Issuu

INDEX

I 7

Sr.No. Chapters Page No. 1A Introduction 1A.1 1A.2 1B Nature, Objective and Scope of Audit 1B.1 – 1B.13 2 Audit Strategy, Audit Planning and Audit Programme 2.1 – 2.7 3 Audit Documentation & Audit Evidence 3.1 3.21 4 Risk Assessment & Internal Control 4.1 – 4.14 5 Fraud and Responsibilities of the Auditor in this Regard 5.1 5.12 6 Audit in an Automated Environment 6.1 – 6.13 7 Audit Sampling 7.1 7.7 8 Analytical Procedures 8.1 – 8.5 9 Audit of Items of Financial Statement 9.1 – 9.49 10A The Company Audit 10A.1 10A.18 10B CARO, 2020 10B.1 – 10B.13 11 Audit Report 11.1 11.12 12 Audit of Banks 12.1 – 12.18 13 Audit of Different Types of Entities 13.1 13.32 Quick Recap List of Standards on Auditing Q.1 – Q.3

Audit 1OA.1 CHAPTER 10A. THE COMPANY AUDIT What to Study? I] Appointment of Auditors > Sec. 139(1), (5), (6), (7) II] Rotation of Auditors -> Sec 139(2), (3), (4) III] Casual Vacancy > Sec. 139(8) IV] Removal of Auditor -> Sec 140 V] Eligibility, Qualification and Disqualification of Auditor > Sec. 141 VI] Auditor not to Render Certain Services -> Sec 144 VII] Remuneration of Auditor > Sec. 142 VIII] Rights and Duties of Auditor -> Sec 143 IX] Penalty for Contravening Provisions > Sec. 147 X] Cost Audit. -> Sec 148 XI] SA 299 Joint Audit of Financial Statements XII] SA 600 Using the Work of Another Auditor

Companies Act, 2013

Contain s

I] APPOINTMENT OF AUDITORS (Section 139)

Appointment of Auditors

A. Government Companies

B. Other than Government companies (PEQ)

Section 2(45) (Subsidiary of a Govt. Co. is also a Govt. Co.)

If stake of ≥ 51% of PUSC to be construed as Voting Powers where shares with differential voting rights have been issued is held by CG or SG or Jointly by both  Appointed by Comptroller and Auditor General of India (CAG) E.g. In SAIL, 55% stake is of Government, hence the auditor is appointed by CAG of India.



An Appointment of Auditors in Government Company (PEQ)

First Auditor Section 139(7)

Appointed by CAG of India

Within 60 days from the date of

Subsequent Auditor Section 139(5)

Appointed by only CAG of India

Within 180 days from the commencement registration of the financial year.

If it fails then within next 30 days The Board of Directors will appoint.

If the Board fails then Members will appoint within next 60 days at EGM by passing an ordinary resolution.

Audit 10A.2

29 Chapters 470 Sections 7 Schedules

B. Appointment of Auditors in other than Government Companies

First Auditor Section 139(6)

Subsequent Auditor Section 139(1)

BOD will appoint within Appointed by the members 30 days from the date of at AGM by passing an Registration of the company ordinary resolution

If BOD fails within the 90 days, from the date of incorporation the members will appoint at EGM by passing ordinary resolution Company to file ADT - 1 with ROC within 15 days of appointment

 Conditions for appointment = Rule 4 (declaration)

The auditor (individual/firm) appointed in Rule 3 shall submit a certificate that:

a) The appointment is within the ceiling limit & the auditor has understood the term of engagement.

b) The appointment will be as per provisions of Sec 141 (no disqualification)

c) No Professional Misconduct is pending/no suits pending

d) List of proceedings listed in certificate is true and correct.

Author's Note: If this is contravened it amounts to Professional Misconduct under clause 9, Part I of Second Schedule. ROTATION OF AUDITORS Section 139(2), (3), (4) 50 Crores

Tenure for (Subsequent of Auditor)

Auditor appointed at 1st AGM can hold the office till 6th AGM, i. e. if a

Practicing CA appointed as first auditor by BOD can be re-appointed as subsequent auditor and can continue till conclusion of 6th year and not Till 5th AGM.

Auditor appointed subsequent to 1st AGM

For Individuals  1 term of 5 years  Cooling period (5 Years)

For Firms  2 terms of 5 years = 10 years  Cooling period (5 Years)

Audit 10A.3 

II]

 Applicability L Listed Public Company U – Unlisted Public Company  PUSC  ₹ 10 Crores P Private Company  PUSC  ₹ 50 Crores A Any Company  whose PUSC requirement is below limit  but Borrowings (Public Borrowings + Public Deposits)  ₹

 Tenure

Author’s Note: -

1. In case of an Audit firm, Partners of the firm may be internally rotated. (if such resolution is passed by SHS)

2. Audit firm shall include other firms whose name or trademark or brand is used by the firm or any of its partners. There should be no common partners between retiring firm & new incoming firm as on the date of appointment

3. Consecutive years shall mean all the preceding financial years for which the individual auditor has been the auditor until there has been a break by 5 years or more.

Manner & Procedure for selection and Appointment of Auditor. [Section 139(1) & Rules]

Does Audit Committee (AC) Exist

Does BOD agree No Yes No

BOD will give own recommendation to SHS

BOD will record reason in writing & ask audit committee to recommend again

PUSC – Paid Up Share Capital SHS Shareholders OR Ordinary Resolution AC will give recommendation to BOD

BOD will forward to SHS who will pass OR

Shareholder will appoint an Auditor by passing Whether such recommendations are proper No ≥ ₹ 10 ₹ 50 T/O ≥ ₹ 100

Audit 10A.4



–

Yes

? Yes

Sec 177: Constitution of Audit Committee Public Company Listed Unlisted Always PUSC

Cr or BORR >

Cr or

SEC 139(9) & 139(10) DEEMED REAPPOINTMENT

A retiring auditor may be reappointed if:

a) He is not disqualified for reappointment

b) He has not given the company any notice in writing of his unwillingness to be reappointed.

c) Special resolution has not been passed at that meeting appointing someone else.

d) Where at any AGM no auditor is appointed reappointed, the existing auditor shall continue to be the auditor of the Company (deemed reappointment).

III] CASUAL VACANCY [SECTION 139(8)]

Casual vacancy means: - Vacation of the office before expiry of the term

Reasons for Casual Vacancy (RTP)

Normal Company Government Company

(Reason can be anything)

Casual Vacancy arises due to Death/Disqualification/ Insolvency.

Appointed by BOD 30 days from Casual Vacancy

Vacancy arises due to resignation only.

1) BOD will be recommended (30 days)

2) Finally approved by the members within 3 months after BOD recommended by calling G.M.

From Casual Vacancy 30 days (CAG)

In case of failure BOD shall fill within next 30 days

Note: - Non-acceptance of appointment by an auditor is not a casual vacancy.

Student’s Notes:

Audit 10A.5

IV] REMOVAL OF AUDITOR (Section 140)

A) Removal of Auditor

140(1) 140(4)

By Members By Members

Before term  At EGM/ AGM Special Notice (SN) u/s 115  Special resolution at AGM

Initiated by BOD

Board Resolution by BOD

Initiated by members

Retiring auditor should not be reappointed

SN can be given by atleast 1% of Voting Power or Maximum ₹ 500000/- PUSC

Apply to CG in Form ADT-2 within 30 days to Copy of SN to the Retiring Auditor seek prior approval & general meeting should be held within 60 days of such approval.

Special resolution in general meeting

OOBH



Auditor has a right to make a written representation and circulate it amongst the members (To defend the removal).

If time is not sufficient to give written representation the auditor should read the representation in the meeting. But a Copy should be filed with the registrar.

If the Tribunal is satisfied that the auditor abuses the right to secure needless publicity then no representation shall be read in the G.M. i.e. representation letter will be circulated.

Note: if written respesnetation of the auditor contains any unsubstaintiated or derogatory remarks it will be considered as professional miscounduct under clause 6 of Part I to the first Schedule to the Chartered Accountancy Act, 1949

Student’s Notes:

Audit 10A.6



B) Resignation/ Removal of Auditor

Resignation Tribunal or CG

Within 30 Days from the Suo Moto Application date of Resignation file ADT-3 CG Other Auditor has to file

ROC ROC NCLT IS SATISFIED

+ + CO CO That the auditor of the Co. have acted in + fraudulent manner or has abated or colluded for other CAG in fraud direct the Co. to change its Auditors Company

For Govt. Co. Cannot be appointed as auditor of any Co. for 5 years

Penalty if, the If application is received from CG then order is passed within 15 auditor fails to intimate days & CG will appoint new auditor

Fine 50K or Audit Fees (whichever is less)

+ ₹ 500/day if failure continues Maximum 2 Lakhs

V] ELIGIBILITY, QUALIFICATION AND DISQUALIFICATION OF AUDITOR 141)

[A] 141(1), (2)]

Individual Practising CA OR Firm whose majority partners are practising in India (Including LLP)

[B] Disqualification [Section 141(3), (4) and Rules]

a) Any Body Corporate (except LLP)

b) An officer or employee of the company. (Directly Related)

c) A person who is partner, or who is in the employment of an officer or employee of the company. (Indirectly Related)

Partner Employee Office Employee

Of company ofOR OR Firm will be Liable for penalty u/s 447Firm will

Audit 10A.7

(Section

Qualification of Auditors [Section

of Auditors

Important

d) A person who, or his relative* or partner (PEQ)

P P R C H A S S

(i) (ii) (iii)

P Person P – Partner R Relative C Company H Holding Co. A Associate Co. S Subsidiary Co.

S Subsidiary of Holding

i. Holds security, however relative/(s) can hold security up to ₹ 1 Lakh face value in the company. In case, if holding of securities exceeds ₹ 1 Lakh, auditor should take corrective actions within 60 days (RTP).

ii. Is indebted for an amount exceeding ₹ 5 Lakhs (> ₹ 5 Lakhs) (RTP) (PEQ).

iii. Has given a guarantee or provided any security in connection with the indebtedness of any third person for an amount exceeding of ₹ 1 Lakh (> ₹ 1 Lakh).

Definition of Relative

Mother Father Sister Brother Son + Spouse Daughter + Spouse

Including all step relative

Spouse Excluding Step Daughter

Having commercial business transaction

e) P P C H A S S S

S Subsidiary of Associate Co.

Exception: - Transactions which are in ordinary course of business & are at Arm’s Length Price e.g. transactions by companies engaged in telecommunication, airlines, hospitals, hotels or other similar business. (PEQ)

f) A person whose relative is a director or is in employment of the company as a director or KMP.

g) Ceiling limit 20 companies (as on the date of appointment) Excluding OPC, Dormant company, small company or Private company PUSC <₹ 100 cr. (PEQ).

[Private company which has not committed default in filing its financial statement u/s 137 and Annual returns u/s 92 of the Act will not be considered in ceiling of 20]

h) A person who has been convicted by a court, of an offence involving fraud, and a period of 10 years has not elapsed from the date of such conviction.

i) A person who, directly or indirectly, renders any service referred to in section 144 to the CHS

Audit 10A.8

[C] Subsequent Disqualification = Casual Vacancy.

If auditor is disqualified u/s 141(3), then he must immediately vacate the office. Such vacation shall be treated as a casual vacancy.

VI] AUDITOR NOT TO RENDER CERTAIN SERVICES [Section 144]

The following services shall not be provided by an Auditor directly or indirectly :

(Key - AAMIR In2 Dangal O)

A Accounting and Book keeping services.

A - Actuarial Services.

M - Management Services.

I - Internal Audit.

R Rendering of Outsourced Financial Services.

In1 - Investment Advisory Services.

In2 Investment Banking Services.

D - Design and Implementation of any Financial Information System.

O Any Other kind of services as prescribed.

VII] REMUNERATION OF AUDITOR [Section 142]

Government Company

Non-Government Company

First Auditor CAG If BOD appoint the auditor, then BOD will decide remuneration If member appoint the auditor, then member will decide remuneration

Subsequent Auditor Recommended by CAG but Fixed by the member in GM or in Approved by member such manner as may be decided in GM for other services

Audit 10A.9



 Audit fees consists of:  Fees for audit engagement  Reimbursement of expenses  Any facilities extended to the auditor  Audit fees will not include remuneration paid



As per Schedule III: - Co. is required to disclose Auditor remuneration

 Dr. to P/L account in notes to account as follows : (C.Y.) (P.Y)

Audit Services xx xx Other Services xx xx xx xx

VIII] RIGHTS AND DUTIES OF AUDITOR [Section 143]

[A] Rights of Auditor

i. Right to access BOA & Vouchers of all time

ii Right to obtain information & explanation

iii. Right to lien BOA (lien = Holding lawful possession) (PEQ)

Auditor can exercise lien only if his fees remain unpaid. Such lien can be exercised over BOA for the year for which fees is unpaid and on which he has worked. However, exercising this right is not practically possible because of:

 Virtue of section 128 which states that BOA are required to be kept at Registered Office &

 In the opinion of council exercising lien attracts disrepute to ICAI and it’s a Professional misconduct under clause 2 of Part IV of the First Schedule.

iv. Right to read out qualification at General Meeting.

v. Right to receive notice and to attend any General Meeting either in person or through representative (eligible to act as auditor)

[B] Duties of Auditor

Sections No. Duty

Section 143(1) Enquiry into certain facts

Section 143(2) Reporting as True and Fair

Section 143(3) Certain matter to be reported whether positive or negative

Section 143(4) Reason for negative qualification

Section 143(5 7) Duties (in regards to Government Company)

Section 143(8) Audit of Branches

Section 143(9) & (10) Compliance with Auditing Standards

Section 143(11) Reporting CARO

Section 143(12 15) Reporting of Fraud

i] INQUIRE 143(1): If any transactions give negative results, then such transactions are required to be REPORTED.

The transactions to be enquired are

Audit 10A.10



a) Advance Term & conditions should not be prejudicial

b) Book entries Should not be prejudicial.

c) Companies not being Investment Company & sold securities at a price < cost (i.e. loss)

d) Loans and Advances shown as Deposits.

e) Personal Expenses charged to revenue.

f) Where any shares have been allotted for Cash, whether it has been received or not and the same has been accounted for

ii] Reporting as to true and fair [Section 143(2)]



Report that the financial statement is free from RMM either due to fraud or error. (True & Fair view = FS made as per AFRF & Schedule III)

 The report shall be made after taking into account the following:Provision of the Act - Accounting and Auditing Standards Matters required to be including in the report

iii] REPORT 143 (3): Whether the examination of transactions give positive or negative Results In both the circumstances, the auditor needs to REPORT

a) Sought and obtained all information and explanations

b) Proper Books of Account.

c) Report on accounts of Branch office

d) Financial statements are in agreement with the Books of Account.

e) Financial statements comply with Accounting Standards/Ind AS.

f) The observations or comments of the auditor on financial matters which have adverse effect on functioning of the company.

g) Any director attracts any disqualifications u/s 164(2)

h) Modification relating to maintenance of Books of Account

i) Internal Financial controls with respect to Financial statements

This is exempt to OPC, Small Company & Private Company whoseTurnover < ₹ 50 crores, & Borrowings < ₹ 25 crores & has not defaulted in return filing (sections 92 or 137)

j) Any other matter as prescribed.



Pending Litigations on its financial position in its financial statement.



Foreseeable losses, if any, on long term contracts including derivative.

 Delay in Investor Education and Protection Fund by the company.

Audit 10A.11

Auditor has received MRL company has not

Advances/Loaned/Invested any funds to any person/Entity/Foreign Company from Borrowing Fund, Share Premium other sources are provided any guarantee.

Received any funds/guarantee from any person/Entity/Foreign Company.

MRL – Management Representation Letter



Other than those stated in BOA

Whether for 1st April, 2022 Co. lies maintained account software for BOA levy feature of audit trail.

 Audit trail is operated throughout the year with no tempering thereof.

NOTE: - Auditor of public company should make a statement u/s 143(3) as to whether the Remunerations paid by the company are in accordance worth sec. 197 of Companies Act, 2013 will be reported u/s 143(3).

(iv) Reasons For Negative qualification [Section 143(4)]



If the auditors have issued opinion as per SA 705, then he has to give reasons for such qualified, adverse or disclaimer of opinion.

 Qualification, Observations or comments on the Financial Transactions or matters mentioned in the Auditor’s Report shall be –

 Read before the company in its general meeting

 Open for inspection by any member of the company

(v) Duties w.r.t. Audit of Government Companies [Section 143(5), (6), (7)]



Duty to follow directions given by CAG



Statutory Auditor must include the following in his report:a) Directions b) Actions c) Impact



Supplementary Audit – within 60 days from the receipt of above Audit report the CAG have right to conduct a supplementary audit.



Comments of CAG – Comments are given by CAG, such comments and supplementary audit is then given to the company. The company shall forward the same to every person entitled to copies of Financial statement u/s 136(1).

Audit 10A.12

vi) Audit of Branches. [Section 143(8)] (RTP)



Main Auditor can audit financial statement of branches.

 However, separate branch auditor may be appointed if required

Indian Branch Foreign Branch

Individual or firm qualified u/s 141(1), (2) An accountant or a person eligible to act as an may be appointed auditor as per the requirement of that country’s law

Signing of Audit Report [Section 145]

Section 145 : - As per Section 145 of the Companies Act, 2013, the person appointed as an auditor of the company shall sign the auditor’s report or sign or certify any other document of the auditor company, in accordance with the provision of sub-section (2) of section 141 and the qualifications, observations or comments on financial transaction or matters, which have any adverse effect on the functioning of the company mentioned in the auditors’ report shall be read before the company general meeting and shall be open to inspection by any member of the company, indicating name of the firm along with firm registration number & name of member with membership number.

Note: 1) An engagement partner of the firm can sign all the audit report on behalf of the firm

2) ICAI has made generation of UDIN mandatory for every signature of Full time Practising Chartered Accountants in phased manner for the following services:

a) All Certificates with effect from 1st February, 2019

b) GST and Income Tax Audit with effect from 1st April, 2019

c) All Audit and Assurance Functions with effect from 1st July, 2019 Therefore, UDIN is being made mandatory for all Audit and Assurance Functions like Documents and Reports certified / issued by full time Practising Chartered Accountants from 1st July, 2019 Further, non-compliance of UDIN directive may attract Disciplinary Proceedings as per Clause 1 of Part II of Second Schedule of The Chartered Accountants Act, 1949.

(vii) Compliance With Auditing Standards [Section 143(9), (10)]

The Auditor has to comply with all the relevant Standards on Auditing (SA).

(viii) Additional Matters of Reporting [Section 143(11)]

The CG may order for inclusion of a statement on specified matters in auditor’s report for specified class of companies (CARO, 2020).

(ix) Reporting of Fraud [Section 143(12 - 15)]

If auditor has reason to believe that an offence involving fraud is being or has been committed against the company by officer or employees of the company then auditor must report such matter to Central Government in following manner:

Audit 10A.13

Report within Company to disclose in Within 2 days report to the AC Board’s BOD (if AC is not constituted)

In Form ADT Audit Committee, AC

a. Nature 45 days seek reply

c. Parties involved reply received not received action is not taken within time within time

d. Remedial action to CG Report to CG 15 days. within 15 days from expiry of 45 days. 2020

Audit 10A.14 Fraud Amount < ₹ 1 crore Amount  ₹ 1 crore

2 days

Report



b. Amount

remedial

(or)

taken Report

within

counted

Applicable to: Statutory, Cost, Branch & Compliance Auditor (PEQ)  Penalty for non-compliance Listed Co. Others Fine ₹ 5,00,000/ Fine ₹ 1,00 000/  Also refer clause (xi) of para 3 of CARO, 2020  Manner of Report:  i. Report shall be sent to Secretary, MCA. ii. In a Sealed cover by Registered post acknowledgement due followed by email. iii. It should be on letter head containing a) Address b) Telephone No. c) E-mail d) Membership No. Analysis By Author:Particular CARO,

3(xi) 143(12) 1) Fraud committed BY whom Company Officer/ Employee Officer/ Employee 2) Fraud committed ON whom Third Party Company Company

4 against against against To

is not constituted, then BOD  Nature  Amount  Parties involved

Min: ₹ 25K

Max: ₹ 5 Lacs

Min: ₹ 10K Intentional Unintentional

Max: ₹ 1 Lac ₹ 50K to ₹ [25 Lacs ₹ 25K to (or) 8 times the amount [₹ 5 Lacs (or) of remuneration] 4 times the (or) 1 year of Imprisonment amount of (or) Both remuneration] labour or other

Audit 10A.15 3) Amount No Limit ≥ ₹ 1 Crore 4) Reporting to Member of the Company Central Government 5) Grounds Notice/Reported Reasons to Believe 6) Reporting By Whom? Statutory Auditor Statutory Auditor, Branch Auditor, Compliance Auditor, Cost Auditor 7) Additional Reporting Statutory Auditor is required to report over whistle blower complain and about the reports and forms filed under sec. 143(12) IX] PENALTY FOR CONTRAVENING PROVISIONS under sections 139 146 & 148. [Section 147]  Penalty Company Officer in default Auditor

 If acted fraudulently or abetted or colluded in fraud with Directors or officers then Penalty u/s 447 shall be levied.  Penalty Civil Criminal imprisonment Fine imposed on Firm of Partner involved in crime X] COST AUDIT (Section 148) [A] Sec 148(1) & Rule 3 - Maintaining Cost Record (in FORM CRA 1) CG may order Companies including foreign company engaged in: 1. Production of goods and 2. Rendering of services To maintain cost record relating to utilisation of material,

item.

Regulated Sector

Telecom, Electricity, Petroleum, Sugar, Drugs, Pharmaceutical & Fertilizers.

Companies

AND

Non Regulated Sector

Iron, Steel, Rubber, Cement etc.

T/O > ₹ 35 crores during PY to include cost record in BOA

[B] Sec. 148(2) & Rule 4 Audit of Cost Records

CG may order to conduct cost audit, if,

Overall annual turnover from all the products and services in PY in case of Regulated sector = > ₹ 50 Cr

Non-regulated sector = > ₹ 100 Cr

AND

Aggregate T/O of individual product or service in PY in case of :

Regulated sector = > ₹ 25 Cr

Non regulated sector = > ₹ 35 Cr

Except:

Whose revenue from exports in foreign exchange > 75% of its total revenue OR

Which in case of operating from SEZ OR

Engaged in generation of electricity for captive consumption

Note: PY = Immediately Preceding Previous Year

[C] Sec 148(1) & Rule 3 Cost Auditor:

i. Cost audit shall be conducted by a Cost Accountant (AMENDMENT) (either individual or Firm.)

ii. Statutory auditor of a company u/s 139 cannot became a cost auditor of the company.

iii. Cost auditor to be appointed in 180 days of commencement of every financial year.

iv. Obtain written consent from auditor.

v. Company to inform cost auditor of his appointment.

Audit 10A.16

 



MCQ – MAY 22

vi. Company to file a notice with CG in form CRA-2 in 30 days of board meeting OR in 180 days of commencement of FY (whichever earlier).

vii. Cost auditor appointed as such will continue till expiry of 180 days of closure of FY or till submission of his Cost Audit Report. [auditor to submit his report FORM CRA 3].

viii. Company in 30 days of date of receipt = furnish such report to CG along with full info & Explanation on every reservation or qualification in form CRA 4 in XBRL Format.

[D] Appointment & Remuneration of Cost Accountant

Audit committee is required u/s 177 No requirement as to Audit committee

Appointment by the Board on Appointment by the Board on recommendation of the committee. its own.

Remuneration Remuneration

* Recommended by Audit Committee Fixed by Board of directors and

* Approved by Board of Directors ratified by the Shareholders.

* Ratified by Shareholders

[E] Condition for appointment

(a) Only individual or the firm can be Cost Auditor in accordance with Companies Act, 2013, the Cost and Works Accountants Act, 1959 and the rules or regulations made thereunder

(b) The Cost Auditor appointment as per section 141

(d) No Professional Misconduct is pending/no suites pending

(e) List of proceeding listed in certificate is true and correct

(F) Removal of Cost Auditor:

He can be removed by BOD through board resolution & by providing reasonable opportunity of being heard.

About appointment of Intimate in new cost auditor

BOD CRA 2 Central Government

(G) Casual Vacancy:

In case of casual vacancy due to death, resignation or removal, BOD shall fill such vacancy within 30 Days & inform CG regarding appointment of Cost Auditor in form CRA - 2 (As depicted above)

Audit 10A.17

Audit 10A.18 Author’s Note: - Refer 3(vi) of CARO, 2020  Forms Note:CRA 1  Maintenance of Cost Records CRA 3  Cost Audit Report (Format) CRA 2  Appointment of Cost Auditor CRA 4  Filing Cost Audit Report with C.G. Student’s Notes:-