maintenance &
support)
9. Key Persons {ClO, CISO, Administrators}
All understanding should be dncumented in
standard format or template
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After underctanding & reviewing ccrfirols, auditor needs
to examine whether and how far same is actually in
operation
For this he will do actual testing of system in operation
He does this on selective basis, he can plan testing in such
a manner that all impcrtant area$ are covared in a pgriod
of say 3 years
It is done by application of procedural tests & auditing in
depth
Test of controls
Test of Controts are performed to obtain audit evidence
about effectiveness of the -
. Design of accounting & internal controls systems,
i.e whether they are suitably designed to prevent or
detect and correct material misstatements &
. Operation af Intern*l sntrcl throughout the pericd
Test cf contro[s Include

1. lnspection - of documents supporting transactions & other
events to gain audit evidence that internal controls have
operated properly
2. lnquiries: about & observatla* cf i*ternal centrols which leave
*c audit trail =
3. Reperfcrmance - involves auditor's independe*t executio* of

procedures or controls that were originally performed as part of
entit/s interna I control
When obtaining audit evidence about effectiveness of controls,
l
auditor considers -
1. How they were applied
Z. By whom they were applied
3. The ccnsistenca with whicft they $terie applled durirg the period
. When deviations are deteeted, auditor makes specific i*quiries
regarding these rnatters, & ensure test of controls appropriately
cover such period of change or fluctuation
CA MRUGESH
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21.
'*ADLANI
f,
tmpact of lT risks i.e on Substantive Types of f-ontrols in an Automated Environment

General lT Controls -These are policies &
Audit, Controls & Reporting procedures that relate to manY applications &
support effective functioning of application
1. lmpact on f.ontrols - lf we can't controls
rely on automated controls, we It maintains integrity & security of data and
also cannot rely on lT dependent includes *
controls 1. Access security * To ensure access to
programs and data is authenticated and
Then system data & reports
authorised to meet financial reporting
should be tested substantively for
objectives
completeness & accuracy 2. Application & System Acquisition,
More Substantive work is needed Development & Maintenance - To ensure
2. lmpact on Substantive Audit - systems are developed, configured and
Cannot rely on data obtained implemented to meet financial reporting
from systems, system data should objectives
be tested for completeness and 3. Program thange -To ensure that modified
systems continue to meet financial reporting
accuracy
objectives
More audit Evidence is needed 4. Data Center & Netrrork operations -To
3. lmpact on Reporting - ensure that production systems are
Communicate to those charged processed to meet financial reporting
with gouernance & lssue modified objectives
auditors report Application Controls
, These are both automated & manual
controls that operate at a business process
levels
.. Automated Applicatign controls are
embedded into lT Applications. Eg - Edit
Checks, User limit check, Validation of input
data, reasonableness checks, mandatory
data fields
lT Dependent Controls -
These are basically m manualcontrols that make
use of some farm of data or information or report
product from lT Systems & Applicaticns
. Design & effectiveness of such controls
depends on reliability of scurce data
. Automated application controls & lT
dependent controls require General lT
Controls to be effective
?2 CA MRUaE5H AAADLANT
Testing Methods to Te$t Contrals Data Analytics for Audit
4 Types of audit tests that should be used
are :
Assess & Report Audit
of
/!$--L+-qa
trl-{
control exists if Control
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AUDIT PROCEDURE5TO OBTAIN AUDIT Further Audit Procedures

EVIDENCE
Test of Controls an audit procedure designed to
Audit Procedures to draw reasonable evaluate the operating effectiveness of controls
Nature of Test of Controls *
conclusion on which to base auditor's
Perform audit prccedures in combination with inquiry
opinion is obtained by performing :
to obtain audit evidence about operating effectiveness
. Risk Assessment Procedures & of the controls including -
r Further Audit Procedures contains : L. How Controls were applied
1. Test of Controls as required by SA's & 2. By Wham they were applied
2. Substantive Procedures including test 3. Consistency within which they were applied
of details & substantive analytical Determine whether controls to be tested are
procedures dependent on other controls , if so we need need to
test effective operation of those indirect controls
Risk Assessment Procedures Determining Ext€nt of Test of Controls includes :
Audit Procedures performed to obtain 1. Frequency of Performance of the control by
Understanding of entity & its environment, Entity during the Period
including the entity's internal control to 2. Length of time during audit period auditor is
relying on operating effectiveness of control
identify & assess the risk of material
misstatement due to fraud or error at the
3. Expected rate of Deviation from Control
4. Relevance & Reliability of audit evidence to be
financial statements & assertion levels
obtained regarding operating effectiveness of
controls
Nature & Timing of Audit Procedures Timing of Test of Controls
Affected by availability of information only in : Auditor shall test controls for pafticular time or
electronic form or only at certain points or thrtugh out the period for which auditor tends
period of time to rely on those controls
Using Audit Evidence Obtained in Previous Audits

Whether it is appropriate to use Audit Evidence
obtained in Previous Period regarding operating
Effectiueness of lnternal Control depends on -
1. Effectiveness of the Control & its application
by the Entity
2. Effectiveness of other elements of lnternal
Control
3. Effectiveness of General lT Controls
4. Risks arising from characteristics of the co*trol
including whether it is manual or automated
5. Risk of Material misstatement & extent of
reliance on the control
6. Risk arising due to lack of change in a particular
control due to changing circurnstances
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't
li:. '
€ombination of Methods/Techniques to Designing & Performing Sub$antive Procedures

Perform Audit Procedures & Ohtain
Evidence (AE-RlO) Auditor's assessment of risk is ludgemental & so may
1. Analytical Procedures - lt consists
not identify all risks of material misstatement &
of evaluation of financiat
There are inherent limitations to internal control
information made by study of
includ ing management override
ng Uporn Circumstances auditor may determine
analytical
nt to reduce risk to an
3. Recalculation - lt consists of
checking mathematical accuracy of
documents or records . lt may be
done manually or electronically
4. Re-Performance - lnvolves
audito/s independent execution
where
Assertions
Assertions refer to representation by management ,
explicit or otheru\rise that are included in the financial
statements , as used by the auditor to consider different
types of potential misstatements that may occur
PC MOVE RIGHT
1" Fresentation - Properly disclosed , classified &
described as per framework
2. Completeness - No Unrecorded Assets , Liabilities
or transaction
3. Measurement -Transaction recorded in proper
amo unt riod
Occurrence Transaction 0r Eve nt too Place
Valuation - Asset Liability recorded
at a process
appropriate carryi ng value
6. Existence * Asset or Liability Exists at a given date
limited to
7. Rights & obligation * Asset is right & Liability is
observation takes ptace
date
26 CA MRUoESH MADLANI
A rrl i::.
Audit Evidence Auditor should obtain reasonable assurance , to

obtain that he shall obtain Sufficient Appropriate
Auditing is a logical process, auditor is called
Audit evidence to reduce audit risk to an acceptably
upon to assess the actualities of situaticn & low level & after than make opinion on Financial
review the statements & give true & fair view Statements
on accounts of the company SA 500 Audit Evidence states we should obtain
Sufficiency & Appropriateness evidence .
An Opinion given on reckless & negligent Sufficiency is quanturir of evidence {quantityl
Appropriateness relates to relevanee & rellability
examination & evaluation may expose the
{quality}
auditor to legal action with consequential loss
of professional standing & prestige Auditor's judgement as to sufficiency may be
affected by factorc such as : (MSRI
It is lnfsrmation used by auditor in arriving at
the conclusions on whieh audttor's opinion is t. Materiality* More Material , More Evidence
& Vice-versa
based
Z. Risk of Material Misstatement - More risk of
It includes - material mis$tatements more checking & vice-
r lnformation coiltained in accounting versa
records
auditor's
& by its nature &
circumstances under which it is
Types of Audit Evidence
Relevance deals urkh logical conne€tion with or
bearing upon the purpose of audit procedure and
Depending upon Nature
where appropriate assertion under consideration .
Visual Relevance also may be affected by direction of testing
I Oral
t Docurnentary Reliability of Audit Evidence
Depending Upon Source Reliability is increased when it is obtained from
o lnternal
lnternal
External
Audit evidence
reliable than obtained i
fvidence in
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l:
Audit Sampling Approaches to Sampling

of audit Statistlcal Sampling - It is approach to sampling that has
%of r Random selection of the sample items &
r Use of probability theory to evaluate sample results
including measurement of sampling risk characteristics
r lt i$ more scientific than testing based on auditors
judgement because lt involves mathematical laws of
probability in determining sample
population r lt is used when population to be tested involve lar6e
number of similar items
Characteristics of Population (CAR) r EB * Compliance testing , payroll , invoices vouching ,
petty ce$h vouching
1. Completeness - Population Non Statistical $ampling
also needs to be complete so I Under this Approach rample size & it's composition
auditor can draw conclusions are determined on the basis of personal experience &
about whether control is knowledge of auditor
ope rati ng effectively duri ng
r lt is simple in operation
the reporting period , r lt is neither objective nor scientific
defensible
r Method provides means of estimating minimum
sample size with specified risk and precision
upon r lt provides better description of large mass of data ,
examination of all data
I
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Sample Design - While Designing Audit sample Sample Selectlon Methodc

, auditor's consideration includes (MSD) - 1. Random Sampling - ln this all the items in the
t. Nature of audit evidence sought & population have known chance of selection. lt
possibte deviation or misstatement includes 2 popular methods :
a) $lmple Random Sampling - ln this we will
conditions that will assist auditor in choose numbers from random numbers by
defining what population to use for computers or picking random numbers from
sampling drum. lt is considered simple & easy to use
2. Specific Purpose to be achieved &
combination of audit procedures likely to
b)
best achieve that purpose
to be tested in few groups called strata . Each
3. Expected rate of deviation is considered stratum is treated as if it were a separate
to design audit sample in case of Test of population & proportionate of items is selected
controls from each stratums
Value of risk auditor is willing to accept will r No of groups in which population is divided is
determine sample size , lower the sampling risk based on auditor's judgement
more the sample size r From each group auditor may pick different
percentages of items i{ ! ': ' ', ',
I
2. lntervalgampllng $'
Examples of Factors lnfluencing Sampl* Size for o ln this no of sampling units in population is
Test of Controls divided by sample size to give a sampling

r Auditor's risk assessment of relevant r
interval. Eg - 5S then every 50* unit is sample
Although starting point may be determined
controls haphazardly, sample i$ truly random if
r lncrease in tolerable rate of deviation , determined by used of computerized random
lower the sample size because we can number generator or random number tables
tolerate some rate of deviation r Method is effective only when population is not
r lncrease in Expected rate of deyiation , structured in a way that sampling interval
matches with particular pattern in population
rnore sample size because then auditor
3. Monetary Unlt SamplinB - lt is type of value
can make reasonable estimate of actual weighted selection in which sample size ,
rate of deviation selection & evaluation results in conclusion in
r lncrease in auditor/s desired leuel of monetary amounts
assurance I more size , only then he can 4. tlapharard sampllng - ln this auditor selects sample
get i ncreased assurance without any stil.tstured technique
r ln case of large population , actual size of
I lt i$ sclected without any bias & thus attempt t0
ensure all items have equal chance of selection.
population has little effect on sample size r lt is not appropriate when using statistical
. For small Population however audit sampling
sampling is not best method to obtain 5. Block S*mpllng * lt involves:electian of block of
sufficient appropriate evidence, there are adjacent items within thc population.
alternative means . lt is not effective because items in sequence
have similar characteristics from items as
compared to elsewhere in population
. lt is not effective whEn we want to draw valid
inferences about whole population
?9 CA ,IARU6E5H MADLANI
, ' trENCE
Nature & Cause of Deviation &

Misstatement
r ln analysing the deviations &
misstatement identified, audito r
may observe many have a common
feature. For eg*TYPe of
transaction, location, product line
or period of time
l ln such circumstances auditor may
decide to identifY all items in
population that has common
feature and extend audit
procedures to those items.
r ln addition such deviation or

misstatements maY be intentional
conclusions were
& indicate the possibility of fraud
audit efficiency
r ln case misstatement or deviation
in a sample is an anomalY, auditor
shall obtain high degree of
certainty by performing additional
audit procedures to obtain
sufficie nt aPProPriate audit
evidence that it does not affect
remainder of the PoPulation
30 CA I1ARU6E5H MADLANI
Projecting Misstatements Eval uating Results of Au dit Sa mpli ng
Auditor is required to project
misstatements for the population to t For Test of controls,
obtain broad view of scale of HiSh Sample Deviation Rate
misstatement but this projection may High Control Risk
not be sufficient to determine an lncrease in Risk of Material
amount to be recorded Misstatements
When misstatement is an anomaly, it is lncrease in Substantive Procedures
excluded when projecting
misstatements to population . For Test of Details
However effect of any such

PROJECTED MISSTATEMENTS +
Anarnaulous Uncorrected Misstatements >=
TOLERABLE MISSTATEMENTS
projefied
a5 whole
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Ohjective of Auditor is to obtain Sufficient & Physical inventory counting conducted

Appropriate Audit EvidEnce ebout - other than at date of financial
. Existence & Condition of lnventory ttatements
Auditor shall perform audit procedures
to obtain evidence about whether
changes in lnventory between count
date & date of financial satement are
properly recorded
Existence & Condition of lnventory
When lnventory is material to financial statements , lf Auditor is Unable to Attend Physical
auditor shall obtain sufficient appropriate audit evidence Counting due to Unforeseen
regarding existence & condition of lnventory by - Circumstances, he shall do it on
Attendance at Physical lnventory Counting - alternative date and perform audit
1. Evaluate Management lnstruction & Procedures procedures on other ffansactions
for recordlng and controlling physical lnventory
counting
2. Observe the Performance of management's count Attendance at PhYsical lnventorY
procedures Counting is lmpracticable
3. lnspect the lnventory & Auditor shall perform alternative
4. Perform Test Counts procedures to obtain sufficient
Perform audit procedures over the entity's final inventory appropriate audit evidence regarding
records to determine whether they actually reflect actual existence & condition of inventory
inventory count results . lf not possible , Auditor shall
modifu opinion as Per SA 705
Matters Relevant In Panning Attendance at Physical When lnventory is with 3'd Party, and
lnventory Counting it is material ,
. Locations at which inventory is held including 1. Auditor shall request
materiality of lnventory confirmation from 3'd PartY about
. Whether Adequate Procedures & instruction are quantity & condition of inventory
expected to be lssued for physical lnventory 2. Perform lnspection & other audit
Counting procedures as aPPropriate in
Nature of lnventorY circumstances
Stages of Completion of Work in Progress
Nature of lnternal Conffol related to lnventory
Risk of Material misstatement relevant to lnventory
Timing of Physical lnventory Counting
Whether Entity maintains Perpetual lnventory
System
t Assistance of Auditor's Expert is nEeded
32 CA AAADLANI
'IARU6E5H
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Litigation & Claims Auditor Assesses Risk of Material
Misstatement Begarding litigation or claims
Auditor shall perform audit procedures to identify - communicate with external legalrounsel
Litigation & Claims involving the entity which may
give rise to risk of material misstatement including r lf there is risk of material
misstatement or audit procedures
t. lnquiry with Management & ln House legal indicate other litigation or claim exists
counsel , auditor can directly communicate
2, Reviewing mi nutes of meeting of t hose with external legal counsel through
letter of enquiry
Reviewing lega
Auditor can alto Meet External Legal Counselwhen -

1. Auditor determines that matter is a significant
risk
2. The matter is complex
3. There is disagreement between management &
entity's external legal counsel
. Such Meetings require management's

permission and are held with representative of
management in attendance
33 CA iARU6ESH AAADLANI
4 AUDIT EVI DENCE
External Confirmatio n s sA-505
positive
confirmation request
,ufidelivsred
= iesponsethat 'inilicat€g', .
34 CA MRUaE5H MADLANI
E
r!. .:
It is Engagement in which either * CONSISTENCY OF ACCOUNTING FOHCIES

, Financial Statements for prior period were RELATING TO OPENING BAIANCES
not audited or
' Financial Statements for prior period were : Accounting Policies reflefied ln
audited by Another Auditor Opening Balances have been
Objective of Auditor with respect to Opening consistently apptied & whether
Balances - lnitial Audit Engagement changes in accounting policies are
. Opening Balances contain misstatements properly accounted, Bre$ent€d and
that materially affect current period's disclosed in the financial statements
financial statements &
Accounting policies reflected in Conclusion
' Appropriate
.
opening balances have been consistently lf Audltor is unable to obtain
applied in current pericd's financial $ufficient appropriate audit evidcnce
$tatements or changes thereto are properly regarding Opening Balances, he shall
accounted, presented & disclosed issue Qualified or Disclaimer ol
Opinion report as per SA 705
Audit Procedures Regarding Opening Balances
r Auditor shall read the most recent financial lf Auditor eoneludes Spening
statement$ if any & predecessor audit report if any ,
Balances have a material
for informaticn relevant to Openins Balances
including disciosures
misstatements , effect of which is not
1" Determine whether Prior Period closing balances properly accounted, disclosed or
have been correctly brought forwatd as Opening presented, auditcr shall express
Balances or when appropriate any udjustments have Qualified or Adverse Opinion as per
been disclosed as prior period items in current year's sA 705
statement of profit & loss
2. Determine whether opening balances reflect the
application o{ appropriate accounting policies
3. Perform one or more of the following :
Perform
O
4q
o i*. &
Responsibilities of Auditor -
r ThC
of
Entity that hac control
on the financial stat€ments

Perform Audit Procedures to
, assess & resPond to risk of
arising from failure
members or
. Common Key
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36 CA AAADLANI
'IARU6E5H
l t
&
As per SA 520 Analytical

Procedures means Evaluation of
financial information th roug h
analysis of plausible relationships
among both financial & non-
financialdata
also covers
Factors to be Considered for Substantive Procedures

(PRASADI
Purpose & Timing of Analytical
Predictability - More appropriate when account balance
Procedures
or relationships between items sf data are predictable
Pu
in
and also
more effective for scme

Procedures using
37 CA MRUGESH MADI-ANI
::: ii :
While Designing & Per"forming Substantive Extent of Reliance on Reliability of Data for
Analytieal Proeedures either alone or in Analytical Procedures
combinatipn with test of details , auditor shall 1. Source of the information available.
1, Determine the suitahility of suhstantive External Is more reliable than lnternal
anElytieal procedures for given 2. Controlover preparation of the
a$$ertiCIn5 takinE into aecount assessed information that are designed to ensure
risk ef material misstatements its completeness r accuracy & vatidity
2. Evaluate the reliability of data from 3. Comparability of the information
developed
g.
tt"
Risk of Material Misstatement$ - whether
Expectation can he developed sufficiently
precisely (DAHI
1. Degree of which information can be

Su ita bil ity of Particular Analytical Procedure disaggregated
for Given Assertions 2. Availability of lnformation both financial
. lt is more applicable to large volume of & nan-finaneial. lf lnformation is available
*ansaetions that are predictable over auditor may consider reliability of
time information
' lt is based on expectatian that 3. Accuracy with which the expected results
relation*hips amon6 deta exist* An alytical P rocedure can
' Suitability will depend upon auditor's
. asse$$ment of how eJfective lt rarill be in
detecting material misstatements lnvestigating the Results of Analytical Procedures
analyticaI procedures - lf there are fluctuations rarith Expected Values
1. lnquiring with the Management &
Obtaining appropriate audit evidence
relating to management's responses and
' evaluating those responses and taking into
account auditor's understanding of the
entity & other audit evidence obtained
during the course of audit
t
2. Performing oth*r audit proeedure$ as

necessary in the circumstances when
management t5 unable to provide an
management's respoDse
38 CA MRUGESH ,IAADLANI
I I I &
s
'* A 'I I J
Techniques Available as Substantive

Analytical Procedures (TRS)
1, Trend Analysis - Comparison of the . The conclusions drawn

data with prior period balance or
with a trend of 2 or rnore prior - from results of analytical
period balances procedures designed &
performed in accordance
2. Ratio Analysis - Useful for analysing with are intended to
asset, liability, income, expenses. corroborate conclusions
Ratios can be compared over time formed during audit of
or to ratios of separate entities individual components or
within the group or with the ratios elements of financial
of other companies in the same statements
industry
This assists auditor to draw
3. Reasonableness Tests - This relies reasonable conclusions on
upon non-financial data for the which base auditofs
audit period under consideration. oprnmn
These are more applicable to
income statement accounts &
certain accrual or prepayment
accounts
4. Structural Modelling - lt constructs

a statistical rnodel from financial &
non-financial data of prior
accounting periods to predict
current account balances
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I ) o I ) , a
AUDIT DOCUMENTATION
-E
AUDIT DOCUMENTATION Purpose of Audit Documentation

. lt refers to record of audit
r Assisting Engagement Team to Plan & Perform the
procedures performed, Audit
relevant audit evidence
r Assisting members of Engagement Team to direct &
supervise auditor work & to discharge their review
obtained & conclusions the
I It is
papers
Form, Content & Extent of Audit Documentation
r $ize & Complexity of Audit

r ldentified risk of material misstatements
Assembly of Final Audit Flle

AUDIT DOCUMENTATION - Audit Fil€ is defined as one or more folders or other storage media in
PROPERTY OF AUDITOR
phyrical or electronic form containing retords that comprise audit
documentation for specific engasement
SQC 1 provides that Audit Auditor shall assemble audit documentation in audit file on timely
Documentation is property Ef the basis after Auditor's report
auditor SQC 1 gives us time limit of max 60 days after the date of auditor's
He may at his discrationmake report

portions or extracts from audit Completion of Final Audit File ls admlnistrativr process and does not
involve performance of new audit procedure or drawing of new
documentation available to client ccncluslons
if it does not affect independence Changes can be made in Audit File if they ere administrative in nature
of audhor or undermine the ftetentlcn Period
validity of werk perfurmed by him After assembly of final audlt file is completed, auditor shall not delete
ar dlscsrd audit dorurnentatlon of any nature before end of ? years
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TS OF CHAPTER,7
COMPLETION T R.EVIEW
4? CA MRUGE5H MADLANI
::,_.
. Written $tatement provided by

Management to auditor to
confirm certain matters or
support Audit Evidence
o Audit Evidence is allthe
lnformation obtained by the
auditor for arriving at conclusion
on which audit report is based
r Written representation are audit
evidence requested from those
responsible for preparation &
presentation of financial
statements Whom $entatlons
r Written Representations do not
provide suffi cient appropriate
audlt ovldenre on thelr own
Man*gtment
absut any sf th€ matters knowledge re to mattrr$
r Wrltten Hepresentatlsn do**
not aff€ft Natur* or sxtent of
fihar Audlt Euldene suditor
has ta obtein *bout fulfllmrnt of
maneEsment responsihilifi es or
cBeeifie asserticns
lf managemrnt d*ef not provide ona

or more of the Requested Written
Representatlonr, the Auditor shelll
matterwith
H:j}s:*e rfl att*rs I n represe ntation
(b) Re-evaluate the integrity of

management and evaluate the eff*ct
that this may have on the reliability of
reprc$entetlons {orel or written} and
audit rvidenee in ge neral; and
{c} Teke appropriate actions, inrludlng

determlning the posrlble cffect on tha
opinion in the audltsds report ih
accordance with SA 705
43 CA AARUGE5H MADLANI
4 $ a
* * a
#
* &
Eq
fr$
s & &,
Events occuring after the Balance Sheet Audit Procedurss Regarding Events Occurring
date & before date of auditor's report and After B/5 Date & B*fore Date af Auditor's Report
facts that become known to auditor after
1. Obtain an understanding of any procedures
date of auditor's report
manaEement ha$ established to ensure that
subsequent events are identified
Obiectives
2. lnquiring of management & where
him to amend the au ditor's reBort
a CA MRUGE5H MADLANI
* I F d * E i s i & t g
A
* * * a
* * t f
Auditor's Responsibility Regarding 6oing Events or Conditions that may cast

Concern Significant Doubt on Auditor's Ability to
Continue as Going Concern :
r Auditor has ta obtain sufficient Financial
Appropriate Audit Evidence regarding e Net liability or net current liability
& conclude on management's going position
concern assumption & see if material e Negative operating cashflows indicated
uncertainty exists as regards to Going by historical or prospective financial
Concern statements
r However there can be inherent r Fixed term borrowings approaching
limitations on auditor's ability to maturity without realistic prospects of
detect material misstatements for renewal or repayment or excessive
future events or conditions dependent on short term borrowings
. Auditor cannot predict future events o lndications of withdrawal of financial
or conditions, so absence of any support by creditors
reference to a material uncertainty r Adverse key financial ratios
about gCI ncern can not gua rantee Operating lndirators
entitY's ab contin ue r Management intentions to liquidate the
con cern
entity or cease operations
AdditionalAudit Procedures when events or
. Loss of key management without
replacement
conditions are identified
Auditar shall perform following procedures :
. Loss of major market, key customer,
L. Where Management has not yet franchise , license or principal supplier
performed assessment, request
. Labour difficulties
management to make assessment on
r Shortages of important supplies
entity's ability to continue as going concern Emergence highly successful
2. Evaluate Management's plans for future competitor
actions in relation to Going Concern
indicators
Non-compliance with capital or other
assessment
statutory or regulatory requirements
3. Where entity has prepared a cash flow
such as solvency or liquidity
forecast & analysis of the forecast is a
requirements for financia I institutions
sign ificant factor
Consider whether
. Pending legal cases , if successful will
clai m s e nti ty can't sati 5 w
has
or regulation or
of these
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45 CA JIARU6E5H A,IADLANI
Auditor & G Con cern Assessm e nt Part 2
Use ef Solng Consem SASI$ OF llse of fioing Ccncern Sasis of Acccunti*g '
II'IAFFROP*t*TE hut IVIateri*l
lf Management has lf Management has lf adequate If adequate

prepared F$ as Per prepared FS on disclosure about disclosure is not
Gpin$ concern, but liquidation h'asis, Material made in Financial
according to Auditor shall UncertaintY i$ Statements,
Auditor Going expreSs made in FS, Auditor shall
concern is not valid UNMODTFIE* Audttor shall exprss$ Qualified or
, then:Auditor shall Spinicn, but m*Y expres$ Adverse Report
express Adverse expres EMPHA$IS UNQUALIFIED
In basis of OPinion
Opinion, as it will OF MAT?ER 0pinion
write, Material
affect all accounts Faragraph in
But Auditors report UneertaintY exists
acc*rdance with $A
shallinclude about Goin$
?0S to draw [Jg*r's
$epsrate sectisn etncern, and sfinne
attention to
with Heading matter is not
alternate method
"Materigl disct*ied in.FS
of accounting
Related
t* Ssing {onre$!"
46 CA MRUGE5H MADLANI
Obiectives of Auditcr Communication Process
. Communicate Clearly with TCWG Auditor shail communicate with
, the responsibilities of auditor in TCWG form, timing & expected
relation to financial statements general content of communications
& overview of planned scope & . Auditor shall communicate in writing
timings of audit
Significant Findings from Audit, if
Obtain from TCWG information auditor feels writte n communication
relevant to Audit is not enough
. To communicate TCWG, about . We need to communicate in writing
observations which are about lndependence, in case of Listed
significant & relevant to their Entities
r esponirb\\\\\ \a s\ ersee
we
MATTERS TO BE COMMMUNICATED BY AUDITOR

when
Auditor's Responsibility in relation to Financial
Statement Audit
1. Auditor is responsible for forming opinion

on FS
2. Planned Scope, Tirning af Audit

- lncludes
communicating about Signifi cant risks
identified bythe entity
3. Significant Findings from Audit - Accounting
Practices, Policies if inconsistent with
Applicable FRF, Significant Difficulties in
Audit, Circumstances that may affect form
& content of Audit report , any other
significant matter. that are relevant in
oversight of fi nancial reporting process
ln case of Listed companieq we have to

communicate whether Partner, Team & Network
firms have with
Auditor i* requir*d ta obtain Understanding of @mmunication of Significant Deficiencies in
lntern*ltsntrol in identifying & assessing lnternal Control to TO,VG
ROMM . Auditgr shall corxmunicate in writing
abeut Significant Defieiencies in lnternal
I
trifferente between Deficlenty & Significant
Beficienry in Internel Contml
. Defiriency * Exists when Controt is
missing, or is unable to prevent or detect
& correct misstatement
. Significant Bef,eieney * Sig*ificant '
Deficiency ar€ thss€:that in auditors Auditor shall lnclude Wrtrten Communication
o,f ':O:f,,; af $tgnificant D*ficiencies
. A desmiption af deficien6y & their
possible effects
enebl*,
::.
48 CA ,t RUGESH A ADLANI
45ff EVALUATIG M htrs
&U
Objective of the Auditor i$ to Evaluste
1. Effect of Misstatements ldentified in
'3t'
r Auditor shall accumulate all

misstatements identified during audit
, unless they are immaterial
e Auditor shall determine whether
over-all Audit Strategy & Plan need to
be revised if -
1. lf circumstances indicate other
Communicate with Those Charged With Governance

oThe auditor shall request Uncorrected
misstatements to be corrected
rlf TCWG doesn't , Auditor shall communi*ate
effect it may have in Auditar's report
shall also communicate effect on
tr! pricr
ac
Financial
Written Repr€sentation Regards Effects *f Unccrrec'ted
oth er fvlisstattirnents remain . Auditor shall request Written Representation

from Management or where applicable TCWG,
Communication & Correction of Misstatements
whether they believe, effects of misstatements
o Auditor shall communicate all the are immaterial individually and in relation to FS
Misstatements to appropriate level of
as a whole
Management
c Auditor shall request Management to Docu me ntation Reg*rding Misstate ments ldentifi ed During
carrect those M isstate ments Audit
r lf Management refuses to correct , r Amount below which Misstatements are immaterial
auditor shall obtain understanding of (Threshold limit - usually 5 % of materiality)
managerfients reasons for not making r All misstatem€nts identified daring Audit & whether
corrections & shall take into account, they are corrected
. when evaluation whether FS are free
r Auditor conclusion whether uncorrected l
misstatement are material individually or in relation

frcm
49 CA JIARU6E5H ilTADLANI

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CHAR.TS OF CHAPTER. a
I
UDIT R.EPOR.T
SA 7OO ENTS
Objectives of Auditor as per SA Basic Elements of Auditors Report

700 t. Title - It should state it is report of lndependent
1. To Form Opinion on Auditor
Financial Statements based 2. Addresse - As required by Circumstances of
on evaluation of conclusion engagement
drawn from audit evidence 3. Auditor's Opinion * First Section shall include
obtained Auditor's opinion & have heading "opinion"
2, To Express Clearly that Opinion $ection willinclude :
Opinion through written o ldentify Entity whose financial statements have been
report audited
Pu r State financial statements have been audited
lance r tdentify title of each statement in financial statement
o Refer to notes including summary of significant
accounting policies
r Specify date of or period covered by each financial
statement
4. Basis for Opinion - lt shall include :
r Audit was conducted in accordance with Standard on
Auditing
Expression of Unmodified Opinion o Refers to Section of Auditors Report that states
on Financial Statements Auditor's Responsibilities under SA's
a
Fair presentation framework
. Gives permission to go for
additional disclosures or
amend requirements of
Financial Reporting
Framework for btitter
presentation
. Financial statement give true with
& fair view in all material
respects in accordance with
applicabte financial reporting required by
framework
Compliance framework
. No Permission as given in fair describe
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51 CA A,1RUGE5H AAADLANI
i
8. Auditor's Responsibility for Audit of Financial Auditor's responsihility for Audlt of Financial
Statements $tatements also rhall
This sedion of Auditor's Report $hall 1, State that auditor communicates with
L. State objective of auditor are to obtain those eharged rrith gov€rnancc regarding
reasonable assurance that fina ncial scope & timing sf audit & significant audit
statements are free from material findings including any significant
misstatement deficiencies in lnternal Control
. l$$ue an auditorrs report that includes 2. State that auditor provides TCWG with
auditor's opinion statement it has eomnlled all
2. $tate that Reasonable assurance is hlgh level requirements regard ing independence
of assurance, but is not guarantee that audit and other
done as per $A's will always detect material
misstatement when it exist
3. Mis$tatBments can arise from fraud or error
and either - 9. Layout of Description of Auditors
Responsibility for Audit of F$
' They are considered material if thay influence Auditoy's responsihility for audit of fS required by
economic decision of user
Auditor's Responsibility for audit of Financial SA shall be included
Statements shall further 1.. ln body of auditors report

. State that audit is conducted in accordance 2. Within appendix to auditor's report , in
with SA's and auditor has exercised which we have to give reference to
professional judgement & skepticism through appendix
audit 3. By specific reference within auditor's report
. Describe an audit by stating auditorrs to location of such description on a website
responsibilities are : of appropriate authority, where law or
1. To identify & assess risk sf material regulation permits
misstatements and design and perform audit 10. Other Reporting Responrihilities * lf there
procedures to respond to such risks are any other reporting responsibilities
2. Obtain understanding of internal controls other than SA, required by law or otherwise
relevant ts audit , but not for purpose of these should be addressed in Separate
opinion on effectiveness on internal controls Se*ion " Reporting on Other Legal &
as IFC as required by companies Regulatory Requirernents "
3. Evaluate on appropriateness of accounting Ll. $ignature of the Auditor - Report is signed
palicies and reasonableness of a*counting by auditor in his personal name, where firm
is appointed , personal name of auditor and
estimates
4. To conclude on management's assessment of in name of audit firm. Membership no of
golng concern and whether material Partner and in case of firm Registration
uncertainty exists number of firm , (fBN) , in audit reports
5. lAlhether FS are prepared as per Fair signed by them
praoentation framework to evaluate over-all 12, Place of Signature * Auditols Report shall
presentation structure and context of financial name Specific Location the city where audit
statements report is signed
work another,Auditor , indicating 13. Date of Auditpr'r fieport * The Date of
report would be the date on which audit
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52 CA AARUGE5H AAADLANI
Purpose Determining lGy Audit rnatters -
1. To enhance communicative While considering we should take into account following
value of auditors report points
2. Provides addhional lnformation L. Areas of higher assessed risk of material
. to lntended users of financial misstatement or significant risk identified in
statements to assist them in accordance with SA 315
understanding matters that in 2. Auditor judgement re[ating to area$ that involve
auditors judgement were of ' rignificant manageffiantludgement including
most significance in audit of ac{ountinE e*tim*te* with,hlgh unc€rtdlilty
firancial statements of current , .3. Effect on audit rf rignificailt
evpnt or tronsactlons
perloo
,,
.', n** c6{!,.lllq during the period ' '. ,
,,:, ',
3. Cnmmunieating key audit
matter$ m8y assiit users in
urdsr$andlns cntit* and areas Communicating Key Audit Matters
, judgemcnt in audited financial lntroductory language in thir section of eudito/$ report

statements shall state that :
L. Key Audit matters are those that are most
Key audit matters is not a substitute to si$nificant in audit of finandul staten'rentr af
following Disclosures (OMG): curr€nt period &
1. Separate opinion on individual l. These iratters are addressed ln qont€xt of
matters financialstatements as a whole and in forming
2. Auditor expressing a modified opinion thereon and auditor does not provide
opinion when required by separate opinion on these matters
circumsta nces of specific
engagement as per SA 705
3. A Substitute for reporting on 5A
570 wtren a material uncertainity
exists relating to events or
conditions that may cast doubt
on going concern
Applicabitity
1. lt is applicable to listed
companies
2. Circumstances in which auditor
dedded to rcrfimunicate key
audit matters
3. When required by law or
regulation
When Auditor disclrimr an opinion ,
rrs €an't use Key audit Matters
53 CA AARUoESH AAADLANI
a -1
Qualified Opinion is lssued When, Consequence of lnability to ohtain audit evidence due
. Auditor after obtaining evidence to Management lmposed limitation
concludes there Ere material
misstatements , hut not
pervasive to financial statements
or
. Auditor is unable to obtain
evidence, but concludes that can
be material misstatements, but
not pervasive
{ Material - Yes
t Persive - No
Adverse Opinicn * Auditor issues

Adverse Opinion when *
. Having obtained Sufficient
appropriate audit evidence
concludes there are material
misstatements & they are
pervasive to financial statements
{ Moterial * Yes
{ Pervasive * Yes
Diselaimer of Opinion
Same
54 CA ,1ARU6E5H TIAADLANI
=
0bjective of Auditor When auditor includes Emphasis of Matter

To draw users attention by way of clear paragraph in auditor's rdport, auditor shall
additional communication in auditor's
report to : 1. lnclude the paragraph within a separate
1. Matter although appropriately section of auditors repoft with appropriate
presented or disclosed in financial heading that includes term "Emphasis of
statements , is of such importance Matter"
it is fundamentalto users
2. lt should give clear reference to matter
being emphasized and to where releyant
understanding of the Financial
disclosures that fully describe the matter
statements or can be found in Financial statements
2. As appropriate any other matter 3. lndicate that auditors opinion is not
that is relevant to users modified in respect of matter emphasized
understanding of audit, auditor's
responsibility or auditor's report
EMPHASIS OF MATTER
.A Paragraph in audito/s report
that refers to matter
appropriately presented or
disclosed in FS, that in audito/s
judgement should be brought to
notice of users for understanding
of fi nancia I statements
. However Auditors opinion is not
modified in this respect
OTHER MATTER
. A Paragraph included in audito/s
report that refers to a matter
other than those presented or
disclosed in F5, that in auditors
judgement should be brought to
notice of users for understanding
of audit , auditor's responsibility
or auditor's report
55 CA MPUGESH MADLANT
1$
]i
a Nature of Comparative lnformation depends Audit Reporting Rega rdin g Corresponding

on requirements of applicable financial Figures
reporting framework When corresponding figures are presented,
I There are 2 broad approaches for auditor opinion shall not refer to
corresponding figu res *xcept
Comparative lnformation - Corresponding
Figures and Comparative Financial
L, lf previous year report included
Qualified or disclaimer or adverse
Statements
opinion and matter which gave rise to
Which approach to follow is specified by law modification is unresolued , auditor shall
or regulation, but may also be specified by also rnodify current period's financial
tarms of engagement statements and also mention both
current period figures and corresponding
2 Broad Approaches of Comparative lnformation figures in descriptian of matter which
Corresponding figures gave rise to modification
. For corresponding figures , auditors opinion 2. lf auditors obtains evidence that a
on tinaneial statements refers to rurrent material misstatement exists in the prior
period onty period financial stataments on which
. Previous year is just given for comparison Unmodifled opinion was issued -
Auditor will see whether issue is solved ,
Comparative fi nancial statements
. For comparative financial statements ,
if not express qualified or adverse
opinion in current period financial
auditors opinion refurs to each p*riod for statements
which financiat statements are presented 3. Prior Period Financial statem€nt not
audited - lf they were not audited
auditor willwrite about same in other
matter paragraPh
Audit Protedures regarding Comparative
Comparative Financial statements
lnformation . In this amounts and dlsclosures for prior
Auditor shall see whether F$ include comparative period are included for comparison with
lnfErmatisn as required by applicable Financial current period , but if audited are referred
Reporting Framework & whether such information to in the auditor's opinion
is appropriately classified, For this Purpose auditor . ln this auditor's opinion shall refer to each
shall evaluate - period for whi*h tuch financial statements
1. Comparative lnformation agrees with are presented on which auditor opinion is
amounts & other disclosures presented in expressed
prior period
. When raportlng on prior perlod Financial
statementt in connection with currBnt
2. Accounting policies reflected in years audit, audhot's opinion dffiers from
compar€tive information are conslstent opinion previously expressed , auditot' shall
with current p*riod or if changes in disclese substantive reasons for different
actounting polices , are properly accounted opinion in Other Matter Paragraph aE per
for, presented & disclosed sA 706
56 CA NARUGE5H iAADLANI
CHAPTER 8 AUDIT REPORT
lnt*r*e[ FinrnciCl Cc$trGI s]$tcm are not applicable ta-fullowing

Stlch Requiraments ef
hivate Companies
S*e Pers+H compa.ny sr
of,lts* thfi$ *$,Fe,r
57 CA MADLANI
'IARU6E5H
csrvlpAHtE$ [,IA1TEF5TO BE Ih'{I.I.JOES IH C*RCI
1. Fir<ed Assets - Maintaining Proper Records, Physically Verified, arry
fifrp[[, aero material discrcpancies if noticed. Title deeds af FA are in narne of
company
The MCA has notified 2. lnver*ury - P*yriccl Verific*fion , Mst€riel discrepancies & how they
Campa nies {Aaditcfls Hepsrt} ere dealt in bock of accauffs
Srde* ?S20 pn 15 Februmy ,
3. [oen* - Compary has Sraflt€d aftl lsan$ t$ pirtis* covered in rcgister
$eitttaimd ult 1*$, if to, it th*f I nnt be cor*pramising to compa*y's
2020 (CARO 2O2Al. CARO 2020 ioterest
4, L#*nfi, lfiv€sttttsrrtn, Guarant+* & Stc*rtty * Fr:ovisions of $ecthon 185
& 1S5 have beet mnrpli€d & dstailsthere of :
5. Fublts Dtps*lte-CsmF*ny has accepted depotits whether dirsctives

issu€d by ftsl heve been follawed
6. Cost fteeor& * M*int**arce 6f cBst records htr b*e* specised,
urh€rtpr *uch acc$untg and record* *re rnade
7. Strtrrtrry Uses * bdent of undirpr*ftd dues sn the l*et dty ef fin**cial
tu.'f* ,
Yg# tatu
(6laf .
58 CA i'IRU6E5H
'IAADLANI

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CHARTS OF CHAPTER g
AUDIT OF UFFER,ENT TYPES

OF ENTITIES
59 CA MRU6E5I{ ITAADLANI
* * * #
n i & # ffi
B
E
# &
ffi ffi
Audit of Expenditure
Audit against Rules & Order
Here we will see rules, regulations and orders issued by executive
authoritiesto see that Expenditure is as per :
t. They are as per provisiors of constitution or any laws

made there under
2. They are not in conflict with orders or rules made by any
higher authority
3.
Theyare as per requirernents ofaudit and accounts as per
C&AG
4. ln case they are not approved by competent authority ,
issuing authority posses$ necessary rule making power
Audit of Sanction
. Expenditure is covered by a sanction &
. Satisfy that authority sanctioninB it , is competent for
the purpose
Audit against Provision of Funds
O Here we will see that -
1. Expenditure has been incurred for same purpose for which
DutiesofC&AG grant and appropriation had been provided &
. Compiling the accounts & subsidiary 2. Amount of expenditure does not exceed the appropriation
accounts and report to made
1. Central Government - Consolidated Propriety Audit
fund of lndia - President O Many times thou expenditure is ssnctioned , provision is
2. State Government - Consolidated made , is as per rules & regulations , but still may be
fund of state - Governor improper , avoidable or not useful expenditure
3. Union Territory - Consolidated fund of O Auditorwill see wisdom, faithfulness & economy of
union t€rritory - Administrat0r transactions
. Audit of Receipts of Union or states O Some General Principles laid down in Audit code are :
. Audit & report on allexpenditures 1. f,xpenditure should not be more than what occasion
from CFI , CFS & CFUT demandr . tven publie cfficer should exercise same
. Audit of Stores & Stocks vigilance as person of ordinary prudence will exercise in his
. Audit of Receipts & Expenditure -
atco$nts
if requirad
60 CA ,iARU6E5H ,IAADLANI
'I I ] t ) I
t
GeneralThings to be Checked for all AUDIT OF EDUCATIONAL INSTITUTE
Entities General
o Review Legal Status of the Entity r Examine Trust Deed or Regulations , in case of
(Proprietor, Partnership, Trust, HUF school and note all provision affecting accounts
Society, Company ) r Read minutes of meeting of managing
r Obtain & Study Fundamental Legal committee or Governing body regarding
Document (MoA, AoA) operation of Bank accounts and sanctioning of
o Review the lnternal Control System of expenditure
Receipts
the entity
o Examine the Powers of members of r Fees from Students
r Check name in Students Fee Register with class
management committee and other
register and test check amount of fees charged
officers
and see there is system of internal check which
o Study minutes of Board meeting or ensures fees are properly charged
Governing Body or Managing r Check fees by comparing cash book with
Committee counterfoils of receipt granted
o Examine Accounting Policies fotlowed o Fees paid in advance is carried forward and
& accounting records maintained r Arrears that are irrecoverable have been
o Check various receipts in the form of written off with sanction of appropriate
organisation in form of fees, rent, authority
income on investments, donations & o Admission fees are credited to Capital fund ,
grants r6,ir., o Free studentship and concessions are granted
r i
Check various Expenditure like staff by person authorised by Managing committee
,
common expenses, capital exp with
r Fines or Late Payments are received and
properly remitted
approval of authority
o Verification of Assets & Liabilities
r Confirm Hostel Dues are received before
students account is closed
Payments r Report old heavy arrears on fees , dormitory
r Verify all PF money of staff has been invested rent to Managing committee
in appropriate securities r Verify rental income with rent agreernent
r Vouch all Capital Expenditure in usual way, (GRrD)
verify same with sanction of committee in r Verify lnterest and Dividend income from
minute book lnvestment, also inspect securities in respect of
r Vouch establishment expenses (Telephone , lnvestments held
stationery, printing etc) and enquire into r Verify any Government or local authority grant
heavy expenditure
r See if expenditure is more than budgeted as and if any expense is disallowed under grant
sanctioned by Managing Committee
and reasons thereof
r |ncrease in salaries of staff has been r See Donations received and if any donations
sanctioned and minuted by committee are for specific purpose, see money was used
Ass€ts for that purpose
. Ascertain that system ordering inspection on Liabilities
receipt and issue of provisions , foodstuffs , r Caution money and deposit paid by students on
clothing and other equipment is efficient and admission is shown as lia[ility in balance sheet
all bills are duly authorised before payment
o Verify inventories of furniture . staff , clothing
, provision and all equipment .
61 CA ,IARUGESH ,I ADLANr
.,1
.:
AUDIT OF HOSPITATS AUDIT OF HOTELS

Receipts General
P Register of Patients * Vouch register of patients lnternal Control - Pilfering is one of biggest
problems in Hotels, $o there should be strong
with copies of bill issued to them to ensure bills
lnternal controls
are prepared in correct period
Receipts
' Also enrure bills have been issued to all Room Sales & Hall Bookirg * The charge for room
patients frorn whom amount was recoverable
sales is normally posted to guest bills by receptionist
. Check cash collections as entered in Cashbook or in case of large hotels by night auditor
with receipts, counterfoils and cther evidence . Check correct no are guests are charged
P lncome frorn lnvestments, Rent - See for correct period with Entry register
lnvestment register te see all income from . Any difference between rates charged
lnterest, Dividend , Rent on Property have and standard rate should be properly
been collected authorised
) Donations * Trace all Subscriptions and . ln many hotels, housekeeper prepares
Donations from cashbook to respective daily occupancy report . see this report ts
registers . compare with guest register and
. Reconcile th* Subscriptions due with .
individuals guest's bill
Proper records are maintained far
suhscriptian register
booking of hallr and other premises for
. Oonations for Specific purpose are used for that
special parties are recovered on basis of
purpose tariff
F Grants * Grants received from Government are Restaurant Eills - Auditor should check restaurant
duly accounted for bilts by reference to KOT {Kitchen order tickets } ,
Payments this wauld help hinn to see Controls over revenue
. Vouch all the Purchases and Expenses cycle
. Verify capital expenditure is incurred with Taxes received from client are paid to Government
sanction of trustees or managing committee authorities
. lncremeilts to staff have been duly authorised Travel Agent & Shops - Auditor should ensure
. Check totals af various items of expenditure money received from travel agents is as per terrns of
credit allowed
with arnount budgeted for them and repaG ta
Payments
trustees or manging committee significant . Cost of minor repairs and redecoration
variations in them
shauld be treated as Revenue Expenditure
Assets . Cost of rnajor alterations and additions to
. See Bepreciation is charged on all assets at Hotel Building should be capitalised
appropriate rates . (.asual Labour * Hotel depends on large
' lnspert bonds , share, scripts, thle deeds of extent on casual labour, se* proper records
properties and compare with those entered in are maintaified and snsura there is *o fraud
Property and lnvestment Register by suggesting proper controls to
. Obtain lnventories, especially sto{k and stcres management
and do physical verification, also compare their ' Commissicn paid to travel agents should be
values with respective ledger balances chacked with reference to agreem€nt on that
behalf
' Examine lnternal cherk as regards receipts and
Assets
issue of stores , medicine, linen, apparatus r
See lnventories like silver , cutlery are treated
clothing, instrument etc, to ensure they are as FA sr lnventory, depends on llfe of asset
properly reccrded in inventory regist€r and are and nature of treatmant follouted by Hotel
and lnventory exists and dafinitions are
closelv
6? CA AARU6E5H MADLANI
& a g B
4 B @
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€;
Audit of Clubs Audit of Charitable lnstatute {Education , religious or any other

General activity for public interest) Eg - Balmission Charitable Trust
. See Financial Powers of secretary General
. Study Constitution under which it is set up
and ifthey have been exceeded ,
report specific cases to managing
committee
Receipts
Entrance Fees * Vouch entrance fees with
members register, counterfoils issued to
thern
S*rbscriptions- Vouch members
subscription wkh counterfoils issued to
them
. Trace recelpts with register of
members for selected period
. Reconcile total subscriptions with
amount due and outstanding
. Arrears are correctly brough
forward from last year
. Arrears are adjusted of current year
. See appropriate steps are taken for
recovery
. Amount eonsidered irrecoverable is
mentioned in audit report
. Advance are properly accounted for
?rir*rE for Food ltems & Amenitiec
. -
Verifu internaf c.hecks mernbers are
charged fcr focdstuffs, drinks
fnterest bearing fixed
Frovided to thern as well as g$ests
and special seryices like billiards ,
record date) and
ttlyrrer*s
Vaueft
c€ars
r 3 Basic Legal forms of charitable entities * Auditor Considerations in Trusts
Trusts, Sorieties & Sectisn I Companies
1. lf charitable institute is Public trust, it will be r Whether accounts are maintained as per
governed by Public Trust Act in relevant state . applicable act & rules
However if no trust exists, then applicable r Whether receipts & disbursements are
legislation would be lndian Trust Act, 1882 proper & money received in form of
2. lt charitable institute is formed as soe iety, it donations is applied as per objects of the
will be governed by Societies Registration Act, trust
1960 r Whether cash balance & vouchers are in
3. Charitable lnstitute can also be formed as custody of manager or trustee are in
non-profit company under Section 8 of agreement with accounts
Companies Act , 2013 r Whether register of movable & immovable
properties is maintained , the changes are
Auditor's Considerations in Case of Societies
communicated from time to time &
r Auditor should ascertain governing legislation inaccuracies rnentioned in previous report
of the society i.e Societies Registration Act
are rectified
1860 or applicable state law
r r Whether property of funds of trust are
Objectives of society need to be ascertained
applied for purpose other than object ar
from its memorandum of association / purpose of the trust
byelaws
r r Amounts of outstandinglar more than one
Ascertain whether society has obtained
year & amounts written atl , if any
registration under Foreign Contribution
(Regulation) Act , 2010 in case foreign
c Whether any money has been invested
contrary to provisions of applicable act of
contributions are received
trust
r Ascertain whether it is registered under
r All cases of improper, illegal or improper
relevarrt provisions of lncome Tax Act which
expenditure or any misconduct on the part
make it possible for tax exemPtion
of the trustees
o Obtain understanding of internal controls in r Whether rnax & min trustees are
respect of donations & various expenditures
maintained
r Evaluation appropriateness of accounting
. Meetings are held regularly as provided in
policies with reference to donations & grants
such instrument
r Some expenses incurred by society are o Whether any of the trustees have any
reimbursed by donors, ascertain how they are
interest in investment of the trust
recognized in financial statements
r o Whether any of the trustees is debtor or
Ascertain any inquiry has been held by
creditor of the trust
Registrar under applicable law or financial
condition & its implication on Auditor's
r Whether any anonymous donations
received are properly accounted for &
opinion
donations in cash are not above limits of
r Ascertain cases of irregular, improper
the trust
expenditure or failure or omission to recover
rnonies or other properties belonging to
. Any special matter auditor thinks necessary
to bring to notice of deputy or assistant
society or loss or waste cf moneY
charity cornmissioner
. Ascertain such expenditure or waste was
caused in consequence of breach of trust or
misapplication or misconduct of governing
body
64 CA Ji1RU6ESH MADLANI
Audit of Local Body Audh Programrne for Local BodY
lncome 1. Local audit wing of state government is
. Property taxes & Octroi in charge of municiPal accounts '
. Other municipaltaxes are profession tax , Sometimes bigger rnuniciPa I
. Taxes on advertisement, tolls, show tax, corporations like Delhi, Mumai have
parking auctions power to appoint their own auditors.
Grants - 2. Auditor should report on fairness of
. General Purpose - Grants given to bridge gap contrnts and presentation of Financial
between needs & resources of local bodies statements . System of financial control
. Speci{ic Purpose Grant * For provision of and adherence to legal or administrative
certain services or performance of certain tasks requirements
. Statutery & Compen*atory Grant * Loss of any 3. Expenditure conforms ta relevant
revenue on taking over tax by state government provisions of the law and is as per rules
frcm local government and regulations framed by competent
Expenses authority
They are endowed with specific functions covering 4. Expenditure is as per provision of funds
. Regulatory 5. All types of tanction either special or
. Maintenance & Development activities general by competent authority
. Expenditure covered by them are classified in 6" Different schernes, programmes and
following heads projects where large expenditure is
General Administration & revenue collection incurred are running economically and
getting expected results (Value for
' Public Health
. Public safety lnvestm*nt)
. €ducation
. Public works &
Audit of Hire Purchase
. Hire Purchase agreernent i$ in writing
Others such as interest PaYment
and is signed by all Parties
Aud itor Ehould Understand Financial Administration
. Hire Purchase agresment specifies
of local Bodies .
clearly *
Some Aspects are :
3.. Hire purchase price of goods
Budgetary Prccedure - This is done to see Financial
accountability and control of expenditure
2. Cash price of goods ,price at which goods
may be purchased for cash bY hirer
Main objective is to ensure funds are raised and money
is spent as per rules and regulations and within limits
3. Date on which agreement shall be
deerned to have commenced
of sanction
Expnditure Coritrol- Here audit is done by state 4. No cf installments & amount of each
goverfiment as it is only way of controlling municipal installnrerrt, Oate & Place of Payrnent
expenditure
5. 6oodtowhich agreerflent relates
Accounting System - Municipal accounting and budget ' Ensure payments are received regularly
as per terms of agreement
format have been criticized as neither simple nor
comprehensible, sometimes providing inadequate
information or excessive . Both these situations are not
conducive to proper system of management
information
b3 CA tlARUoESH AAADLANI
. t
Leasing Company - Feature of LLP

. See Object clause of leasing . LLP shall file "Statement of Accounts & Solvency " in prescribed
company to determine the goods Form 8 with Registrar every year within 30 days from end of
financial year to which it relates
like capital goods , consumer . Every LLP also should file ennual return in Form 11 within 60
durables in respect on which
days of close of Financial year
company can undertake such . Accounts shall be audited in accordance with Rule 24 of LLP ,
activities Rules 2009
. Further whether company can Exemption -
undertake financing activities or . Turnover does not exceed 40 lakh rupees or
not . Contribution does not exceed 25 lacs rupees
. Whether there exists a procedure . However partners of such LLP decide to get accounts of such LLP
to ascertain credit analysis of audited , then they can
lessee like lessee's ability to meet
. Registrar would have power to obtain information from
commitment under lease, past designated partner, partner or employee of LLP
. He can summon any designated partner, partner or employee
credit record , capital strength ,
of LLP in case lnfn is not furnished or registrar is aot satisfied
collateral security etc
with information furnished
' Lease agreement will be seen
Auditorwlll be appointed by designated partners of LLP -
and following points may be . At any point of time for first financial year, but before end of
noted * flrst financial year
1. Description of lessor, lessee , . At least tiirty days prior to end of each financial year {other
equipment and location where than first FY)
equipment is to be kept . Casual vacancy will also be filled by designated partners
2. Amount of tenure of lease , dates . lf desginated partners fail , then partner will appoint auditor
of payment , late charges, Advantages of Audit of [[P
. Helps in detectinB errors & frauds & verification of financial
deposits or advances
statements
3. Whether equipment shall be
Disputes , if any between partners in matters of accounts will be
returned to lessor on termination
solved with help of audited accounts
of agreement and cost shall be Settling accounts between partners at time of admission , death
borne by lessee , retirement, insolvency , insanity
4. Whether agreement prohibits Banks & Financial lnstitutions will lend money to firms only on
lessee from assigning the basis of
subletting the equipment and auditor will help in
authorizes lessor to do so management
. Examine lease proposal form
submitted by lessee requesting Auditors Duty in case of LLP
Iessor to provide hirn equipment
on lease
. Auditor should get definite instructions in writing as to work
. Examine acceptance letter from to be performed by him
lessee indicating equipment has
. Auditor should mention
been received in order and is 1. Whether records of the firm appear to be correct & reliable
acceptable to lessee 2. Whether he has obtain all information & explanation
. See Board resolution authorizing necessary for his work
a particular directsr to execute 3. Whether any restriction was imposed on him
lease agreement
. lf partners maintain minute book , he shall refer any
. Ensure invoice is retained safely resolution passed regarding accounts
as lease is long term f,ontract
. Auditor should read LLP agreement and note following
. See that copes of insurance
provisions - Nature af business , capital contributed by each
policies have been obtained by partner, lnterest for capital contributed , Drawings, Salary
lessor for his records
partner Rights and duties of partners
Profit sharing ratio etc
66 CA ,I RUOESH fi ADLANI
AI,DIT OF NGO Payments
General .Programme and Project Expenses * Verify
. Knowledge of NGO , its mission ,
agreement with danor / contributor supporting
vision, areas of operation and
particular programme or project with respect to
environrnent in which it 0perat6
. Knowledge of all relevant statutes with conditions
regard to amendments , circulars
. ln case projects involving contractt , Ensure
. Legal form of organisation income tax is deducted, deposited, returns and
. NGO's Organisation chart, financial filed and verify terms of contract
and administrative manuals, Project . Establishment Expenses - Verify PF , Life insurance
aad programme guidelines premium , ESIC are deducted and deposited within
. Examination of minutes of Board /MC
time.
/ Governing bcdy
. Study accounting system and internal . Check expenses like postage , stationery ,
control & lnternal check travelling etc
. Setting materiality levels for audit
. Check requirements for Earmarked funds and see
purpose they are used for that purpose
. Nature and timing of reports . Vouch disbursements and expenditure as per
lnvolvement sf experts agre€ment with donors for each of the balances
Review of previous years Assets
Fixed Assets - Vcuch all Acquisition / sale or disposal of
Receipts assets including depreciation and authorisation for same.
Grant for Projects - Agreement with
donors and grant letters to ensure funds
' Check Donor's agreement for the grant
af"e accounted for

' ln case of immovable Broperty check title etc
lnvestments - Check investment register and
Frrtd Raising Program - lnternal controls investments physically ensuring they are in name of NGO
and person who are responsible for . See lnterest is received or not
co{lection of funds , and collections are - Verify lnvestments and disinvestments are for
deposited in Bank daily approval by appropriate authority
*ternbership fees - Fees received with Cash in hand * Physicatly verify cash in hand at close of
rernbership register . Ensure pr0per year and whether it tallies with books of tallies with
cssification is made between entrance books of accounts
iees and annualfees and life membership Bank Ealance * Check BRS and ascertain details of old
-e€5.
and outstandin6 and unadjusted amounts
. Reconcile fees received with fees Inventory - Verify inventory in hand and obtain
to be received during the year certificate from management for quantity and valuation
hftscriptions - Check with subscription of the same
qbter and receipts issued . tiabilities
. Reconcile subscriptions with report . Corpus Fund - Contribution / Grants in corpus
in rnagazine fund should be vouched with letter from donor
. Check rates of subscription
schedule
' Heserves - Vouch transfers from Projeet I
programmes with donor leffers and bcard
ffir=st and Dividend * Check with resolution of NGO .
Fr€stmentS
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67 EA iARUGESH JI,IADLANI
AUDIT ERATIVE
S+me $ate act$ prorlde that socl€ty maY use Res€rve Fund =
Audit ar par fac 1? of fo'operatfue Sacietles Ast, .
ln Business of society as working capital
1912
May invest as per provisiens of act
'.
Regisuer shall audit or person authori$sd by him by
Mav be usad far some plblic purp$s€ likety to
geierul or specialorder in writing shall audit accounts prorilote obiectiYes ofsocietY :
of every registered socJety once at least in every year

Suallllcltisn af Audlter
1. CA0r
2. Person hcldlngdiplartr ln cooperatlve accaun't;
or
Auditor
Government
:pgsture*:ofcorp*rgdr.E*udlt ' ' " :
Sxamtn*ton of gvcrdue [tGLt];.5 Mor:thsto SYears

e*d t:Ere:tha* 5 Xears rnitt llave'to b€ clalsified and
reporEd to auditor
: O*erdu* lnterest ; lnbrsst-tlenld be' excluded.from
intsr€$t$utstaldiagaadaccru€d :'' : :'' '.
C€rttrketion of Bad Debts -When they are written
3. Boroudngt r maY act+pt lnans gnd'depesits Etr rnly. rhan tertif;+d=Le'b*d bv::eudi!or,:'*r.here not
tertifitd,r:fitanagir}g+cfirn+tt€e oJ toeie!? rnu$
frsm its mernbars subi€ctto r€strictierts afid
.*uth$ri*,srlitgoff' ',,, ' "'
,,Valt*tarof A*g*e & f&$Ilthg *&€f-*ifruv*i*ns.€f
AS 2 &A510
Adherence to Coop€radrre Prirxlples -
ch*ck \a&e&€r ableets o{ tqqf$t*ti= ${Sanizaitoa :
h*v€,hen hfuved,till+lri'seofits,lmr*lng',,'
l,lor't*'terrn: o*piofis:;'*Utjn tagns oL.prrxistq',
benefrt to rnemters
€.*psnss
.lhere
f+df$atUia
*t p€lssll',:::,'
lit
lf
*udtt Clstif taSur bY SociatY

Afterlud8pmert of anonar-all pqrformane af rociety,
euditor urill awstd a elass tt s$ietY based on criteria
spcified by registrar
fimanagernant i5 hotsltisfiad'about award of sdit*lass,
:afaudE,
68 CA I,TRUGESH,I,IADLANI
CHAPTER S &UDIT SF DIFFERESIT TYPES OF HNTITIES
AUDIT OT M
Applies to Cooperative Society who C.Gow may direct special audit for such period or periods as
sbjects are not confined to one state specified in order
Funds of multi-state cooperative Additional Condition - Central Government shall order for special
society cannot be utilized for any audit only if Government or State Government wither by itself or
political purpose both hold 5L % or more of paid up share capital in such multi-
Qualifications of Auditor state cooperative society
. CA as p€r CA Act , L949 . Special auditor shall make report to Central Government
Disqualifications . On receipt of report central government may take action
1. Body Corporate . lf Central Government, does not take action within 4
2. Officer or employee of multi- months from date of receipt , Government shall send to
state cooperative society multi-state cooperative society full or extract of report and
3. Person who is member or is in circulate it to members or read before members in
employment of officer or meeting
employee of multi-state . Expenses shall be determined by Central Government
cooperative socity . lt shall be paid by multi-state cooperative society , if they
4. Person who is indebted to fail , it shall be recoverable as arrear of land revenue
multi-state cooperative society lnquiry / lnspection by Central Registrar
or who has given guarantee or . lt may on reguest from -
security regarding thi rd person 1. Federal cooperative to which multi state cooperative
1000 society is affiliated or
2. Creditor or
Poweru & Duties of Auditor 3. L/3'd cf members of board or
. Right to access at all times books
4. tlil.n of total no of members of multi state cooperative
accounts and voucher kept at
society
.
head cffice or elsewhere . Hold an inquiry / inspection or direst some other person to
Shall be entitled to officer or
hold an inquiry into working and financial condition
explanation of such information . However before holding such inquiry / inspection , 15 days
as he may think necessary for
pe#ormance of his duties as
notice must be given to multi state cooperative society
Powers of Person holding lnquiry
auditor
Powerc of Central €olrernment to
. He shall access books, accounts, documents, securities,
Direct Special Audit in rertain cases cash and other properties
Under Section 77 where Central
. He may tell officers of society to hold general meeting by
giving notic* of atleast 7 days before meeting , if officers
Government is of opinion that {5SS} -
. Afairs o{ any multistate fail , he can call meeting
cooperative society are not . Summon any person who is knowledge of affairs of rnulti
managed in sosnd business state cooperative society to appear before him at any place
prinriples or at headguarters of society or any branch
. Managed in a manner that is Cornmsnication of Inquiry
likely to cause serious injury or O Central Registrar shall within period of 3 months of date of
damap to inter€Et of trade, receipt of report, cornmunicate rep$rt of inquiry to multi-
industry or business to which it state cooperative society
pertains
' Endanger its solnenty
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CHAR,TS OF CHAPTER. IO
) I )
70 CA AARU6E5H AAADLANI
:;i::;i:i;i:i=i;i::i;i:i;::;i::i;::i::;i:::;i::i::;i::;i::;:::i;ti:::;::;::i;:::;i:i:t;i:=i::;3ii:i;::i:1i:i;i:i;::i==i=-
Appointment of Auditor Conducting an Audit - Audit of Banks /

1. Banking Company * Appointed at the AGM by Branches lnvolve Following $tager :
Shareholders, but prior approval of RBI is 1. lnitial Consideration by Statutary
needed Auditor
2. Nationalised Bank * Appointed by BOD of the e Declaration of lndebtedness
Bank , but prior approval of RBt is needed r lnternalAssignments in Banks by
3" State Bank of lndia - Appointed by
Statutory Auditor
Comptroller & Auditor General of lndia in
consultation with CentraJ Government
r Communication with previous auditor
4. Suhsidiaries of SBI - Appainted by SBI 2. ldentifuing & Assessing Risk of Material
5. Regional Rural Banks * Appointed by Banks Misstatements
concerned with approval central 3. Understandingthe Bank & its
environment lncluding it* lnternal
Control
Remuneration of Auditors 4. Understand the Bank's Accounting
ln accordance with provisions of Section t4? of Process
Companies Act, 2013 5. Understandingthe Risk Management
Process
Nationalised Banks & SB! * o Oversight & involvement in contrsl
Fixed by RBI in consultation with the Cen$al process by those charged with
Government Governance
r ldentification, measurement and
monitoring of risks
r ControlActivities
r MonitoringActivities
o Reliable lnformation System
6. Engagement Team Discussions
7. Establish Overall Audit Strategy
I, Develop Audit Flan
L Audit Planning Mernorandum
lo.Determine Audit Meterlalfty
ll.Consider 6cing Concern
L2.Assess the Eisk of Fraud including
Money taundering
13.Assess Specific Risks
1
l4.Eisk Associated wtth Outsourcing af
Activities
l$.Respon*e to Assessed Risk$
15,Stre*s Testing
tT,Basel lll Frarnett ark
lS.Reliance on / revietr of cther Heports
bile A ication on ur Phone
71 CA TVIRUGESH AAADLANI
.l'
Regulatory Framework Bank Audit Approach

: Sanking Regulation Att,7949 Based on nature and thrust of operations .
. Rgl Art,1934 nature of adverse features , level of compliance
, Cornpar?ies Act, 3013 of previous reports, and audit risk based on
. Stcte Bank af tndfu Att , 1955 breach of internal controls , audit plan should be
r Stste Bank of lndia (subsidiaries Bank, drawn out
lese) Following questions should be kept in mind while
t Eanking Companies {Acquisition & undertaking / performing control activities
Tmnster ol tJndertakings ) Act, 197A lilho
o Regional Rural Banks 7976, t" Who Performs the control
t lT Act,ZffiA 2. Does the above person have requisite
r knowledge & authority to perform the
Pr*venffon of Money Loundering A*,
control
2002
r What
SerurifiiEtior & Reconstruction of
Finandal Ass*fs & Entarcement of
1. What evidence is generated to prove that
conrolis performed
Securitjes lnterest lct, 2OA2 lSAfrFAfSr/
When
r Credif lnlormation Compa*ies
1. When & with what frequency is co*trol
fegulatio* Act,2ffi5 performed
. Payment& Seftlemertsystern Act, 2ffi7
2. ls frequency enough to pr€vent or detect
Peculiarities involved in Bank Audit are : and correct Risk of Material Misstatements
r Wide Geographical spread of Sanks Where
Network 1. Where is evidence of control retained
r Hug€ volumes & complexity of 2. How long is it retained
transactions 3. ls it available for audit
r Large range ofproducts & services whv
offered
1. Why is control performed
r Ixtensive r.lse of technolcgy 2. What type of errors are pretrented or
detected through performance of control
r Strirt vigil*ncr by Eanking flegulator How
1. trlow is controlprrformed
TYPTS OTAUDIT RIPORTSTO 3E ISSUED 2. What are control activities
tr. Statutory &udit Reput {SA 700, 701, 3. Can these activities be bypassed
705,70S) 4. Can the bypass be detected
2. Long lorm Audlt Rrport as per 5. llow are deviations handled
requirernerts of ilBl Sthtdule 6. What tirne frarne fur
3. Tax Audit Rtport as per lnccrnt Tax Att
1951
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7? CA AARUaESH JV1ADLANI
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6 B
*
Audit of Clubs Auditor shsuld examine efficienry of int*rnal controls

General over advances to determine nature , timing & extent of
. See Financial Powers of secretary his substantive pro*edures
and ifthey have been exceeded , . Advance is given after credit worthiness of
report sPecific cases to managing borroryer and san$ion frsm appropriate
committee
authoritY from bank
Receipts . AII the n*cessary documents should be there
Entrance Fees - Vouch enffance fees with . Compliance with term$ of sanction & end use of
members register, counterfoils issued to
them
funds
Subcriptions - Vouch members
. Sufficient margin is there & it is to b* checked at
subscription with counterfoils issued to regular intervals bY banks
them , Securities like share, debenture should be
. Trace receipts with register of transferred in n*me sf bank
members for selected Period . All securities requiring registration are registered
. Reconcile total subscriptions with in name olhank
amcunt due and outstanding . ln c*se of goods in possessisn of bank, conteilt*
. Arrears are correctly brough of eoods should be t$t tlecked at tinr* of
forward from last year
. Arrears are adjusted of current year
. See appropriatesteps ar€takenfor
recovery
. Amount considered irrecoverable
mentioned in audit report
Categories of NPA
rI substandard Assets - would be one which has
remained NPA for a period less than or equal to 1'2
months -!1% of TotalAmount O/S
1 year 1m
crockery
irrer*ory Doubtful 1m
a Yerify Doubtful 3 years 1&
(rgars, 3. togsAs$Bi- identified [y Bank or
cfiarged ort , but
ryryriate' - 1SS%
eanred. .,,
- Ursddgoods
irrer*ory
E
73 CA ,IARUGESH AAADLANI
_--
Non-Performing Assets NPA for Agricultural Advances * Crop season is time taken
. An Asret becgmes NPA when it from sowing to harvesting
ceases to generate income for Short Duration Crops
Bank. ' Crop Season is less than 1 year
. . lt is NPA , if lnstalment or Principal is overdue for
NPA is an loan or advanc€ when
more than 2 crop seasons
Long Duration Crops
1. lnterest &l or lnstalment of . Crop Season is more than l" year
principal remain overdue for a . lt is NPA , if lnstalment or principal is overdue for
period of more than 90 days in more than 1 crop season
respect of term loan Accounts where there is Erosion in Value of Security /
2. ln respect of CC / OD when it is Frauds done
out of order for more than 9O . lf value of security falls less than 50 % of value
days assessed hy bank, such NPA's may be sftaight away
3. Bill remains overdue for a period classified under doubtful category & provisioning
of more than 9O days in case of should be made as applicable to doubtful assets
bills purchased & discounted
. lf realisable value of security falls less than 1{l % , it
will be classified as loss asset . lt may be written off
or fully provided for by banks
When is it out of order ? ACCOUNTS REGULARISED NEAR ABOUT B/S DATE
L. When amount withdrawn is more . Asset classification of borrower where few credits
than sanctioned limit / drawing are recorded before B/S Date should be handled
power or with care & account should be deemed as NPA
2. When there are no credits or . Central Government Advances where guarantee is
3" When credits are not enough to not revoked / repudiated would be classified as
Standard Assets, but their income of those
cover the lnterest debited during
Advances will still be booked on cash basis , thou
same period
these are standard assets . Because these are
Computation of Drawing Power
treated as standard assets because of guarantee by
' Accounts which exceed drawing central governrnent
power & sanctioned limit should Advances against term Deposits . NSC ,KVP ,lVP etc
be brough to notice of . Advances against all the:e eligible for surrender &
management I head office life policies need not to be treated as NPAs ,
regularly provided adequate margin is available on accounts .
' Drawing power is arrived based After margin is not available it will be treated as
on current stock statement NPA,S
.' However large borrowers, don't Advances Against Consortium *
submit stock statements regularly It should be based on record of recovery of individual
member banks, if all money is paid to lead bank and lead
, so their stock statement should
banks do not pay to member banks.
not be older than 3 months .
. lf account is based on drawing Advances to Bank Staff
/ Classification of NPA is hased on record of recovery
power calculated from stock / Availahility of security or net worth of horrower
statements older than 3 month it should not be considered for HPA
deemed as irregular
llar?ra
/ Asset Classification should be borrower wise and
not facility wise
dttiAu 4
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ff<Ldbu 74 CA MRUGESH ,VIADLANI
I * t s n t t
Audit Approach and Procedures for lncome Schedules of income & expense accounts
Accounts
. Schedule L3 lnterest Eorned

Reasonable Assurance -
In carrying out
a Schedule 14 Other lncome '
audit of income, auditor is primarily
concerned with obtaining reasonable Schedule 75 lnterest Expended
assurance that income took place from Schedule 16 Operation Expenses
transactions in relevant period , income is
recorded in proper amount, period and
proper account Partial Recoveries in NPA's
. Accrual Basis - RBI has advised any
income exceeds -
L. t% of total income of the banks, it Whenever Partial recoveries are
income is taken on gross basis or there, we will recognise income as
2. L% of net profit , if income is taken net per AS - 9 and for past period
of costs , should be considered as per AS 9 amount not recognised will be
. Cash Basis - Any income other than above accounted.
norms, ffiiy be recognised when it is However we need to ensure credits
received or accrual
. lncome on NPA - lt is not recognised until are not out of fresh / additional
it is actually received facilities sanctioned to borrowers
. Reversal of lncome - When a credit Memorandum Account - On NPA,
facility became NPA for the 1sr Time , all bank will reverse all lnterest, but
lnterest accrued and credited for previous still may keep record in
period should be reversed. lt will also Memorandum account for their
apply to Government Guaranteed control purpose
accounts also
. Advances against Term Deposit , KVP,
lVP, Life Policies * May be taken to
inrome account till adequate margin is
available
. Bills Purchased * Outstanding at tlose of
year, the discount received thereon
should be apportioned between the years
. Bills for Collection - Only commission
should be booked after paying to
customer on whose behalf money was
collected
. Re-negotiation - Fees and commission
should be recognised on acrual basis over
period of time
. Test checks lnterest eamed by Banks for
sample items in respect of all loans
75 CA TIARUGESH ,IAADLANI
,/
Audit Approach for Expenses For Audit of Operating Expenses
. ln carrying out audit of lnterest Expense
auditor is concerned with overall 1. Auditor should evaluate system
reasonableness of interest expense by
of internal control relating to
analysing ratios of interest paid of
expenses to determine nature,
different types of deposits and
timing and extent of other audit
borrowings to average quantum of
procedures
liabilities during the year
. Analyse various types of deposits 0/S at 2. Auditor should see Trends in
year end , auditor may carry out respect of maior items of
weighted average interest rate and see expenditure
and cornpare lnterest with Actual 3. Expenses should also be analysed
interest and inquire into difference, if on month on month basis
material 4. Verify expenses with documents
. Auditor should compare Average rate of evidencing purchase / debit note
interest paid with corresponding received
deposits for previous years to analyse 5. Compare reasonableness of
materialdifferences. He can also expenses by comparing it with
compare lnterest month wise previous period
. Auditor should test check on reasonable
basis :
Disclosure of Prior Period items
L. lnterest is provided on alldeposits upto
date of the B/5 , and verify whether
there is any excess or short credit of
a In format of PIL it does not
materialamount specifically provide for disclosure
2, lnterest rates are in accordance with of Prior Period items in current
bank's internal regulations of the RBI years profit and loss, such
directives disclosures should be done if
3. ln case of FD, lnterest rate is as per FD needed
Certificate
4. lnterest on savings Account should be
test checked in accordance with rules
framed by bank in this behalf
5, lnterest on inter-branch balances have
been provided at the rates prescribed by
head office
5. lnterest on overdue / matured deposits
are provided for
76 CA MPUGE5H AAADLANI

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;:!;-1i:]ii1 ; .l .t. r,l' .
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iii,;:..,1j,1jt
l ) o CHAPTER, 1I
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77 CA MF.;UGE6H AAADLANI
)
ENT
Firms system of Quality Control Leadership Responsibilities for Quality of Audit

should include policies & , Engagement partner is responsible for quality of each
procedures addressing each of the audit engagement to which he is assigned as partner
following elements: ' Actions of Engagement Partner & members of
Engagement Team in taking responsibility for over all
1. Leadership Responsibilities quality on each audit engagement emphasize -
for Quality within the firm . lmportance to Audit Quality of -
2. Ethical Requirements L. Performing work that complies with professional
3" Acceptance & Continuance standards & regulatory & legal requirements
of Client Relationships & 2. Complying with firm's quality control policies &
Specific Engagements procedures
4. Human Resources 3. lssuing auditor's report appropriate as per
5. Engagement Performance circumstances
6. Monitoring 4. Ability to raise concerns without fear of reprisals
The Fact that quality is essential in performing audit
engagements
Ethical Requirements relating to an Audit of Financial Statements Acceptance & continuance of client
relationships & audit engagements
Code of Ethics has given Fundamental Principles of Professional Ethics
relevant to auditor conducting audit of financial statements (I-COP) sQC 1 requires that firm obtains
lntegrity i nformation before accepting
Confidentiality Engagement
Objectivity lnformation such as following
Professional Competence & Due Care assists Engagement Partner in
Professional Behaviour deciding Acceptance & Continuance
lndependence of Mind * State of Mind that permits making an opinion of Audit Engagement are
without being affeeted by others, & act with integrity & exercise Appropriate or not :
objectivity & professional scepticism
lndependence of Appearance * Such Facts & Circumstances should not a lntegrity of Principal Owners
be that that third Barty can conclude that auditor's antegrity , objectivity
, Key Management & those
or professional scepticism has been compromised Charged with Governance
Threats to lndependence (SAIF) a Whether Engagement Team
Self lnterest Threat - Occur when firm , its partner or associate could is Competent to perform
benefit from financial lnterest in client . audit & has necessary
Self Review Threat - Review of any Judgement or conclusion reached in capabilities including time &
previous audit .
resources
Advocacy Threats - Promoting Client's opinion to a point , where people Whether Firm &
' believe objectivity is getting compromised
EngagementTeam comply
lntimidation Threat - Threat of replacement over disagreements with with relevant ethical
application of accounting principles or reduce work in response to reduced requirements
fees a Significant matters that have
Farniliarity Threat - Auditors are too sympathetic to client's interests
arisen during current or
Safeguards to lndependenc€
previous audit engagement
When such threat €xists , audit should not teke the audit or put in place
& their implications for
safeguards that eliminate them . lf Auditor is unable to implement adequate
safeguards , he rnust not accept the watk.
contin uing relationsh ip
78 CA MRUOESH MADLANI
I
- Fart 2
Engagement Performance
Firm should establish Policies & Procedures to ensure Engagements are performed in accordance
with Professional Standards & legal & regulatory requirements & Engagement partner issues
reports that are appropriate in circumstances
Through Policies & Procedures -

1. Firm seeks to establish consistency in quality of engagement performance
2. Consistency is accomplished through written or electronic manuals, software tools or
other subject matter specific guidance
3. Matters include
o How engagement teams are briefed on Engagement
o Processes for complying applicable engagement standards
o EngaBement supervision , staff training & coaching
Human Resources Monitoring

Firm should establish Policies & Procedures to
Firm should establish Policies & Procedures
provide it with reasonable assurance that it has
designed to provide that system of quality
Personnel with Capabilities, Competence & control are relevant, adequate , operating
Commitment to ethical Principles necessary to effectively & complied with in practice.
perform its engagements Purpose of Monitoring Compliance with
Policies & Procedures should Address Following Quality Control Policies & Procedures is to
Provide Evaluation of :
Personnel lssues
Recruitment
Capabilities
r Adherence to Professional Standards
Competence & regulatory & legal requirements
Career Development
r Whether Quality ControlSystem is
Promotion designed & effectively implemented
Compensation o Whether firm's quality control policies
Performance Eva uation
I
& proeedures have been appropriately
Estimation of Personnel Needs applied , reports are issued as
appropriate i n circumstances
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79 CA M*U6E5H TTADLANI
+
!. ;
Auditor shall agree with terms of Audit As per SA 2X0 "Agreeing the Terms of Audit Engagement" ,
Engagement with Management or Preconditions for an audit may be defined as " Use by
those charged with Governance as Managernent of an acceptable financial reporting framework
appropriate. Audit Engagement Letter in preparation of financial statements & agreement of
is sent by Auditor to his client
management & those charged with governance to premise
on which audit is conducted "
ln order to establish Preconditions for an audit are present ,
The terms of Audit Engagement shall
Auditor shall
include -
1. Objective & Scope of Audit of r Determine whether Financial Reporting framework is
Financial Statements acceptable &
2. Responsibilities of Auditor Obtain agreement of managem ent
3. Responsibilities of Management ackn owledges and understands its responsibility
4. ldentification of Applicable Preparation financial rel
Financial Reporting Framework framework
for pre pa ration financial For lnternal Control Management considers
state ments
Form & Co ntent of
be ssued by Auditor
Limitation on $coBe Prior to Audit Engagement Acceptance Recurring Audits
lf Management or those charged with Governance put Auditor may not decide to sent new
limitation on scope of auditor's work such that auditor feels Engagement Letter for each period.
he has to issue Disclaimer of Opinion Report However in foltowing factors he has to
Auditor shall not accept such limited Engagement unless prepare New Engagement Letter -
required by law or regulation to do so . Any lndication that entity
misunderstands objective & scope cf
Acceptance of a change ln engagement
Audit
Auditor before completion of Engagement is requested to
change the Engagement
. Any revised or special terrns of audit
engagement
lf Auditor concludes that there is Reasonable Justification
to change the engagement , he shall prepare New o A recent change of Senior
Engagement Letter & lssue report under revised terms and Management
to avoid confusion would not reference to original r A Significant Change in Ownership
engagement or work performed under original engagement r A Significant Change in Nature or Size
lf there is No Reasonable Justification , Auditor should not of Entity's Business
agree & should tell Management to continue the r Change in legal or regulatory
assignment requirements
lf not permitted by Management to continue He shall r Change in Financial reporting
Withdraw from Audit Engagement where possible under framework
law or regulatior n & teport to parties such as owner r r Change in other Reporting
regulator or tho,se charged with governance Raquirement
80 se &tRLr&rsF"{ eftA&l*ANx
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DIFFERENCE BETWEEN SqC f & 5A 220 Firms System of Ethical Requirements

Quality Control Firm should establish Policies & Procedures so firm & its
sQc 1 team comply with ethical requirements contained in
o Deals with all Engagements including Audit , code of ethics issued by lCAl
reviews & other assurance & related service Such Policies & Procedures enable firm to *
1. Communicate its lndependence Requirements
to ks personnel
SA Evaluate that
threats to take
Particular Audit Engagentent
Firm should Establish System of Quality Controlto

provide with reasonable assurance that firm Atleast tak€
comply with Professional Standards & legal &
regulatory requi rements
It includes -
r Leadership Responsibilities for Quality Acceptance & Continuance of Client Relationship &
Within the Firm Audit Engagement
r EthicalRequirements tf there is any conflict between firm & client , it should
. Acceptance & Continuance of Client be properly resolved before accepting engagement
Relationships & Specifi c Engagements Policies & Procedures should include consideration of -
Leadership Responsibilities for Quality within the Firm

e SQC 1 requires firm should establish Policies &
Procedures to promote an internal culture based
on recognition that quality is essential in
performi ng enga gements
Human Resources -
Firm should establish Policies & Procedures to
provide reasonable assurance, that it has
personnel with capability, competence &
Further Perscns
commitment to ethical principles necessary to
perform its engagements
Such Policies & Procedures include *
r Recruitment
Monitoring
The firm should ensure that policies ard procedures r Capabilities
relating to the system of quality control are relevant,
adequate, operating effectively and complled witb in
r Competence
practice. Such policies and procedures should include an
r Career
ongoing csnsideration and evaluation of the firm's r Promotion
srysem of
of a seleclisn N eeds
81 #s &t&Li#Hs$-,{ &AmLANr
MiDraNt
GA Mrugesh Madlani
Mo.: +91 88663 56467
www. m ru g esh mad lan i.co m

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AUDITING & ETHICS

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that regard 4.' Sther MEtt*rsThat A#ect timttation of

Difference Between Audit & *eview

However, Review is a limited assurance €ngagement' lt

However, both %udit" and "revierg" are related to

Audit Definition Auditor Should Keep in Mind Following Points tc Ensure

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gives Assurance to users of Non-Assurance - Practitioner does

Relationship of Audit with Other Disciplines

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AUDTT STR.ATEGY , PLANNING t

Documentation of Audit Plan Audit Strategy Assists Auditor in /

Following Audit Procedures need Planning Process - Elements of planning

o Planning Activities - lt involves

Constructing Audit Programme - Disadvantages of Audit Programme

U:e of Senchmark in Detemtining MaterialitY for Revision ol Materiality

lf the auditor condudes that a lower

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Objectives of lnternal Control

Dewnl+ad Mt:bile Fhane

Auditor needs reasonable assurance that Narrative record

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Test cf contro[s Include

3. Reperfcrmance - involves auditor's independe*t executio* of

tmpact of lT risks i.e on Substantive Types of f-ontrols in an Automated Environment

Assess & Report Audit

control exists if Control

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AUDIT PROCEDURE5TO OBTAIN AUDIT Further Audit Procedures

Using Audit Evidence Obtained in Previous Audits

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€ombination of Methods/Techniques to Designing & Performing Sub$antive Procedures

Audit Evidence Auditor should obtain reasonable assurance , to

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Audit Sampling Approaches to Sampling

Sample Design - While Designing Audit sample Sample Selectlon Methodc

Test of Controls divided by sample size to give a sampling

Nature & Cause of Deviation &

r ln addition such deviation or

However effect of any such

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Ohjective of Auditor is to obtain Sufficient & Physical inventory counting conducted

Auditor can alto Meet External Legal Counselwhen -

. Such Meetings require management's

3. Reperfcrmance - involves auditor's independet executio of

lntre[ FinrnciCl Cc$trGI s]$tcm are not applicable ta-fullowing

5. Fublts Dtpslte-CsmFny has accepted depotits whether dirsctives