auditing important areas
DESCRIPTION
Some of the Important areas in CA IPC Auditing for this November AttemptTRANSCRIPT
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CA ARUN KUMAR THIRAKKANAM
GURUKUL FOR CA
Important Areas for CA IPC November Attempt
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Some General Points
Students are adviced to refer to the RTPs for the
November Attempt without any failure
Answer the practical questions in three parts
o Facts of the case
o Provisions of the law or standard
o Analysis and Conclusion
Try to refer the section numbers and standard
numbers as far as possible
With respect to the true or false statements try to
give the reason for your answer in three of four
lines
Vouching, verification, and special audits related
questions must be answered points wise
Wishing you all the success
CA T Arun kumar
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What are the advantages of an Independent Audit?
Safeguards the interest of persons who are not associated with the management of the entity.
Acts as a moral check on the employees from committing frauds.
Helpful in calculating taxes, negotiating loans
Helpful in determining the purchase consideration for a business.
Useful in settling trade disputes for higher wages or bonus
Useful in settling claims in respect of damage suffered by property, by fire or some other calamity.
Detects internal control weaknesses.
Audit ascertains whether the necessary books of account and allied records have been properly kept.
Audited accounts are of great help in the settlement of accounts at the time of admission or death of partner.
Government may require audited and certified statement before it gives assistance or issues a license for a
particular trade.
What are the factors influencing existence of frauds and errors?
The risk of fraud or error in the financial statements depends upon so many factors such as
Integrity and competence of the management
Internal controls weaknesses
Availability of audit evidences
Unusual pressures upon the entity
Unusual transactions in the entity
What are the inherent limitations of an audit?
As per SA 200 the auditor can only obtain reasonable assurance because of the following limitations that the audit
suffers from-
Nature of Financial Reporting: Accounting involves accounting estimates. The accounting estimates are based
upon certain assumptions. There is always a risk that the assumptions may not be correct. Examples: Depreciation,
provisions etc.
Nature of Auditing: During the course of audit the auditor will be mostly relying on the information provided by
the management of the entity. The management at times may not provide information to the auditor or may
mislead the auditor by providing wrong information to the auditor and in these cases it will not be possible for the
auditor to arrive at a correct opinion.
Nature of Audit evidences: During the course of audit most of the evidences collected by the auditor will be of
persuasive in nature than conclusive.
Time and cost constraints: The audit has to be completed within certain cost limits and time limits. Thus for the
entities with huge volumes of transactions it might not be possible for the auditor to go for total verification. Most
of the times the auditor resorts to test checking or selective basis of checking. As the auditor is not verifying all the
transactions there is obvious risk that the auditor may not be able to identify all the misstatements.
Limitations of Internal Controls: The auditor for the purposes of his audit relies on strengths and weaknesses of
internal controls. However the internal controls do suffer from certain limitations. At times they look strong but
may not prevent the frauds and errors due to the limitations like collusion, manual errors, and managements
abuse of power and business changes.
Define True and Fair view
The term true and fair view is not exhaustively defined. It includes the following aspects.
Following accounting standards, consistency in accounting policies.
In case of a company preparation of financial statements in accordance with Schedule III, and in case of
companies like insurance, banking and electricity companies in accordance with their respective statutes for
whom schedule III is not applicable.
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Following the pronouncements of ICAI issued in this regard (guidance notes, accounting standards)
Proper valuation and disclosure of assets and liabilities along with charges on assets in accordance with
accepted accounting principles.
Separate disclosure of all unusual, exceptional or non recurring items.
Preparation of Books of accounts on accrual basis and double entry system
Compliance with going concern assumption and prudence concept.
What is scope of an audit (or) Explain OVER ALL APPROACH FOR AN AUDIT
Examination of the accounting and internal control system. Reviewing the system and procedures to find out
whether they are adequate and comprehensive and incidentally whether material inadequacies and
weaknesses exist to allow frauds and errors going unnoticed.
Checking of the arithmetical accuracy of the books of account by the verification of postings, balances, etc.
Verification of the authenticity and validity of transaction entered into by making an examination of the
entries in the books of accounts with the relevant supporting documents.
Ascertaining that a proper distinction has been made between items of capital and of revenue nature and that
the amounts of various items of income and expenditure adjusted in the accounts corresponding to the
accounting period.
Comparison of the balance sheet and profit and loss account or other statements with the underlying record
in order to see that they are in accordance therewith.
Verification of the title, existence and value of the assets appearing in the balance sheet.
Verification of the liabilities stated in the balance sheet.
Checking the result shown by the profit and loss and to see whether the results shown are true and fair.
Where audit is of a corporate body, confirming that the statutory requirements have been complied with.
Reporting to the appropriate person/body whether the statements of account examined do reveal a true and
fair view of the state of affairs and of the profit and loss of the organisation
What are the basic principles governing an audit?
The following are some of the basic rules that the auditor should follow while conducting an audit.
a. Integrity: The auditor should be straightforward, honest and sincere in his approach to his professional work.
b. Objectivity: The auditor should not hold any other contradictory works.
c. Independence: The auditor must be fair and must not allow prejudice or bias to override his objectivity. He
should maintain an impartial attitude.
d. Confidentiality: The auditor should not disclose any information to a third party without specific authority or
unless there is a legal or professional duty to disclose.
e. Skills and competence: The audit should be performed and the report prepared with due professional care by
persons who have adequate training, experience and competence in auditing. The auditor requires specialised
skills and competence which are acquired through a combination of general education, knowledge. The
auditor requires a continuing awareness of developments including pronouncements of the ICAI on
accounting and auditing matters, and relevant regulations and statutory requirements.
f. Work performed by others: When the auditor delegates work to assistants or uses work performed by other
auditors and experts he continues to be responsible for forming and expressing his opinion on the financial
information. However, he will be entitled to rely on work performed by others, provided he exercises
adequate skill and care.
g. Documentation: The auditor should document matters which are important in providing evidence that the
audit was carried out in accordance with the basic principles.
h. Planning: The auditor should plan his work to enable him to conduct an effective audit in an efficient and
timely manner. Plans should be based on knowledge of the clients business.
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i. Audit Evidence: The auditor should obtain sufficient appropriate audit evidence through the performance of
compliance and substantive procedures to enable him to draw reasonable conclusions there from on which to
base his opinion on the financial information.
j. Accounting System and Internal Control: Management is responsible for maintaining an adequate accounting
system incorporating various internal controls to the extent appropriate to the size and nature of the business.
The auditor should reasonably assure himself that the accounting system is adequate and that all the
accounting information which should be recorded has in fact been recorded. Internal controls normally
contribute to such assurance.
k. Audit conclusions and reporting: The auditor should review and assess the conclusions drawn from the audit
evidence obtained and from his knowledge of business of the entity as the basis for the expression of his
opinion on the financial information. The audit report should contain a clear written opinion on the financial
information and if the form or content of the report is laid down in or prescribed under any agreement or
statute or regulation, the audit report should comply with such requirements.
List down the differences between Final & Continuous Audit
Continuous Audit Final Audit
Periodical Execution of Audit Audit conducted at the year end
Can cover more number of transactions Has to go for selective basis of verification
Detects misstatements at the earliest Detection of misstatements after year end
Increased cost Reduced cost
Disturbs the clients routine works Comfortable for the client
Develops informal relation with clients staff Less chances of informal relation with clients staff
In depth examination might not be possible In depth examination possible
Chances of manipulation of audited books No chances of manipulating audited books
Lacks continuity of work Audit is completed at a stretch
Reliable financial information at any time Reliable financial information after year end
Write about Audit Methods
1. Inspection: Inspection involves examining records or documents, whether internal or external, in paper form,
electronic form, or other media, or a physical examination of an asset. Inspection is mainly used with respect
to verification of documents and tangible assets.
2. Inquiry: Inquiry consists of seeking information of knowledgeable persons, financial and non- financial, within
the entity or outside the entity. Inquiries may range from formal written inquiries to informal oral inquiries.
Responses to inquiries may provide the auditor with information not previously possessed or with
corroborative audit evidence.
3. Observation: Observation consists of looking at a process or procedure being performed by others, for
example, the auditors observation of inventory counting by the entitys personnel, or of the performance of
control activities.
4. External Confirmation: An external confirmation represents audit evidence obtained by the auditor as a direct
written response to the auditor from a third party in paper form, or by electronic or other medium.
5. Recalculation: Recalculation consists of checking the mathematical accuracy of documents or records.
Recalculation may be performed manually or electronically.
6. Re-performance: Re-performance involves the auditors independent execution of procedures or controls that
were originally performed as part of the entitys internal control.
7. Analytical Procedures: Analytical procedures consist of analysis of significant ratios and trends.
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Write about Surprise Check
Surprise check refers to verification of certain areas without any prior intimation to the client.
The surprise check is normally conducted in areas such as cash, inventory and internal controls.
Through performing these surprise checks the moral check on employees will increase and more over
certain frauds can be identified only through these surprise checks.
While carrying out these surprise checks the auditor has to keep time and areas of verification as surprise
elements.
As per ICAIs guidelines the auditor must try and carry out the surprise check at least once in every audit.
However the auditor may consider increasing the frequency of these surprise checks considering the
volumes of transactions, Internal Controls weaknesses and managements instructions.
The observations during the surprise check have to be reported to the appropriate level of management
and TCWG.
What is In-depth Examination?
It implies examination of a few selected transactions from the beginning to the end through the entire flow of the
transaction, i.e., from initiation to the completion of the transaction by receipt of payment of cash and delivery or
receipt of the goods. This examination consists of studying the recording of transactions at the various stages
through which they have passed. At each stage, relevant records and authorities are examined; it is also judged
whether the person who has exercised the authority in relation to the transactions is fit to do so in terms of the
prescribed procedure. For example, if payment to a creditor is to be verified in depth, it would be necessary to
examine the following documents:
The invoice and statement of account received from the supplier.
The entry in the inventory record showing that the goods were received.
The Goods Received Note and Inspection Certificate showing that the goods on receipt were verified and
inspected.
The copy of the original order and authority showing that the goods in fact were ordered by an authority
which was competent to do so.
It is to be emphasized that, so far as the management is concerned, the internal control should have willing
acceptance at the hands of the employees and there should exist proper mechanism for such motivation.
List down the situations where the Engagement Letter has to be re circulated in case of Recurring Audits
In case of a recurring audit, the auditor may decide not to send a new engagement letter each period. However,
the following factors may make it appropriate to send a new letter:
Any indication that the client misunderstands the objective and scope of the audit
Any revised or special terms of the engagement.
A recent change in senior management, board of directors or ownership.
A significant change in nature or size of the clients business.
Changes in Legal requirements, ICAIs pronouncements
Should the auditor accept the changes requested by the management in engagement letter?
An auditor who, before the completion of the engagement, is requested to change the engagement to one which
provides a lower level of assurance, should consider the appropriateness of doing so.
The auditor would consider carefully the reason given for the request, particularly the implications of a restriction
on the scope of the engagement, especially any legal or contractual implications.
If the auditor concludes that there is reasonable justification to change the terms of engagement he will prepare
and give a new letter of engagement to the management. If the auditor is unable to agree to a change of the terms
of the audit engagement and is not permitted by management to continue the original audit engagement, the
auditor shall:
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(a) Withdraw from the audit engagement where possible under applicable law or regulation; and
(b) Determine whether there is any obligation, either contractual or otherwise, to report the circumstances to
other parties, such as those charged with governance, owners or regulators.
What are the factors to be considered while deciding upon Materiality?
Materiality is a relative term and it differs from one audit to another and one area to another. The following
aspects must be taken into consideration while deciding up on the materiality
At times the financial reporting framework applicable to the entity may mention the materiality levels for
certain areas. If that is the case the auditor can adopt those materiality levels.
Most of the time the materiality is decided on the basis of the amounts involved.
Sometimes even a small amount may become material considering its nature.
The items which are material in the previous year will be considered material even for the current year.
What are the factors that influence the extent of reliance on Analytical Procedures?
The extent of reliance on analytical procedures depends upon the materiality, strengths and weaknesses of
internal control system, time availability to perform other audit procedures, risks involved and accuracy of
prediction. (Write in detail)
What is Audit risk and its components?
Audit risk is the risk that some of the material misstatements may remain undetected and the auditor gives an
audit opinion which is not appropriate. Audit risk arises due to the following risk factors -
Inherent risk is the risk that there will be material misstatement in accounting process when there were no related
controls.
Control Risk is the risk that internal control existing will fail to control misstatements.
Detection risk is the risk that substantive test of details will fail to detect misstatements.
Write about Risk Assessment Procedures
Risk Assessment Procedures and Related Activities:
a. Risk assessment procedures are those audit procedures which are carried out to identify the risks involved
in an audit. Risk assessment procedures by themselves do not provide sufficient appropriate audit
evidence on which to base the audit opinion
b. The risk assessment procedures shall include the following:
o Inquiries of management, and of others within the entity
o Analytical procedures.
o Observation and inspection
o Discussion among the engagement team.
o Using previous experiences
c. The engagement partner and other key engagement team members shall discuss the susceptibility of the
entitys financial statements to material misstatement.
Write about Assertion level and Financial Statement level risks
The auditor has to assess the effect of identified risks both at financial statement level and assertions level.
A. Financial Statement Level:
a. Risks of material misstatement at the financial statement level refer to risks that relate pervasively to
the financial statements as a whole and potentially affect many assertions. Risks of this nature are
not necessarily risks identifiable with specific assertions at the class of transactions, account balance,
or disclosure level.
b. The following risks are some examples for risks at financial statement level
o Concerns about the integrity of the entitys management
o Concerns about the conditions and reliability of an entitys records
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o Unusual pressures on the management
o Nature of the entitys business
o Factors affecting the industry in which the entity operates.
B. Assertion Level:
a. Risks of material misstatement at the assertion level for classes of transaction, account balances and
disclosures need to be considered.
b. Some of the examples for assertion level risks are
o Quality of accounting system, i.e., financial statements susceptibility to misstatements.
o Complexity of transactions requiring the work of an expert.
o The degree of judgment involved in determining account balances.
o Susceptibility of assets to loss or misappropriation.
o Transactions not subject to ordinary processing
What are the precautions to be taken while preparing an Audit Programme?
As per SA 300 the auditor has to consider the following aspects while planning an audit.
The auditor has to first decide up on whether or not to accept or continue the audit engagement. The
auditor has to take this decision by keeping in mind firms policy, legal requirements, ethical
requirements, previous experiences and communication with the previous auditors
After deciding up on acceptance or continuance of the audit, the letter of engagement has to be prepared
and submitted to appropriate levels of management and TCWG
The auditor has to obtain the knowledge of business of the entity. The knowledge of business is very
helpful in understanding the risks that may exist in the entity that should be considered while planning.
The knowledge about business can be obtained by referring to preliminary documents such as
MOA/AOA/bye laws, Annual reports, previous working papers, industrial journals inquiring management
and TCWG etc.
To plan his audit the auditor has to first understand his scope of work. He has to carry out compliance
procedures, risk assessment procedures and analytical procedures in order understand the risks involved.
On the basis of risks involved the auditor has to decide upon nature, extent and timing of the audit
procedures.
The audit programme prepared has to be changed from time to time depending up on the results from
carrying out the programmed audit procedures.
The audit programme and changes made during the course of audit along with the reasons behind those
changes have to be documented properly.
While planning an audit the auditor has to involve the audit team and has to conduct periodical meeting
with them during the course of the audit to review their work.
List down the limitations of Internal Control System
The potentiality for human error.
The possibility of dilution of controls through collusion.
The possibility that a person exercising control could abuse (misuse) that authority.
The possibility that control procedures may become outdated.
When a company is required to have an Internal Auditor? (Important for Practical Questions)
As per section 138 of the Companies Act, 2013 the following class of companies shall be required to appoint an
internal auditor or a firm of internal auditors, namely:-
every listed company
every unlisted public company having-
o paid up share capital of fifty crore rupees or more during the preceding financial year; or
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o turnover of two hundred crore rupees or more during the preceding financial year; or
o outstanding loans or borrowings from banks or public financial institutions exceeding one
hundred crore rupees or more at any point of time during the preceding financial year; or
o outstanding deposits of twenty five crore rupees or more at any point of time during the
preceding financial year;
every private company having-
o turnover of two hundred crore rupees or more during the preceding financial year; or
o outstanding loans or borrowings from banks or public financial institutions exceeding one
hundred crore rupees or more at any point of time during the preceding financial year:
What are the methods to verify Internal Control System?
Narrative record: The narrative record is a complete and exhaustive description of the system as found in
operation by the auditor. Actual testing and observation are necessary before such a record can be developed. It
may be recommended in cases of small business.
Check list: A checklist is a series of instructions or questions, which a member of the auditing staff must follow and
answer. When he completes instruction, he initials the space against the instruction. Answer to the checklist
instructions are usually Yes, No or Not Applicable. A few examples of checklist instructions are given hereunder:
Are tenders called before placing orders?
Are the purchases made on the basis of a written order?
Are purchase order forms pre-numbered?
Are the stock control accounts maintained by persons who have nothing to do with: Custody of work,
Receipt of stock, Inspection of stock, Purchase of stock.
Questionnaire: It refers to a list of questions prepared by the auditor in respect of which the answers are to be
provided by the client. ICQ can be prepared for the following areas. Cash and bank balances, Purchases, Sales,
Payroll, Inventory, Fixed assets, Investment. ICQ contains questions which are arranged in logical and sequential
manner in order to know about the working of internal control system. It consists of 3 vertical columns: Column 1 -
Questions, Column 2 - Space for answers, Column 3 - Remarks. Usually the answers are provided by the client in
the form of 'yes' 'no' or 'not applicable'.
Where the system has inherent defect the same is described in detail in the remarks column. ICQ is narrative in
nature. The auditor should be careful while framing the questions because if they are not properly related to each
other they may not bring out the defects existing therein thereby defeating the purpose of ICQ itself.
The main advantage of ICQ is that it can be prepared for any system whether simple or complicated. The main
disadvantage is that it is highly narrative in nature. Finally, the auditor has to report to the management the
weakness observed by him through ICQ.
Flow chart: A flow chart is a symbolic representation of flow of a transaction i.e. this refers to the pictorial
description of an existing system. It is one of the methods of evaluation of IC system of the client. It is giving more
emphasis on diagrammatic representation rather than narrative description
It involves the range of various symbols and signs. It discloses the document and information flow. For eg. In the
case of flow chart for purchases it shows how the various documents such as purchase orders, GRN are generated,
recorded, followed up and disposed of. It shows the origin of the document and the ultimate disposal thereof. The
main advantages of IC flow chart are diagrammatic in nature. However, it has a defect also that everyone cannot
understand it as it involves usage of symbols. Moreover, it cannot be applied in the case of simple systems.
Internal Control Evaluation: It is a summary document prepared by the auditor containing his major observations
during internal controls verification. It contains a set of questions formed in a negative manner which high light the
major weaknesses in the system.
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P ltd., a garment exporter, asked their internal auditor, a practicing chartered accountant, to conduct physical
verification of the yearend inventory and the report of such verification was handed over to the statutory
auditor for their view and use. Can statutory auditor rely on such report?
To determine the adequacy of specific work performed by the internal auditors for the external auditors purposes,
the external auditor shall evaluate whether:
The nature and scope of specific work performed, or to be performed, by the internal auditors;
The assessed risks of material misstatement at the assertion level for particular classes of transactions,
account balances, and disclosures.
The work was performed by internal auditors having adequate technical training and proficiency.
The work was properly supervised, reviewed and documented.
Adequate audit evidence has been obtained to enable the internal auditors to draw reasonable
conclusions.
Conclusions reached are appropriate in the circumstances and any reports prepared by the internal
auditors are consistent with the results of the work performed.
Any exceptions or unusual matters disclosed by the internal auditors are properly resolved.
What are the factors determining the reliability of an Audit Evidence
The Appropriateness depends on relevance and reliability of audit evidence. The reliability of audit evidence again
is a relative term which can be decided based upon the circumstances by keeping in mind the following rules
(Reliability Standards)
External evidence is more reliable than internal evidence.
Internal evidence is more reliable when related internal control system is working satisfactorily.
Evidence obtained by the auditor himself is more reliable than obtained from the entity.
Documentary evidences are more reliable than oral evidences.
Original documents are more reliable than photo copies.
If the evidence received from different sources/forms is consistent there is a high level of reliance.
What are different types of Confirmation Requests?
Positive confirmation request asks the third party to reply to the auditor in all cases either by indicating
agreement / disagreement with the given information or by asking third party to provide information. A
response to positive confirmation request is ordinarily expected to be reliable. If reply to a request is not
received in reasonable time, he may send an additional confirmation request.
Negative confirmation request asks the third party to respond directly to the auditor only if there is
disagreement with the information provided in the request. It is considered to be less persuasive than the
positive confirmation request. Auditor should use them only if risk of misstatement is low, I.C. are
effective, Item contains small amount, Low exception rate is expected, No reason to believe that recipient
may disregard the request.
What are Auditors duties with respect to using External Confirmations?
While using external confirmations the auditor should decide the following
Areas where confirmation technique has to be used
Parties from whom confirmation has to be obtained
Form of confirmation request has to be spent
Date of confirmation
Follow up action in case confirmation is not received
If the management restricts the auditor from obtaining confirmation the auditor has to inquire for the reasons. If it
is found to be intentional the auditor should reassess his risk. He must try and obtain the evidence from other
sources, if it is not possible the auditor may consider modifying his opinion in this regard.
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The auditor need not verify the Accounting policies every year - Comment
The auditor shall obtain sufficient appropriate audit evidence about whether the accounting policies
reflected in the opening balances have been consistently applied in the current periods financial
statements, and whether changes in the accounting policies have been properly accounted for and
adequately presented and disclosed in accordance with the applicable reporting framework.
If the current periods accounting policies are not consistently applied in relation to opening balances in
accordance with the applicable financial reporting framework; or a change in accounting policies is not
properly accounted for or not adequately presented or disclosed in accordance with the applicable
financial reporting framework, the auditor shall express a qualified opinion or an adverse opinion.
How should the auditor deal whenever there is a modification in the previous auditors report?
If the predecessor auditors opinion regarding the prior periods financial statements included a modification to
the auditors opinion that remains relevant and material to the current periods financial statements, the auditor
shall modify the auditors opinion on the current periods financial statements.
List down the situations where sampling is not suitable
Opening and closing balances.
Matters involving estimation and computation. Example, depreciation, taxation etc.
Presentation and disclosure of information in the financial statements.
Items which are material.
Transactions which the auditor is expected to check as required by law
Transactions of non-recurring nature (like export sales) or exceptional transactions.
What precautions the auditor should take when adopting Audit Sampling
The auditor must review the existence, system of internal control. If he finds that the system is either
defective or ineffective, he should not apply test checking.
He should apply test checking if he finds that the transactions to be checked are homogeneous in nature.
The sample of records selected for test checking should be taken on random basis and should be as far as
possible representative in nature.
The sample selected should be representative in character i.e., work of almost all employees, all periods
and all the books should be included.
The time available at the disposal of auditor is also to be considered while applying test check technique.
The auditor must always review the results of test checking with a view to find whether there is any
further scope of checking records, not checked so far. The nature of errors detected through the test
checks may reveal this if they are probed carefully.
What are the advantages of Statistical Sampling?
The sample size does not increase in proportion to the increase in the size of population.
The selection is more objective and is based on mathematical law of probability.
This method gives a minimum sample size associated with a specified risk and precision level.
It also provides a means for taking a calculated risk and corresponding precision i.e., the probable
difference in the result due to checking of transaction on sample basis in lieu of checking the entire
universe.
It may provide a better description of large mass of data than a complete examination of all the data.
Write about Audit Note Book & Audit Completion Memorandum
Audit Note Book:
The audit notebook contains auditors specific observations on matters in respect of which satisfactory explanation
was not readily or immediately available. In the course of follow-up of the observations recorded in the audit note
book, many of them get settled with explanations and evidences produced by the management latter, while
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deleting any such observation, the auditor also records against each of such observation the reasons for deletion.
Thereafter, the auditor is left with only the unsettled observations and considers them from various relevant
angles for preparing the audit report.
Significance:
It is useful as evidence in the court, in case client files a case against the auditor.
Therefore the audit notebook forms an important evidence of work done and points considered in the
course of an audit.
The audit note book is also a very useful document to design the next audit programme so as to concrete
on debatable issues.
Audit Completion Memorandum
It is a summary that describes the significant matters identified during the audit and how they were addressed, or
that includes cross references to other relevant supporting audit documentation that provides such information.
Significance:
Such a summary may facilitate effective and efficient reviews and inspections of the audit documentation,
particularly for large and complex audits.
Further, the preparation of such a summary may assist the auditors consideration of the significant
matters.
It may also help the auditor to consider whether, in light of the audit procedures performed and
conclusions reached, there is any individual relevant SA objective that the auditor has not met or is unable
to meet that would prevent the auditor from achieving the auditors overall objective.
What factors the principal auditor should consider while relying upon the work of Another Auditor?
Principal auditor should advise another auditor regarding use to be made of his report, Areas requiring special
consideration, Time Table for completion of audit, Significant accounting auditing and reporting requirement.
Principal auditor should ask another auditor regarding any limitation on his work.
Auditor should consider his findings. He may discuss them with him and branch officials.
Principal auditor may require another auditor to submit questionnaire w.r.t. work performed by him.
Principal auditor may require supplement tests to be performed by Another auditor ; or himself
In case of foreign component, he should consider another auditors qualification and experience.
If there is modification in another auditors report then, principal auditor should consider whether
modification in his report is required. If the principal auditor is unable to use the work of another auditor and
also unable to perform other audit procedures, he may consider modifying his opinion treating it as a
limitation on scope.
Write about the following
Opening or Introductory Paragraph
The Report should identify the financial statements that have been audited including the following:
Entity
Title of each component of financial statements
Summary of accounting policies and explanatory information
Date & Period covered by each financial statement
Fact that financial statements have been audited
Management Responsibility Paragraph
It states that management is responsible for:
Preparation of financial statements as per applicable FRF
Design, implementation & maintenance of internal controls
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Fair presentation of financial statements (in case, financial statements are prepared as per fair presentation
framework)
Auditors Responsibility Paragraph
Responsibility is to express an opinion on the financial statements
Audit was conducted in accordance with SA issued by ICAI
Auditor complied with ethical requirements
Auditor obtained reasonable assurance as to whether financial statements are free from material
misstatements
Audit involves procedures to obtain evidences about amounts & disclosures in financial statements
Procedures depend on the auditors judgement including RAP
Auditor considers internal controls but do not express opinion thereon (if he is supposed express an opinion
there on he shall omit this phrase)
Audit includes evaluation of accounting policies, accounting estimates & overall presentation of financial
statements
Auditor believes that audit evidences are sufficient & appropriate to provide the basis for auditors report.
Emphasis of Matter Paragraph
The objective of the auditor, having formed an opinion on the financial statements, is to draw users attention,
when in the auditors judgment it is necessary to do so, by way of clear additional communication in the auditors
report, to a matter, although appropriately presented or disclosed in the financial statements, that is of such
importance that is fundamental to users understanding of the financial statements.
When the auditor includes an Emphasis of Matter paragraph in the auditors report, the auditor shall:
Include it immediately after the opinion paragraph in the auditors report;
Use the heading Emphasis of Matter, or other appropriate heading;
Include in the paragraph a clear reference to the matter being emphasised and to where relevant disclosures
that fully describe the matter can be found in the financial statements;
Indicate that the auditors opinion is not modified in respect of the matter emphasised.
Limitation on scope refers to a situation where the auditor is unable to carry out some or all of his planned audit
procedures. In this situation the auditor will not be able to obtain sufficient and appropriate audit evidences which
are necessary in forming his opinion. Where there is a limitation on scope on auditors work which is of material
effect the auditor has to express a qualified opinion, whereas if it is of pervasive effect the auditor has to disclaim
his opinion.
Disagreement with management refers to a situation where in the auditor has identified certain misstatements
during the course of his audit and communicated the same to appropriate level of management & TCWG, however
they have not rectified the said misstatement. When the uncorrected misstatements are of material effect the
auditor has to qualify his opinion, however if it is of adverse effect the auditor must express an adverse opinion.
What are the payments restricted as per Companies Act 2013
Under sub-section (1) of section 143, Clause (e) whether personal expenses charged to the revenue account of
a company should be reported.
Under section 180, the Board of Directors of a company except with the consent of the company by a special
resolution exercises the following powers.
To sell, lease or otherwise dispose of the whole or substantially the whole of the undertaking of the
company or where the company owns more than one undertaking, of the whole or substantially the
whole of any of such undertakings.
To invest otherwise in trust securities the amount of compensation received by it as a result of any
merger or amalgamation;
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To borrow money, where the money to be borrowed, together with the money already borrowed by the
company will exceed aggregate of its paid-up share capital and free reserves, apart from temporary loans
obtained from the companys bankers in the ordinary course of business:
Provided that the acceptance by a banking company, in the ordinary course of its business, of deposits of
money from the public, repayable on demand or otherwise, and with drawable by cheque, draft, order or
otherwise, shall not be deemed to be a borrowing of monies by the banking company within the meaning of
this clause.
To remit, or give time for the repayment of, any debt due from a director.
Under section 181, the Board of Directors of a company except with the prior permission of the company in
general meeting, contribute to the Bonafide charitable and other funds any amount in any financial year, the
aggregate of which exceeds 5% of its average net profits for the three immediately preceding financial years.
Section 182 deals with prohibition and restriction regarding political contributions. According to this section, a
government company or any other company which has been in existence for less than three financial years
cannot contribute any amount directly or indirectly to any political party. In other cases, contribution in any
financial year should not exceed 7 % of average net profits during the three immediately preceding financial
years.
Section 183 permits the Board and other person to make contributions to the National Defence Fund or any other
Fund approved by the Central Government for the purpose of National Defence to any extent as it thinks fit.
Write about Cut off Procedures
Business is a continuous affair involving various activities such as purchase, manufacture, selling etc.
Consequently, accounting of these transactions is also a continuous affair. It is necessary that the transactions
relating to different periods are segregated so that true and fair profit can be arrived at.
The accounting process by which such segregation takes place is called cut off procedure. Such procedure is
adopted in respect of purchases, sales, and inventory.
Ex 1: while closing the books of accounts for the year ending 31st March 2002, the company should ensure
that the sales made in the month of April are not considered in the accounts and at the same time the sales
made in the month of March are not included in the subsequent years accounts.
By adopting this procedure, the auditor is in a position to satisfy himself that the profit or loss disclosed by
financial statements is not affected by fictitious entries.
Some of Important Areas in Vouching
Advertisement Expenses
Obtain the complete list of media of advertisement i.e., newspaper, slides, hoardings, magazines,
television, radio etc. showing the dates, exact location, timings, etc. along with the amounts paid in
respect of each category.
The auditor should see that the advertisement has been authorised by a responsible officer.
See that the advt. exp. incurred for acquisition of capital asset is added to cost of such asset.
Where an advance for advt. is paid for, the auditor should see that the same is adjusted latter.
If there is a regular contract with an advertising agency, see that regular statements are obtained from
the agency showing the advertising media and amounts debited to the client.
See that the voucher is supported by the receipts or paper-cuttings of all the advertisements.
See that the disclosure requirements of Sch.III have been complied with or not.
Travelling Expenses
Refer to the travel policy of the client.
See whether the travel is authorised by responsible official.
Check the calculations in the travelling expenses statements.
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See whether the reports of travelling expenses, submitted by the employees are supported with all the
possible evidences for the amounts spent.
Whether amount claimed for sundry expenses such as tips etc. is reasonable.
See whether personal expenses of the employees are claimed.
Where an advance for traveling expenses is given to the employee, see that the same is adjusted latter.
Where the traveling allowance is given in the place of traveling expenses see the calculations.
If the company had booked tickets or hotel room and made payments directly, see that these have not been
claimed again as reimbursement by the employee.
See that the disclosure requirements of Sch.III have been complied with or not.
Government Grants
Note the amount of Subsidy and the conditions subject to which it is sanctioned.
The application for subsidy submitted to the authorities should be studied.
It should be ascertained whether the grant is of a capital nature for funding assets or of a revenue nature.
Mere computation formula of quantum of grant with reference to the cost of project of itself will not make
the grant a capital nature ipso facto.
The accounting of grant should be in accordance with AS 12 Accounting for Government Grants of ICAI. The
revenue grant can be taken to income statement, with appropriate disclosure.
The capital grant may be adjusted against cost of asset or may be kept in a capital reserve to be transferred to
profit and loss account each year in proportion to depreciation of that asset charged in profit and loss account.
The receipt of the subsidy should be checked with bank statement.
The conditions attached to subsidy should be fulfilled by the company. The auditor should check whether any
liability or refund of grant for breach of conditions could arise
See that the disclosure requirements of Sch.III have been complied with or not.
Payment of Income Tax
Check the computation of income tax.
Check the tax rates applicable for the concerned period.
Check the Income Tax return filed by the client.
Check the adjustment of advance taxes and tax deductions at source before arriving at the final liability.
Check the challans supporting the payment of income tax.
If the income tax is paid against any demand notice issued by the department verify the same.
Ensure that the payment of income tax has been duly accounted and adjusted to the provision created in the
previous year.
See that the disclosure requirements of Sch.III have been complied with or not.
Reporting Requirements as per Clause 7 or CARO 2015
Selling Agents Commission
Ensure that the payment is properly authorised.
Check the agreements with the agent and see whether they are complied with.
Check the correctness of the calculations.
In case commission is given only on the realisation from the debtors verify the amounts received and check
the calculations accordingly.
Check the adjustments w.r.t bad debts, sales returns & Cancelled orders.
See that the disclosure requirements of Sch.III have been complied with or not.
Insurance Premium
See whether the payment is properly authorised.
Check the policy document physically.
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See that the voucher is supported with the receipt for the premium paid.
Find out whether the insurance coverage is adequate.
See that the insurance premium paid for the part of the next year is debited to prepaid expenses account.
Where the policy is not renewed the auditor should enquire into the reasons.
See that the disclosure requirements of Sch.III have been complied with or not.
Payment of Gratuity
Understand the policy of the entity. Examine the basis on which the gratuity payable to employees is worked
out.
Check the computations/amount of gratuity paid to employees who were retired during the year with
reference to number of years of service rendered by them.
See that the annual contributions have been charged to Profit and Loss Account in case the concern is making
the contributions to an outside fund.
See that the annual premium has been charged to Profit and Loss Account in case the concern has taken a
policy from LIC.
See that the contributions/premium paid is adequate.
See that gratuity is recognized on accrual basis.
See that the provisions of the gratuity act have been complied with.
The auditor should treat the actuary as an expert and conduct procedures relevant to checking the opinion of
an expert in accordance with SA 620.
The auditor should check the technical competence of actuary, the input fed to the actuary, the assumptions
made by the actuary, the methodology adopted by the actuary, opinion given etc.
The auditor should bear in mind the relevant pronouncements of AS 15 Employee benefits in this regard. He
should check whether the expenses of provision for gratuity are towards a defined benefit plan or
contribution plan.
See that the disclosure requirements of Sch.III have been complied with or not.
Write about Impairment of assets
Besides charging annual depreciation by the reason of wear and tear etc., to re-instate the correct value of the
assets, impairment loss needs to be provided.
The difference between the carrying amount of an asset and recoverable amount is termed as Impairment
Loss.
The treatment of impairment loss is similar to depreciation except that impairment loss can be re-instated in
future if the recoverable amount of the asset exceeds the carrying amount.
Various external and internal sources of information can be taken as the basis of determining the impairment
for Assets.
The auditor must ensure that provisions of AS 28 are followed.
Some important areas in Verification
Tangible Assets
Carry out Physical Verification.
Verify ownership of plant and machinery by inspecting the purchase invoices.
Register: In case number of P & M owned is large, a Register is generally maintained by the entity. The auditor
should also examine it to ascertain existence & ownership.
Verify the purchases by checking Board resolution & supporting evidences like invoices etc.
In case of sale check the authority for sale with the board resolution and Supporting evidences such as cash
receipt.
See whether proper depreciation is provided in the accounts.
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Ensure that the expenses incurred for installation of the machinery have been capitalised.
In case the plant and machinery is self generated see that no profits have been booked and only the cost
incurred have been capitalised.
Review the repairs account to confirm that distinction is made between capital & revenue expenses.
The auditor should also look into insurance policies taken for P & M.
Ascertain the charges, if any. Sometimes, a floating charge may be created over such assets. If they exist, see
that the provisions companies act have been complied with.
Ensure that the assets are properly disclosed in the as per Schedule III.
In case of vehicles verify the registration documents and vehicle log book maintained by the entity.
In case of Land, verify the registration deed and ensure that no depreciation is claimed.
In case of Buildings, verify the registration deed and municipal tax receipts.
In case of Lease Hold Property, verify the lease agreement and also compliance of AS 19.
In case of fixed assets situated abroad, ensure that the FEMA rules and RBIs regulations have been complied
with.
In case of assets acquired on Hire Purchase system, verify the Hire Purchase agreement and ensure that the
asset is accounted at its cash price.
Intangible Assets
In case the number of patents is large, the auditor can obtain a schedule of patents.
The auditor can verify the existence & ownership of a patent by examining certificates issued upon the
registration of the patent.
In case patent rights have been purchased, the assignment deed surrendering sellers right should be
examined.
The cost of a patent purchased includes its purchase price and the registration cost.
The cost of a patent if developed by the client it self, all research and development expenses, including
registration fees and other direct costs incurred in creating it, should be capitalised.
The auditor should ensure that renewal fees paid have been debited to profit and loss account. The latest
renewal receipt should also be examined to ensure that patent rights are alive.
The auditor should ensure that patents are being shown at cost less amortisation charges.
The cost should be written off over the legal term of its validity or over its useful commercial life, whichever is
shorter.
However, if it is found that the patent rights have already lost substantial part of their commercial value, it
would be proper to value it at their residual commercial value, when it is less than the book value.
In case the product covered by the patent rights does not have any sale value then patents should be shown at
nil valuation notwithstanding any residual life.
Ensure that the assets are properly disclosed in the as per Schedule III.
Investments in securities
Obtain the schedule of investments in hand containing description, date of purchase, face value, book value,
market value, rate of interest, date of payment of interest etc.
Examine whether the objective clause of MOA permits the company to make the investments.
See that purchases/sales are made only after the sanction of proper authority.
Carry out physical verification of the investment certificates or title deeds of immovable properties.
Check the prices paid/received with reference to the brokers contract note.
See that the expenditure incurred on account of transfer fees, stamp duty etc. is included in the cost of
investments.
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Special attention should be paid to investments purchased or sold cum-dividend, ex- dividend, cum-interest,
ex-interest, cum rights/ex-rights or cum bonus /ex-bonus.
Others name: If the entity is holding investments otherwise than in the name of the enterprise, the auditor
should try to ascertain the reasons for the same and examine relevant documentary evidence.
Others custody: The auditor should see the justification for keeping the investments in the custody of third
parties.
Satisfy that the investments are properly valued (AS-13) & disclosed (Schedule III).
In case of Investments in Subsidiary, verify the compliance of AS 21 and also obtain confirmation from the
concerned subsidiary.
In case of Investments in Associate, verify the compliance of AS 23 and also obtain confirmation from the
concerned subsidiary.
In case of Investments in Joint Venture, verify the compliance of AS 27 and also obtain confirmation from the
concerned subsidiary.
In case of Investments in Partnership Firm, verify the partnership deed and also obtain latest financial statements
of the concerned firm to ensure that the share of profit or loss has been properly accounted in companys books.
Inventory
Examine the existence & efficiency of internal control procedures in relation to the custody of stock in trade.
The extent of auditors attendance at stocktaking would depend upon his assessment of the efficiency of
relevant internal control procedures, and the results of his examination of the stock records maintained by the
entity.
See that the instructions issued by the management are being actually followed. Perform test counts to satisfy
himself about the effectiveness of the count procedures.
See that the discrepancies (differences) noticed on physical verification have been investigated and properly
accounted for.
Where stocks of the entity are held by third parties the auditor should also examine the justification for keep-
ing the stock in the custody of third parties. Also obtain written confirmation directly from third parties on the
stocks held.
See that adequate provision has been made for obsolete and spoiled stock.
See that the write offs made against the proper authority.
See that the stock is properly insured.
See that valuation is made at Cost or NRV whichever is lower. See the compliance of AS 2
Ensure that the assets are properly disclosed in the as per Schedule III.
Bills receivable
Obtain the schedule of Bills receivable in hand containing name of the parties, date of bill drawn, Amount, rate
of interest, due date etc.
Carry out a physical verification of the bills receivable on hand.
See that they are in Safe custody.
See that they are drawn under proper authority.
See that they are properly drawn, stamped, duly accepted etc.
Obtain confirmation certificate from bankers in case they are lying with bankers for collection.
See that bills discounted by proper authority & the accounting entries passed are correct.
If discounted bills have been dishonoured, the auditor should ensure adequate provision has been made for
irrecoverable amount.
The auditor should see that amount of bills discounted is shown as a contingent liability.
Ensure that the assets are properly disclosed in the as per Schedule III.
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Loans given
Examine whether the objective clause of MOA permits the company to lend the loans.
Obtain confirmation from the borrowers for the amount of loan.
Check the title deeds of the land mortgaged or other securities.
Check the entries in the Loan register.
Examine the mortgage deed and find out whether it is properly executed. If it is a second mortgage, check
whether the first mortgagee has been informed of the second mortgage and whether he (the first mortgagee)
has the title deeds relating to the property.
See whether amount is being repaid as per the mortgage deed & if not whether reasonable steps have been
taken by the company for recovery of the principal and interest.
See whether loans given to other companies are at a rate of interest not less than the bank rate in case of
Inter Corporate loans.
Compliance of Section .143(1).
Ensure that the assets are properly disclosed in the as per Schedule III.
In case the loan is give to a director, verify the recoveries made and also ensure the disclosure requirements
as per AS 18.
Loans taken
Reconcile the balances in the loan account with that shown in the pass books.
Confirm it by obtaining a certificate from the bank.
Verify the authority under which the loan has been raised. In the case of a company, only the Board of
Directors is authorised to raise a loan from a bank.
Ensure compliance with Companies Act provisions
See that the purpose for which loan has been raised and the manner in which it has been utilised.
See that the terms & conditions of the loan agreement have been complied with or not. (For example,
restrictions as to dividend payment, maintenance of debt equity ratio etc.).
Secured loan: Where the market value of an asset offered as a security against loan has fallen below the
amount of a loan outstanding, the auditor should ensure that the loan is classified as secured only to the
extent of market value of security.
If any loan has been discharged get it confirmed with the loan discharge certificate.
Ensure that the assets are properly disclosed in the as per Schedule III.
In case the loan is taken from a subsidiary, ensure the compliance with AS 18.
In case of Foreign Currency Loans, ensure that the closing balances are restated as per AS 11.
In case of short term loans like over drafts & cash credits, the stock statements submitted to the bank have to
be verified.
Final and Interim Dividend
Examine the companys Memorandum and Articles of Association to ascertain the dividend rights of different
classes of shares.
Confirm that the profits appropriated for payment of dividend are distributable having regard to the
provisions contained in Section 123 If the company proposes to pay the dividend out of past profit in reserves,
see that either this is in accordance with the rules framed by the Central Government in this behalf or the
consent of the Government has been obtained.
Inspect the shareholders Minute Book to verify the amount of dividend declared and confirm that the amount
recommended by the directors.
If a separate bank account was opened for payment of dividends, check the transfer of the total amount of
dividends payable from the Dividends Accounts.
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Check the particulars of members as are entered in the Dividend Register or Dividend List by reference to the
Register of Members, test check the calculation of the gross amount of dividend payable to each shareholder
on the basis of the number of the shares held and the amount of CDT, if applicable. Verify the casts and cross
cast of the different columns.
Check the amount of dividend paid with the dividend warrants surrendered. Reconcile the amount of dividend
warrants outstanding with the balance in the Dividend Bank Account.
Examine the dividend warrants in respect of previous years, presented during the year for payment and verify
that by their payment, any provision contained in the Articles in the matter of period of time during which
amount of unclaimed dividend can be paid had not been contravened.
According to section 123, as it is compulsory for a company to transfer the total amount of dividend which
remains unpaid or unclaimed, within thirty days of the declaration of the dividend to a special bank account
entitled Unpaid Dividend Account of .... Company Limited/Company (Pvt.) Limited. Such an account is to be
opened only in a scheduled bank. The transfer must be made within 7 days from the date of expiry of thirty
days.
The expression dividend which remains unpaid means any dividend the warrant in respect thereof has not
been enchased or which has otherwise not been paid or claimed.
In case any money transferred to the unpaid dividend amount of a company remain unpaid or unclaimed for a
period of seven years from the date of such transfer shall be transferred to Investor Education and Protection
Fund established under section 125 of the Act.
Ensure the compliance, in case dividend is paid in case of inadequate profits.
A company may distribute part of its profits during the two annual general meetings. That means, a company
may declare dividends before the close of the accounting year and finalisation of accounts. Board may from
time to time pay to the members such interim dividend as appeared to be justified by the company.
Sweat equity shares
The shares must be of the class already issued i.e. the sweat equity shares issued by the company must be are
of a class of shares already issued.
At least 1 year must have completed since the Co. became entitled to commence business.
The shareholders shall pass a special resolution authorizing the issue of such shares.
The resolution authorising the issue should specify the number of shares, current market price, consideration,
if any, and the class of directors or employees to whom such equity shares are to be issued.
If the company is listed on stock exchanges, sweaty equity shares can be issued as per the regulations made by
SEBI.
In the case of a company whose equity shares are not listed on any recognised stock exchange, the sweat
equity shares are issued in accordance with the prescribed guidelines.
Bonus shares
The partly paid-up shares, if any outstanding on the date of allotment, are made fully paid-up;
It complies with such conditions as may be prescribed like the company which has once announced the
decision of its Board recommending a bonus issue, shall not subsequently withdraw the same.
The bonus shares shall not be issued in lieu of dividend.
Reduction of Share capital
To verify that the alteration of capital is authorised by the Articles.
See that the procedure prescribed by the articles is complied with.
To inspect the minutes of the shareholders meeting authorising the alteration.
Examining the order of the Court confirming the reduction.
See that the necessary intimation to the Registrar is made.
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Vouching the journal entries recorded to reduce the capital and to write down the assets by reference to the
resolution of shareholders and other documentary evidence.
Verifying the adjustment made in the members accounts in the Register of Members and confirming that
either the paid up amount shown on the old share certificates have been altered or new certificates have been
issued in lieu of the old, and the old ones have been cancelled.
Confirming that the words and reduced, if required by the order of the Court, have been added to the name
of the company in the Balance Sheet.
Utilization of Security Premium Account
Companies Act merely discusses the restriction on utilisation of share premium as contained in Sec.52. The
securities premium account can be utilised only for any of the following purposes:
Issuing fully paid bonus shares to members.
Writing off of the balance in preliminary expenses of the company.
Writing off of the commission paid or discount allowed, or the expenses incurred on issue of shares or
debentures of the company.
For providing the premium payable on redemption of any redeemable preference shares or debentures of
the company.
For buy back of shares u/s 68.
Reissue of Forfeited Shares
See that the articles permit such reissue.
Check whether proper notice was given to member who has defaulted in payment.
Refer to the resolution of the Board of Directors, re-allotting forfeited shares. See that Reissue is made at a
price such that the total sum paid by the original owner of shares together with the reissue price is not less
than the par value. In other words, the discount on re-issue should not exceed the amount forfeited on those
shares.
See that the profits resulting on the reissue of shares credited to the Capital Reserve Account.
Ensure the compliance with Sec 53 of the companies Act.
Some Important Areas in Special Audits
Educational Institutions
The educational institutions are mostly formed as a society or trust. The auditor must refer the preliminary
documents like Byelaws or trust deeds in order understand the objectives of the educational institution and its
rules and regulations. He must also refer to the minutes of the meetings of governing body or managing
committee. In case of university verify the provisions of corresponding statute.
Verification of Fees Receipts: The auditor before verifying the fees receipts must understand the different
types of fees that have to be collected from the students as per the rules of the institution (Eg: Admission fees,
Tution fees, Material Fees and Hostel Fees etc..). He has to verify the following aspects w.r.t fees receipts
o Verify copies of fees receipts
o Cross verification of number of students with class registers
o Over all reconciliation of fees collections
o In case of reimbursements from Government the documents collected in that regard
o In case of fees dues pending for long periods, the reasons for the same.
o See that free studentship and concessions have been granted by a person authorised to do so, having
regard to the Rules prepared by the Managing Committee.
o Confirm that fines for late payment or absence, etc. have been either collected or remitted under
proper authority.
Verification of Donations & Grants received: Auditor has to verify the following aspects
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o Receipts in Bank statements
o Verify terms of Grant sanction letter and its compliance
o Verify whether the donations are used for the purposes for which they have been given
o Verify the accounting of donations
Verification of Investment Income: Auditor has to verify the following aspects
o Understand the entitys investment policy
o Conduct physical verification
o Verify the entries in Investment registers
o Ensure that the incomes are properly recognized on accrual basis periodically.
Verification of Other Incomes: Auditor has to verify the following aspects
o Verify rental income from landed property
o Verify receipts from sale of waste papers in cash book
Verification of Expenses: Auditor has to verify the following aspects
o Verify the governing body approvals for all the capital expenditure incurred
o Compare the actual amounts of expenses with that of budgeted amounts and inquire the abnormal
deviations
o Verify the calculations of salaries
o Ensure that the amounts of provident fund, ESI, professional tax have been properly deducted from
the employees salaries
o Verify the depreciation calculations
o Verify the fixed assets register and ensure that all the fixed assets are properly insured
o Verify the controls in Library with respect issue and recovery of books
The educational institutions can avail tax benefits under Income tax act, the auditor has to ensure that the
available benefits are properly claimed and the conditions if any for claiming those benefits are properly
fulfilled.
The auditor must also verify that the income tax refunds receivable are received properly. If the refunds are
pending for long periods the reasons have to be inquired.
The auditor should ensure that the financial statements are properly prepared and all the funds have been
properly disclosed.
Hospitals
Hospitals are mostly formed as a society or trust. The auditor must refer the preliminary documents like
Byelaws or trust deeds in order understand the objectives and its rules and regulations. If the hospital is
registered as a company the auditor has to go through its memorandum and articles of association. He must
also refer to the minutes of the meetings of governing body or managing committee.
Verification of Consultancy Fees Receipts: The auditor before verifying the fees receipts must understand the
rules of the hospital and the rates of its consultancy fees. In case of multi specialty hospitals the auditor has to
understand the different services that are rendered and its respective consultancy fees. He has to verify the
following aspects w.r.t consultancy fees receipts
o Verify copies of fees receipts
o Ensure that the hospital is having proper controls to ensure that all the services rendered to a patient
are properly billed
o Cross verification of consultancy fees received with patients registers
o In case of reimbursements from Government or Insurance companies the documents collected in that
regard
o See that free consultancy if any have been granted by a person authorised to do so, having regard to
the Rules prepared by the Managing Committee.
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Verification of Donations & Grants received: Auditor has to verify the following aspects
o Receipts in Bank statements
o Verify terms of Grant sanction letter and its compliance
o Verify whether the donations are used for the purposes for which they have been given
o Verify the accounting of donations
Verification of Incomes from Laboratory and Pharmacy: These laboratories or pharmacies may be maintained
by the hospitals on their own or else out sourced. If they are out sourced the auditor has to verify the sharing
agreement with the party and ensure that the hospitals share of income is properly received.
If they are maintained on own the auditor has to verify the controls with respect to billing. He has to verify
that the inventories lying in pharmacy are properly valued. He has to ensure that the medicines which passed
their expiry date are not shown in the inventory balances.
Verification of Investment Income: Auditor has to verify the following aspects
o Understand the entitys investment policy
o Conduct physical verification
o Verify the entries in Investment registers
o Ensure that the incomes are properly recognized on accrual basis periodically.
The auditor has to check whether the receipts of participation fee for seminars conducted by the hospital are
properly accounted and are in accordance the rules and regulations framed.
Verification of Expenses: Auditor has to verify the following aspects
o Verify the governing body approvals for all the capital expenditure incurred
o Compare the actual amounts of expenses with that of budgeted amounts and inquire the abnormal
deviations
o Verify the calculations of salaries
o Ensure that the amounts of provident fund, ESI, professional tax have been properly deducted from
the employees salaries
o Verify the depreciation calculations
o Verify the fixed assets register and ensure that all the fixed assets are properly insured
o Verify the payments made to specialists, surgeons with the help of bank statement and the
agreements with the concerned parties
Hospitals can avail tax benefits under Income tax act, the auditor has to ensure that the available benefits are
properly claimed and the conditions if any for claiming those benefits are properly fulfilled.
The auditor must also verify that the income tax refunds receivable are received properly. If the refunds are
pending for long periods the reasons have to be inquired.
The auditor should ensure that the financial statements are properly prepared and all the funds have been
properly disclosed.
Hotels
A Hotel is usually constituted as a company. Therefore, various provisions of the Companies Act, 2013 relating
to the audit of accounts of companies are also applicable to its audit. The auditor has to refer memorandum
and articles of association along with minutes of its board meetings to understand the rules and regulations of
the Hotel.
Verification of Room Rentals & Banquet Hall Rentals: The auditor has to ensure that the entity is having
proper control to identify the services provided to the guests and bill them properly. The auditor for this has
to understand the different kinds of suites that are available and the tariff rates for the same. He has to verify
the following aspects
o Duplicate copies all bills acknowledging the receipt from guests.
o Corresponding receipts in Cash book or Bank book.
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o Compare the tariff rates throughout the year and obtain the reasons for abnormal differences if any in
this regard.
o Compare the room occupancy ratios for different periods and obtain reasons for any abnormal
deviations.
o For ledgers coming through travel agents or other booking agencies the bills are usually made on the
travel agents or booking agencies. The auditor should ensure that money are recovered from the
travel agents or booking agencies as per the terms of credit allowed.
o The auditor should ensure that proper records re-maintained for booking of halls and other premises
for special parties and recovered on the basis of the tariff.
o The auditor should ensure that proper valuation of occupancy-in-progress at the balance sheet date is
made and included in the accounts.
Verification of Incomes from Bars & Restaurants: These may be maintained by the Hotel on their own or else
out sourced. If they are out sourced the auditor has to verify the sharing agreement with the party and ensure
that the share of income is properly received.
If they are maintained on own the auditor has to verify the controls with respect to billing. The existence of
system of KOT/BOTs and their daily reconciliation has to be ensured. He has to check whether there are
proper controls with respect to storage and issue of stock.
Verification of Other Incomes: Auditor has to verify the following aspects
o Check whether the entity is having proper controls w.r.t parking receipts. Ensure that the parking
receipts are duly accounted in cash book.
o Verify rental income received from rental of space to ATMs, showrooms etc.
o Verify the monies received in cash book or bank statement for sale of scrap.
o In large hotels it is usual to operate a booth to facilitate conversion of foreign currencies to Indian
rupees. The auditor should ensure compliance with the various applicable provisions of Foreign
Exchange Management Act, 1999 and the rules framed by Foreign Exchange Dealers Association.
Verification of Expenses: Auditor has to verify the following aspects
o Verify the approvals for all the capital expenditure incurred
o Verify the calculations of salaries
o Ensure that the amounts of provident fund, ESI, professional tax have been properly deducted from
the employees salaries
o Verify the depreciation calculations
o Verify the fixed assets register and ensure that all the fixed assets are properly insured
o Check whether the entity is claiming higher depreciation rates for its furniture & fittings.
o Commission, if any, paid to travel agents or booking agents should be checked by reference to the
agreement on that behalf.
o The auditor should see that costs of renovation and redecoration are treated as deferred revenue
expenditure, where as costs of major alterations and additions to the hotel building and facilities
capitalised.
o The inventories in any hotel are both readily portable and saleable particularly the food and beverage
inventories. It is therefore extremely important that all movements and transfers of such inventories
should be properly documented
o Pilfering is one of the greatest problems in any hotel and the auditor has to ensure that the hotel is
having proper control system in operation to address these petty losses.
o The auditor has to ensure whether all the applicable licenses have been properly obtained and
renewed periodically
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o The food cost percentages throughout the period have to be compared and abnormal deviations if any
have to be inquired for.
o Ensure that the entity is collecting all the applicable taxes properly and remitting the same to the
concerned authorities within due dates.
Charitable Institutions
The Charitable institutions are mostly formed as a society or trust. The auditor must refer the preliminary
documents like Byelaws or trust deeds in order understand the objectives of the educational institution and its
rules and regulations. He must also refer to the minutes of the meetings of governing body or managing
committee.
Verification of Subscriptions & Donations received: Auditor has to check whether the entity is having proper
internal control system with respect to collection of subscriptions & donations. He has verify the following
aspects
o Verify the counterfoils
o Receipts in Bank statements
o Controls on donation receipts books
o Cross verify the entries in subscriptions & donations registers
o Verify the accounting of donations
Verification of Grants received: Auditor has to verify the amounts of grants received with Bank statements
and corresponding grant sanction letters.
Verification of Investment Income: Auditor has to verify the following aspects
o Understand the entitys investment policy
o Conduct physical verification
o Verify the entries in Investment registers
o Ensure that the incomes are properly recognized on accrual basis periodically.
Verification of Other Incomes: Auditor has to verify the following aspects
o Verify rental income with the help of rental agreements.
o Examine the system of internal check regarding moneys received from box collections, flag days, etc.
and checking the amount received from representatives, with the correspondence and the official
receipts issued.
o Legacies - Verifying the amounts received by reference to correspondence with any figures and other
available information.
o Vouching gross receipts and outgoings in respect of any special functions, e.g. concerts, dramatic
performance, etc., held in aid of the charity with such vouchers and cash statements as are necessary.
In particular, verifying that the proceeds of all tickets issued have been accounted for, after making the
allowance for returns.
Verification of Expenses: Auditor has to verify the following aspects
o Verify the governing body approvals for all the capital expenditure incurred
o Compare the actual amounts of expenses with that of budgeted amounts and inquire the abnormal
deviations
o Verify the calculations of salaries
o Ensure that the amounts of provident fund, ESI, professional tax have been properly deducted from
the employees salaries
o Verify the depreciation calculations
o Verify the fixed assets register and ensure that all the fixed assets are properly insured
o Ensure that all the expenses incurred by the entity are for the purposes for which the charitable
institution is formed.
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Charitable Institutions can avail tax benefits under Income tax act, the auditor has to ensure that the available
benefits are properly claimed and the conditions if any for claiming those benefits are properly fulfilled.
The auditor must also verify that the income tax refunds receivable are received properly. If the refunds are
pending for long periods the reasons have to be inquired.
The auditor should ensure that the financial statements are properly prepared and all the funds have been
properly disclosed.
Government Expenditure audit
Audit against rules and orders: In this auditor looks for whether the expenditure incurred complies with the
relevant provisions of the act and in accordance with the financial rules and regulations.
These rules and orders mainly fall under the following categories:
o Rules and orders dealing with the making of the claims against government, withdrawing moneys from
the Consolidated