About the Author

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 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, 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.

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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 JAIN

108, Darya Ganj New Delhi 110002

Email: jainpranav@hotmail.com

May 2023