About the Author
---
Pranav Jain, -
I-5
Pranav Jain, FCA
Preface TO SECOND EDITION
In the past few years, there has been an increase in NPA of banks some of which are being attributed to corporate frauds including fraudulent financial reporting. This has resulted in increased allegations of negligence by auditors.
National Financial Reporting Authority (NFRA) had in September 2021 released a Consultation Paper on “Statutory Audit and Auditing Standards for Micro, Small and Medium Companies (MSMCs)”
Following are the two verbatim extracts of comments made by NFRA in the Consultation Paper:
Quality Review Board set up by the Ministry of Corporate Affairs carries out review of quality of services provided by the members of Institute and brings out a report on Audit Quality Review each year. A perusal of these reports indicate various non-compliances with standards on auditing, accounting standards, disclosure requirements as per Schedule III among other non-compliances.
All these have resulted in the Institute of Chartered Accountants of India (ICAI), oversight bodies like NFRA, Securities and Exchange Board of India (SEBI) becoming more committed to driving audit quality, primarily through their audit inspection processes and other measures.
NFRA has been carrying out Audit Quality Reviews of various auditors/ audit firms and has released various Audit Quality Review Reports. These reports point out significant deficiencies in audit quality besides
-
I-7
non-compliances with respect to SQC 1, independence requirements, among other non-compliances.
In November 2022, NFRA has issued Audit Quality Inspection Guidelines pursuant to powers granted to it u/s 132(2) of the Companies Act, 2013. The overall objective of inspections is to evaluate compliance of the audit firm/auditor with auditing standards and other regulatory and professional requirements, and the sufficiency and effectiveness of the quality control system of the audit firm/auditor.
ICAI has in 2022 issued Audit Quality Maturity Model (AQMM). More recently in January 2023, NFRA has issued a Consultation Paper on Publication of Annual Transparency Reports (ATR) by Auditors/Audit Firms of Public Interest Entities. Both AQMM and the proposals in the Consultation Paper will bring out qualitative aspects of audit processes of auditors in public domain. This will likely result in a paradigm shift in the way the auditors are appointed.
These measures are largely in response to changing public expectation and the need to better address the gap between what the auditor is required to do and what stakeholders expect the auditor to do.
Expectations from auditors are not entirely misplaced. The word “audit” is intended to convey a clear message to the users of the financial statements: that the auditor has obtained reasonable assurance that the financial statements are free from material misstatement, regardless of the size or type of the entity.
The present situation was very appropriately summed up by a former President of ICAI during his tenure as president:
It is with this background that this book has been written to assist audit staff in carrying out audit of the financial statements. The book comprehensively covers the entire process related to audit of financial statements of companies not following Ind AS and other non-corporate entities (such as Trusts, LLP) starting with appointment/reappointment of auditors and concluding with issuance of audit report. Though the book has been written in the context of accounting standards other than Ind AS, the book will be useful for audit of entities applying Ind AS. This is so because the core concepts such as risk assessment, determining materiality, etc., are similar irrespective of the financial reporting framework. Similarly, audit procedures like obtaining balance confirmations,
I-8
compliances with Companies Act, 2013, testing of borrowings, etc., are identical whether the entity is following Ind AS or other standards. The book provides guidance on “Risk Based Audit” as per Standards on Auditing issued by the Institute of Chartered Accountants of India. It is important to note that the present Standards on Auditing do not distinguish the audit approach required for a “one-person entity” from the audit approach required for a large corporate with facilities at multiple locations and employing thousands of people. . The basic approach to an audit, therefore, does not change just because the entity is small.
The book covers in detail the procedures to be performed by the auditor for each financial statement area, disclosures required by Schedule III (Division 1) and Accounting Standards (other than Ind AS). Practical examples have been included to explain the audit procedures and other concepts, for example, reconciliation of balance of trade payables as per books of account with the balance confirmation received from the party has been explained by way of a numerical example. Similarly numerical examples have been included to explain the concept of FIFO and Weighted average in case of valuation of inventories.
Many audit procedures require an auditor to refer to various provisions of the Companies Act, 2013 and Accounting Standards. An effort has been made to include the applicable provisions of the Companies Act, 2013 in relevant Chapters. For example, relevant provisions of Companies Act, 2013 related to Share Capital have been included in the Chapter on Audit of Share Capital. Similarly relevant extracts of accounting standards have been included in respective Chapters to give an overview of the accounting standard. This will enable the auditor to link the audit procedures of a particular financial statement with the legal requirements and the requirements of the accounting standard.
In addition to the disclosure requirements of Schedule III (Division 1) and Accounting Standards, reporting requirements under the Companies Act, 2013 and the Companies (Auditor’s Report) Order, 2020 [CARO 2020] have also been incorporated as applicable in the relevant Chapters. For example, reporting requirements related to Property, Plant and Equipment in CARO, 2020 have been included in the Chapter on Audit of Property, Plant and Equipment. This will facilitate linking of the audit procedures to relevant reporting requirements.
An effort has been made to address commonly noticed errors in application of standards or disclosure requirements. This has been done either by including a numerical example or by reference to findings of FRRB, QRB, Expert Advisory Committee of ICAI.
I-9
I-10
The book also includes various templates to facilitate documentation requirements as required by various standards on auditing and also to obtain information from the entity in a meaningful format.
It is important to caution that the book is not a substitute for complete text of the standards on auditing, accounting standards, Companies Act, 2013 or other pronouncements. It is advisable to refer to the complete text of the standards/pronouncements for comprehensive knowledge on the subject.
The ICAI holds the copyright for the publications of the ICAI. Text from various publications of the Institute of Chartered Accountants of India (ICAI) has been reproduced under permission from the ICAI.
I hope that this book would serve its intended purpose of helping in improving the quality of audit and enable the auditor fraternity to meet the ever-increasing expectations of the regulators and other stakeholders. I look forward to feedback and suggestions for further improvements.
CA. PRANAV JAIN108, Darya Ganj New Delhi 110002
Email: jainpranav@hotmail.com
May 2023
Gratitude
I-11
-
Pranav Jain I-12
CA.
Chapter-Heads
PAGE About the Author I-5 Preface to Second Edition I-7 Gratitude I-11 Contents I-15 CHAPTER 1 : INTRODUCTION TO AUDIT OF FINANCIAL STATEMENTS 1 CHAPTER 2 : PRELIMINARY ACTIVITIES, APPOINTMENT, ROTATION, RESIGNATION AND REMOVAL OF AUDITORS 10 CHAPTER 3 : JOINT AUDIT 49 CHAPTER 4 : ASSESSMENT OF RISKS OF MATERIAL MISSTATEMENT 61 CHAPTER 5 : ASSESSING INHERENT RISKS OF MATERIAL MISSTATEMENT 80 CHAPTER 6 : EVALUATION AND RESPONSE TO RISK OF FRAUD 94 CHAPTER 7 : EVALUATION OF INFORMATION TECHNOLOGY ENVIRONMENT 120 CHAPTER 8 : UNDERSTANDING INTERNAL CONTROLS 127 CHAPTER 9 : USING THE WORK OF INTERNAL AUDITOR 177 CHAPTER 10 : MATERIALITY 188 CHAPTER 11 : RESPONSE TO ASSESSED RISKS 207 CHAPTER 12 : FURTHER AUDIT PROCEDURES 226 CHAPTER 13 : ENGAGEMENT TEAM DISCUSSIONS 241 CHAPTER 14 : AUDIT MANAGEMENT AND LOGISTICS 249 CHAPTER 15 : COMMUNICATION WITH THOSE CHARGED WITH GOVERNANCE 286 CHAPTER 16 : COMPLETION OF PLANNING 301 CHAPTER 17 : CORE CONCEPTS 303 CHAPTER 18 : AUDIT EVIDENCE 334 CHAPTER 19 : OPENING BALANCES 340 CHAPTER 20 : AUDIT SAMPLING 346 CHAPTER 21 : AUDIT OF SHARE CAPITAL 351 I-13
PAGE CHAPTER 22 : AUDIT OF RESERVES & SURPLUS 373 CHAPTER 23 : AUDIT OF BORROWINGS 379 CHAPTER 24 : AUDIT OF TRADE PAYABLES, OTHER LIABILITIES 399 CHAPTER 25 : AUDIT OF PROVISIONS AND CONTINGENT LIABILITIES 423 CHAPTER 26 : AUDIT OF PROPERTY, PLANT AND EQUIPMENT 443 CHAPTER 27 : AUDIT OF INTANGIBLE ASSETS 462 CHAPTER 28 : AUDIT OF INVESTMENTS 475 CHAPTER 29 : AUDIT OF INVENTORIES 494 CHAPTER 30 : AUDIT OF TRADE RECEIVABLES 514 CHAPTER 31 : AUDIT OF LOANS & ADVANCES AND OTHER ASSETS 529 CHAPTER 32 : AUDIT OF CASH AND BANK BALANCES 553 CHAPTER 33 : AUDIT OF REVENUE FROM OPERATIONS 572 CHAPTER 34 : AUDIT OF OTHER INCOME 584 CHAPTER 35 : AUDIT OF PURCHASES 593 CHAPTER 36 : AUDIT OF EMPLOYEE BENEFITS EXPENSES 603 CHAPTER 37 : AUDIT OF OTHER EXPENSES 626 CHAPTER 38 : OTHER AUDIT PROCEDURES 645 CHAPTER 39 : AUDIT OF RELATED PARTY TRANSACTIONS 652 CHAPTER 40 : CONSOLIDATED FINANCIAL STATEMENTS 661 CHAPTER 41 : OVERVIEW OF BANK AUDIT 677 CHAPTER 42 : ASSESSMENT OF GOING CONCERN 682 CHAPTER 43 : ASSESSMENT OF SUBSEQUENT EVENTS 692 CHAPTER 44 : OVERVIEW OF STANDARDS ON AUDITING 700 CHAPTER 45 : OVERVIEW OF ACCOUNTING STANDARDS 708 CHAPTER 46 : WRITTEN REPRESENTATIONS 716 CHAPTER 47 : AUDIT QUALITY ASSURANCE, AUDIT COMPLETION AND EVALUATION OF RESULTS OF TESTS PERFORMED 721 CHAPTER 48 : COMMUNICATION WITH THOSE CHARGED WITH GOVERNANCE 739 CHAPTER 49 : FORMING AN OPINION - AUDIT REPORT ON THE FINANCIAL STATEMENTS 748 I-14
About the Author I-5 Preface to Second Edition I-7 Gratitude I-11 Chapter-Heads I-13 1 INTRODUCTION TO AUDIT OF FINANCIAL STATEMENTS 1.1 1 1.2 5 1.3 7 2 PRELIMINARY ACTIVITIES, APPOINTMENT, ROTATION, RESIGNATION AND REMOVAL OF AUDITORS 2.1 10 2.2 11 2.3 15 2.4 17 2.5 18 2.6 20 2.7 24 APPENDIX 1 : 25 I-15 Contents
APPENDIX 2 : 26 APPENDIX 3 : 31 APPENDIX 4 : 32 APPENDIX 5(a) : 34 APPENDIX 5(b) : 35 APPENDIX 6 : 36 APPENDIX 7 : 37 APPENDIX 8 : 40 APPENDIX 9 : 47 3 JOINT AUDIT 3.1 49 3.2 49 3.3 50 3.4 53 APPENDIX 1 : APPENDIX 2 : 55 58 4 ASSESSMENT OF RISKS OF MATERIAL MISSTATEMENT 4.1 61 4.2 61 4.3 62 4.4 62 4.5 63 4.6 63 4.7 63 4.8 63 4.9 64 I-16
APPENDIX 1 : 78 APPENDIX 2 : 79 5 ASSESSING INHERENT RISKS OF MATERIAL MISSTATEMENT 5.1 80 5.2 81 5.3 90 5.4 92 APPENDIX 1 : 93 6 EVALUATION AND RESPONSE TO RISK OF FRAUD 6.1 94 6.2 94 6.3 95 6.4 96 6.5 97 6.6 98 6.7 99 6.8 105 6.9 108 6.10 109 6.11 109 6.12 109 6.13 110 6.14 111 6.15 111 APPENDIX 1 : - 113 APPENDIX 2 : 118 I-17
I-18 7 EVALUATION OF INFORMATION TECHNOLOGY ENVIRONMENT 7.1 120 7.1A 120 7.2 121 7.3 123 7.4 125 APPENDIX 1 : 126 8 UNDERSTANDING INTERNAL CONTROLS 8.1 127 8.2 127 8.3 128 8.4 128 8.5 131 8.6 132 8.7 133 8.8 137 8.9 138 8.10 139 8.11 142 APPENDIX 1 : 146 APPENDIX 2 : 174 APPENDIX 3 : - 175 9 USING THE WORK OF INTERNAL AUDITOR 9.1 177
I-19 9.2 177 9.3 179 9.4 181 9.5 181 9.6 183 9.7 183 APPENDIX 1 : 185 10 MATERIALITY 10.1 188 10.2 189 10.3 190 10.4 190 10.5 196 10.6 198 10.7 199 10.8 199 10.9 200 10.10 201 APPENDIX 1 : 202 11 RESPONSE TO ASSESSED RISKS 11.1 207 11.2 209 11.3 211 11.4 217 11.5 218 11.6 219
I-20 11.7 220 11.8 220 11.9 221 11.10 221 11.11 221 APPENDIX 1 : 223 12 FURTHER AUDIT PROCEDURES 12.1 226 12.2 228 12.3 239 13 ENGAGEMENT TEAM DISCUSSIONS 13.1 241 13.2 241 13.3 242 13.4 242 13.5 244 APPENDIX 1 : 245 14 AUDIT MANAGEMENT AND LOGISTICS 14.1 249 14.2 249 14.3 255 14.4 255 14.5 256 14.6 256 14.7 257 APPENDIX 1 : 260
I-21 APPENDIX 2 : 262 APPENDIX 3 : 265 APPENDIX 4 : 270 APPENDIX 5 : 274 APPENDIX 6 : 284 15 COMMUNICATION WITH THOSE CHARGED WITH GOVERNANCE 15.1 286 15.2 287 15.3 288 APPENDIX 1 : 289 APPENDIX 2 : 297 16 COMPLETION OF PLANNING 16.1 301 16.2 301 16.3 302 17 CORE CONCEPTS 17.1 303 17.2 303 17.3 306 17.4 315 17.5 323 APPENDIX 1 : 330 APPENDIX 2 : 333
I-22 18 AUDIT EVIDENCE 18.1 334 18.2 334 18.3 334 18.4 335 18.5 335 18.6 336 18.7 336 18.8 337 18.9 338 19 OPENING BALANCES 19.1 340 19.2 340 19.3 341 APPENDIX 1 : 345 20 AUDIT SAMPLING 20.1 346 20.2 347 20.3 347 20.4 348 20.5 350
I-23 21 AUDIT OF SHARE CAPITAL 21.1 351 21.2 353 21.3 368 21.4 369 22 AUDIT OF RESERVES & SURPLUS 22.1 373 22.2 374 22.3 376 23 AUDIT OF BORROWINGS 23.1 379 23.2 380 23.3 388 23.4 390 APPENDIX 1 : 394 APPENDIX 2 : 396 24 AUDIT OF TRADE PAYABLES, OTHER LIABILITIES 24.1 399 24.2 401 24.3 416 24.4 417 APPENDIX 1 : 422
I-24 25 AUDIT OF PROVISIONS AND CONTINGENT LIABILITIES 25.1 423 25.2 424 25.3 431 25.4 431 APPENDIX 1 : 436 APPENDIX 2 : - 439 APPENDIX 3 : 440 26 AUDIT OF PROPERTY, PLANT AND EQUIPMENT 26.1 443 26.2 447 26.3 454 26.4 455 27 AUDIT OF INTANGIBLE ASSETS 27.1 462 27.2 465 27.3 470 27.4 470
I-25 28 AUDIT OF INVESTMENTS 28.1 475 28.2 480 28.3 486 28.4487 APPENDIX 1 : 493 29 AUDIT OF INVENTORIES 29.1 494 29.2 499 29.3 509 29.4 510 APPENDIX 1 : 513 30 AUDIT OF TRADE RECEIVABLES 30.1 514 30.2 514 30.3 522 30.4 523 APPENDIX 1 : 528
I-26 31 AUDIT OF LOANS & ADVANCES AND OTHER ASSETS 31.1 529 31.2 536 31.3 544 31.4 545 APPENDIX 1 : 551 32 AUDIT OF CASH AND BANK BALANCES 32.1 553 32.2 557 32.3 564 32.4 564 APPENDIX 1 : 566 APPENDIX 2 : 568 APPENDIX 3 : 571 33 AUDIT OF REVENUE FROM OPERATIONS 33.1 572 33.2 575 33.3 582 33.4 582 34 AUDIT OF OTHER INCOME 34.1 584
I-27 34.2 585 34.3 589 34.4 590 35 AUDIT OF PURCHASES 35.1 593 35.2 594 35.3 598 35.4 598 36 AUDIT OF EMPLOYEE BENEFITS EXPENSES 36.1 603 36.2 605 36.3 610 36.4 611 APPENDIX 1 : 617 APPENDIX 2 : 622 37 AUDIT OF OTHER EXPENSES 37.1 626 37.2 626 37.3 637 37.4 637 APPENDIX 1 : 642 APPENDIX 2 : 643 APPENDIX 3 : 644
I-28 38 OTHER AUDIT PROCEDURES 38.1 645 38.2 645 38.3 647 38.4 648 38.5 649 APPENDIX 1 : 650 APPENDIX 2 : 651 39 AUDIT OF RELATED PARTY TRANSACTIONS 39.1 652 39.2 653 39.3 655 39.4 659 39.5 659 40 CONSOLIDATED FINANCIAL STATEMENTS 40.1 661 40.2 662 40.3 - 662 40.4 666 40.5 668 APPENDIX 1 : 669
I-29 41 OVERVIEW OF BANK AUDIT 41.1 677 41.2 678 41.3 678 41.4 680 42 ASSESSMENT OF GOING CONCERN 42.1 682 42.2 683 42.3 685 42.4 685 42.5 688 42.6 690 42.7 691 43 ASSESSMENT OF SUBSEQUENT EVENTS 43.1 692 43.2 694 43.3 696 APPENDIX 1 : 697 44 OVERVIEW OF STANDARDS ON AUDITING 44.1 700 44.2 701 44.3 701 44.4 705 44.5 706
I-30 45 OVERVIEW OF ACCOUNTING STANDARDS 45.1 708 45.2 708 45.3 709 45.4 711 45.5 712 45.6 713 46 WRITTEN REPRESENTATIONS 46.1 716 46.2 716 46.3 717 46.4 718 47 AUDIT QUALITY ASSURANCE, AUDIT COMPLETION AND EVALUATION OF RESULTS OF TESTS PERFORMED 47.1 721 47.2 722 47.3 723 47.4 723 47.5 724 47.6 726 47.7 728 47.8 728 47.9 728 47.10 730 APPENDIX 1 : 732 APPENDIX 2 : 738
48 COMMUNICATION WITH THOSE CHARGED WITH GOVERNANCE 48.1 739 48.2 739 48.3 740 APPENDIX 1 : 742 APPENDIX 2 : 745 49 FORMING AN OPINION - AUDIT REPORT ON THE FINANCIAL STATEMENTS 49.1 748 49.2 749 49.3 755 APPENDIX 1 : 763 APPENDIX 2 : 770 APPENDIX 3 : 773 APPENDIX 4 : 781 I-31
CHAPTER 4
ASSESSMENT OF RISKS OF MATERIAL MISSTATEMENT
4.1 INTRODUCTION -
reasonable assurance
material misstatements
4.2 REASONABLE ASSURANCE
--a. 61
4.3 MATERIAL MISSTATEMENT
4.4 AUDIT RISK and;
Components of Audit Risk
Para 4.4 62
-
b.
c.
d.
-
4.5 INHERENT RISK
4.6 CONTROL RISK
4.7 DETECTION RISK
4.8 BENEFITS OF RISK BASED AUDIT
a Time flexibility for audit work
63 Para 4.8
--
-
b Audit team’s effort focused on key areas
c Audit procedures focused on specific risks
d Communication of matters of interest to management
4.9 CONCEPT OF RISK ASSESSMENT
Para 4.9 64
-
-
4.9.1 Risk Assessment Procedures
4.9.2 Risk Assessment Process
65 Para 4.9--
Appendix 1
4.9.2.1 Identify Possible risks of material misstatement -
4.9.2.2 Assess whether identified possible risk of material misstatement is at the financial statement level or assertion level
Para 4.9 66 i ii iii For
overall financial statement level
specific assertions
Assertions
a
b
c
d
e (
a) Completeness
67 Para 4.9 -
-
Example:
(b) Existence
Example: -
(
c) Accuracy-
Example: -
(
d) Valuation
Example:
(e) Presentation
4.9 68 -
Para
-
-
-
Example:
Example:
a Assertion- Completeness
b
Assertion- Existence
c Assertion- Valuation
69
4.9
Para
--
4.9.2.3 Assess for each identified possible risks of material misstatement, whether it is in fact a risk of material misstatement and whether such risk of material misstatement is a significant risk of material misstatement
Example: -
4.9.2.4 Significant Risks of Material Misstatement
Para 4.9 70 dAssertion- Accuracy e AssertionValuation Existence assertion
-
-
4.9.2.5 Assessment of Risks of Material Misstatement
Examples
71 Para 4.9 i ii iii iv v vi-
i ` `` -
4.9.3 Presumed risks of Material Misstatement
The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements’
Para 4.9 72 ii ` ` iii ` vice versa
AUDIT OF FINANCIAL STATEMENTS
AUTHOR : PRANAV JAINt
PUBLISHER : TAXMANN
DATE OF PUBLICATION : MAY 2023
EDITION : 2nd Edition
ISBN NO : 9789357780117
NO. OF PAGES : 866
BINDING TYPE
: PAPERBACK
DESCRIPTION
Rs. 1895 USD 55
This book comprehensively covers the entire cycle of audit of financial statements, starting from the 'appointment of the auditor' to the 'issuance of the audit report' and archival of the audit file. It also provides guidance on 'risk-based audit' as per the Standards on Auditing issued by the Institute of Chartered Accountants of India (ICAI). This book will be helpful for audit assistants, engagement partners, and small & medium practitioners. Also, this book moves away from the 'checklist' based approach (which is more beneficial for experienced auditors) to describing the audit procedures in a comprehensive and easy-to-understand language. The Present Publication is the 2nd Edition and has been amended until April 2023. This book is authored by CA Pranav Jain with the following noteworthy features:
• [Overview of Audit Trail], which is mandatory for companies w.e.f. 1st April 2023 has been included in this book
• [Important Requirements of Audit Quality Maturity Model] issued by ICAI has been included
• [Comprehensive Explanation of Audit Procedures] in an easy-to-understand language, keeping in mind the junior staff or less experienced auditors
• [Examples of Potential Risks of Material Misstatement] are included in the book for the particular financial statement area
• [Interlinking of Audit Procedures & Risks of Material Misstatements] in addition to other procedures required as per the standards on auditing or meeting the statutory requirements
• [Significant Findings of Reviews by NFRA, QRB & FRRB to Highlight Non-Compliances] have been incorporated in various chapters
• [Practical Examples] have been included to explain the audit procedures & other concepts. For instance, a detailed example has been included to explain the requirements of the applicable standards of auditing regarding the identification of risks of material statements and documentation thereof
• [Real Case Scenarios] are used to describe the concepts to bring more clarity
• [Numerical Examples] have been included to explain the concept of FIFO & weighted average in case of valua tion of inventories
• [Examples for the Audit Team to Understand Audit Procedures] are included in this book
• [60+ Templates] to facilitate the auditor in meeting the documentation requirements & obtain information in a meaningful format
• [Linkages to Legal Requirements] are included in this book. Examples of such linkages are as follows:
o Companies Act, 2013
o Accounting Standards
o Standards on Auditing besides covering reporting requirements such as CARO 2020 and disclosure require ments as per Companies Act, 2013 & Accounting Standards
• [Illustrative Disclosures as per revised Schedule III & Requirements of Accounting Standards] for each financial statement area to enable the auditor for the following:
o Adequate disclosures in financial statements
o Meeting reporting requirements
o Helping even the junior-most team member to understand the concept
ORDER NOW
